Operations: Managing Business Functions Internationally
! Introduce techniques for assessing market sizes for given countries.
! Describe a range of product policies and the circumstances in which they are appropriate.
! Contrast practices of standardized vs. differentiated marketing programs for each country in which sales are made.
! Emphasize how environmental differences complicate the management of marketing worldwide.
! Discuss the major international considerations within the marketing mix: product, pricing, promotion, branding and distribution.
Marketing is a social and managerial process through which individuals and organizations satisfy their needs and objectives via the exchange process. Chapter 16 begins by examining the ways in which marketing managers analyze country market potential in order to develop effective international marketing mix strategies. It reviews the adaptation vs. standardization debate and also considers the rationale for selecting nationally responsive vs. globally integrated marketing strategies. The chapter discusses each of the marketing mix variables from an international perspective and concludes with a note about international electronic commerce.
Founded in 1886,
Teaching Tip: Review the PowerPoint slides for Chapter 16 and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures and tables in the text.
Although basic marketing principles are the same in both domestic and foreign markets, environmental differences often require those principles be applied in different ways. A marketing mix consists of the controllable variables, i.e., product and branding, promotion, distribution (place) and price designed to create value for the customer and achieve competitive advantage for the firm.
II. MARKET SIZE ANALYSIS
Once a firm decides to enter foreign markets, it must carefully collect and analyze data in order to determine specific country product-market potential and the marketing mix required to achieve its objectives.
A. Total Market Potential
Total market potential represents the total potential sales of all competitors within a given product market (category). To determine potential demand for its own product, a firm must first estimate the potential sales of the total market and then derive its current and desired market-share. The major indicators for potential sales of most products are present income and population, plus the rate of growth in each. Other variables to be considered include the possible obsolescence and leapfrogging of products, the costs of both essential and non-essential products, income elasticity, income inequality, the availability of substitute products and cultural factors and tastes.
B. Gap Analysis
Gap analysis represents a method for estimating a firm’s potential sales of a given product by determining the difference between the total market potential and gaps in usage, competition, product line offerings and distribution. Gap analysis helps managers determine both the size of and the reasons for differences between market potential and actual sales.
III. PRODUCT POLICY
Economists define a product as a bundle of benefits; marketers more elaborately state the idea as anything that can be offered for acquisition, attention, use, or consumption that might satisfy a need or want. Products can be tangible, intangible, or some combination of the two. The international applications of five common product policies are highlighted below.
A. Production Orientation
A production orientation indicates a firm is more concerned about production variables such as efficiency, quality and/or capacity than it is about marketing. Firms assume customers want lower prices and/or higher quality. Such an approach is still used internationally for selling commodities, for passive exports and for serving foreign-market segments that resemble domestic markets.
B. Sales Orientation
A sales orientation indicates a firm assumes global customers are reasonably similar and it can therefore sell abroad the same product it sells at home. A firm will be aided in this approach when there is also a spillover of product information from one country to another.
C. Customer Orientation
A customer orientation indicates a firm is sensitive to customer needs, i.e., it thinks in terms of identifying and serving the needs of the customer. Given a particular country market, what products are needed?
D. Strategic Marketing Orientation
A strategic marketing orientation indicates a firm is committed to continuously serving foreign target markets and to making incremental product adaptations to satisfy local customers. It draws upon elements of the production, sales and customer orientations, as appropriate.
E. Societal Marketing Orientation
The societal marketing orientation indicates a firm recognizes it must conduct its activities in a way that preserves or enhances the well-being of all its stakeholders, i.e., as it serves the needs of its customers it must also address the environmental, health, social and work-related problems that may arise when producing or marketing its products abroad.
F. Reasons for Product Alterations
The primary reasons behind the tendency of firms to alter their products to meet local conditions are legal, cultural and/or economic in nature.
1. Legal Reasons. Explicit product-related legal requirements vary widely by country but are usually meant to protect customers, the environment, or both. Protective packaging laws and international product standards represent two very complicated legal issues.
2. Cultural Reasons. Cultural factors affecting product demand may or may not be easily discerned. While religious beliefs may offer clear guidelines regarding product acceptability, other factors such as color, design and artistic preferences may be much more subtle.
3. Economic Reasons. Levels of income, differences in income distribution and the extent and condition of available infrastructure can all affect demand for a particular product. Often, price-reducing alterations are required if a firm wishes to participate in a particular country market.
G. Alteration Costs
Usually firms will choose to standardize basic components while altering critical end-use characteristics. Certain alterations (such as packaging and color options) may be inexpensive to make, yet they can have an important effect on demand.
H. Extent and Mix of the Product Line
When making product line decisions, managers must consider the cost and effect on sales of offering just one or a few products internationally as opposed to an entire family of products. Whereas narrowing a product line allows for the concentration of effort and resources, the broadening of a product line may lead to distribution economies.
I. Product-Life Cycle Considerations
Differences will likely exist across countries in both the shape and the length of a product’s life cycle. A product facing declining sales in one country may have growing or sustained sales in another. Such country differences can lead to an extended life for a given product.
Price represents the value asked for a product. Although usually expressed as a monetary value, in the case of barter transactions it may not be. In the long run, price must be low enough to generate sufficient demand but high enough to yield a profit to the firm. The complexities of pricing are exacerbated in the international arena.
A. Government Intervention
Every country has laws that either directly or indirectly affect prices to the final customer. Price controls may set either maximum or minimum prices for designated products. The WTO permits a government to establish restrictions against any imports that enter the country at a price below the price charged to customers in the exporting country (dumping). However, a firm may charge different prices in different countries because of competitive and demand factors (e.g., a firm may choose to exclude fixed costs in the price calculation of products exported to developing countries in order to be price competitive in those markets.)
B. Greater Market Diversity
Country variations lead to many ways of segmenting the market for a particular product. Depending upon market conditions, a firm may adopt any of the following pricing strategies.
1. Skimming. A skimming pricing strategy sets a high price for a new product, which is aimed at market innovators. Over time, the price will be progressively lowered in response to demand and supply conditions, i.e., the presence of additional competitors.
2. Penetration. A penetration pricing strategy sets an aggressively low price to attract a maximum number of customers (some of whom may switch from other brands) and to discourage competition.
3. Cost-plus. A simple cost-plus strategy sets the price at a desired margin over cost.
C. Price Escalation in Exporting
If standard markups occur within distribution channels, either lengthening the channels or adding other expenses somewhere within the network will further increase the delivered price of the product. Common reasons for price escalation in export sales are tariffs and the often greater distance to the market. To compete in export markets, a firm may have to sell its products to intermediaries at a reduced price in order to lessen the amount of price escalation.
D. Currency Value and Price Changes
Pricing in the case of highly volatile currencies can be extremely difficult, especially under conditions of high inflation. Pricing decisions must assure the company of sufficient funds to replenish inventory. This may result in the need for frequent price adjustments. Further, currency fluctuations also affect pricing decisions for any product that faces foreign competition; when a currency is strong producers may have to accept a lower profit margin if they wish to be price competitive.
E. Fixed vs. Variable Pricing [See Table 16.1]
The extent to which manufacturers can or must set prices at the retail level varies substantially by country. There is also substantial variation in whether, where and for what products customers prefer or expect to negotiate an agreed-upon price. Local laws and customs may limit firms’ abilities to set prices as they choose. In many cultures, prices are simply the starting point in the bargaining process.
F. Company-to-Company Pricing
Dominant retailers with substantial clout may get suppliers to offer them lower prices, which in turn will enable them to compete as the lowest-cost retailer. However, such clout may not exist in new foreign markets. In addition, many industrial buyers are claiming large price reductions through Internet purchases.
Promotion consists of the messages intended to help sell a product, i.e., direct and indirect forms of communication designed to inform, persuade and/or remind a target audience about an organization and its products. The promotion mix consists of personal selling, advertising, sales promotion/support and publicity/ public relations activities.
A. The Push-Pull Mix
Promotion strategies may be categorized as push (personal selling and trade sales promotion) or pull (advertising, consumer sales promotion and publicity). Most firms use a combination of both. Factors that will determine the mix of push and pull strategies include the type of distribution system, the cost and availability of media, customer attitudes toward sources of information and the relative price of the product as compared to disposable income.
B. Standardization of Advertising Programs
Advertising represents any paid form of media (nonpersonal) presentation. Although savings from the standardization of advertising are not as great as those from product standardization, they can nonetheless be substantial. However, in addition to reducing costs, standardized advertising may also improve the quality of advertising at the local level, prevent the confusion associated with different national messages and images and speed the entry of products into new country markets. Standardization usually implies using the same agency globally. However, it is difficult to completely standardize an advertising campaign for a number of reasons.
1. Translation. When a media transmission spans multiple countries, there is no opportunity to translate a message into other local languages. When messages are translated, numerous difficulties can be encountered with both language (content and meaning) and images.
2. Legality. What is deemed to be legal advertising in one country may in fact be illegal elsewhere. Differences result mainly from varying national views on consumer protection, competitive protection, standards of morality and nationalism.
3. Message Needs. An advertising theme may not be appropriate everywhere because of national differences in how well consumers know a product, how they perceive it, who makes the purchasing decision and what features are most important.
A brand is a name, term, sign, symbol and/or design that is intended to identify a product or product line and differentiate it in the marketplace. A trademark is a brand, or a part of a brand, that is granted legal protection because it is capable of exclusive appropriation. It protects the seller’s exclusive rights to use the brand name and/or brand mark. MNEs must make four major branding decisions: brand vs. no brand, a manufacturer’s brand vs. a private brand, one brand vs. multiple brands and a global brand vs. multiple local or regional brands.
A. Language Factors
Both the translation and pronunciation of brand names pose potential problems in many markets. Often the problems are obvious, but other times they are quite subtle, yet critical. In addition, brand symbols (shapes and colors) are culturally sensitive in many societies.
B. Brand Acquisitions
When an MNE acquires a (foreign) firm, it automatically acquires its brands. In some instances those brands will be maintained; in others they will be folded into a larger brand in order to capture economies of scale and to promote regional/global brand recognition.
C. Country-of Origin Images
Firms must determine whether to promote a local or foreign image for their products. The products of some countries may be perceived as being particularly desirable and of higher quality than products from other countries. A firm may be able to enhance its competitive advantage by effectively exploiting this perception.
D. Generic and Near-Generic Names
While firms want their brand names to become household words, they do not want those names to become so common they are considered to be generic (e.g., Kleenex and Xerox). Generic names may either stimulate or frustrate the sales of the firm from whom the name was expropriated.
Distribution refers to the physical and legal path that products follow from the point of production to the point of consumption. The distribution channel (aka the marketing channel) consists of the set of interdependent individuals and organizations that take title to or assist in the transfer of a title to a product from producer to final customer. Coverage refers to the nature of a firm’s distribution strategy within a given region (exclusive, selective, or intensive). In many instances, geographic barriers and poor transportation infrastructure and facilities will divide a country into very distinct viable and non-viable markets.
A. Difficulty of Standardization
Distribution is often the marketing mix variable that firms find the most difficult to standardize. This is because each country has its own national distribution system that is historically intertwined with its cultural, economic, and legal environments. Other factors that influence the ways in which consumer products are distributed within a given country include:
· people’s attitudes toward entrepreneurship
· the ability to pay retail workers
· restrictions on the size of stores and their hours of operation
· the financial ability to carry large inventories
· the efficacy of the national postal system.
B. Choosing Distributors and Channels
Just as in the case of production, a firm may choose to handle the distribution function internally or outsource it to a specialized provider.
1. Internal Handling. When sales volume is low, it is usually more cost effective for a firm to contract with an external distributor. On the other hand, distribution may be handled internally when sales volume is high, when the firm has sufficient human, capital and financial resources, when after-sales service is extensive and complex, when customers are global and when a firm can otherwise enhance its competitive advantage.
2. Distributor Qualifications. Common criteria for evaluating and selecting distributors include financial strength, good relationships with their customers, the extent of their other business commitments regarding both complementary and competitive products and the state of a distributor’s equipment, facilities and personnel. A final consideration is how quickly start-up can occur.
3. Spare Parts and Repair. The more complex and expensive a product, the more important that after-sales service will be. When after-sales service is critical, firms may need to invest in service centers, which can in turn become important sources of revenues and profits.
4. Gaining Distribution. Distributors choose the products and firms they wish to represent and emphasize. A new entrant must therefore convince a desired distributor of the viability of both its products and the company itself. To do so it may need to provide extra incentives or be willing to enter into exclusive arrangements provided a competitor does not already occupy that position.
C. Hidden Costs in Foreign Distribution
Because of the differences in national distribution systems, the cost of getting products to customers varies widely from one country to another.
1. Infrastructure. In many countries, ports, roads and warehouse facilities are so poor that getting goods to customers in a timely fashion and at a reasonable cost, with minimal damage or loss en route, is truly difficult.
2. Levels in the Distribution System. Many countries have multi-tiered wholesale systems through which a product must move before reaching the retail level. Because each intermediary adds a markup, final delivered prices increase.
3. Retail Inefficiencies. In some countries, low labor costs and a basic distrust by owners of all but family combine to result in retail practices that raise consumer prices, especially when there is an insistence upon counter (as opposed to self) service.
4. Restrictions. Many countries have laws that protect small retailers, which in turn effectively limit the number of large retail firms and the efficiencies they bring to their operations. Many countries also limit operating hours.
5. Stock-outs. When retailers have little space for storing inventory, distributors must incur the cost of making more frequent but smaller deliveries to prevent retail-level stock-outs.
D. The Internet and Electronic Commerce
As electronic commerce increases, customers worldwide can quickly compare prices from different distributors, thus intensifying price competition. However, global Internet sales are not without problems. A firm cannot easily differentiate its marketing program because the same web advertisements and prices reach customers everywhere. At the same time, however, a firm’s Internet ads and prices must comply with the laws of each country where it markets its product.
What Products Should Companies Market Internationally?
Even when MNEs strictly abide by host-country laws, they may be criticized for paying too little attention to the product needs of developing countries. In addition, MNEs have also been faulted for promoting products to people who either do not understand a product’s potential negative consequences or cannot afford it (even though they may want it). It is not clear that even if stakeholders could agree on what comprises responsible behavior, governments could effectively legislate it. In the absence of regulation, how far companies should go to protect customers is unclear both within and across countries. Further, is it in the best interests of a firm (and its stakeholders) to give in to pressure groups, especially when the grounds for their protests are highly controversial?
LOOKING TO THE FUTURE:
Will the “Haves” and the “Have-Nots” Meet the “Have Somes”?
Most projections indicate the disparities between the “haves” and the “have-nots” of the world will continue to grow throughout the foreseeable future, both within and across countries. To serve the “haves,” firms will offer luxury products to customer niches that cut across national boundaries. At the other extreme, companies will have numerous opportunities to develop low-cost standardized products designed to fit the needs of the “have-nots.” For many firms, these two extremes present a serious dilemma. Moreover, firms will find it increasingly difficult to charge different prices in different countries, although they will be increasingly able to cut intermediaries out of the distribution channels for their products.
Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter 16. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter 16.
CLOSING CASE: Dental News and Hotresponse [See Map 16.2]
1. Why do you believe Dental News continues to receive card responses even though people can respond on the Web through Hotresponse?
Given the diverse markets that Dental News serves, it would be expected that access to the Internet and the Worldwide Web would differ across markets. Thus, it is prudent of Dental News to simultaneously run the response cards along with the web response option through Hotresponse. It is interesting, however, that the use of Hotresponse has not led to a significant reduction in card responses. It would appear that the two response options complement one another very well.
2. As more people come online, will there be a need to print the editions of Dental News? Why or why not?
There will definitely be a need to continue to print Dental News. The web will not substitute for hard copies sent through the mail, although it may supplement them. Posting a publication on the web does not ensure that people will actually go to the site and look it up. Given the cost and speed of the web, it is likely that more and more of the responses and information will be supplied electronically. For the foreseeable future, however, printed matter will continue to play a key role. (Dental News may be able to benefit from a web edition of its newsletter by offering differing advertising packages, one to include only ads in a web-distributed format. This could eventually serve as a significant source of income and profit, as the costs of web-based publishing are minimal.)
3. As more people come online, do you believe dental product companies will sell more directly rather than go through distributors? Do you think this may vary by type of dental product and company? If so, why?
The propensity of dental product companies to sell more of their goods directly to their customers (as opposed to going through distributors) will vary according to several factors. It will depend largely on the extent to which dental product manufacturers feel they have adequate in-house competencies to handle sales, shipping and service functions. Those that do will tend to engage more heavily in direct sales. The type of dental product being sold will also serve to promote or hinder a firm’s move toward more direct sales. Companies that are a quite distant from their customers and whose products require significant after-sales service will probably continue to use established distribution networks to ensure customer satisfaction. Those whose products are easy to ship and do not require after-sales follow-ups will tend to move more quickly into direct customer sales.
4. Within the marketing mix (product, price, promotion, branding and distribution), which are most important when Dental News tries to sell advertising to companies producing dental products?
In this instance, both price and promotion are very important. At this stage, branding is not critically important because Dental News operates in many markets without significant competition. Because the advertising sold is not distributed to the people who bought it, the distribution issue is really how to effectively get Dental News into the hands of potential customers for the advertised products. Maintaining a large subscription base is essential to the survival and success of the business.
Additional Exercises: International Marketing
Exercise 16.1. While many firms have moved to develop globally standardized products, others have moved toward more product differentiation across countries. Ask students to discuss the types of products for which they would expect to see more global standardization, and those for which they would expect to see more local differentiation. Be sure they consider both goods and services.
Exercise 16.2. A number of advertising agencies have expanded their operations to the global level so they can offer their services on a worldwide basis. Ask students to discuss the reasons an MNE might prefer to work with a single global advertising agency rather than a series of local or regional agencies. Then ask students to explore the challenges advertising agencies face when they choose to offer worldwide services.
Exercise 16.3. When a firm is confronted with excess capacity but its national currency is relatively weak, it may choose to export to markets with relatively stronger currencies. Ask students to discuss the logic and wisdom of basing a long-term international marketing strategy on foreign currency swings. What would a firm have to do to effectively position itself to maximize such “opportunities”?