INTERNATIONAL MARKETING NOTES
International marketing is the performance of business activities designed to plan, price, promote, and direct the flow of company’s goods & services to consumers in more than one nation for profit.
Adaptation of the controllables (marketing mix elements) to the uncontrollable elements determines the ultimate outcome of the marketing enterprise.
· Political / Legal
o Political decisions involving domestic foreign policy
o Any country has a right to restrict foreign trade when it adversely affects the security or economy of the country
o Conversely there may be positive effects when there are changes in foreign policy and countries are given favored treatment (MFN)
· Domestic Economic Climate
o Home based uncontrollable element
o Direct impact on the capacity to invest in plants and facilities
o Capital generated in the home country and then mobilized
o Internal economic conditions will result in restrictions against foreign investment in order to strengthen the domestic economy
o In the home country – Eg. Kodak & Fuji
· Political / Legal Forces
· Level of Technology
o Technical expertise may vary
o Technical Knowledge
o Special training
· Alien Status of Foreign businesses
o Foreigner control the business
o Alien in the culture of the host country
o E.g. Coke
· Cultural Forces
· Competitive forces (Soft Drink)
For Global marketing to be a success environmental adjustments are needed.
SRC – Self Reference Criterion
- Unconscious reference to ones own cultural values, experiences and knowledge
Values Meanings History Beliefs Symbols
E.g. - Vicks /
Stages of International Marketing
· No direct foreign Marketing
o No activity in cultivating customers outside domestic market
o Distributors / Dealers / Foreign Customers coming directly to the firm
o Web Pages (Indication)
· Infrequent Foreign Marketing
o Product surplus in domestic market
o No intention of maintaining continuous market representation
o Few companies fir this model as customers always look for long term commitment
· Regular Foreign Marketing
o Marketing goods on a continuous basis to foreign markets
o Overseas Middlemen / Own Sales force / Sales subsidiary
o Adaptation of the product to the foreign market
· International Marketing / Multinational Marketing
o Fully committed & involved in international marketing
o Markets all over the world
o Production & marketing activities outside the home market
o The company formulates a unique strategy for every country with which it conducts business
E.g. Balsara – Mint / Cinamint
· Global Marketing
o At this stage, companies treat the world, including their home market as one
o Maximize returns through global standardization of its business activities
o Efficiency of scale by developing a standardized product, of dependable quality, to be sold at a reasonable price to a global market
o The company standardizes its logo, image, store, processes
o Wherever necessary due to cultural differentiation adaptations are made
(Multidomestic & Global Marketing can exist simultaneously)
International trade involves voluntary exchange of goods, services, assets, or money between residents of two different countries or between different countries. The fundamental question that arises for most of us at the thought of international trade is why should a business firms of one country should to the another country, when the industries of that country also produce goods and market them. What is the basis of international business?
A number of theories have been developed to explain the basis for international trade. The different trade theories include theory of absolute advantage, theory of comparative advantage, and classical trade theory. These theories discuss and analyze different nuances of trade for the trading partners and deal with the financial dynamics of the trading activity between two countries
Theory of absolute advantage
The Scottish economist Adam Smith first explained the theory of absolute advantage in 1776. He argued that a country has an absolute advantage in the production of a good when it can produce more of that good with a given amount of resources than another country.
A simple economic model can be used to illustrate the principle of absolute advantage.
The following economic model is based on the following assumptions and is just an example:
- There are only two countries, Australia and China.
- These two countries each produce only wheat and cloth.
- Each country has the same amount of resources (land, labor and capital), however the quality differs.
- Resources are transferable between the production of wheat and cloth.
- Production costs for each country are fixed.
- There are no trade barriers, such as tariffs between the two countries.
Table 1 Absolute Advantage - Production before Specialization
Table 1 shows the production for each country before specialization.
With a given amount of resources Australia can produce 30 units of wheat and 20 units of cloth. While China can produce 5 units of wheat and 25 units of cloth.
In this example Australia produces more wheat while China can produce more cloth.
Australia then has an absolute advantage in the production of wheat and China an absolute advantage in the production of cloth.
Table 2 Production gains after specialization
60 (+25) (net gain)
50 (+5) (net gain)
When each country specializes in the production of the goods they have a comparative advantage in, greater production of both goods could occur.
This is illustrated in Table 2, were the production of wheat has increased by 25 units and production of cloth by 5 units.
It is quite realistic to think that one country has an absolute advantage over another country in the production of some goods. Finland has done this recently by specializing in the production and distribution of Nokia telephones.
Criticism: According to this theory every country should be able to produce certain products at low cost compared to other countries and should product certain other products at comparatively high price than other countries. International trade takes place only under such condition. But, in reality most of the countries do not have absolute advantage of producing at lowest cost and commodity, yet they participate in international business.
Theory of comparative advantage
Adam Smith's theory of absolute advantage is a simple explanation of the benefits of international trade. However, if one country has an absolute advantage in the production all goods, can there be benefits from trade.
In 1817, David Ricardo, a classical economist developed the principal of comparative advantage to explain this situation. The principal is based on the relative efficiencies of production where each country has a comparative advantage in producing the commodity in which it has the lower opportunity cost.
Opportunity costs are what must be given up in order to consume or produce another good. For example, going on an overseas holiday may involve giving up the purchase of a new car. The comparative advantage principle can be illustrated using Tables 3 and 4.
Table 3 Comparative advantages: production before specialization
In Table 3, Australia has an absolute advantage in the production of both wheat and cloth. By using the theory of comparative advantage, both countries can gain from specialization and trade.
Table 4 Opportunity costs
1 unit of wheat
1 unit of cloth
0.5 (10/20) units of cloth
2 (20/10) units of wheat
1 (5/5) units of cloth
1 (5/5) units of wheat
From Table 4:
- Australia has a comparative advantage in the production of wheat since it has to give up only 0.5 units of cloth to produce an extra unit of wheat, while China must give up 1 unit of cloth to produce an extra unit of wheat. So it is more practical for Australia to specialize in the production of wheat.
- China has a comparative advantage in the production of cloth since it has to give up only 1 unit of wheat to produce an extra unit of cloth, while Australia must give up 2 units of wheat to produce an extra unit of cloth. Consequently it is more practical for China to specialize in the production of cloth.
Australia has a comparative advantage in the production of wheat and China cloth. Trade between the two countries should be beneficial because of the different opportunity costs for these commodities.
Table 5 Production levels after specialization
40 (+15) (net gain)
10 (-5) (net gain)
From Table 5 we can see that total output has increased when countries specialize in the production of goods and services based on comparative advantage. As both countries are using their resources more efficiently, trade will lead to higher standard of living than would be otherwise possible.
A modern approach to comparative advantage
Michael Porter The Comparative Advantage of Nations (London, Macmillan 1990), suggests that instead of different factor endowments being the basis for international trade much of the world's trade is taking place between nations with similar factor endowments.
Factor endowments and comparative advantages are important in countries that have industries based on natural resources and where production does not rely on high levels of technology or where the labor force is relatively unskilled. Porter suggests that it is competitive advantage (based on lower costs, technological innovation and product differentiation) rather than comparative advantage that is becoming an important factor in determining the pattern and direction of international trade.
Transnational corporations are playing a very important role in this development because they are able to coordinate their production activities by moving resources production components, investment funds, technology and labor across the world.
Assumptions and Limitations
a. It assumes countries are only driven by the maximization of production and consumption.
b. It assumes only two countries are engaged in the production and consumption of two goods.
c. It assumes no transportation costs. In reality, transportation costs are a major expense of international trade.
d. It assumes labor is the only resource for production and is mobile within each nation but cannot be transferred.
e. It assumes specialization does not result in gains in efficiency. In fact, specialization results in increased knowledge of a task and future improvements.
The Opportunity Cost Theory
Gottfried Harberler proposed the opportunity cost theory in 1969. The limitations of the comparative cost theory produced the basis of this theory. The opportunity cost is the value of alternatives, which have to be forgone in order to obtain a particular thing. For example Rs. 1000 is invested in the equity of Rama News Print Limited and earned a dividend of 6% in 1999, the opportunity cost of this investment is 10% interest, had this amount been deposited in a commercial bank for a term of one year.
Another example is that, India produces textile garments by utilizing its human resources worth of Rs. 1 billion and exports to the US in 1999. The opportunity cost of this project is, had India developed software packages by utilizing the same human resources and exported the same to USA in 1999, the worth of the exports would have been Rs. 10 billion.
Opportunity cost approach specifies the cost in terms of the value of the alternatives, which have to be forgone in order to fulfill a specific act.
Thus, this theory provides the basis for international business terms of exporting a particular product rather than other products. The previous example suggests that it would be profitable to India to develop and export software packages rather than textile garments to USA.
We slightly modify the previous example. For example, assume that India earned Rs. 15 billion by exporting the same software packages to UK in 1999 rather than to USA. This theory suggests that the opportunity cost of India’s software exports to USA in 1999 is Rs. 15 billion.
This. This theory also provides basis for international business of exporting a product to a particular country rather to another country.
Other theories of International Trade
1. The Productivity Theory
It is criticized that most of the comparative cost theories are not applicable to developing countries. Hence, H. Myint proposed productivity theory and the vent for surplus theory.
The productivity theory points toward indirect and direct benefits. This theory emphasizes that the process of specialization involves adapting and reshaping the production structure of a trading country to meet the export demands. Countries increase productivity in order to utilize these gains of exports. This theory encourages the developing countries to go for cash crops, increase by enhancing the efficiency of human resources, adapting latest technology etc.
Limitations – However, this theory has also certain limitations. They are:
Ø Labour productivity did not increase after certain level.
Ø Increase in working hours
Ø Increase in the proportion of gainfully employed labour in proportion to disguised unemployed labour.
2. The Vent for Surplus Theory
International trade absorbs the output of unemployed factors. If the countries produce more than the domestic requirements, they have to export the surplus to other countries. Otherwise, a part of the productive labour of the country must cease and the value of its annual produce diminishes.
Thus, in the absence of foreign trade, they would be surplus productive capacity in the country. This surplus capacity is taken by another country and in turn gives the benefit under international trade.
Appropriateness of this Theory for Developing Countries: According to this theory, the factors of production of developing countries are fully utilized. The unemployed labour of the developing countries is profitably employed when the vent for surplus is exported.
International trade permits for more efficient use of capital and labour. Hence. J.S. Mill described this theory as, “serving relic of the Mercantile Theory.”
3. Mill’s Theory of Reciprocal Demand
Comparative cost advantage theories do not explain the ratios at which commodities are exchanged for another. J.S. Mill introduced the concept of “Reciprocal demand” to explain the determinations of the equilibrium terms of trade. Reciprocal demand indicates a country’s demand for one commodity in terms of the other commodity; it is prepared to give up in exchange. Reciprocal demand determines the terms of trade and relative share of each country.
Quality of a product exported by country A
Equilibrium = -----------------------------------------------------
Quality of another Product exported by country B
Assumptions: Assumptions of this theory are: Existence of two countries, trade in only two goods, both the goods are produced under the law of constant returns, absence of the transportation costs, existence of perfect competition and existence of full employment.
Modern Trade Theories
Modern theories focus on the concept of economies of scale as opposed to the assumption of constant returns of scale incorporated in other theories. This may mean that as a company produces on a larger scale, average costs fall (internal economies of scale), but also that costs (the establishment of good infrastructure, the presence of well-trained employees, etc.) will decline if numerous other businesses are established in the vicinity (external economies of scale). The company's earnings increase disproportionately to the increase in use of all factors of production (e.g. labour, machinery, capital). The company then gains an ever-increasing advantage over other firms in its sector and thereby ends perfect competition, which was an assumption of traditional theories.
It should be clear that if economies of scale, regardless of their base, largely determine international competitiveness, it is mainly incidental factors or even chance that will decide why one country, for example, has a strong aircraft industry as a result of internal economies of scale and another country has acquired and electronics industry as a result of external economies of scale.
A second implication of economies of scale is that even if countries have comparable supply structures (so that there are no comparative cost advantages and, according to traditional theory, no reason for specialization either), there are still reasons why one country specializes in one product and another in something else. If they do so, production costs can be reduced in both countries by economies of scale, and everyone involved in international trade can benefit.
However, economies of scale need not include all stages of production. They may actually be important at the sub-process stage of production because production can be considered as a series of sub-activities ranging from design to assembly. The company can create economies of scale by concentrating on a few sub-activities such as design and production of certain components or assembly. Other sub-activities then take place elsewhere, e.g. abroad. And when it comes to explaining the location of these sub-activities, companies often resort to the concept of comparative costs (as used by traditional theorists): labour-intensive assembly takes place where labour is cheap, and the design takes place where there is plenty of technological know-how.
INTERNATIONAL MARKETING DECISIONS
International Marketing presents a more complex task than domestic marketing because of the uncontrollable international marketing environment and their heterogeneity. Hence, though the basic marketing decisions to be made are similar in international and domestic marketing, making international marketing decision is generally more challenging.
In international marketing, a company has to make, broadly five strategic decisions.
1. International marketing decision: The first decision a company has to make, is whether to take up international marketing or not. This decision is based on a serious consideration of a number of important factors, such as the present and future overseas opportunities, present and future domestic market opportunities, the resources of the company in terms of skills, experience, production and marketing capabilities and finance, company objectives etc.
2. Market Selection Decision: Once it has been decided to do international marketing, the next important step is the selection of the most appropriate market. For this purpose, a thorough study of potentials of the various overseas markets and their respective marketing environment is essential. Company resources and objectives may not permit a company to do business in all the overseas markets. Further, some markets are not potentially good, and it may be suicidal to waste company resources in such markets. A proper selection of the overseas markets therefore is very important.
3. Entry and Operating Decisions: Once the market selection decision has been made, the next important task is to determine the appropriate mode of entering the foreign market such as export, contract manufacturing, direct manufacturing plant etc. on the basis of this decision, proper arrangements must be made to continue the activities of marketing.
4. Marketing Mix Decision: As in the domestic marketing, the success highly depends upon the applicability of proper Marketing Mix, in International marketing also; Marketing Mix plays a major role. The elements of marketing mix – product, promotion, price and physical distribution should be suitably designed so that they may be adapted to the characteristics of the overseas market.
INTERNAL AND EXTERNAL INTERNATIONAL MKTG CONCEPT
The key difference between domestic and international marketing is the multi-dimensionality and complexity of foreign country markets a country may operate in. Knowledge and awareness of these complexity and implications for international marketing is must.
The important environmental analysis model à SLEPT (Social, Legal, Economical, Political and Technological)
1. SOCIAL AND CULTURAL Influences
a. SOCIAL: Difference in social conditions, religion and culture determines whether the customers are similar or dissimilar across the globe.
McDonald’s had to understand the same in
b. CULTURE: Culture describes the kind of behaviour considered acceptable in society.
The prescriptive characteristic of culture simplifies a consumer’s decision-making process by limiting product choices to those which are socially acceptable. The same feature creates problems for those products, which are not in time with culture.
- Coca Cola had to withdraw its 2 liters bottle from
market as Spaniards were not having refrigerator having larger compartments. Spain
- Johnson’s floor wax was doomed to failure in
as it made the wooden floors very slippery and Johnson failed to take into account the custom of not wearing shoes inside the home. Japan
- Coca Cola when introduced in china the name sounded like “KOOKE – KOULA” meant thirsty mouth, full of candle wax. So they had to change the name to “KEE KOU KEELE” which meant “joyful taste and happiness.”
, White face is associated with death of mask. Japan
- The size of refrigerators in
is very big compared to Indian refrigerators, as women there believe in storing vegetables and other eatable items, which can be consumed till longer period of time. USA
Even the value and beliefs associated with color vary significantly between different cultures. Blue considered as feminine and worm in
Such differences suggest that same marketing mix can not be used for all markets.
2. Legal Environment:
Legal systems vary both in content and interpretations. A successful marketer will modify his marketing strategies in accordance with such variations. Laws affect the marketing mix in terms of products, price, distribution and promotional activities quite dramatically. For many firms such laws are burdensome regulations.
For e.g. in
An international Marketer should learn about the advertising, packaging, and labeling regulations in foreign markets.
3. ECONOMIC ENVIRONMENT:
The economic situation varies from country to country. There are variations in the levels of income and living standards, interpersonal distribution of income, economic organization, occupational structure and so on. These factors affect market conditions.
The level of development in a country and the nature of its economy will indicate the type of products that may be marketed in it and the marketing strategy that may be employed in it. In high income countries there is a good market for a large variety of consumer goods. But in low-income countries where a large segment does not have sufficient income even for their basic necessities, the situation is quite different.
4. POLITICAL ENVIRONMENT:
The political environment of international marketing includes any national or international political factor that can affect the organization’s operations or its decision-making. The tendencies of governments to change regulations can seriously affect an international strategy providing both opportunities and threat. (1992’s liberalization policy by Narsimha Rao Govt.) An unstable political climate can expose firms to many commercial, economic and legal risks.
Political risk is defined as being: “A risk due to a sudden or gradual change in a local political environment that is disadvantageous to foreign firms and markets.”
5. TECHNOLOGICAL ENVIRONMENT:
The Technological Environment is perhaps the most dramatic force now shaping our destiny. An international marketer should very well keep in his mind the change taking place in technology and thereby affecting the product.
New technologies create new markets and opportunities. However, every new technology replaces an old technology. Xerography hurt carbon-paper industry, computer hurt typewriter industry, and examples are so on. Any international marketer, when ignored or forgot new technologies, their business has declined. Thus, the marketer should watch the technological environment closely. Companies that do not keep up with technological changes, soon find their products outdated.
MULTINATIONAL CORPORATIONS (MNCs)
A Multinational Corporation is a business unit which operates simultaneously in different part of world either by manufacturing or marketing or both by keeping its headquarter elsewhere as a strategic nerve centre.
Although MNC took birth in the early 1860s, it was after the Second World War that the Multinationals have grown rapidly.
Generally, an MNC meets five criteria.
1. It operates in many countries at different levels of economic development.
2. Its local subsidiaries are managed by nationals.
3. It maintains complete industrial organizations including R & D and manufacturing facilities, in several countries.
4. It has direct investment base in different countries.
5. It derives from 20 % to 50 % or more of its net profits from foreign operations.
CLASSIFICATIONS OF MNCS
Pyramid Model Umbrella Model Inter/ Conglomerate
MNC MNC MNC
a. Pyramid Model MNC: These organizations have strong Headquarters and weak subsidiaries. Head Quarter is rude, arrogant and gives no powers to its subsidiaries. The decision making capacity is also not centralized. For E.g. Siemens, Johnson & Johnson, IBM, McDonalds, Marks & Spencer etc. This model of MNC is very power conscious.
b. Umbrella Model MNC: This model is very good among others. There is a relationship of mutual help between the Head quarter and the subsidiary. Ideas and money flow freely.
Making money and using power is not the primary motto of the organizations. Head quarters give full freedom to the subsidiaries. Both HQ and subsidiaries are very strong. E.g. P & G, Price water house, KPMG etc.
Problems: These organizations are very image conscious. If anything damages their image, strong actions are taken for that.
c. Inter conglomerate Model MNC:
Ø For such organizations, money is main aim.
Ø Investment and Rate of Investments are very high.
Ø No loyalty towards any subsidiary countries. E.g. HLL, Unilever etc.
Ø Companies enter any segment and adapt the approach of Multi segments, Multi markets, Multi products and Multi countries.
Ø Such companies try to acquire monopoly and take over its competitors there by reducing competition. E.g. Brooke Bond and Lipton are taken over by HLL.
How MNCs expand their business:
1. International Licensing: MNC permits the domestic company to use its trademark, brand name or technical know-how for manufacturing and marketing purpose. The license is given against payment of fee which acts as source of income to the MNCs. E.g. Brand 555 is the licensed user of British American Tobacco company. In
2. International Franchising: the licensor not only provides the brand name but also the raw material. E.g. McDonalds. (Syrup – pharmaceutical companies, printed circuit boards to electronic items, essence – cold drink companies (Pepsi gives its essence to Punjab Agro).
3. Turnkey projects: MNCs undertake to complete the whole project and handover the same when ready to the host country. Such project may be supplied on tender basis. Such projects provide new opportunity to expand the business activities.
4. Joint Ventures: “Like marriage, binding between home country representative and host country representative, to set up a project either in home country or host or 3rd country with a commitment of joint risk taking and joint profit sharing.”
E.g. Modi Luft – Modi and Lufthansa
5. Collaborations: It deals with any one part of management function, either finance or technology collaboration. (it is not possible to have collaboration in consumer products and FMCG. It happens generally with medicines, technological products.)
E.g. Bajaj –
Collaborations are time bound and not permanent.
Merits of Multinational Corporations:
- Change and progress: MNCs are said to be the agents of change and progress, on world wide.
- Enables maximum use of resources.
- To the host countries, the plants, equipments, and technical know how necessary for its operations which is not available otherwise is made available thru MNCs.
- MNCs create employment opportunities in the host countries. Local recruitment of Junior Managers creates a pool of managerial talent in the host country.
- Goods are made available at cheaper price due to economies of scale.
- MNCs contribute enormously to technology transfer between rich and poor countries.
- MNCs stimulate domestic employment.
- Helps removal of monopoly and improve the quality of domestic made products.
- Promotes exports and reduce imports by raising domestic productions.
- Provides benefits of R & D.
DEMERITS OF MNCs
(Students please elaborate the following points)
- Provides out-dated technology.
- MNCs exploit local labour by paying relatively lesser rates.
- MNCs involvement often results in the lack of development of local research and development.
- Use of capital-intensive technology reduces jobs in local country.
- MNCs ruin domestic companies.
- Adverse effect on life style / culture in host countries.
- Charge very high fees.
Some of the Indian MNCs: IOC, Ranbaxy, Dr. Reddy, Wipro, Infosys, ONGC,
Along with trade barriers, there are trade blocs among the countries of the world. These blocs offer special concessions to members of the group but impose restrictions on the imports from the non-member countries. As a result, these trade blocs are harmful to the growth of free international trade. Efforts should be made to remove such trade blocs so as to have free trade among the nations of the world. Unfortunately, efforts in this direction by WTO are not effective.
Trade blocs are groups of countries that have established special preferential arrangements governing trade between members. Although in some cases the preferences-such as lower tariff duties or exemptions from quantitative restrictions the general purpose of such arrangements is to encourage exports by bloc members to one another-sometimes called intra-trade.
OBJECTIVES OF TRADE BLOCS (REASONS OF FORMING T.B.)
Ø To remove or at least to reduce trade barriers among the member-countries of the group.
Ø To impose common external tariff and non-tariff barriers on non-member countries.
Ø To bring integration of economies of member countries through free transfer of labour, capital and other factor of production.
Ø To maintain cordial economic, political, cultural and social relations among the members of the group.
Ø To provide assistance to member countries of the group in all possible ways in solving their current economic problems.
TYPES OF ECONOMIC INTEGRATION / TRADE BLOCS
Ø FREE TRADE AREA: In Free Trade Area all barriers to the trade of goods and services among member countries are removed. In an ideal free trade area, no discriminatory tariffs, quotas, subsidies o administrative impediments would be allowed to distort trade between member countries. Each country however, is allowed to determine its own trade policies with regard to non-members. For e.g. there is a free trade agreement known as NAFTA (The North American Free Trade Agreement) between three counties; USA, Canada and Mexico.
Ø Common Market: A Common Market is a step ahead of custom union. It eliminates all tariffs and other restrictions on internal trade, adopts a set of common external tariffs and removes all restrictions on free flow of capital and labor among member nations. Thus, a common market is a common marketplace for goods as well as for services. Unlike a custom
DETAILS OF IMPORTANT TRADE BLOCS
1. Association of South East Asian Nations
The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on
The ASEAN Declaration states that the aims and purposes of the Association are:
(i) To accelerate the economic growth, social progress and cultural development in the region through joint endeavors.
(ii) To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter.
(iii) To maintain close cooperation with the existing international and regional organizations with similar aims.
WORKING OF ASEAN
The member countries of ASEAN have Preferential Trading Arrangements (PTA), which reduces tariffs on products traded among member countries. In 1992, ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and processed products.
The members have also established a series of co-operative efforts to encourage joint participation in industrial, agricultural and technical development projects and to increase foreign investments in their economies. These efforts include an ASEAN finance corporation, the ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations have introduced some programmes for greater diversification in their economies.
and ASEAN India
2. LAFTA (LATIN AMERICAN FREE TRADE ASSOCIATION)
LAFTA was established in February 1960 under the Treaty of Montevideo. The member countries of the association are
The main objective of the association is to build up a common market for South American countries and thereby to bring about a gradual reduction in trade barriers among member countries. LAFTA as a trade bloc wants to stimulate intra-Latin American trade and also to increase Latin American’s declining share in world trade. However, LAFTA could not emerge as a powerful economic union due to non-cooperation among the member countries. The member countries have been competing among themselves for promoting their exports. Political instability among the member countries is another cause responsible for making this union weak and ineffective. Due to lack of understanding and mutual trust, the integration among the member countries is not effective.
In recent years, the Latin American debt crisis has eroded some of the industrial progress that the countries had made and has forced them to rely on primary product exports to patch up their debt. In 1989, Andean countries made a renewed effort to revive regional co-operation with new measures. LAFTA was replaced (renamed) by the Latin American Integration Association (LAIA) with the signing of the Montevideo Treaty of 1980. The achievements of LAIA are also moderate.
An 'advising bank' is a correspondent of a bank which issues a letter of credit, and, on behalf of the issuing bank, the advising bank notifies the beneficiary of the terms of the credit, without engagement on its part to pay or guarantee the credit.
As a major center of power in the global economy, the European Union (EU) is second only to the
In 2004, EU accounted for 35.1 % of global merchandise exports as compared to 11.1 % by the
About the EU: The EU is an organization of European Countries dedicated to increasing economic integration and strengthening cooperation among its members. The EU has its headquarters in
Objectives of the EU: Its principal goal is to promote and expand cooperation among members states in economics, trade, social issues, foreign policies, security, defence, and judicial matters. Another major goal of the EU is to implement the Economic and Monetary Union, which introduced a single currency, the Euro for the EU members.
The Single Market and Common Commercial Policy: The single market refers to the creation of a fully integrated market within the EU, which allows for free movement of goods, services and factors of production. The EU, in conjunction with Member States, has a number of policies designed to assist the functioning of the market. Some of the policies are given below:
Competition Policy: The main competition lied in energy and transport sector. The union designed this strategy to prevent price fixing, collusion (secret agreement), and abuse of monopoly.
Free movement of goods: A custom union covering all trade in goods was established and a common customs tariff was adopted with respect to countries outside the union.
Services: Any member nation has a right to provide services in other Member States.
Free movement of persons: Any citizen of EU member state can live work in any other EU member state
Capital: There are no restrictions on the movement of capital and on payments with the EU and between member states and third countries.
Trade between the European Union and
Top items of trade between
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Textile and clothing
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Gemstones and jewellery
Leather and leather products
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Power generating equipment
Gemstones and jewellery
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Ø Tariff and non-tariffs have been reduced, but compared to International standards they are still high.
Ø Under the Bilateral trade between
Ø Under the same trade there is an agreement on sugarcane. The EU has undertaken to buy and import a specific quantity of sugarcane, raw or white, from
3. THEORY OF INTERNATIONAL PRODUCT LIFE CYCLE (IPLC)
The International Product Life Cycle (IPLC) theory explains trade in a context of comparative advantage, describes the diffusion process of an innovation across national boundaries.
The life cycle begins when a developed country, having a new product to satisfy consumer needs, wants to exploit its technological breakthrough by selling abroad. Other advanced nations soon start up their own production facilities and before long LDCs do the same. Efficiency shifts from developed countries to developing nations. Finally, advanced nations, no longer cost-effective, import products from their former customers. The advanced nation becomes a victim of its own creation.
Stages and characteristics
There are 5 distinct stages in the IPLC stage 0 through 4. The given below table shows the major characteristics of the IPLC stages, with the
IPLC stages and characteristics for the initiating country
IMP / EXP
(1) Local Innovation
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Few: Local Firms
(2) Overseas innovation
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Few: Local Firms
Decline owing to economies of scale
Advanced Nations & LDCs
(4) Worldwide imitation
Increase owing to lower eco. Of scale.
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Advanced nations & LDCs
Increase owing to comparative disadvantage
Stage 1 – Local Innovation: Stage 1, on the left of the vertical importing / exporting axis, represents a regular and highly familiar product life cycle in operation within its original market. Innovations are most likely to occur in highly developed countries because consumers in such countries are affluent and have relatively unlimited want. From the supply side, firms in advanced nations have both the technological know-how and abundant capital to develop new products.
Stage 2 – Overseas Innovation: As soon as the new product is well developed, its original market well cultivated, and local demands adequately supplied, the innovating firm will look to overseas markets in order to expand its sales and profit. Thus, this stage is known as a “Pioneering” or “International Introduction” stage. The technological gap is first noticed in other advanced nations because of their similar needs and high-income levels.
Competition in this stage comes from usually US Firms, since firms in other countries may not have much knowledge about innovation. Production cost tends to be decreasing at this stage because by this time the innovating firm will normally have improved the production process. Supported by overseas sales, aggregate production costs tend to decline further because of increased economies of scales. A low introductory price is not necessary because of the technological breakthrough; a low price is not desirable because of heavy and costly marketing effort needed to educate consumers in other countries about the new products.
Stage 3 – Maturity: Growing demand in advanced nations provide a movement for firms there to commit themselves to starting local production, often with the help of their government’s protective measures to preserve infant industries. Thus, these firms can survive and succeed in spite of relative inefficiency.
Development in competition does not mean that the initiating country’s export level will immediately suffer. The innovating firm’s sales and export volumes are kept stable because LDCs are now beginning to generate a need for the product. Introduction of the product in LDCs help offset any reduction in export sales to advanced countries.
Stage 4 – Worldwide imitation: This stage means tough times for the innovating nation because of its continuous decline in exports. There is no more new demand anywhere to cultivate. The decline will certainly affect the
Stage 5 – Reversal: The major characteristics of this stage are product standardization and comparative disadvantage. The innovating country’s comparative advantage has disappeared and what is left is comparative disadvantage. This disadvantage is brought about because the product is no more capital-intensive or technology-intensive but instead has become labor-intensive for LDCs. LDCs now can establish sufficient productive facilities to satisfy their own domestic needs as well as to produce for biggest market in the world. For e.g. the black and white televisions are now no more manufactured in USA as many Asian firms can produce them much less expensively than any US firms.
VALIDITY OF THE IPLC
Several products have conformed to the characteristics described by the IPLC. For e.g. at one time the US used to be an exporter of typewriters, cash registers, B/W Televisions etc. but with passage of time, these simple machines are now being imported, while US firms exports only the sophisticated, electronic version of such machines.
For industries suffering the imitation stage or maturity stage things are likely to get worse rather than better. Companies can understand the implications of the IPLC and adjust marketing strategies accordingly.
I. Product Policy:
Another modified version of outsourcing is having various components produced under contract in different countries. That way, a firm takes advantage of the most abundant factor of production in each country before assembling components into final products for worldwide distribution.
IBM’s PC system consists of components made in low-cost countries-monochrome monitor in
II. Pricing Policy:
Stage – 1: At this stage, firm can afford to behave as a monopolist, charging a premium price for its innovation. But this price must be adjusted downward in the second and third stage of IPLC to discourage potential new comers and to maintain market share. For e.g. IBM was slow in reducing prices for its PC models. They believed that the IBM PC was too complex for Asian imitators. This proved to be a costly error as the basic PC hardly changed for several years. As a result other Asian companies came out with their own brands.
Stage – 4: In the last stage, it is not practical for the innovating firm to maintain low price due to competitor’s cost advantage. But the firm’s above-the-market price is feasible only if it is accompanied by top-quality product.
III Promotion Policy: Promotion and pricing are highly related in IPLC. In the starting, the marketer must plan for a non-priced promotional strategy such as providing technical support, or offering after-sales-service or giving warranty for a particular period after the product is offered. The concentration should be towards meeting consumer’s demand. Positioning is another important point at the beginning. The marketer should try to position the product as a high-quality product having good reputation. One thing the company must never do is to allow its product to become a commodity item with prices as the only buying motive as such products can easily be duplicated by other firms. Through out four stages product differentiation, not price is most important for protecting a company from the crowded, low-profit market segment.
Once a product is in the final stage of its life cycle, the innovating firm should strive to become a specialist not a generalist, by concentrating its efforts in carefully selected market segments, where it can distinguish itself from foreign competitors. To achieve distinction in product, the innovating firm can add product features or offer more service.
PORTERS FIVE FORCE MODEL
The Five Forces model of Porter is an Outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value) of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces:
Entry of competitors. How easy or difficult is it for new entrants to start competing, which barriers do exist.
Threat of substitutes. How easy can a product or service be substituted, especially made cheaper.
Bargaining power of buyers. How strong is the position of buyers. Can they work together in ordering large volumes.
Bargaining power of suppliers. How strong is the position of sellers. Do many potential suppliers exist or only few potential suppliers, monopoly?
Rivalry among the existing players. Does a strong competition between the existing players exist? Is one player very dominant or are all equal in strength and size.
Porter's Competitive Forces model is probably one of the most often used business strategy tools. It has proven its usefulness on numerous occasions. Porter's model is particularly strong in thinking Outside-in.
Threat of New Entrants depends on:
- Economies of scale.
- Capital / investment requirements.
- Customer switching costs.
- Access to industry distribution channels.
- Access to technology.
- Brand loyalty. Are customers loyal?
- The likelihood of retaliation from existing industry players.
- Government regulations. Can new entrants get subsidies?
Threat of Substitutes depends on:
- Quality. Is a substitute better?
- Buyers' willingness to substitute.
- The relative price and performance of substitutes.
- The costs of switching to substitutes. Is it easy to change to another product?
Bargaining Power of Suppliers depends on:
- Concentration of suppliers. Are there many buyers and few dominant suppliers?
- Branding. Is the brand of the supplier strong?
- Profitability of suppliers. Are suppliers forced to raise prices?
- Suppliers threaten to integrate forward into the industry (for example: brand manufacturers threatening to set up their own retail outlets).
- Buyers do not threaten to integrate backwards into supply.
- Role of quality and service.
- The industry is not a key customer group to the suppliers.
- Switching costs. Is it easy for suppliers to find new customers?
Bargaining Power of Buyers depends on:
- Concentration of buyers. Are there a few dominant buyers and many sellers in the industry?
- Differentiation. Are products standardized?
- Profitability of buyers. Are buyers forced to be tough?
- Role of quality and service.
- Threat of backward and forward integration into the industry.
- Switching costs. Is it easy for buyers to switch their supplier?
Intensity of Rivalry depends on:
- The structure of competition. Rivalry will be more intense if there are lots of small or equally sized competitors; rivalry will be less if an industry has a clear market leader.
- The structure of industry costs. Industries with high fixed costs encourage competitors to manufacture at full capacity by cutting prices if needed.
- Degree of product differentiation. Industries where products are commodities (e.g. steel, coal) typically have greater rivalry.
- Switching costs. Rivalry is reduced when buyers have high switching costs.
- Strategic objectives. If competitors pursue aggressive growth strategies, rivalry will be more intense. If competitors are merely "milking" profits in a mature industry, the degree of rivalry is typically low.
- Exit barriers. When barriers to leaving an industry are high, competitors tend to exhibit greater rivalry.
Strengths of the Five Competitive Forces Model. Benefits
- The model is a strong tool for competitive analysis at industry level. Compare:
- It provides useful input for performing a SWOT Analysis.
Limitation of Porter's Five Forces model
- Care should be taken when using this model for the following: do not underestimate or underemphasize the importance of the (existing) strengths of the organization (Inside-out strategy). See: Core Competence
- The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations. See: Parenting Advantage
- From a more theoretical perspective, the model does not address the possibility that an industry could be attractive because certain companies are in it.
- Some people claim that environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation. See: Disruptive Innovation
- Sometimes it may be possible to create completely new markets instead of selecting from existing ones. See:
Strategy Blue Ocean
PORTERS NATIONAL DIAMOND FOR COMPETATIVE ADVANTAGE
According to Porter, as a rule competitive advantage of nations is the outcome of 4 interlinked advanced factors and activities in and between companies in these clusters. These can be influenced in a pro-active way by government.
The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries. These factors can be grouped into human resources (qualification level, cost of labor, commitment etc.), material resources (natural resources, vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities, deregulation of labor markets, or liquidity of national stock markets. These national factors often provide initial advantages, which are subsequently built upon. Each country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal.
This explains the existence of so-called lowcost- countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the
Home Demand Conditions
Describes the state of home demand for products and services produced in a country. Home demand conditions influence the shaping of particular factor conditions. They have impact on the pace and direction of innovation and product development. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets. Porter states that a country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Normally,
home markets have a much higher influence on an organization's ability to recognize customers’ needs than foreign markets do.
Related and Supporting Industries
The existence or non-existence of internationally competitive supplying industries and supporting industries. One internationally successful industry may lead to advantages in other related or supporting industries. Competitive supplying industries will reinforce innovation and internationalization in industries at later stages in the value system. Besides suppliers, related industries are of importance. These are industries that can use and coordinate particular activities in the value chain together, or that are concerned with complementary products (e.g. hardware and software). A typical example is the shoe and leather industry in
Firm Strategy, Structure, and Rivalry
The conditions in a country that determine how companies are established, are organized and are managed, and that determine the characteristics of domestic competition Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries. Typical corporate objectives in relation to patterns of commitment among workforce are
of special importance. They are heavily influenced by structures of ownership and control. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies. Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale.
The role of government in the Diamond Model of Porter
The role of government in the Diamond Model of Porter is to act as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance. They must encourage companies to raise their performance, to stimulate early demand for advanced products, to focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.
Diffusion of innovation
This extension of the product life cycle was developed by Everett M. Rogers in 1962 and simply looks who adopts products at the different stages of the life cycle.
1. Innovator who make up 2.5% of all purchases of the product, purchase the product at the beginning of the life cycle. They are not afraid of trying new products that suit their lifestyle and will also pay a premium for that benefit.
2. Early Adopters make up 13.5% of purchases, they are usually opinion leaders and naturally adopt products after the innovators. This group of purchasers are crucial because adoption by them means the product becomes acceptable, spurring on later purchasers.
3. Early Majority make up 34% of purchases and have been spurred on by the early adopters. They wait to see if the product will be adopted by society and will purchase only when this has happened. They early majority usually have some status in society.
4. Late Majority make up another 34% of sales and usually purchase the product at the late stages of majority within the life cycle.
5. Laggards make up 16% of total sales and usually purchase the product near the end of its life. They are the ‘wait and see’ group. They wait to see if the product will get cheaper. Usually when they purchase the product a new version is already on the market. Some may call Laggards, bargain hunters!
1. HOFSTEDES THEORY
According to Geert Hofstede, there is no such thing as a universal management method or management theory, valid across the whole world. Even the word 'management' has different origins and meanings in countries throughout the world. Management is not a phenomenon that can be isolated from other processes taking place in society. It interacts with what happens in the family, at school, in politics, and government. It is obviously also related to religion and to beliefs about science.
The five Cultural Dimensions of Hofstede
The cultural dimensions model of Geert Hofstede is a framework that describes five sorts (dimensions) of differences / value perspectives between national cultures:
Power distance. The degree of inequality among people which the population of a country considers as normal.
Individualism versus collectivism. The extent to which people feel they are supposed to take care for, or to be cared for by themselves, their families or organizations they belong to.
Masculinity versus femininity. The extent to which a culture is conducive to dominance, assertiveness and acquisition of things. Versus a culture which is more conducive to people, feelings and the quality of life.
Uncertainty avoidance. The degree to which people in a country prefer structured over unstructured situations.
Long-term versus short-term orientation. Long-term: values oriented towards the future, like saving and persistence. Short-term: values oriented towards the past and present, like respect for tradition and fulfilling social obligations.
To understand management in a country, one should have both knowledge and empathy with the entire local scene. However, the scores of the unique statistical survey that Hofstede carried out should make everybody aware that people in other countries may think, feel, and act very differently from yourself, even when confronted with basic problems of society.
HIGH AND LOW CONTEXT CULTURE
The general terms "high context" and "low context" (popularized by Edward Hall) are used to describe broad-brush cultural differences between societies.
High context refers to societies or groups where people have close connections over a long period of time. Many aspects of cultural behavior are not made explicit because most members know what to do and what to think from years of interaction with each other. Your family is probably an example of a high context environment.
Low context refers to societies where people tend to have many connections but of shorter duration or for some specific reason. In these societies, cultural behavior and beliefs may need to be spelled out explicitly so that those coming into the cultural environment know how to behave.
- Less verbally explicit communication, less written/formal information
- More internalized understandings of what is communicated
- Multiple cross-cutting ties and intersections with others
- Long term relationships
- Strong boundaries- who is accepted as belonging vs who is considered an "outsider"
- Knowledge is situational, relational.
- Decisions and activities focus around personal face-to-face relationships, often around a central person who has authority.
Examples: Small religious congregations, a party with friends, family gatherings, expensive gourmet restaurants and neighborhood restaurants with a regular clientele, undergraduate on-campus friendships, regular pick-up games, hosting a friend in your home overnight.
- Rule oriented, people play by external rules
- More knowledge is codified, public, external, and accessible.
- Sequencing, separation--of time, of space, of activities, of relationships
- More interpersonal connections of shorter duration
- Knowledge is more often transferable
- Task-centered. Decisions and activities focus around what needs to be done, division of responsibilities.
The major elements of culture are material culture, language, aesthetics, education, religion, attitudes and values and social organisation.
Material culture refers to tools, artifacts and technology. Before marketing in a foreign culture it is important to assess the material culture like transportation, power, communications and so on. Input-output tables may be useful in assessing this. All aspects of marketing are affected by material culture like sources of power for products, media availability and distribution. For example, refrigerated transport does not exist in many African countries. Material culture introductions into a country may bring about cultural changes which may or may not be desirable.
Language reflects the nature and values of society. There may be many sub-cultural languages like dialects which may have to be accounted for. Some countries have two or three languages. In
Aesthetics refer to the ideas in a culture concerning beauty and good taste as expressed in the arts -music, art, drama and dancing and the particular appreciation of colour and form. African music is different in form to Western music. Aesthetic differences affect design, colours, packaging, brand names and media messages. For example, unless explained, the brand name FAVCO would mean nothing to Western importers, in
Education refers to the transmission of skills, ideas and attitudes as well as training in particular disciplines. Education can transmit cultural ideas or be used for change, for example the local university can build up an economy's performance.
The UN agency UNESCO gathers data on education information. For example it shows in
Education levels, or lack of it, affect marketers in a number of ways:
- · advertising programmes and labelling
- · girls and women excluded from formal education (literacy rates)
- · conducting market research
- · complex products with instructions
- · relations with distributors and,
- · support sources - finance, advancing agencies etc.
Religion provides the best insight into a society's behaviour and helps answer the question why people behave rather than how they behave.
Religion can affect marketing in a number of ways:
- · religious holidays - Ramadan cannot get access to consumers as shops are closed.
- · consumption patterns - fish for Catholics on Friday
- · economic role of women - Islam
- · caste systems - difficulty in getting to different costs for segmentation/niche marketing
- · joint and extended families - Hinduism and organizational structures;
- · institution of the church -
and its effect on advertising, "Western" images Iran
- · market segments - Maylasia - Malay, Chinese and Indian cultures making market segmentation
- · ensitivity is needed to be alert to religious differences.
Attitudes and values
Values often have a religious foundation, and attitudes relate to economic activities. It is essential to ascertain attitudes towards marketing activities which lead to wealth or material gain, for example, in Buddhist society these may not be relevant.
Also "change" may not be needed, or even wanted, and it may be better to relate products to traditional values rather than just new ones. Many African societies are risk averse, therefore, entrepreneurialism may not always be relevant. Attitudes are always precursors of human behaviour and so it is essential that research is done carefully on these.
Refers to the way people relate to each other, for example, extended families, units, kinship. In some countries kinship may be a tribe and so segmentation may have to be based on this. Other forms of groups may be religious or political, age, caste and so on. All these groups may affect the marketer in his planning.
There are other aspects of culture, but the above covers the main ingredients. In one form or another these have to be taken account of when marketing internationally.
STRATEGIES TO ENTER GLOBAL MARKETS
There are a variety of ways in which organisations can enter foreign markets.
Exporting is the most traditional and well established form of operating in foreign markets. Exporting can be defined as the marketing of goods produced in one country into another.
The advantages of exporting are:
- manufacturing is home based thus, it is less risky than overseas based
- gives an opportunity to "learn" overseas markets before investing in bricks and mortar
- reduces the potential risks of operating overseas.
The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has to be weighed against the advantages. For example, in the exporting of African horticultural products, the agents and Dutch flower auctions are in a position to dictate to producers.
Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture, ownership and participation in export processing zones or free trade zones.
Licensing: Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor".
It is quite similar to the "franchise" operation. Coca Cola is an excellent example of licensing. In
Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation.
Licensing gives the following advantages:
- Good way to start in foreign operations and open the door to low risk manufacturing relationships
- Linkage of parent and receiving partner interests means both get most out of marketing effort
- not tied up in foreign operation and
- Options to buy into partner exist or provision to take royalties in stock.
The disadvantages are:
- · Limited form of participation - to length of agreement, specific product, process or trademark
- · Potential returns from marketing and manufacturing may be lost
- · Partner develops know-how and so licence is short
- · Licensees become competitors - overcome by having cross technology transfer deals and
- · Requires considerable fact finding, planning, investigation and interpretation.
Those who decide to license ought to keep the options open for extending market participation. This can be done through joint ventures with the licensee.
Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation".
Joint ventures are a more extensive form of participation than either exporting or licensing. In
Joint ventures give the following advantages:
- · Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process
- · Joint financial strength
- · May be only means of entry and
- · May be the source of supply for a third country.
They also have disadvantages:
- · Partners do not have full control of management
- · May be impossible to recover capital if need be
- · Disagreement on third party markets to serve and
- · Partners may have different views on expected benefits.
If the partners carefully map out in advance what they expect to achieve and how, then many problems can be overcome.
Ownership: The most extensive form of participation is 100% ownership and this involves the greatest commitment in capital and managerial effort. The ability to communicate and control 100% may outweigh any of the disadvantages of joint ventures and licensing. However, as mentioned earlier, repatriation of earnings and capital has to be carefully monitored. The more unstable the environment the less likely is the ownership pathway an option.
Three basic factors determine the boundaries of the pricing decision - the price floor, or minimum price, bounded by product cost, the price ceiling or maximum price, bounded by competition and the market and the optimum price, a function of demand and the cost of supplying the product. In addition, in price setting cognisance must be, taken of government tax policies, resale prices, dumping problems, transportation costs, middlemen and so on. Whilst many agricultural products are at the mercy of the market (price takers) others are not. These include high value added products like ostrich, crocodile products and hardwoods, where demand outstrips supply at present.
Transfer pricing is more appropriate to those organisations with decentralised profit centres. Transfer pricing is used to motivate profit centre managers, provide divisional flexibility and also further corporate profit goals. Across national boundaries the system gets complicated by taxes, joint ventures, attitudes of governments and so on. There are four basic approaches to transfer pricing.
- · Transfer at cost: few practise this, which recognises foreign affiliates contribute to profitability by operating domestic scale economies. Prices may be unrealistic so this method is seldom used. Otherwise it is basically used for increasing corporate profitability.
- · Transfer at direct cost plus overheads and margin. Similar to that in transfer at cost. Profits are show at every stage.
- · Transfer at a price derived from end market prices: very useful strategy in which market based transfer prices and foreign sourcing are used as devices to enter markets too small for supporting local manufacturers. This gives a valuable foothold. Prices are required to be competitive in the international market.
- · Transfer at an "arm's length": this is the price that would have been reached by unrelated parties in a similar transaction. The problem is identifying a point "arm's length" price for all products other than commodities. Pricing at "arm's length" for differentiated products results not in a specific price but prices, which fall in a predeterminable range.
There are three possible global pricing policies - extension (ethnocentric), adaptation (polycentric) and invention (geocentric).
Extension: The same global price. A very simple method but does not respond to market sensitivity.
Adaptation : Different prices in different markets. The only control is setting transfer prices within the corporate system. It prevents problems of arbitrage when the disparities in local market prices exceed the transportation and duty costs separating markets.
Innovation : A mix of a) and b). This takes cognisance of any unique market factor (s) like costs, competition, income levels and local marketing strategy. In addition it recognises the fact that headquarters price coordination is necessary in dealing with international accounts and arbitrage and it systematically seeks to embrace national experience.
Skimming Price strategy: Skimming price strategy is strategy in which the manufacturer charges a very high price in the initial stage of the PLC from the consumers. The exporter has also to incur very high promotional expenses since the product the newly introduced in the market. In this strategy, the exporter keeps his profit margin very high. This type of strategy is used in case of fashionable and novelty items, perishable items and consumer durables which are introduced for the first time in the market. This type of strategy is particularly useful if the exporter enters in the international market for a short term and his main motive is profit maximization. It is not possible for any exporter to follow this export pricing strategy for a long time. It is used to match the demand and supply of early adopters and reinforce customers perception of high value products.
Penetration Price strategy: In this type of pricing strategy, the exporter charges a lower price in the initial stages since the main objective of the exporter is to capture a large market share and create brand loyalty among the consumers. In the later stages, the exporter raises the prices of the product and recovers the losses suffered in the initial period. This pricing strategy can be followed in case of products where the exporter is assured of large market and continuous sale. It is used by organizations who have non differentiated products or have large marketing systems in place.
Market Holding strategy: in this type of strategy, the goal is to maintain the market share. It is used for price adjustment against competitors. Here, the organization usually keeps a similar price with that of the competitors in the initial stage. Such type is also required due to the price and currency flutuations in different countries.
Cost plus pricing: There are basically two types under this heading, the historical accounting cost method and the estimated future cost method. The former includes direct and indirect costs and has the disadvantage of ignoring demand and competitive position in the target market. Estimated cost approaches are based on assumptions of production volume (depending on process) which will be a principal factor determining costs. Again difficulties may lie in trying to estimate production levels. In reality, costs may be a useful starting point but should never be used as a final arbiter.
One major feature of international pricing is the increase on the price due to the application of duties, increase in costs of transportation and distribution margin increase, increase with the length of distribution channel, etc.
Dumping: It is the sale of an imported good or product at a price lower than normally charged in domestic market or country of origin than the country of sale. It is usually done by organizations to capture the market share. There are anti dumping legislations used by the government to protect local industries since it affects development of local economy, as it cannot be predicted. To be convicted, both price discrimination and injury must be proved.
If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns.
A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:
Cost Leadership Strategy
This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market.
Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership.
Firms that succeed in cost leadership often have the following internal strengths:
- Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.
- Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.
- High level of expertise in manufacturing process engineering.
- Efficient distribution channels.
Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share.
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily.
Firms that succeed in a differentiation strategy often have the following internal strengths:
- Access to leading scientific research.
- Highly skilled and creative product development team.
- Strong sales team with the ability to successfully communicate the perceived strengths of the product.
- Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.
Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well.
Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out sub-segments that they can serve even better.
A Combination of Generic Strategies
- Stuck in the Middle?
These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.
Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is less likely to become "stuck in the middle."
However, there exists a viewpoint that a single generic strategy is not always best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. There have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly when another firm entered the market with a lower-quality product that better met the overall needs of the customers.
Generic Strategies and Industry Forces
These generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.