The Plan for Today:
• Merck Case study: Final Discussion & Action Plan
Marketing Program elements
• Product Decisions
• International Distribution Decisions
• Pricing Decisions in International Context
Influential factors in global supply chain
• Strategic benefits: Cost – Quality – Lead times• Factors of influence
– Country• Endowment factors (Nike, Reebok – Asia, low cost labor)• Cultural variations • Arbitrage and leverage• Government incentives and regulations
– Industry• The labor content of the products• The amount of raw materials and their respective scarcity• Value and cost of the components• Perishability of the products
– International strategy - to consider:• Nature of the markets (change, growth, relative size)• Infrastructure for transportation• Level of technology• Financial management (i.e., exchange rate volatility)• Organization behavior and human resources
Analysis of a company’s standardization potential
Source: adapted from Kreutzer, 1988. Reproduced with kind permission from Emerald Group Publishing Ltd.
Product decisions
• Dimensions of Product Offer
• The Product Life Cycle
• Product Positioning – Targeting Right Customers in the Right Markets – Baltika example
• Branding decisions
Before deciding on international marketing research strategy…
• Some main decision factors:– Consumer products– Industrial products– Services
Core product, packaging and service adaptation for international markets
Core productplatformdesign
function
Packaging
Service
Pricing Brand name
Quality
Package
Trademark
Delivery
Maintenance & repair
WarrantySpare parts
Legal
Theory of international product life cycle (IPLC)
Exporting
Importing
USA (initiating country)
Other advanced nations
LDCs
1 2 3 40
Source: Sak Onkvist and John J, Shaw, “An Examination of the International Product Life Cycle and Its Application within Marketing”, Columbia Journal of World Business 18 (Fall, 1983): 74
(0) – Local innovation, (1) – Overseas innovation, (2) – Maturity,(3) – Worldwide imitation, (4) - Reversal
IPLC stages and characteristics
Stage Import/
Export
Target
market
Competitors Production
costs
(0) Local
Innovation
None USA Few: local firms Initially high
(1)Overseas
Innovation
Increasing
export
USA, advanced nations
Few: local firms Decline due to economies of scale
(2)Maturity Stable
export
Advanced nations, LDCs
Advanced nations
Stable
(3)Worldwide
imitation
Declining
export
LDCs Advanced nations
Increase due to lower economies of scale
(4)Reversal Increasing export
USA Advanced nations, LCDs
Increase due to competitive disadvantage
Different degrees of product newness
Low Newness to Company High
High
Newnessto
InternationalMarket
Low
RepositionExistingproducts
Line extensions/
improvements
New to company
New to home
country
Cost reductions
New toInternational
markets
Increasingrisk
Product/ communication mode
Promotion
Product
Standard
Adapt
NewAdaptStandard
Straight extension
Promotionadaptation
Productadaptation
Dualadaptation
Productinvention
Source: Source: adapted from Keegan, 1995.
Product innovation and differentiation
• Nokia vs. Samsung
• P&G – unlike Coca-Cola, P&G has changed its Tide detergent 30 times in the past 50 years
“We live or die by product innovation, we know that if we don’t have it, we can’t grow the business in North America. Nor can we succeed in China or Russia the way we need to (John Pepper)”
Consumer products as competitive platforms
• A product platform refers to the development of a set of subsystems and interfaces that form a common product structure
• Markets consolidation vs. fragmentation – Renault: from 34 to 10 platforms by 2010,
emphasis on brand, design, styling
The industrial products firm• Industrial firm involves a network of influences
• The level of economic development in a country is a major determinant of the demand for industrial products
• Culture has less impact (usage patterns, product features, specifications, negotiations)
• Customer-bound nature of industrial products (collaborative internationalization decisions)
• Derived nature of demand
– Chrysler/Daimler-Benz - $80 bln on parts
– Renault-Nissan merger – new jointly developed vehicles are likely to be designed to share some components, increasing leverage
Routes to international markets for the industrial products firm
Routes to international
markets
Follow customers abroad
Company integrates into supply chain
Member of a business system
Internationalise as independent company
The service firm: internationalization
• A service can be described as any activity or benefit that a supplier offers a customer that is usually intangible and does not results in the ownership of anything
• According to the International Standard Industrial Classification (ISIC):– Wholesale, retail trade, restaurants, hotels, transport,
storage and communications, financial, insurance and real estate and business services, personal, community and social services, government services
• Intangibility, Inseparability, Perishibility, Heterogeneity
The service firm: internationalization (2)
• Only those services that are embedded in goods can be directly exported– Software, videos, CDs…
• The involvement of people is crucial• Critical role of customer contact as the physical
presence of the customer in the system– High contact – customized nature of each delivery,
customer can affect the time of demand, the exact nature of service and the quality of service
• The closer the contact – the richer the customer relationship
• Delivered by technology - do not require high contact• Scale and culture effects
Contact and customers served
Mass Services
Professional services
High
Low
Personal contact
Few ManyCustomers
Service Shops
Standardization vs customization in services
• Customer contact dictates the extent to which services may be standardized or should be customized
• Core services that are sold globally are more likely to be standardized
• The criteria: is a service people-based or equipment-based?– Automatic car-wash
• Investments in people and training as a mean of standardization,
• Standardization and customization simultaneously possible by using local nationals as providers the ‘foreignness’ of a standard service may be overcome (local cabin crews by international airlines).
Contact and tangibility in international marketing of services
Location bound(engineering,
long-term consulting)
Location free(market research,
Insurance)
Standardised(service-product
bundle)
Value added Services
(technical support)
Pure services Bundled services
Tangibility
High
Low
Personal Contact
Source: adapted from Vandermerwe, S. and Chadwick, M. (1989) ‘The internationalization of services’, The Services Industries Journal, January, p. 85, and Patterson, P. G. and Cicic, M. (1995) ‘A typology of services firms in international markets: an empirical investigation’, Journal of International Marketing, 3 (4), 57–83
Brand equity refers to the premium a customer would pay for the branded product compared to an identical unbranded version of the same product?
The role of branding•To distinguish a company’s offering and differentiate one particular product from its competitors•To create identification and brand awareness•To guarantee a certain level of quality and satisfaction•To help with promotion of the product
Pricing decisions in International Context
• Comparison with domestic pricing strategies
• Factors influencing pricing
• International pricing strategies
• Terms of sale/delivery terms
• Export financing
Pricing
• A product can not exist without price• Price should never be isolated from the other parts of
the marketing mix!• Consumers do not object to price; they object to is a lack
of relationship between the perceived value of the product and price
• Only area of global marketing mix where policy can be changed rapidly without large direct cost implications
• Decisions in global markets are affected by complexity of influential factors
Should price be uniform worldwide?
1. There is no reason for an export price to differ from the home price EU example:
due to free movement of goods, elimination of customs barriers, and harmonization of VAT rates
internationally recognized consumer goods with wide European distribution are likely to have more uniform pricing system
2. Prices across multiple markets should be coordinated without violating national law
Nintendo case: price cartel 1991-1998 with 7 European distributors and allowed the companies to keep prices for its games artificially high in certain countries, resulting in extraordinarily wide differences in prices among countries
Influences on international pricing
Exchange rate movements
Technology and competition
Distribution channels and
price escalation
International pricing
influencesPrice coordination
across markets
options to consider the cost factor1. Export price should be lower than home price
overhead expenses are spread over an expanded production volume low price may be necessary to penetrate the foreign market
2. Cost-plus method (i.e., full cost) all costs (including domestic marketing costs and fixed costs must be
paid for by all other countries) domestic price plus various overseas costs (freight, packing,
insurance, customs duties, etc) ethnocentric practice – the same price prevails everywhere it is easy for the price to end up being to high
Mercedez-Benz - cost-plus method lead to engineers insensitivity to costs! The company found that its costs were 30% higher above Lexus!Now engineers and plant managers are required to meet the market-driven target price.
Example
options to consider the cost factor (2)• Marginal-cost pricing
– represents a more polycentric approach
– is based upon an assumption that some of the product costs, such as administration costs and advertising at home are irrelevant overseas
• research and development costs, engineering costs have already been accounted for in the home market and thus should not be factored in again by extending them to other countries
– the actual production costs plus foreign marketing costs are used as the floor price below which the prices cannot be set
the method is sensitive to local conditions
full costs may not be adequately taken into account by overseas subsidiaries
Japanese firms use this method to penetrate foreign markets; and to maintain the market share. Break even is regarded as a success. The profits, thus, are sacrificed to keep factories going.
the factor of elasticity• To be competitive does not mean that a company’s
price must be at or below the market– Desirable image
• SONY strategy: price above the market on the base of the image; though when the price gap between it and competitors has widened too far, SONY had to decrease prices
• Cartier takes full advantage from its reputation. A watch made by its subcontractor for $125 is sold by almost 5 times above it.
• More then 2/3 of BMW owners are repeat buyers – because of brand loyalty, BMW was able to price its cars 10-30% above competitors comparable models
• Country’s per capita income can be a good indicator of market’s ability to pay (and indirectly determine a product’s elasticity of demand)
• Exceptions: Levi’s 501’s example shows that a high price can succeed in countries with low per capita income
factor exchange rate
exchange rate has no impact in domestic marketing, but is crucial in international marketing
– since 1985 a sharp drop in the dollar value against major currencies caused earnings of US MNCs to jump;
factor market share• high market share provides pricing flexibility
– ability to be above market– economies of scale advantage– important for late entrants (as an entry barrier)
• can be bought with a very low price– Compaq shocked the Japanese market in 1992 by selling desktop PCs
for less than a half the price of Japanese manufacturers
culture
• all buyers – the same price?
• flexible (negotiated) price?– tradition of haggling around price – superior
negotiating skills are required to get a better price
Skimming is a price strategy that involves charging a high price at the top end of the market with the objective of achieving the highest possible contribution in a short time.
Problems with skimming
• Having a small market share makes the firm vulnerable to aggressive local competition
• Maintenance of a high-quality product requires a lot of resources
• If product is sold more cheaply at home or in another country grey marketing is likely
Market pricing is a price strategy involves charging a final price based on competitive prices.
Penetration pricing is a price strategy that involves charging a low price with the objective of achieving the highest possible sales.
Intensive local competition
Lower income levels of locals
View of exporting as marginal activity
Structural factors of standardized versus differentiated pricing
Source: Reprinted from European Management Journal, Vol. 12, No. 2, Diller. H. and Bukhari, I. (1994) ‘Pricing conditions in the European Common Market’, p. 168, Copyright 1994, with permission from Elsevier.
A taxonomy of international pricing practices
3 Multilocal price setter
4 Global price leader
1 Local price follower
2 Global price follower
High
LowPre
pare
dnes
s fo
r in
tern
atio
naliz
atio
n
Multilocal markets Global markets
Industry globalism
Source: Adapted from Solberg et al., 2006, p. 31. In the original article Solberg has used the concept ‘Globality’ instead of ‘Globalism’.
alternative pricing strategies• Pricing involves more than simply marking up or
down• Alternative strategies include:
– Timing of the price change– Number of price changes– Time interval to which price change applies– Number of items to change– Use of discount and credit– Bundling and unbundling
Ex: US car makers – price changes by small amounts a number of times over the year
alternative pricing strategies (2)
• The effect of price can be masked and greatly moderated by financing or credit terms
• Discounts may be used to adjust prices indirectly– Large vs smaller middlemen
• To bundle or unbundle the product– Bundling adds value and increases prices a little or not at all for
added value• Japanese car makers in USA
– US car makers – a base price plus extra cost for each option– Ford – experiment with bundling approach (3 levels of bundling)
+ simplified production and assembly system, cut costs, speeded up delivery time, clearer market image for the brand, simplified marketing activities
- the price can be made more affordable when unblundling the product
dumping strategies
• Dumping – a form of price discrimination, the practice of charging different prices for the same product in similar markets– Boeing accused Airbus of receiving $9 bln in subsidies enabling the
company to price each airplane at some $15 to 20 million less than the true cost
• Types of dumping– Sporadic dumping (manufacturer with unsold inventories wants to get
rid of distressed or excess merchandise)– Predatory dumping involves selling at a loss to gain access to a
market and perhaps to drive out competition and achieve monopolistic position
– Persistent dumping is the most permanent mode of dumping, requiring consistent selling at lower prices in one market than in others (maybe due to recognition that the market are different in terms of overhead costs and demand characteristics)
• Japan – home prices for consumer electronics are higher (no foreign competition)
dumping strategies (2)
• Whether or not dumping is illegal depends on whether the practice is tolerated in a particular country– Switzerland has no specific antidumping laws
• Most countries have laws specifying a minimum price or a floor on prices that can be charged in the market
Ex. Melex golf carts in US
Ex. Mitsui – the largest dumping case (falsifying documents, hiding the origin of products, backdated invoices, rebates, claims about damaged goods, etc)
• Dumping thus is a controversial practice; economists argue that the widely used antidumping measures have been abused for protectionist purposes
how to dump?
• Dumping is a risky strategy• Preferable strategy is to use other means to legally
overcome dumping laws– To differentiate the exported item from the item being
sold in the home market• Japanese car makers market their automobiles under new or
different names in the USA
– Provide financing terms that can have the same effect as price reduction
– Produce the product in a host country• Japanese producers facing higher prices at home and lower
prices in foreign markets; solution – to manufacture the sets in the USA and importing the components and parts from Japan
Transfer pricing describes the prices charged for intracompany movement of goods and services.
Transfer at cost
Transfer at arm’s length
Transfer at cost plus
terms of sale• Incoterms (International Chamber of Commerce)
– Defining responsibility of buyers and sellers for delivery of goods under sales contracts
• Incoterms 2000 (i.e. FOB London Incoterms 2000)• 4 categories:
– E termsE terms - the seller will make goods available to the buyer on the seller’s own premises
– F termsF terms - the seller is required to deliver goods to a carrier appointed by the buyer
– C termsC terms – the seller will be required to contract for carriage but will not take risk of loss or damage to goods
– D termsD terms – the seller is required to bear all costs and risks needed to bring goods to the place of destination
Delivery terms
• EXW Ex-works• FAS Free alongside
ship• FOB Free on board• CFR Cost and freight• CIF Cost, insurance,
and freight
• DAF Delivered at frontier
• DES Delivered ex-ship
• DEQ Delivered ex-quay
• DDP Delivered duty paid
terms of sale
EXW FAS FOB CFR CIF DEQ DDP
Supplier’s warehouse
X
Export dock
X
On board vessel
X X X
Import dock
X
Buyer’s warehouse
X
Main transit insurance risk on
Buyer Buyer Buyer Buyer Seller Seller Seller
Global pricing contract is requested when a customer requires one global price per product from the supplier for all its foreign SBUs and subsidiaries.
Advantages• Lower prices worldwide• Higher levels of service• Standardization of
products• Efficiency of processes• Faster diffusion of
innovations
Disadvantages• Less adaptability to
market changes• Potential for quality
inconsistencies• Dependence upon
supplier could result in higher prices
• Resistance to GPCs among local managers
• Monitoring costs
Customer
Supplier advantages and disadvantages of GPCsAdvantages• Access to new markets• Economies of scale• Influence over market
development through association with industry leaders
• Strong relationships developed
• Solve price and service anomalies across countries
Disadvantages• Resistance to change• Loss of customers • Risk of failing to deliver on
promises• Inappropriate use of cost
information • Over dependence on one
customer • Conflict in distribution
channels
Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 61–70.
Characteristics of letters of credit
• An arrangement by banks for settling international commercial transactions
• Provide a form of security for parties involved
• Ensure payment, provided that terms and conditions of credit have been fulfilled
• Payment based on documents only and not on merchandise or services involved
The process for handling letters of credit
Source: Phillips et al., 1994, p. 454, with permission from ITBP Ltd.