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INTERNATIONAL

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MARKETING

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Prof. A. K. Sengupta
M.A., (Holder of U. N. Fellowship)
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Subject Editor
A. M. Munshi
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PubUshedby
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SCDL
No part ofthis book may be reproduced or copied or transmitted in any form without the
prior permission of the author and SCDL, Pune
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2011
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PREFACE

Globalisation, by implication means a borderless world in which individual nations are

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witnessing a paradigm shift in production and marketing practices on a world wide basis.
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The business scenario in this new era clearly warrants the creation of a new breed of
"global managers" with vision and the drive to deal with a fast changing and volatile world
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trading environment. The new era global manager is envisaged as an individual fully geared l~ t
to manage the rigours of a competitive and complex world trade environment. Besides ~r';2i;(,)
having a global vision, he needs to possess the capacity to organise information, manage
human resources, formulate action plans, cope with multitude stress situation and have the
aptitude and depth ofbusiness knowledge required to meet competition head on. Managing ~l;r;):;:;~; ';~};:
the corporate change from a domestic to international orientation and developing and L\' ,', ':
sustaining competitive advantage will be the focus areas for top management in most Indian f.; ..
firms in the coming years. "'f"l'. .
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Against this background this course is designed to equip the participants with the concepts,
skills and techniques for appraising the emerging nature ofthe globalisation and designing
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a corporate planning strategy for in-house application. After the course, the participants ~.:

will be able to (a) identify and select market and firm specific opportunities through a ~l
rigorous screening process, (b) appraise potential export markets in terms of potential
risks factors and profitability expectations, (c) design an appropriate marketing strategy,
keeping in view the corporate mission and long term objectives, (d) draw up an export
marketing plan and appraise the operational issues involved, (e) design an organisation
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structure consistent with the intemationalisation strategy,

A.K. Sengupta

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ABOUT THE AUTHOR

Prof. A.K. Sengupta is Director, Jagannath International Management School, New Delhi. ~f~~
Formerly he was Dean, Indian Institute of Foreign Trade. He has 37 years experience in
teaching in Post Graduate Management Programmes and Academic Administration. He
started his career as a faculty member in North Bengal University.

Prof. Sengupta had spent a term as visiting scholar at John Anderson School ofManagement,
University ofCalifornia, Los Angeles, U.S.A. under UNDPfellowship.

Prof. Sengupta's areas of specialization are International Marketing Management &

Research and International Trading Environment. During his tenure at 11FT, he undertook
34 research studies. His research studies included: "Establishment of Free Port in India"
"Export Promotion Effort ofSmall Scale Sector." He undertook intensive Studies on Export
Marketing ofAgricultural Products, Leather, Textiles, Marine Products, Handicrafts &
Handlooms. His country specialisation includes Africa and CIS.

Prof. Sengupta had visited many countries in North America, West Europe, Middle East,
Africa, South East Asia, and East Europe in connection with Market Research Studies,
Presentation of Papers in Academic Conferences, Training Programmes and Seminars.

Prof. Sengupta is associated with many important assignments ofGovt. ofIndia, Universities
etc. He was the Member - Secretary of a Task Force, constituted by Ministry ofCommerce,
Govt. of India, Expert member of ursc Board, External examiner of PhD Thesis of
many Universities and Member of many Committees.

He has presented papers in Seminars and Conferences (both within the country and abroad).
Prof. Sengupta has co-authored four books on International Business.

Swati Mujumdar
Director, SCDL
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CONTENTS

Unit Page
No. TITLE No.

1. Introduction to International Marketing 1

1.1 Introduction
1.2 The Nature and Scope ofIntemational Marketing
1.3 InternationalMarketing Environment
1.4 Avenues ofEntry into Foreign Markets
1.5 Foreign Marketing Involvement
1.6 Market Entry and Operation Decision
1.7 Summary
1.8 KeyWords
1.9 Self-Assessment Questions

2. Challenges of Globalisation 25
2.1 Introduction
2.2 Operation in Foreign Countries
2.3 Strategic Marketing Orientation
2.4 Implications ofGlobalisation on International Marketing
2.5 TheIndian Context
2.6 Summary
2.7 KeyWords
2.8 Self-Assessment Questions

3. Why Firms Go International 43 ;.

3.1 Introduction
3.2 Motivating Factors
3.3 International Marketing vs. Domestic Marketing
3.4 Evolution from Domestic Marketing to
Global Marketing
3.5 The Driving Forces

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Unit Page
No. TITLE No.
3.6 Successful Principles of International '!mii1~!~iiii~
Marketing-oriented Companies
3.7 Summary
3.8 KeyWords
3.9 Self-Assessment Questions

4. The Task of International Marketing 63

4.1 Introduction
4.2 Steps in the Marketing Process
4.3 International Orientation
4.4 International Marketing Considerations in SME Sector
4.5 Stages in Market Development
4.6 Income and Purchasing Power Parity
4.7 Summary
4.8 KeyWords
4.9 Self-Assessment Questions

5. Environmental Factors Affecting International Marketing 81

5.1 Introduction
5.2 International Marketing Environment
5.3 InternationalTradingEnvironment
5.4 Cultural factors
5.5 GATTandWTO
5.6 Intellectual Property Issues
5.7 Regional Trade Groups
5.8 Levels ofEconomic Integration
5.9 Dumping
5.10 Summary
5.11 Key Words
5.12 Self-Assessment Questions
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Unit
Page
No.
TITLE No.

6. Foreign Market Entry Strategy 105

-6.1 Introduction
6.2 Elements ofForeign Market Entry Strategy
6.3 Export Management Companies
6.4 Entering Foreign Markets through Licensing and Other
Contractual Arrangements
6.5 Entering Foreign Markets through Investment in
Local Production
6.6 Emerging Markets
6.7 Planning and Organising Market Entry
6.8 Summary
6.9 KeyWords
6.10 Self-Assessment Questions

7. International Product Strategy 129

7.1 Introduction
7.2 Product Lines
7.3 Product Planning for Exports
7.4 Product Adaptation
7.5 Issues in Consumer Product Strategy
7.6 Product Elements for Adaptation
7.7 Issues in Industrial Product Strategy
7.8 Summary
7.9 KeyWords
7.10 Self- Assessment Questions

8. International Distribution Strategy 147

8.1 Introduction
8.2 Importance ofIntemational Distribution
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Unit Page
No. TITLE
No.
8.3 International Channel System
8A "DirectExporting
8.5 Indirect Channels
8.6 Factors Affecting Channel Choice
8.7 Selecting and Motivating Overseas Agents and
Agency Agreements
8.8 Export Agency Agreement
8.9 Importance ofPhysical Distribution
8.10 The Internet as a Channel
8.11 Summary
8.12 Key Words
8.13 Self-Assessment Questions

9.
International Promotion Strategy 177

9.1 Introduction
9.2 Advertising and Promotion
9.3 International Advertising Issues
9.4 Sales'Promotion
9.5 Telemarketing
9.6 The Internet
9.7 Public Relations
9.8 Corporate Advertising
9.9 Summary
9.10 Key Words
9.11 Self-Assessment Questions

10.
International Pricing Strategy 197

10.1 Introduction
10.2 Pricing Aspects

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Unit Page
No. TITLE No.
10.3 Pricing Orientation
-10.4 Typesof Pricing
10.5 Elements of Costs for Export Price Quotation
10.6 International PricingIssues
10.7 Environmental Influences on Pricing
10.8 Counter Trade
10.9 Dumping
10.10 PricingApproaches
10.11 Summary
10.12 Key Words
10.13 Self-Assessment Questions

11. Outsourcing and Strategic Relationships 221

11.1 Introduction
11.2 Forms of Outsourcing
11.3 EvaluatingProductsfor OffshoreSourcing
11.4 Procurement Process
11.5 Reasons for InternationalStrategicPartnership
11.6 Advantagesof Outsourcing
11.7 Disadvantages of Outsourcing
11.8 IT Outsourcing
11.9 StrategicRelationships in IT Outsourcing
11.10 Summary ( .

11.11 Key Words

11.12 .Self-Assessment Questions

12. International Marketing Research 241

12.1 Introduction
12.2 Marketing Research for Export ImportTrade
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Unit Page
No. TITLE No.
12.3 Estimating Market Potential
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12.4 Market Access

12.5 Factors Affecting Demand
12.6 Research Process and planning
12.7 GatheringInformation
12.8 Field Research
12.9 Contents of a Report
12.10 Scope of IMR
12.11 Primary Data Collection
12.12 Marketing Research on the Internet
12.13 Summary
12.14 Key Words
12.15 Self-Assessment Questions

13. e-Marketing and e-Commerce 271

13.1 Introduction
13.2 Impact of e-Marketing
13.3 Relationship Marketing
13.4 e-Commerce
13.5 Popularity of e-Commerce
13.6 State of e-Readiness
13.7 Summary
13.8 KeyWor~s
13.9 Self-Assessment Questions
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Unit Page
No. TITLE No.

14. Future Trends 287

14.1 Introduction
14.2 Changes in the Future
14.3 Guidelines for Companies Seeking Export Markets
14.4 A Bilateral Partnership Moves Ahead
14.5 The Infosys Formula
14.6 Summary
14.7 KeyWords
14.8 Self-Assessment Questions

15. Case Studies 303

Case Study 1
Case Study 2

Appendix 315

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INTI{OI)UCTI()N TO
INTERNA1~I()NAL
. MARKETING
Objectives

After completing this unit, you will be able to:

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<:iF describe the basic concepts of international marketing.

<:iF categorise the trading relationships between countries.

<:iF assess the growing complexities of international trade.

<:iF review the main aspects ofthe foreign environment.

<:iF summarise the avenues ofentry into foreign markets.

<:iF identify the broad types of orientation required by

companies for growth in international markets.

<:iF state the scope of marketing decisions.

Structure
1.1 Introduction

1.2 The Nature and Scope ofInternational Marketing

1.3 International Marketing Environment

1.4 Avenues ofEntry into Foreign Markets

1.5 Foreign Marketing Involvement

1.6 Market Entry and Operation Decision

1.7 Summary

1.8 Key Words

1.9 Self-Assessment Questions

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International Marketing

1.1 INTRODUCTION

This unit introduces the reader to the basic concepts in international marketing. The methods
and procedures of international trading have undergone qualitative and quantitative changes
over the last two decades; multinational trading practices are growing more complex with
the growth of competition among MNCs and among nations; the growth of the internet
economy and the sharp growth of emerging markets such as India and China have also
contributed to the transformation.

The first section deals with the dimensions ofthe international marketing environment, and
some of the important factors related to the foreign environment are covered. When a
domestic company decides to enter foreign markets, it has several options and the more
significant ones are reviewed.
!....
In the subsequent section, the degree ofinvolvement in foreign markets are reviewed since
they can vary from zero involvement to total involvement. The means ofentry and the kind
ofinvolvement the firm wishes to have in its presence in foreign countries are two principal
decisions required as part ofthe set of international marketing decisions. The last section
presents a briefdiscussion on the four 8s related to international marketing decisions.

1.2 THE NATURE AND SCOPE OF INTERNATIONAL MARKETING

Trading among nations is a historical phenomenon. For thousands of years trading of

goods has been taking place among nations. The content, structure, methods and procedures
of trading have, however, undergone qualitative and structural changes from age to age
and region to region. To appreciate the nature of the change and challenges ofinternational
marketing in the context of existing and emerging trading relationships among countries
and groups ofcountries representing different marketing systems, it is necessary to understand
the historical perspective of the evolution of international trading pattern. Most of its
characteristics today have their roots in the political and economic past of the trading
nations. Post-war developments, in the fields of science and technology, political and
economic aspirations of the erstwhile colonial countries, emergence of international,
economic and social institutions, formation ofregional economic and trading groups, growing
complexities and competitiveness of multinational trading practices, and a host of other
factors have added new dimensions to and brought about far-reaching changes in
international trade policy.

The scope and task ofinternational marketing management from the standpoint ofindividual
enterprises is to be viewed against the backdrop ofthe world trading environment, marketing
systems and characteristics, and political and economic relationships among the nations of
the world.

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Unit 1 Introduction to Internation-al Marketing

Definition

International Marketing is the performance of business activities to plan, price, promote

and direct the flow of a company's goods and services or users in more than one nation for
profit.

1.3 INTERNATIONAL MARKETING ENVIRONMENT

Marketing in the modem context goes beyond its immediate role as a process through
which exchange of goods and services takes place and is viewed as an integral part of the
total socio-economic system which provides the framework within which activities take
place. It is, therefore, necessary to understand the total structure of the society, including
its political, legal, social, economic and cultural institutions and the marketing system and
behaviour and response pattern. Let us first understand the concept of International
Marketing. This can be defined as follows:

a) Marketing involves the performance of operations in a Business System: In a

manufacturing enterprise these operations usually include-research and development,
production, distribution, finance purchasing and personnel.

b) Marketing includes those operations that determine existing and sustained change in
the market: In order to determine the market opportunity, it is necessary to study the
customer market needs and characteristics, through the performance of activities
such as market research, demand analysis and forecasting.

c) Marketing includes those operations that influence existing and potential demand: In
order to influence the demand pattern of customers, the marketing operations include
activities such as product development, branding and packaging, pricing, advertising,
sales promotion, public relations, etc.

d) Marketing includes those operations that activate the supply of goods and services:
Marketing is concerned with all activities that are connected with the physical
distributioriof goods and their exchange in the market place, including channel selection,
transportation, shipping, warehousing, storage, inventory control and so on.

Marketing thus covers awide range of inter-related business activities that enlarge the role
of a marketer from one of selling what has been produced, to one of influencing what is to
be produced. In other words, the primary concern of marketing management is to identify
and satisfy specific customer needs by means of specific products or services, wherein lies
the key to profit. From this point of view marketing has been defined as a need satisfying

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International Marketing

process which places the customer at the pivotal position around which all marketing
activities revolve. Customerorientationis thus at the base of the modem marketingconcept
and 'integrated'marketing is the means of translating this concept into practice.
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In domestic marketing, an enterpriseusually participates in nearly all the functional areas
of marketing, namely, productlinepolicy, pricingpolicy, distribution andpromotional policy.
In International marketing, a firm can limitits activities nearlyto the shipmentof itsproducts
to foreignbuyersor it can partlyparticipatein all the marketingactivities abroad,depending
on the natureand degreeof itsinvolvement in foreignand managementmarketingfunctions.
Althoughthebasic marketingfunctioncould be the same for both nationalandtransnational
marketing, the implementation of the firm's marketing programmes and the factors that
influence such programmes are often considerably different from one market situation to
another. These differences can create additional management problems of planning,
coordination control, supervision and financing of international marketing activities of a
finn.

The environmental dimensions of international marketing are to be reckoned with by a

firm, irrespective of its techniques of foreign market entry or the kind of its involvement.
These are 'given' factors which affect all aspects of international marketing activities,but
over which the firm has no control. International marketing is therefore characterised by
problemsof diversities, complexities andtheuncertain andchangingnatureof environmental
conditionsand the varietyof approaches,techniques,strategiesand tacticsthat are required
on the part of the firm to cope with these problems. In domestic marketing, the firm has to
contend with the elements of nationalenvironment only,whereas internationalmarketing
has to copewiththe variables ofboth nationaland international environment. Environmental
differencesarethereforeat the root of problems,complexitiesand uncertainties inherentin
internationalmarketingoperations.

The dimensions of internationalmarketing environment can be broadly classified into (a)

Domestic environmentand (b) Foreign environment.

a) Domestic Environment

The main aspectsof domesticenvironmentwithinthe limitationof whicha firmhas to carry

outitsforeign marketing activities, consistof a largevarietyof factors, therelative importance
of which keeps on changingfrom country to country and from one point of time to another.
These factors are broadly related to domestic, economic and political conditions. They
also include the country's existing and potential resources endowment and prospects of
augmenting resources from externalsources,leveland brandof economicgrowth, industrial
~ase and structure, marketing infrastructure and logistics systemand existenceof facilitating

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Unit 1 Introduction to International Marketing

and supporting agencies for the conduct of foreign trade, size and trend ofdomestic demand
and availability of surpluses for export. Government polices and plans, monetary and
fiscal policy, and foreign exchange regulations, import-export policies and procedures and
several other allied matters have a direct bearing on the conduct of foreign marketing by
an enterprise.

b) Foreign Environment

Home-based export expansion-measures are necessarily related to the conditions prevailing

in possible markets abroad. A firm has to overcome various constraints and adapt its plant
and operations to suit foreign environmental conditions to gain initial market access and to
carry on its marketing activities efficiently within the framework ofthe marketing system in
the chosen foreign markets.

Factors related to the foreign environment

Just as there are the uncontrollable factors in the domestic environment, there are the
uncontrollable factors in the international environment. Some of these factors that are
critical to the decision making process are: political stability, class structure and economic
climate. China has moved away from a communist legal system in which all business was
done with the state, to a system that embraces the model of the free-market economies
such as the USA and the UK. India has moved away from the state-dominated public
sector economy of the eighties, to a system that has opened up new markets to the private
and public-private partnerships similar to that ofthe developed economies. The more
significant elements in the uncontrollable international environment are depicted in fig. 1.1.

Fig 1.1: Uncontrollable forces of Foreign Environment !

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International Marketing

The mainelementsinclude:
i) Political/legal forces
ii) Levelof technology
iii) Economicforces
iv) Competitiveforces
v) Distribution structure
vi) Geographyand infrastructure

vii) Culturalforces

i) Political/legal forces

Political/legal forces affecta business, whetherit operates indomestic orin international

markets. This is often accentuated by the 'foreign' status accorded to the company,

which increases the difficulty of properly assessing and forecasting the dynamic

international business climate. It is not merely the fact that 'foreigners' control the

business buttheyreceivebiasedtreatmentatthehandsof politicians or legalauthorities.

The fact remains that a foreign company is foreign and thus, always subject to the

political whims of the local government to a greater degree than a domestic firm is.

ii) Level of technology-

Vastdifferencesthatexist between the developed and developingcountriescan often

lead to wrong assessmentsby the foreign company.This is particularlyapplicablein

the case of industrialproductssuchas itemsof machinery. The conceptsof preventive

maintenance in a cement manufacturingplant in the USA can be very differentfrom

those understood in India or Vietnam.Technical expertise may not be available at a

level necessary for product support, and the average worker/supervisor may not

have the necessary technical knowledge to maintain the machinery or equipment

accordingto prescribedprocedures, Specialtrainingprocedures have to be developed

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by the foreigncompany to providethe necessarysupportservicesin the host country.
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iii) Economic forces
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The worldeconomy has changed dramaticallysince the time when the worldwas far I~ ~ ~
less integrated than it is today. Today there is global economic growth. Markets in
I
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Unit 1 Introduction to International Marketing

every region of the world are potential targets for almost every company from high
technology to low technology and across the spectrum of products from basic to
luxurious. The economic dimensions of the world market environment are of great
importance. There have been several changes in the world economy, which have
important-implications for the companies intending to enter foreign shores. The new
relatives of the world economy are the result of some significant developments such
as:
Increased volume of capital movements
The world economy is the dominant economic unit
Growth of e-commerce has diminished the importance of national barriers

iv) Competitive Forces

The nature ofcompetition for any industry varies from country to country and often
decides the mode of entry into foreign markets. It is often spelt out by many authors
that competition works to drive down the rate of return on invested capital. Rates of
returns that are projected to be lower than the competitive rate will not prove to be
beneficial to the company that is thinking of entry into a new market. Lower rates of
return will result in withdrawal from the market and a decline in the levels of activity
and competition. However, if the competitive rates ofreturn show an increasing trend
over the last few years, there is scope for new market entrants.

The Porter's five forces model of competition analysis is one of the most widely
accepted models and is useful in analysing foreign markets also. Analysing competition
in foreign markets requires special focus on one ofthe forces mentioned i.e. Rivalry
among competitors. To the extent that the rivalry among firms forces companies to
innovate and/or reduce costs, it can be a positive force. To the extent that it drives
down prices and therefore, profitability, it creates instability and has a negative influence
on the attractiveness of the industry. Several factors can create strong rivalry:
Once an industry becomes mature, firms focus on market share and how it can
be gained at the expense of others.
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Industries characterised by high fixed costs are always under pressure to keep
production running at full capacity. Once the industry accumulates excess capacity, ;i~~;~:!~~\;?;;
the drive to fill capacity will push prices (and hence the profits) down.
A lack of differentiation or absence of switching costs encourages the buyers to
treat the products as commodities and look deeper for the best prices. This
again puts pressu.re on prices and profitability. Hence, the need to analyse the
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International Marketing I .'
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competition at the time ofentry into foreign countries is critical to the development i
of marketing strategies for the firm. One of the consequences of expansion of I
global marketing activity is the growth ofcompetition on a global basis. Global
competition is a critical factor affecting success. In some industries, global
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companies have virtually excluded all other companies from their markets. In
the detergent industry, Colgate, Unilever and P&G dominate the industry on a
.worldwide basis. The marketing skills and the market 'push' strategies of these
three companies have become the source ofcompetitive advantage by achieving
global brand status. A similar story can be seen unfolding in the global automotive
industry.

According to Porter's theory, the presence or absence of particular attributes in

individual countries influences industry development. These attributes are factor
conditions, demand conditions, related and supporting industry and firm structure
and rivalry. The relati ve importance of these attributes shapes the environment
in which the firms compete in their global industries.

v) Distribution structure

Distribution channels in markets around the world are among the most highly
differentiated aspects of a nation's marketing system. The diversity of channels and
the wide range ofpossible distribution strategies can present challenging problems to
any firm designing an international marketing program. Smaller companies are often
blocked by their inability to establish effective channel arrangements. In large
companies operating via country subsidiaries, channel strategy is one element that
headquarters do not easily understand. To a large extent, channels are an aspect of
the marketing program that is locally led through the discretion of the in-country
marketing management group. It is important for managers responsible for international
marketing programs to understand the distribution structure including the status ofthe
infrastructure development necessary for satisfactoryfunctioning. Channels and physical
distribution are an integral part of the international marketing mix and must be
appropriate to the product design, price and communication aspects of the total
marketing program.

vi) Geography and infrastructure

The climate and physical terrain ofa country are important environmental considerations
when appraising a foreign market. The effects of these geographic features on
marketing, ranges from the influences on product adaptation to more lasting influences
on the development of marketing systems.

8
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 \ , .
Unit 1 Introduction to International Marketing f.
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Altitude, humidity and temperature extremes are climatic features that affect the uses
and functions of all products and equipment. For example, US manufacturers of
construction equipment have found that major changes and modifications are required
to cope with the dust and heat of the Gulf region. Different seasons in the northern
and southern hemispheres also affect international strategies.

vii) Cultural Forces

Marketers need to effectively interpret the influence and impact of each of the
uncontrollable environmental elements on the marketing plan for each foreign market
in which they hope to do business. In a broad sense, the uncontrollable elements
represent the culture. The difficulty facing the marketer in adjusting to the culture lies
in recognising its impact.

The task ofcultural adjustment is the most challenging and important one confronting
the international marketers - they have to adjust their marketing efforts to cultures to
which they are not attuned. Cross-cultural misunderstandings can result from a simple
hand gesture - it has different meanings in different parts of the world.

To succeed across the globe requires recognition that there may be considerable
difference between the various regions, although there are visible trends that show
that social and cultural differences are becoming less of a barrier.

Social factors such as growth and movement in population around the world are
important factors heralding social changes. There are also visible moves in the
population within many countries leading to the formation ofhuge urban areas where
consumers have a growing similarity of needs across the world. By the year 2015, it
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or less developed countries. These cities will become huge markets by themselves. ; .:.:_~ -c-, -: .:.~"

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Legal Dimensions 1'/:;=:::0)/
The legal dimensions ofinternational marketing environment include all laws and regulations

regarding product specifications and standards, packaging and labelling, copyright, trade

marks and patents, health and safety regulations particularly with respect to foods and

drugs, promotional methods and advertising, trade margin and mark-ups, etc. The legal

aspects of marketing abroad have severe implications, which an exporting firm needs to

know closely.

Legal systems around the world vary both in content and iriterpretation. A company
is bound, not only by the laws of its home country but also by those of the countries

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International Marketing

in which it is operating and by the growing provisions of international law. The

international legal environment has three dimensions:

Local domestic laws: Finding a route through the legal maze across markets requires
the services of experts on the separate legal systems and laws pertaining to each
market targeted.

International Laws: There are a number ofinternational laws that can affect the firm's
activity.

Domestic Laws: In the home country, a firm will have to abide by its own national
laws in all activities, whether domestic or international. Laws will affect the marketing
mix in terms of products, price, distribution and promotional activities quite
dramatically.

Business Dimensions

These include business customs and practices, distributive structure and channel network,
competitions pattern, means and methods ofmarketing communication and all other factors
related to the conduct of marketing activities.

.R!S Activity A:
a) Two ways in which international marketing is different from domestic marketing are:
1. ~ _

2. _

b) Three types ofuncontrollable forces in the foreign environment are:

1. _

2. ~ _
3. _

1.4 AVENUES OF ENTRY INTO FOREIGN MARKETS

When a domestic company decides to enter into international business, it has several

10
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Unit 1 Introduction to International Marketing

options, not necessarily naturally exclusive, to do so, depending, however,on the nature
and degree of involvement the company wishes to have in foreign business.

These avenues are briefly discussed below:

(a) Exporting .. ~

The domestic company can sell its products to foreign buyers directly or indirectly.For
directexports, it establishes directcontactwithforeigncustomers (actual usersor importers
distributors) and ships the goods according to the customers' orders and requirements.
The exporting firm takes upon itself the entire responsibility concerning packing,
documentation, shipment, credit and exchange risks, Government regulations, customs
clearance,etc. In direct exporting the company may have home-basedexport department
or subsidiary, foreign-basedsales branch or subsidiary; or foreign-basedsole distributors
or agents.

Incaseof indirectexporting, thefirmcan use a varietyof independent middlemenoperating

in the internationalmarket.He can use for example: (i) home-basedexport merchant who
buys the firm's product and sells it abroad on his own account taking all exporting risks
and tasks upon himself; (ii) home-based export agent whose primary responsibility is to
locateforeigncustomersfor the finn's productfor a commissionandrendercertainservices
without taking titleto the product, (iii)resident agent or representativeof foreign buyers;
(iv)cooperativemarketing organisationthatundertakes exportingon behalfof themember
firms which partly controls the activitiesof such an organisation: (v) combination export
manager (CEMP) who ~cts as overseas selling agent for non-competitive number of
principals and practically acts as the 'export department' for the firms he represents.

The existence of the these variants, their trading activities, business norms and practices
I~~;!f;fti;ff!f.

may differ from country to country and market to market. The exporting firm has the
choice of using the various combinations of channels network for the same product in
differentmarkets or for differentproducts in the same markets or for differentproducts in
differentmarkets.

(b) Licensing Arrangement

Licensingarrangements.represent signingof an agreementwitha foreign-based enterprise,

which is granted under the terms of agreement of right to use the patents, processing
know-howor trademarks of the licenser-companyusuallyin exchangefor a fee or royalty.
Through this arrangement, the licenser can enter the foreign market at little risk and gets
thebenefitof gainingthemanufacturing technology and marketing of a well-known product

11
.... , ,-, ~ -. .
~ - .. -.
 \
International Marketing

or brand. Licensing does not involve foreign investment risk since the licensee sets up its
own production and marketing facilities. Ifthe cost of production is comparatively lower
in the licensee's country, the licenser can import the product from the licensee to improve
its competitive position in its own market or a third country, thus opening up a new avenue
of export for the licensee. i
I"

(c) JointVenture [
,
Joint ventures involve setting up of an enterprise in collaboration with a foreign-based
company, for the manufacture and marketing of specific product lines. Such collaborations

=
can take various forms covering such areas as managerial and technical know-how and
technology transfer, equity participation, R&D activities, manufacturing and marketing
facilities or a combination thereof. For political or economic reasons, joint ventures may I. '. .. .'
I. ."
become the only technique of entering a potential export market, particularly in those I:
I.

countries that have restrictions on the inflow offoreign capital. Joint ventures set up in the I:
I.' .
developing host countries could be an important means of import substitution process and
i.
ofhe1ping local industries benefit from the industrial and technological progress ofadvanced I

countries and accelerate the process of expansion and diversification of industrial base
and product range, subject however to various political and economic implications that
are normally associated with ventures.

(d) Contract Manufacturing

Contract manufacturing represents various kinds oftie-up ofmanufacturing facilities and

arrangements agreed upon between two or more manufacturers located in different
countries. Such manufacturing activities could be carried on under subcontracting
arrangements for the fabrication ofcomponents and accessories and even finished products
in a foreign country. The international sub-contractors perform similar functions as the
domestic ancillary industries do for end-user industries. International sub-contracting for
economic and marketing reasons could be an effective technique offoreign market entry
for those developing countries which have adequate technological expertise, manufacturing
base and facilities, relatively cheaper raw materials for labour and other infrastructural and
comparative advantages.

(e) Foreign Investment

Direct and unilateral investment abroad involves establishment of assembly, processing,

packaging or even complete manufacturing, distributing, and marketing facilities in foreign
markets, usually under the financial and management control of the holding company.
Such a subsidiary established in the host country abroad becomes part of the country's

12
. '" .'.' -'. - .-
'-,' '.' -, . ,-~ .' -
. -. :- :-"'-'. ,. '.- ".". . ~.' . - -.-.
 \
Unit 1 Introduction to Intemati'onal Marketing

economic life and industrial complex and contributes in a variety of ways to the rate of
economic development ofthehostcountryas wellas enlarges theprofitbaseof theinvesting
company. It is the cruxof global involvement in foreign business in which both long-term
benefits and risks could be equally high because of social, economic or political reasons.

(0 Management Contracts !. .. .

Entry into foreignmarketscan be made by offeringvarious kindsof consultingservicesto

theforeign customers, government or private, doingfeasibility studies andeventually entering
into contract for setting up turnkey projects. Project exports could open up yet another
avenue notonlyforsupplying machinery, components andequipmentfortheinitial installation
of the project but also continued supply of spares and replacements over a long period.

There could, however be numerous versions and combinations of the arrangements and
techniques for enteringand conductingforeign business,with corresponding financial and
investments risk, managerialand organisational responsibilities. The choiceof a particular
technique for doing foreign business by a company will depend on a number of factors,
both external and internal, and in the kind of involvement the company wants to have in
international marketing operations.

S Activity B:
a) Two advantages to a firm setting up a joint venture in a foreign country are:

b) Two types of intermediariesoperatingfor firms in international marketsare:

1.5 FOREIGN MARKETING INVOLVEMENT

ForeignMarketinginvolvement of a manufacturing companymay widelyvaryfroma state

of indirect involvement to a state of total involvement; several types of involvement are

13
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International Marketing

generally observed, although those are not mutually exclusive nor sequentially progressive.

A:firm may choose to have all kinds ofinvolvement simultaneously for different products in

different markets. The involvement decision is conditioned by a variety of internal and

external factors such as the firm's export policy and programme, size & resources and

product range, volume of export business, regulatory and procedural conditions to be

fulfilled both from exporting and importing angles- for gaining entry into a particular export

market segment and several other factors having a bearing on this decision.
,

t~,i~
For example: (a) A firm's product may find its way to a foreign market without any active

effort or involvement on the part ofthe manufacturing firm. This could happen through the

initiative offoreign buyers or domestic export-merchant houses. In such cases the product

is bought rather than sold and the manufacturing firm may not even be aware of the

destination of its product, not to speak of active market promotion or involvement; (b) A

firm may try to find out temporary foreign outlets for its product, if it faces a situation of

over production or recession in home market or for some other similar reason. The primary

motive under these circumstances is to dispose of surplus stock which the domestic market

cannot absorb. The firm's involvement in foreign business is purely temporary and remains

confined to locating perspective foreign customers for the product; (c) A firm may have

built-in facilities for producing, for the selling in foreign markets a part ofthe entire produce

by adopting one or more techniques of foreign market entry; (d) A firm may become

international in character by creating both producing and marketing facilities around the

world for serving transnational markets through a complex and integrated system of

investing, manufacturing, processing and distributive network. Their marketing activities

are planned and carried ou.ton a global basis.

Depending on the kind and degree ofits involvement in foreign marketing, a firm has to re

orient and re-organise its activities to cope with the different levels of operational ~~;~~;;~1~

>:~>~---,,:
responsibilities inherent in such involvement. To throw some light on this issue, some

guidelines are available from what is called the EPRG orientation. The EPRG framework t;~~~.j;}}.}~-~

attempts to identify four broad types oforientation ofthe firm towards internationalisation
[

ofits operations. These are: Ethnocentrism, Polycentrism, Regiocentrism and Geocentrism

(EPRG).

Ethnocentric orientation ?:::;~::~:~:::}: .

..

The ethnocentric orientation of a firm considers that the products, marketing strategies
and techniques applicable in the home market are equally so in the overseas markets as
well. Foreign markets are looked upon merely as an extension of the home market. In l .
such a firm all foreign marketing operations are planned and carried out from the home .
Q.ase, with little or no difference in product formulation and specification, pricing strategy,

14
 \
Unit 1 Introduction to Intemati~nal Marketing

distribution and promotional measures as between the home and overseas markets. The
firm generally depends on its foreign agents and export-import merchants for its export

~
sales..

Polycentric orientation
I .
When a firm adopts polycentric approach to overseas marketing, it attempts to organise
its international marketing activities on a country-by-country basis. Each country is treated ,.

~:;~j
as a separate entity, and individual strategies are worked out accordingly. Local assembly
or production facilities and marketing organisations are created for serving the market

needs in each country.

Polycentrism could be most suitable for films seriously committed to international marketing
I . . .
and have the resources for investing abroad for fuller and long-term penetration into chosen
overseas markets.
I

Regiocentric orientation
I
When a company views regions as unique and seeks to develop an integrated regional
strategy, it is said to display regiocentric orientation. For example, an Indian company that I
focuses on the countries included in the SAARC (South Asian Association for Regional
Cooperation) region or in the EU (European Union) region is regiocentric. The term
'transnational company' is also used to describe such an orientation. The company sees
similarities and differences in a particular region. It can be ethnocentric or polycentric in its
view of the rest of the world markets.

As an example, Fedders Lloyd of USA was among the first few companies to decide that
Asia represented a good opportunity for its range of air-conditioners outside the USA.
Initially, China was selected followed by India and Indonesia. As it expands into other
markets and makes other commitments internationally, it continues to evolve as an
international company or an MNC.

Geocentric orientation

In geocentric orientation, the firm adopts a world-wide approach to marketing and its
operations become truly global in character. In a global enterprise, the management
establishes manufacturing and processing facilities around the world in order to serve the
various national or regional markets through a complicated but well-coordinated system
of distributive network. There are close similarities between regio-centric and geocentric
approaches to international marketing, except perhaps that the geocentric orientation calls

15
 \
International Marketing

i
for a much greater scale of operation, coordination and organisational set-up;; , order to !

cater to markets of heterogeneous characteristics.

From the foregoing discussion it will be evident that the scope of international marketing 1:!~!!I!:i!:!f;i :;
,

for a firm will be-determined by its decisions to the means of entry into foreign markets as i .. .

well as by the kind of involvement the firm wishes to have in international marketing .. ~

operations. It cannot be said that one kind of orientation is better than the other, as each
has its own advantages and limitations, depending on a variety offactors, some of which
are within the control of the finn and some beyond.

International Marketing Task

1. International marketing decision

2. Market selection decision

3. Market entry and operating decision

4. Marketing mix decision

5. Marketing organisation decision

International marketing decision

A firm's decision to go international and get involved in foreign marketing is conditioned by

various considerations, which are often linked with the company's own policies and
programmes as well as with the national compulsion for export expansion. The latter is
particularly true for developing economies where exports are a national obligation ofutmost
importance. The problem ofdeveloping countries is not only ofexporting, but offormulating
export expansion policies and strategies in such a manner as will fetch optimum returns in
foreign exchange. It is therefore of vital importance to decide the processing stage at
which the product will be placed on export markets, whether, for example, in primary
produce form, raw materials form, or in bulk in packaged and branded form, Marketing
implications and procedures are qualitatively different between commodity marketing and
what is called strategic marketing where product standardisation channel and promotion
varieties playa crucial role in market access or failure ofthe product. International marketing
decision of a firm in developing countries in particular, is therefore too closely link with ~t:i~;!:tJ!!:i!t;~

and, often influenced by, government policy and programme for export expansion in terms
of products and markets. Within the limitations of national export promotion priority and
strategy, the company decides in accordance with its own resources and attractiveness for
foreign market opportunities.

:-.:. ...
;

16
'." ::.: ~.- -- . ~ "."
 \
Unit 1 Introduction to Internati'onal Marketing

Market selection decision

The market selection decision process consists of a planned and systematic search for
relevant information in order to identify potential markets and measure market opportunities.
Information gap is one ofthe critical factors that confront exporters, specially in the context
of rapidly changing character of foreign markets and marketing conditions. No one can
possibly sell all products in all markets, nor do all markets offer equal opportunities for all
products. For economic, legal, geographic or technological reasons certain foreign markets,
even though potential, may be closed to export from a country. In some markets, potential
may be low. Distance and lack ofshipping facilities may preclude certain markets. Through
the process of preliminary screening on the basis of available published data or other
better sources of information, the exporting firms can select a group of countries which
appear as potential markets, for do company's products. The company's search for export
opportunities would necessarily be limited by its production and supply capacity. Hence it
is always a good strategy to concentrate in those markets which offer the highest potential
for company's products and which the company can supply and service with maximum
efficiency. The target market selected on the basis of elaborate research analysis, should
also be examined from the point of view of potential profitability, so that the selected
markets and market segments offer the best opportunities for the company's products.

PS Activity C:
EPRG framework stands for:

1.6 MARKET ENTRY AND OPERATION DECISION

The various means offoreign market entry have been discussed earlier in this paper. The
firm's task is to determine the best possible mode of entering a foreign market segment
keeping in view its international marketing objectives. Depending on the nature ofconstraints
or convenience for gaining access to foreign markets, the company may decide to choose
more than one means ofentry in different markets or market segments. Entry and operating
decisions also depend on the marketing involvement decision of the firm as well as on its
effect on the expected rate of return.

17
. ".- - .... '." " ' .. -- -. ~ ~
 \
International Marketing

Marketing-mix decision
- ~ --.. -
The marketing-mix decision relates to the following aspects of marketing tasks, namely:
ff;!;::;~~:;~i::

1. Product mix decision

2. Pricing decision

3. Distribution channel mix decision

4. Promotion mix decision

1. Product-mix decision

The decision on product mix involves product line policy and product adaptation and
presentation to suit the buying and consumption pattern in the chosen market segments.
By offering a suitable range of product lines and combinations of product attributes mix
sizes, design, formulation, style, packages, brands, etc., the exporting firm can bring about
distributive product differentiation and 'position' the product in specific market segments.
The content of product adaptation and planning needed for foreign markets depends on a
number of considerations including market characteristics, climatic and socio-economic
conditions, government regulations, competitive product specialties, distribution and selling
outlets, packaging etc. and expected profit contribution to each product adaptation.

2. Pricing Decision

Pricing is an important tool of marketing and one of the means of achieving the sales
objectives. There are several approaches to the formulation ofpricing strategy for a product
in a given market segment during a given period taking into consideration the characteristics
of selected market segments and existing or potential competition. The pricing decision
process should ideally start from the 'base price', which the final buyer pays for the product.
In a competitive market situation, the exporter is usually obliged to sell his products at a
competitive price commanding a premium over other similar products. Such distinctiveness
usually results not only from the product specialty but also from the 'subjective association'

r:':t!0~

and image attributed to the product by its consumers. Having determined the expected
base price, the exporting firm can work back the discount structure and other marketing
,. -.
and producing costs with the objective of maximising profit realisation or achieving other
marketing goals.
i
An illustrative range of considerations entering export pricing decision process is given
II
below:
!
[::': ':-- ".;~ ..

18
 \
Unit 1 Introduction to International Marketing

What should be the role of price in the overall export marketing strategy and what
degree of pricing discretion does the firm have in the target market?

What is the probable life cycle of the product and what is the present stage of the ~:i,?Xif;

cycle?

How should the product be priced-above, below or at par with competitive products?

How is competition likely to react to the price?

Should there be the same or differentiated pricing strategy for different markets or
market segments?

3. Distribution Channel-mixDecision

The distribution channel decision is again dependent on market entry and the involvement
decision. For an exporter there are several options to move its product into the distribution
pipeline ofthe importing market, which consists of a wide variety ofmiddlemen performing
various kinds of buying and selling functions as well as facilitating activities. The shortest
channel of distribution is to establish direct relationship with the final buyer; in case ofthe
consumer the final buyer is the retail outlets and for industrial product or raw materials, the
actual users. The direct exporting to final buyers and indirect exporting through intermediaries
have their own merits and limitations, subject to the firm's export strategy and foreign
market and marketing conditions. The guiding principle in the channel decision is to come
closer to the final buyer and have maximum economy and efficiency in the management of
distribution, as well as to have continued feedback on market r~sponse to the product.
Proper selection and management of distribution is of crucial importance for marketing
success of the product both in terms of sales and profit. The firm, therefore, needs to
select the most appropriate and efficient channels and work in close cooperation with the
channel members.

4. Promotion-mixDecision

Market promotion for export includes basically the elements ofmarketing communications,

~i0:rt

either face-to-face or through other means of attracting customer attention to, and creating
interest in, the product. There are numerous means and techniques of market promotional
activities aimed at the trade level in order to put the product into the distributive pipeline
i
and into the customer homes. The importing firm has to carefully select the most effecti ve
combination of the promotion of the promotion-mix, keeping in mind the customer
i
I
characteristics, nature ofproduct, information and communicational effectiveness of different I

19
 \
International Marketing

media, cost and other variables. Advertising, sales promotion, publicity, public i elations,
exhibitions, trade fairs, personal selling-all individually and collectively contribute towards
communication effectiveness.

The marketing-mix decision of an exporting firm is the core of export management task.
The export success depends on the efficiency of the firm to formulate the most appropriate
blending ofthe different elements ofthe marketing mix, i.e. product, price, distribution and
promotion and translate into the strategic plan of action and break it down into sub-plans
in respect of each product and market segment. The marketing mix elements are the
ingredients for fulfilling the different marketing objectives, as shown below:

Marketing tasks Marketing Techniques

1. What does the market need? Marketing information and research.

2. By what means can the need be satisfied? Product planning, packaging, and
Pricing.

3. How does the product reach the buyer? Distribution, transportation, warehousing,
retailing, etc.

4. How does the customer know about the Publicity, advertising, sales promotion.
product and is influenced to buy it?

Marketing organisation decision

The marketing organisation decision of an exporting firm is determined by its decision as

to how the firm wishes to conduct its international marketing activities and also by the
degree of involvement and control the firm wants to have on the marketing of its product
in foreign countries. It also depends on the international marketing objectives of the firm
and the kind and range of product and number of markets and market regions it wishes to
serve. The firm may start with an export department within its domestic organisation or it
can have a broad-based international division or even a separate export subsidiary for
planning and conducting its foreign operations from the home base. When a firm decides
to be international, a significant change takes place in its organisational orientation with no
operative distinction between domestic and foreign markets.
r'ii}';';!
The multinational firm plans its activities on a global basis and all manufacturing facilities,
marketing and distribution policies become integrated into a consolidated process ofplanning I.
and executing marketing operations.
I
I

I>
20
 \
Unit 1 Introduction to Intemati~nal Marketing

16 Activity D:
a) Two considerations for product adaptation in a foreign market are:

b) The marketing tasks related to the international marketing mix decision are:

1.7 SUMMARY

This unit has covered some of the basic concepts in international marketing and introduced
to the reader the trading practices in the current environment. The scope and task of
international marketing are to be viewed against the backdrop of the world trading
environment, marketing systems and political and economic relationships among the nations
of the world. Some of the factors that are different for marketing in domestic and foreign
markets have been covered.

A firm has to overcome various constraints and adapt its manufacturing operations to suit
the environmental factors in different countries. It also needs to carryon its marketing
activities efficiently within the framework of the marketing system in the chosen country.
The main elements of the foreign environment affecting marketing activities have been
discussed in some detaiL Some of the more significant macro factors related to the foreign
environments have also been discussed. These include factors that are critical to the
marketing decision-making process.

The important avenues available to a company that decides to operate in foreign markets,
are reviewed and discussed. The~e options are also covered in some detail in a subsequent
unit.

The issues that govern a finn's decisionin foreign marketing involvement have been described.
The involvement decision is conditional by a number of internal and external factors such
as the firm's export policy and program, size resources and product range regulatory and

21
 \
International Marketing

procedural conditions to be fulfilled from the angles of both exporting and importing. The
EPRG framework attempts to identify four types of firm orientation towards
internationalisation ofits operations. The marketing decision process along with operational
decisions that are required for target markets have been outlined in the last section.

1.8 KEYWORDS

International marketing: It is the performance ofbusiness activities to plan, price, promote

and direct the flow of a company's goods and services to consumers or users in more than
one nation for a profit.

Licensing arrangement: It represents the agreement with the foreign-based enterprise

in which the licensee is granted the right to use the patents, processing know-how, technology
or brands of the licensor company, usually in exchange for a fee or royalty payment. !.
I
Joint venture: It concerns the setting up of an enterprise in collaboration with a foreign
company for the manufacture and marketing of specific product lines. Such collaborations
can cover areas such as managerial and technical know-how, technology transfer, equity
participation, research and development, manufacturing and marketing facilities or a
combination thereof.

Contract manufacturing: It refers to various kinds of tie-ups ofmanufacturing facilities

and arrangements agreed upon between two or more manufacturers located in different
countries.

1.9 SELF-ASSESSMENT QUESTIONS

Q 1. Define the terms: international marketing and domestic marketing.
Q2. Bring out the key issues that make international marketing different from domestic
marketing.

Q3. Explain some ofthe reasons why Indian firms are currently interested in international
markets.

~
Q5. Describe and differentiate between three major uncontrollable macro-level forces in
the foreign environment.

Q6. Describe some of the obstacles that can come in the way of small and medium
Indian companies that want to export. I. .
!.
I
Q7. What are differences between a 'Joint Venture' and 'Foreign Investment'? 1.
i.
I.

22
.-.'. -.-. ":.:-"- -:'- ':":-::- '::- - --
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 -. .
....

.. ,
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I,

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i
1

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jlU!l~:lIlt1W Iu..UO!lI1W~lUI 01 UO!pnpOl1 UI
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 \

CHALI-dENGES OF
GLOBAI-oIISA1'ION

Objectives

After completing this unit, you will be able to:

(iT' reproduce the concepts of globalisation.

(iT' assess the impact of globalisation at the level of the firm.

(iT' summarise some of the unknown aspects in foreign

environments.

(iT' enumerate the types of strategic marketing orientation.

(iT' explain some implications of globalisation on international

marketing.

Structure

2.1 Introduction

2.2 Operation in Foreign Countries

2.3 Strategic Marketing Orientation

2.4 Implications ofGlobalisation on International Marketing

2.5 The Indian Context

2.6 Summary

2.7 Key Words

2.8 Self-Assessment Questions

L ~ ~ ~ L ~. ,_ ' _ _ _ ".' '.'. _

-:- ..
 \
International Marketing

2.1 INTRODUCTION

The firm exporting its products deals with a variety ofissues and problems when operating
in foreign environments; among other things, international marketing involves dealing with
different cultures, history and different sets ofgovernment policies.
I ...

The termglobalisation has come to mean many things to many people. The effects of
globalisation have been wide-ranging and need to be understood with special reference to
the international marketing subject and its scope. This unit covers some of the elementary
aspects of globalisation and its effects on international business processes.

The trading environments have undergone a number ofdevelopments since the establishment
of the WTO, unification ofGermany and the collapse ofthe USSR. The role ofthe trading
blocs has been highlighted since globalisation needs to be viewed through many perspectives.

The most important aspect concerns the implications and the effects of globalisation on
international marketing as well as on international marketing managers. This has been
covered in the last section so that the learners get to know the degree of impact.

2.2 OPERATION IN FOREIGN COUNTRIES

International marketing is reckoned as a dynamic aspect of the corporate strategy for

survival and generation of business opportunities. It involves operating in foreign
environments and dealing with unknown people wanting altogether different products.
Every country has a separate export/import (or exim) policy reflecting its economic
compulsions and growth requirements. Further, relations among countries are governed
by national governments. Then, there are problems oflanguage, culture, social background,
tariff regulations and currency fluctuations.

Mindset

Selling abroad is a complex task. It requires a different mindset and high sense of
commitment. Infact, the whole thing should be meticulously planned and executed like a
mission. Temperamental decisions have no place in overseas marketing. The decision to
enter export market should be final and it does not call for a roll-back. This is possible
when export is recognised as an integral part of corporate activity. People enter export
markets for a variety of reasons, which may include recession in the domestic market,
higher profitability, utilisation of available export incentives, need for imported inputs and
increased productivity. Whatever be the reason for selling overseas, the exporter must
provide for the required level of commitment.

26
.... ~-.-- ,-, -.. ,- ..
 \
Unit 2 Challenges ofGlobalisatiofi

Enlarged Scope

Over the years, the scope of international marketing has been enlarged to cover activities
like joint ventures, licensing, franchising and establishment of a production unit abroad. In
fact, people are now talking about globalisation, which means transnational operations
characterised by free flow of trade and factors of production across national borders. A
spurt in information technology and greater use of telecommunications have given a boost
to this phenomenon. This process started with OPEC and floatation of dollar during the
70s. Theodore Levitt of Harvard mentioned this concept in 1983, the main emphasis of
this syndrome being on developing a global outlook for working. With this development,
trading in merchandise has lost its significance. Money flows and global sourcing of inputs
are important factors. Among factors of production, management holds the key position.

Cost-Efficiency

The basic objective ofglobalisation is to concentrate on a few business functions in different

markets or territories in such a manner that the ultimate product/service enjoys the available
comparative advantage and thus becomes the most cost-efficient and hence competitive.
Implicitly, this means interdependence of world markets. The basic philosophy of this
exercise is to think "globally and act locally". The reason for this is very simple. We still live
in an incredibly diverse planet, inhabited by individuals who believe in different ideologies,
speak different languages, practice different life styles and rely on different approaches in
business. Various forces affecting globalisation as pointed out by Michael Porter in his
book entitled, "Competitive Advantage of Nations" are:

(i) Growing similarity ofcountries in terms of available infrastructure, distributionchannels

and marketing approaches.

(ii) Fluid global capital markets: National capital markets are growing into global capital
markets because of the large flow of funds between countries.

(iii) Technological restructuring: The reshaping of competition globally as a result of

technological revolutions such as in micro electronics.

(iv) Integrating role of technology: Reduced cost and increased impact of products have
made them accessible to more global consumers.

(v) New global competitors: A shift in competition from traditional country competitors
to emerging global competitors.

27
 \
International Marketing

Developments

The current international trading environment is characterised by a number ofdevelopments,

such as, the establishment ofWTO, the emergence of trading blocs, the unification of
Germany and the collapse ofUSSR. Further, as a result of the GAIT Accord, although a
number ofbenefits are now expected in the areas ofagriculture, textiles and pharmaceuticals,
several problems relating to trade policy changes and legal enactments are yet to be resolved.
The multilateral trading system which has become a reality calls for strict adherence to the
rules of international trade among member countries. Again, there are apprehensions
regarding sovereignty, poverty alleviation, economic growth etc., with the implementation
ofUruguay Round Agreement.

Trading Blocs

The trading blocs, while accelerating the process of growth and social change within a
particular group, are discouraging the inflow of goods from outside through manipulation
of import tariffs in favour of member countries. Further, in the name of growing
unemployment and unchecked imports at prices lower than their domestic products, many
ofthe developed countries are now coming up with a number of inconceivable tariff and
non-tariff barriers. The range, scale and application of particularly non-tariff barriers are
very complex and include such aspects as procurement policies, dumping measures, method
of assessing duties, administrative procedures and packing regulations. These countries
are also planning to introduce new trade restrictions like labour standards, environmental
conditions and sanitary regulations to ward off import of several items into their markets.

SWOT Analysis

Viewed against this background, it is necessary to attempt a SWOT analysis ofIndia's

export capabilities and extract the maximum out of our existing product and market
positioning. Over the years, we have depended on a small basket of traditional items for
generation ofIndian exports. The number of competitors for these items has grown and
some of them have outperformed us. Another problem of our export is that we have
focused on low value and simple items for which there is not much scope now. Further, we
have failed to take advantage of the global sourcing. There are a number of technology
intensive products like automated data equipment, telecom equipment and electronic items
for which there is a large market in developed countries. Nearly, 50 per cent of such items
are imported from developing countries like China, Indonesia, Malaysia and Thailand. In
the past, we have lost this opportunity. We must now get out of this trap by speeding up
the ongoing process of change. This involves several steps:

28
 \
Unit 2 Challenges ofGlobalisat~ofi

a) Vision

The most significant part of this change is to haye a vision supported by long-term policy.
And this vision should be reflected in the creation of something unique and different, which
cannot be imitated. Procter & Gamble took advantage ofits mass merchandising skills to I .

become a world leader in soaps and detergents. This could not be matched by others in !
the market. On the other hand, General Electric Company developed a computerised x
ray machine which was immediately imitated and out-priced by Toshiba. The responsibility
for giving such a direction and support lies with the top management. As of now, we have
very few companies in India with a long-term strategy and this has been mainly due to the
lack of stable government policies for business development. In the changed scenario, it
should be possible for individual units to work with greater confidence for their development
and growth. In order to achieve sustainable growth in export markets, it is necessary to
expand the existing product line either by increasing one's own production capacity, or
acquiring another company in the same product line. Dominance achieved in this manner
would also help in attracting additional talent and capital, resulting in further growth ofthe
company. The focus on existing line of production is necessary to exploit the available
expertise in a particular field.

b) Quality

Improvement in quality is yet another component of globalisation. Over the years, Indian
companies have operated in a sheltered home market where the customers are less
demanding and the inflow ofquality products at low prices was blocked through imposition
of high customs tariff. With the opening up of the Indian economy, we can no longer be
complacent and wait for outsiders to come and dislodge us in our own country. To be
successful in the international market, one has to be a 'world-size player' with matching
international quality standards, and fight out the profit sanctuaries offoreigners right in their
home countries. After the unification ofEurope, ISO 9000 was the 'mantra' for successful
operation abroad, and unless we qualify for this standard, the wider choice available with
the customers will simply keep us at bay. Customers all over the world have become
increasingly sophisticated and few will accept anything less than the best. One should,
therefore; offer the same level of quality both in emerging as well as mature markets.

c) Advantage

Identification ofproducts with competitive advantage is yet another aspect ofglobalisation.

It is an established fact that every firm or country cannot market several products abroad.
Different countries have competitive advantage in different industries. For instance, Japan
is successfulin electronics, the USA in computers and aircrafts, Germany in fine chemicals

29
 \
International Marketing

and Italy in leather products. To achieve success in overseas markets, it is de : rable to

combine both country and product-specific advantages. Viewed in this context, it would
be necessary for Indian players to concentrate on such products as textiles, jewellery,
leather, software, engineering, air-conditioning and movie production in the international
market. Recently, some of the Indian herbal products have also been very popular in the
Western countries. Cheap labour should not be viewed as an enduring advantage in
international markets. There are many industries in India where we have comparative cost
advantage because of cheap labour. But with gradual induction of foreign technology in
some of these areas, and the product becoming more sophisticated, these advantages are
becoming redundant. Further, the cost variation in different sectors also gets narrowed
down with higher levels of automation. This fact is amply demonstrated by the Japanese
experience where the labour cost is 20 times higher than that of India. With a labour
market reform in India, the situation will definitely improve in the country.

d) Alliances

Another area ofchange relates to product adaptation. This requires continuous upgradation
of technology and a huge investment in brands. Indian companies have lagged behind in
this area. There are several reasons for this. One, our export basket mainly comprised
bulk commodities where the value addition was minimal. Second, India's share in world
exports has been low and the only domain of competition was pricing. And thirdly, we
were obsessed with the socialist pattern of working where advertising is considered a
wasteful expenditure. Excellence in international marketing requires heavy expenditure on
product development and brand building. It is understood that establishment of brand in a
market like USA or Europe takes about four to five years and during this period, one has
to spend about Rs. 160 crore on advertising and publicity. Once a brand backed by
continuous product improvement is established, it will generate a kind of faith and credibility
in the product, which will sell automatically. Indian companies selling abroad should also
be prepared for a strategic alliance with a multinational company. Such a strategy is very
important in the present context where multinationals are going global very fast by joining
hands with even rivals. In the process, many of the Indian companies will graduate into
multinational and global companies. It is heartening to know that a few Indian companies
like Parle Agro, Mohan Meakins, Koparan Ltd. and Hero Motors have entered into
franchisingllicensing arrangements for manufacturer oftheir products in selected countries.

e) Reforms

Acceleration of economic reforms is essential for pushing through the ongoing process of
globalisation. We have yet to decide on several problems relating to foreign investment,
level playing field, privatisation,land ceiling act, public sector disinvestment and liberalisation

30
:.:-.:.~.. ~ ~ _.. - ~ .. :-: = ~.~ ~.: -:=.- :.~ ~ ..,'
 \
Unit 2 Challenges of Globalisador'i

in the import of consumer products. Once these issues are settled, the tempo of integrating
Indian economy with the world will be built up further.

~ Activity A: i~i;~ij~j~~i~;~?
I

a) Two examples offoreign companies operating in India that have adopted the principle I
i
of 'Think global, act local' are:
1., _

2. _

b) Economic reforms in India are helping the cause of globalisation and increasing the
pace ofintegrating the Indian economy with the world

o True o False

2.3 STRATEGIC MARKETING ORIENTATION

The degree ofmarketing involvement (described in Unit 1) does not necessarily correspond
to the strategic thinking and orientation ofthe finn. Often companies stray into international
markets because of a sudden spurt in demand. Strategic marketing planning may be of
secondary importance in the rush to 'fill up the tank' with orders.

Three distinct approaches to strategic marketing orientation are prevalent in firms involved
in international markets:

1) Extension ofdomestic marketing orientation

2) Multi-country marketing orientation

3) Global marketing orientation

i ..

1. Extension of domestic marketing concept t,.o,.:/;~~

The firm seeking extension of domestic sales into foreign markets is representing one type
r;~r;;~~1
of strategic marketing orientation. It views its international operations as secondary to,
and an extension of, its domestic production. Domestic business is its priority but foreign
I ...
sales are seen as a profitable extension of its domestic operations. Firms believe that is r!
I
their products can sell in their own country, they should sell elsewhere too. Minimal efforts l

31
 \ , .
I ..
! .
International Marketing

are made, if any, to adapt the marketing mix to international markets. In this strategic
orientation the aim is to market to foreign customers in the same manner as that to domestic
customers. It seeks markets that are similar to the home market and those that accept its
domestic products. This domestic market extension strategy can be very profitable and
firms with this approach are'ethnocentric' .

2. Multi-country marketing orientation

When a company recognises the differences between overseas and domestic markets and
the importance of offshore business, its orientation may shift to a multi-country marketing
strategy. This firm is guided by the concept that markets in different countries need
independent marketing programs. Firms adopting this orientation have clear and separate
marketing strategies for each country that they wish to involve themselves in.

Subsidiary companies operate independently ofone another in establishing their marketing

objectives, goals and plans. The parent country uses separate marketing mix elements
with little interaction among themselves. Products are adapted for each market with very
littlecoordination with other country markets; advertising campaigns, pricing, and distribution
decisions are localised.

The firm that applies this concept does not look for similarity among elements of the
marketing mix that might yield better results through standardisation. On the contrary, it
aims for adaptation to local country markets. Control is decentralised while recognising
the exclusivity of each market through local inputs.

Firms with this type oforientation are generally 'polycentric' . Some ofthe Korean companies
operating in India such as LG Electronics and Samsung fit in this category.

3. Global Marketing Orientation

The global marketing concept views an entire set of country markets including the home
market as one unit, identifying group of prospects with similar needs as a global segment.
The firm then develops a marketing plan that strives for standardisation wherever it is
possible, and cost-effective. Its marketing activity is global and its market coverage extends
across all continents. The company employing a global marketing outlook keeps aiming
for efficiencies of scale and cost by developing a marketing mix applicable across national
boundaries. Ford Motor Co., Intel and Microsoft are some of the companies that can be
described as global companies.

The marketing plan of such firms may imply a standardised product with country-specific
advertising or has a standardised theme in all countries with cultural-specific appeals to a

32
 \
Unit 2 Challenges of Globalisatloti

unique market characteristic, or has a standardised brand or image but has adapted products
to meet specific country needs and so on. E.g. Mc'Donald's standardises its processes,
logo, most ofits advertising, and interior decor and layouts whenever and wherever possible.
However, it is possible to find wine in the menu in France, beer in Germany, pork burgers
in Thailand and the 'Maharaja Mac' Veggie burger in India.

Being global is a mindset and a way of looking at commonalities that can be standardised
across regions or country-market groups.

The global marketing orientation has proved to be successful for many export-dominant
firms and MNCs. There is bound to be widespread adoption of this concept among the
newer companies that have big ambitions to enter new countries and new continents.

In fact the similarities of customer needs across countries have forced companies like
Sony Corp. (Video games) and Microsoft Windows (operating systems) to launch new
products almost simultaneously (or with very little time lag) in multiple countries around the
world.

However, the 3 types of strategic marketing orientation described above need not be
mutually exclusive. Depending on the product and the market, other orientations may be
present and may make more sense in certain concepts; for example, Unilever may follow
a global marketing strategy for disposable diapers but a multi country strategy in Asian
markets for soaps and detergents.
.r :-;

~ Activity B:

a) Identify two Indian Companies that have multi-country market orientation.

b) Identify two Indian Compa~es that have global marketing orientation.

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\ I.:
International Marketing

2.4 IMPLICATIONS OF GLOBALISATION ON INTERNATIONAl.

MARKETING

Globalisation offers marketers the opportunity ofreaching a much wider range ofconsumers
than has been the case in the past. This makes some aspects of marketing easier and
others moredifficult.

Basic tools and techniques of marketing

In an increasingly integrated business environment the emphasis moves from an individual

to a collaborative marketing platform. The essence of changes in tools and techniques of
the market is in the response to nationaIJregional aspects that remain during the processes
of transition - different aspects ofcorporate activity mature and globalise at different rates,
and nationaIJregionallegal requirements and product standards change very slowly.

This has led to Sony's concept of "global localisation" and this drives the company's
marketing worldwide. The basics are globalised-core technology, design, branding - and
the final product specification mix, promotion, customer support are undertaken just as if
Sony were acting as a national/regional company.

Behaviours are converging, but slowly. The influence ofhistory and culture difference will
remain significant. However the impact of the information revolution is such that there is
convergence and it is beginning to accelerate. Levi's are as much in demand in developing
countries like China, India and Brazil, as in the USA. The basic marketing messages
aimed at young, well-informed consumers work in Beijing and Delhi as in San Francisco;
the percentage of localisation will slowly decline over time.

Working out the physical channels to markets is not enough; marketers now need to
understand the informational channels to market.

Supply-chain marketing

Marketing is based increasingly on three interacting supply chains: product/service,

information and money. Transfers ofinformation and money are relatively easy, since these
are two elements of business that.became globalised most easily and most rapidly. The
product/service supply chain is more difficult because it is less homogeneous and remains
subject to local (mainly cultural) variances. Because of (a) constant migration of value
under conditions of competitive supply and (b) decision-making under conditions of
asymmetrical information, the scope ofthe concept ofmarketing is moving gradually beyond
the classical4Ps (product, price, promotion, place) that have framed the discipline for so
long.

34
"'.
 \
Unit 2 Challenges of Globalisat1on

What is happening, quite simply, is that customer value can be derived from any element
or combinationof elements in the total supply chain, notjust on the final product package.
Marketing is about identifying(a) where value-adding conversions can take place and (b)
how and why customersdevelop and change their views as to what constitutesvalue.This
takesplace againstabackground of increasinglycollaborativerelationships ratherthan the
traditional 'arm's length' dealings. It can be usefullysummarisedas a holisticand integrated
business process, as follows.
Technology/ Systems

L / Logistics

Sustained
Base Value-adding Customer
Materials Conversions Satisfaction

! -,
R&D t
Learning
Structure/culture

Marketing via the concept, tools and techniques of supply chain management
Fig. 2.1: Integrated Business Process
When the above conceptofthe full business process is considered, it is not difficult to see
how the decoupling of value creation from the country of location of the resources and
activities that are restricted to the 4Ps necessitates a redefinition ofthe activity we term
'marketing' . Globalisationaccentuatesthis tendency.
Knowledge-based marketing
It followsfrom thetwo sub-sections above that international marketingis essentially rooted
in knowledge acquisition,processing and application. The nature of market research and
marketing is changing to take this into account. How we discover what brings a buyer
(consumerorbusiness/industrial) to a choiceis increasingly complex. It is nolongersufficient
to build a brand and promote it on the basis of techniques and propositions that made an
impact twenty to thirty years ago in an American/European demand context.
The basis of a brand now involves commonality and consistency of key factors in the
productpackage, coupledwithlocaldetailsin[malspecification thatappealto theexperience
sought by the target buyer group(s).

35

 \
International Marketing

Globalisation cannot remove the aspects of the marketing mix that are set to remain
internationally heterogeneous. Therefore the question ofmanaging the information supply
chain is becoming more critical in marketing as business becomes increasingly global. f;~ ;~i%1j-;jl~ :i:.
Asymmetry ofinformation is often the critical factor that gives rise to competitive advantage,
at least over the short-term period.

We also bear in mind that "time compression" is a fact of marketing life- in terms of
product life-cycle, innovation, time-to-market and other potential order qualifiers and order
winners. The quantity and quality of information and the speed and creativity with which
such information can be processed are central to 21 st -century marketing. Market research
is responding to this challenge by developing and refining cost-effective techniques ofdata
mining and data manipulation- increasingly on a global basis.

What we are seeing is a new "currency" of marketing that is part of the essence of
globalisation. The true differentiators are increasingly located in "intellectual" rather than
"physical" capital. Thus high-value work gets done in locations where access to intellectual
capital is most favourable (the high-cost developed world) and manufacturing/assembly
gets done where raw materials, physical capital and labour are most favourably accessed
(the low-cost developing world). Order winners are found in the former; order qualifiers
are shifting increasingly to the latter. It is, in the long run, pointless to interfere in this
rational economic process.

Cohesiveness and consistency

If globalisation affects organisations, then it varies by function within a business. The final
challenge is to maintain cohesiveness and consistency in presenting a company and its
offerings to the world.

It is unlikely that markets will converge entirely because ofdifferences in history, sociology,
culture, physical and legal environments, and many other micro aspects. This makes issues
such as branding more, not less, important. But the concept and purpose of a brand is
changing; it serves only to make a statement about a company's core values and position.
The ability of a customer to reach a "segment ofone" (or realistically a "segment offew")
on the basis of a cohesive and consistent marketing platform, will be the key to global
success.

This is the true nature of Sony's principle of "global localisation".

Competencies in the new market environment

The new market environment is characterised by significantly greater organisational fluidity.

36
 \
Unit 2 Challenges of Globalisatlon r

I... .
All this gives rise to an additional set of challenges that are faced by business leaders I.
I .
generally, but especially in the marketing function, these translate readily into a comparison I. .

~
of core competencies, as follows.
I .
Competencies that are declining Competence that are growing :.
'.
l.
Getting ahead Adding value
Individual self Team working
Personal space, status Interpersonal effectiveness
Personality-driven Process-driven
Subject expertise Multidisciplinary
Initialqualifications Continuous updating/extending
Lifetimecommitment Cohesive but mobile career
Project management Business management
Predominantly deductive thinking Increasingly inductive thinking

The move towards globalisation requires marketing (and other) managers to abandon
national allegiances and this can happen only when top company management modifies its
own views and installs a set of processes and structures that relate to the emerging reality
of the business and not to past practice. Globalisation extends choice-on both the supply
and demand sides of business relationships. It not only opens up more markets to us, it
simultaneously opens our markets to more competitors. This provides a more fluid marketing
environment in which an organisation can "hedge" its markets and customers in order to
maximise returns and minimize risk and uncertainty.

This is why globalisation can never be about selling in each region of the world. It is why
the global company will be distinguished by its capabilities not simply by the number of
markets it serves or the number of countries from which it sources its inputs. Properly
managed at inter-governmental level, globalisation will level the playing field to a very
significant extent and will change the nature ofopportunity and competition. This constitutes
the true and emerging essence ofglobalisation. It will challenge and alter our concepts and
practices in marketing, and more generally, in strategic and operational management.

2.5 THE INDIAN CONTEXT

Business across borders is increasingly becoming commonplace. The business economies

of many nations are witnessing upturn and downturn cycles. This is forcing most local

37
 \
International Marketing

companies to look for business outside their national borders. This aspect is also being
facilitated by the growth of the Internet and its associated worldwide usage.

Quite a few countries have decided to reduce trade barriers or opened up markets that
were once prohibited-to private commercial enterprises. This is evident in many parts of
Europe, Latin America and Asia including India. The ongoing economic reforms in India
such as tariff reductions, deregulation ofindustries and allowing private sector participation
in government-owned companies (e.g. VSNL now partnering with TATA Group in
telecommunications, Reliance group's involvement in oil exploration) are attracting the
entry of global companies and multinational companies (MNCs).

Significant differences in labour costs in developing countries like India and China create a
strong reason for MNCs to locate or shift their manufacturing bases there and use the
facilities to supply market demand across the world. Both Hyundai Motors Company,
South Korea, and Ford Motor Company, USA are making automobiles in their plants in
Chennai (in South India) and marketing them to countries in Europe and Asia.

MNCs drive considerable cost advantages through economies of scale by concentrating

on world-scale volumes as opposed to national-scale volumes.

This gives them substantial advantages over local competitors who concentrate only on
domestic markets. Incertain industries, MNCs have the ability to transfer their production,
marketing and management know-how from country to country at vel)' low cost. Globalised
operations are therefore considered essential now for companies to get maximum advantage
in driving down costs.

Globalisation can be seen making deep inroads into industries such as motor vehicles,
telecommunications (Mobile and long-distance services), Internet services, petroleum
products and energy. Indian firms are also in the forefront with leading companies like
Mahindra & Mahindra, Bharat Forge, Bajaj Auto setting up units or having joint ventures
with foreign companies in markets outside India.

I
I
2.6 SUMMARY

In this unit, an attempt has been made to introduce the concepts of globalisation and the
challenges that companies face as a result of its spread. l
i .:,:;.,:; : , ;~,. :

I
~~X~~{:~(;(J
..

International marketing is reckoned as a dynamic aspect ofcorporate strategy for generation

of business opportunities. The issues and problems involved with companies operating in I

foreign environments have been brought to the forefront in the initial sections. The ways by
I

38
 \
Unit 2 Challenges of Globalisation

which globalisation is throwing up new opportunities for companies have been discussed.
The necessity of having a long term vision for companies operating in foreign markets has
been stressed.
1;~;! ~ 1[i;~; i~
It is not possible to deal with the topic of globalisation in isolation and without making
reference to the emergence of global companies and therefore, global competition. The i"
implications and effects ofglobalisation on international marketing have been covered in a
later section and given due prominence. The international marketing manager can no longer
afford to ignore the impact of globalisation on the company he/she is associated with. In
the units that follow, the more detailed aspects of globalisation will become clearer.

2.7 KEY WORDS

Trading blocs: A term used to refer to a group of nations within a certain region to
promote trade and business within themselves. This group may also discourage the inflow
ofgoods from outside the region through manipulation ofimport tariffs in favour ofmember
countries.

Global marketing: In this stage, the company treats the world, including their home
market as one market. Market segmentation decisions are no longer focused on national
borders.

Globalisation: This is a term that refers to increasing global connectivity integration and
interdependence in the economic, social, technological, cultural, political and ecological
spheres. It is the process by which the experience ofeveryday life is becoming standardised
around the world.

2.8 SELF-ASSESSMENT QUESTIONS

Q 1. What are the main issues faced by a company operating in a foreign country?

Q2. Why is the study on the effects of globalisation important?

Q3. Discuss the ways in which globalisation is affecting the Indian auto component

industry. '

Q4. How is the multi-country marketing orientation different from the global marketing
orientation?

39
 \
International Marketing

Q5. Different countries have competitive advantages in different industries. :~hborate

on this with two examples.

Q6. Visit the website: www.infosys.comand identify the source of the measures in
international operations that have helped the company establish its presence on a
global scale.

to'

~ .

40
117

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\tVHY FIRlVIS GO
IN~rI~RNAl'l()NAL

Objectives

After completing this unit, you will be able to:

(iF determine some ofthe reasons why firms go international.

(iF identify the basic similarities and differences between

domestic marketing and international marketing.

(iF trace the collaboration of a firm that moves from domestic

marketing to global marketing.

(iF explain some ofthe key forces that drive companies into
international marketing.

(iF justify the reasons that have made companies successful in

international markets.

Structure

3.1 Introduction

3.2 Motivating Factors

3.3 International Marketing vs. Domestic Marketing

3.4 Evolution from Domestic Marketing to Global Marketing

3.5 The Driving Forces

3.6 Successful Principles of International Marketing-oriented

Companies

3.7 SUIIlIIla1}'

3.8 Key Words

3.9 Self-Assessment Questions

 \
International Marketing

3.1 INTRODUCTION

~ !~ [:~ l)~:;~-:
There are various factors that motivate a company to operate and market on foreign
shores. Some ofthese factors are the 'pull' type and some belong to the 'push' type. It is
necessary to understand some of these factors in detail since they provide us with answers
to some basic questions of the existence of companies in foreign countries. There are
similarities and differences between domestic marketing and international marketing. In a
separate section an attempt has been made to highlight the various factors in simple terms.

The progression ofthe company's involvement in foreign countries proceeds from export
marketing to global marketing. A global marketing strategy involves the creation of a single
strategy for a product server or company for the entire global market. Although Unit 2
introduced the concept of global marketing briefly, this section takes the concept forward.
This concept has assumed great importance in India with the emergence ofIndian companies
that have become international in outlook and performance, as well as those with global
ambitions.

This is followed by a section on the main driving forces that are creating new multinational
companies (MNCs). The importance of international marketing is derived from the fact
that driving forces have a much greater influence on companies than the restraining forces.
In the last section, some ofthe successful principles that have guided companies to succeed
in international markets have been presented in a condensed form.

3.2 MOTIVATING FACTORS

The factors which motivate firms to go international may be broadly divided into two
groups, vis., the pull factors and push factors. The pullfactors, most of which are proactive
reasons, are those forces of attraction which pull the business to the foreign markets. In
other words, companies are motivated to internationalise because of the attractiveness of
the foreign market. The attractiveness includes, broadly, the relative profitability and growth
prospect.

The pushfactors refer to the compulsions of the domestic market, like saturation of the
market, which prompts companies to internationalise. Most ofthe push factors are reactive
reasons.

Important reasons for firms involved in exports and imports are discussed below:

1. Profit Motive
One ofthe most important reasons of internationalisation of business is to earn profit.

44
 \
Unit 3 Why Finns Go International I
i:

Often it has been found that International business could be more profitable than
sellingin the domesticmarket.

One of the important motivation for foreign investment is to reduce the cost of
production by-taking advantage of cheap labor input or raw material.

2. Growth Opportunities

The growth potential of many foreign markets is a strong attraction for foreign
companies.In a number of developing countriesboth the populationand income are
growing fast. It may be noted that the several developing countries, the newly
industrialising countries(NICs)and the Peoples' Republicof China in particularhave
been growing much faster than the developed countries.

3. Domestic Market Constraints

Domestic demand constraints drive many companies to expand the market beyond
the nationalborder. The market for a number of products tends to saturateor decline
in the advanced countries. This often happens when the market potential has been
almostfully tapped.Anothertype of domestic marketconstraintarisesfrom the scale
economies. The technological advances have increasedthe sizeof theoptimum scale
of operation substantially in manyindustries makingit necessary to haveforeign market
in addition to the domestic market, to take advantage of the economies of scale. It is
the thrust given to exports that enabled certain countries like South Korea to set up
economic sizeplants.

Domestic recessionoften provides companies to explore foreign markets.

4. Competition

Competition may become a driving force behind internationalisation. A protected

market does not normally motivate companies to seek business outside the home
market. The economic liberalisation in India since 1991 has increased competition
fromforeign firms, HencemanyIndiancompanies are now goingintemational in a big
way.

5. Government Policies and Regulation

Many govemmentsgive number of incentivesand other positivesupportto domestic

companies to export and to invest in foreign countries. Sometimes companies may
be obliged to earn foreignexchangeto finance theirimports and to meet certainother

45
 \
International Marketing

foreign exchange requirements like payment of import bill, payment ofroyalty and

dividend and debt. Some companies (particularly in developed countries) move to

foreign countries because ofcertain regulations like the environmental laws.

6. Spin - off Benefits

!.
International business helps the company to improve its image. International marketing

may have pay-off for the internal market too by giving the domestic market better

product. Further the foreign exchange earnings may enable a company to import

capital goods technology etc. Another attraction of exports is the economic incentives

offered by the government.

7. Strategic Vision
The systematic and growing internationalisation of many companies is essentially a

part of their business policy or strategic management.

~ Activity A:

Two main motivating factors for companies to go international are:

1., _

2. _

3.3 INTERNATIONAL MARKETING VS DOMESTIC MARKETING

There are three basic points of similarities between domestic marketing and international

marketing:

1. Both in domestic marketing and in international marketing, success depends upon

satisfying the basic requirements of the consumers. This necessarily involves finding

out what the buyers want and meeting their needs accordingly.

2. It is necessary to build goodwill both in the domestic market as well as in the

international market. t15X0\
3. Research and development of product improvement and adaptation is necessary

both for international marketing and domestic marketing.

46
 \
Unit 3 Why Finns Go Internatiorfal

However, there are some salient features of difference between international marketing
and domestic marketing.

Sovereign Political Entities

Each country is a sovereign political entity and goods and services have to move across
national boundaries. As a result, they may have to face a number of restrictions. They may
fall in anyone ofthe following categories:

i Tariffs or Custom Duties - These only make the goods expensive and are not
intended to ban foreign goods entirely.

IL Quantitative restrictions - These are mainly intended to restrict trade in the specific
commodities subject to restrictions, the major objective being protection of domestic
industries.

m. Exchange Controls - In some cases though the entry ofgoods is not banned, importers
may not be allowed the necessary foreign exchange for payment of the goods due to
the existence of exchange controls.

IV. Local Taxes - One of the objectives is to make the foreign goods comparatively
costlier than domestic goods.

Different Legal Systems

Each country has its own legal systems and very often the legal systems operated by
different countries differ from each other.

The existence of different legal systems makes the task of businessmen more difficult as
they are not sure as to which particular system will apply to their transactions. However
attempts are being made to bring about uniformity in some specific areas.

Different Monetary Systems

Each country has its own monetary system and the exchange value of each country's

currency is different from that of another.

Lower Mobility of Factors of Production

Factors of production are less mobile as between nations than in the country itself.

 "- ".

\
International Marketing

Differences in Market Characteristics

Each country is a separate market having its own demand pattern, channels ofdistribution,
methods of promotion, etc. These differences are accentuated due to the existence of
government controls and regulations.

Differences in Procedures and Documentation

Each country has its own procedures and documentary requirements and traders have to
comply with these regulations if they want to export to or import goods from foreign
countries.

Greater Degree of Risks

There is a greater degree of risk involved in international marketing than in domestic

marketing due to:

L Larger volume of transactions and the higher value ofthese transactions.

n. Longer time period involved in these transactions due to longer time in transit and the
longer credit period involved.

m. Comparatively less knowledge about the parties' reputation and credibility.

_ ..
In addition, as stated earlier, there are the exchange fluctuation risks.

Cultural Differences

Exporting means operating in a cross-culturalenvironment. This makes the task ofmarketing 'i~f~t~~l~
more complex because the marketer must appreciate how different is the foreign culture
from his own and how the difference has to be reflected in shaping his behavior pattern as
well as his export marketing strategy.

Differences

Domestic Marketing ! International Marketing

1. Business laws and regulations are defined Foreign laws and regulations may not
and understood be clear
2. Business is carried out in single currency Many currencies are involved with
wide exchange rate fluctuations.

48
 \
i ..
Unit 3 Why Finns Go International
I

Domestic Marketing International Marketing

3. Business risks can usually be identified Environments can be so unstable that

and assessed. is becomes extremely difficult to
identify and assess risks
4. Research data is available in single Research data is in foreign language r.

language and is easily accessible. and may be extremely difficult to

obtain.
5. Promotional message need to consider Numerous cultural differences need
a single national culture. to be taken in to account.
6. Market segmentation occurs within a Market segments might be defined
single country. across the same type ofconsumer in
many different countries.
7. Communication and control are International communication &
immediate and direct. difficult
8. Functional specialisation within a International marketing managers
marketing department is possible. require a wide range marketing skills.
9. Selling and delivery documentation Documentation is often drivers and
can be standardised. complicated due to meeting different
border regulations.
10. Distribution channels are easy to Distribution is often carried out by
monitor and control. intermediaries hence much harder to
monitor.
11. New product development can be New product development must take
geared to the needs of the home market. into account all the markets the
products will be sold in.

~ Activity B:

a) Two main advantages the company having international markets over one that operates
only in the domestic market are:
1. -----,- _

2. _

b) In international marketing, the foreign laws and regulation are usually.

o Clear o Not Clear

49

 \
International Marketing

3.4 EVOLUTION FROM DOMESTIC MARKETING TO GLOBAL

MARKETING

The term global marketing has been in use since the early 1980s. It began to assume
widespread use in 1983 with the seminal article by Ted Levitt. Prior to that, international
marketing or multinational marketing was the term used most often to describe international
marketing activities. However, global marketing is not just a new term for an old
phenomenon; there are real differences between international marketing and global
marketing. In many ways global marketing is a subcategory ofinternational marketing with
special importance in our present world.

Domestic Marketing

Marketing that is aimed at a single market, the firm's domestic market, is referred to as
domestic marketing. In domestic marketing, the firm faces only one set of competitive,
economic, and market issues and, essentially, must deal with only one set of customers,
although the company may serve several segments in this one market.

Export Marketing

The field of export marketing covers all those marketing activities involved when a firm i ...
markets its products outside its main (domestic) base ofoperation and when products are
physically shipped from one market or county to another. Although the domestic marketing
operation remains of primary importance, the major challenges of export marketing are
the selection of appropriate markets or countries through marketing research, the
determination of appropriate product modifications to meet the demand requirements of
export markets, and the development of export channels through which the county can
market its products abroad. In this phase, the firm may concentrate mostly on the product
modifications and run the export operations as welcome and profitable by-product of its
domestic strategy. Because the movement of goods across national borders is a major
part of an exporting strategy, the required skills include knowledge of shipping and export
documentation.

International Marketing
. '

When practicing international marketing, a company goes beyond exportingand becomes

much more directly involved in the local marketing environment within a given country or
market. The international marketer is likely to have its own sales subsidiaries and will
participate in and develop entire marketing strategies for foreign markets. At this point, the
necessary adaptations to the firm's domestic marketing strategies become the main concern.

50
 \ f -,
Unit 3 Why Finns Go International
I

I
Companies going international now will have to find out how they must adjust an entire
marketing strategy, including how they sell, advertise, and distribute, in order to fit new I

market demands. I;.-~; ~; ; ~i:.;

An important challenge for the international marketing phase of a firm becomes the need
to understand the different environments the company needs to operate in. Understanding
different cultural, economic, and political environments becomes necessary for success.
This is generally described as part of a company's internationalisation process, whereby a
firm becomes more experienced to operate in various foreign markets. It is typical to find
a considerable emphasis on the environmental component at this stage. Typically, much of
the field of international marketing has been devoted to making the environment
understandable and to assist managers in navigating through the differences. The
development of the cultural/environmental approach to international marketing is an
expression of this particular phase.

~uhinational~arketing

The focus on multinational marketing carne as a result ofthe development ofthe multinational
corporation. These companies are characterised by extensive development ofassets abroad
and operate in a number of foreign countries or markets as if they were local companies.
Such development led to the creation of many domestic strategies, thus the name
multidomestic strategy whereby a multinational firm competes with many strategies, each
one tailored to a particular local market. The major challenge of the multinational marketer
is to find the best possible adaptation of a complete marketing strategy to an individual
country.This approach to international marketing leads to a maximum amount oflocalisation
and to a large variety of marketing strategies. The attempt of multinational corporations to
appear "local" wherever they compete, often results in the duplication ofsome key resources.
The major benefits are the ability to completely tailor a marketing strategy to the local
requirements.

Pan-Regional Marketing

Given the diseconomies of scale of individualised marketing strategies, each tailored to a

specific local environment, companies have begun to emphasise strategies for larger regions.
These regional strategies encompass a number of markets such as Euro-strategies for
Western Europe. Such integration is apparent in North America, where the United States,
Canada and Mexico have signed a far-reaching trade pact, or in the Pacific Rim, where a
number ofcounties have made great progress in their economic development. Companies
considering regional strategies look to tie together operations in one region, rather than
around the globe, the aim being increased efficiency, Many firms are presently working on

51
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International Marketing

such solutions, moving from many multi-domestic strategies in Europe toward Pan
European strategies.

Global Marketing

Over the years, academics and international companies alike have become aware that
.opportunities for economies of scale and enhanced competitiveness are greater if they can
manage to integrate and create marketing strategies on a global scale. A global marketing
strategy involves the creation of a single strategy for a product, service, or company, for
the entire global market, that encompasses many markets or countries simultaneously and
is aimed at leveraging the commonalties across many markets. Rather than tailor a strategy
perfectly to any individual market, the company aims at settling on one general strategy
that can be applied throughout the world market. The management challenge is to design
marketing strategies that work well across many markets. It is driven not only by the fact
that markets appear increasingly similar in environmental and customer requirements, but,
even more so, by the fact that large investments in technology, logistics, or other key
functions force the companies to expand their market coverage.

Thus global marketing is the last stage in the development of the field of international
marketing. While global marketers face their own unique challenges that stem from finding
marketing strategies that fit many countries, the skills and concepts of the earlier stages are
very important and continue to be needed. In fact, companies that take a global marketing
approach will be good exporters because they will include some exporting in their strategies.
Such firms will also have to be good at understanding of the cultural, economic, and
political environment ofmany countries. Furthermore, few global marketing strategies can
exist without some local tailoring, which is the hallmark ofmultinational marketing. As a
result, global marketing is but the last of series of skills, all included under the broad
concept of international marketing.

S Activity C:
Two differences between multinational marketing and global marketing are:

1. _

2. _

3.5 THE DRIVING FORCES

The rapid growth of the world economy in the last three decades has been shaped by the

52
 \
Unit 3 Why Firms Go International

various driving and restraining forces. During the 1990s, changes in the business environment
have presented a number ofchallenges to the established methods of carrying out business.
Today, the importance ofinternational marketing is derived from the fact that driving forces
have a much greater influence than the restraining forces.

Although the driving forces can vary from industry to industry, typical driving forces can be
converging market needs, technology transportation and communication improvements,
product development costs, and quality improvement pressures.

Converging market needs

Markets around the world consist of cultural universal elements and culturally different
elements. The common elements provide an underlying basis for the opportunity to create
and serve international markets. The creation ofinternational markets holds the key to the
development of global markets. The soft-drink industry is one example ofnew pervasive
the common elements are in virtually every country of the world. There is ample evidence
to suggest that consumer needs and wants around the world are converging, thereby
creating new international markets where none may existed before.

Technology

Technology is a universal factor that crosses national and cultural boundaries; no longer
does it belong to a single nation. Once a technology is developed, it becomes available
everywhere around the world. The emergence of a global village has been characterised
by technological factors ~uch as the Internet, growth in satellite communication and world
wide TV networks such as CNN and BBe.

Transportation and communication improvements

iifi~Iit~~if~

t"-:'::= .~::::.~~.:~:=

The time and cost barriers associated with distance have fallen drastically over past few
decades. The fit airplane ushered in new revolution by marketing it possible for people
travel ground the world in less than 48 hours. Tourism has enabled people from many
countries to see and experience the newest products being sold abroad. Without modem
jet travel it is difficult to imagine one to one communication among company employees
and between the company and itsconsumers. Since the 1990s, communication technologies
such as e-mail, fax teleconferencing and videoconferencing have allowed managers and
executives to link up electronically from virtually any part ofthe world for a fraction ofthe
cost of air travel.

A similar revolution can be observed in transportation technology, physical distribution

53
 \
International Marketing

costs have declined and so has the time element. The per-unit cost of shipping au.omobile
from Japan and Korea to the USA by specially designed auto-transport ships is less than
the costof overland shipping from Detroit to the West Coast of USA.

Product development costs: When new products require major investments and long
time periods, the pressure for globalisation becomes severe. In the pharmaceutical industry
the cost of developing a new drug in 1976 was USD 54 mn. This rose to USD 359 mn. in
1993. Such costs have to be large enough to support investments ofthis size. It is therefore
not surprising that new research in pharmaceuticals and basic research is shifting from the
developed world to countries such as India which one of the largest in terms of scientific
and technological manpower.

The success of an IT company depends a great deal on innovation through R&D the top
IT MNCs have been investing millions of dollars in R&D around the world. Since 2003,
a number of these R&D centers have been set up in India, some of these companies
have more than one centre, for example, IBM has two centers in Delhi and Bangalore,
Microsofthas two in Hyderabad and Bangalore and Adobe India has two in Noida and
Bangalore. In addition, R&D centers have been set up by yahoo, Google and INTEL.
It is estimated that nearly 25 percent of fresh global reinvestments by IT MNCs are
channelised towards their R&D centers in India, According to a senior official at olecrosoft
Research India, India has a rich pool of research talent and provides opportunities to
work on interesting problems, for examples, the number oflanguages in India makes it a
good place to conduct research in multilingual systems India is an excellent place to do
research in technologies that are suited to emerging economies.

Source: The Times of India

i;J -..!{~ Jl i!i

Quality Improvement Pressures: International marketing strategies can generate greater

revenue and greater operating margins that can be reinvested to support design and improve - . - -..
~ ~

::/::~--'.. -.:-~~~
quality. An international company and a domestic company may each spend 5 % of their
sales on research and development, but the international company may have many times
the revenue ofthe domestic company because it serves multiple national markets.

This has brought into the open the ,concept of world class quality. International companies
like Nissan, Toyota, Honda, Caterpillar & John Deere have raised their bench works on
quality that is truly world class. When an international company establishes a benchmark
in quality, competitors have to make their own improvements and come to its leveL For
products that are conceived on a global marketing level, uniformity can reduce engineering,
design and production costs access business functions.

54
'. -... ."... - -- - --
~
 \
Unit 3 Why Firms Go Internati'anal

Quality, uniformity and cost reduction were all driving forces behind Ford's development
of its world car sold in the USA as Contour and Mercury Mystique, and as Mondeo in
Europe and certain other countries.

There can be reason why economic growth has been a driving force in the expansion of
the international economy and the growth ofinternational marketing.

Firstly,growth has created market opportunities that provide a major incentive for companies
to expand internationally at the same time, slow growth in a company's domestic market
can trigger the need to look for opportunities in foreign countries with high rates ofgrowth.

Second, economic growth has reduced resistance that might otherwise have developed in
response to the entry of foreign firm into domestic economics.

Thirdly, the worldwide movement toward de regulation and privatisation is opening up

formerly closed markets significantly. Privatisation of telephone and telecommunication
network systems around the world is creating opportunities and threats for every company
in the industry.

Leverage

Any international company possesses the unique opportunity to develop leverage. Leverage
is a type of advantage that a company enjoys by virtue of the fact that it conducts business
in more than one country. There are four important types of leverage an international
company enjoys:
I'',',',"',
D
~)if.;~~~~;~

Experience transfers

ii) Scale economies

iii) Resource utilisation

iv) International or global strategy

S Activity D:

Two typical driving forces that are exerting a great influence on companies are:
~;!;?;{~t;::

1. _

2. _

55
 \
International Marketing

3.6 SUCCESSFUL PRINCIPLES OF INTERNATIONAL MARKETING

ORIENTED COMPANIES
By now it is well acceptedthatthe principlesthat governedsuccessin domesticmarketing

arenotreadily acceptable intheinternational marketplace. In orderto survive ininternational

markets, companies need to adopt a different set of strategies and tools so that they can

withstandmoredemanding customers, fierce competition andtheexternal constraints thrown

up by the environments in specific countries. A new kind of response is needed from the

company that seeks to make inroads in the international area.

Therearecertaincommonprinciples in international marketing thathavehelpedcompanies

gain success.Some of the important principles are reviewed below:

1. Marketing is a strategic business concept: The traditional concept of marketing

has lost its adaptability in international regions. When companies are shatter up by

external drivers such as technology, economy and market condition they have face

internalorganisationalpressures withinthemselves shareholders, people culture.In

such a scenario, marketing has to take centre stage and become a key strategic

business conceptwithintheorganisation. This meansthatthe topmanagementshould

formulate the company's direction in the various countries and have long-term

orientation.

2. Marketing is everyone's business: All the employees within the firm form a

community called amarketing community. In thecommunity, every personisa marketer

meaningthe responsibilities of acquiring, satisfying andretaining customerslieon the

shouldersof every person. The responsibilityof creating customer loyaltybecomes

the central aspect of all internal operations.

~f:;2~~%~~
3. Creating value: The third principle is the foundationof the internationally oriented
company. It does not go after short term profits but creates customer value for long
term relationships. By continuously and consistently creating value, the company
generatesprofits. Successfulcompanieshave followedthis verybasicconcept: value
is the key to winning and creepily customers. i .
I

"- .. -' -- .', .. ~

4. Recognition of the diversify of customers: This principlesis based on the premise ~::::::~~~:::~~~~:~
1",:,:.,:;:.:.:.::.::
that not all customers are created equal. Many companies are tempted to think that
their customers have roughly similar needs and wants. This assumption only leads
them to create averageproductsof average value. The customersin variousmarkets
are quitedifferent andtheirneedsare diversified. In buildcustomerloyalty, a company
should concentrate on differences in need and wants.

56
-.-:.,.- ". ,.--".-.
 \
Unit 3 Why Firms Go International

5. Developing a brand: Taken in a broader context, a brand is a value-creator, bran is

the equity of the firm that adds value to products and services it offers. It is an asset
that creates value to consumers by enhancing satisfaction and recognising quality. A
key price-driver for company that intends to go international is the brand. It is the
brand that enables the company to avoid its products and services from being
commoditised.

6. Service as a paradigm: One of the biggest value-enhancers is service. It is not just

offering pre-sales service post sales services or even during sales service out of
compulsion. It is the paradigm ofthe company to create, a lasting value to customers
through products and services. In create long lasting value and build relationships
with customers, the firms offer should provide constant value to customers. The top
management has key role in creating, maintaining and developing the service philosophy
the whole organisation.

7. Process as a value-enabler: This refers to the process ofcreating value to customers.

It reflects the product quality, cost and delivery of a company to customers. This
principle emphasises the need foe the company to manage the supply-chain process
from raw material to finished products in a way that enhances value creating activities
and eliminates the value eroding activities within the company. It requires the firm to
be the hub network organisations where it could establish relationships with
organisation that have the potential to add value. The term often used to describe this
strategic alliance. Benchmarking; outsourcing, re-engineering, mergers and acquisitions
are examples of strategic actions to improve process. The value-creating drivers
such as brand, service and process should not only create value to external customers
and the investor community, but also become the credo for internal customers (i.e..
the people).

8. Differentiation in content, context and infrastructure: Differentiation is the act

of designing a set of meaningful differences in the company's offers with respect to
competitors' offers. Different products are the core tactic of the company to support
its positioning. Differentiation should create a truly different and unique product or
offering for customers. The product not only has to be perceived differently by

~:::JP;;:0~~
customers (positioning), it has to be really different in content, context and infrastructure
(differentiation).

A company can ideally create a unique offer by concentrating on three aspects of I

differentiation: content, context and infrastructure. l

Content (what to offer) is the core benefit oftheproduct itself. I

I
l"
~.'. --->

57
 \
International Marketing

Context (how to offer) refers to the way the company offers the pfCl 'jet.

Infrastructure (enabler) is the technology, facilities and people used to create the
content and context.

When the positioning strategy is not supported by differentiation, the company may
overproduce and under deliver to customers - an undesirable situation since it could
damage the company's brand and reputation. On the other hand, if positioning is
supported by differentiation the company will establish strong brand integrity. It means
the brand image in the consumers' minds is similar to the brand identity communicated
by companies.

9. Bring agility: In this principle, an agile company continually engages in three main

activities. First, it constantly monitors competitors' movements and consumer behavior

(WHAT). Second, it continuously uses and analyses the information gathered from

the first activity to get a useful inference about the environment (WHY).

Third, the collected information is incorporated in its strategy and tactic development
process (HOW).

The agile company monitors, scans and reviews the business and competitive
environments continually. It responds in order to preempt the competitors movement.

This principle allows the company to be not first a change agent and a change driver
but also a 'change surpriser'. A 'change surpriser' is a company that is always agile.
It is the company that can balance what, why and how.

10. Integrate present, future and gap activities: Successful companies generally

achieve a balance in their activities present, future and gap.

Present activities are about today's products that create profit by servicing today's
customers. Future activities are about developing tomorrow's products that create
sustainable growth by servicing tomorrow's different customers.
I. .:
Glap Activities are about enhancing capabilities ofthe technology and people, internally 1.-::;:---:.;:

and externally, or by creating a strategic alliance or merger and acquisition in order to W;i?/~;j.~
1"'.".:::::-,-
create activities for a risk free future.

The above ten principles are first some of the important ones that have been adopted
by companies seeking worldwide success. Together they signify the transformation
from a marketing oriented company to a customer driven company.

58
 \
Unit 3 Why Firms Go International

filS Activity E:
a) Two common principles that have helped Indian companies market abroad are:

1._ _"...--..."...,.-_ _- - - - - - - - - - - - - - -
2. _

b) Presales services for a manufacturing company can be a big:

o Value creator
o Value enhancer
o Value enabler

3.7 SUMMARY

This unit has attempted to answer some of the "Why's" of international marketing. This is
necessary to make a solid foundation on which the rest of the units of this subject can be
based. Some of the 'push' and 'pull' factors that motivate a company to go international
were studied.

The progression of the company's involvement in foreign countries was reviewed. It is

necessary to understand the concepts of global marketing; particularly since more and
more Indian companies are going international in the current business environment.

The main driving forces that are creating new MNCs have been presented in a subsequent
section. This section has been included so that the reader can understand the nature of the
new face of international marketing and how companies are leveraging their strengths in
foreign markets.

This unit concludes with a section on some of the principles based on which companies
have achieved success in international markets. This section is not comprehensive and the
reader is advised to refer to additional literature to have a complete understanding.

3.8 KEY WORDS

Domestic marketing: It refers to a term that describes the actions taken by a company
in the marketing area while operating in the home country.

59
_ > r , __ . _ -~- ," - _ - -
:~~ .:::':'0,: :.~ '.:.: :>~.': '::.; .:~:..~::-:.:o :-.:~ ~.: "':'.~:~,<->:' ~ ~ -,

\
International Marketing

Multinational marketing: A term used to describe the marketing activities by companies

that are characterised by extensive development of assets abroad and extensive marketing
operations in a number of countries.

Value enabler: It refers tothe process of creating value to customers and reflects the
product quality, cost and delivery of a company to customers.

Leverage: It refers to some type of advantage that a company enjoys by virtue of the fact
that it conducts business in more than one country.

Differentiation: It is used to describe the act of designing a set of meaningful differences

in the company's offers with respect to competitors' offers.

3.9 SELF-ASSESSMENT QUESTIONS

Q 1. What are the specific advantages a finn can derive by going international?

Q2. What are some of the important reasons why firms look for export markets?

Q3. Identify six points of difference between domestic marketing and international

marketing.

Q4. Identify and explain three main driving forces that are creating new opportunities for
companies in a foreign nation.

Q5. Explain the concept of leverage a company possesses by entering foreign markets.

Q6. Explain some of the principles that have helped Bharat Forge Ltd. to become the
second largest forging company in the world.

~;f:~:7~C: ~!.!

60
:.:-.:.:- : "." ., ~ . .._.~~.. ,.,0,_._00 .. ~~,~. :..'.::.. ."
 , .. ,: ~ ~ ,.,: . "-"

19

'G,~c~1

I
S3:.LON
I
.
I
I \1l,ll0!WUJ;)lUI 00 SUJJ!d A4M.
!
j
. I \
,
 . : .:- - ~.: - : ~ , :. - ,

'(;9

S3:J..ON

'i3U!l;l~J\!W !\!U0!l\!UJ;llUI

\
 - \

THE TASK OF
IN'rEJlN.A'rIONAI-J
- Ml\RKETING
Objectives
After completing this unit, you will be able to:
(fr enumerate the steps in the international marketing process.

(fr explain the degree and nature ofinvolvement in international

business by companies.

(fr justify the international orientation through the EPRG

framework.

(fr state the international marketing considerations in the SME

section and the five ways of participation.

(fr describe how countries differ in the various stages of

market development.

(fr assess the relevance of income and purchasing power

parity.

Structure

4.1 Introduction

4.2 Steps in the Marketing Process

4.3 International Orientation

4.4 International Marketing Considerations in SME Sector

4.5 Stages in Market Development

4.6 Income and Purchasing Power Parity

4.7 Summary

4.8 Key Words

4.9 Self-Assessment Questions

-.
 \
International Marketing

4.1 INTRODUCTION
Having gone through the introductory aspects of international marketing and the reasons
why firms go international in the previous units, it is useful to focus our attention on the
tasks of international marketing.

The tasks ofinternational marketing are rendered more complicated than domestic marketing
since each foreign country adds its own unique set ofuncontrollable elements. The adaptation
ofthe marketing mix to the uncontrollable elements will ultimately determine the magnitude
of the tasks and the outcome of the marketing efforts.

The degree ofinvolvement in international business by companies vary widely. The EPRG
framework is a useful model in understanding the levels ofinvolvement and orientation of
firms towards international business. Depending on the ethnocentric orientation or
polycentric orientation, the marketing strategy can be an extension strategy or adaptation
strategy.

In recent years, it is not only the large organisation that has taken giant steps in expert
marketing but also the small and medium enterprise (SME) sector. The SME sector is
equally important in the growth ofthe nation's economy and promotion of exports. It is
therefore appropriate to study some of the dimensions in export marketing that affect the
growth of this sector. Another major task ofthe international marketer is the identification
ofthe level ofmarket development in each foreign country. The GNP per capital is generally
used as the base for dividing the various countries. It is also useful in understanding the
concepts and the importance of income and purchasing power parity (PPP) to compare
the standards of living in various countries on a common platform. Some examples of
GNP figures for a few countries have been included for the readers' benefit.

4.2 STEPS IN THE MARKETING PROCESS

The frrststep obviously is the most crucial one, viz.the commitmentto enter international

business.

Once the basic decision has been accepted as the organisation motto, the second

step is to carry out the SWOT analysis. This analysis consists of evaluating the

strengths, weaknesses, opportunities and threats of the company against the ~~il~~
perspective of internal, external and international parameters.

The result ofthis analysis will help in reaching a conclusion (the third step) with regard

to: (a) which markets to enter (b) which particular segment (c) how to enter and (d)

how to market.

64
.~' .. " .__
._'_~.r._.~ ,:"._ F. _ _ ~. ~ ~,
 \
Unit 4 The Task of Internation~l Marketing

Once decisions have been taken on these, the company will be in a position to set the
targets (the fourth step) in terms of market penetration, sales volume or product
awareness relative to specified time horizons.

The fifth step is.to develop the organisational system to carry out the international
marketing functions and to make adequate resources available to make the functioning
effective.

The sixth step involves the carrying out ofthe actual job of international marketing.

The seventh and the final step is to review, identifying the mistakes if any, modify the
system, if required, and set new targets for the succeeding period.

Fig. 4.1 summarises the critical steps and the task processes in international marketing.

I Commitment to Export I
I
Analyse
I
I I
Internal Factors External Factors
- Product - Market
I I
Decide

Target Market ~ ."

- Market Segment
- Entry Method
- Marketing Strategy ~:~~~:J;;J;~
Set h/:,:\//
l:,::':','/';':':
I :~::. -.' ;. ::
~.=

I Target
~
I
Implement
I

Organise ,
Allocate
- Department Resources
- Subsidiary
-,
--
--- Export ......
.---
Fig. 4.1: Steps in international marketing

65
.:,': -.- -. ~.' -.' . -' -,.. .
 \
International Marketing

S ActivityA:
The inputs required for a decision on the target market are an analysis of:

4.3 INTERNATIONAL ORIENTATION

The degree and nature ofinvolvement in international business by companies varies widely.
The Ethnocentric, Polycentric, Regio-centric, Geocentric (EPRG) scheme is helpful in
understanding the levels of involvement of firms in international business. The EPRG
framework identifies four types ofattitude.

Ethnocentric Orientation
Strong orientation towards the home country.
Overseas operation viewed as secondary to domestic operation, primarily as means
of disposing of"surplus" domestic production.

Home base is used for production of standardised products for export in order to
gain some marginal business.
Plans for overseas markets are developed in home offices, using policies and
procedures identical to those employed in domestic market.
Overseas marketing is commonly administered by an export department.
Overseas operation conducted from a home country base with strong reliance on
export agent.
Domestic product mix without major modifications for overseas market.
Ethnocentrism in international marketing is characterised by "Extension Strategy".
I

Appropriate for small companies entering first time in international operations or

companies with minimal international commitments; entails minimum risk and
commitments to overseas markets.

Pricing decisions are often taken from home market, which might not fit the local
market.

66
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Unit 4 The Task of Intemation;' Marketing l
i
I
No international investment.
I

Polycentric Orientation '.' .

f~:~~~;~~~~f~~~~~~
A strong ()rien,t,!tion to the host country.

Polycentric attitude arises when company begins to recognise the importance of

inherent differences in overseas market.

The attitude places emphasis on differences between markets that are caused by
variations within, such as income, culture, laws and politics.

The assumption is that each market is unique.

Personnel from the host country are often employed and allowed to have a great deal
of discretion in market decision.

Local personnel and techniques are best suited to deal with local market conditions.

Subsidiaries established in overseas markets - each subsidiary operates independently

and establishes own marketing objectives and plans.

Environment of each market is considered while formulating marketing strategy.

Market segmentation is done on a country basis.

Emphasis is put on local laws, custom and culture and great care is taken to understand
the local way of doing business.

Results in maximum degree of geographic decentralisation.

Marketing is characterised by Adaptaiion Strategy.

The most important merit of polycentrism is the adaptation ofthe marketing strategies
to the local conditions.

A significant degree ofdecentralisation.

Regiocentric orientation

Companies view different regions as different markets.

A particular region with a certain important common marketing characteristic is

regarded as a single market.

67

 \
International Marketing

Given the dis-economies of scale of individualised marketing strategies ear tailored

'j

to a specific local environment, companies have begun to emphasise strategies for

large regions. .

Strategy integration and product policy, are implemented at regional leveL

Geocentric orientation i .
I . .

Companies view the entire world as a single market and develop standardised
marketing mix projecting uniform image of the company and its products for the
global market, common R&D, inventory management & training.

Provide improved coordination and control etc.

P6 Activity B:

a) A significant degree of decentralisation refers to a characteristic of the firm having

- - - - - -orientation.

b) Two characteristics ofcompanies having regiocentric orientation are:

1. _

2. _

4.4 INTERNATIONAL MARKETING CONSIDERATIONS IN SME

SECTOR

International marketing is not necessarily confined to the large organisations and MNCs.

The small and medium enterprise (SME Sector) is equally, if not more, important in the

growth of the nation's economy and promotion of exports. The SME sector comprises

firms ranging from a single person business to sophisticated businesses employing 250

300 persons that might have a strong domestic market abroad. In the current business

scenario, the SME sector is one of the fastest growing sectors particularly those that are

~t~jl!~l;;~;i;
operating in developing countries. ,

j ..... ,., ...

The importance of the SME sector has increased because there has been widespread
downsizing ofthe workforce in large organisations. These organisations are increasingly I
outsourcing their non-core functions including design and manufacturing to SMEs.
Employment in the public sector has been decreasing due to extensive privatisation of
public sector owned utilitiesand agencies such as gas, electricity,water, telecommunications

68
'.'.-- -. "." ." .
Unit 4
\
.
The Task of International Marketing

and railways. In countries such as Philippines, Vietnam, India and Malaysia, the SME
sector is not on the agenda for economic growth while recognising its importance in the
modernisation process. The export potential and the tasks before the SMEs need to be
reviewed against this background.

The alternative approaches for international market development that an SME can follow
are:

1) Exporting is primarily concerned with selling domestically developed and

domestically produced good and services in foreign countries.

2) International niche marketing is concerned with marketing a differentiated

product or service overseas using the full range of market entry and the options
available in the marketing mix.

3) Domestically developed niche services - deals with international marketing based

on what has worked domestically.

4) Direct marketing - allows firms to market products and services in international

markets from a domestic location (including e-commerce).

5) Participation in the international supply chain ofl\1NCs - involves piggy backing

by the SME on the MNC's international initiatives; this may involve either domestic
production or establishing a facility close to where the MNC's locations are established
in other countries.

1. Exporting: This is one of the early stages in international marketing strategy and
usually involves intermediaries such as agents and distributors. Exporting provides
the advantage ofexpanding the foreign market with relatively little commitment and
limited associated risk. Many firms, both large and small, do not progress beyond the
stage ofrelatively limited involvement in international markets.

The range ofmotivations in exporting include government subsidies, attractive profit

apostrophe and growth opportunities, economic's resulting from supplementing the
order book, and the possession of unique products.

A weakness in exporting concerns the limited involvement ofexporters in the foreign

markets.

This often results in a lack of information and knowledge of the market demand and
the dynamic nature that can result in loss ofbusiness to a competitor. Many companies

69
 ,.

- \
International Marketing

with export potential may never get involved in international marketing themselves for
varied reasons such as show payment by buyers, too much red tape, lack of
competition by priced products, danger ofpayment defaults, a lack oftrained personnel
and language barriers. However, there are sufficient examples ofcases of SMEs that
have overcome these barriers by training staff and the intermediaries as well as by ,
i .

seeking expert assistance.

When SMEs put the onus of international marketing on agents and distributors they
appear to overlook the alternative market entry strategies. This approach may meet
the immediate objective of seeking offload excess production capacity, but it may
not provide them with a sound footing for increasing their international presence.

2. International niche marketing: This alternative occurs where firms become a strong
force in a narrow specialised market of one or too segments across foreign markets.
The segments are usually too small or service must be highly differentiated, have clear
positioning and be recognised by other participants in the international supply chain.

To succeed or develop the niche market, the firm must: l

I
have a clear understanding of the segmentation criteria,
I

have exhaustive information on the niche customer needs,

I

provide superior levels of service, I

I -
carry out innovations and products adaptations,
I .

rit~f~~:~'!!f

apply appropriate marketing mix strategies to build market share in each country
in which it wishes to be involved.

3. Domestically developed niche services: With increased international travel and

improved access to communications, a much more sophisticated package and wider
range of services to visiting foreign customers can be offered. Examples include
specialised training, healthcare and telemedicine, sports, cultural and leisure events,
specialist retailing such as handicrafts and luxury goods.
I

These activities lead to wealth and jobs being generated in the local economy in ways
similar to exporting and niche marketing. The additional challenge is that the benefits
obtained from the service provided must be unique and superior and outweigh the
benefits the consumer deri ves from locally available services.

70
Unit 4
..

The Task of International Marketing I .. .

I .
I~.
In addition to the services designed to be offered to individuals in both consumer and
industrial markets, a whole range of additional services which fall in this category are I

concerned with developing solutions for opportunities or problems identified abroad.

These can include technology developments, clinical trial facilities for pharma
companies, software development and product and packaging design services.
II .
4. Direct marketing: Direct marketing offers the substantial benefits of eliminating
distribution channel partners such as importers, distributors, wholesalers and retailers
by using a variety of communication media including telephone, television and
networked computers. Borders can be crossed relatively easily and at fairly reasonable
costs without the SME having to face many barriers. Direct marketing represents a
growing area ofinternational business conducted by SMEs that also makes extensive
use of e-commerce.

This alternative also has its own disadvantages: communication can still be a problem
despite having a number of media, and the danger of cultural insensitivity in the
communication persists. It is necessary to use customer databases that should be
updated, accurate and capable of dealing in foreign languages. Even an incorrectly
spelt name can be embarrassing to the SME. Different cultures have different levels
of acceptance of the internet and e-business.

5. Participation in the international supply chain ofMNCs: Many SMEs are part
of the supply chain oflarge international companies or service providers. This may
imply domestic marketing of supplies and subsequent exporting by a large company.
Sona Keys Systems is a supplier of steering gear assemblies to Maruti Suzuki, which
exports its automobiles to some countries in Europe. Compared with other domestic
marketers, the difference is that supply chain members might 'piggyback' on the
internationalisation oftheir major customers, following them to a new country to
supply their operation there. Failure to do this might result in a competitor being
created, who will supply the products and services in the new market and possibly
bid for business in the original market too.

J6 Activity C:
a) According to you, the importance ofexport marketing in SMEs in India will
o Increase
o Decrease
o Remain the same as before
:. ':'rc"i: ~ :.:.: .::-::'~'L ~-.;.~.: _:.::."'- ~ .-_r, - '''.' - . ':'. ",:.'.' -:.",: :-.; -:.-:.:: :'. - - -- L'~'.'. _-.-":-:":,- , .~.: ::.:: >:.- .:::<::':':'-: ':'-:;:-,"-,:--.:::..:.>.-~~, :-.:.~. :.:::: :::.:::.::: :::~:~:::::-:.:-~:::::::.:::::.;,.:-; . :~::: ~ ~:.: '-::L:: :-:::'.:_: :.:~; :'L:>:=::::.~:: ~::~:"::::, ::~<: ::-::

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International Marketing

b) For an SME to succeed in a niche market overseas, two things that the firm must do
are:

1. _

2. _

c) Two disadvantages of a direct marketing approach by a SME are:

1. _

2. _

4.5 STAGES IN MARKET DEVELOPMENT

International markets are going through cyclic changes and different levels of development.

Amongst the major tasks of the international marketer, is the identification of the level of

market development in each foreign country. One of the permanent measures used for

grouping these countries is GNP (gross national product) per capita. Using GNP as a

base, international markets can be divided into four groups:

Measure used

i) Low income countries (GNP per capita in USD) < 785

ii) Lower-middle income countries > 785 and < 3,125

iii) Upper-middle income countries > 3,125 and < 9,655

iv) High income countries > 9,655

(Base year considered 2000)

R1~~t:~~
i) Low - income countries: Low income countries are those countries with GNP per
capita of less than USD 785. They constitute 37 percent of the world population but ~.-
less than 3 percent of GNP. Low-income countries are characterised by the following:
Limited industrialisation and high percentage of the population engaged in
agriculture and subsistence farming
Low literacy among the population
High birth rates

- Heavy reliance on foreign aid

Political instability and unrest

72
-, :'~.-~' _, , - , ' .~.~ _ , _ . ' _.' _.L ~ _ _ ._. , " "
 I
\ r.
Unit 4 The Task of International Marketing

Concentration in Africa (South of Sahara)

In general, these countries represent limited markets for all products and are not
important locations for high competition levels.

ii) Lower-middleincome countries: These are also known as less developed countries
or LDC. Their GNP per capita figures are much higher than the low income countries
but less than USD 3,125. These countries constitute 39 % of the population but only
11 % of GNP. These countries are in the early stages of industrialisation. They are
locations for the production of standardised or mature products such as clothing for
export markets.

Consumer markets in these countries are growing. LDCs represent a competitive

threat as they mobilise their cheap labor to serve major advantage in mature,
standardised, labour intensive products such as athletic shoes.

iii) Upper-middle income countries: These are also known as industrialising countries.
Their GNP per capita lies in the region between USD 3,125 and 9,655. These countries
account for 7 % of the world population and 7% of world GNP. In these countries,
the percentage of population engaged in the agriculture sector drops sharply as people
move to the industrial and the service sectors, and the degree ofurbanisation increases.
They have wages that are rising, have high rates of literacy and higher education, but
they still have lower wage costs than the high income (or advanced) countries.
Countries in this stage of development become competitors and experience rapid,
export-driven economic growth.

iv) High-income Countries: These countries are also known as advanced, developed
industrialised, post industrial or first world countries with GNP per capita exceeding
USD 9,655. lithe oil-rich countries in the Gulf region are excluded, the countries in
this category have reached their present level through a process ofsustained economic
growth. These countries account for only 16 percent ofthe world population but 82
percent of the world GNP.

Some of the characteristics of these countries are:

The importance of the service sector in the GNP (>50 %)
The importance of information processing and exchange
The importance ofknowledge over capital as the key strategic resource
An orientation towards the future
~ :": ~ : ~ : ~ ~.: ~ .:.~ .~-: "-:'. -~' . "--r. -,

\ .,, ."

International Marketing

A strongcultureof innovation
Product and market opportunities in a post industrial society are more heavily
dependent on new products and innovationsthan in industrialisingsocieties.
'.'
Basket Cases: A basket case is a country that is in a stage of perennial turmoil and the
economic,politicaland socialproblemsare so huge that companiesdo notfind it attractive
for investment and marketing operations. Some basket cases are low-income, no growth
countriessuch as Ethiopia and Mosambique. Other cases may includecountries that were
once successful but have been divided by political forces over the last few years.

J6 Activity D:
a) The primarymeasurethat separateslowermiddleincomecountriesand upper middle
incomecountriesis:

b) A basket case refers to a country that is:

4.6 INCOME AND PURCHASING POWER PARITY

Income is the single most valuable economic variable. This is the surmise on which a
company plans its international expansion. For some products with very low unit cost,
population is more appropriate as a variable, but for the vast majority of consumer and
industrialproductsin international rnarkets today,the most importantindicatorof potential
is income.

In an ideal situationGNP and other measures of national income converted to US dollars

(USD)shouldbe calculatedon the basisof purchasing powerparities(i.e. whatthe currency
will buy in the country of issue) or through direct comparison of the standardsof living in
the countriesof the world.However, such data are not easilyavailablein regular statistical

74
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Unit 4 The Task of Intemation;] Marketing

reports. The alternate method of conversion oflocal currency measured at the year-end
USD foreign exchange rate could be used. It needs to be remembered that exchange rates
often bear little relationship to the prices of those goods and services not traded
internationally, which form the bulk ofthe gross national product (GNP) in countries. The
use of exchange rates tends to exaggerate differences in real income between countries at
different stages ofeconomic development.

Table 4.1: Top 10 Nations ranked by GNP per capita and PPP

2000 GNP Per Capita Income

USD
1. Luxembourg 38,587
2. Norway 38,070
3. Singapore 36,484
4. Switzerland 36,479
5. Kuwait 35,242
6. Japan 34,796
7. Denmark 33,984
8. USA 20,463
9. Hong Kong 27,463
10. Austria 25,854

2000 GNP Income adjusted for Purchasing Power Parity (PPP)

USD
1. Luxembourg 35,708
2. USA 29,953
3. Singapore 28,648
4. Norway 25,807
5. Hong Kong 24,602
6. Switzerland 24,222
7. Denmark 23,555
8. Japan 23,353
9. Belgium 22,765
10. Austria 21,787

75
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"'"Ii- ."
International Marketing

Table 4.1 ranks in the top 10 countries in terms of 2000 GNP per capita. Although the
USA ranks 8th in income, its standard ofliving as measured by what money can buy is
second only to Luxembourg.

The concentration ofwealth in a handful of large, developed countries is the most striking
element in the global economic environment. The USA is without doubt, a giant amongst
the countries in all continents as for as GNP is concerned. In 2000, the USA accounted
for 90 percent of the North American region's GNP. In western Europe, four countries
namely Germany, France, the UK and Italy accounted for almost 73 percent of western
Europe's GNP. Japan accounted for 62 percent ofAsia's GD P.In Latin America, Argentina,
Brazil and Mexico accounted for 73 percent of LAFTA (Latin America Free Trade Area)
GDP.

At the early stages of the development process, economic development works to the
relative disadvantage ofthe lowest income groups. Brazil, for example has become one of
the world's most unequal societies with the top 20 percent of the country's population
earning 65 percent of national income while the bottom 20 percent earns less than 3
percent. China is experiencing a similar type ofincome inequality.

According to a report by Keystone India, India is set to become the worlds third largest
economy by equalling or surpassing Japan some time before 2008 much earlier than
previously projected. Only the USA and China will posses larger economies.

The Indian expansion is riding on 'significant accelerations in economic growth since

2003, especially the liberalisation in strategic sectors such as telecom, banking, aviation
and real estate. India's growth is coming mostly from the areas of mobile telecom (where
it is the fastest growing) in the world), motor vehicle sales and the housing market.
However, in real terms, India remains the world's 12th largest economy and its one billion
plus population makes it one of the poorer nations in terms of per capita income.

~ Activity E:

In international markets today, the most important indicator of market potential is:

76
._-,_ .... ,-."
 \ .~.

Unit 4 The Task of International Marketing l['" .

. .

International Marketing Decision Areas i

I
Therearea numberof challenges thatexistforcompanies wishing toestablish theirpresence lc ,;'>.'.
ininternational markets. The foremostamongtheseis how theycan leveragetheirresources f:(Z'X':~:)i:;;
I
to: i
!
Respond faster to the changing basis of global competitive advantage.

Increase their global appeal by building theirglobal brand.

Createan international presenceby achievinginternational reach,oftenin partnership

with others.

Manage diverseandcomplex activitiesacrossa range of sometimessimilarbut often

disparate markets and cultures.

Manage the higherrisk associated with enteringemerging markets.

4.7 SUMMARY
In thisunit,the attentionis focusedon the tasksof international marketing. Their scopeand
dimensions have been examined.

Thevariousstepsinvolvedin the marketingforceshavebeenpresented in theinitial section.

It hasbeenstatedthatthedegreeof involvement in international business islargely dependent
upon the company's orientation towards business abroad. The ethnocentric, polycentric,
regiocentric and geocentric (EPRG) framework gives us guidance on the levels of
involvementand orientation of firms. The marketing strategy will depend a great deal on
thecompany's orientation.

Internationalmarketingis not necessarilythe prerogativeoflarge firms, and MNCs sector

is equally important in the growth ofthe nation's economy. A separate section has dealt
with some of the issues in export marketing that affect the growth of this sector.

International marketsaregoingthroughcyclicchangesand different levelsof development.

Among the major tasks is the identification of the level of market development in each
foreigncountry. The GNP for capita is the base figure upon which the groups of countries
aredividedinto low-income, lowermiddleincome,uppermiddleincome and high income
countries.This may be consideredas the initialstep in internationalmarket segmentation.
In another section the concept of purchasing power parity (PPP) has also been explained

77
 ..-. :.: -.~.' '-' ~ ~. -.':'.:.;:: ~:_'- :<:....~: -- ~ ::~ ~' ..::<'.:.:..:.:.~":'.:': : : .~. :.,~. :::.'-::'-~:= ~'.

International Marketing " '",- ."

in order to understand how the standards of living in various countries are coi..pnred. A
section on the important decision areas in international marketing provides the conclusion,

4.8 KEYWORDS

SWOT analysis: It refers to the analysis of evaluating the strengths, weaknesses,

opportunities and threats of the company against the perspective of internal, external and
international environment.

EPRG framework: The international orientation of a company is decided by the extent

and degree of involvement in international business that can vary widely. The EPRG
framework refers to the four general types of orientation in foreign markets, namely
ethnocentric, polycentric, regioncentric and geocentric orientation.

Purchasing power parity (PPP): It refers to what a currency will buy in the country of
issue.

4.9 SELF-ASSESSMENT QUESTIONS

Q1. Enumerate the steps involved in international marketing.

Q2. Discuss the differences between the four types orientation in the EPRG framework.

Q3. Discuss the five major approaches that can be followed by SME in export markets.

Q4. How can SMEs improve their participation in the international supply chain ofMNCs?

Give one example.

Q5. How are international markets divided on the basis of GNP per capita?

Q6. Identify two major export marketing decision areas and explain why they are so
important to the firm.

~:::'i}}:;'@

78
 " ~- .. ..
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 08

S3J.ON

 \ ."Ii" ."

ENVIR()Nl\lEN1'AIAFACTORS
AFFI~crrING IN1'ERNATIONAL
l\!IARKETING
Objectives
After completing this unit, you will be able to:
r:lr assess the important environmental factors in international
business.
r:lr justify how differences in levels ofdevelopment and income
have implications for the business.
r:lr review the types and features of trade barriers
r:lr assess the impact of cultural factors in international
marketing.
r:lr review the importance ofGATT and WTO in international
trade.
r:lr state the importance of intellectual property rights(lPR).
r:lr explain the relevance of regional trade groups.
r:lr list levels ofeconomic integration.
r:lr overview the extent of tariff and non tariff barriers among
foreign countries across various regions.

Structure
5.1 Introduction
5.2 International Marketing Environment
5.3 International Trading Environment
5.4 Cultural factors
5.5 GATTandWTO
5.6 Intellectual Property Issues
5.7 Regional Trade Groups I

5.8 Levels of Economic Integration

5.9 Dumping
5.10 Summary
5.11 Key Words
5.12 Self-Assessment Questions

, '
 - .: : ~ ~ .: - :-~. .": ...::.:...... :.:.:.:-.;.~.~ .''; -.' . :: ~.: :":'-:~'~..::'_.. -.:.~ ~ ..".:.~ ~.~ . ' , . " .. -~. -' ~ ~": --~.~ "~.":".:. -.:.- ._.:.:.:;- -.

\ . ." . ."

International Marketing

5.1 INTRODUCTION

r() :W!i;~)!;i!.
The rapid growth of war-affected economies and previously less developed countries
have led companies to international shores with the creation of new global opportunities. It
is necessary to understand how the new economic environment has been created and
what are its effects on internationally oriented companies. For an easier analysis, the
environment has been divided into economic, social, demographic, politicaland technological
areas. As an example, differences in the technological environment may call for product
modifications.

International trade accounts for the major part of international business. It is necessary to
analyse the important factors that affect international business transaction such as trade
barriers, trade negotiations. In particular the proliferation oftrade barriers has the maximum
impact on firms that carry out international business. The two broad types of barriers,
namely tariff and non tariff barriers have been discussed.

There is a variety of cultural factors that have shaped societies in all the countries of the
world. Income levels also affect consumer behaviour differently around the world.

The basic principles and framework for international trade have been laid down by GATT
and later on by WTO. Those principles lay down the ways in which international trade i -

should be conducted. I-

International marketers need to ensure the registration of trademarks and patents in each
country where business is conducted. Some of the common issues relating to intellectual . I":,
property and intellectual property rights (IRe) are presented.

To promote easier trade within regions, different regional trade groups have been formed
across the world. These are broadly divided into five regions covering most of the active
trading natioils.
~~~~
(::':'<'.::,::::;:

In the last section, five levels of economic cooperation are identified and discussed.

5.2 INTERNATIONAL MARKETING ENVIRONMENT

A brief account ofthe important environmental factors relevant to international business is

given below.

Economic Environment

The economic environment has much to do with the scope ofbusiness, business prospects

82
~.~. - - , :-' - ..' ~.--' ....
.
 \
v
Unit 5 Environmental Factors Affecting International Marketing

and business strategy. The nature and level of development of the economy, economic
resources, size of the economy, economic system and economic policies, economic
conditions, trends in the GNP growth rate and per capita income, nature of and trends in
foreign trade, domestic supply and demand conditions are all factors relevant to business.

The differences in the levels ofdevelopment and income have implications for the business.
In the developing countries, particularly in the low income economies, the demand for
many categories of goods and services is limited because of the low levels of income.
Many developing countries suffer from severe balance of payments problems. Therefore,
their import policies, in general, are very restrictive.

A number of developing countries, however, hold out very good prospects for business in
future because ofthree reasons, viz.:

L A steady increase in population

ii. Increase in income

iii. Growing democratisation and individual freedom

The developed economies are characterised by high levels of income and consumption
and business competition. Foreign trade is more liberal in comparison with that ofmost of
the developing countries. Import restrictions are confmed, by and large, to import competing
industries. The markets for many products in these economies are nearing saturation or
have already saturated or are even declining mostly because of the population trends.

While the advanced economies are characterised by high level ofcompetition in the industrial
sector and fast technological changes and innovation, most developing countries lag behind
in these respects. The differences in the income levels may necessitate product and price
modifications. This difference in the nature of demand has important implications for
marketing.

Social Environment

The social or cultural environmentencompassing the religious aspects, language, customs,

traditions and beliefs; tastes and preferences; social stratification; social institutions; buying
and consumption habits etc. are all very important factors for business. What is liked by
people of one culture may not be liked by those of some other culture. One of the most
important reasons for the failure of a number of companies in foreign markets is their
failure to understand the cultural environment of these markets and to suitably formulate
their business strategies.

83

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International Marketing

Many companies modify their products and/or promotion strategies to suit the tastes and
preferences or other characteristics of the population of the different countries. For a
business to be successful, its strategy should be the one that is appropriate in the socio
cultural environment, Even when people of different cultures use the same basic product,
the mode of consumption, conditions of use, purpose of use or the perceptions of the
product attributes may vary so much so that the product attributes, method of presentation,
positioning, or method of promoting the product may have to be varied to suit the
characteristics of different markets.

In short, the social environment of different markets differs vastly. Even within a nation,
cultural diversity may be very significant. It is essential to understand these differences to
formulate successful business strategies.

Demographic Environment

Demographic factors such as size ofthe population, growth rates, age composition, family
size, nature ofthe family, income levels etc. have very significant implications for business.

Advanced countries, particularly with a large population, are generally attractive markets.
The major part of the international trade and foreign investments naturally takes place
between these nations. Because of the large potential of these markets, competition is
generally strong in them.

Political and Government Environment

The political environment including the characteristics and policies ofthe political parties,
the nature of the Constitution and government system and the government environment
encompassing the economic and business polices and regulations are among the factors of
utmost importance in the market selection and business strategy formulation. These factors
may vary considerably among different nations.

While there are no radical differences in the philosophies ofmajor political parties in some
countries, the situation is quite different in some others. The government system in a number
of countries, including several countries which are making rapid economic progress and
having liberal policies towards foreign capital and technology, is not very democratic.

There are also wide variations in the policies and regulations regarding the conduct of the
business. For example, certain trade practices or promotional methods/strategies allowed
in some countries may be regarded as unfair by the laws of some other countries. Many
governments specify standards for products to be marketed in the country. Marketing of

84
::.:',::::.:_:.:...:.:~~.::~:~:_:~:_~._.: ~_.~:~. ':' . . . : : " r ' _ : .." : , ; : : : : _". _.~. : ..:.. '._._

'\
Unit 5 Environmental Factors ~ffecting International Marketing

certain products are even banned in some countries. Policies or regulations regarding
quality control and inspection vary considerably between nations. Such is the case with
packaging and labelling. Regulation ofthe quality, prices, packaging, labeling etc. is also
very common.
f;%~:;-;~;'~J.~
Technological Environment

The type of technology in use, the level of technological developments, the speed with
which new technologies are adopted and diffused, the type of technologies that are
appropriate, the technology policy etc. are important to business. Advances in technology
may also cause relocation of production. For example, several companies in the advanced
countries shifted the T.Y. production to developing countries to take advantage of the
cheap labour.

Technological environment ofthe use offacilities etc. also have very important implications
for business. For examples, advances in the technologies of food processing, packaging
and preservation, transportation etc. have facilitated product improvements and introduction
and have considerably improved the marketability of products. The advent ofmicrowave
ovens has gi ven a new dimension to food marketing. Differences in the technological
environment may call for product modifications.

S Activity A:
In developing countries, the demand for luxury cars is limited because:

5.3 INTERNATIONAL TRADING ENVIRONMENT

International trade accounts for the major part of international business. Certain other
forms of international business, like international investment, may also be affected by
international trade. The international trading environment is, therefore, a very important
factor affecting international business. The international trading environment includes
important factors such as trade barriers, trade agreements, trading blocs, cartels and
multinational trade negotiations.

85
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:_:<o. ' ':':,. _':"." _~ '.~. ~:. ~.-o. -,~. ~.:.: .:_:' ~.:::' :':-;':<..::>":.; . ":"; ....,:. _~.o. :o.<: .o..~' - ::..:..~: -: -;..-.:-.' :.:.,- .:.~ ~,>=<-:o..-.:-: ;-:.<~:.::::;:~.::'~',,: _~,_. _.~: .:o.: .:,=.:'.:,:: >:'-->:.>:~-.-, x:~: -~: .:~: ;': : ':'::: .,:.::.

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Trade barriers

One ofthe most important features ofthe international trading environment is the proliferation
ofthe trade barriers. The main objectives of imposing trade barriers are to protect domestic
industries from foreign' competition, to promote indigenous research and development, to ,. .

!
conserve the foreign exchange resources of the country, to make the balance of payments
position favorable, to curb conspicuous consumption, to mobilise revenue for the
government and to discriminate against certain countries. There are, broadly, two types of
trade barriers, viz., tariff barriers and non-tariff barriers.

TaritTandNon-taritTbarriers

There is a world of tariff and non-tariff barriers that is designed to protect a country's

markets from intrusion by foreign companies. Nations utilise legal barriers, exchange barriers

and psychological barriers to limit the entry offoreign goods. Businesses work together to

establish private market barriers while the market structure itself may provide strong barriers

to imported goods. The complex distribution system in Japan is one example ofhow the

market structure can create a barrier to trade. However, in a legal sense, it cannot be

viewed as a trade barrier.

There are numerous reasons for the governments to maintain restrictions on trade. A few

of these are presented here:

1. Protection of an industry that has the potential to grow really big

2. Protection of the home market

3. Need to keep sources of revenue within the borders

4. Maintenance of the standard of living and real

5. Maintenance of employment and reduction of unemployment

6. Industrialisation ofa low-wage nation

7. National defence measure I::::.:::,::~,-:

r~XK:!::~?
8. Increase of business size

9. Retaliation and bargaining

10. Conservation of natural resources

86
-;' -':.' . -', -. ~," '.' .
 \
Unit 5 Environmental Factors AtThcting International Marketing

To encourage development of domestic industry and protect existing industry, governments

may establish such barriers to trade as tariffs, quotas, monetary barriers, non-tariffbarriers,
and market barriers. Barriers are imposed against imports and against foreign businesses.

TariffBarriers: A tariff is a tax imposed by the government on goods entering its borders.
Tariffs may be used as a revenue-generating measure or to discourage import ofgoods, or
for both reasons. In general, tariffs:

increase inflationary pressures, government control and political considerations in

economic matters;

increase weaker balance of payments positions, supply and demand patterns,

international relations

restrict manufacturers supply sources, choices available to consumers, competition

Tariffs are more often discriminatory, arbitrary and require constant administration and
supervision.

Non tariffbarriers: There are a variety of non-tariff barriers exercised by countries to

restrict the inflow of goods. Some of these are listed below:

Quotas - Government procurement policies

Import licensing requirements - Export subsidies
Proportional restriction offoreign - Countervailing duties
to domestic goods
Embargoes - Prior import deposit requirements
Antidumping practices - Variable levies
Tariffclassifications - Voluntary export restraints (VER)
Documentation requirements - Orderly marketing agreements (OMA)

Quotas: A quota is a specific unit of rupee or rupee limit applied to a particular type of
goods. There is a limit on the value of imported TV sets in Britain, there are quotas on ball
bearings from Japan in Germany, Italian restrictions on Japanese motorcycles.

Voluntary Export Restraint (VER)

The VER is an agreement between the importing country and the exporting country for a
restriction on the volume of exports. Japan has a VER on automobiles to the USA.

87

 \ """\- .."

International Marketing

OMA: The OMA (Orderly Marketing Agreements) is also a similar type of f1 '. .reement
betweentwocountries. The OMAinvolves negotiation betweentwo governments tospecify
export managementrules and monitoringof trade volumes.

Boycotts and embargoes: A government boycott is an absolute restriction against the

purchase and import of certain goods from other countries.An embargo is a refusal to sell
to a specific country.

~ Activity B:

a) A tariff is a tax imported by the government on:

b) Expandthefollowing:
VER

OMA

I .".

~4CULTURALFACTORS

'Ways ofliving' is how anthropologists define culture. They are certain tenets built by a
group, transmittedfrom one generation to another. Aculture exists in the context of many
social institutions such as family, educational, religious, governmental and business
institutions.Culture includes both conscious and unconscious values,ideas, attitudesand
symbols that shape human behaviour. It does not include one-time solutions to unique
problems or passing fads or styles.

Since culture represents responses governed by traditional values to recurring situations,

they are difficult to change. Even a simple aspect like colour preference is influenced by
culture, and consumer behaviour can vary widely from country to country. For e.g. Green
is a highlyrespectedcolourin Muslim countries, but associatedwithdiseasein someAsian
countries. White is usually associatedwith purity and cleanlinessin westerncountries,but
signifiesdeathin someAsian countries.

There are differencesin attitudes towards classes of the products, suggestingthat they are
shaped by culture. ' The use and throwaway' attitude towards small gadgets like the

88
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Unit 5
.. .,.
Environmental Factors Affecting International Marketing

electric toothbrush and other items like mobile phones or simple electronic calculators is
predominant in western, developed countries. In the developing countries, expectations
from consumers are high in terms of life and length ofusage. The average consumer in the
USA or Europe believes that a self-owned family car should be replaced with a new
model within three to five years, whereas the average customer in India believes in retention .
of a car for at least ten years. ! .

Income levels also influence consumer behaviour and attitudes around the world.

There are certain product classes that have universal appeal and do not require adaptations
when marketed in various countries. Some of these are convenience foods, electronic
products, software programs, soft drinks. As communications continue to shrink the world,
more and more products will reach out to more and more international markets. However,
this does not suggest that company differences can make or break the success ofa product
when marketed internationally.

Increasing travel and improving communications have precipitated many cultural changes
in many nations resulting in a convergence of attitudes towards clothing, music, food and
drink. The globalisation of culture has been capitalised upon and significantly accelerated
by companies such as IBM, Coca-Cola, McDonalds, Levi Strauss, Nike, Heimeten and
BMG entertainment. These are only some companies that have broken down cultural
barriers as they expand into new markets with their products. Similarly, new opportunities
for financial services have been provided by American Express, HSBC, Visa and
Mastercard.

~ Activity C:

To ensure the success of a consumer product in the Gulf Region, the company:
o Must recognise o Need not recognise
the cultural aspects of that country. (Put a tick mark on the right answer)
I
I
5.5 GATT AND WTO i
!

In 1957, a treaty was signed among 123 nations whose governments agreed in principle f,c:};,,::~-;:,;
~::':'::,':'H\
to prompt trade among members. This was called the GATT (General Agreement on
Trade and Tariffs). It was intended to be a multilateral, global initiative and the negotiators
did succeed in literalising world trade in merchandise. GATT itself had no powers of
enforcements since the losing party in a dispute was not bound to implement the ruling.
The process of dispute settlement could drag on for several years.

89
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International Marketing

The four basic principles of GAIT were:

!!:;!;;;'j,~~M:
1) Member countries will consult each other concerning trade problems.

2) The agreement .provides a framework for negotiation and embodies results of

negotiations in legal instruments.

3) Countries should protect domestic industries only through tariffs when needed and if
permitted. There should be no other restrictive devices such as quotas prohibiting
imports.

4) Trade should be conducted on a non discriminatory basis.

It was expected that reduction of barriers would be mutual and reciprocal because any
country's import increase caused by such reduction would be offset by export increases
caused by the other country's reduction of restrictions. This concept was the basis of the
principle ofMFN (Most Favoured Nation).

It was then decided in 1995 to replace GAIT with the WTO (World Trade Organisation).
The WTO being more permanent and legally secure has more authority to settle trade
disputes, and along with the IMF and the World Bank, serves to monitor trade, and
resolve disputes.

The WTO's strengthened dispute settlement system was expected to be better able to
limit the scope for unilateral and bilateral actions outside the multilateral system. Some
important changes under the new settlement mechanism included:

1. Fixed time limits for each stage of the dispute settlement process.

2. Automatic adoption of dispute settlements reports.

3. Automatic authority to retaliate on request if recommendations are not implemented.

4. Creation of a new appellate body to review travel interpretation ofWTO agreements.

5. Improved procedure transparency and access to information in the dispute settlement

process.

The WTO had 148 members in 2003 when Nepal became the 148 th member. Supporters
of the WTO have long agreed that a reduction of trade barriers will boost global trade.
However, there is hardly any empirical investigation of whether the WTO has an impact
on trade policy.

90
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Unit 5 Environmental Factors Affecting International Marketing

Tradeministersrepresentingthe WTO member countries meet annually to work on improving

world trade. At the 1996 meeting in Singapore, an agreement was reached concerning i
tariffson information technology products.
I;?;i:;};: :~:;'~
It remains to be seen whether wro will live up to the expectation regarding major policies
i .
initiative on such issues like competition offoreign investments. !

Whereas GATT mainly dealt with trade in goods, the wro and its agreements now cover
trade in services, traded inventions, creations and designs (intellectual property).

Table 5.1: GDP and merchandise trade by region. 2004-06

(Annual percentage change at constant prices)
GDP . Exports Imports
2004 2005 2006 2004 2005 2006 2004 2005 2006
North America 3.9 3.2 3.4 8.0 6.0 8.5 10.5 6.5 6.5
United States 3.9 3.2 3.4 8.5 8.0 10.5 11.0 6.0 5.5
South and Central 6.9 5.2 5.2 13.0 8.0 2.0 18.5 14.0 10.5
America (a)
Europe 2.4 1.8 2.8 7.0 4.0 7.5 7.0 4.0 7.0
European Union (25) 2.3 1.6 2.8 7.0 4.0 7.5 6.5 3.5 6.5
Common Wealth of 8.0 6.7 7.5 12.0 3.5 3.0 16.0 18.0 20.0
Independent States (CIS)
Africa and Middle East 6.0 5.5 5.4 8:0 5.0 1.0 14.0 13.0 8.5
Asia 4.8 4..1 4.4 15.5 11.5 13.5 14.5 8.0 8.5
China 10.1 9.9 10.7 24.0 25.0 22.0 21.5 11.5 16.5
Japan (b) 2.7 1.9 2.2 13.5 5.0 10.0 6.5 2.0 2.0
India 8.0 8.5 8.3 15.5 20.5 11.5 16.0 20.5 12.0
World 3.9 3.2 3.7 10.0 6.5 8.0 ... ... ...
(a) Includes the Caribbean.

(b) Trade volume data are derived from customs values deflated by standard unit values
and an adjusted price index for electronic goods.

Source: WTO
:.,:

91
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 \ .,. ~

International Marketing

,@'S Activity D:

Two basic principles of GATT are:

1
.... _ - - - - - - - - - - - - - - - - - - - - - -
2. _

5.6 INTELLECTUAL PROPERTY ISSUES

International marketers need to ensure the registration of trademarks and patents in
each country where business is conducted. This is necessary since patents and trademarks
that are protected in one country are not necessarily protected in another. In the USA, the
patent holder retains all rights for the life ofthe patent even ifthe product is not produced
or sold. Trademark and patent protection in the USA is very strong and American law
relies on the precedent of previously decided court cases for guidance.

There are numerous companies around the world that find ways to exploit loopholes or
other unique opportunities offered by patent and trademark laws in individual nations.
Infringement oftrademark and copyright is a critical issue in international marketing and it
can take a variety of forms.

Counterfeiting is the unauthorised copying and production of a product. An alternate

type of counterfeit (or imitation) uses a product name that differs slightly from a well
known brand but is close enough that consumers will associate it with the genuine brand.
Another type is piracy: the.unauthorised publication or reproduction of original work or
program (including electronic media). Piracy is particularly damaging to the entertainment
and software industries: computer programs videotapes, cassettes and CDs are particularly
easy to duplicate illegally. It is estimated that piracy costs the software industry about
USD 1.5 bn. per year.

The most important of the international patent agreements is the International Convention
for the protection ofIndustrial Property. The convention, also known as the Paris union,
dates to 1883 and is honoured by nearly 100 countries. This treaty facilitates multi country
patent registration by ensuring that, once a company files in a signatory country, it will be
afforded a right of priority in other countries for one year from the date ofthe original filing;
beyond this period, the company risks a permanent loss of patent rights abroad.
~! ,~i ':~:W;'~
1- - - ~ ~ - - -

The failure to protect intellectual property rights (IPR) in the world can lead to the legal
loss of rights in potentially profitable markets. Because patents, processes, trademarks
and copyrights are valuable in all countries, some companies have found their assets
appropriated and profitably exploited in foreign countries without license or royalty fees,.

92
 \
Unit 5 Environmental Factors ~ffecting International Marketing

They often learn that other firms are not only producing and selling their products or using
their trademarks but that the foreign companies are the rightful owners in the countries in
which they operate.

Many businesses fail to take proper steps to legally protect their intellectual property.
They fail to understand that registration and legal ownership in one country does not mean
ownership in another.

J!6 Activity E:
Illegalrecording and marketing ofCDs will fall under the following category ofinfringement:

5.7 REGIONAL TRADE GROUPS

Although the WTO remains the principal organisation for multilateral initiatives in trade
countries in each ofthe world's region are looking to easier trade within their regions. The
trade groups of countries given in the following paragraphs are divided into the European,
North American, Asian, South and Latin American, African and Middle Eastern trade
groups.

1. The European Union

The European Union (EU) formerly known as the European Community (EC) was
established in 1958 with six original members- Belgium, France, Holland, Italy,
Luxembourg and West Germany, Subsequently new members were admitted- Britain,
Denmark and Ireland in 1973; Greece in 1981 and Spain and Portugal in 1986;
Finland, Sweden and Austria in 1995. The EU now represents 378 mn. people, a
combined GNP of USD 8.3 billion and 28 percent of the world GNP.

On January 1, 1999, the European Union adopted the Euro as its common currency.
As the participating nations adopted the Euro, there was a transition cost in terms of
the temporary loss of output and the possible increases in unemployment due to the
required adjustment to the price stability and fiscal criteria laid out in the Maastricht
Treaty. Banks in particular, had to bear the cost of USD 10 bn to 13 bn (about 2
percent of annual operating costs) over a changeover period) with software changes

93
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-,
 International Marketing
.. .,- .",

accounting for half the cost. By 2002, the substitutions ofEuro notes and coins were
complete.

European Economic Area (EEA)

In 1991, the European Economic Community and the seven-nation European Free
Trade Association (EFTA) reached an agreement on the creation of the European
Economic Area (EEA) beginning 1993. Although the goal was to achieve the free
movement ofgoods, services, capital and labour between the two groups, the EEA is
a free trade area, not a customs union with common external tariffs. The EEA is the
world's largest trading bloc with 383 rnn. consumers and USD 8.5 billion combined
GNP.

Central European Free Trade Association (CEFTA)

In 1992, Hungary, Poland and Czechoslovakia signed an agreement creating the

Central European Free Trade Associations (CEFTA). Romania, Slovenia and the
two countries created by the division ofCzechoslovakia, Czech Republic and Slovakia
- are also CEFTAmembers.

2. North American Free Trade agreement (NAFTA)

In 1993 the three major countries in North America, namely the USA, Canada and
Mexico agreed to form the North American Free Trade Agreement (NAFTA). The
resulting free trade area had a population of407 rnn in 2000 and a combined GNP of
USD 9.3 trillion. It is expected that the benefits ofcontinental free trade will enable all
three countries to meet the economic challenges of the decades to come.

By 1998, the volume of trade within the NAFTAregion had risen considerably. US
exports to Canada had increased by 37 percent and exports to Mexico by 55 percent.
US imports from Canada were up by 34 percent while imports from Mexico jumped
by 91 percent.

NAFTA progressively eliminates all US Mexico tariffs over a 10 year period and
also phases out Mexico-Canada tariffs at the same time. Such barriers to trade as
import licensing requirements and customs user fees are eliminated. The treaty
establishes the principle of national treatment to ensure that NAFTA countries will
treat NAFTA origin products in the same manner as domestic products. To protect
foreign investors in the free trade area, NAFTAhas established five principles.

94
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-~.' :.' -.' ~.'.' '. -- - . - . -, -.
 - ~:-: ~-: .,:-:- -"~-: ,":-.'~-.-.:' :".' '.~-'.-,. ~-'-

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Unit 5 Environmental Factors Affecting International Marketing

a. Non- discriminatory treatment

b. Freedom from performance requirements

c. Free transference of funds related to investments

d. Expropriations only in conformity with intemationallaw

e. The right to seek international arbitration for a violation of the agreements

protections

3. Asia Pacific Economic Cooperation (APEC)

The 18 countries that make up the Asia Pacific Economic Cooperation (APEC)
account for 38 percent of world population and 52 percent of world GNP.

Much debate among APEC members has centered on whether all trade barriers in
Asia can be eliminated by year 2020.

4. Association Of South East Asian Nations (ASEAN)

ASEAN is an organisation for economic, political and cultural cooperation among its
10 member countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
Philippines, Singapore, Thailand and Vietnam. The countries have agreed to eliminate
most tariffs by 2010.

The ASEAN group has 495mn people and a gross GNP ofUSD 700 bn per capita
GNPs among ASEAN member countries ranged from USD 34684 in Singapore to
USD 290 in Cambodia in year 2000.

5. Andean Group
The Andean Group was formed in 1969 to accelerate the economic development of
its members namely Bolivia, Colombia, Ecuador, Peru and Venezuela through
economic and social integration. Beginning 1992, the Andean Pact signatories agreed
to form Latin America's first operating sub-regional free trade zone. More than l00mn
consumers were affected by the pact that abolished all foreign exchange, financial
and fiscal incentives and export subsidies. The Andean group with a population of
1.13 lakhs accounts for USD 284 mn in combined GNP.

A summary of these and other groupings and their nations is given in Table 5.2.

95
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International Marketing

Table 5.2: Regional Trade Blocs

Trade blodgroup Countries
1) AFTA (ASEAN Free Trade Area) ASEAN Members
.'
2) ASEAN Association of SouthEast Asian
Nations: Brunei, Indonesia, Malaysia,
Philippines, Singapore, Thailand and
Vietnam
3) APEC Asia Pacific Economic Cooperation:
Australia, Brunei, Canada, Chile,
China, Hong Kong, Indonesia, Japan,
Korea, Malaysia, Mexico, New
Zealand, Papua New Guinea,
Philippiness, Singapore, Chinese,
Taipei (Taiwan), Thailand, USA.
4) CAEMC Central African Economic and
Monetary Community: Cameroon,
Central African Republic, Chad,
Republic of Congo, Equatorial Guinea,
Gaben.
5) CARICOM Caribbean Common Market: Antigua
& Bermuda, Bahamas, Barbados,
Belize, Dominica, Grenada, Guyana,
Jamaica, Monteserrat, St. Christopher
Nevis, Trindad, Tobago.
6) CIS Commonwealth of Independent States:

Armenia, Azerbaijan, Belarus,

Georgia, Kazakhstan, Kirgizstan,

Moldova, Russia, Tajikistan,

Turkmenistan, Ukraine and Uzbekistan

7) EFTA 1
European Free Trade Association:
Austria, Finland, Ireland, Leichenstein,
Norway, Sweden, Switzerland.
8) EU European Union: Austria, Belgium,
Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg,

96
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\
Unit 5 Environmental Factors ~fft:cting International Marketing

Netherlands, Portugal, Spain, Sweden,

UK (plus ten new members)
9) Mercosur . Southern Common Market: Argentina, ]i~!~:m~j~!~~
Brazil, Paraguay,Uruguay i

10) NAFfA North America Free Trade Agreement: I

Canada, Mexico, USA.

11) OECD Organisation for Economic
Cooperation and Development:
Australia, Canada, Ireland, Japan, New
Zealand, Norway, Switzerland,
Turkey, USA and EU members.

S Activity F:
Expand the following abbreviations:

ASEAN: - - - - - - - - - - - - - - - - - - - - -

OECD: - - - - - - - - - - - - - - - - - - - - -

CIS: - - - - - - - - - - - - - - - - - - - - - -

EEA:----------------------

5.8 LEVELS OF ECONOMIC INTEGRATION

Trade theorists have identified five levels of economic cooperation. They are:

1) Free trade area

2) Customs union

3) Common market

r~~;~j;~~;t~
: ~:: :: > :~, :: ,
4) Economic and monetary union

5) Politicalunion

1) Free Trade Area

In a free trade area, the countries eliminate duties among themselves while maintaining

97
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." .". ~ ~
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-; -:, : ::.:'~.~ .~.'- :~~~.- .:.: ....-.:.': .. ..~:. ,-.' '.~ .. -:'. ~.: .--- .-.' .:.'
'

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separately their own tariffs against outsiders. The purpose of a FfA is to facilitate
trade among member nations. The USA has an FfA with Singapore and Chile, while
Mexico has one with the ED. Singapore also has an FfA with Australia and Japan.
Countries forming a free trade area do not need to share joint boundaries.

2) Customs Union

A customs union is an extension ofthe FfA in the sense that member countries must
also agree on a common schedule ofidentical tariff rates. The objectives ofthe customs
union are to harmonise trade regulations and to establish common barriers against
outsiders. Uniform tariffs and a common commercial policy against non-members is
necessary to prevent them from taking advantage of the situation by shipping goods
initially to a member country that has the lowest joint boundaries. A recent example
of the customs union is the one formed in 1996 between Turkey and the EU.

3) Common Market

The level of economic integration here is more complex than either a free trade area
or a custom union. In this alternative, countries remove all customs and other restrictions
on the movement ofthe factors of production (such as services, raw materials, labour,
capital) among the members ofthe common market. The tariffrates in member countries
are uniform across countries within the common market. The point of entry is now
determined by the members non-tariff barriers. The outsiders, strategy can then be to
enter a member country that has the least non-tariff restrictions, because goods can
be shipped freely once inside the common market.

In 1993, the world's largest and most lucrative common market was formed by the
ED and EFfA namely the European Economic Area (EEA). The EEA eliminates
non-tariff barriers between the EFfA and the EU countries to create a free flow of
goods services, capital and people in a market of more than 400 mn people.

4) Economic and Monetary Union (EMU)

The EMU represents the next higher level ofeconomic cooperation among countries.
Some authorities distinguish between a monetary union and an economic union. The
monetary union has the following characteristics:

total and irreversible convertibility of currencies;

complete freedom of capital movements in fully integrated financial markets;

98
"-",-.'
 \
Unit 5 Environmental Factors Afiecting International Marketing

r
! ..

irrevocably fixedexchangerateswithno fluctuation of marginsbetweenmember

currencies,leading to a single currency.
i
!

The economicadvantages of a singlecurrencyincludetheelimination of currencyrisk fi~'i~! ! ~-j-!;:_ :

and lower transaction costs. Inone European commission study, it was found that
businesses were spending USD 1208/on (or 0.4 percent ofEU's GDP) a year on
currency conversions before the euro came into force.

The economicunionrepresents a singlemarketfor goods,services, capitaland labour,

complemented by commonpolicyand coordination in severaleconomicand structural
areas. The benefits are:
the transactioncosts associated With currency conversionare eliminated;
the foreignexchange risk is eliminated,resultingin improved trade and capital
mobility.
An example of an economic and monetary union is the unificationof East Germany
and WestGermany. The EU is uniquein the sensethatit is the firsttime that advanced
countries have agreed to cooperate economically on such a huge scale.

5) Politicalunion

The political unionis the ultimatetype of regionalcooperationbecauseit involvesthe

integration of botheconomic and politicalpolicies. The EU hasbeen movingtowards
social,political and economic integration.The EU's goal is to form a politicalunion
similar to that of the 50 states of the USA.

The political unioninvolves issues suchas having commondefence andforeign policies,

strengtheningthe role of the EU parliament and adopting an EU- wide socialpolicy.
However it seems doubtful that pure forms of economic integration and political
unioncancoexistin reality. Even if they did,theywouldnot lastlongbecausedifferent
countries eventually have different goals and inflation rates. No country would be
willing to surrender its sovereignty for economic reasons. The EU, despite great
progress, hasbeenplaguedbyinfighting amongmemberstates withconflicting national
interests.

At the same time, it needs to deal with:

i) redefinition of nationalsovereigntyin the lightof new economicalliances;
ii) combiningnationalprioritieswitha singledecisionmaking process;

99
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International Marketing

iii) ways to deregulate separate economies to induce competition among national

monopolies.

Marketers need to treat the EU as a single market rather than as numerous separate
and fragmented markets. Finns external to the area are faced with overcoming trade
barriers, perhaps through the establishment oflocal production facilities. For example
Ireland tried to attract foreign investment by claiming its membership of the EU in its
promotional campaigns. Nike was able to avoid the EU tariffs by opening a plant in
Ireland.

2S Activity F:
a) Two levels of economic cooperation identified by trade analysts are:

b) Two differences between an economic and monetary union and a political union are:

5.9 DUMPING

Dumping refers to the sale of an imported product at a price lower than that normally
charged in a domestic market or country of origin. Many countries have developed their
own policies and legal systems to protect their domestic companies from dumping. The
US Antidumping Act of 1921 that is enforced by the US Treasury, did not defme dumping
specifically, but referred to it as unfair competition.

Some countries use dumping legislation as a legitimate device to protect local companies
from predatory practices offoreign MNCs. In other nations, they represent protectionism
- a device for limiting foreign competition in the market. The basis for legislation on anti
dumping is that dumping is harmful to the orderly development of enterprise within an
economy.

For a positive proofofdumping to occur in the USA, both price discrimination and injury
must be demonstrated. The existence of either one without the other is insufficient ground
for dumping. Companies that clash with antidumping legislation have developed a number
of approaches to overcome the laws. One example is that of an auto accessory
manufacturing company that packaged the product with a handtool and an instruction
..
100
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Unit 5 Environmental Factors A.ffrcting International Marketing r

manual. The tariff rate in the export market was lower than that prevailing for tools, and
the company enjoyed immunity because the package was not comparable to competing
goods in the market.

Another approach is.to make non-price-competitive adjustments in arrangements with

affiliates and distributors (e.g.. Extension ofcredit).

PS Activity G:
Dumping is:

5.10 SUMMARY

The factors that govern the present economic environmenthave been discussed. The
economic, social, demographic, political and technological environment has far-reaching
implications for internationally oriented companies. As an example, differences in the
technological environment may call for product modification by the firm.

International trade accounts for the major part of international business. Some of the
important factors that affect international business have been analysed. They include trade
barriers, trade agreements, trade blocs and multinational trade negotiations. The two broad
types of trade barriers, tariff and non-tariff barriers, have been described in detail.

In the following section, the impact of cultural factors has been reviewed although this
topic merits much more space. The framework for international trade laid down by GATT
and WTO have also been covered.

Registration oftrademarks and patents has become vitally important in all countries where
business is conducted. Some of the issues relating to intellectual property and intellectual
property rights (lPR) have been'reviewed,

Economic cooperation between countries is carried out at five different levels that have
been described in detail in the last.

101
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International Marketing

5.11 KEYWORDS

Trade barriers: These refer to restrictive actions taken by countries to protect domestic

industries from foreign competition with the objective ofkeeping the balance of payments r1:;i(~i~;;~I;~~

position favourable.
. ..

Tariff: A tariff is a tax imposed by the government on goods entering its borders.

Non-tariffbarriers: Restrictive methods adopted by a country using ways other than

imposition of import duties and various forms of taxes.

5.12 SELF-ASSESSMENT QUESTIONS

Q1. How do the economic and political environments affect companies in the international
marketing environment?

Q2. What are the factors that affect the international trading environment?

Q3. Describe the reasons why governments impose restrictions on trade.

Q4. Mention and explain some of the significant non tariff barriers.

Q5. Make a list of 10 products that do not require adaptations or modifications when
marketed in different countries.

Q6. What are the ways by which infringement of trademarks and patents can occur?

Q7. What are the salient aspects of regional trade agreements?

Q8. Analyse the marketing environment factors for the Indian auto component sector
considering the ED as a region.

f~i)\1

102
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FOREIGN J\tIARKET ENTRY

STRArr.l~GY

Objectives
After completing this unit, you will be able to:
(Jr list the various modes of foreign market entry.
(Jr identify the role and purpose of export management
companies.
(Jr explain why companies are increasingly investing in local
production.
(Jr assess the advantages and disadvantages of acquisition
entry and joint ventures.
(Jr identify the reasons why emerging markets are an attractive
attractive proposition.
(Jr review the factors for planning and organising market entry.

Structure
6.1 Introduction
6.2 Elements ofForeign Market Entry Strategy
6.3 Export Management Companies
6.4 Entering Foreign Markets through Licensing and Other
Contractual Arrangements
6.5 Entering Foreign Markets through Investment in Local
Production
6.6 Emerging Markets
6.7 Planning and Organising Market Entry
6.8 Sunnnary
6.9 Key Words
6.10 Self-Assessment Questions
-""." -"--"

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International Marketing
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6.1 INTRODUCTION

When a company decides to enter international markets, it faces a number of tasks and
challenging situations. This unit attempts to answer some ofthe main tasks involved while
deciding to go international. The issues on which the basis of market entry is decided are
presented in the initial sections, followed by the alternatives available for foreign market
entry.Therole and purpose ofexport management companies (EMCs) are briefly discussed.
The considerations that govern the section offoreign distributors are listed.

Companies may enter foreign markets under a wide variety of contractual arrangements
such as licensing, franchising, contract manufacture etc. The advantages and disadvantages
of the forms of entry need to be clearly understood so that their application can be
conceived. Two forms of ownership related strategies are acquisition and joint ventures.
The principal advantages and disadvantages have been discussed.

More nations are seeking economic growth and improved standards ofliving as part of
their efforts to embrace globalisation. China, South Korea, Poland, Argentina, Brazil,
Mexico and India are some of the countries that are witnessing major economic changes
and emerging as vast markets. In these countries there is an ever increasing and changing
demand for goods and services. The various considerations for companies that need to be
reviewed when entering big emerging markets (BEMs) have been presented.

A brief section on planning and organising market entry strategies is included in the
concluding section ofthis unit.

6.2 ELEMENTS OF FOREIGN MARKET ENTRY STRATEGY

A foreign market entry strategy is a comprehensive plan that lays down the objectives,
resources, and policies that will guide a company's international business over a period of
time long enough to achieve a sustainable growth in world markets. Market entry plans
call for decisions on the following issues:

1. The target product and target foreign market

2. The company's objectives and goals in the target market

3. The entry modes to penetrate the target foreign country

4. The marketing plan to penetrate the target market in the target country

5. The control system to monitor performance in the target country/market

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Unit 6 Foreign Market Entry Strategy

Foreign Market Entry Modes

Foreign market entry modes may be classified as follows:

1. Export Entry Modes

a. Indirect
b. Direct agent/distributor
c. Direct branch/subsidiary
d. Other

2. Contractual Entry Modes

a. Licensing
b. Franchising
c. TechnicalAgreements
d. Service Contracts
e. Management Contracts
f. Constructionffurnkey Contracts
g. Contract Manufacture
h. Co-production Agreements
1. Assembling Arrangements

3. Investment Entry
a. Sole Venture: new establishment
b. Sole Venture:acquisition
c. Joint Venture:majority
d. Joint Venture: 50-50
e. Joint Venture: minority,

Overseas market can be tapped in two ways:

Basing production in home country

Contract manufacturing in foreign country

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International Marketing

Export entry

Production in home country is possible in two ways - Indirect exports and direct exports.

Indirect Exports ' ..'

Foreign visitors purchase goods- in the process add to foreign exchange earnings.

Foreign department stores, foreign firms having branch offices locally or agents who
buy on behalf of their parent offices abroad, though add foreign exchange it is not a
result of any deliberate efforts on part of locals to promote exports.

Merchant exporters/Export houses, where manufacturers entrust the job of selling

his products abroad - normally do not engage in manufacturing.

Advantages of using Export Housel Merchant Exporter

Manufacturer avoids problems of direct exporting such as investment ofresources in

collecting market intelligence, setting up of export departments - served with foreign
market knowledge.

Operational cost of export house/merchant exporter spread over several parties

results in saving in unit cost.

Effecting consolidated shipment - possibility ofreduction of unit freight.

Reputation ofexport house enables manufacturers to get better representation.

Disadvantages

May take too many unrelated lines resulting in producer neither getting expertise nor
the attention he is looking for.

Possibility ofmanufacturer continually depending on export house and not developing

export expertise himself.

Export house will push the product abroad on its own name and reputation - foreign I~~~X:;:~
customer may not associate the product with the manufacturer at all.

By using an indirect channel, a manufacturer can begin exporting with low start-up costs,
modest risks, and the prospects of early profits on sales.

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Unit 6 Foreign Market Entry Strategy

2S Activity A :
Two models of contractual entry are:

1. ~-------------------
2. _

6.3 EXPORT MANAGEMENT COMPANIES

An export management company (EMC) is a specialist in international marketing that acts

as the export department for several manufacturers in non- competitive lines. EMCs vary
greatly in size, product/market specialisation, services, and experience. The representative
EMC is small (one or two individuals in management and sales), relies on foreign agents or
distributors rather than on its own foreign sales offices, takes title to its client's products
and specialises in certain geographic areas.

Direct exporting

While indirect exporting gives the manufacturer immediate access to foreign markets through
the marketing network ofEMCs and other export intermediaries. But the other side ofthe
coin is a manufacturer's lack of control over its foreign sales. A manufacturer who wants to
exploit foreign markets aggressively will move on to direct exporting after gaining his initial
exposure through indirect exporting.

Direct exporting offers the manufacturer the following specific advantages:

a) greater control over the foreign-marketing plan (pricing, advertising, personal selling,
distribution, product services, etc.)

b) greater concentration of marketing effort on the manufacturer's own product line

c) quicker information feedbacks on markets, competition and performances, and

d) better protection of the manufacturer's trademarks, patents, goodwill, and other

intangible property. These advantages become actual, however, only when a
manufacturer organises for exporting and commits the resources necessary for an
active penetration of foreign markets. The higher start-up cost and risk of direct
exporting compared to indirect exporting can only be justified by greater marketing
effectiveness.

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The most common channel in direct exporting are those using foreign agents or distributors
and foreign branches or subsidiaries.

A foreign agent is an independent middleman who represents the manufacturer in the

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target market. As-an agent, this middleman does not take title to the manufacturer's product
but rather sells that product on a commission basis. Furthermore, an agent seldom holds
inventory beyond samples or extends credit to customers. Usually the manufacturer receives
order from his agents and then shifts directly to the foreign buyer.

In contrast, a foreign distributor is a merchant who buys the manufacturer's product for
resale to other middlemen or to the final buyers. The distributors perform more functions
than the agents (such as maintain inventories, extending credit, servicing orders and providing
after-sales services), and he also assumes the ownership risk. His compensation is his
profit margin on resale of the manufacturer's product.

Choosing a foreign agent or distributor: Finding good agents or distributors is a

recurring problem for export managers. It is recommended that they begin the recruitment
processes by drawing up an agent (distributors) profile that lists all the desirable features
of an agent (distributors) in a particular foreign target market.

Manufacturer is well advised to make the final selection of a foreign agent or distributor
only after personal interviews with the best prospects. Interviews are the most reliable
way for manufacturers to gain a feel for a particular agent (distributor) and his organisation.
But interviews should come only after desk research has identified the best candidates.
The time and expenses needed for a careful selection of an agent or distributor is justified
by the critical importance of this decision.

Afinal point on export entry. The manufacturer's agreement with his foreign representative
should be a written contract that clearly sets forth the rights and obligations of both parties.
Provisions relating to sole and exclusive rights, competitive lines, the resolution of disputes
and contract termination are of particular importance.

RS Activity B :
Two advantages of direct exporting are:

1._---,- _

2. _

..

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Unit 6 Foreign Market Entry Sln!tegy

Profile for Evaluating Prospective Foreign Distributors

lines handled

experience with manufacturer's product line

trading areas covered

size offirm

sales organisation

physical facilities

willingness to carry inventories

after-sales service

knowledge and use of promotion

reputation with suppliers, customers and banks

record of sales performance

cost of operations

financial strengths and credit rating

relation with local government

knowledge ofEnglish and other relevant languages

knowledge of business methods ofmanufacturer's country

overall experience

willingness to cooperate with manufacturer

6.4 ENTERING FOREIGN MARKETS THROUGH LICENSING AND

OTHER CONTRACTUALARRANGEMENTS
Companies may enter foreign markets under a wide variety of contractual arrangements:
licensing, franchising, technical arrangements, service contract, construction/turnkey
contracts, contract manufacture, co-production agreements and others. Licensing is by
far the most common contractual arrangement.

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International Licensing

W;i~~;~':~i;:;
The essence of an international licensing agreement is the transfer of industrial property
rights (patents,trademarks,and/or proprietyknow-how) from a licenserin one country to
a licenseein a sec-ond country, The usualpracticeis for the licenserto allowfor the licensee
to use the rights for a specified period of time in return for royalty compensation.

Licensing may be viewed as simply a way of obtaining incremental income on "shelf'

technology that has already been written off against domestic sales. Or a manufacturer

may agree to exchange technology with a foreign counterpart,a practiceknown as cross

licensing. Again,manufacturers may licenseabroadto get legalprotectionfor theirpatents

and trademarks in countries where they must be "worked" to remain valid or to guard

against infringement.

Advantages and disadvantages of licensing as a primary entry mode

Licensing offers the manufacturer both advantages and disadvantages as a primary entry

mode. Compared to export entry, the most evident advantage of licensing is the

circumvention of importrestrictions and transportation cost in penetrating foreignmarkets.

Instead of transferring physical products to a target country, the manufacturer transfers

intangiblepropertyrights and technology. In contrastto investmententry,the outstanding

advantages of licensing are low entry cost and low direct risk.Although licensing incurs

transfer cost, it requires no fixed investment by the manufacturer. For the same reason,

licensingarrangementsare exposed to far less politicalrisk than foreign investments.

The most criticaldisadvantage of licensingas an entrymode is the licenser's lackof control

over the licensee'smarketing program.Although the licenserordinarilymaintainsquality

controlover the licensedproduct, he does not control the licensee'svolume of production

or marketingstrategy. The market performanceof the licensedproducttherefore,depends

on the motivation and the abilityof the licensee.

A second disadvantage is the lower absolute size of returns from licensing, compared to
return from export or investments. Licensing revenues take the form of running royalties
over the life of the agreement.Today, royalty rates seldom exceed 5% of the licensee'snet r[.: .....
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Anotherdisadvantage of licensingis itsexclusivity. Ordinarily a licensing agreementgrants

to the licensee exclusiverights to use the technology or trademark in the manufactureand

sale of specified products in the licensee's country. For the duration of the agreement

therefore, the licenseris preventedfrom marketingthose productsin the licensee'scountry

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Unit 6 Foreign Market Entry slnltegy

by using another entry mode, such as export or investment. This opportunity lost is particularly
irksome when the licensee fails to exploit market opportunity.

Other Contractual Entry Modes

International franchising : Unlike conventional licensing, the franchiser licenses a
business system to an independent franchisee in a target foreign country. The franchisee
carries on a business under the franchiser's trade name and in accordance with policies
and practices laid down by the franchise agreements. Holiday Inn, McDonald's, Kentucky
Fried Chicken, Avis, and many other US firms have become household names in scores of
countries. The classic international franchiser, of course is Coca Cola. International
franchising has become, therefore, a powerful entry mode for companies that have products
and services that can be reproduced by independent franchisee.

Contract manufacturing: In contract manufacturing, an international firm negotiates

arrangements with a company in the foreign target country to manufacture a product for
subsequent sale by the international firm. To get the product manufactured to its own
specifications, the intemational firm usually transfers technology to the contract manufacturer.
Contract manufacturing can offer several advantages to the manufacturers as a mode of
foreign market entry. It requires only a modest commitment of capital and management
resources compared to investment entry, avoids the political problem oflocal ownership,
and allows the manufacturer to exercise full control over the foreign marketing program.
On the other hand, the manufacturer may find it difficult or impossible to locate a good
contract manufacturer (especially in developing countries); he must often provide substantial
technical assistance to bring the contract manufacturer up to desired quality levels.

Management contracts: Under an international management contract, a company

undertakes the day-to-day management of an independent enterprise in a foreign target
country. In return for its management services, the company ordinarily receives fees over
the fixed life of the contract.

Manufacturers usually enter management contracts only in conjunction with other agreements
such as joint ventures or turnkey projects, because they seldom see themselves as primary
suppliers of management services.

Turnkey construction contracts: Under a turnkey project a company provides not

only engineering and construction services but also the additional services needed to bring
the project up to the point of operation before it is turned over ~o the owner. At times a
company may also operate the project for a transition period, an arrangement called turnkey
plus. In short, a turnkey contract calls for the international transfer of package of services
- engineering, construction (often including financing), training, and (possibly) management.
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Co production Agreements : Co production is a kind of non-equity joint venture. Under

a long term contract a company (mainly in developed countries) provides technology,
components and other inputs to an enterprise (mainly in developing country), in return for
a share ofthe resulting production, which it then markets in its own country. A manufacturer
in the developedcountry may gain several advantages from a co-production agreement
including the sale of equipment and other products to the enterprise in a developing country,
a low cost source of products for sale in the developed market. But these advantages
must be weighed against certain possible disadvantages - the failure of the partner to
maintain quality standards or meet delivery schedules. Co-production agreements are
very attractive to developing countries because payments to the developed countries come
out of production, rather than out of scarce foreign exchange.

RS Activity C :
Two differences between international licensing and international franchising are:

1. _

2. _

6.5 ENTERING FOREIGN MARKETS THROUGH INVESTMENT IN

LOCAL PRODUCTION
I

Advantages and disadvantages of investment entries

Companies invest abroad in production for three fundamental reasons - to acquire minerals
and other raw materials through exploitation of natural resources, to source manufactured
products at a low cost for use or sale at home and in third countries, and to build a
logistical base for the penetration of a local market in the target country.

Through investment entry a company can establish a full function enterprise in the target
country and thereby exploit its competitive advantages to a higher degree than is ordinarily
possible through export or contractual entry modes. Investment entry allows a company
to control the foreign marketing program and to gain logistical advantages that may arise
from the circumvention ofimport barriers, saving in transportation costs or lower production
costs. Because of its manifold advantages, investment entry has become the hallmark of
the multinational corporations.

Investment entry also poses certain disadvantages compared to other entry modes; it
requires a far greater commitment of capital management and other company resources.

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Unit 6 Foreign Market Entry Strategy

This higher commitment, in tum, means a higher exposure to business and political risk.
Substantial start-up costs, long payback periods and the cost of disinvestment in the event
of failure must also be considered disadvantages of investment entry. Again, managers
need more information to make good investment decisions than is true of export and
licensing decisions.In particular investment becomes a high-risk entry mode when the
investor has no prior experience in the target country.

The Decision to Invest in a Target Country

The investment entry decision is the outcome of a lengthy process that ordinarily involves
severalmanagers from differentfunctions and at different levelsofthe company organisations.
We can structure this process as a sequence of checkpoints that must be passed before ~~;;;~;;;jt~;:;:
the final approval of a foreign- investment proposal.

1. Should we investigate the foreign - investment proposal?

2. Is the present investment climate in the target country acceptable?

3. Will the investment climate remain acceptable over our strategic planning period?

4. Will the investment project meet return on investment and other objectives after taking
account of business and political risks?

5. Have our entry negotiations with the host government reached a satisfactory outcome?

a) Investment entry through acquisition

A foreign investment proposal may be a proposal to acquire a firm in the target

country rather than start a venture from scratch.

Advantages and disadvantages of acquisition entry

Acquisition entry offers a company several potential advantages compared to new

venture entry. They are only potential advantages because they depend critically on
the choice of the acquired firm. A poor choice can transform a potential advantage
into an actual disadvantage. The most evident advantage of acquisition entry is a
faster start in the target country. The investor gains control over a going concern with
a product line, manufacturing facilities, managers, workers, and customers. To achieve
the same market penetration through a new venture could take several years. For the
same reason, acquisition entry promises a quicker return on investment.

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International Marketing

b) Investment entry through joint ventures

Joint venture entry occurs when an international company invests in a business enterprise
in a target country together with a local partner firm. The foreign investor may hold a
majority, a minority, or half of the joint venture's equity. Joint ventures are usually
started from scratch, but they may also result from the purchase of equity in an existing
local fum.

Advantages of Joint Ventures

In many developing countries joint ventures may be the only investment entry mode
available to international companies because host governments prohibit sole ventures.
By contributing capital to the joint venture, the local partner reduces the foreign partners'
investment outlay and risk exposure. But the local partner's most valuable contribution
is his knowledge of the local business environment and his ongoing contacts with
local customers, suppliers, bank, and government official. That is why joint ventures
can be attractive to companies with little experience in foreign operations.

Disadvantages of Joint ventures

International managers commonly complain that joint ventures dilute their control
over foreign operations. Even with majority joint ventures, international manager must
accommodate the interest of local partners.

Choosing the right partner

After the managers have decided on a joint venture as the appropriate entry mode
for a target country, the most critical decision is the choice of a local partner. Managers
should first determine what they want the joint venture to accomplish in the target
country over a strategic planning period, and how the joint venture fits into their
overall international business strategy. Next, they need to find out the objectives and
policies of the prospective local partner, as well as the resources he would bring to
the joint venture. Only after agreement on the purpose of the joint venture should
managers go on to negotiate specific issues-ownership share, the allocation of
management responsibilities, profit reporting, dividend policy,the settlement ofdisputes, : .... . - -'

and others. Joint ventures will prosper only if the partners trust each other and

c)
continually support their common endeavour.

Foreign direct investment (FDI)

~

~ '.' .

Another form of ownership-related market entry strategy is foreign direct investment

(FDI) i.e. investment within a foreign country. Company decides on this alternative to

116
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Unit 6 Foreign Market Entry sli-a'tegy

manufacture locally and to capitalise on low cost labour, to avoid high import taxes,

to reduce the high costs of transportation to market, to gain access to raw materials,

or merely as a means of gaining market entry. Firms may either invest in or buy local

companies or establish new facilities for manufacture.

The growth offree trade areas that are tarifffree among members but have a common

tariff for non members creates an opportunity that can be capitalised on by direct

investment; Korea's Samsung Electronics invested USD 500 fill. to build a TV picture

tube plant in Mexico to feed the already huge, TV industry centered in NAFTA.

Kyocera Corp. ofJapan bought Qualocomm's wireless consumer phone business as

a means offast entry into the American market. NESTLE built a new milk factory in

Thailand to serve the ASEAN free trade area.

More and more companies having international objectives are establishing

manufacturing operations throughout the world. This is a trend that will increase as

barriers to free trade are eliminated and companies can locate manufacturing wherever

it is most cost effective.

The selection of an entry mode and investment decisions are critical decisions because

the nature of the firm's operations in the country market is affected by and depends

on the choices made.

PiS Activity D :
a) Two main advantages for entry by acquisition are:
1. _

2. _

b) Two major differences between contractual entry and investment entry are:
1. _

2. _ i .
I. .. .

Deciding on the right entry mode

~
We have reviewed several foreign-market-entry modes. As we have seen, each mode has
its advantages and disadvantages. Managers must decide on an entry mode for a particular
product and for a particular foreign countryImarket. To do so, they may follow one ofthe
three different decision rules.

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International Marketing

The naive rule is for managers to use the same entry mode such as agent/distributor
exporting, for all target countries. Because country markets and entry conditions are
heterogeneous, this rule leads managers to forsake promising market that cannot be
penetrated with the.ir single entry mode or to end up in markets with an inappropriate
mode.

The pragmatic rule is for managers to find an entry mode that "works". In most instances,
managers start by assessing export entry, and only if such an entry is infeasible, do they go
on to assess another mode. This rule avoids the two pitfalls of the naive rule, and it also
saves management time and effort. But it fails to lead managers to the most appropriate
mode.

The strategy rule is for managers to decide on the right entry mode as a key element in a
company's foreign-market-entry strategy. It is the most difficult rule to follow because
managers must make systematic comparisons of alternative entry modes.

6.6 EMERGING MARKETS

The single most important element to which the foreign marketer must adjust the marketing
tasks is the economic level of a country. A study ofthe aspects of economic development
is necessary to gain insight into the economic climate along with an assessment of the
economy's growth potential.

According to the five stage model developed by Walt Rostow, there are five stages in
economic growth as shown below:

Table 6.1 : Rostow's 5 Stage Model

Stage

1 The traditional society Lack of capability to increase productive

levels
Low levels ofliteracy
Low level of social infrastructure

Stage

2 Preconditions for take-off Societies approaching take- off stage to

growth

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Unit 6 Foreign Market Entry Slrategy

- Small beginnings in transportation,

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communication, Power, education, health 1'.::::.:.::.;',.;.
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Stage
....

3 Take-offLevel - Countries achieve growth pattern

- Steady development of human resources and
infrastructure
- Modernisation of industrial production

Stage

4 Maturity Level - Sustained levels of growth are achieved

- Extension ofmodem technology to all
economic fronts
- Ability to produce needed products through
technological & entrepreneurial skills

Stage

5 High mass consumption - Real income per capita rises

level
- Large production of population has
discretionary income

[Adaptedfrom: The stages ofeconomic growth/by Walt W Rostow/lndediCambridge

University Press (UK)]

Although there can be overlap of stages, the model provides the international marketer
with some indication between economic development and the types of products a country
needs and the levels of industrialisation reached.

The United Nation classifies a country's stage ofeconomic development based on its level
of industrialisation.

The 3 categories are:

i) MDCs (More Developed Countries) - Industrialised countries with high per capita
incomes such as Canada, UK, France, Germany, Japan and the USA.

119
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International Marketing
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ii) LDCs (Less Developed Countries) - Industrially developing countries first entering

international trade such as those in Asia and Latin America.

iii) LLDCs (Least Developed Countries) - Industrially underdeveloped, agrarian societies

with extremely low per capita income levels and little world trade involved, such as

parts of Central Africa and parts ofAsia.

Oflate, a country's investment in information technology (IT) is an important key to economic

growth. The cellular phone, the internet and other advances in IT have opened opportunities

for emerging economies to catch up with the developed world. India's growth in the IT

sector has created an economic revolution in the country and in the USA. 30 percent of

the workforce in California's Silicon Valley is Indian. India's consistent GDP growth rate

of 6 percent plus since 2002 has been largely driven by the IT industry.

One indicator of economic development is the level ofinfrastructure development within

the country. Infrastructure represents those types of capital goods that serve the activities

of many industries- such as roads, ports, airports, telecommunications, communication

networks, power, and energy supplies. These are all necessary to support the production

and marketing of companies. The quality of infrastructure directly affects a country's

economic growth potential and the ability ofan enterprise to function effectively in business.

For example, inadequate transportation facilities can increase the costs of distribution of

companies to reach certain market segments. Business efficiency is affected by the presence

or absence of financial and commercial service infrastructure such as advertising agencies,

warehousing facilities, credit and banking facilities etc. existing within a country

Demand in Emerging Markets

Modem and traditional sector within the economy make the task of estimating demand in

less developed countries very challenging. The modem sector is generally observed in the

urban and semi-urban areas- that have airports, international hotels, high concentration of

industries and an existing, western-culture oriented middle class; of course, this class

represents the buying class and hence is of more significance to the international marketing

companies of developed countries. There is also the traditional sector containing the

remainder ofthe country's position. Although the two sectors may be physically close to

each other within the same country, they are poles apart in terms of production and

~}*%~
consumption. This dual economy phenomena affects the size of the market and in many

countries, creates two distinct economic and marketing levels.

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Unit 6 Foreign Market Entry S1~ategy

Table 6.2 : Market indicators in selected countries

Country Population GDPper Cars per TV Sets PCsper

(inmn) capita 1000 per 1000 1000
.. ' (USD) persons persons persons
(No.) (No.) (No.)
I.USA 285.3 31,592 759 835 625
2. France 59.2 30,492 564 632 337
3. Germany 82.3 32,813 529 586 382
4. Japan 127.0 44,458 560 731 349
5.UK 58.8 22,592 424 950 366
6. Spain 41.1 17,595 467 598 168
7. South Africa 43.2 4,068 143 152 69
8. Poland 38.6 3,716 286 401 85
9. China 1271.8 878 8 312 19
10.Brazil 172.4 4,633 79 349 63
11.India 1032.4 477 8 83 6
12. Kenya 30.7 325 13 26 6

Source: World Bank report 2003 extract

The markets of the future will include expansion in industrialised countries and the
development of the traditional sector in less developed countries. The traditional sector
offers the greatest long term potential but profits are generally slow to come by. The
companies that will benefit in the future emerging markets, will be the ones that invest
when it is difficultand initiallyunprofitable.

Table 6.2 gives some idea of comparison of potential in developing countries and the
developed countries.

Big emerging markets

Experts have predicted that imports to the countries identified as big emerging markets
will be 50 percent of the industrial world by 2010. Presently they account for half the
world population and 25 percent of the industrial world's GDP.

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Some of the key emerging markets have been identified below based on various reports
including the world bank.

Asia Latin America Europe Africa

-
1.China 4. Argentina 9. Poland 11. South Africa
2. India 5. Brazil 10. Turkey
3. South Korea 6. Columbia
7. Mexico
8. Venezuela

Some of the important characteristics exhibited by the big emerging markets are:

they are all very large with significant populations and population growth

they represent huge markets for a wide range of products

they have strong economic indicators of growth and are regional economic drivers' I

they have undertaken major economic reforms

they are ofpolitical importance within regions

they are capable ofpushing growth in neighbouring countries as they grow

Since many of the above mentioned countries representing the emerging markets of the

future lack modern infrastructure, much of the expected growth will be in those sub

sectors that are related and linked to infrastructure development such as environmental
f;5~5~~~!!flj~
technology, healthcare, telemedicine, biotechnology, transportation, IT Services, financial

services and energy.

~ Activity E :

a) Expand the following terms:

r;~x;'~t;! i!J:i.
LDCs: -'---- _

LLDCs: _

MDCs: _

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Unit 6 Foreign Market Entry Strategy

b) Two big emerging markets in Asia are:

6.7 PLANNING AND ORGANISING MARKET ENTRY

Before carrying out business internationally through sourcing, exporting or investing or a

combination of these strategies, the company needs to look at conditions in the potential
country to analyse what the advantages, disadvantages and costs will be and whether the
risk is worth taking.

In choosing export markets, it is necessary to establish the key factors influencing sales
and profitability of the product under consideration. The company's experience in the
home market mayor may not be relevant to the individual export markets being considered.
The following nine questions need to be answered for a creating a product-market profile.

1) Who buys our product?

2) Who does not buy our product?

3) What problem does our product solve?

4) What are customers now buying to satisfy the need?

5) What need does our product serve?

6) What price is being paid for the products they are currently buying?

7) When is our product purchased?

8) Why is our product purchased?

9) Where is our product purchased?

Each answer to the above questions provides an input to the decisions concerning the four

P'S. In the current environment of ever increasing competition, companies can penetrate
an existing market by offering more value than its competitors - better benefits, lower
prices, or both; this applies as much to marketing in export country as to the home country.

123
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Once a product-market profile has been created, six criteria should be assessed:

1) market potential

2) market access

3) shipping costs

4) potential competition
5) service requirements

6) product fit
After the research findings have identified the potential markets, there is no substitute for a
personal visit to size up the market firsthand and begin to develop the export marketing
plan.

A principal issue that an expanding firm must address is whether to export or produce
locally. In many emerging markets, this issue is resolved by a national policy that requires
local production. Any company that wishes to enter such a country is generally forced to
produce locally. If the choice is to be made by the company, the trade off for local vs
regional or global production cost, quality, delivery and customer value. Costs will include
labour, materials, capital, land and transportation. Economies of scale are important in
determining costs to justify the investment required to establish a production site. If the
product is heavy, transportation costs are greater and provide an incentive to locate
production closer to the customers.

If a company decides to source locally, it has a choice ofbuying, building, or renting its
own manufacturing plant or signing up a local company for contract manufacturing. A
contract manufacturer may be in a position to add production to an existing plant with less
investment than the manufacturer would require to achieve the same volume of production.
If this condition prevails, then an attractive price can be obtained from the contract
manufacturer.

A summary of the steps in the decision criteria for market entry is given in table 6.3

Table 6.3 : Market Entry and Expansion Decision

1. Sourcing Home, third or host country? Cost, market access,

country of origin factors

124
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Unit 6 Foreign Market Entry Strategy

2. In-country or in-region Cost, market impact assessment

marketing organisation
fi:; ;'~;:;:;!;:;,~:

3. Selection and training Distributors and sales agents

-.'

4. Marketing Mix strategy Goals and objectives of sales, earnings and share of
market; market positioning, marketing mix strategy

5. Strategy implementation Implementation, evaluation and control

2S Activity F :

The choices available to a company to source locally in a foreign country are:

6.8 SUMMARY

This unit has turned its focus on the main tasks involved in entering foreign markets.
Companies face a host of challenging tasks and the issues on which the basis of market
entry is decided are put forward. The role and purpose of export management companies
have been briefly discussed.

There isa variety ofcontractual arrangements by which companies enter foreign markets.
The advantages and disadvantages ofthe important modes ofentry are reviewed. In addition
two forms of ownership related strategies - namely acquisition and joint ventures - are
briefly discussed.

Numerous nations such as China, Brazil, South Korea, Argentina and India are seeking
economic growth and improved standards of living. These nations are becoming the
emerging markets of the future and clearly the developed nations are expanding into the
big emerging markets (BEMs) t~ capitalise on the huge opportunities. The considerations
that are applicable for these markets have been discussed in some detail.

In the final section, the principles of planning and organising market entry strategies have
been included.

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International Marketing

6.9 KEYWORDS
Market entry: It refers to the action required by a company to commence marketing
operations in a foreign country.

Indirect export: This refers to the activities related to exports that involve routing of
goods and/or services through intermediaries located in the home country or in the foreign
country.

International franchising: In this type of licensing, the franchiser licenses a business

system to an independent franchisee in a target foreign country.

Foreign direct investment (FDI): It refers to the investment by the company in a foreign
country for the purpose ofcarrying out business including marketing activities.

Emerging markets: A new group ofdeveloping countries that is experiencing rapid growth
rates, increased industrialisation and embracing technological developments creating new
opportunities for domestic and international companies.

6.10 SELF-ASSESSMENT QUESTIONS

Q 1. What are the major issues based on which decisions for foreign market entry should
be planned?

Q2. Identify the main forms offoreign market entry.

Q3. What is the role and purpose of export management companies? !:",'::;::';'-:,':'.
W6~~i~~
Q4. What are the options available to Chinese- based fast food chain to enter the Indian
market?

Q5. Describe the advantages and disadvantages of a licensing agreement.

Q6. What are the specific advantages of investment entry for an India-based auto

component company?

Q7. Discus the reason why emerging markets are becoming important to MNCs?

Q8. What are the main factors in planning and organising foreign market entry strategies?

Q9. Describe the five-stage model for assessing the economic growth level of a specific
country.

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IN-TERNi\.TI()NAL PR()DUCT
S1~RArrl~(;Y

Objectives
After completing this unit, you will be able to:

(iT' state the importance of product, and offering a product

suitable for the international market.

(iT' explain the need and purpose of product adaptation to

suit differentinternational environments.

(iT' review the factors that require changes in the product

offering when selling abroad.

(iT' enumerate the mandatory and cultural requirements of

product adaptation.

(iT' discuss the main issues in consumer product strategy.

(iT' analyse the main issues in industrial product strategy.

Structure
7.1 Introduction

7.2 Product Lines

7.3 Product Planning for Exports

7.4 Product Adaptation

7.5 Issues in Consumer Product Strategy

7.6 Product Elements for Adaptation

I

7.7 Issues in Industrial Product Strategy

7.8 Sumrruny

7.9 KeyWords

7.10 Self-Assessment Questions

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7.1 INTRODUCTION
International markets for both consumer products and industrial products are prese-nting
new challenges and new opportunities. New consumers are coming up in markets that
never existed before. _"" such as emerging markets. They promise to be huge markets
tomorrow, if not today. Consumers' tastes and requirements are changing and becoming
more sophisticated in the developed countries. Whether the domestic products and services
are suitable for export markets is a crucial question that needs to be answered by companies.
Decisions about products involve such issues as what product lines to introduce in various
countries. In addition, there is a need to determine whether a product should be adapted
or modified to suit local customs and characteristics and whether a totally new product
should be introduced.

This unit reviews some ofthese critical questions and attempts to provide the framework
for international product strategy. The reasons for product adaptation are many and these
are examined in one of the sections here.

Quality aspects have taken centre stage with the growth of competition in international
markets and with the consumer demanding innovative products. Quality is just one ofthe
many issues that are linked to success in foreign market. Similarly, the issues related to
industrial product strategy also need to be examined since they can be different from those
for consumer products.

7.2 PRODUCT LINES

Decisions about product involve such issues as what product lines to introduce in various
countries, to what extent a product should be adapted or modified to match local customs
and characteristics, whether new products should be introduced; where the R&D effort
should be concentrated, whether the firm should diversify into unrelated areas; which
products should be eliminated; how product should be packaged; what brand policy to
pursue; what after sales services to offer; and what guarantees the company should provide
on various products.

Products are a bundle of attributes put together to satisfy a customer need. The product
objectives for each country market should be defined separately and be based on overall
corporate objectives on the one hand and on the concerns of the individual national
governments on the other. Product planning decisions, both immediate and strategic are
based on product objectives.
I

130
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Unit 7 International Product St?ategy

Product design is a major strategic issue. A company can either offer a standard product
worldwide or adapt it to local requirements. Adaptation can be physical (for example
changes made in the electrical wiring system of a machine to match voltage requirements
of a country) or cultural (for example colour change in response to a cultural preference).
~l~;;~~\:;~;:~:
The decision to standardise or adapt is dictated by the nature of the product, market
development, costlbenefitconsiderations, legal requirements, competition, support system,
physical environment and market conditions.

To operate overseas successfully, a periodic review of the product line is necessary. Product
line development essentially involves three alternatives:

1. Extension ofthe domestic line (which refers to the introduction of domestic products
to overseas market).

2. Adding additional products to the overseas market even if the company does not
carry those products domestically.

3. Adding new products.

New products for international markets can be either developed internationally or acquired.

~ Activity A:

The three alternatives for product line development are:

1. ----------------
2. _

3. _

7.3 PRODUCT PLANNING FOR EXPORTS

Product planning for exports is a process for selecting items for a target market. It involves
determination of length and depth of a product line. Length related to a number of products
and depth signifies variation of q particular item. This process is generally confined to the
existing product line for which the intending exporter has the necessary manufacturing
capabilities.Ethnic and specialtyitems have no problems. The difficultylies with manufactured
products where the requirements are different. This is attributed to a variety of reasons
like physical conditions, functional needs and method of product use. For instance large
refrigerators are not preferred in Japan where the apartments are small.

-.: -.-:-.-.-,.:
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International Marketing

In contrast, bigger appliances are liked in the US. In developing countries bicycles are
used for transportation. Against this Americans require SLR bicycles forrecreation. Further,
Switzerland has sold the same watch in different sizes to USA and Japan due to variation
in wrist size. Hand pumps for use by African farmer must have a sturdy handle for tying
buffaloes. Likewise, tliere could be a number of examples where the same products are
sold differently in different markets. The subject involves discussion on issues like product
adaptation, standardisation, product life cycle, brands, packaging and support service.

7.4 PRODUCT ADAPTATION

A product that is perfectly good for one market may have to be adapted for another.
There can be many reasons for this. Physical conditions may be different. Functional
requirements may vary from country to country. People in different places may use products
differently or for different purposes. Product adaptation is changing the product either
through value addition or by making it functionally different. Selection offeatures is the key
element in product adaptation. This calls for a review ofenvironmental factors affecting an
export item. Robinson has identified a number offactors, which require change in product
design for selling abroad. Major design changes in product adaptation are as follows:

Factors of Design Changes

This includes size, capacity and volume. For instance the United States follows non-metric
size, but European dimensions products are based on metric system. In such a situation,
simple translation of non-metric size into metric will not suffice. Thus intending exporter
has to change the product physically to required metric standard.

Climatic Conditions

Climatic conditions also dictate product changes resulting in change of raw material. A
leading manufacturer of industrial abrasives had to change the material for its supply to
another country for reasons of different climate. A similar change was effected by a paint
manufacturer for export to another country. Further, Sony's music system operating in
India has a dust protection mechanism.

Product Use

This relates to product use and its performance. Mixer grinders in USA have power rating
ranging between one to two minutes because ofminimal/simple use ofthis equipment. As
against this, in India, Pakistan and Bangladesh, this appliance is used as a full fledged
kitchen machine where it's rating goes up to 1/2 hour or more.

132
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Unit 7 International Product St?~tegy

Cultural Views

Products have to change with cultural values which are reflected in fashion, taste and
preferences. For instance, red and white have happy a connotation, whereas black and
white is a sign of grief. Green is associated with illness in Malaysia. Brighter colours are
liked in Africa. These colours are extremely relevant for fabrics and packaging. Mattel
Toys ofDSA wanted to sell their Barbie Doll in Japan. But the Japanese did not like the
American favourite doll. Later the firm introduced a modified Barbie - slightly oriental
eyes and a more girlish figure.

Quality

Quality reflects end-issue values. If a nut or bolt is reckoned as a hardware item, its quality
would be different when the same is used as an auto part.

Specific Requirements

At times, an exporter may be required to change the product to make a specific requirement.
This happens in the case ofDS market, where an Italian firm adjusted the fermentation
process of wine against an established French product.

Level of Sophistication

Design/functional use of items exported to different countries should match with the level
ofsophistication in target markets. Products designed in highly developed countries often
exceed the required standards in developing countries. For instance Ray Ban glasses have
been recently introduced in India. It will however take some time for the market to develop
receptivity for it. Manufacturers in developing countries face the opposite challenge to
upgrade the level of standard. Finally tastes, level of skills & technical development may
be different and may dictate changes in product.

Strategy

Product adaptation is also used as a strategy to enter a new market that is dominated by
existing manufacturers. In such a situation some product differential will help the intending
exporter to sell his product successfully in the target market. This is amply demonstrated
by the recent entry of Hyundai small cars against Maruti in the Indian market. Not only
this, Hyundai is planning to take on the existing luxury models sold by Japan and others in
Switzerland. This is evident from Hyundai's participation in the recent Auto Shows in
Detroit and Geneva. A similar syndrome is, however witnessed in the CTV market in India
where some ofthe Japanese TV majors like Sony, AIwA, and Akai are virtually driving

133
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International Marketing

Indian products out of the market. Both the cars and TVs sold by these companies have
amasing features and are perceived by buyers as absolutely different products. Further,
Tropicana (an American orangejuice) which has hitthe Indian market is likely to take a toll
on 'Real' and 'Onjus' juices made by Dabur and Enkay Texofood respectively.

Standardisation

Standardisation is equally important in the planning of products for export. This is more
relevant for consumer items. Major benefits of this strategy include economies of large
scale production, R&D, and marketing. With international travel becoming very common,
it is easier to win loyalty ofcustomers through standardisation both at home and overseas.
Further, "made in image" provides an additional premium when a country sells its products
worldwide. Standardisation also helps in saving on technology as the same specifications
are used for standardised products. To generate better marketing results it is desirable to
mix up both product adaptation and standardisation for countries having similar segments.
In the wake of globalisation, where a number of consumer products are being sold as
items ofWorld standard, this practice will be found extremely useful. International presence
of brands like Sony, Pepsi, National, Me Donald's vindicates these arguments. The basic
argument in favour of uniform multinational product strategy is that it is least costly in terms
ofboth manufacturing and marketing.

Life Cycle

Understanding of product life cycle is another element of export planning. Longevity of

product life is related to the level of economic development of a country. Compared to
developing economies, a product sold in developed countries has shorter life. This is 1::::",-:,:,:/;<:
attributed to greater competition in developed markets. A product has four stages in its life ~(:;~::;::Xj;
cycle. In the first stage a product is in the process of development, and sales pick up
gradually. Having established acceptability, the product registers rapid growth during the
second stage. In the third stage, the product reaches maturity. The fourth witnesses a
decline in the sales. This development is related to life cycle of manufacturing technology
which becomes obsolete with the passage of time.

Kotler has explained this syndrom~ as "demand-technology life cycle". With the advent of
new technology a new product is developed which replaces the old item. This transformation
is not instant. It involves some time-lag between obsolescence oftechnology and elimination
of products based on this. For instance, with the introduction of audio cassettes, the LPs
were dumped by some people, but this process took some time. The same thing happened
when the manual typewriter was replaced by electronic typewriters. Products sold
'Y0rldwide do not command the same status in different countries. This difference has to

134
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Unit 7 International Product St?ategy

be plugged by extending the life cycle of products through innovation. International

companies like, Sony, 3M, Toyota and Cannon have done this by creating a regular stream
of products which have been lapped up by customers over and over. This requires
competence in product development, which has to be built up as a kind of corporate
culture. Indian companies which are successfully following this track include Ranbaxy,
Hero Honda, and Sundaram Fasteners.

Branding

Branding is yet another aspect of product planning for exports. It is an identity or value
addition given to a product. In a market driven economy, this recognition is built up through
provision of quality product and adequate back-up service. This identity is rooted in a
language which would evoke similar emotions/associations world wide. Further it should
not be misinterpreted. It should have universal appeal and be amenable to integrated
international marketing strategy. The examples are Sony, Toyota and IBM. At times, it
would be necessary to use a different brand for a particular market to reflect its local
background. Again, some of the foreign buyers would ask for goods under private brands.
This happens in the case of supplies made as original equipment. In this situation, the
importer acts as a manufacturer of the exported item which is sold in the target market as
a local product. This approach is good for making an entry into a new market but it does
not serve long term interest to the exporter. A number ofJapanese firms have adopted this
strategy for exporting a variety of electronic products to USA and Europe. Some of the
Indian machine tool manufacturers have also sold general purpose machines to USA under
this arrangement. If necessary, the intending exporter should safeguard his interest through
registration of his brands/trade marks in the target market.

Packaging

Packaging is also important for product planning. A change in marketing environment

requires a different package to ensure adequate protection and shelf life for a product.
Difference in climatic conditions also influences the packaging requirement. In a country
like USA, which is characterised by a high degree of shelf merchandising, promotional
appeal in consumer packaging is very important. This is not required in the case ofdeveloping
countries where over-the-counter service is in vogue.
I

Further, distribution handling is not the same in all countries. In developed economies,
packaging should not entail additional handling at a retail leveL As against this there are a
number of countries in the third world, where extra labour is used to supply individual
orders from bulk packages at a retailing stage. Besides, there are special provisions in a
number of countries. For instance the US has Food and Drug Regulations which must be

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International Marketing

complied with for export offood products. Netherlands forbids use of straw in I .ickages.
South Korea and Australia expect a declaration that timber used in packaging is free from
any diseases. A leading cigarette company in the USA had to use more than 250 packs for
meeting special requirements/satisfying customers in different countries. For instance,
Australia wanted number of cigarettes to be written on individual pack. Canada requires
bilingual language on the packages. To avoid errors in the printing ofletters, basic art work
in Arabic and Greek languages is prepared in the target markets. Other considerations
which affect decisions on product packaging include size, shape, material and text. Customs
and level of income also affect the packet size. For instance, razor blades in USA and
Europe are sold in packs of 5 and 10. While in developing countries these are purchased
in singles. The material used in packaging may also differ in foreign markets. Beer in cans
is very popular in USA. But Europeans like it in glass bottles. The colour, text and design
of packaging should integrate with national requirements. In Europe and Latin America
where people travel too often, use of same colour will help in quick identification of a
product.

Support Service

Support service is the last but crucial point in product planning for exports. These involve
two components - warranty and after-sales-service. The intending exporter must have a
clear policy with regard to product warranty. Based on its corporate strategy the exporter
should either declare that his domestic warranty is valid worldwide or specify a separate
policy in this context for different countries. Adoption ofworldwide warranty with uniform
performance standard may look simple but this may not work under different marketing
conditions. For instance in acountry like United States a computer related item may have
thirty to sixty days of warranty but this may require one year in case of Europe or Japan.

Time span and standard coverage apart, the intending exporter should examine the method
of a product used in a particular country. For example in a developing country a product
may be subjected to rough use causing frequent product failure. In such situation, it would
be desirable to make local provisions for the required support service. This can be done
either through establishment of a subsidiary or appointment of an independent sales
distributor to perform the necessary function. In both the cases availability oftrained stock
with adequate stock of spares is important. This should be reckoned as an investment and
not a recurring expenditure.

~ Activity A:

a) Mention two aspects of branding that affects product planning for exports:

136
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Unit 7 International Product Strategy

1. _
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2. _

b) Two types of support services that are crucial for developing product strategy for
export markets are:

1. _

2. _

7.5 ISSUES IN CONSUMER PRODUCT STRATEGY

International competition is placing new emphasis on the basic principles of business.

Product life cycles are becoming shorter, quality aspects are becoming paramount, prices
are becoming increasingly competitive and consumers are demanding innovative products.
The power in the market place in most mature markets and emerging markets is shifting
from a seller's market to a customer's one. Today, with the explosion of information, the
customer has a wide variety of choices and knows what is best, cheapest, and high quality.
Quality is likely to remain the deciding factor in most international markets.

Maintaining quality

Maintaining quality is critical in consumer products, particularly food-related ones and

personal care items. A typical problem for many international brands is that actual production
is located far from the markets where they are consumed. This forces the manufacturers to
lose control ofthe product with the lengthening ofthe distribution chain.

Sometime back, Mars, Toblerone and Cadbury were the top selling brands in Russia for
chocolates. Within five years, the Russian manufactured brands had overtaken these brands
in the local market. Maintenance of quality becomes a major issue for such items. When
the Russian market opened its doors to foreign trade, foreign companies rushed in with
products that included out-of-date quality products. Chocolates were smuggled in and
sold in streets with the result that they were mis-handled in the process. Moreover, it was i
. :.',
found through the price research that the Russian brands appealed more to the Russian
consumer in taste even though the price was higher than the international brands such as
Cadbury and Toblerone.
I,;\;\1!~
i

It is clear therefore that quality is not only essential and desirable, but the need for
maintenance of quality is also supreme.

137
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Mandatory requirements

To meet the specific requirements of certain international markets, suitable product

modification and adaptation may be necessary. These can range from simple changes in
packaging to total redesign of the core product.

Homologation is a term used to describe the changes that are essential for compliance to
local standards. It has been found that mandatory adaptations are more frequent than the
need of adaptation for cultural reasons.

There are specific legal, economic, political and climatic requirements in a country that
dictate the need for product adaptation. During the eighties when the Indian government
was against foreign investments, Pepsi changed its product name to 'Lehar Pepsi' to gain
local acceptance. Subsequently, when the political climate became favourable, they reverted
to the original brand name of 'Pepsi'.

Since most products sold abroad by international companies have their origin in their
home markets, the product require some form ofmodification without which the companies
would remain on a weak wicket.

Green marketing

Since the 1990s green marketing has become a quality issue particularly in Europe and
USA. Europe has taken the lead in the 'green movement' with strong public opinion and
legislation favouring environment friendly marketing and products. 'Green Marketing' is a
term used to identify concern with the environmental consequences ofa variety ofmarketing
activities.

The European commission (BC) issued guidelines for eco-labeling that became operational
since the early 1990s. The product is evaluated on all significant environmental effects
throughout its lifecycle from manufacturing to disposal. A detergent formulated to be
biodegradable and non polluting is judged friendlier than one whose formulation is harmful
when discharged into the environment.

Laws that incorporate a system to control solid waste, while voluntary in one sense, do
carry penalties. The Ee law requires that packaging material through all channels of
distribution from the manufacturer to the consumer, is recycled or reused. It is estimated
that between 25 and 45 percent ofthe weight of packaging materials contained in packaging
waste is recycled. There is growing public awareness and political pressure to control
solid waste. Total compliance with these systems is only a matter of time.

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Unit 7 International Product Strategy

S Activity C:

Two main issues that need to be considered for consumer product strategy are:

1. ~------___,___-----------

2. _

7.6 PRODUCT ELEMENTS FOR ADAPTATION

In order to identify the possible ways by which a product may be adapted to an international
market. It is useful to view the various dimensions into three distinct elements as shown in
Fig. 7.1.
l"

3. Support element

-Delivery - Spares - Installation - Other related services

-
Warranty - Instructions - Repair and maintenance
2. Packaging element
Price - Brand
Quality - Trademark
Packaging -Labelling
Styling
~:-' .'." ...
1. Core element
Product platform
r~;~~;;rff~Jj
Design features
Functional features
Legal compliance

- Fig. 7.1: Product Elements Model

1. Core Element: The core element consists of the physical product that deriyes its
shape and form from essential technology and all its design and functional features. It
is in the product platform that product variation can be added or deleted to satisfy

139
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International Marketing

local references. Alterations in design formulations, functional features, flavo. ~:. colour
and other aspects can be made to adapt the product to cultural variations. The Japanese
traditionally eat fish and rice for breakfast. So Nestle developed cereals with familiar
tastes- seaweed, carrots, coconuts and papaya. Nestle soon captured 12 percent of
the market share in the breakfast cereal market.

In markets where hot water is not easily available, washing machines have heaters in
the machines that make up the adaptation.

2. Packaging Element: This element includes style features, labelling, trademarks,

packaging, quality price and all other aspects of a product package. The importance
of each element in the eyes of the consumer depends on the need that the product is
designed to serve.

In packaging, sub-elements frequently require changes that are both discretionary

and mandatory. Some countries require labels to be printed in more than one language
while others require them only in the local language.

Labelling laws create special problems for companies selling products in various
markets with different labelling laws and small initial demand.

3. Support Element: This element includes repair and maintenance, instruction,

installation, warranties, deliveries and the availability of spares. It generally includes
all the service related areas without which consumer durables would find it hard to
generate a foreign market. In some countries, the concept of routine maintenance or
preventive maintenance is not a part of the culture. As a result, products may have to
be adapted for less-frequent maintenance. The literacy levels in a country may require
a finn to change the product's instructions or make them available in the local language.

The product element model can be a useful guide in order to determine the adaptation
requirements of products proposed for foreign markets.

International Brands

An International Brand is defined as the use of a name, tenn, sign or symbol design or a
combination intended to identify goods and services of one seller in multiple geographic
regions and differentiate them from those of competitors.

A Global Brand is defined as an international brand that makes use of the same elements
on a global basis.

140
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Unit 7 International Product Strategy

The international brand is one of the most valuable resources a company possesses. It
envelops years ofadvertising, goodwill, quality evaluation, product experience, and support
elements that the market associates with the product. The value of brands like Kodak,
Sony, Me Donald's, KFC, Coca-Cola, Ford, Citibank, HP Compaq, Microsoft run into
billions ofdollars.

A global brand gives a company a uniform worldwide image and substantial cost savings
when introducing products with the same brand name. Nestle, Proctor & Gamble and
Gillette have some brands that are promoted worldwide while some are specific to certain
countries. Nestle has around 7000 local brands in its family ofbrands. Among its largest
global brands is 'Nescafe'.

~ Activity D:

Price is an important sub-element of the following element for adaptation:

1. Core element _

2. Packaging element _

3. Support element _

7.7 ISSUES IN INDUSTRIAL PRODUCT STRATEGY

There are more similarities in marketing product and services to businesses across country
markets than differences', unlike the case of consumer product marketing. For industrial
products that are customised (eg. Special alloy steels, specific software for specific
application needs), adaptation takes place for domestic as well as foreign markets.

There are three factors that affect demand in international markets for industrial products:

I. Volatile demand

II. Stages ofeconomic and industrial development I

i

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III. Levels of technology and services

I. Volatile demand r ,:

The most striking difference between consumer and industrial marketing is the cyclical
nature of demand for industrial products. The concept of derived demand is
fundamental to the marketing ofcapital, high-value industrial equipment and services.

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International Marketing

Other terms used for industrial products are business product and B2B (business
to business) products. Derived demand can be defined as that demand that is
dependent on some other source or development. The demand for passenger
aircraft is derived from the worldwide consumer demand for air travel services.
The demand for oil refinery equipment is dependent on the consumer demand
for petrol, diesel, kerosene and other types ofoil in specific countries and region.
There was a sharp fall in passenger air traffic following the September 11 terrorist
attack in USA that ultimately led to the cancellation oforders for commercialjet
aircrafts from Boeing and Airbus Industry.

Industrial firms adopt suitable measures to manage this volatility by:

raising prices faster and reducing advertising expenditures in times ofeconomic

boom

maintaining broad product lines having wide application possibilities

focusing on stability

becoming selective in their operations in certain markets and making market

share a secondary strategic goal.

II. Stages of economic development

These five stages have already have been already reviewed in unit 6. They represent
an important environmental factor affecting the international market for industrial goods
and services. The degree of economic development is generally used as a rough
measure of a country's industrial market.

III. Levels of technology and services

Technology is the key to economic growth, and for many industrial products, it provides
the competitive edge to industrial companies. In the present world scenario, the
expansion of demand for industrial products and services is being generated by the

~
economic growth in Asia, thy creation of market economies in Eastern Europe and
the CIS and the privatisation of state owned enterprises in Latin America.

Industrial Services i .. .
r.

For many industrial products the range ofservices often decides the selection ofthe suppliers. I.
Businesses also buy a variety of services that are not associated with physical products.
I.
f

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Unit 7 International Product St~~tegy

Professional services are purchased from advertising and legal firms, transportation and
insurance companies, engineering andtax consultancy firms, Effectivecompetition inforeign
companies not only requires product capability but effective service, prompt delivery and
the ability to provide a range of post-sales services such as warranty and the ability to
provide spares and 'replacement parts for a specific time period. GE medical system
provides a wide range of post sales services for hospitals and clinics that purchase their
equipment- training; IT related services, associated healthcare services and parts for
replacement and accessories. Customer training is rapidly becoming a major post-sales
servicewhen sellingtechnicallycomplex products and equipmentin countriesthat demand
the latesttechnologybut do not always have the necessarytrainedpersonnel.Cisco Systems
isjust one companythathas collaborated with theGovernmentand a university in Singapore
to establish the first Cisco Academy TrainingCentre to serveEast and the Far East nations.

Relationship Marketing

In order to fulfill the needs of an industrial customer, the international markets must
understand those needs as they exist today and how they will change as the buyer strives
to compete in more international markets that call for special relationships. This type of
marketingis calledrelationshipmarketing.The objectiveof the relationshipmarketingis to
make the relationship an important attribute of the transaction, enabling the supplier to
differentiate itselffrom itscompetitors. Industrial productsfitintoa businessormanufacturing
process and their contributions will be judged on how well they contribute to that process.
Constant and close communication with customers is the single-most important source of
information about the development of new industrial products and services.

Relationshipmarketing shifts the focus away from price to service and long term benefits.
The reward is loyalcustomers- that translates intolong termprofits.Relationshipmarketing
holds the key to success in virtually all internationalindustrial markets.

S Activity D:
Three factors that affect demand in international markets for industrial products are:

f"Si;:~

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International Marketing

7.8 SUMMARY

This unit focuses on one of the P'S in marketing namely product, from an international
strategic viewpoint. The size and potential of international markets for both consumer
products and industrial products is constantly shifting. Decisions about the product for
international usage and consumption involve such issues as what product lines to introduce,
to what extent a product should be adapted or modified to suit local tastes and customs
and specific export markets.

A separate section on product adaptation has examined the need and the methods. Products
have to satisfy functional requirements that can vary from country to country. Some of
these issues are product standardisation, product life cycles, brands, packaging and services.
This is followed by a separate section on the major issues in consumer product strategy.
They are three distinct elements that help us to view the various dimensions in product
adaptation- Core, packaging and support elements. These elements have been explained
in some detaiL

The issues related to industrial product strategy are also discussed in a following section
since different dimensions apply to industrial products.

7.9 KEY WORDS

Product adaptation: The process of making modifications in products (such as colour,

taste, packaging, size, etc.) to make them suitable for marketing in specific countries.

Homologation: A term used to describe the changes that are essential for compliance to
local standards.

Green marketing: A term used to identify concern with environmental consequences of

a variety ofmarketing activities.

7.10 SELF-ASSESSMENT QUESTIONS

Q 1. What are the factors to be considered while designing a product for the international
market? '

Q2. Distinguish between product adaptation and product standardisation?

Q3. Discuss the factors necessary for making a successful domestic product successful
in an international market with one specific example.

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Unit 7 International Product Strategy

I ..

Q4. What considerations apply in making the packaging suitable for international markets? I.

Q5. Discuss the various product elements at the three levels that should be addressed by

Q6.

Q7.
firms seeking export markets.

Discuss the main issues involved in industrial product strategy.

What is relationship marketing in the context of international markets?

, .

145
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IN1-'EI{NAllONAL
IlIS1'RIIJU r r I ( ) N srrl~ATE(;Y

Objectives
After completing this unit, you will be able to:
qr show the availability of various distribution channels for
products and services.
qr enumerate the principles of selecting, motivating and
controlling the channels.
qr discuss the importance of appointing overseas agents for
distribution.
qr relate the preparation and the draft ofan agency agreement.
qr evaluate the factors affecting channels choice.
qr assess the growing importance of the internet as a channel.
qr explain the issues that make physical distribution in foreign
markets a challenging task.

Structure
8.1 Introduction
8.2 Importance ofIntemational Distribution
8.3 International Channel System
8.4 Direct Exporting
8.5 Indirect Channels
8.6 Factors Affecting Channel Choice
8.7 Selecting and Motivating Overseas Agents and Agency
Agreements
8.8 Export Agency Agreement ,

8.9 Importance ofPhysical Distribution

8.10 The Internet as a Channel
8.11 Summary
8.12 Key Words
8.13 Self-Assessment Questions

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8.1 INTRODUCTION

The distribution process for international marketing involves all those activities related to
time, place and ownership utilities for consumer and industrial products. The selection,
operation and motivation of effective channels of distribution are often crucial factors in
gaining an advantage in international markets. The formulation of distribution strategies is
characterised by diverse activities and culturally differentiated roles ofintermediaries. These
strategies pose a challenge for any firm entering international markets.

There are many situations that are similar in international marketing distribution and domestic
marketing distribution. However, the environmental influences can lead to substantially
different policies and channel options. The international marketers need to understand
how these influences affect the distribution policies and options in approaches.

The structure of the distribution system available in a country is affected by the level of
economic development, the personal disposal income of consumers and the quality of
infrastructure. While environmental factors such as culture, physical environment and the
legal/political system can also have wide ranging effects, marketers who develop distribution
strategy must decide how to transport the goods from the manufacturing locations to the
end-consumer.

The initial sections in this unit introduce the aspects related to the importance ofinternational
distribution, the categories and types of channels and the roles of intermediaries in both
direct and indirect channels. This is followed by a section on the various factors affecting
the choice of channels.
-I'"
The selection of agents becomes a key aspect in distribution strategy. The advantages of l,,;:~:::,'::;:::
having an export agent are enumerated. This is followed by a typical draft of an agency r}:~;w~,:;!
agreement. In the final sections ofthis unit, the importance of physical distribution and the
development of the internet as a channel are explained.

8.2 IMPORTANCE OF INTERNATIONAL DISTRIBUTION

Distribution channels are the link between producers and customers. It is acknowledged

that effectiveness of marketing depends, among other factors, on making the product

~~i~"~:~~~~:
1

available at the right places and at the right time at the minimum possible cost.
, '

A distribution channel is defined as "the path traced in the direct and indirect transfer of

title to a product as it moves from a producer to the ultimate consumer or industrial users."

A distribution channel, in other words, is a set of firms and individuals that take title, or

assist in transferring title to the particular good or service as it moves from the producer to

148
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v
Unit 8 International Distribution Strategy

the consumers. Channels of distribution consist of two categories of intermediaries or

middlemen, namely:

i, Merchants who take title to the goods

ii. Agents who do not take title to the goods but assist in the transferring of the title

Each member ofa channel is a link in a distribution network of organisations that extends
from the producer to the users of products and services. Though it is found that some firms
perform all channel functions, typically several organisations are linked together in a
distribution channel to carry out the various activities including storage, transportation,
sales contract, service, sorting and re-packing.

The channels of distribution available in a country depend on its stage of economic

development. It can be concluded that:

The more developed countries have more levels ofdistribution, more speciality stores
and supermarkets, more department stores and more stores in the rural areas.

The influence ofthe foreign agents declines with economic development.

The manufacturer-wholesaler-retailer functions become separated with increasing

economic development.

Financing function of wholesalers declines and wholesale markets increase with

increasing development.

The number of small stores declines and the she of the average store increases with
increasing development.

Retail margins improve with increasing economic development.

S Activity A:

The channels of distribution in a country depend on its:

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International Marketing

8.3 INTERNATIONAL CHANNEL SYSTEM

In internationalmarketing two categories of channels are involved, namely,channels between
the nations, and channels within the foreign market. t~ji ~i ;~; j~i;~:;:
The international distribution system consists of two sub-systems, namely, the domestic
system and the foreign system. There are two ways of exporting, namely, direct exporting
and indirect exporting. When the export is direct, the producer himself takes the
responsibility for the marketing job and makes direct sale to any or more of the foreign
customers. The important kinds of foreign customers (here the word customer is used to
refer to the firm/person who buys the product from the exporter) - are importers,
distributors, government departments, industrial buyers, retailers and consumers. If any of
these customers is not a [mal consumer, he is a marketing middleman or a channel member
between the producer and the final consumer.

Whether to sell directly to the customers or indirectly through agents or distributors will
depend on the relative strengths of the various factors involved.

Indirect Exporting

The distinction between direct exporting and indirect exporting is on the basis of how the
exporter carries out the transaction flow between himself and the foreign importer or
buyer. In indirect exports, the manufacturer utilises the services of various types of
independent marketing middlemen. In other words, when a manufacturer exports indirectly,
he transfers the responsibility for the selling job to some other organisation. On the other
hand, in direct export, the responsibility for performing international selling activities rests
on the producers. These activities are carried out by organisations that are administratively
a part of the manufacturer's company organisations.

The indirect method is more popular with firms that are just beginning their exporting
activities, and with those whose export business is not considerable. Indirect exporting
has the following advantages:

i Standing in the market: A new exporter's name will be an unknown element and
therefore, even though the price and quality of the product may match those of the
new companies, the new entrant will be at a disadvantageous position. In such a
situation it would be easier to gain credibility in the market if a known distributor can
be persuaded to handle the product, because the standing of the distributor will help
in assuring the customers about the quality of the new merchandise.

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Unit 8 "
International Distributio1 Strategy

n. Economies ofScale: Customers of certain range of products generally purchase a

set ofcomplementary products rather than one. A distributor handling a complete line
can therefore effectively economise on selling costs. A manufacturer-exporter, selling
directly may not enjoy this economic advantage, unless it is a very large company
manufacturing a complete line ofcomplementary products.

m. The firm does not have to build up an overseas marketing venture.

IV. The channel is simple and inexpensive.

v. The risk involved is less.

VI. Little or no investment required to enter the international market place.

Vll. The manufacturer incurs no start-up costs for the channel and is relieved of the
responsibilities for physically moving the goods overseas.

vm, The intermediary very likely represents several clients who can help share distribution
costs; the costs for moving the goods are further reduced.

IX. No company personnel are required to do the overseas business.

x. The middleman may have an established network of sales offices and international
marketing & distribution knowledge.

This method is, therefore, advantageous for firms with small means and for those whose
limited exportbusiness does notjustify large investments in developing their own international
marketing infrastructure.

The main limitations of the indirect method ofexporting are:

1 The manufacturer gives up control over the marketing ofits products to another firm.
This situation may adversely affect the product's success in the future.
;.:
n. Ifthe chosen intermediary is not aggressive, the manufacturer may become vulnerable,
especially in the case where competitors are careful about their distribution practices.

111 The indirect channels may not necessarily be permanent. Being in the business of
handling products for profits, the intermediary can easily discontinue handling a
manufacturer's product if there is no profit or if a competitive product offers a better
profit potential.

151
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International Marketing

IV. If the product has a long purchase cycle and requires a large amount of market
development and education, then the export middlemen may not devote the necessary
effort to penetrate into a new market.

Ji6 Activity B:
a) When a manufacturer exports indirectly, the responsibility ofthe sellingjob

( ) is transferred to the other organisation

( ) is not transferred

b) Two significant advantages ofindirect exporting are:

1. _

2. _

8.4 DIRECT EXPORTING

Direct export refers to the sale in the foreign market by the manufacturer. Instead of using
an export agent or export merchant, the manufacturer makes the sale directly to the foreign
buyers. The export is direct, as the manufacturer does not use any independent middlemen
in the channel between the home country and the overseas market. Due to the complexity
of trade regulations, customs documentation, insurance requirements and worldwide
transportation alternatives, people with special training and experience are necessary to
handle these tasks. Also the current or expected volume must be sufficient to support the
in-house staff.

The factors in favour of selling directly are:

i. Control: The exporting company will have direct control over the marketing operations
and, therefore, can devise and implement the proper marketing strategy in tune with
the changing marketing conditions.

u. Customer Satisfaction: Buyers of highly specialised equipments prefer to deal

directly with the manufacturers as they expect to be completely assured oftheir service

152
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Unit 8 "
International Distribution Strategy

and backup system. Distributors may not have highly qualified technical people on
their pay-roll for conducting sales negotiation for such equipment.

iii. Profit: By selling directly, the exporting company can save the commission that
becomes payable to the agent. If the volume of sales in fairly high, it may become
more economical to establish its own sales office than paying commission calculated
on a percentage basis of sales turnover.

Other advantages in direct selling are active market exploitation since the manufacturer is
more directly committed to its foreign markets. Another advantage is greater control. The
channel improves communication because approval does not have to be given to a
middleman before a transaction is completed.

Direct selling has some limitations. It is a difficult channel to manage if the manufacturer is
unfamiliar with the foreign market. Moreover, the channel is time consuming and expensive.
Without a large volume of business, the manufacturer may fmd it too costly to maintain the
channel.

A number oforganisational arrangements are available to a company for carrying on direct

exporting. These are:

L The export business may be conducted by a domestic export department or division.

11. The company may establish overseas sales branches or subsidiaries in addition to
domestic marketing department. As a part of overseas sales branch, the company
may also establish storage or warehousing facilities.

m. A company may employ travelling salesmen for the overseas market. These travelling
salesmen may be home based or may be attached to the foreign branches or
subsidiaries.

Types ofIntermediaries and their Functions

There are several typesofintermediaries associated with both direct and indirect channels.
The figure below gives the broad channels that are available to a manufacturer.

153
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International Marketing

I PRODUCER I
,

-..

Merchant Agent
I I
Home Market
Middlemen
r
+
Importer I Agent/Broker I
Distributor

Wholesaler
I I
Foreign Mai ket
Middlemen
Retailer Retailer
I I I I

ConsumerlInstitutional User
I
Fig. 8.1: International Marketing Channel System

Direct Channel (Foreign Market Channel Members)

Direct exporting channels are shown in figure 8.2.

PRODUCER

Government
Importer I Distributor
Department/State
buying
Organisations End Users
Wholesalers Retailers
Fig. 8.2: Direct Exporting Channels

154
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Unit 8 International Distribution Strategy

Importers: Importersidentifyneedsin theirlocal market and find productsfrom the world

markets to satisfy these needs. The importers purchase goods in their own names and act
independentlyof the manufacturers.As independentmiddlemen,these channel members
use their own marketing strategies and keep in close contact with the markets they serve.

Foreign Distributors: Aforeign distributor is a foreign firm that has exclusive rights to
carry out distribution for a manufacturer in an overseas country or specific area. The
distributorpurchasesmerchandisefrom the manufacturerat a discount and then resellsor
distributes the merchandise to retailers and sometimes to final consumers. In this regard,
thedistributor's function inmany countries may bea combination of wholesaler andretailer.
Butin mostcases,the distributor is usuallyconsideredas an importeror foreignwholesaler.

There are a number of benefitsin using a foreign distributor. Unlike agents,the distributor
is a merchant who buys and maintains merchandise in its own name. This arrangement
simplifies the creditandpaymentactivities forthemanufacturer. Tocarryoutthe distribution
function, the foreign distributor is often required to warehouse adequate products, parts
andaccessories and to havefacilities andpersonnelimmediately available to servicebuyers
and users.

Foreign Retailers: If foreign retailers are used, the products in question are consumer
products ratherthanan industrial products. Thereare several meansby whicha manufacturer
may contactthe foreignretailersand may interestthem in carryinga product,rangingfrom
a personal visit by the manufacturer's representative to mailing of catalogues, brochures
and other literatureto prospectiveretailers. Most large retailerspreferto deal directlywith
themanufacturers. Large food chains in USA and Europe are mostlyin directcontactwith
foreign manufacturers in ordertoobtainpriceconcession. Departmentstores, supermarkets,
specialtystores,discountstores;and hypermarketsare among the most importantretailers
thatbuy directlyfrom supplyingcountries.

Government Departments/State Owned Trading Companies: In some countries

governmentdepartmentsbuy large quantities of certain goods often on a long-term basis.
These are generally essential goods of mass consumption or of use in Government t..:..
Departments.
~q~,;?
End Users: Sometimes, a manufacturer may sell directly to foreign end users with no
intermediary involvedin the process. This directchannelis a logicaland naturalchoicefor
costlyindustrialproducts.

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 International Marketing " .",- .."

16 Activity C:

An importer is an example of:

( ) Direct channel ( )inClirectchannel

8.5 INDIRECT CHANNELS

A manufacturer may often find it impractical to sell directly to the various foreign parties
(i.e., foreign distributors, foreign retailers, government department, state controlled trading
companies, end users etc.). There are many intermediaries that come between these foreign
buyers and the manufacturers.

The manufacturer deals with one or more domestic middlemen who in tum move and/or
sell the product to foreign middlemen or final users. Although there are many kinds oflocal
sales intermediaries, all can be grouped under two broad categories:

L Domestic Agents

D. Domestic Merchants

The basic difference between the two is ownership (title) rather than just the physical
possession of the merchandise. Domestic agents never take title to the goods, regardless
of whether the agents take possession of the goods or not. Domestic merchants, on the
other hand, own the merchandise, regardless ofwhether the merchants take possession or
not.

Domestic Agents

Agents can be classified according to the principal whom they represent. Some agent
intermediaries represent the buyer; others represent the interest ofthe manufacturer. Those
who work for the manufacturer include export brokers, manufacturer's export agents,
export management companies and co-operative exporters. Agents who look after the
interests of the buyer include purchasing agents and country controlled buying agents.

IU;:~; ~-;:~1t~;
These are discussed below.

Export Management Companies: In some countries, there are Export Management

Companies (EMC), which manage under contract, the entire export activities of a
manufacturer. When compared with export agents, the EMC has greater freedom and
authority. The EMC provides extensive service ranging from promotion to shipping
arrangement and documentation. In short, the EMC is responsible for all the manufacturer's

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Unit 8 "

International Distribution Strategy

-,

international activities. The EMCs' are compensated in forms of commission or retainers

plus commission.

Export Broker: The function of an export broker is to bring a buyer and a seller together
for a fee. The broker may be assigned some or all foreign markets in seeking potential
buyers. It negotiates the best terms for the seller (i.e., manufacturer) but cannot conclude
the transaction without the principal's approval ofthe arrangement. For any action performed,
the broker receives a fee or commission. An export broker does not take possession or
title of the goods. In effect, it has no financial responsibility other than sometimes making
an arrangement for credit. The export broker is useful because of its extensive knowledge
of the market demand and foreign customers. This knowledge enables the broker to
negotiate the most favourable terms for the principal.

Manufacturer's Export Agent: Export agents are individual or firms that assist
manufacturers in exporting goods. Unlike EMC's, export agents provide limited services.
These agents focus more on the sale and handling of goods. The advantage of using an
export agent is that the firm does not need to have an export manager to handle all the
documentation and shipping tasks. The disadvantage is the export agent's limited market
coverage, which requires the use of numerous export agents to cover different parts ofthe
World. The manufacturer's export agent works on commission.

PurchasingAgent: The purchasing agent represents the foreign buyer. By deciding and
conducting business in the exporter's country the purchasing agent is in a favourable position
to seek a product that matches the foreign principal's preferences and requirements.
Operating on the overse<l;s customer's behalf, the purchasing agent's acts in the interest of
the buyer by seeking the best possible price. The purchasing agent's client pays a commission
for the services rendered. The purchasing agent is also known as the commission agent
and buying agent.

Country Controlled BuyingAgent: This kind ofagent performs exactly the same function
as the purchasing agent, the only distinction being that a Country Controlled Buying Agent
is actually a foreign government's agency or a quasi-governmental finn. The country
controlled buying agent is empowered to locate and purchase goods for its country. This
agent may have a permanent office located in countries that are major suppliers.

Resident Buyer: Another variation on the purchasing agentis the resident buyer. Aresident
buyer is an independent agent that is located near highly concentrated production centers.
Although functioning much like a regular purchasing agent, the resident buyer is different
because he is retained by the principal on a continuous basis to maintain a search for new
products that may be suitable. The long-term relationship makes it possible for the resident
buyer to be compensated with a retainer and a commission for business transacted.

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International Marketing

Export Merchant: The domestic based export merchant buys the manufacturer's product
and sells it abroad on his own. When this type of middleman is used in an international
marketing channel the marketingjob ofthe manufacturer is reduced to essentially domestic
marketing, and except for certain modifications in the product mix which are sometimes
required to suit the international market, all aspects of the international marketing tasks are
handled by the export merchants.

Export Houses: In India, there are a number of export houses that export products
produced by many manufacturers. Some companies have established their own export
marketing subsidiaries. They take responsibility for the promotion of goods, marketing
research, credit, physical handling of the products. They have good contacts with the
overseas buyers and may also have an established network of sales offices.

Trading Companies: Unlike an export house, which concentrates on exports, a trading

company is active both in exports and imports. Japanese trading companies have been
very successful in promoting Japan's exports. Like export houses, the trading companies
offer a broad range of services from marketing research to fmancing and present a relatively
inexpensive way for the small or medium size firms to do international business. The
advantages of using trading companies are enumerated below:

1 They can avail themselves of the various economies of scale in transportation,

warehousing, and other areas related to physical distribution.

n. They can avail themselves of export finance available at concessional rates.

iii. They are in a position to employ qualified and specialised staff to look after the
complicated work relating to customs, legal problems, procedure and documentation.

IV. They can bargain with large trading companies in foreign countries on an equal footing.

v. They can achieve economies in export promotion by using the most effective advertising
and publicity media as also by participating in many trade fairs and exhibitions.

VI. They are able to absorb many of the risks inherent in international trade because of
the wide range of products handled by them.

Small industrial units can derive significant advantages by availing themselves of the services
of trading houses and export houses:

1 Information on market opportunities abroad.

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Unit 8 International Distributio'h Strategy

ii. Ability to provide finance through trade credits, investments, direct loans and loan
guarantees.

IlL Ability to absorb many of the risks inherent in trade because of the wide range of
products they handle.

IV. Sales opportunities in otherwise out-of-the-way markets.

Cooperative Exporter (Piggy Backing): When a company does not find any channel
partner with sufficient interest to pioneer new products, the practice of piggy backing may
offer a way out of the situation. Piggy backing is an arrangement with another company,
which sells to the same customer-segment to take on the new products as if it were the
manufacturer. The products retain the name ofthe manufacturer and both partners normally
sign a multi-year contract to provide for continuity. The new company is in essence 'piggy
backing' its products on the shoulders ofthe established company's sales force. A Japanese
manufacturer of soy sauce Kikkoman decided to piggy back on Del Monte's sales force
for its entry into Mexico. The two companies have signed an earlier technical agreement
allowing Kikkoman to sell Del Monte's tomato juice in Japan. Following Kikkoman's
entry into the US market, the company planned to enter several South American countries.
The company also wanted to use Del Monte's existing strong retail sales network. As a
result of this move Kikkoman was in a position to gain immediate distribution, a process it
would have taken years to develop on its own.

Similarly, Colgate Palmolive Company has been distributing Wilkinson blades in many
international markets. Sony Corporation serves as a distributor in Japan for different
European and US companies. Through its Sony International Housewares, Sony distributes
for such companies as Whirlpool, Schick, Regal Ware and Health Company. Likewise
Pepsi and Smirnoffhave such arrangements for distribution of Vodka and soft drinks in
USA and Russia. The principal asset of the cooperative exporters is their experience in
dealing overseas as manufacturers themselves. Therefore they are more aware of and
sympathetic towards the problems ofother manufacturers interested in developing export
markets.

Under a piggyback arrangement the manufacturer retains control over marketing strategy,

particularly pricing, positioningand advertising. The partner acts as a 'rented' sales force l;::;~;;;!;~~I}!

j:--'---- -- ----
only.

S Activity C:
a) Two differences between a domestic agent and a domestic merchant are:

159
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International Marketing

1. _

2..
----------------------
b) Two advantages.of trading companies are:

1.----'- _

2. _

8.6 FACTORS AFFECTING CHANNEL CHOICE

The following are some factors that need to be considered before taking a decision whether
to go for direct and indirect exports.

Factors Indirect Direct

The market Dispersed Concentrated
Small potential sale Large potential sale
Consumer market Industrial market
The product Non-technical product Technical products
Consumer goods Industrial goods
Marketing skill of Company lacks marketing Company possesses
the Company skill and experience marketing skill and experience
Degree of control Company desires little Company desires high
control degree of control
Financial condition Weak financial condition Strong fmancial condition

Following are some additional points to be considered for channel choice:

1. Characteristics of the Product

L Unit Value - In general, direct sales are preferred for items ofhigh unit value.

ii Bulk and weight - If bulk transportation is possible, direct exporting is preferred.

m. . Technical nature - Technologically complex and specialised products are usually

sold direct.

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Unit 8 International Distributio'h Strategy

IV. Perishability - The more perishable the product, the shorter should be the channel.

v. Fashion goods are usually sold direct to retailers.

vi. Standardisation - Indirect channels are possible for standardised products.

vii. Stages of market development - New products are promoted by direct sales.
Indirect channels may be adopted for established products.

2. Who Buys the Products?

L Government Departments - In some countries, government departments buy

commodities directly, often on a long-term basis.

ii, Industrial Buyers - Large industrial companies often buy direct from producers
their requirements ofraw materials, metals or components.

m, Distributors - A distributor buys and holds large stocks of a product in return

for an exclusive right to sell the product in the area represented by him.

IV. Wfwlesalers - Some large wholesalers may prefer to buy directly from producers
or manufacturers.

v. Large Retail Stores - Large departmental stores may prefer to buy directly.
They send either buying delegations or have their buying offices in the exporting
country.

3. Volume of Sales Expected, i.e., the existing and the potential future size of the
market.

4. Firm's Own Resources - How much does the firm want to be involved - the time
and attention the firm can devote to exporting?

Criteria for Selection of Channels

L Costs involved - How much investment is required on the part of the firm for a
particular channel?

11. The behaviour ofthe competitors, i.e., what are the firms in similar line doing?

in, Possibilities of getting appropriate feedback about customers, regarding the response
to and acceptance of the product.

161
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International Marketing

PS Activity D:
Three factors that are to be considered while taking decision on direct or indirect exports
are:

1. _

2. _

3.. _

8.7 SELECTING AND MOTIVATING OVERSEAS AGENTS AND AGENCY

AGREEMENTS

Overseas Agents

In order to appreciate the market characteristics of a particular territory and to exploit the
full potential of the market, it is necessary for an exporting organisation to have its own
office in that market. But for many smaller companies, it is not possible to open their own
offices abroad. Commercial agents can perform the functions, which an overseas office of
the parent body is supposed to do. Therefore, the role of commercial agents is extremely
crucial from the standpoint of exporting firms. The agent being a local person is thoroughly
conversantwith the market. He is also likely to have contacts with important persons in
the business and, therefore, is in a position to promote the interest of the exporting firm.
[ ..
The agents secure orders in the name of and on account of the principal. But he does not !:
trade on his own. He gets commission on the basis of the orders that he has secured.
~}'~i~f[;J;i~t[;
Advantages of having Agents

The basic advantages of having an agent in the export market are as follows:

L In some countries there are legal stipulations that all imports/ tenders are to be handled
through a local agent who is a resident and citizen of the country. In such cases,
appointment of the agent becomes obligatory.

II. The agent is a local man and is, therefore, supposed to be knowledgeable of the
marketing conditions and prospects of specific products in that market.

iii. He is likely to have good contacts with the decision-makers at various levels, which
may be crucial in the case oflarge contacts.

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Unit 8 International Distributio'h Strategy

IV. He will have a set-up in the major commercial centers of the country and, therefore,
will be in a position to call personally on main buyers at regular intervals.

v. Commercial and trade information relevant to the principal's product line can be
passed on by the agent with greater speed.

vi. The agent is paid on commission basis on the total value of the orders secured by
him. There is, therefore, no fixed or overhead cost.

vn. An agent, if he is well established, may have warehousing facilities, which are crucial
in the export marketing of certain types of products.

vm, An agency firm also has specialised sales staff competent to handle sales of
sophisticated items.

ix. An agent can provide after sales service, which is an integral part ofthe total marketing
function for manufacturing items.

Identifying Foreign Agents

There are various ways to identify agents in the foreign markets. One way is to contact the
Indian Embassies and the High Commissions for a list of agents who are working for the
specified product group. The international merchant banks also have good deal of
information on commercial agents in various countries. The chambers of commerce in
various countries also are in a position to provide information on agents. Import promotion
centers established in various countries can also help in this matter. There is also an
International Union of Commercial Agents and Brokers at Amsterdam. This is an
organisation, which can provide information on agents in European countries and the United
States. Another method of identifyingagents is to visit fairs and exhibitions. Since a large
number of agents also visit these fairs it is possible to contact them personally. The final
method of identifying agents is to insert advertisements in trade journals.

Once a list of potential agents is prepared on the basis ofthe various techniques mentioned
above, the next step for an exporter is to decide on the particular agent whom he would

~:~.g~ f:;'~;:
like to appoint. Agents have to ~e selected with care. Selection of agents takes time and
effort and calls for goodjudgment. There are essentially three qualities, which an exporter
should look for in an agent. First is character, which means that the agent must have
established his credibility in the particular business he is engaged in. The second quality is
capital, i.e., he must have a sound financial base for his business operations. And lastly, he
must have the capacity, i.e., he should have contacts in the right places and possess adequate

163
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International Marketing
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marketing expertise to promote the products of the principal. These are the thrc 'Csthat
really make an agent successful.

Before deciding on a particular agent, the exporter should decide as to what type of agent
he would like to have. A question may arise as to whether a big agency house should be
approached or a smaller one will be better. The answer to this question depends on the
level ofbusiness that the exporter expects to generate in the first and subsequent years. If
the initial level of business is not expected to be large, a big agency house will not be
interested in taking up his product. In such a case, a medium size agency organisation will
be better suited for the exporting firm. Similarly, there are both advantages and
disadvantages in appointing a very small agency firm. The advantage is that the firm being
small will make sincere attempts to get business and will devote more attention to the
promotion ofexporting company's products. The disadvantage is that such an organisation
may not have adequate contacts.

Once the firm has identified the qualities that it expects of the agent and the range of
service, which he has to render, the firm should obtain the following information in order to
find out the appropriateness of that agent. These are:

L How long has the agent been in business?

ii. How many salesmen has he got? What is their age and experience?

Ill. Names ofthe other accounts he is presently handling. Does he carry any lines that are
directly competitive with or complementary to the firm's lines?

iv. Total turnover during the last few years.

v. What is the average turnover per account?

VI. Has he got adequate working capital?

On the basis of the answers to these queries the firm should be able to evaluate the
potentialities of various agents and make a final choice.

Motivating and Controlling th~ Agents

The exporting firm must develop a system for moti vating the agent. One way to motivate
the agent is through granting exclusive agency rights in a particular territory. This means
that he will be solely responsible for the development of particular market and will receive
commission on all orders, which the firm gets from the market.

164
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Unit 8 International Distribution Strategy

I
Another method of providing incentives to the agent is to introduce variable commission
rates. In the beginning of the year a target may be set. If the agent is able to surpass the
target, he may be given the higher rate of commission. Supplying promptly the sample
orders is also one way to keep the agent happy. Providing promotional and published
ti~; :M; .; ;-.;i:
materials is an important instrument to motivate the agent. It may also be desirable to invite
.:
the agent periodically to the head office so that he can see the company's operations first
hand and also participate in the formulation of the marketing strategy.

The export firm must also have a system to evaluate the performance of the agent. One
criterion of evaluation can be the share of the market that the company has secured and
how the market share is changing over time. The annual rate of growth in sales is another
criterion. The number of new customers developed by the agent can be another factor in
the evaluation process.

Payment ofAgency Commission in India

Payment ofcommission to overseas agents is allowed either by remitting the amount or by

deducting it from the invoice value. The application indicating the particulars, such as,

exporter's code number, customs/shipping bill number and date, name of commodity,

name and address ofthe buyer/agent and export value, should be submitted to the authorised

dealer together with an attested copy of invoice and documentary evidence in support of

the amount to be remitted.

For remitting the agent's commission, the exporter will have to purchase foreign exchange

from the free market. Alternatively, he can maintain a foreign exchange account to the . I. .

extent of 50 per cent of the f.o.b. value of his export earnings.

J#!S Activity E:

Two advantages of having an agent in the export market are:

1. _

2. ~ _

8.8 EXPORT AGENCY AGREEMENT

I:;:'~/ :-; :~;
An Agency agreement is a legal document, which establishes the commercial relationship
!
between the principal and the agent.

165
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International Marketing
i
: .

It incorporates the conditions actually agreed upon by the concerned parties for the conduct
of business. When negotiating an agency agreement, the Indian firm should be careful on
certain points. These are:

i, Parties to the contract

IL Contractual products

Ill. Contracted territory

IV. International buying groups may like to contact the exporter directly. Exporters should
reserve the right to negotiate directly with international buying groups in his own
country for orders which ultimately will be executed in the agents territory - whether
the agent will be eligible to commissions on such sales should be made explicit in the
agreement.

v. Acceptance or rejection of order

When credit terms are involved and the principal is not sure of the credit-worthiness
ofthe buyer, he should have the right to reject the order.

VI. Payment of commission

a. Rate on which commission to be paid

b. Calculated on percentage basis - the base for such calculation

c. The time when commission becomes payable.

Vll. Settlement of disputes

viii. Renewal and termination of agency

A specimen agency agreement is given below:

AN AGREEMENT made this .., day of.. 20 ..

BETWEEN Whose Registered office is situated
at.. (hereinafter called "the Principal")
of the one part and
. . . . . .. . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. (Hereinafter
called "the Agent") of the other part.

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Unit 8 International Distributiol Strategy

WHEREBY IT IS AGREED as follows:

1. (for use by Sole Agent)

The Principal appoints the A gent as and from the ! --

....................................... ... to be its Sole Agent 1-: .. _

~

in (hereinafter called''the area") for the

sale of manufactured by the Principal and such other
goods and merchandise (all of which are hereinafter referred to as "the goods") as
may hereafter be mutually agreed between them.

OR

(For use by Export Houses/ Exporter not being manufacturer)

The Principal appoints the agent as and from the to

be its Sole Agents/ Agent in (hereinafter called
"the area") for the sale of manufactured
in India or (hereinafter referred to as "the goods")
as may hereafter be mutually agreed between them.

2. The Agent will during the term of years (and thereafter until
determined by either party giving months' previous notice in writing) diligently
and faithfully serve the Principal as its Agent and will endeavour to extend to the sale
ofthe Principal within the area and will not do anything that may prevent such sale of
interfere with the development of the Principal's trade in the area.

3. The Principal will from time to time furnish the Agent with a statement ofthe minimum
prices and the terms at which the goods are to be sold and the Agent shall not sell
below such minimum price but shall endeavour in each case to obtain the best price
obtainable.

4. The Agent shall not sell any of the goods to any person, company, or firm residing
outside the area, nor shall he knowingly sell any ofthe goods to any person, company,
or firm residing within the area with a view to their exportation to any other country

r:;,x';~~:j:~i
or area without the consent,in writing ofthe Principal.

5. The Agent shall not during the continuance of the Agency hereby constituted sell
goods ofsimilar class of such as would/or might compete or interfere with sale of the
Principal's goods whether on his own account or on behalf of any other person,
company, or firm whatsoever.
,
t -...
j

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International Marketing

6. Upon receipt by the Agent of any order for the goods the Agent will immediately
transmit such order to the Principal who (if such order is acceptedby the Principal)
will execute the same by supplying the goods direct to the customer, or his order.
7. Upon the execution of any such order the Principal shall forward to the Agent a
duplicatecopy of the invoice sent with the goods to the customer and in like manner
shall from time to time inform the Agent when payment is made by the customer to
thePrincipal.
8. The Agent shall duly keep an account of all orders obtained by him and shall every
three months send a copy of such account to the Principal.
9. The PrincipalshallallowtheAgent the following commissions(basedon f.o.b. India
Rupee values) in respect of all orders obtained by the agent in the area, which have
been acceptedand executed by the Principal.The said commission shall be payable
every months on the amounts actually received by the Principal
from the customers.
10. The Agentsshallbe entitledto commissionon the tenus and conditions mentionedin
the last precedingclause on allexport orders for the goods receivedby the Principal,
for export into the area. Export orders in this clause mentioned shall not include
ordersfor the goods receivedby the Principalfrom and sole deliveredto customer's
principal place of business outside the area although such goods may subsequently
be exported by such customer into the area, excepting where there is conclusive I ! .

evidencethat orders which may actuallybe transmittedvia the Head Office in India
are resultant from work by the Agent with the customers.
11. Shouldany disputeariseas to the amountof commissionpayableby the Principalto
theAgent the same shallbe settledby theAuditorsfor the time beingof the Principal
whose certificateshall be final and binding on both the Principal and theAgent.
12. The Agent shall not in any way pledge the credit of the Principal.
13. The Agent shall not give any warranty in respect of the goods without the authority
in writingof the principal.

14. The Agent shall notwithout the authority of the Principal collect any moneys from
customers.
15. The Agent shall not give credit to or deal with any person, company,or firm, which
the Principal shall from time to time direct him ~ot to give credit to or deal with. I r ...

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International Distributio'l-; Strategy

16. The Principal shall have the right to refuse to execute or accept any order obtained
by the Agent or any part thereofand the Agent shall not be entitled to any commission
in respect of any such refused order or part thereof so refused.

17. All disputes or differences whatsoever arising between the parties out of or relating
to the construction, meaning and operation or effect of this contract or the breach
thereof shall be settled by arbitration in accordance with the Rules ofArbitration of
the Indian Council ofArbitration and the aware made in pursuance thereof shall be
binding on the parties.

18. This agreement shall in all respects be governed and interpreted in accordance with
the Laws of India.

IN WITNESS whereof the parties hereto have subscribed their signature on the day and
year first herein before written.

(Signatures)

8.9 IMPORTANCE OF PHYSICAL DISTRIBUTION

International physical distribution encompasses the logistics or movements of goods across

countries from the sources of supply to the centers ofdemand. ill other words, it is concerned
with getting the right product to the right place at the right time in a good condition at a
reasonable cost. Warehousing, transportation and inventory control are the major
components ofphysical distribution.

The final purpose of physical distribution acti vity is to provide adequate service to their
customer. This is an activity, which offers a great potential for increasing efficiency. In
:i!i!;:{~ji;{;J~
international distribution there are complexities ofnational borders, customs oftrade, tariffs
and duties, carrier performances, monetary exchange, and the necessity of filling out
numerous documents.

Management of International Physical Distribution

As mentioned earlier, the three important aspects of physical distribution are warehousing,
transportation and inventory management. The basic decisions to be made concerning
warehousing are how many warehouses of what size does the company need and in which
country they should be located. The decisions on warehousing require information such as
where the firm's customers, both current and potential are geographically located around
the world; what is the pattern oftheir current demand and what demand pattern is likely to

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International Marketing

emerge in the future; and what level of customer service should be followed. All this
information is analysed before making the warehousing decision. The transportation decision
mainly involves choice of a model of transportation for shipping the goods, both
internationally and locally within a foreign nation. This decision is affected by such pre
factors as the availability oftransportation, nature of product, size of shipment, distance to
be travelled, and type of demand and costs of different shipping alternatives.

Inventory management deals with stocking inventory to fill customer orders. It involves
two decisions - how often to order in a given period and how much to order.

For an integrated decision on international physical distribution, these three aspects should
be considered simultaneously. This amounts to considering physical distribution as a system.
The cost involved in administering warehousing, transportation and inventory functions are
inter-related, and they must be considered simultaneously for effective decision-making.

2S Activity E:
Three important components of international physical distribution are:

8.10 THE INTERNET AS A CHANNEL

An important distribution channel has emerged as another distribution method since the
advent of e-business. Computer hardware and software companies and large music and
book retailers were the real adopters of this method of distribution and marketing.
Technically, e-commerce is a form of direct selling.

Consumer services, consumer and industrial products, B2B services are some of the
products marketed through e-commerce. It involves direct marketing from a manufacturer,
retailer, service provider or some other intermediary to final user. Some of the e-marketers [(,,',}:!}:;,:
with an international presence are: Dell Computers Cooperation that generates more than f;~~?6~/~~:~~!
50 percent of its sales online; Cisco Systems generates more than $ 1 billion in sales
annually through e-commerce. Cisco website appears in 14 languages and has country
specific content for 49 nations. Sun Micro Systems along with its after - marketing company
Sun Express, have local language information on more than 3500 aftermarket products.

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International Distribution Strategy

Although e-commerce is more developed in the USA due to the high penetration of PCs
and because of the lower cost of internet access than elsewhere, other countries are also
moving ahead at a fast pace.The expansion of B2B transactions willbe acceleratedby the
growth of industrial inputs, such as steel, chemicals and car components, transactionsby
smaller finns and an increased number of business services offered over the Internet.

Small and medium enterprises (SMEs) are expected to generate substantial growth in
internettransactions, as well as to pool their purchasesthrough variousinternetexchanges
for everything from telephone services and home furniture to electricity.Although each
orderis individually small,such purchaseswhen combined accountfor 30 to 60 percentof
the firms total non-labour costs and are usually brought inefficiently and expensively.
Reducedpricesby bulk purchasing throughan onlineintermediary and the savingresulting
from placing and processing orders online (that is cheaper and faster compared to the
traditional ways) could reduce costs by 10 to 20 percent.

Services are ideally suited for international sales on an online basis whether it is banking,
education, consulting or retailing it can be marketed through a website that is globally
accessible. Outsourcingof traditional in-house tasks like inventory management, quality
control, accounting,tax calculation and legal services are on the increase not only within
theUSA but also internationally.

B2Bcompaniescan cut operationalcosts throughonlinetractionsand e-commerce,There

are three major benefits:

I. It reduces procurement costs; it is easier to find the cheapest supplier and processing
costs of transactions are reduced.

II. It allows better supply chain management. 75 percent of all Cisco orders are online
and their linkups with the supply chain management system reduce order cycle time
from 8 weeks leading to increased customer satisfaction.

III. Tighterinventorycontrolis possible.The direct links between Wal-Mart'sinventory

systems and its suppliers,each automaticallygeneratesa replenishmentrequest.

An important advantage of selling direct is that the total costs can be lowered so that the
finalpriceoverseasis considerablyless than it would have been had the localintermediary
fj:~tN?:;::

beenpresent. When intermediaries are eliminated eitherthe selleror the buyermust assume
the functionsthat they performed. .

The e-supplier needs to sort out the following issues for him to be a viable player in the
internationalmarket space.

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International Marketing

I. Culture: Some of the important factors have been furnished in unit 05. TIle website
and the product must be culturally neutral or adapted to fit the special characteristics
ofthe market. For example, the different cultural reactions to colour can be a potential
problem for websites designed for global markets.

TI. Adaptation: Ideally a website should be translated into the languages of the target
markets. This may not be financially viable for some companies but the most important
pages should be translated when the company is making a long term commitment to
sales in another country. Web pages should be designed for that market. It is the
company's responsibility to bridge the language and cultural gap. As competition
increases a country specific website may make the difference between success and
failure.

ID. Local contact: Companies fully committed to foreign markets are creating virtual
offices abroad. Foreign customers are more likely to visit sites in their own country
and in the local language.

IV. Payment: The consumer should be able to carry out credit card transactions either
bye-mail (from a secure page on the website), by fax or over the phone.

V. Delivery: Once sufficient volume in a country or region is reached, container shipments

to free trade zones or bonded warehouses can be used for distribution of individual
orders via local delivery services with the region. The same location can also be used
for post sales services such as spare parts, defective product returns and supplies.

VI. Promotion: Advertising the company's presence in e-commerce and the products
or services should also be carried out. Local language advertising may become a
necessity in certain countries. Search engine registration, press releases, local
newsgroups and banner advertising are some traditional methods.

~ Activity F:

a) The internet as a distribution channel is suited to the requirements of SMEs because:

172
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Unit 8 International Distributioh Strategy

b) Two major benefits ofthe internet as a distribution channel are:

1. _

2. ~ _

8.11 SUMMARY
Various factors affect the choice and selection of distribution systems in international
marketing. This unit has reviewed the process ofselection and how environmental influences
affect distribution policies and approaches. These considerations enable the international
company to structure an efficient channel for products and services on a country-by
country basis.

The importance and elements of a channel system for international distribution have been
explained in the initial sections. The relative merits and demerits of direct and indirect
exporting have been analysed. In situations where the manufacturer finds it impractical to
sell directly to the various foreign intermediaries, the option of indirect channels has been
covered in a separate section. This is followed by a section on the factors that affect
channel choice. The role ofcommercial agents is crucial to exporting firms and the advantages
ofhaving agents are given alongwith the factors that motivate the agents. In the fmal section,
the development ofthe internet as a channel has been explained.

8.12 KEYWORDS
Export Management Company (EMC): a term used for a company that manages
under contract the entire export activities of a manufacturer.

Export House: a term that describes a company that exports products produced by
many manufacturers. They take the responsibility for the promotion of goods, marketing
research, credit and physical handling of the products. .

Piggy backing: refers to an arrangement with another company which sells to the same
customer segment to take on the new products as part of its product range.
,

International physicaldistribution: refers to the logistics or movement of goods across

countries from the sources of supply to the centers of demand. Warehousing, transportation
and inventory control are major components of physical distribution.

~~ ."

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 International Marketing " "-<i(- .."

8.13SELF-ASSESSMENT QUESTIONS
Q1. What criteria would you adopt in the selection of overseas agents? How can agents
be involved in marketing planning?

Q2. Describe briefly the main channels of distribution used in export markets. Which
one would you recommend for an SME and why?

Q3. What are the advantages of having an agent in the export market?

Q4. Identify the most important clauses in an agency contract.

Q5. What are the functions performed by an export house in India?

Q6. Identify some ofthe under! ying factors affecting the channel ofdistribution pattern.
Explain the role of each.

Q7. What is the importance of physical distribution decisions to managements? What

principal elements would you take into consideration for its management?
iI

Q8. Why are services and products more suited for international sales on an online
basis? I
I...
Q9. What are the issues that confront an e- supplier to be a viable player in the international
market space? 1::\:..: ..
1"'\,

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INTERN AllONAL
PROMOll()N STRAl"EGY

Objectives

After completing this unit, you will be able to:

(iT' list the local market characteristics that affect advertising

and promotion of products.
(iT' identify some of the factors that make international
advertising effective.
(iT' emphasise the tasks of advertising in marketing
communications.
(iT' discuss the main types of advertising and promotion in an
international environment.
(iT' state the main issues that concern international advertising.
(iT' assess the growth of the internet as an advertising medium.
(iT' review the principles that make corporate advertising
important.
Structure
9.1 Introduction
9.2 Advertising and Promotion
9.3 International Advertising Issues
9.4 Sales Promotion
9.5 Telemarketing
9.6 The Internet
9.7 Public Relations
9.8 Corporate Advertising
9.9 Sumrruuy
9.10 Key Words
9.11 Self-Assessment Questions
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International Marketing

9.1 INTRODUCTION

Integrated marketing communication (IMe) comprises advertising sales promotion-trade

shows, personal selling and public relations. In many foreign markets, the availability of
appropriate communication channels to customers can determine entry decisions. Very
often, different messages may be appropriate for different communication channels, and
vice versa.

This unit attempts to cover the broad elements and sub-elements ofthe communications
mix with special reference to the international environment which can be dynamic. It is
important to determine the merits and demerits ofthe various IMe elements since they will
vary from country to country.

While the focus is on advertising and sales promotion, a brief discussion on the other
components has also been included. The initial section covers the principles behind successful
advertising and advertising methods followed by the directions taken by leading companies
in sales promotion. Two recent channels that have opened up recently and merit
consideration are: telemarketing and the internet as a channel.

The role of public relation (PR) managers needs to be defined by considering the effects of
PR efforts on an international platform-although many ofthe principles may be applicable
to the domestic environments also. A separate section on corporate advertising has been
included as the concluding section of this unit since it is gaining in significance as a result of
the expansion of more companies into more foreign markets.

9.2 ADVERTISING AND PROMOTION

International promotion is essentially a cross cultural communication and should take into
account the social customs, beliefs, attitudes etc. International promotion can take place in
the following five ways:

1. Advertising

2. Direct mailing

3. Personal selling

4. Store promotion

5. Trade fairs and exhibition

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Unit 9 International Promotion 'Strategy
I

I .
.
1. Advertising Il .. . .

~
Advertising is most susceptible to sociological difference. The task of advertising is to
communicate information and persuasive appeals effectively.Advertising in foreign markets
is a pretty expensive affair. Advertising on scale is meaningful for large multinational I. . ...

corporations operating through their own subsidiaries in several markets. For small
I .
enterprises advertising in overseas markets in a big way is out of question for reasons of I

cost. They can however, advertise in trade directories or in some specialised journals. It
would be desirable for them to approach professional consultants regarding choice of
media, message, etc.

Unified or Diversified Advertising Strategy

It is sometimes argued that within certain geographical areas, not necessarily, political
national boundaries, the custom, culture and demand structures are increasingly becoming
uniform due to extensive information flow and increased international traveL Within such a
setting it becomes, therefore, logical and economic to follow a unified advertising policy.

On the other hand, there can be no doubt that across the country people may speak
different languages, may have different religions and traditions, and are subject to divergent
physical and climatic conditions. To motivate in such situations will definitely require proper
adaptation of the advertising strategy to such diverse elements.

The criteria which help in determining whether unified or diversified strategy should be
followed are discussed below:

(a) Type ofproduct: When there are certain universal selling points for some products,
for example, razor blades, electric irons, automobile tyre, ball point pens, products
are sold primarily on the basis of objective physical characteristics. These objective
characteristics are likely to be considered by consumers to be identical, regardless of
market differences, suggesting that the same appeals will be effective in all markets.

(b) The homogeneity and heterogeneity of markets: When characteristics such as

income, education and occupations are alike, individual consumer characteristics such
as needs, attitudes, and customs may also be alike, thus suggesting that the advertisers
use the same selling points.

2. Direct mailing

Two distincti ve features ofdirect mailing method are that the system is selective and that it
is personaL It is selective because the approaches are made directly only to those who

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International Marketing

have been identified as the target audience. It is personal because the letter and other
publicitymaterialsare mailed either by name or by designation of the identifiedreceiver.

The crucialfirststepin directmailingmethodis the preparationof the mailinglist.Once the

list is ready, the letterand other printed materials are to be designed in a way so as to give
a personaltouch.The receiver must feel thatit is not a routineletterbut somethingdifferent
andpersonal. Directmailingisgenerally lesscostlythanadvertising. Anothermostimportant
requisiteis the preparationof suitablesalesliterature. Salesliterature can take the following
forms: (1) company brochure or leaflet (2) product leaflets (3) price list (4) catalogues
containingfulllistingand basic descriptionof specificproducts.

J!!S Activity A:
A majorstepin directmailinginvolves:

3. Personal selling

It isan effective meansof reaching the buyers.It involves an alive, immediate and interactive
relationshipbetween the buyer and the seller.Major advantages of personal selling are:

The strategy can be adjusted to meet the requirements of the buyers.

The seller gets to know the prospective buyer's reaction almost instantaneously.

He can collectinformation about the buyers markets and environment.

He can provide technical and commercial information to the buyers.

Personal selling calls for very meticulous preparation on the part of salesmen in terms of
acquiring all the necessary information about the product, pricing etc. but also skills for
personalcommunication. Salesmenshoulddevelopthe necessary skillsto be ableto survive
and grow in the competitive markets the world over. Personal selling can also cultivate
~t~~
long term personal relationshipwith the buyer. If a personal rapport is developed with the
buyers, they wouldbe hesitantin shifting to unknown suppliers.

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Unit 9 International Promotion' Strategy

Personal selling can be used effectively in industrial market for selling technical goods like
machinery and equipments. However it is expensive but very effective. The exporter may
lack the intimate and diverse knowledge ofthe environment in foreign trade.

RS Activity B: . -."

Two major advantages of personal selling are:

1. _

2. _

4. Store promotions

This is a promotion method by which a country's merchandise is promoted by a department

store where either a complete floor or a shelf can be hired for displaying products.

5. Trade fairs and exhibitions

Fairs and exhibitions constitute the means of presenting goods and services in an attractive
manner with the aid of colour, light and motion in order to catch the imagination of the
visitor, attract his attention and get him interested in the objects displayed. They help to
reach the public which may not be reached in any other way or which by nature would
disregard other media or publicity. Fairs are more useful for industrial products whose
demonstration is more effective.

Trade Fairs

Participation in a trade fair will help an exporter to have an idea of:

1. What is available in the market concerned?

2. Who would be his competitors?

3. To what extent would the product have to be adapted?

4. Prevailing prices in world markets

5. Strengths and weaknesses of competing products.

In addition, he would be able to know the new developments and technological trends in
his industry. He may also come across a possible buyer for his product and an agent to
represent him.

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Generally the term trade fair is used to mean general large fairs, whereas exhibitions as
specialised fairs or solo or company exhibitions. Even in the category trade fairs, there are
different types.

(a) General Fair: Inthese fairs there are exhibits of all types and they have attraction
both for the business firms as well as for the household buyers. There may be separate
pavilions for separate product groups.

(b) Specialised Fair: These fairs are highly specialised in the sense that only specific
products are displayed. These fairs are intended for the trade and industry and not
for the general public. The objective of such fairs is not only to conclude deals
immediately but also to have first hand knowledge oftechnical developments in that
particular sector, to identify business partners on a long term basis or to get ideas for
product development.

Exhibitions

(a) Solo exhibition: Sometimes the government of a country may organise an exhibition
of its export products in a country where market prospects are bright. The exhibition may
be a specialised one i.e., where only a small number ofrelated product groups are displayed
or a general exhibition showing all important export products of the country.

(b) Company exhibition: Such an exhibition is organised by an exporting firm to exhibit

its own products depending on the nature of the products. The exhibition may be open to
trade and consumer both.

Pre-FairPlanning

Once the decision is taken that the company should participate in the fair or the exhibition,
it must prepare an action plan to derive maximum benefit out ofthis participation. It must
see that all the organisational problems associated with the participation are identified and
solved. Secondly it must prepare marketing and follow up plans to concretise the leads
that may be obtained during the fair. The basic points which should be considered in this
connection are given the form of a checklist below:

(a) Before the fair:

1. Prepare market research report

2. Drawupmarketingplan

3. Draft preliminary budget

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Unit 9 International Promotion'Strategy

4. Make site booking

5. Reserve hotel accommodation

6. Appoint customs agent to clear exhibits and display materials

- ..

7. Finalise budget

8. Prepare publicity and advertising materials

9. Submit draft of stand design to fair authorities for approval

10. Issue invitation(directmailing)

(b) During the fair:

1. Ensure that the stand is adequately manned throughout.

2. Ensure that all the visitors to the stand are welcome and their enquiries are
answered and recorded.

3. Ensure that handout material is always available.

4. Obtain visiting cards of the visitors.

5. Visit other stands to establish personal contacts.

6. Arrange follow up appointinents with visitors, if required.

(c) After the fair:

1. Arrange disposal of stand and exhibits in accordance with local customs and
regulations.

2. Compute details of all enquiries received and business conducted.

3. Prepare the action plan for following enquiries.

J#!S Activity C:
a) A company manufacturing'welding electrodes will prefer to participate in:

( ) General fair

( ) Specialised fair

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International Marketing

b) Two important items in the checklist for planning participation in an exhibi: on are: I

1. _

2. ."

9.3 INTERNATIONAL ADVERTISING ISSUES

A company that seeks to create an international campaign must have the ability to transform
its domestic campaigns. There are strong reasons to create such a campaign. The creative
process will force the company to determine whether there is demand on the international
front for its product. The first mover advantage gained by a company in determining global
demand for any product is huge since it commands an edge over its competitors.

Because advertising is often designed to add psychological value to a product or brand, it

plays a more important role in marketing communications for consumer products than in
marketing industrial products. Frequently purchased and low cost per unit products will
generally require heavy advertising. The maximum spending on advertising for different
categories of products in 1998 is given in table 9.1.

Table 9.1: International product categories measured by advertisement

spending

Rank I Product category

-
I Automotive

2 Personal care
3 Food
4 Entertainment and media
5 Drugs
6 Soft drinks
7 Electronics
8 Cleaners
9 Fast food restaurants
10" Computers, software, peripherals

184
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Unit 9 International Promotion' Sfrategy
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Companies like Unilever, Nestle, P&G, Coca-Cola spend nothing less than $1 billion in
advertising outside USA.

Clearly, the growth ofinternational advertising will continue as some nations reach maturity f1;$(~
stage and some new-nations appear in the growth stage. The potential for international I:
I::: .: . :: .....:
advertising also increases as companies recognise the emergence of new concepts such as
product cultures. Some segments, for example, can be defined on the basis of global
demography; youth culture is an example -rather than ethnic or national culture. Athletic
shoes and casual wear in clothing can be targeted to a worldwide segment of young adults
in the 18-25 years group. MTV is just one of the media vehicles that enable people,
virtually anywhere, to see how the rest ofthe world is affected by products that are popular
in other countries. Many human wants and needs are similar ifpresented within recognisable
experience situations.

International advertising also offers economics of scale in advertising as well as improved

access to distribution channels. Nestle's 'NESCAFE' is marketed as a global brand even
though advertising messages and product formulation vary to suit cultural differences. The
overall requirements ofcommunication and persuasion are generally fixed in nature and do
not vary much from country to country. The same is true for the components ofthe process
ofcommunication. The advertiser's message must be encoded via the appropriate channels
and decoded by the customer or receiver. The company faces the following major difficulties
in its attempt to communicate with customers in any location.

I. The message may not reach the intended recipient. This problem may be related to
the advertiser's lack ofknowledge about suitable media for reaching certain types of
audience. The effectiveness ofTV as a medium will vary with the proportion ofTV
viewership in a particular country.

II. The message may reach the target audience but may not be understood, or (worse)
it might be misunderstood. The target audience's level of understanding or improper
encoding may be a problem.

TIL The message may reach target audience but it may still not induce the recipient to
take action. This could be the result of a lack of cultural knowledge about a target
audience. '

IV. The effectiveness of the message may be lost because of 'noise' . Noise here, refers
to external factors such as clutter of competitive advertising and confusion at the
receiving end.

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International Marketing

The key question international marketers' face is whether the message and media strategy
should be modified from country to country. Coca-Cola is ofthe school that consumers
differ from country to country and they must be reached by advertising tailored to the
respective country. However, there are specific products categories (like software) for
which international advertising messages are not only viable but have very substantial cost
advantages in brand building on an international scale.

Localised and globalised advertising both have their rightful places in the advertising world.
For successful international advertising, a global commitment to local vision is an essential
attribute. An international advertising campaign will result in:

Substantial cost savings

Increased control

Potential leverage for global appeal

A localised advertising campaign will result in:

Focus on the most important features of a product in each nation

An enhanced image ofcultural sensitivity

Greater chances of getting the message understood and relating to the unknown
customer

The approach will depend on the product involved and a company's objectives in a
particular foreign market.

~ Activity D:

a) Two problems associated with communication with potential customers in any location
are:

1. _

2. ~--------------

b) A software product is one category where the following type of advertising is more
suitable
( .) localised advertising

( ) standardised advertising

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Unit 9 International Promotion'S(rategy
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I
9.4 SALES PROMOTION I
I
I

~,i~lli~~
Sales promotion refers to any consumer or trade program oflimited duration that adds
tangible value to a product or brand. Sales promotion laws and usage vary around the
world but usually comprise the following:

a) Promotional pricing tactics

b) Contests

c) Games

d) Premiums and specialties

e) Dealer contests

f) Merchandising materials

g) Tie-in and cross-promotions

h) Trade shows and exhibitions

i) Sponsorship

The purpose of sales promotion is to stimulate customers to sample a product or to increase

consumer demand. Trade promotions are designed to increase product availability in
distributing channels. Besides providing a tangible incentive to buyers, sales promotion
also reduces the perceived risk buyers may associate with purchasing the product. From
the company's viewpoint, sales promotion provides accountability -the manager in charge
ofthe promotion can immediately track the results of the promotion.

Several types of sales promotion techniques are under review by individual countries. This
necessitates a constant monitoring of regulations to ensure that a company's promotion
techniques comply with local regulation. Most European countries have a limit on the
value ofthe premium given. Colgate was sued by a local blade manufacturer in Greece for
giving away razor blade with shaving cream. Austria considers premium to be a form of ,~.;~::.:,{;*>:

discriminatory treatment towards layers. In Finland, premiums are allowed so long as the f~0~j~
word 'free' is not used with them. Belgium, Germany and Scandinavia have strict laws
concerning promotion emanating from their desire to protect consumers from being
distracted from the true value of a given product or service.

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In France, it is illegal to sell a product for less than its cost. In Germany, markc ers must
notify authorities in advance if they plan to have a sale. It is restricted to such events as
going out ofbusiness, giving up a particular product line, end of January (winter), end of
July (summer) and a twenty-fifth anniversary.

9.5 TELEMARKETING
When personal selling is carried out over telephone networks, it is called telemarketing.
Although telephone selling has been in existence for a number of years in the developed
countries, the growth of the direct marketing field has given a big push to this mode of
selling. In overseas markets, telemarketing is not as far developed as in the USA because
ofthe low penetration levels oftelephones in the private households. In addition unsolicited
sales calls are coming under the scanner in many countries under consumer protection law
and invasion of privacy. Germany restricts unsolicited calls on grounds of privacy invasion
and this ban even applies to an insurance salesperson's announcement of a visit.

9.6 THE INTERNET

The internet is emerging as a viable medium for advertising. Its use in business to business
communication and promotion via catalogues, product brochures, and instruction manuals
is rapidly growing. Since a large number of businesses and industrial across the world
have the internet, it can reach a very large proportion of the business to business market.

Its usage as an advertising ~edium by consumer product companies is also steadily growing.
Many goods companies have e-stores and others use it to push sales in retail outlets. The
growing number of internet households accessible outside the USA generally constitutes a
younger better-educated market segment with higher than average incomes. This group is
an important market niche for many companies.

However, new limitations will be set as the internet usage continues to grow in new and
emerging markets. Issues such as pay-per-view, taxes, unfair competition, import duties
and privacy are being addressed by many nations across the world.

Serious internet advertisers or e-marketers need to be more effective in communicating

the existence of their websites via other advertising media. Already, companies are
increasingly posting vacancy and recruitment advertisements with full details on their
websites while the print media are used merely to inform the reader to visit the company
website for further details.

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Unit 9 International Promotion'Srrategy

16 Activity E:
A good response from overseas customers to a marriage bureau can be expected in India
if it advertises:

( ) in the print media

( ) in the local,regional language press

( ) in search engines on the internet

9.7 PUBLIC RELATIONS

The company's public relations(PR) department serves the purposeof fosteringgoodwill

andunderstanding amongitsconstituents bothinsideandoutside thecompany. PRmanagers
attempt to generate favourable publicity that is a non paid form of communication. They
also playa key role in responding to disturbing press and media reports or controversies
that arise because of company activities in different parts of the world. The basic tools of
PRinclude:

news releases
newsletters
press conference
toursof plantsand manufacturingestablishments
articlesin trade and professionaljournals
company publicationsand brochures
TV interview appearances by company personnel
special events and sponsorship
homepages on the internet

Generally speaking, a companyhas littlecontrolon how a storygetsreported. The company

cannot directly control the tone or slant ofthe story. Sometimes, publicity is generated
whena companysimplygoesaboutthe businessof international marketingactivities. Nike
received a greatdealof negative publicity regarding alleged sweatshop conditions infactories
run by sub contractors.

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It is in crisis situations that the ultimate test of a company's understanding ofthe power and
importance of public relations comes to the forefront. The best response is be forthright
and direct, reassuring the public at large and providing the media with accurate information.
The Bhopal gas tragedy in 1980s is a classic example of how Union Carbide (a respected
MNC in those daysj had to face the brunt of public anger and discontent and found it
difficult to settle the claims of victims' relatives even 15 years after the event.

Advertising publicity and other forms of communication are important tools for the
international marketer. All these elements can be used in international marketing either
alone or in varying combinations. The identification ofglobal appeals and benefits forces
companies to probe deeply to identify the basic needs and motives. Advertisers may place
a single global agency in charge of worldwide advertising or use one or more agencies on
a regional or local basis.

Sony in India

Sony is the world's second largest consumer electronics maker after Matsushita. It
recorded consolidated annual sales of about $67 billion for the fiscal year ending March
2005. The consumer electronics division contributes about 66 percent of the company's
overall turnover. Sony Corp has been the subject of a clutch of restructuring programs
and has cut 10,000 jobs and closed down 11 manufacturing locations out of 67 in the
recent past.

Sony Corporation now considers India a fast growing market for future growth. In addition
to its dealer network in India, Sony has established 'Sony World' outlets that exclusively
stock the popular and the latest range of Sony products. Sony expanded its dealers and
network in India from 1800 dealers to 4700 dealers and the outlets from 157 to 174.
With more outlets, the average sales per outlet has increased that is reflected in the
growth of its business.

More Sony exclusive outlets are being planned in residential areas, the idea being that the
customer can visit the showroom at their leisure time with their families, which will help
them have a feel of the products before taking a decision. In addition, the interiors are
also being spruced up to impart the exclusive look and feel of Sony. The company has
hired architects and store designers, making it one ofthe few companies in the country to
do so. The company claims to have registered several success stories with its new retail
initiative.

Another strategy that has worked for Sony in India is the establishment of strong dealer

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Unit 9 International PromotionStrategy

networks. There are many first-time dealers who have never felt the need to switch over

to strong competitors like Samsung and LG Electronics.

Sony has also realised the importance of making available in India its latest range in TV
I~:f?~):;:
,
sets, audios, and digital imaging products simultaneously as elsewhere in the world. Sony's
portfolio in India includes its LCD TV range (Wega), projection televisions, plasma
televisions, hi-fi audio systems, car audio systems, DVDs, digital camcorders, home
theatre systems, PC monitors and laptops (under the VAIO brand).

Sony's highest selling item globally remains its Walkman, the product that revolutionised
music history in the world, but in India it is colour TV sets that account for the maximum
business both in value and volume. The flat TVs and flat panel TV sets are presently the
fastest growing segment in India. The company has a dominant market share of 85 percent
in the India camcorder market.

So far, Sony has remained a low-profile advertiser with an advertising budget that is
about 6 percent ofits turnover. Dealers seem to differ on the impact ofadvertisements by I ~~
i
the company. The company is also relying heavily on print media for its advertising. Even

when it launched the BRAVIA range of LCD TV sets, Sony focused on getting the

showroom right and training the sales staffrather than above-the-line advertising.

With the Japanese giant ready to reinvest in the Indian market, Sony India looks ready

for a harder second round battle.

Source: Business India

9.8 CORPORATE ADVERTISING

More and more international companies who are shifting their advertising budgets to
corporate campaigns realise the value of a broader-based image. Canon, Vivendi and
ABB are just three examples that are spending more money on corporate image
advertisements to boost the profile of the corporate brand. Canon, for example, shifted
10 percent of its marketing budget in Europe to a corporate brand campaign. The firm
wants to use its corporate advertising to help reposition the firm. It expects to achieve the
~~:.~~fd/,:,
shift from being a manufacturer ofoffice automation machines to a office solutions provider. [;?'~%W::,
To make the transition, Canon has used an advertising campaign that carries the tag line:
'created by' with the visuals showing how Canon products stimulate consumers and
companies to achieve their goals.

191
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International Marketing

ABB had a different reason for investing in a corporate campaign. They wanted to raise
their profile in USA, when it was found that many policy makers there were unaware of
ABB's capabilities.
~~j~~~i;i;1f~i~:
These global firms are discovering that corporate campaigns that place a premium on
image and broad information rather than specific brand features or performance !

characteristics, are very successful in establishing the name ofthe finn in the minds of both
consumers and corporate business buyers. The vast majority of corporate campaigns run
by consumer goods manufacturers are undertaken by firms in the shopping goods category,
such as appliance and auto marketers. In terms of media use, firms in USA have found
both the magazine and TV media to be well suited to corporate advertising efforts. The
following points summarise the purpose for corporate advertising:

I. Build the image ofthe firm among customers, shareholders, the financial community

and the general public.

II. Boost employee morale or attract new employees.

III. Communicate an organisation's view on social, political or environmental issues.

IV. Better position the finn's products against local and foreign competition that is often

perceived to be of high quality.

V. Playa role in the overall integrated marketing communications of an organisation as

support for main product or service advertising.

The three basic types of corporate advertising are:

1) Corporate image advertising: The major portion ofcorporate advertising efforts focus

on enhancing the overall image of a firm among important constituents-typically, these

are customers, employees, and the general public. When IBM promotes its image

through the slogan: "Solutions for a small planet" or when Toyota uses 'Investing in

the things we all care about' to promote its five manufacturing plants in USA, the goal

is to enhance the broad image of the firm.

2) Advocacy advertising: This type attempts to establish the position ofthe company on

important social, political or environmental issues. It is referred to as advertising that

addresses and influences public opinion on issues of concern to the sponsor. Typically

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the issues are directly relevant to the business operations ofthe organisation. Chevron,
USA is one MNC that has used advocacy advertising to state its position on important
environmental issues.

3) Causes related-advertising: This type of advertising features a firm's affiliation with an

important social cause-reducing poverty, AIDS control, increasing literacy and curbing
drug abuse are some examples. The firm generally donates money to a non profit
organisation in exchange for using the company name in connection with a promotional
campaign. The firm's association with a worthy cause is expected to enhance the
image of the firm in the minds of consumers.

Corporate advertising serves an important supportive role for brand advertising and it can
offer more depth and breadth to a firm's integrated marketing communications program.

RS Activity F:
In a situation where an Indian company wants to attract foreign investment, it should
undertake:

( ) Product advertising

( ) Corporate advertising

( ) Product & service advertising

( ) Brand advertising

9.9 SUMMARY

The IMC program includes coordination among its major components namely, advertising,
sales promotion, public relations and direct marketing. Global and international marketers
face special problems in every market related to legal, language, media and production
limitations. It is necessary to consider these when designing and formulating an IMC
program.

This unit has covered the principles ofthe major components ofIMC with special reference
to foreign facing international advertisers in designing the best messages for each of the
markets being served. There is great risk of cultural misunderstandings in both public
relations and advertising media.

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International Marketing

Brief reviews of the components other than advertising and sales promotion have been
included. In the current business environment ofextensive outsourcing in the IT and other
industries, there is a special focus on two relatively new developments-telemarketing and
use of the internet a~ a medium for advertising.

In the final section, a review of the basis and purpose of corporate advertising has been
included. Significant changes are occurring in communication technologies that are causing
1< ...
dramatic changes in the structure ofIMC programs in various companies. Operations in
international markets cannot be disassociated from a fundamentally sound IMC program.

9.10 KEY WORDS

Integrated marketing communications (II\1C): This is a term ofrecent origin to describe

all the major components of the marketing communications mix generally used by
organisations and entities-namely advertising, sales promotion, public relations and direct
marketing.

Store promotion: A promotion method where a country's merchandise is promoted by a

department store or any retail outlet where either a complete floor or a shelf can be hired
for displaying products.

Telemarketing: The act of personal selling carried out over telephone networks is called
telemarketing.

Corporate advertising: Advertising that is used to boost the profile of the corporate
brand instead of the physical product or service.

9.11 SELF-ASSESSMENT QUESTIONS

Q I . Discuss the various techniques of sales promotion in overseas market.

Q2. Why and how does advertising for foreign markets differ from that of domestic
markets?

Q3. Discuss the role and significance oftrade fairs and exhibitions in promotion exports.
Make a checklist for a company to plan its participation.

Q4. Discuss the various factors you will take into account in selecting an advertising
agency for international marketing.

194
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Unit 9 International Promotion Strategy

Q5. 'International advertising also offers economies of scale in advertising as well as

improved access to distribution channels' . Discuss the pros and cons ofthis statement
.with reference to one example.

Q6. Identify.the major difficulties faced by a company in communicating with foreign

customers. Explain the remedial measures that can be taken.

Q7. Identify the circumstances under which you would select localised advertising and
globalised advertising.

Q8. How is the internet being used as a communication medium by companies involved
in industrial products and business services?

195
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INTERNATIONAL PRICING
rrEGY
Sl'RA

Objectives
After completing this unit, you will be able to:

r:ir identify the important pricing aspects.

r:ir analyse the two basic types ofpricing orientation.

r:ir enumerate the main factors that affect export pricing.

r:ir explain the concept of transfer pricing.

r:ir assess the elements that support the use of marginal cost

pncmg.
r:ir list the various elements ofcosts for export price quotation.
r:ir discuss the major issues in international pricing including
the environmental influences.

r:ir state the principles of counter trade.

r:ir evaluate the various pricing approaches.

Structure
. 10.1 Introduction
10.2 Pricing Aspects
10.3 Pricing Orientation
10.4 Types of Pricing
10.5 Elements of Costs for Export Price Quotation
10.6 International Pricing Issues
10.7 Environmental Influences on Pricing
10.8 CounterTrade
10.9 Dumping
10.10 Pricing Approaches
10.11 Summary
10.12 Key Words
10.13 Self-Assessment Questions

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International Marketing

10.1 INTRODUCTION

Even when the international marketer produces the right product, carries out the appropriate
promotion and takes measures for ensuring the availability of the product at the right
place, the efforts, will not produce results unless the pricing is right. U ntil the product's
price reflects the customer's perception of quality and benefits in the price, the task of the
international marketer remains unfinished. Determining the correct price in an international
market is one ofthe most difficult challenges that go far beyond the way price is determined
in domestic markets.

This unit focuses on the major pricing policy questions that arise from the special factors
found in foreign markets. The initial section deals with the introductory aspects in pricing,
the two basic types of pricing orientation and the factors that affect export pricing. This is
followed by the guidelines and factors that help the marketer decide transfer pricing - a
very significant development that has taken root in today's world ofincreasing globalisation.
The basic issues in marginal cost pricing are given along with the nature of the components
of an export price based on marginal costs.

A separate section deals with the environmental influences and issues that have a significant
impact on international pricing. Price escalation issues such as exchange rates, inflation
and government controls and subsidies have been briefly covered. Two other issues of
importance in the current business environment are: counter trade and dumping. These
have been highlighted prior to the final section on pricing approaches that describe some
ofthe relevant types of pricing adopted by companies operating in foreign markets.

10.2 PRICING ASPECTS

Pricing is a particularly critical and complex variable in overseas marketing strategies. The
pricing decision ultimately affects an organisation's ability to stay in the market. At the
same time, the uncertainties of entirely unpredictable forces such as cost competition and
demand threaten and present numerous pitfalls for international pricing.

International pricing has several processes and ramifications. Corporate headquarters has
a role in making pricing decisions.pifferent price-setting approaches are available, and a
variety of concerns influence pricing decisions including intra fum pricing, dumping and
leasing.And international markets must work with facility through allthese complex variables.

Pricing, an important decision in any business, be it domestic or international, directly

affects revenue and thus profitability. Further, appropriate pricing aids proper growth as
development of mass market depends to a large extent on price.

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Unit 10 International Pricing Str~tegy

Uniform versus differentiation pricing

Towhat extent the settingof uniform prices is desirablein worldwidemarket is a question

thatmultinational companies perpetually face. Someinternational markets argueforuniform
prices. Others,however, observethatobviousdifferences in the marketof variouscountries , .

favourtheuseofinternationally differentiated pricing policies. The decision between uniform ,

and differentiated pricing would be dictated by such factors as competitive conditions,
lifestyleposition oftheproduct, productdiffusion process, regulatory considerations, channel I . '. . .

structure, companyobjectives, and consumerpriceperceptions. If the competitiveposition f ~._~-'

of the firm does notvary from market to market, it may be worthwhileto pursue a uniform
pricing strategy. Afirm essentially in a monopoly or differentiatedoligopolistic situation
may price its product uniformlyon a global scale.

S Activity A:

Pricingis an important decisionfor any business that directlyaffects

Production and sales ( )

Salesand profitability ( )
I

Productionand profitability ( )

Sales and share value ( )

10.3 PRICING ORIENTATION

Companiesmainlyfollowtwo differenttypesof pricingorientation:

The cost approach

The market approach

The cost approach involves firstly computing all relevant cost and then adding a desired
profit mark up to arrive at the price. The cost approach is popular because it is simple to
comprehend and use and leads to fairly stable prices.

Under the marketapproach,pricing startsin a reversefashion. First an estimateis made of

the acceptable price in the target segment. An analysis is performed to determine if this
pricewouldmeet thecompany's profitobjectives. The marketapproachfocuseson pricing
from the viewpointof the customer. Unfortunatelyin many countriesit may not be easy to

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\
International Marketing

develop an adequate price demand relationship and therefore implementation of the market
approach may occur in vacuum. It is this kind uncertainty that forces marketers to opt for
the cost approach. .
li;'\~l;~
Ji!S Activity B:
Two types of pricingorientation in export marketing are:

1. _

2. _

10.4TYPES OF PRICING
1. Export pricing

Export pricing is affected by three factors:

a. The price destination (i.e., who it is that will pay the price - final consumer,
independent distributors, a wholly owned subsidiary, a joint venture organisation)

b. The nature of the product (i.e., whether it is raw or semi processed material
components, finished or largely finished products or services, or intangible
property, patents, trademark formulas)

c. The currency used for billing (i.e., the currency of the purchaser's country, the
seller's home country currency, or the leading international currency)

There are five principal ways of quoting export prices, ex-factory, free along-side
ship (FAS), free on board (FOB), cost insurance and freight (Clf') and delivered
duty paid.

2. Transfer pricing

Transfer pricing refers to the pricing ofgoods/services among units within corporation.
Essentially, pricing decisions are affected by the following factors:
,
a. Income tax liability within the host country

b. Tariff and/or custom duties

c. Exchange controls

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Unit 10 International Pricing Strategy

d. Profit repatriation restriction

e. Quota restrictions

[ Predict status

To set transfer prices, companies usually set guidelines like the following:

1. All domestic and foreign units are profit centers and transfers must be set at
levels that yield a reasonable profit to both the selling and buying units.

ii Profit is divided according to functions performed in producing and marketing

goods to unrelated buyers.

iii. Gross margins (the spread between production and distribution cost and the
sale to an unrelated buyer) are divided more or less evenly between domestic
producing and foreign marketing units.

IV. Overall impact on consolidated profit is the paramount consideration and profit
is taken where it is best for the total corporation.

RS Activity C:
Two guidelines important for setting transfer price are:

1. _

2. -----------,-

3. Marginal cost pricing

Pricing on marginal cost basis means that the prices should be so set that at least the
marginal cost, popularly known as direct costs are covered. Ordinarily the total cost
can be divided into two broad categories: fixed cost and variable cost. Up to a
certain level of output, fixed costs remain unchanged, irrespective of the volume of
output. Variable costs, on the other hand, vary in proportion to the volume of
production. Thus, under the marginal cost pricing system, the relevant cost is the
variable cost or the direct cost. The use of marginal cost pricing in the case of export
markets is advocated on the basis that if the manufacturers are able to realise the
direct cost including those involved in export operations specifically, they would be
able to export without in any way affecting the overall profitability of their firms.

201
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International Marketing

There are a number of points in support of the use of marginal cost for export r ;cing:
a. Export sales are additional sales and, therefore, these need not be burdened with
overhead costs which are ordinarily recovered from the domestic markets.

b. The manufacturer's product is probably less well known in foreign markets than that
ofhis competitors from developed countries.

c. The markets for the products of developing countries are usually in countries with
low national income. In such cases, high prices may limit the sales to a small segment
ofthe market. Low prices, on the other hand, may serve to widen and create markets.

d. Competition in foreign markets may require quotation of a lower price.

The question now arises: how to recover the fixed or overhead costs? There are two
possibilities:

i, Fixed costs may be recovered from the domestic market, and

n. Extra loading may be done on commodities that can bear high costs.

Feasibility

The feasibility ofthe adoption of marginal cost pricing would, however depend upon:

L the existence of a large home market,

n. adoption of mass production techniques which will reduce the gap between the full
and the marginal costs,

m. the capacity of the home market to pay higher prices.

Again the basic assumption for the use ofmarginal cost pricing is that additional production
for exports is possible without increasing overhead costs.

The main operating conditions justifying the use of marginal costs for exports are:

L When the firm has reached the break-even point on the basis of domestic costs. l?t1~
n. Where overheads are substantial

iii. Domestic market is not large enough to ensure full capacity utilisation.

iv. When export incentives are available

202
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Unit 10 International Pricing Str~tegy

Limitations

There are certain limitations of marginal cost pricing which must not be lost sight of:

i If the importersbecome used to low price it might be difficult to increase price later
on.

lL This policy is not applicable or is oflimited use to industries

which are mainly dependent upon export markets and

where overheads are insignificant.

Marginal Cost Sets the Lower Limit

A word of caution is necessary at this stage. When it is advocated that marginal cost
should be the basis for export pricing, the idea is not that direct cost only should be
charged in every case. The point that has to be emphasised is that marginal cost only
provides the lower limit up to which a firm can reduce its prices without in any way affecting
its overall profitability.

Disadvantages

There are certain disadvantages of marginal cost pricing.

a. Developing countries might be charged ofdumping their products in foreign markets.

b. Intense competition among exporters from developing countries may lead to

undercutting each other, resulting in the loss of valuable foreign exchange.

c. Very often low prices may be quoted in the absence of adequate information about
prices prevailing in foreign markets.

RS Activity D:

Two main advantages of marginal" cost pricing are:

1. _

2. --,--'----- _

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International Marketing

10.5ELEMENTS OF COSTSFOR EXPORTPRICEQUOTATION

The following chart gives the various elements ofcosts:

(a) For export pricebasedon marginal cost

(b) For export price based on full cost

~
I. Export Price Based On Marginal Cost

(1) Direct costs:

(a) Variable costs:

I

Direct material"

Direct labour

Variable productions overheads (for example, special dyes and jigs)

Variable administration overheads (for example, salary ofexport clerk)

(b) Other costs directly related to exports:

Selling costs - advertising support to importers abroad

Special packaging, labelling etc.

Commission to overseas agent

Export credit insurance

Bank charges

Inland freight

Forwarding charges

Inland insurance

Port charges

Export duties, if any

Warehousing at port, if required

Documentation and incidentals

204
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Unit 10 International Pricing Str~tegy

Interest on funds involved/cost of deferred credit

Cost of after-sales service including free parts supply

Consular fees
Pre-shipment inspection and loss on rejects

After-sales service

Total Direct Costs

Less: Duty drawback and benefits from sale of import license, if any.

1. Direct Cost Net =EO.B. price at marginal cost

2. Freight (volume or weight whichever is higher)

3. Insurance

C.I.F. price (based on marginal cost)

II. Export Price Based On Full Cost

1. Direct cost as in (as in (1) above)

2. Fixed cost/common costs -.::::....:.;'.:.;.

Production overheads
":.7:~:.::::;::.::.~:~:

Administration overheads

Publicity and advertising (general)

F.O.B. price (based on full cost)

3. Freight (volume or weight whichever is higher)

4. Insurance

C.I.F. price based on full cost

Part I of the above cost sheet gives the lower limit for export pricing. As would be clear
from the cost sheet, all costs directly related to exports are taken into account for fixing the

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International Marketing

lower limit. If some incentives are allowed on the export of the product concerned, the
lower limit would be further reduced by the amount of incentives.

In the case of export houses purchasing their supplies from supporting manufacturers, the
cost price of supplies obtained would constitute the lower limit.

Points to be covered in an Export Price Quotation

A precise description of the merchandise, packaging, quality and technical

specialisation.

Price including any rebates and discount and terms ofpayments.

Terms of delivery. If c. i. f price is quoted, a breakdown of the same should be

provided.

Minimum and the maximum quantities that should be supplied.

The mode shipment and the date of delivery.

The period for which the quotation is valid.

Market Oriented Export Pricing

The following chart gives the nature of analysis for market - oriented pricing:

Analysis for market-oriented export pricing

Market price _ _

Less retail margin on selling price _ _

Cost to the retailer

Less wholesaler's mark up onhis cost _ _

Cost of the wholesaler

Less importers' mark up on his cost _ _

Cost of the importer _ _

Less import duty _ _

206
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Unit 10 International Pricing Strategy

C.LF. price _ _
Less freight and insurance charges _ _
F.Q.B. realisation of the exporter_

S Activity E:

Twofactors that make Clf value different from FOB value are:

1. _

2. _

10.6 INTERNATIONAL PRICING ISSUES

One of the majorbenefitsto a country in havinginternational tradeis the favourable impact

of international competition on national price levels and in turn, on a country's rate of
inflation. There are three basic factors that decide the boundaries within which market
prices should be set.

The first is productcost whichhelps to fix the minimum price.Althoughit may bepossible
for firms to price a product below its cost, it cannot do this for long periods if it wants to
continuemarketingoperations.

The second factoris that competitiveprices for comparable productscreate a price ceiling
or upperboundary. International competition alwaysputspressureon the pricesof domestic

J01&~~~
companies.A major benefit of international trade is the prospect of lower prices.
I'
Thirdly, there is an optimum price between the lower and upper limits for every product I' ,
[.:.::.::.::'::

which is a function of the demand for the product as determined by the willingness and r~;~~{:?~~?{~
abilityof customer to buy.

Withincreasing globalisation,there is greater competitive pressureon companies to curb i

~-': }:':'; ~ ;
priceincreases. In an industry thatinvolves foreigncompetition, companies haveto compete
with other companies all over the world. If a manufacturer raises prices, it is important to
make sure that the increase does not put him out of contention with the competitors. [":""':':"':':':
....
. ,
I

Theinternational marketing managerhastodeveloppricing systems andpolicies thataddress

theminimumandmaximumpricelevels alongwiththeoptimumpricelevels ineachnational
market. The important considerations for marketing in overseas markets are:

207
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International Marketing

i) How sensitive are the price levels?

ii) How competitive are the price levels in each market?

iii) Can different prices be charged for different price segments?

iv) Is the demand in the target market price elastic or inelastic?

v) Whether the prices are viewed by the host government as reasonable or unfair?

vi) Do the country's anti-dumping laws pose a problem?

vii) The types of discounts and allowances the firm can offer its international customers

viii) Whether the price fixed by the firm matches that of the customer's perception of the
price in the price-quality matrix

ix) Whether the tariffs applicable on the product are likely to remain stable

x) Whether the exchange rate will be reasonaby stable in case the firm is considering
direct or indirect exports.

Changes in domestic prices are generally reflected in the exchange rate of the country's
currency. In the real world of currency markets, international marketers are faced with
difficult decisions on how to deal with windfalls resulting from favourable exchange rates
and with losses from unfavourable exchange rates.

International pricing decisions must also take into account international transportation costs,
the number ofintennediaries in long channels ofdistribution and the demands ofinternational
key accounts for equal price treatment irrespective of country location.

There are also internal organisational considerations besides cost. Within the typical
corporation there are many interest groups. Organisationalleve1 profitability, maximum
manufacturing efficiency, anti-trust implications of international pricing practices and
compliance with government on transfer price legislations are some ofthe considerations
that can give rise to conflicting objectives while seeking international market presence.

In addition, the finn has to deal with the rapidly changing international market place. Very
often, the information regarding demand is inaccurate or misleading. In Russia, for example
market research is a fairly new concept and historical data may not be easily available.

208
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Unit 10 International Pricing Strategy

10.7 ENVIRONMENTAL INFLUENCES ON PRICING

Amongthemajorenvironmental influenceson pricingdecisions are: currencyfluctuations, f::'i::';:::X,::;:,

inflation, governmentcontrols and subsidies,competitivebehaviourand market demand. r):f!);;:::;;l:~:;;~

1. Currencyfluctuations

There are two major dimensions to this problem. The first relates to fixing the price of
products in countrytargetmarkets. Whenthisiscarriedout,anyappreciation or depreciation
of the value of the currency in the country of productionwill lead to gains or lossesfor the
seller. The second one concerns fixing the pricing in the currency of the home country.If
this is done, any appreciation or depreciation of the home currency will result in price
increases or decreases for customers with no immediate consequences for the seller.

When currency fluctuations result in an appreciation in the value of the currency of a

country that is an exporter,companies can accept the fact that currency fluctuations may
infavourably impactoperatingmargins and they can renew their effortsto reduce costs.In
the short run, lower margins enable them to hold prices in target markets and in the long
run,reductionin costs helps them to improve operatingmargins;for companies thatare in
a strong, competitive market position, price increases can be passed on to customers
without significant decreases in sales volume. In more competitive market situations
companies in a strong-currency country will probably absorb any prices increase by
maintaining international marketpricesat pre-evaluation levels. In practice, a manufacturer
and a distributorwill worktogetherto maintainmarket share in internationalmarkets.The
alternativeactionscan be:

either the distributoror the manufacturer decides to reduce the profit percentage; J~f~i~?~~~I~~~;
I??~:}::::~
the distributormay choose to purchase higher volume to achieve discounts; -.--

the distributorcan reduce inventory and adoptjust-in-time method for stocking and

delivery.

By using these approaches,it is possible to remain price competitivein markets in which

currency devaluationin the importing country is a price consideration.The international
pricing strategiesunder varyingcurrency conditionscan be summarisedas below: I)~;~~~?;;!~:!
When domestic currencyis WEAK the firm can:

expand product line and add expensive features;

209
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 \

International Marketing

shift sourcing and manufacturing to domestic market;

exploit export opportunities in all markets;

speed up repatriation of foreign-earned income and collection;

,
~-
use full-costing approach, but use marginal cost pricing approach in new or competitive
markets;

minimise expenditure in local, host-country currency;

minimise local borrowing;

bill foreign customers in their own currency.

When domestic currency is STRONG the firm can:

engage in non price competition by improving quality, delivery and post sales services;

improve productivity and engage in cost reduction;

shift sourcing and manufacturing overseas;

give priority to exports to countries with stronger currencies;

deal in counter trade with weak-currency countries;

i :;-C-.:::
reduce profit margins and use marginal cost pricing;

=~
maximize expenditures in local, host country currency;

buy need services abroad and pay for them: in local currencies;
,.
borrow money needed for expansion in local market;

bill foreign customers in their own currency;

slow down repatriation offoreign income.

An exchange rate clause allows the buyer and seller to agree to supply and purchase at

fixed prices in each company's national currency. lithe exchange rate moves within a

specified range of, say plus/minus 5 percent, the fluctuations do not affect the pricing

210
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Unit 10 International Pricing Strategy

agreement that is spelled out in the exchange rate clause. Exchange rate clauses are designed
to protect both buyer and seller from unexpectedly large fluctuations in currencies.

2. Inflation

Inflation refers to a persistent change in price levels and affects all countries. Inflation
requires periodic price adjustments that are necessitated by rising costs that need to be
recovered by increasing selling prices. In an inflationary environment, the important criterion
for the firm is to maintain operating profit margins. So long as it maintains its margins, it has
effectively protected itselffrom the effects ofinflation.

When payment is likely to be delayed for several months or is worked out on a long term
contract, inflationary factors must be factored into the price. Because inflation and price
controls imposed by a country are beyond the control of companies, they use a variety of
techniques to increase the selling price to compensate the effects. They may charge for
extra services, increase costs in transfer pricing or break up products into components,
and price each component separately.

3. Government controls and subsidies

If governments limit the freedom of managements of companies to adjust prices, the

maintenance ofmargins comes under threat. Ina country that is undergoing severe fInancial
difficulties, and is in the midst of a financial crisis (eg. Foreign exchange shortage caused
partly by runaway inflation), government officials are under severe pressure to take some - ," .. :" - ..~. ~ .

action. This situation has occurred in Brazil on many occasions. In some cases, governments
take immediate steps rather than get to the root cause of inflation and foreign exchange
shortages. When selective controls are imposed, foreign companies are more vulnerable
to control than local businesses. Government control can also take the form of prior cash
deposit requirements imposed on importers. This is a requirement that company has to tie
up funds in the form of deposit (with no interest applicable) for a specifIed time period if it
wishes to import products. Such requirements force companies to lower prices, since
lower prices mean smaller deposits. Another government requirement that affect the pricing
decision is the restriction on transfer of profits out of a country. Under such rules, a high
transfer price paid for imported goods by an affiliated company can be interpreted as a
device for transferring profits out of a country.

An action by a government on subsidies can also force a company to make strategic use
of sourcing to be price competitive. In USA, a fair proportion of the agricultural sector is
subsidised, 'however poultry products are not thus making their prices non-competitive in
world markets' .

211
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International Marketing

4. Competitive Behaviour

Pricing decisions are also governed to a large extent by competitive action. Ifcompetitors
do not adjust their prices in response to rising costs, the management is constrained in its
ability to adjust prices accordingly. Conversely, ifcompetitors are manufacturing or sourcing
in a low cost country, it may be necessary to cut prices to stay competitive.

RS Activity F:
Three major environmental influences on pricing decisions in foreign countries are:

1. _

2. _

3. _

10.8 COUNTER TRADE

Marketers need to be aware of which markets require counter trades just as they must be
aware of social customs and legal requirements.

One ofthe earliest counter trade agreements occurred between Russia and Pepsi Company
before the 'ruble' (Russian currency) was convertible and before most US companies
were trading with Russia. Pepsi Company wanted to gain entry into the Russian market
before Coca Cola. The only way possible for them was to accept vodka from Russia and i:",.', .c-, '.: '~-.
bottled wines from Romania to finance Pepsi Company bottling plants in those countries.
Pepsi Company dominates the cola market in Russia and all the former republics of the
~~;;~;~1~~;
USSR, in part because of its exclusive counter trade agreement with Russia that prevented
the entry of Coca cola for more than 12 years.

There can be many reasons why countries insist on counter trade:

1) To reserve hard currency

f:;:;;;:{;;;;;:;~
2) To improve balance of trade .
I. .
3) To gain access to new markets I' .

4) To upgrade manufacturing capabilities

212
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Unit 10 International Pricing Strategy

5) To maintain prices of export goods

6) To force reinvestment of proceeds from weapons deals

Counter trade <;an take the following forms:

Barter: that refers to the direct exchange of goods between two parties in a transaction
across borders.

A compensation deal involves payment in goods and in cash. General Motors (USA)
sold locomotives and diesel engines to Yugoslavia worth $ 12 million and took cash and $
4 million payment for cutting tools made in Yugoslavia.

Counter Purchase (offset trade) - where the seller agrees to sell a product at a set price
to a buyer and receives payment in cash. The first contract is contingent on a second
contract that is an agreement by the original seller to buy goods from the buyer for the total
sum involved in the first contract or for a pre-fixed percentage of the amount.

Product buy-back agreement- which is made when the sale involves goods or services
(eg. industri al goods or capital equipment) that produce other goods and services. The for I
I
seller agrees to accept a partial payment for a certain portion of the output or the seller
receives full amount towards the price initially, but agrees to buy back a certain portion of
the output.
I
I
10.9 DUMPING I' ...
I: ..'

i:" .
r;~;;-!;gi~~!
Dumping has achieved international proportion and has become an important global pricing
issue. Dumping occurs when imports sold in a particular country are priced at levels that
represent less than the cost of production plus an eight percent profit margin or at levels
below those prevailing in the producing country. Many countries disapproved of the US
-.
systems of anti-dumping laws, in part, because historically, the Commerce Department
almost always ruled in favour of a US company filing a complaint.

Some countries use dumping legislation as a tool to protect local companies from aggressive
pricing tactics by foreign companies.
t:~~J;';,~;;:;:
There are four types ofdumping practices:

Sporadic dumping occurs when a manufacturer with unsold inventories wants to get rid
ofexcess merchandise.

213
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Predatory dumping involves selling at a loss to gain access to a market with the intention

of driving away competitors.

Persistent dumping involves consistent selling at lower prices in one market than in
'~;;):[M:;:;~')';
others.

Each of the above three types involves charging lower prices abroad than at home.

Reverse dumping involves deliberately pricing goods lower in the domestic market while

charging higher prices in foreign markets. In such a case, the overseas demand is less

elastic and the foreign market can tolerate a higher price.

16 Activity G:
The significant difference between reverse dumping and other types of dumping is:

10.10 PRICING APPROACHES

Some demand-oriented approaches to pricing are given below:

Skimming pricing. When a new or innovative product is being offered, you can

initially charge a high price, since the "early adopters" are not very price sensitive.

You can then lower the prices to "skim" offthe next layer of buyers, etc. Eventually,

the price will drop as the product matures and competitors begin to offer lower

prices.

Penetration pricing. In this strategy, you set a low initial price in order to penetrate

quickly into the mass market. A low initial price discourages competitors from entering

the market, and is the best approach when many segments ofthe market are price '. ',"

sensitive. Amazon.com, for example, offers a discount price and may lose money on [;: :;!r=:)i~:~;f;
the first sale, but this way they gain more customers at a lower marketing cost, who
will purchase products later (since it costs much less to attract them back for the
second or third sale if they are happy with their first purchase experience).

Prestige pricing. Cheap products are not taken seriously by some buyers unless

214
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Unit 10 International Pricing Str~tegy

they are priced at a particular level. For example, you can sometimes find clothing of
the same quality brand at Nordstrom as you do at the Men's Warehouse. But because
it is priced higher, Nordstrom's clientele believes it to be of higher quality.

Demand-backward pricing is sometimes used by manufacturers. First, they determine

the price consumers are willing to pay for a product. Using an approach that works
backwards from the end-consumer selling price and applying the standard markups
taken by retailers and wholesalers, they come up with the price they can charge
wholesalers for the product.

Odd-even pricing takes advantage ofhuman psychology that feels that USD 499.95
is less than USD 500. Studies of price points by direct marketers have found that
products sell best at certain price points, such as USD 197, 297, 397, compared to
other prices slightly higher or lower.

Bundle pricing is offering two or more products together in a single package price.
This can offer savings to both the buyer and to the seller, who saves the cost of
marketing both products separately. The customer is willing to pay more because he
perceives he is getting a lot more, even though the cost to the seller may not really be
that much more.

Some of the cost-oriented approaches to pricing are given below:

Standard mark-up pricing: In international markets, a manufacturer typically may

mark his price up 15% over his costs, a wholesaler 20% over his costs, and a retailer
I

..

~]}~;!~!i~r:i~i!;
40% over his costs: The retailer gets a larger markup based on the principle that,
since he is closest to the end user, he is required to spend more services and individual
::.~
attention meeting the buyer's needs. t::.~:.::::~ :~:'.

Cost-plus pricing adds a small percentage to the retailer's costs.

Experience-curve pricing assumes that it costs a company less to produce a product

or provide a service over time, since learning will make them more efficient.

~f'tJ,;!

Then there are competition-oriented approaches to pricing:

Customary pricing is where the product "traditionally" sells for a certain price.
Candy bars of a certain weight all cost a predictable amount - unless you purchase
them in a fancy boutique or an airport shop.

..

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International Marketing

Above-, at-, or below-market pricing. Certain stores advertise "low cost" or

"discount" pricing. Others price at the market, while others deliberately price above
the-market at premium prices to attract prestige buyers.

Loss-leader pricing works on the basis of losing money on certain very low priced
advertised products to get customers who will buy other products at the same time.

Flexible-price policies offer the same product to customers at different negotiated

prices. Cars, for example, are typically sold at negotiated prices. Many B2B sales
depend on negotiated contracts.

Once the list or quoted price is determined, the manufacturer has the flexibility to
make some special adjustments.

Quantity discounts encourage customers to buy larger quantities, and thus cut
marketing costs.

Seasonal discounts encourage buyers to stock inventory earlier than their normal
demand would require. This enables the manufacturer to smooth out manufacturing
peaks and troughs for more efficient production.

Rebates, such as $40 off on Microsoft FrontPage 2000, are usually offered by the
manufacturer, but sometimes a retail store will offer its own rebate. Rebates make
marketing sense, since they strongly motivate sales, but often less than 50% of the
buyers will remember to collect the receipt, proof-of-purchase, and rebate form, fill
it out, and mail it prior to the expiration date. And, of course, the rebate is often
subtracted from the list price of the item, which still has considerable profit built in.
Rebate marketing is less than half as expensive to the marketer as the price cut would
seem to indicate.

Trade discounts are offered by manufacturers to distributors or resellers in their

distribution chain. For example, a manufacturer may quote list price of $1000 less
30/1015, meaning 30% offthe list price to the retailer, an additional 10% off the
$1000 to the wholesaler, and an additional 5 % off the $1000 to the jobber. This
pricing will be expected if you have an online B2B store.

Cash discounts are sometimes offered for the costs saved from not having to extend
credit and bill the buyer on an open account. This mainly affects B2B sales rather
than retail.

216
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Unit 10 International Pricing Strategy

Allowances may be permitted for trade-ins or by a manufacturer for promotional

advertising that a retailer undertakes.

Geographic adjustments involve FOB (freight on board) pricing at the point of

shipping. '

liS Activity H:
Three types of pricing strategies commonly used by companies in international marketing
are:

1. _

2. _

3. _

10. 11 SUMMARY

Market prices at the consumer level are much more difficult to control in international
marketing than in domestic marketing. Factors such as market conditions, competitors
groups, cost factors and government regulations have to be thoroughly researched and
analysed not only for each country in which the firm operates but also for each market
within a country. Controlling costs that lead to price escalation when exporting products in
foreign countries is a challenging task facing the exporter.

This unit has focused on the major pricing policy issues. The two basic types of pricing
orientation and the factors that affect export pricing have been introduced. This is followed
by the factors and guidelines that help the international firm having multiple product categories
decide on transfer pricing. The issues and dimension related to marginal cost pricing have
been covered.

Another section has dealt with the environmental issues and influences that affect international
pricing in a significant way. The major issues of price escalation such as exchange rates,
inflation and government controls and subsidies have been covered briefly.

In the final section, the pricing approaches and the types of pricing that are relevant to
companies operating in foreign markets have been described.

217
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International Marketing

10.12 KEYWORDS

Differentiation pricing: This refers to the practice by companies in adopting different

pricing methods and policies in arriving at prices for different export markets.
.
Transfer pricing: The pricing of goods that are transferred from a company's operations
or sales units in one country to its units elsewhere is known as transfer pricing (or Intra
Company pricing).

Marginal Cost pricing: A type ofpricing method that is concerned only with the recovery
of marginal costs (or variable cost). As against this method, full-cost pricing refers to the
method concerned with the recovery of fixed costs and variable costs. In such a case, the
price is often set on a cost plus basis, that is, total costs plus a profit margin.

Price escalation: This term relates to a situation in which selling prices in a specific
foreign market are raised by shipping costs, insurance, packing, tariffs, channels of
distribution, wholesaler margins, special taxes, administrative costs and exchange rate
fluctuation.

10.13 SELF-ASSESSMENT QUESTIONS

Q 1. What are the factors that should be taken into consideration for setting a price in an
overseas market?

Q2. Discuss the concept of transfer pricing. How is it relevant in the context of the current
international business environment?

Q3. Explain the principles behind marginal cost pricing. What are its disadvantages?

Q4. Explain the basic elements for export price quotation based on marginal cost?

Q5. Discuss the role played by currency fluctuation in price escalation of goods. What
. options can a firm exercise when the domestic currency is weak?

Q6. How do government controls, and subsidies affect the price level decisions by firms?

Q7. Discuss the types of pricing strategies available to international marketers.

218
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()urrS()URCING AND
srrRAl'E(;lC R~:LA1~IONSHIPS

Objectives
After completing this unit, you will be able to:
(iF list the forms ofoutsourcing.
(iF identify the selection criteria for outsourcing.
(iF devise ways to assess the capabilities of suppliers or
partners.
(iF state the elements of evaluating products, sources and
partners for offshore sourcing.
(iF enumerate the steps in the procurement process.
(iF differentiate between outsourcing and an international
strategic partnership.
(iF explain the reasons for the development of offshore
sourcmg.
(iF weigh the advantages and disad vantages of outsourcing.
(iF overview the elements and the scope ofIT outsourcing.
(iF outline the phases in building long-term strategic
relationships.
Structure
11.1 Introduction
11.2 Forms of Outsourcing
11.3 Evaluating Products for Offshore Sourcing
11.4 Procurement Process
11.5 Reasons for International Strategic Partnership
11.6 Advantages of Outsourcing
11.7 Disadvantages of Outsourcing
11.8 IT Outsourcing
11.9 Strategic Relationships in IT Outsourcing
11.10 Summary
11.11 Key Words
11.12 Self-Assessment Questions

\.

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International Marketing

11.1 INTRODUCTION

New changes in the political, economic, socio-cultural and technological environments

call for new strategies in international competition. Outsourcing is the most visible form of
international strategic.partnership (ISP). In this form ofpartnership, the participants remain
independent subsequent to the formation of the alliance the formation of the alliance and
they make ongoing contribution in technology, products and other key areas.

This unit describes some of the basic elements, purpose and reasons for outsourcing and
emphasises the need for a long-term strategic partnership to ensure the firm's
competitiveness in many foreign countries. The four forms of outsourcing have been
explained along with their selection criteria. The availability and capabilities ofsupplier or
partners are of utmost importance before the identification and selection. The ways by
which products are evaluated for outsourcing have been described in the following selections.
This is followed by the five basic steps in the selection ofthe right supplier. With outsourcing
taking deep root in enhancing the competitiveness of companies, it becomes logical to
forge an international strategic partnership in the long-term. Some ofthe important reasons
for the development of new forms of ISP have been explained. The main advantages and
disadvantages that are relevant to outsourcing have been described in detail.

The basic reason for the success of the IT software industry has been the level ofoutsourcing
that started in the mid-nineties. It is therefore appropriate to analyse the scope of IT
outsourcing and understand which types of services are generally outsourced. It is also
necessary to appreciate the necessity of building long-term strategic relationships in IT
outsourcing, and a brief review explains the three important phases in building and maintaining
such a relationship.

11.2 FORMS OF OUTSOURCING

Terms used

.A number of terms have been used and are in vogue to describe international and global
strategic partnerships. Some of these reflect the degree and level of partnerships developed
between two or more companies it} different countries:
Collaborative agreements
Strategic international alliances
Global or international strategic partnerships (GSP or ISP)
Outsourcing (or offshore sourcing)

222
.......:. ....-~
-~-~ .......
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Unit 11 Outsourcing and Strateglc"Relationships

Contract manufacturing

Forms of outsourcing (offshore sourcing)

There are four forms of offshore sourcing namely, offshore purchasing, offshore
~0
I ~ ~ ~ ~ ~ ~ ~ ~

subcontracting,Joint-Ventureoffshore manufacturing and controlled offshore manufacturing.

Offshore purchasing

This is a relationship between independent buyers and seller-in which goods are exchanged
for money. The arrangement may vary in many ways, including:

Whether the transactions are directly between the buyer and seller or through one or
more agents.

Dealing may be on transaction- by-transaction basis or have some longer- term

contract.

Offshore sub contracting

Covers many different relationships between independent companies in which the

buyer is more involved with the source than in a simple buyer-seller relationship.

The buyer may provide detailed product specification, technical assistance, raw
materials, or needed components, or even some financing to foreign manufacturer.

Joint-venture offshore'manufacturing

It involves joint ownership by local firm and a foreign company ofan offshore manufacturing
enterprise.

Controlled offshore manufacturing

This relationship is that of a parent and a wholly- owned foreign operation, generally a
subsidiary corporation that supplies the parent's needs for a product.

Selecting the forms of offsho~e sourcing

Alternatives:

Specific forms ofoffshore sourcing arrangements vary widely - the basic distinction is the
degree of control exercised by the buyer over the foreign source.

223
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International Marketing

Offshore
Offshore
Joint-venture off Controlled offshore
Purchasing
subcontracting
shore Manufactruing manufacturing
B U y E R B U y
E R B U y E R B U y E R
- .,~

~ I ~'" I ~~
I

Payment
Technology
or Materials
Payment

Products
Investment

Capital

Management

Technology

Materials
Payment Products
and/or parts
Investment
Capital
Management
Technology I
Products
and/or parts,

1
1 1
Products
profits and/
and/or parts and/Profit
and/or
or fees
and lor fees
parts

I "r I I I
FOREIGN FOREIGN
FOREIGN
FOREIGN

SOURCES SOURCES
SOURCES
SOURCES

Fig. 11.1: Alternative Forms of Offshore Sourcing

Selection criteria

The needs ofdifferent industries vary and so do their off sourcing pattern.

Apparel Industry: Offshore sourcing done through purchasing or sub-contracting.

Electronic industry: More ofcontrolled manufacturing.

Four important considerations for selection ofvarious off shore sourcing methods:

1. Company capabilities and resources

2. Availability and capabilities of suppliers or partners

3. Projected sourcing volumes and variability

4. Degree of integration of offshore sourcing with other operations

1. Company capabilities and resources

Different forms of offshore sourcing demand different abilities on the part of enterprises
and vastly different commitments ofresources.

224
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Unit 11 Outsourcing and Strategic'Relationships I!. .' .

Offshore purchasing requires little experience or investment.

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i":.:-:: .. ,.
Controlled offshore manufacturing requires a considerable commitment ofinvestment
capital and management time. ~~
I

2S Activity A: I.
I'
i

The four forms of offshore sourcing are:

1. _

2. _

3. _

4. _

2. Availability and Capabilities of Suppliers or Partners

An important determinant of how a company sets up off shore sourcing is whether or not
acceptable partners or suppliers exist in the countries in which the parent company wants
to locate a source.

Suppliers with the needed production experience, technology, and management capabilities
may be hard to find, as may partners with investment capital and other important inputs.

Whether acceptable suppliers and/or partners are available depends, of course, on the
complexity of the production requirements and on the size of the 'proposed operations.

Small operations for relatively simple products may have a wide choice of suppliers or
partners whereas larger investments for more complex products will be limited.

3. Projected sourcing volumes and variability

.Companies needing large volumes of foreign products can justify a large fixed
investment - fixed cost can be spread over the high volume of output.

For companies with smaller needs, an independent supplier will be more active.

Variability

If a company establishes its own manufacturing plant, it will want to keep it

running steadily to cover its fixed cost.

--,-
 \
International Marketing

If the business is variable, the company will choose the purcl.asing or

subcontracting alternatives (example: fashion oriented products, where. sales
are difficult to project).

4. Degree of integration of offshore and domestic operations

If a company wishes to integrate its off shore sources tightly with the company's operations
it will need considerable control over all sources - it will require control over off shore
manufacturing.

A closely controlled offshore operation will facilitate a coordinated production schedule,

ease in transfer oftechnology, and provide flexibility in financial decisions regarding transfer
pricing of components and finished products, dividend payments and capital investments.

When a company can tolerate a somewhat looser relationship with its sources or when
requirements are so predictable that control is less important, foreign purchasing or sub
contracting is often preferable to controlled offshore manufacturing.

S Activity B:
Two capabilities that are desirable while selecting an offshore sourcing partner are:

1. _

2. _

11.3 EVALUATING PRODUCTS FOR OFFSHORE SOURCING

Main Cost Tradeoffs

Some products are sourced off shore because they are not available domestically. In such
a case, there is no alternative to offshore sourcing. Such cases are rare.

Offshore sourcing is chosen because it is cheaper than domestic sourcing. Whether offshore
sourching is cheaper depends on a product's manufacturing cost structure i.e. the mix of
labour, material and other input needed in its fabrication. The relative cost of different
inputs varies greatly among countries. The best products for offshore sourcing are those
that use intensively the inputs that are cheaper abroad.

Products Suitable For Offshore Sourcing

Products suitable for offshore sourcing are those for which saving in production cost are
sufficient to offset higher costs of transportation, duties and corporate overheads.

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Unit 11 Outsourcing and Strateglc"Relationships

Labour intensive products

Most products or components suitable for offshore sourcing have a significant labour
input- sewinggarments- assemblingsemi conductors- workers in developingcountries ~ji~~i~!i~i;t~!i:
can be trainedto perform such jobs with low cost.

Standardised products

Productswith steadysalesor at leastpredictablesalesare more suitablefor manufacturing

than products that face abrupt shift in demand - off shore sources can be given long
productionrun that can be programmed well in advance for required delivery dates.

Products that are easy to ship and face low input duties:

Products withhighvaluerelativeto weight(volume) willhavelow transportation cost

relativeto their total manufacturingcost and sales price.

Products with low import duties.

Evaluating sources and partners

For a supplieror subcontractor, the most importantselectioncriteriarelatesto the source's

capabilitiesfor manufacturing and delivering acceptable products on time at acceptable
costs.

Sources should alsobe evaluated intermsoftheirwillingness to be goodlongtermsuppliers.

Jointventurepartnershouldbe selectivewith considerable care as therelationship is likely

to be long term and requires relativelycomplex interactionbetween the partners.

It is important to clarify what a partner is expected to contribute and its capability to

actuallymake such a contribution. A partneris expectedto bring the ventureconsiderable
expertisein additionto itscapitalinvestment.

Important too may be govt. and business connections that a foreign partner brings to a
venture.

It is crucial to understand whether the goals and expectation of the company and the
foreign partners arecongruent. Ajoint venturerelationship impliesjointdecisions on matters
suchas capacity expansion, profitlayoutpolicies, transfer prices andproductdiversification,
which can be quite controversialif the partners have differentobjectives.
!
iC
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International Marketing

Negotiating with prospective sources and partners

Negotiating purchasing, sub-contracting and joint-venture agreements with foreign

enterprises requires all the same negotiating skills that a domestic venture requires. In

addition, however, cultural differences and differences in the role of the host country govt.

are important to recognise. Bargaining styles differ greatly across nations.

Evaluating production site

The most important decision related to offshore sourcing is the choice of the country from

which to source, especially if a firmcontemplates the establishment ofits own manufacturing

facility.

Factors in evaluating desirability of a site are:

Labour factors

Labour cost

Labour availability

Labour productivity

Labour reliability and unions

Infrastructure factors

Industrial sites

Transportation and communication

Local suppliers of goods and services

Govt. policy factors

Govt. regulations i,::/:);:~:;::

t-~:.:-:.::~-:-:~'.:-:
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Govt. incentives

Stability factors

Economic or political instability can cause unexpected problems for offshore sourcing

operations. Inflation, currency fluctuations, civil disruption or changes in govt., all may

228
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Unit 11 Outsourcing and Strategtc'Relationships

have unfortunate consequences.Economic stability is closely related to political stability.

High inflation may lead to social disruption and political change. Likewise, political changes

~[Ii!!;;~~i~j~i~:
often lead to changes in economic policies.

S Activity C: .' ! .. .

Two major considerations while evaluating sources and partners for offshore are:

1. _

2. _

11.4 PROCUREMENT PROCESS

Selection of Right Supplier

Five Basic Steps

1. Determine the requirement of what is to be purchased

2. Identify suitable suppliers

3. Assess the reliability and capability of these sources

4. Register the potential suppliers

5. Review suppliers' performance periodically

1. Determining requirements

The imports need ofthe business firm or government department must be clearly
specified

Type of product stated in technical terms

Deadlines forreceivi~g the goods

2. Identifying suitable suppliers

Draw up a list of suitable sources (need to have sufficient number of qualified potential
suppliers resulting in a competitive market situation- the best terms of purchase to be
obtained.)

229

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Sources

Advertisement

Past suppliers

Directories

Reliability and capability

Quality of Product

Regularities of theirsuppliers

Price of the product

Supply capabilityin relationto buyers' need

After sales service

Financialsoundnessof the company

2S Activity D:
Three major aspects related to reliability and capabilitiesin the procurement process are:

1. _

2. _

3. _

11.5 REASONS FOR INTERNATIONAL STRATEGIC PARTNERSHIP (ISP)

While the international options used by companies to enter international markets have
been reviewedin unit06, this unit outlinesthe other forms of strategicpartnershipsand, in
particular,outsourcing(or offshore sourcing).The recent changes since the early nineties
in thepolitical, economic, socio-cultural and technological environments of theinternational
firmhavecombined tochangetherelative importance of thetraditional strategic partnerships.
Some of the important reasons for the development of new forms of ISP are:
Falling trade barriersbetween nations and between continents

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Unit 11 Outsourcing and Strategic"Relationships

Globalisation of markets across the world

Convergence of consumer needs and wants

Growth ofnew cornrnunications technologies

Some ofthe reasons for the development of offshore sourcing are:

Cost reduction due to large differences in labour costs and development costs

Desire amongst the alliance partners to operate in more than one foreign country

Improvements required in delivery and reliability

To overcome international competition in the targeted markets

To establish a presence in a new foreign market or an emerging market

To increase the number of available sources

A means ofreaction to increased worldwide competition or as a strategy to gain a

competitive edge in certain international markets.

The main reasons behind the wave ofoutsourcing (particularly for companies operating in
mature markets) are:

i) External companies can perform certain operating activities better or cheaper.

ii) Outsourcing allows a firm to concentrate its resources and energies on its core business
- those activities that are at the center of its expertise and those that are essential for
its competitive and financial success.

2S Activity E:
a) Some of the reasons for the development of offshore sourcing are:

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b) Go to the website www.zensar.com and write down three capabilities that ompany
has developed in the Business process outsourcing (BPO) segments: !
! . .

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11.6 ADVANTAGES OF OUTSOURCING

The benefits derived by companies that adopt outsourcing in their strategic plan are many:

Significant cost reductions are possible for the outsourcing firm.

Some activities and functions can be performed better by outside specialists.

It enhances the firm's ability to achieve a competitive advantage so long as both

companies do not trespass each one's core competencies, capabilities and technical
know-how.

It reduces the company's risk exposure to changing technology or changing buyer

preferences.

It streamlines the outsourcing company's operations and reduces the time to get new
products in the marketplace, lowers internal coordination costs or improves operational
flexibility.

It allows the outsourcing company to leverage its core competencies.

Examples:

Many PC makers have shifted from assembling units in-house to using contract
assemblers because of the economies of scale associated with purchasing PC
components in large volumes, and assembling PCs Dell Computers' partnerships
with PC component suppliers have allowed it to operate with fewer than four days of
inventory costs.

Cisco outsources most of its production and assembly of routers and switching
equipment to contract manufacturers that together operate 37 factories all linked to
Cisco facilities via the Internet.

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Unit 11 Outsourcing and Strategic'Relationships

Most large auto companies source navigation systems and audio systems for passenger
cars from companies with specialised know-how rather than make these systems
themselves.

Many MNCslike HP Compaq, IBM and others have sold entire plants to suppliers
and then signed contracts to purchase the output from them. ! .

General Electric (GE) USA, has a partnership for its jet engine division with
SNECMA, a government-owned French aerospace company. This enabled GE to
gain access to the European market so that it could sell its engines to Airbus Industry
- the European consortium for aircraft manufacture and the main rival of Boeing,
USA.

In many cases, outsourcing is a superior strategic alternative to vertical integration.

11.7 DISADVANTAGES OF OUTSOURCING

There are dangers in excessive outsourcing and not all of the considerations ofoutsourcing
point towards advantages. Even ISPs prove to be failures if there is a mismatch of goals,
objectives and trust.

If not done judiciously, the outsourcing company may lose control over its core
competencies and become over-dependent on the outsourced company.

The outsourced c~mpany may gain capabilities of a high order and become a
competitor to the outsourcing company. This happens frequently in contract
manufacturing.

The outsourcing company may lose touch with the prime activities and expertise that
determine its success in the long-term.

Cisco guards against loss of control and protects its manufacturing expertise by
designing the production methods that its contract manufacturers must use. It utilises
online technology to monitor the factory operations ofcontract manufacturers around
the clock.

Partnerships may not work out smoothly when short-term and long-term goals of the
partners are divergent.

Differences in management philosophy, expectations and approaches may come to

the fore, affecting the performance of the partnership adversely.

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 International Marketing "

~ Activity F:

Two major disadvantages in offshore sourcing are:

f:;i!~j~jj~~~11)!;
1. .....

2._ _-'-- _

11.8 IT OUTSOURCING

'IT outsourcing' is the general term used for IT and IT-Enabled Services (ITES). With
over 44 percent market share in the global outsourcing business and 70 percent in the

Business process Outsourcing (BPO) market segment, India has become the largest
outsourced partners and solution provider in this space. Other emerging countries that
have entered this space include Argentina, Bangladesh, Canada, China, Czech Republic,
Ireland, Malaysia, Mexico, Pakistan, Philippines, Poland, Russia, South Africa and Vietnam.

Outsourcing is causing sweeping changes in the IT and ITES industries. Forrester Research,
a US based research organisation, predicts that at least 3.3 fill. white collar jobs and
USD 136 bn. in wages will be outsourced by 2015. According to Forrester, 830000
service-sectorjobs moved offshore in 2005. Another research firm predicts that by 2015,
the outsourcing rate ofIT jobs in developed countries will increase to 30 percent from
under 5 percent at present. According to Frost & Sullivan, another US research firm, the
cumulative value of outsourced IT services work was worth over USD 464 bn. in 2004
from various developed countries. In terms of dollar value, Japan is the largest outsourcer
of the world followed by the USA.

Currently, most ofthe BPO revenue in India comes from voice services, but it is estimated
that by 2010, the non-voice segment (also referred to as knowledge process outsourcing
or KPO) will rise to 50 percent of the total revenue from outsourced services. The KPO
segment includes emerging growth sectors like system integration, infrastructure
management, automotive and avionics design, engineering services, legal research, equity
research, risk management, simulation, telemedicine and human resources.
,

Research process outsourcing (RPO) in the biotech industry is another growth sector. It is
currently a USD 120 fill. business in India growing at the rate of 75 percent per year.
RPO includes basic research, drug discovery, clinical trials management, compound
screening, bio-informatics and regulatory submissions.

234
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Unit 11 Outsourcing and Strategic 'Relationships

The types of services in the IT industry that are outsourced are numerous and growing
each day. The table 11.1 below provides a representative list.

Table 11.1: Outsourced IT Services

.. , ~

Category Name of Service

Software development - New application development
and maintenance services - Application or service integration
- End-of-life support
- Legacy application maintenance
- Legacy application conversion
- Software quality assurance
Contact Management - Call centers
Services - Customer support
- IT help desks
- Prospecting
- Telemarketing
- Mailing list management
- Web based and e-mail marketing
Data Services - Data design and maintenance
- Data processing and mining
- Market research
- Legal research
- Analytics Statistical analysis
- Geographic information systems
Miscellaneous - Desktop publishing
- Document management
- Hardware development and testing
- Litigation support
- Tax preparation
- Exam grading i."

- Logistics support
- Supply chain management
- Multi-media authoring
- Movie production support
- Industrial design
- Engineering services
- Human resources
- Network management
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International Marketing

PS Activity G:
Write down two types of services that are outsourced in the IT industry that are in addition
to those given in table 11.1.

11.9 STRATEGIC RELATIONSHIPS IN IT OUTSOURCING

A project approach to outsourcing assumes that the overall level of outsourcing assumes
that the overall level of outsourcing in an organisation is low, and therefore, no substantial
benefits can be derived from scale. This approach focuses more on cost management
rather than integration and joint development of capabilities. Outsourcing has become a
strategic imperative that flows from a vision at the highest level of an organisation.
Consequently, outsourcing has become a useful tool to increase an organisation's productivity
and flexibility to compete.

Long-term agreements help realise many ofthe following benefits:

Better assessment of capabilities needed for organisations to become world-class in

sourcmg.

A predictable way to build these capabilities.

Improvements possibilities in many of the service level agreements (SLAs).

Possibilities ofsimplification and standardisation; in re engineering and transformation

of process or activities.

Vendor investments and sharing of business risk and rewards- indicators of a true
partnership to build long-termrelationships. The organisations need to take a strategic
view towards sourcing and follow a structured approach covering the phases
mentioned in Table 11.2

236
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Unit 11 Outsourcing and Strategic'Relationships
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Tablell.2: Phases in Strategic relationships I

I
PHASE 1
Assessing Sourcing
- - . Measurement ofcurrent sourcing effectiveness
- - . Defining the plan ofhaving access to world class ~;jg~ :":~:~'i

capabilities - - .- capabilities I

- - . Identification of key capabilities required from the

global sourcing program

PHASE 2 - - . Identifying the activities that will be insourced,

Portfolio structuring outsourced and co-sourced.

Splitting the global sourcing portfolio among

- - . shortlisted models.

PHASE 3 - - . Identifying SLAs with each partner on various

Relationship global sourcing dimensions
development
- - . Identifying OLAs (Operational level agreements)
for contractual interactions with vendors
- - . Agreeing on SLAs & OLAs with each partner

fi!S Activity H:
!
The three phases in strategic relationship development in the field ofIT outsourcing are:

~~i~~~

11.10 SUMMARY

The two main reasons for outsourcing have been explained as: i) external companies can
perform certain activities better or cheaper, and ii) outsourcing allows a firm to concentrate
its resources on its core business. Outsourcing is one of the first steps in establishing an
international strategic partnership. This unit describes some ofthe basic elements, purpose
and detailed reasons for outsourcing.

237
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International Marketing

In the initial sections, the four forms of outsourcing have been explained along with their
selection criteria. The ways by which products are evaluated for outsourcing have been
described in the subsequent sections.

Some of the importantreasons for the development of new forms ofISP are discussed in
some detail. This is followed by a detailed description ofthe advantages and disadvantages
of outsourcing. In the Indian context, it is now important to review the developments that
have taken place in IT outsourcing. Sweeping changes are being witnessed in IT and ITES
industries in India. To keep this topic simple, a section gives the reader a glimpse of some
of the representative types of services that are outsourced. In the final section the three
phases in building long-term international strategic relationships are briefly reviewed.

11.11 KEYWORDS
Outsourcing: This is a form ofinternational sourcing that involves buying suppliers outside
the firm's country ofmanufacture. Firms resort to outsourcing as a reaction to increased
worldwide competition or as a proactive strategy to gain a competitive advantage.

Joint ventureoffshoremanufacturing: This involves joint ownership by a local firm

and a foreign company for an offshore manufacturing entity.

Controlled offshore manufacturing: This condition exists when there is a relationship

between a parent company and a wholly-owned foreign corporation (generally a subsidiary)
that supplies the products needed by the parent company.

International strategic partnership(lSP): A term used to describe a form ofco-operative

strategy in which the participants (usually in different countries) remain independent
subsequent to the formation of the alliance and where the participants make ongoing
contributions in technology, products, and other key strategic areas.

11.12SELF-ASSESSMENT QUESTIONS
Q 1. What are the four important considerations a firm should have in selecting the right
method of offshore sourcing?

Q2. Explain the differences betweenjoint venture offshore manufacturing and controlled
offshore manufacturing with the help ofan example.

Q3. Describe the process for evaluating products for outsourcing.

238
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 "
Unit 11 Outsourcing and Strategic 'Relationships

Q4. Describe some of the reasons why firms need to progress from outsourcing to an
international strategic partnership.

Q5. What are the advantages and disadvantages of outsourcing?

Q6. According to you, what are the main reasons for the rise ofIndia as an outsourced
partner for IT Services?

Q.7 Describe the three phases involved in building a long-term strategic relationship in
IT outsourcing.

239
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INTERN}\.TIONAI.J

MARKE'rIN(;' l{ESEARCI-I

Objectives
After completing this unit, you will be able to:
("ff> expalin the significance of International Marketing
Research (IMR).
("ff> ~auge the extent of a country's import tariffs while
Investigating an export market.
("ff> assess the factors that affect demand in export markets.
("ff> identify the main steps in the IMR process.
("ff> show how research is conducted and presented.
("ff> discuss how information can be gathered from a variety
of sources as part of secondary research.
("ff> list the factors in conducting field surveys.
("ff> explain the differences between domestic marketing
research and the scope of IMR.
("ff> discover the problem areas in primary data collection.
("ff> demonstrate how the internet is creating new models in
IMR.
Structure
12.1 Introduction
12.2 Marketing Research for Export Import Trade
12.3 Estimating Market Potential
12.4 MarketAccess
12.5 FactorsAffectingDemand
12.6 Research Process and Planning
12.7 GatheringInformation
12.8 Field Research
12.9 Contents of a Report
12.10 Scope ofIMR
12.11 Primary Data Collection
12.12 Marketing Research on the Internet
12.13 Summary
12.14 Key Words
12.15 Self-Assessment Questions

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International Marketing

12.1 INTRODUCTION
In developing international marketing strategies, information is a key component. The
information needs can range from general data required to evaluate market opportunities
to specific information.for marketing decision concerning the 4P's. The Marketer's task is
therefore to find the most accurate, defendable and reliable data possible within the
constraints imposed by time, cost and status of current development.

This unit attempts to define the different elements in IMR, the approaches the marketing
researcher can take and the problem areas that make IMR different from domestic marketing
research. The significance ofIMR is evident in the field of export trade since competition
is open to both domestic and international companies. The important factors in estimating
market potential and in obtaining market access are reviewed. This is followed by a section
on a checklist of factors affecting demand and price structure. The stages in the research
process and the basic contents of a research proposal are presented although these may
be quite similar to those followed in the domestic research process.

It is relevant for the researcher to know the sources and techniques of obtaining information.
The typical external sources of information for products, commodities, trade practices,
growth in imports and exports used in real life situations have been provided. This section
is followed by the methodology used in field research.

A separate section also reviews the scope of IMR and gives briefly the main differences
between domestic marketing research and IMR. The reasons for and the problem areas
of primary data collection are also discussed before an analysis of the role of the Internet
inIMR.

12.2 MARKETING RESEARCH FOR EXPORT - IMPORT TRADE

The significance ofmarketing research gains greater importance in the field of export trade
in which competition is not limited only to domestic manufacturers, but also from foreign
companies of varying sizes, including international giant corporations. Markets of today
are dynamic and undergo sudden changes on account of the peculiar marketing
characteristics of the individual markets. While it may be possible to forecast and ascertain
the changes in the local marketing environments, it is highly difficult to undertake this exercise
in respect of overseas markets as the exporter is away from the market place and not fully
conversant with the market characteristics.

In export trade, the distance between an exporter and his customers is ordinarily much
wider than at home. By distance, it is not meant only physical distance. More important is

242
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Unit 12 International Marketing Research I

the marketing distance created by intermediaries standing between the exporters and the
ultimate consumers of his products and the cultural distance arising out of the fact that
these consumers are members of another culture and society. All these distances conspire
to produce an information gap that needs to be overcome if a company is to plan its export
sales rationally. The way to close this gap is through a systematic study of foreign markets
directed towards identifying and measuring export market opportunities. The rapidity of
changes going on in the export markets, the buying sophistication ofconsumers, the growing
complexity of international business operations, the intensity and quality of competition
have made international marketing quite difficult. These circumstances offer an enormous
advantage to the exporter who has superior information about the identity and behaviour
offoreign buyers.

12.3ESTIMATING MARKETPOTENTIAL
Export market research should be able to answer three basic questions if management is
to plan effectively for the years ahead.

(I) What is the market potential of a specific export market or (markets)?

(2) What is the company's sales potential in that market (or markets)?

(3) On what specific segment of the chosen market (or markets) should export
management concentrate its marketing effort?

Answer to these questions lead to the selection of a target market for the strategic export
plan. Further, research is focussed on this target market to learn more about the buyer's
behaviour, marketing structure and competition.

A wide range of factors can affect a product's prospects in the world markets. These
factors need to be studied by the researcher in order to estimate a market's potential for
products. The factors that limit market potential for an exporter can be grouped under five
headings.

His own country's trade regulations

Limitations on market access

Market size and growth

The competition

Acceptable Prices

" __ ".' ' . '. _ ._",' _ ~ r ".' '.' _ _,

 '1 '",- ."

International Marketing

One ofthe basic factors that must be taken into account in export market research is the
exporting country's foreign trade regulations. These may block or hinder exports to all
countries or to particular ones. Apart from such restrictions exporters may be required to
follow elaborate and time consuming procedures, including the preparation of documents.

~ Activity A:

Two important considerations in estimating market potential in a foreign country are:

1.

2. _

12.4 MARKET ACCESS

Tariffs & Quotas: There are at least three major reasons why a market researcher
should check a country's import tariffs when he is investigating it as an export market:

Tariffs can affect the competitiveness ofhis product against products made within the
market.

They can affect the competitiveness of his product against those of suppliers from
third countries who may be subject to different tariff rates.

They must be taken into account in calculating possible selling prices.

Internal Taxes: A variety of internal taxes can play an important part in CostlPrice build
up for a product, and thus in its market prospects. In some cases internal taxes are imposed
in such a way that they discriminate against foreign goods, so that their effect is similar to
that of an import tariff. .

Currency Restrictions: Many governments impose controls and restrictions on the

expenditure of foreign exchange for imported goods or services. Sometimes such restrictions
can effectively seal off a market to all suppliers and for all but the most essential goods.

Health and Safety Regulations: Many countries impose strict health and safety
regulations on the import or sale of products particularly food products. These regulations
may concern the raw material from which a product is made, the conditions under which
it is processed, how it is packaged and labelled. Failure to learn about and conform to
such regulations would exclude a supplier from a market.

244
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Unit 12 International Marketing Research

Political Factors: The market researcher must also know about the political forces that f .... ..'

may influence policy. Sometimes religious or ideological pressures can result in restrictions
on the import of certain products, such as alcoholic beverages. Apart from such internal
political factors, the politics ofinternational relations can playa role in creating or eliminating
tariff barriers and ill shifting the relative positions between competing supplying countries.

Market Size, Pattern & Growth: Studying the official trade barriers tells the market
researcher whether his product can gain access to a particular market. The researcher
must also find out what sales potential his product really has in the market. He must assess
the present size of the market, how it is likely to grow and what share of it this particular
product can win.

Imports: The researcher has to find out:

How much of the product is presently being imported.

From where have the imports been corning.

r
How the market share of the various foreign suppliers has been shifting and is likely
to develop.

The prices of exports from various sources.

Consumption: Besides imports, it is also necessary to know how much of the product,
the market actually consumes and is likely to consume in the future. The researcher must
also study:

The size and trends of production within the market.

Export from that market.

The factors that will affect the'share of imports in consumption and in particular the
share that his products might be able to capture.

When studying the size and pattern of consumption ofa particular product, the researcher
must investigate the following characteristics.

How much of the product is consumed annually?

Who consumes it?

Where is it consumed?

How often is the product bought by an individual purchaser?

245
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International Marketing

How is the product used?

What other products are competing for the same usage?

Market Segmentation: In any national market, only a certain portion ofthe total population
or the total number of industrial users is the buyer or the potential buyer of any particular
product. These people/firms tend to share certain characteristics. In case of consumers,
these shared characteristics might be related to such factors as income level, age, level of
education, profession, ethnic background etc.

There are three reasons why market researchers should identify segments:

By identifying the segment or segments within the total market which are most likely

to buy the product (the target segment), the researcher can arrive at a more accurate

estimate of its potential consumption and sales by merely looking at the market as a

whole.

Identifying target segment in a market is a necessary step in collecting information

that will help decide how to market a product. People in different social and economic

groups often tend to purchase products in different kinds of shops, read different

publications, watch different television programmes and respond to different sales

argument.

Selecting target segments and understanding their characteristics provides a basis for

adapting the product t? the market in order to increase its chances of success.

Once the target market segment has been identified, it can be very helpful to draw up

an "end-user profile" to bring together relevant characteristics of the 'typical' user,

the people or organisations that make up the target market segment.

S Activity B:
It is necessary to research the health and safety regulations for marketing herbal medicines
in a foreign country because:

r~{~lii;:!;;f::!

246
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Unit 12 International Marketing Research

12.5 FACTORS AFFECTING DEMAND

Economic Factors: How much of a product people can buy, and which products they
choose to buy is obviously influenced by their purchasing power. So a market researcher
attempting to project a country's demand for a product must consider such factors as the
general economic outlook, employment levels, the level and distribution of income and so
on.

Climate and Geography: Consumption of many products is influenced by the climate.

Geographic factors also the affect the consumption pattern within a country. Internal barriers
to transport and communication and differences in resources can result in great differences
in the way people in different parts of a country make their living, their life styles and the
products they use.

Social and Cultural Factors: Certain people may have negative attitudes towards a
certain country and its products. The frequency of their shopping can affect the size of
packs they prefer to purchase. They may have a special liking or dislike for particular
colours. They may be worried about how healthy a food product is, or be more concerned
with its taste. Intangible factors like these can be more important than trade barriers or
prices in deciding the fate of a product in a market.

Competition: The market researcher must find out:

The structure and extent ofcompetition

The reasons for the.success of major competitors

The chances ofcompeting against them

In studying the structure and extentof competition, the researcher must try to answer the
following questions:

Does direct competition exit, and if so, who are the important suppliers, domestic
and foreign?

What is the extent of indire,ctcompetition?

What share of the market does each important supplier have, and how have these
market shares been changing?

What particular cost advantages or disadvantages do important suppliers have (raw

material supply, labour cost etc.)?

247
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What are the plans for expansion of the competitors?

Ifforeign suppliers have a significant share ofthe market, do they enjoy relative tariff,
transport cost ~r similar advantages?

Do the main competitors have a strong enough grip on distribution channels to make
entry difficult?

Activities of competitors need to be studied in terms of the products marketed presently

or proposed to be introduced in the short, medium and long runs, by sizes, specification,
standards etc. in terms of prices quoted, discounts or commissions offered, distribution
channels followed, packaging practiced and sales promotion undertaken. The information
ofcompetition helps in formulating, vigilant packaging, pricing, and promotional policies of
an exporter.

Prices: One of the key questions the market researcher must try to answer is: "At what
price must we sell our goods to ensure that they will be able to compete with similar
offerings already in the market.

To sum-up, the Research checklist for estimating market potential may be as follows:

1. Your country's trade regulations

Currency and tax regulations
Licensing and other documentary requirements

2. ~arketaccess

Tariffs and quotas

Internal taxes
Health and safety regulations
Political factors affecting access

3. Market size, pattern and growth

Imports (volume, value, sources, trends)

Consumption (volume, growth trends, geographic pattern, market segmentation)

Factor affecting demand (economic, climate and geographic, social and culture)

248
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Unit 12 "
International Marketing Research

4. Competition
Domestic production, volume and growth
Structure
Strength
Reasons for success

5. Price Structure
r0~:X;~-;(;:
Prices to end-users 1:-:'-:-'-'-'.-:-

Trade mark-ups r.;;:-;~:{i~:.

Transport cost
[if Wet:?
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EX-factory cost I

~ Activity C:

Two main factors affecting demand in a foreign market are:

1. _

2. _

12.6 RESEARCH PROCESS AND PLANNING

The Research process consists of a series of stages in steps that serve to guide the research
project from the conception through the final recommendations. These are:
.
Problem Formulation
.J..
Research Objectives
.J..
Research Design
.J..
Design of Data collection
I .J..
Method
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Questionnaire Designing
.J..

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Sample Design
.J,.
Collection ofdata and information
.J,.
Analysis and Interpretation of Data
.J,. ..
R esearch report wntmg

However these activities could be summarised as: (1) Planning the research, (2) Analysis
of data and information, (3) Gathering information, (4) Writing and presenting the report.

Problem Formulation: One ofthe most valuable roles marketing research can perform is
helping to defme the problem to be solved. Only when the problem is carefully and precisely
defined can research be designed to provide pertinent information. Part of the process of
problem definition includes specifying the objectives ofthe specific research project.

Problem formulation requires good communication between decision maker and marketing
researcher. The decision maker needs to understand what research can and cannot
accomplish. The researcher needs to understand what the decision managers hope to
learn from research i.e., the project objectives.

Research Objective: The research objective is a statement, in as precise terms as possible,

ofwhat information is needed. The research purpose motivates the development ofresearch
objectives. Research objectives have three components. The first is the research question:
It specifies the information needed by the decision maker. The second element is the
development ofhypotheses'that are basically alternative answers to the research question.
The third is the scope or boundaries of the research.

Research Proposal: A proposal describes a plan for conducting and controlling a research
project. Administratively, it is the basis for a written agreement or contract between the
manager and researcher, as well as a record of what was agreed. As such it provides a
vehicle for reviewing important decisions. This helps ensure that all parties are still in
agreement on the scope and purpose ofthe research, and it reduces later misunderstandings.
Frequently proposals are used to make a choice among competing suppliers and to
influence positively the decision to.fund the proposed study. For these reasons, a proposal
should be viewed as a persuasive device that demonstrates the researcher's grasp ofthe
problem and ability to conduct the research and also highlights the benefits of the study.

J!5 Activity D:
Three important steps in the research process are:

250
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Unit 12 International Marketing Research I
! -

1. _

2. ------------------

3. --- _

Basic Contents of a Proposal

1. Executive Summary: A brief overview of the contents of the proposal. It may be

the only part read by some people, so it should be sufficient to give them a basic
understanding ofthe proposal.

2. Purpose and Scope: A description ofthe management problem, the possible reasons
for the problem, and the decision alternatives being studied.

3. Objectives: Defines the information to be obtained in terms of research questions

to be answered. This information must be related explicitly to the management
problem.

4. Research Approach: Presents the important features of the research methods to

be used. All aspects of the research that might be elements of a contract should be
discussed, such as sample size, data collection method, sample selection procedures.

5. Time and Cost Estimates: This encompasses all negotiated aspects, including
total fees, payment, provisions, treatment of contingencies and the schedule for
submission ofinterim, draft and final reports.

6. Appendices: Any technical matter of interest, Statistical information etc. should be r%;~;~~;:;~~
part of the back end of the proposal.
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RS Activity E: r(:~;;=:%:::;
1-:'::'::':::::':
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Ina proposal for identifying an export market for' Amul' brand cheese slices, you would ,

attach the following appendices:

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12.7 GATHERING INFORMATION

The sources and techniques by which information is gathered through market research are
generally divided into two broad categories: Exploratory Research and Field Research.
,

Exploratory research basically involves the collection ofinformation from documentary

sources, published or unpublished and the search for these sources. Field research involves
collecting information primarily though contacts with people. In export market research,
we can say that exploratory research is carried out mainly in the researcher's own country,
while field research is carried out both in the domestic market and overseas market.

The role ofexploratory research is to provide some ofthe information needed for marketing
and to lay a foundation for field research. Exploratory study is used for the following
purposes:

To provide enough information to identify the most promising markets and screen out
others

To pinpoint specific factors which should be investigated and to establish priorities

for further research

To gather information about the practical problems of carrying out research

To increase analyst's familiarity with the problem

To clarify concepts

In general, exploratory research is appropriate to any problem about which little is known.
Exploratory studies are characterised by their flexibility. Exploratory studies are carried
out through (i) Literature search, (ii) Experience survey and (iii) Analysis of selected cases.

Literature search (desk research) is the quickest and cheapest way to collect information.
The search may involve conceptual literature, trade literature, published statistics.

Experience survey, which is also called key informant survey, attempts to reap the
knowledge and experience of those familiar with the general subject being investigated.
These interviews are all unstructured and informal.

Analysis of cases - The third approach involves intensive study of selected cases of
phenomenon under investigation - examination of existing records, observation of the
occurrence of the phenomenon.

252
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Unit 12 International Marketing Research

Evaluation of Sources
.
1. Coverage Extent to which source covers research topic of interest. . ....

~Wj[:!;:;i[::m?
2. Level Can the source provide information in the details required?

3. Emphasis Relevance in terms of application of source to problem at hand.

4. Tnneliness How latest are the dates?

5. Accessibility Whether confidentiality or other barriers prevent the researcher from

accessing the source.

6. Accuracy Level of accuracy contained in the data. 1; i; ; l!:~;N; ; :

(:-- ",-,-'

Internal Sources

1. Your own files: The researcher's files should contain information extracted from
newspapers, trade journals, which he regularly refers to.

2. Company records: A market researcher can often find information in the company's
customer lists, sales records, and correspondence from salesmen, agents, and
distributors and letters from customers (including enquiries and complaints).

Institutional Sources

The institutions which provide market information are listed below:

l1:fEi~
"

1. Libraries

2. Foreign Missions

3. International organisations like FAD, DECD, WTD, ITC etc.

4. Government agencies

5. Chamber of Commerce
6. Trade Associations

7. Research Institutions

8. Bank

9. Documentary sources - Bibliographies, Directories, Trade Statistics, Newspapers

& Journals.

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A list of selected sources of information (International) is given below:

UN
a) Yearbook ofIntemational Trade Statistics

b) World Trade Annual

c) Commodity Trade Statistics

d) Country-wise Reports

Food & Agriculture Organisation (FAD)

a) Production Yearbook

b) Monthly Bulletin of AgriculturalEconomics & Statistics

Economic Intelligence Unit, London (EIU)

a) Quarterly supplements on Countries

b) Annual Supplements on countries

c) Special Reports on countries and commodities (Adhoc) I. ...

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. .. - ",..
Bank "

Report on countries by Lloyds Bank, Barclays Bank, Chase Manhattan Bank. 'Ccizii
DEeD Publications
I~ ;j~;i:f;(-i
a) Foreign trade statistical series I.:: .
I

b) Annual Economic Survey for different countries i.":: ....

International Monetary Fund (IMF)

a) Annual Report

b) Direction of Trade

c) InternationalFinancial Statistics

254
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Unit 12 International Marketing Research I

World Bank

~;~0i;
a) Country Reports

b) Annual Reports I ~

I
i
c) Newsletters ~

Yearbooks & Directories

a) Europa Yearbook: A World Survey

b) Kelly's Directory of Manufacturers

c) Comer's Reference Book for World Traders

d) Owen's International Register (Importers, Exporters, Manufacturers of Developing

Countries)

e) FinancialTimes Yearbook,Business Information

f) Commodity Year Book (USA)

g) Stores of the World

UNCTADIWTOIITC
. I:::~ .": ~ ::: . ~ ..

a) Forum (Quarterly) I~~~~~ ~~: .

b) Market Survey Reports
B~~;~;'N':i~
c) Monographs on Trade Channels

d) Handbook ofInternational Trade and Development Statistics

US Department of Commerce

Overseas Business Reports

EU

OfficialJournal of European community

255
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International Customs Bureau, Brussels

International customs Journal on countries (Do annes )

Individual countries

(a) Plan Document, (b) Statistical publication, (c) Investment Laws & guidelines, (d) Trade
Statistics, (e) Publications from leading chamber of commerce and Industry & Trade
i
Associations.

12.8 FIELD RESEARCH

Published sources usually can provide a lot of valuable information, and they should be
used fully before turning to field research. The researcher should make thorough preparations
in his home country. In addition to the normal preparation for any business trip, on the
basis of his desk research he should plan his field research as follows:

1. Decide on the goal of the field research

2. Decide what kind of people will be surveyed and where they are located

3. Draft a survey questionnaire

4. Arrange interviews

The Questionnaire

The questionnaire is the basic tool of field research. The purpose of a questionnaire is to
uncover the information. A good questionnaire will:
.
Be as short and simple as possible while still covering all relevant information

Ensure a maximum response

Avoid irrelevant information

Make it easy forrespondents to give the information they have

I~;~;-;:; !; : :;
Facilitate evaluation, analysis and interpretation

The process of designing a questionnaire should follow a logical sequence. The basic
steps are:

256
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Unit 12 International Marketing Research

1. Define clearly what information is required.

2. Write series ofquestions, the answers to which would provide the required information.

3. Arrange the questions in a logical sequence, making sure that they are as interesting
as possible and free from ambiguity.
,

4. The length of the questionnaire should be kept to the minimum.

5. Before starting to design his questionnaire, the researcher should make a written list
of points that need to be covered in terms of the overall research objective.

6. It is not always best to ask direct questions. Sometimes information can be gained by
asking one or more indirect questions.

7. Each question on the questionnaire should cover only one point.

8. Questions should invite answers which can be recorded quickly and conveniently.

Planning ofField Survey

In-country Study: Before undertaking the overseas field survey the researcher should
first undertake an in-country study to assess the supply base. This may include the types of
problems one is likely to encounter while organising production/procurement. During this
phase ofthe study, the researcher should study the raw material supply position, availability
of skilled labour, quality, control system, arrangement for bulk and standardised supplies
etc.

Programme Schedule: A programme schedule should be made in advance which allows

for planned research (travel time, list ofrespondents, public holidays, interview schedule
etc.).

Sampling: In choosing his direct sources of information, the researcher must take care
that they are truly representative of whatever aspect of the market he is researching.

Arranging Interviews: It win not be possible for the field researcher to arrange all his
interviews beforehand. However, it is important to write ahead and arrange as many
interviews as possible. This will give the researcher some advance idea about how to
schedule his itinerary. .

257

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Timing: The researcher should arrange his visit so that he does not arrive in the country

when most of the respondents have gone on holidays. If a specialised trade fair is being

planned, it may be a good time for the visit to coincide with it. The researcher's schedule
i:j~;!;.~;~j!j~:~~i
should never be too rigid. Once in the field he will undoubtedly discover new leads and

should allow room in his schedule for following these up. The researcher should always try

to arrange his appointments in such a way that he can tour the market country in an orderly

manner.

Samples: The researcher should organise manufacture of samples. These samples should

carry price tags and detailed information about the specification etc.

Literature: The researcher should carry literature, brochure etc. about the survey products.

Visiting Cards: The name in the visiting cards should preferably be printed both in English

and the local language.

Letters: Letters requesting appointments for interviews should be neatly typed on

Company's/Organisation's stationery. The letter should clearly state the purpose of the

requesting interview.

Interviews

Arrive at the interview properly prepared and on time.

Be neatly dressed.

Begin by introducing yourself and explaining the purpose ofyour visit.

Phrase your question clearly and concisely.

Be brief.

Don't begin with the most unwanted and difficult questions.

Listen to the answers, be alert and show interest in the discussion.

Take legible, comprehensive notes during the interview and read them through as

soon as possible afterwards.

Guide the discussion, keeping it focused on the subject of interview.

Leave a short time for informal discussion at the end.

258
" -, " .- ~" .
 'l .,
Unit 12 International Marketing Research

Type of information and Data to be Collected

a) Current domestic production and future plans of production

b) Market size =_ (Production + Imports-Exports)

c) Imports

Trend during the last five years

Major suppliers

India's share

d) Exports - Trends and Major destinations

e) Trade relationship and agreement

f) Commercial policies

g) Import regulations

h) Tariff and non-tariff barriers

D Price quotations

j) Payment terms

k) Trade requirements

Q Distribution channels & mark-ups

m) Transport
.
n) Marking, Packing and Labelling requirements

0) Specific consumer preferences i",'

r(~;~'&':;fj;

p) Competition

q) Listing names ofleading buyers, agents etc.

r) Details about trade fair & exhibitions

s) Sales promotion
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~ Activity F:

The following steps in following a plan for field research are essential:

1. ---'-"- _

2. _

3. _

12.9 CONTENTSOFA REPORT

The report must draw together in a well organised and concise format all the relevant data
collected during the stages of research process. Basically, the report should have the
following parts.

Introduction

The Summary offindings & conclusions

The main body

The appendices

The main body of the report should contain tables and charts. Tables and charts assist the
reader (i) to grasp comparisons, trends and relations quickly and easily and (ii) to draw
attention to the most important aspects of the data.

The following guidelines may be kept in mind while drafting the report:

Consider the reader, his outlook and experience

Keep the report as short and concise as possible

Write in a natural style

Make sure that all topics covered are relevant to the purpose of the report.

Double-check all figures and statistical data

Use tables and charts

Make sure that the report is neat, well-typed and easy to read.

260
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Unit 12 International Marketing Research

Presenting the report

Ifa market researcher wants his report to result in action, he must often play an active role
in presenting it personally to the right people. Charts and tables prepared may be projected
with an overhead pr-ojectoror power point presentation or slide projector drawn on display
cards. The researcher should present the summary of the report, particularly the main
findings and recommendations ofthe study, specifying the agencies which have to implement
the recommendations. If the report is not confidential, then it should be brought to the
notice ofthe people who could use them. This might involve calling a press conference or
organisation of a seminar.

12.10 SCOPE OF IMR

While the purpose ofdomestic marketing research is well known, international marketing
research (IMR) involves two additional aspects. First, information must be gathered from
and communicated across cultural boundaries. There are innumerable agencies available
in most countries that are experienced in cross-cultural communication and who overcome
language barriers. Secondly, the environments in which the research tools are applied are
often different in foreign markets. The difficulties faced by the international marketing
researcher are: .

i) differing emphasis on the kinds of information needed;

ii) the limited variety of appropriate tools and techniques available, and

iii) the problems in implementing the research process.

I
The basic difference between domestic and international market research is the broader
scope for foreign research necessitated by the high level of uncertainty. To facilitate the
~;)itj
approach, research can be divided into the types based on information needs:

i) general information about the country, area and the constituent markets;

ii) information necessary to forecast future marketing requirements by anticipating social,

economic and industry trends within specific markets or countries;

iii) specific market information used to make product, promotion, distribution and price
decision and to develop marketing plans.

In domestic research, maximum emphasis is placed on the third type mentioned above,
mainly on account ofthe fact that the information in the other two types is generally available
through secondary sources:

261
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The broader scope ofIMR is contained in the collection and assessment of the following
types ofinformation:

i) Economic: General data of the economy, inflation, business cycle trends, specific
industry studies, 'key economic indicators.

ii) Socio-cultural and political scenario: A general non-economic review of

conditions that affect the division's business (refer to unit 5 for the important cultural
factors)

iii) Overview ofmarket conditions: A detailed analysis of the international market

condition the firm faces in terms of the various segments.

iv) Technological environment: A summary of the current technological trends as it

relates to the firm's business,

v) Competitive situation: A review of the leading competitor's revenues, methods of

market segmentation, products and apparent strategies adopted in foreign markets.

vi) Infrastructure development: This applies more to the emerging markets since the
state of the physical infrastructure is often crucial in timing the entry and operational
strategies.

As a firm becomes more committed to foreign marketing and the costs of possible failure

increase, greater emphasis is paid to IMR.

PS Activity G:

Infrastructure development in a country needs to be assessed because:

12.11PRIMARYDATACOLLECTION

If the answers to the research questions are not adequately answered or are extremely
difficult to obtain, the market researcher should collect primary data.

262
 .,.
Unit 12 " .

International Marketing Research

Primary data is data that pertains to the task specifically and newly collected for the
particular research project. Parties that are contracted for primary data include the finn's
sales representatives, distributors, intermediaries, and/or customers in short, all those who
can provide relevant market information,

Marketing research methods are of two basic types: quantitative research and qualitative
research.

Quantitative research: In this type of research, a large number of respondents are given
a set of structured questions in specific format or to select a response from a multiple
choice set. The questions are designed to elicit specific responses regarding aspects ofthe
respondent's behavior, intentions, attitudes, motives, and demographic characteristics. The
responses received in a survey are then summarised in percentages, averages or other
statistical parameters.

Qualitative research: In this type of research the questions asked, are almost always
open-ended or in-depth. The idea is to collect unstructured responses that reflect the
persons' thoughts and feelings on the subject. It is reported that Nissan Motors sent a
researcher to live with an American family (renting a room in their house) for six weeks to
directly observe how Americans use their cars. Qualitative research seeks to interpret
what the people in the sample are like - their outlooks, feelings, attitudes, opinions and
their resulting actions.

Qualitative research is used in international marketing to define a problem more clearly. It

is also used in cases where gaining an understanding of the market is desired more than
quantifying relevant aspects. The most frequently used form ofqualitative questioning is
the focus group interview. Qualitative research is helpful in determining the impact of socio
cultural factors on behaviour patterns and in developing research conclusions that can be
tested in later studies. Proctor & Gamble (P&G) has been one ofthe pioneers in this type
ofresearch obtaining consumers' feedback for more than 70 years.

Some of the problems associated with primary data collection arise from the cultural
differences among countries.

i) Ability to communicate: It is difficult for a person to formulate needs, attitudes and

opinions about goods Whose use may not be understood, that are not in common use
within the community, or that have never been available.

ii) Willingness to respond: The unwillingness or the inability ofmany persons to respond
to research surveys may be due to cultural differences. In many countries and societies,

263
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the husband is not the sole money-earner, but also dictates how it will be spent. In such
cases, it is pointless to question the wife to determine demand and preferences. In some
countries,women would never give their consent to be interviewed by a male.

iii) Sampling infield surveys: The lack of demographic data and available lists makes
it difficultto draw meaningful samples. In many countries,telephone directories,census i

data and detailed characteristics ofthe population are not available in an updated form.
The researchermust estimate characteristicsand populationparameters,sometimes with
littlebasic dataon which to build an accurateestimate. Withouta breakupof the age of the
total population, the researchercan never be certain of a representativesample requiring
an age criterion because there is no basis of comparisons for the age distribution in the
sample.
!,'

iv) Languagebarrier: The languagebarrierand thedifficulty in exacttranslation creates

problemsin extracting thespecificinformation desiredand in interpreting the respondent's
answers. In the Italianlanguage, the words for aunt anduncle are differentforthe maternal
and paternalsidesof the family. Literacyis yet anotherproblemin developing countries. In
some such countries,writtenquestionnairescan be completelyuseless.

v) Multi-cultural researchproblems: When companies operating on a global scale

standardise various partsofthemarketing mix acrossseveral countries, multicultural studies
assume importance. The marketing characteristics across diverse cultures need to be
comparedforsimilarities and differences beforea company proceedswithstandardisation
on any aspect of its marketing strategy. The four problem areas mentioned in the above
paragraphs pertain to conducting research in one cultural setting- if extended to multiple
cultures,one can imaginehow the difficulties get furthercompounded.

Multi-cultural research involves dealing with countries that have different languages,
economies,socialstructures, behaviourand attitudepatterns. When designingresearchto
be appliedin differentcountriesin some cases,the entireresearch designmay be different
betweencountriesto maximisethe comparability of result.

J#!S Activity H:
Twomain problems associatedwith primary data collectionare:
1. _

2. _

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Unit 12 International Marketing Research

12.12 MARKETING RESEARCH ON THE INTERNET

The Internet provides a new and important medium for conducting IMR projects. Two of
the most important influences on industry are the Internet and globalisation. Worldwide
consumer groups have been created on the Internet to help test marketing programs across
international samples.

The different uses of the Internet in international research are:

i) Online surveys and buyers groups: These can include incentives for participation
and they yield better responses than direct mail and phone surveys that are more
expensive.

ii) Online focus groups: Bulletin boards are used for this purpose

iii) Web visitor tracking: Servers automatically track and time visitors travel through
websites.

iv) Advertising measurement: Servers track links to other sites, and their utility can be
assessed.

v) Customer identification system: Many companies install registration procedures

that allow them to track visits and purchases over time. I

vi) E-mail Marketing list: Customers can be asked to sign up on e-mail lists to receive
I
future direct marketing information via the Internet.
I ..
vii) Embedded research: More customers around the world are seeking information on
the Internet- about products and services, comparison shopping among alternatives, ~
interacting with service providers and maintaining the brand relationship. The methods
used are often embedded directly into the actual purchase and use situations, and are
therefore more closely tied to actual economic behaviour. Some firms even provide
the option of designing products online- the ultimate in applying research for product
development purposes.

Toronto city has posted an online city guide on the website: www.toronto.com. It contains
a popup survey to solicit visitors' reactions and demographic information. The latter data
I-;X~!!;~;i}
are collected to help build visitor profiles, including browsing patterns that can be used in
promotional materials given to potential advertisers.

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International Marketing

Today, the power ofthe Internet for IMR is the ability to easily access volumes of secondary
data. These data have been available in the print form in the past, but now they are much
easier to access and in many cases, are more current. If you want to know the quantity of
a specific product being shipped to a country, the import duties on a product and whether
or not an export license is required, is all there on your PC thanks to the Internet.

The ability to conduct primary research is one of the most exclusive advantages of the
Internet. As more members of the general population in various countries gain access to
the Internet, it will become more powerful and accurate for conducting primary research.
The Internet can be cine of many methods of collecting data, giving the researcher more
flexibility across countries.

Samples of Important websites for IMR

www.usatradeonline.gov -Import and export information on more than 18000

commodities.

www.exnn.gov. - The export-Import Bank of USA provides information on

trade financing services by US Government.

www.wto.org - The World Trade Organisation provides information and

important world trade figures.

www.oecd.org - The Organisation for Economic Cooperation and

Development (OEDC) provides information on OECD
policies and associated data on 29 member countries.

www.euromonitor.com - Euromonitor is a company that provides a variety ofdata

and reports on international trade and marketing.

www.worldchambers.com - The world network ofchambers ofCommerce & Industry

provides data and addresses regarding chambers of
commerce around the world.

S Activity I:
Two main advantages ofusing the Internet for IMR are:

1. _

2. _

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Unit 12 International Marketing Research

12.13 SUMMARY
This unit is intended to supplement the material normally discussed in basic marketing
management sessions. Information plays a key role in developing international marketing
strategies. The information needs can range from general data or statistics pertaining to a
country to specific information for marketing decisions related to the four P's.

This unit attempts to give a wide coverage to the issues in IMR as distinct from those
normally encountered in domestic marketing research. The important factors in estimating
market potential and in obtaining market access have been reviewed. A section on a
checklist offactors affecting demand and price structure is a simplification ofthe various
issues involved in these areas. The stages in the research process and the basic contents of
a research proposal are presented.

One of the qualities a compe~ent researcher must possess is the ability to know the sources
and the techniques ofobtaining information. Some examples ofcommodities and growth
in imports and exports have been included for ready reference. This is followed by a
section on the approach methods for field research.

Separate sections also review the scope of IMR, the research for and the problems
associated with primary data collection. This unit ends with a brief analysis on how the
Internet has become an effective tool in IMR.

12.14 KEY WORDS

Marketing research: It is process of systematic gathering, recording, processing and

analysing marketing information and data for the purpose of taking effective marketing
decisions.

International Marketing Research (IMR): This refers to the process of applying

marketing research methods and techniques in foreign countries.

DomesticMarketing Research: This refers to the research process applied and restricted
to the domestic country.

Primary Data: Data that is specifically collected without relying on other published
information is called primary data.

Secondary Data: it refers to data or information that is already available in published

form, CDs or on the Internet.

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International Marketing I
I

Research Process: The research process consists of a series of steps that serves to
guide the research project from problem formation to final recommendations.

12.15 SELF-ASSES~MENT QUESTIONS

Q 1. Youarethe marketing manager of an old establishedcompany in India manufacturing
tyres and tubes for LeV s (light commercial Vehicles). In view of a slump in the
domestic market, the management has asked you to explore overseas markets.
What are the various factors and criteria you would apply in selecting suitable export
markets?

Q2. What factors need to be considered for gaining foreign market access and market
segmentation?

Q3. Identify the various steps in the research process and describe the relevance of each
step.

Q4. Explain the differences between exploratory research and field research.

Q5. Mention the important steps in planning a field survey.

Q6. Identify the differences in the scope of IMR and the scope of domestic marketing
research.

Q7. Identify the significant differences between qualitative research and quantitative
research.

Q8. What are the main problem areas associated with primary data collection?
.
Q9. What are the various ways in which the Internet can be used in IMR?

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e-IVIARKETING AND
e.. COMMEI{CE

Objectives
After completing this unit, you will be able to:

rJr gauge the impact of e-marketing in the current context of

international business.

rJr assess the importance ofrelationship marketing with the

advent oflnternet technologies.

rJr list the aspects that make e-mail marketing successful.

rJr state the principles of e-commerce and the factors that

are leading its growth.

rJr analyse how the development of nations is compared

through the growth and adoption oflCT technologies.

Structure

13.1 Introduction

13.2 Impact of e-Marketing

13.3 Relationship Marketing

13.4 e-Commerce

13.5 Popularity of e-Commerce

13.6 State of e-Readiness

13.7 Summary

13.8 Key Words

13.9 Self-Assessment Questions

 'l '"," ."

International Marketing

13.1 INTRODUCTION

It is necessary to study the various aspects of e-marketing in today's world. Marketing is

undergoing a revolution as a result of the explosion of information technology and the
Internet. Nowhere is the impact ofICT (IT and communication technology) so deep than
in the field ofinternational marketing.

This unit examines some of the basic elements of the new technological environment and
discusses the changes that are being experienced in various markets. The possibility of an
interactive relationship between companies and customers has become very real. Perhaps
the deepest impact ofe-marketing has been the widening scope ofrelationship marketing.
This unit discusses some ofthe steps that are necessary to build relationship and establish
brand presence across countries.

With reference to an example, a section in this unit discusses in some detail how one MNC
has managed to generate sales and build customer satisfaction through the medium of e
mail marketing.

No discussion on e-marketing can be complete without a reference to e-commerce. This

unit gives a small capsule on the basic terms and growth factors of e-commerce along with
the reasons for its growing popularity.

e-commerce is a term that is used to describe the state of a nation by taking into account
the development and adoption ofICT technologies including IT infrastructure. In the final
section, relevant information from a white paper prepared by the EIU (Economist
Intelligence Unit) is presented to give the reader a glimpse of how future rankings of
countries may be arrived at by assessing the extent of their development in ICT.

13.2 IMPACT OF e-MARKETING .

The aim of market segmentation has always been to create a new value offer for as many

customers as possible. In practice, a segment meant a 'collection' or group of customers

having similar profiles, needs and wants. However, the emergence of the world-wide web

has created a powerful new tool for accomplishing a task that was previously considered

theoretical by marketers: creating marketing programs for a segment ofone. Segmentation

~
,

was not used in global marketing because it was too expensive to address the individual
customer. With the availability of the Internet and IT, it is now possible to respond to the
individual customer regardless of where the customer is located. i

e-marketing is now considered to be the single most important new development in

I ~ ~ ~
technology in the entire history ofmarketing, particular in its ability to overcome distance. , ~

272
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Unit 13 e-Marketing and e-Comm~rce

e-marketing represents theextensiveusageof the Internetandcommunication Technologies

(lCT) in the field of marketing. .

Example ~j ~!i~ti:;~;!; :
Previously,the only way motorcycle accessories could cross national boundaries was by i
iI
settingup marketing and distributionoperation in foreign markets.Today this is no longer
necessary."Motorcycle consumer New' is one ofthe many reader-sponsored magazines
that includes reviews of products that are marketed in various countries with the phone
number and e-mail addresses of the manufacturer or dealer.Readers of the magazine can
communicate directly with the supplier who can receive payment by credit card and ship
anywherein the world through expressdelivery. The immense declinein communications
and shipping costs and the decline in tariff and non-tariff barriers to trade have opened up
world markets to countries that were formerly too small to participate in foreign markets.

Interactivity

Before the emergence of ICT, communications between companies and their customers
werelimitedto one-way communication.Companies made theiroffersin all theirvarieties
and the customersmade tierselectionsin the marketplace.The possibilityof an interactive
relationship between companies and prospects has now become very real. This is
particularlytrue for online retailerswho can use customer purchasebehaviour information
to customise theircommunication to their customers.

Speed in international Marketing

Before the rise of ICT created revolution in communications around the world, the speed
of information related to the company and products travelled slowly. Products had to be
introduced in one country at a time; .

ICThaschangedallthat.Todaymanufacturers andenterprises havetheoptionof introducing

productsand servicesacross many countrieson a simultaneousbasis.Moreover,consumer
expectations have changed too. The Korean consumer is as eagerly looking forward as
theAustralian oneto the nextbigintroduction fromglobalcompanies likeSonyorMicrosoft. :. : -. .

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PS Activity A: ~~~i~\~~~~~~
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Two major factors in e-marketing that have helped international marketers are:
I
1. _
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2. -,- _ i
I
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13.3 RELATIONSIDPMARKETING
A major development in the marketing area and B2B marketing in particular, has' been
relationship marketing. The Internet has opened up wide-ranging new possibilities for
creating a relationship with international customers, potential customers, suppliers and
channel members, international marketers can now focus on delivering value to the individual
customer. The company should offer the customer great value, and serving the customer
should be profitable for the company. The relationship should turn out to be mutually
beneficial.

To build relationships on the web, the good websites should treat different constituents
differently. The steps involved in building such a relationship are:

I Identification

2 Differentiation

3 Interaction

4 Customisation

1. Identification

Websites need to capture information in respect of users. This involves more than
gathering the names and addresses of visitors. e.g. their habits, preferences and
interests. Companies generally have to make a trade-off here. Web users are
increasinglybeing asked for their details when they visit specific sites.The most effective
way to encourage completion appears to be in tying it to specific benefits such as a
tailored environment or home page, or specific promotional offers.

2. Differentiation

The company also needs to understand the relative worth of each user. In some
circumstances, it can therefore be more appropriate to tailor content to reflect relative
worth. This may involve prioritising the effort of designers to offer the greatest utility
t--::..:-~--::; ':.~-.:.
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Sites like amazon.com use a technique known as 'collaborative filtering' .This involves I
comparing the interests of a specific user with those of a larger group ofvisitors with i
a similar profile. In essence, the organisation can demonstrate to a user that they
!
know what he/she might be interested in and offer a list of pertinent suggestions for
purchase. Apart from promoting a feeling of relationship, this technique can also add I

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Unit 13 e-Marketing and e-Comrr;'erce

substantial value, by suggesting resources the user might not otherwise have been
aware of. The Amazon website, for example, prompts the reader with a list of other
books that people who bought that book in the past also purchased.

3. Interaction .

The most effective websites engage the potential purchaser in a dialogue and add
value by being seen to interact with the user. The Fedex website allows users to input
a consignment number and to track the progress of a particular package. This has
reduced the telephone traffic to the organisation's call center and allowed the
i.:::,::::
organisation to reduce costs while actually enhancing the service provided. Similarly,
e-Trade.com site allows users to demand specific information that they might receive
from the site. They may, for example, wish to be notified when the price of a stock
reaches a certain level. The company contacts a link to the site should the user wish
to buy or sell at that level.

4. Customisation

Customising some aspect of a service based on a particular user's needs forms an

important aspect in a relationship strategy. Many of the current set of websites allow i
users to visit a site and to tailor the nature of the product to their own specific i .
requirements. The user can now pick and mix the features that will be added to a new ~
I
PC before it is shipped from the factory.
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Having gathered information from the users, it is important that the organisation uses 1,-:'
that knowledge to add value for consumers, by customising the offering as a result.
This may involve offering the facility to customise the product, customise the service
or the manner in which the organisation stays in touch.

In using the Internet as a relationship building tool, organisations should pay particular
attention to the four elements mentioned in the preceding paragraphs and appraise
their performance against the best performing sites on the web. It may also be useful
to conduct an analysis of the performance ofrelated sites (preferably of those firms in

m
,

the same product category) to develop a benchmark of their own performance, so I .

that the scope for potential improvement can be analysed.

HPMoves forward with 'Technology at Work' newsletter

HP is one of the world's leading technology companies. With nearly USD 80 bn. in
annual revenues, HP provides a wide varietyoftechnology products and solutions including

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International Marketing

powerful super-computers, servers, PCs, Printers and digital cameras - to customers

ranging from the largest firms to individual consumers.

HP believes in delivering a globally consistent, high quality customer experience that is

critical to its success, Yetgiven its sise of 150,000 employees in 178 countries, maintaining
its high standards for consistency and responsiveness is a challenge.

B2B firms around the world have been pouring money in email marketing. However,
only well targeted and relevant emails generate sales and customer satisfaction. They
can even damage the positive brand image that the firm is seeking to build through this
medium. Because of its emphasis on deep customer research, relentless testing and
continual improvement, 'Technology at Work' email newsletter has influenced over USD
100mn in revenue and saved million dollars in customer service costs.

''Technology at Work' has 5 million subscribers across the USA and Europe who receive
one of 54 different versions of the newsletter once a month. HP's North American e
Marketing Manager and one of the founders of 'Technology as Work' built the program
bn the following principles:

Start with a clear purpose .

Determine the content that customers want

Engage an executive sponsor

In this case the idea was aggressively promoted by the VP Marketing by implanting the
benefits to the executive team and sponsoring the resources required to spread the
implementation to the combined HP/Compaq marketing teams.

Successful email specialists will appreciate the example set by 'Technology at Work'
because it:

balances user needs with business goals - the newsletter strives to meet both business
and user needs by sending customers only products information related to their
profIles and integrating promotions with utilities, humour, news and product updates.

uses both profIle and behaviour to create relevance - HP identifies customer groups
with the content they are interested in and also how technical they want the content
to be that enables HP to customise content and capability level. HP also supplements
the profile by creating behavioural segments- like clickers, non-clickers and
responders - to help optimise delivery frequency and message content.

276
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Unit 13 e-Marketing and e-Comrri'erce i ..

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is relentlessly tested, measured and adjusted - HP believes in constant refinement I .....

that will make the newsletter even more valuable. HP test and optimises everything

from colour and subject line to article length, order and balance in the ratio of news
to promotions. HP also tracks measures for customer satisfaction, support cost
avoidance, immediate revenue generation, deferred revenue generation, and offline
assisted revenue.

Further improvements likely to be introduced by HP include:

more account-specific marketing programs that provide better support to the sales
forces by introducing client-specific newsletter versions dedicated to the issues and
products of its top client accounts;

dynamically evolving customer profiles over time that will involve user behavioural
data to trigger customer,profile updates and better targeted companies as behaviours
indicate changing user interests.

Source: Forecast Research Report

S Activity B:

a) The four major steps in building relationships while adopting e-marketing are:

1. _

2. ----'--- _

3. _

4. .

b) Two major factors contributing to the success of e-mail marketing in HP are:

1. _

2. ----+- _

13.4 e-COMNIERCE
e-commerce can be defined in a very simple way as using electronic media for conducting
commerce. This involves activities like putting up an electronic interface between service

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International Marketing

provider and target (viz. Customer), streamlining the workflow in the organisation to process
the requests from the customer and ultimately deliver what ever is promised. Say
amazon.com has a web site which acts as the interface between the organisation and its I\ji~\~ ~i !~; ! ; j
customers, has a network of many warehouses which are interlinked so that they can
process the incoming requests and ultimately has tie up with FedEx so that they can courier
the goods to the customers. Contrary to the popular belief, e-commerce is much more
than simply opening up a new, online sales channel. It's about using technology to streamline
your business model, creating savings and increasing efficiency. It is about lowering costs
and establishing closer, more responsive relationships with your customers, suppliers and
partners. The two parties in the transaction i.e. provider of service and the target of service
can be either a business or an end user (customer).

Depending on this, the three types of e-commerce are:

B2B (business- to -business) like Siebel technologies

B2C (business -to-customer) like amason.com

C2C (customer-to- customer), e.g., ebay.com

The companies involved in e-commerce can be classified into two categories. One is the
company that exists only on the Internet. These companies do not have physical stores or
do business in the traditional way. Two examples ofthis are Amazon.com and CdNow.com.
The other type of company uses the Internet to complement their existing business. One
example may be Barnes and Noble (barnesandnoble.com). In addition to selling books at
their stores with locations across the country, Barnes and Noble operates a website in
which customers can search for books that they may be interested in purchasing.

Example

iSteelAsia is a secure, neutral trading platform created by and for steel industry professionals.
iSteelAsia enables users to buy and sell steel, network with a global community of steel
traders and find up-to-date steel industry information and news.

iSteelAsia offers the tools and advice that meet the needs ofthe steel trading community.

A personalised Trading Centerthat keeps track ofyour buying and selling negotiations,
yet provides an industry standard level of data security and privacy.

An easy-to-set up and maintain Company Account that allows you to add additional
users at varying access levels, so you can manage your company's ability to view,
create and negotiate trades.

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Unit 13 e-Marketing and e-Comm~rce

Conversion, industry research and community-based tools to complement your trading

activities.

News from a variety of external sources, plus industry reports and perspectives from
experienced in-house editorial staff.

Customer Service that can take care of your needs at any time, both offline and
online.

Factors leading to growth

There have been a number offactors which have led to the growth of e-Commerce. A few
of them are:

1. Age ofcompetition

2. Globalisation ofeconomy

3. Commercialisation and privatisation ofInternet

4. High labour cost and lesser available time

5. Higher volumes of sales at lower profits

6. Shorter product life cycles due to changes in technology

7. Faster communication ofinformation over computer networks thus reducing distances

worldwide as a result ofthe emergence ofIT (Information Technology }- a combination
of telecommunications and computer science.

New technologies have changed the entire concept of doing business. Business needs to
.
respond to these challenges in order to remain globally competitive as survival is ofthe
. fittest.e-Commerce is a critical action tool for competitive business strategies in international
trade. e-Commerce encompasses the entire online process ofdeveloping, marketing, selling,
delivering, servicing and paying for products and services. The Internet's Web browser
and client/server architecture and networks of hypermedia databases on the World Wide
Web serve as the technology platform for electronic commerce among inter-networked
communities of customers and business partners. Since communication through Internet
and other online services has become very popular and easy to operate, traditional EC
activities can now be conducted with new participants on a global scale.
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Electronic Commerce uses the Internet, Intranet and Extranets to accompli h online
transactions with customers and business partners. EC means different things to different
people. To some it may mean transfer of standardised & structured information between
firms i.e. EDI (Electronic Data Interchange). To others it may mean shopping on the internet
and to still others it may mean tracking & tracing the course of action through its journey in
the value chain.

Nevertheless, e-Commerce can be perceived as:

Business strategy to cut down costs, while improving quality and increasing the speed
of delivery of goods/services.

Ability to sell and purchase products/services/information on computer network.

A solution for office automation and quick business transactions.

A tool to improve intra-business functioning like business re-engineering.

A tool to improve inter-business communication through easy and accurate interaction

and information interchang~.

~ Activity C:

Two major factors contributing to the success of e-mail marketing in HP are:

13.5 POPULARITY OF e-COMMERCE

There are many factors for the growing popularity of e-commerce across national
boundaries.

1. Low set up cost: Anybody can easily set up a website. In fact, there are many
organisations and training institutes who help customers in developing and launching
web sites. To market a product, large retail showrooms are not required, just a web
site showing the characteristics of the product including cost details is sufficient.

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Unit 13 e-Marketing and e-Comrnerce I

2. GlobalMarket: Nobody can dominate the global market as presenceon the internet I
is easynotonlyfor globalgiants,but even smallorganisations can participate actively I
at low costs and compete with stiff competition.
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3. Global Access: Since more than 200 countries are hooked onto the Internet, any I
i

body who can afford a TV and a telephone can fully access the Internet and gain the i
information required.

4. Availability oftechnologies: Since the same technology of web servers, browsers,

engines, internet connections, hardware is used throughout the world,business can
be easily conducted.

5. MultipleOpportunities: By usinge-Commerce, multiple activities likeselling, renting,

purchasing, etc can be performed. In fact, a whole variety of transactions can be
provided - all under one roof.

13.6 STATE OF e-READINESS

TheETIJ (Economist Intelligence Unit)isthe business information armof 'The Economist'
group.It continuouslyassessesand forecastspolitical,economic and businessconditions
in more than 200 countries. As part of its services, it provides insight and analysis on
globalbusinessand managementtrends.

The ETIJ publishes an annual e-readiness ranking of the world's largest economies since
2000.The rankingevaluates the technologicaleconomic,politicaland social assetsof 68
countries and theircumulativeimpacton theirrespective informationeconomies.

e-readiness is definedas the 'State of Play' of a country's informationand communication

r~f1~;~~~
technologies (lCT) infrastructure and the ability of its consumers, businesses and
governments to use ICT to theirbenefit.When a countrydoes moreonline,the assumption
is that its economy can become a more transparent and efficientone. The ranking allows
governments to gauge the success of their technology initiatives against those of other
countries. It also provides companies that wish to invest in online operations and
technologies withan overviewof the world's mostpromisinginvestmentlocations.
,

Thee-readiness rankings area weighted collection of nearly 100qualitative criteriaorganised

intosixdistinct categories measuring thevarious components of a country'ssocial, political,
economicandtechnological development. The underlying principlebehindthe rankings is
thatdigitalbusinessis fundamentally aboutbusinessand that for digitaltransactions to be
widely adopted andefficient, e-readiness is notsimplya matterof the numberof computers,

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International Marketing

broadband connections and mobile phones in the country; it also depends on such things
as citizen's ability to utilise technology skillfully, the transparency ofthe business and legal
systems, and the extent to which the government encourages the use ofdigital technologies.

The importance of e-readiness cannot be gauged by technology penetration or average

Internet access speeds. Returns from e-readiness are realised when countries use ICT to
boost economic and social development. North America and Western Europe have
translated investments in ICT into economic benefits. The so-called 'digital divide' between
the e-developed countries and the e-developing countries is narrowing with each passing
year. This is evident in the case of basic connectivity: emerging markets are providing the
vast majority ofthe world's new phone and Internet connections. Many developing countries
are also enhancing their e-readiness in other ways- for example, through the growth ofIT
outsourcing capabilities in countries such as Bulgaria, Vietnam and India.

A country's level of e-readiness, more often than not, mirrors its overall economic
development. Consistent economic development usually dictates a higher level of sustained
investment in ICT infrastructure and the commitment to policy development.

Some of the significant observations with the e-readiness rankings released in a while
paper by EIU in collaboration with the IBM Institute for business value are given below:

The adoption of open-source software has expanded business and public-sector

access to IT in Latin America where the cost of basic packaged software is too
prohibitive for many small enterprises and government agencies.

Broadband wireless technologies like 'WiFi' and 'WiMax' are also coming into the
picture for markets looking to improve online access.

Mobile Internet makes sense for-emerging markets not only because the networks
are quicker to roll out than fixed infrastructure but also because developing countries
are comfortable with wireless solutions.

Voice over IP (VOIP) is another tool used to enhance connectivity - in developed

and developing countries alike - by reducing the cost of international calling to help
consumers and enterprises. I

Worldwide, Denmark was ranked No.1 once again in the latest ranking with an e
readiness score of9.00 (out of 10) while the USA, Switserland and Sweden follow
with scores of 8.88,8.81 and 8.74.

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Unit 13 e-Marketing and e-Comm~rce

Among the BRIC countries, Brazil is ranked 41 (score:5.29); Russia 52(score:4.30);

India 53 (score:4.25); China 57(score:4.02)

Among the 20 countries in the list of 2006 are: Hong-Kong (4 th ) ; Singapore (6 th) ;
South Korea (Ifi'"); Taiwan (I?") and Japan (l S").

The gap between the highest and lowest scoring countries has dropped from 6.08
points in the previous year to 5.80 points.

Top rank:holders in the previous year continue to be leaders in the latest list too that
includes nine of the top 10 countries.

(This section is condensed from a white paper by EID available on the website:
www.eiu.com)

2S Activity F:
According to you, the two most significant observations made in the report by Ell.I are:

1. _

2. _

13.7 SUMMARY

This unit has reviewed the important issues of e-marketing in the context of modem
. r
developments. It has been stated that the impact ofI.CT in the international marketing field
is deep and widespread. r~{j~~~~$~
This unit has examined some of the'basic elements of the new technological environment
and has discussed the changes that are being experienced in various foreign markets.
Perhaps the deepest impact of e-marketing has been the widening scope of relationship
marketing. This unit has covered some ofthe steps necessary to build relationships.

An example of how one MNC has managed to generate increased sales and build customer
satisfaction through e-mail marketing has been included.

e-marketing and e-commerce are twin developments and one cannot be dissociated from
the other. This unit has only given the reader a small capsule on the basic terms and growth
factors in e-commerce.

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In the final section, the concept of e-readiness as applied to the level of develop nent of a
nation has been introduced. Relevant information from a report prepared by the EIU
(Economist Intelligence Unit) has been included to give the reader a glimpse ofhow various
nations are ranked on the basis ofthe development and adoption ofICT technologies.

13.8 KEY WORDS

e-marketing: A term used to describe the predominant adoption ofIT and Internet in the
field ofmarketing.

e-Commerce: A general term, that is used to describe transactions that take place in
sellingofgoods and services predominantly over the Internet.The main types of transactions
are:- B2C (business to consumer); B2B (business-to-business); C2B (customer to
business);

ICT: An abbreviation for IT (Information technology) and communication technologies.

e-mail marketing: It refers to the process of carrying and marketing activities mainly
through the e-mail medium.

e-readiness: A term that is used to define the level of growth in a nation of ICT, ICT
infrastructure and the ability of its consumer, businesses and governments to use ICT to
their benefit. Returns from e-readiness are realised when countries use ICT to boost
economic and social development.

13.9 SELF-ASSESSMENT QUESTIONS

Q1. What does the term e-marketing refer to? In the field of international marketing,
describe the ways in which e-marketing can be used.

Q2. Why is speed in international marketing an important issue in the current business
environment?

Q3. Identify the basic steps in relationship marketing as applicable to the e-marketing
environment. I

Q4. Describe the ways in which customer relationships can be strengthened through e
mail marketing by any Indian firm involved in exports.

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Unit 13
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e-Marketing and e-Commerce
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Q5. 'e-commerce' is much more than creating an online method for sales' . Describe the
ways in which a company can realise the full potential of e-commerce.

Q6. Describe some of the factors that account for the growth of e-commerce.

a. inIndia

b. in the USA

Q7. What are the possible reasons for India being ranked low in terms ofits e-readiness?

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Objectives

After completing this unit, you will be able to:

(ff> list the type and scale of changes that have affected
international markets.

(ff> apply the principles outlined in the previous units to arrive

at a few general guidelines for companies seeking export
markets.

(ff> explain the concepts and underlying benefits of a bilateral

trade relationship.

(ff> assess the factors and action that have helped one of the
world's top IT services company to achieve operational
excellence in world markets.

Structure

14.1 Introduction

14.2 Changes in the Future

14.3 Guidelines for Companies Seeking Export Markets

14.4 A Bilateral Partnership Moves Ahead

14.5 TheInfosysFormula

14.6 SUlllII1alY

14.7 Key Words

14.8 Self-Assessment Questions

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14.1 INTRODUCTION

The world economy has undergone drastic changes in the last 3 decades. It is necessary
to assess how these changes have affected companies that are continuously exploring new ~:~:i~~;~:~~~J~
overseas markets. All indications are that more changes are likely to be witnessed in
economies that are embracing globalisation.

This unit attempts to track some of the changes that are altering the business landscape in
both developing and developing countries. Factors such as growth of developing countries
and growth ofglobal market segments are analysed. Some general guidelines and principles
followed by successful companies in international markets are summarised in the next
section. These may not be entirely new but can serve as important pointers for companies
seeking new international markets.

Countries have benefited a great deal from bilateral trade relationships. A typical example
of such a relationship is provided in detail on the India-European Union bilateral partnership.

In a concluding section to this unit, the foundation on which the success of one of the top
five IT Companies in the world has been built is given in terms ofits guiding principles.

14.2 CHANGES IN THE FUTURE

The world economy has undergone drastic changes over the past three decades. More
changes are expected to follow over the next three decades. The emergence of international
and global markets, globalcompetitors and more players in the international arena are
representative of the intensity of the changes in the past.

Just as companies have changed their outlook towards export and world markets, the
customers have grown increasingly intolerant ofthe short-term, quick-returns oriented
company. The explosion of communication and internet technologies has made a drastic
change to the expectation levels of customers across the various countries. This will no
doubt accelerate the growth ofthe 'global customer' i.e. the customer who will share
common interests and needs with his counterpart in many countries.

There are many such changes that will continue to impact companies on a large-scale.
Some of these are discussed in the following paragraphs.

1. Growth of developing countries

The so-called 'poor' countries of the world are now getting richer - and at greater
speed than the rich countries of the world; most of the world economies are in a stage

288
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Unit 14 Future Trends

of economic growth. Countries such as Singapore and South Korea are already
high-income countries. The expectation to economic progress is in Africa, south of
Sahara (excludingSouth Africa which is 'showing reasonablygood growth levels).

2. Emergence ofthe world economy

The second major change is the emergence of the world economy as the dominant
economic unit. Companiesthat recognisethis fact have the greatestchanceof growth
in world markets.The USA is still a superpower, but it is no longerin a positionto tell
other successful nations how to tread the right path. Wealth creates the foundation
for politicaland military power and the basis for an assumptionof moral superiority.

3. Product maturity and productionlocations

Productsmaturityis a cqnceptthat needsto be carefullyredefinedin today's economic

environments. The automobile isa matureproductinthesensethatgrowthhasremained
stagnant or marginal in the developed countries. However, cars are being designed
and adapted to suit different markets and the ways of manufacturing are being
revolutionised. Automobiles today are being produced in countries at every stage of
development, but more than 90% of the production comes from the developed
countries.

There are mature products that have become relatively standardised in their
manufacture andcontinueto requirea relativelyhighpercentageof labourto produce.
In such a case, the production has shifted increasingly to the developing countries.
The athleticfootwearindustryhas shiftedits productionto low cost countries,and no
company has been able to reverse this trend. This has offered employment
opportunitiesfor the lower-income countries, and a challenge for the higher income
countries to shift labour to other industries in which the cost of labour is not such a
significant factor in the production location. The same trend has been observed in
synthetictextilesand readymadeclothing.

However, the sheer competitiveness in the particular product-line or industry may i

force the larger firms to seek low-cost production bases. The phenomenal rise in
outsourcing by the firms in developed countries to low-income countries seems to
suggest that their production costs in home countries are making their products un
remunerativein foreignmarkets.Changesin globaland international competitionare
bringingcompanies into more direct competitionwith economic rivals in other parts
of the world than was the case in the past. Companies in the same industries in
differentcountriesand ~egions competeaggressively witheach otherin manufactured

289
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International Marketing

goods, agricultural products, natural resources and services.

4. Growth of global market segments

The future of international marketing lies in the ability ofcompanies to address global
marketsegments. More companies are showing successful approaches at identifying
and tapping these segments. The soft-drink industry has been successful in reaching
a global segment and is now taking actions to follow in the fruit-and-flavour segment.

The rapidly expanding growth ofInternet access and the capacity of the Internet itself
are playing major roles in supporting the growth of global markets and international
marketing. Amazon.com can reach customers in Taiwan and Turkey just as easily as
it can reach any comer within the USA. Customers anywhere in the world are only a
click away from their favourite book or music album. With credit cards, customers
can pay for goods and services in any currency.

These are the new economic realities. As the world becomes more integrated, new
opportunities and new challenges emerge for companies and for countries.

5. Growth oflT and Internet

This topic has been already dealt with in the previous unit. The unimaginable growth
ofIT and the Internet has enabled the marketing teams to address the single customer.
Today, marketing has the tools to address the segment of one, the individual.

This capacity is available in the local market as well as in the global market. Today
small companies can act like big companies and vice versa. This is creating a new
dynamism in every sector ofthe global economy, especially in the developed countries
that have the resources to invest in IT hardware and software. In addition to e
commerce, the Internet revolution is creating a new medium for information,
entertainment, communication and advertising, besides a new e-commerce retail
segment.

P6 Activity A:
a) Two significant changes that have affected the economy and business in virtually all
countries are:
1. _
2. _

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2. N arne two product categories or types that can be considered as global products:

l.~~ _

2. -- -,- _

14.3 GUIDELINES FOR COMPANIES SEEKING EXPORT MARKETS

Although there can be no fixed set ofguidelines for companies attempting to serve markets,
a look at some of the guidelines that have helped companies achieve success so far can be
pointers for the seekers of export markets:

1. Prospective entrants determine if they have a clear advantage over players. This may
be a result of better or special technology, experience or access to customers. Such
an advantage clears the,path for overcoming barriers to entry or expansion. There is
little doubt that a firm that has a clear advantage over prospective entrants or existing

competitors is most likely to be successful.

2. Prospective entrants determine whether the market is a growing one. Clearly a market
where the potential is stagnant or declining is less attractive than the one where it is
growing. The fight for market share in a declining market cannot be continuous.

3. Prospective firms usually conduct their own competitive analysis for each foreign
market. Porter's five forces analysis and other tools assess the attractiveness of a
market. In an ideal situation that is conducive for entry or expansion, the bargaining
power of supplier and customers is low; the industry has substantial barriers to entry
so that the threats of substitute products is low, there are enough competitors and
enough price elasticity so that the internal rivalry among existing competitors is not

r~1~;);
high.

4 Unmet market needs or under-served market niches are discovered by the prospective ~ ." :

firm. Either other competitors are unable to serve some market needs or the firm has
discovered some unique way of satisfying customers. It makes a great deal of sense
when the firm discovers such a need or niche before moving into an export market
with full resources. ~~~:::~~::~~}:
:'.:_~-~-.: .-:-.-.

5. The size ofthe market opportunity matters a lot. In addition ~o the ability to influence
or have a strong impact on the industry, the firms need to take the size ofthe opportunity
into account. The firm finds itself in an advantageous position when the market is
neither too small nor too large.

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6. The potential entrant has found dissatisfied customers who do not mind the switching
costs. Insome industries, the level of customer satisfaction is extremely low. In such
cases, the firm makes an assessment of:

D the level ofcustomer satisfaction

ii)their difficulty in switching over to new supplier

iii) the process they go through in selecting a new supplier

Apparently, this type of assessment has brought considerable success to the potential
entrants in many foreign markets. They have avoided a market where the customers
are generally satisfied, switching costs are high and price is the dominant purchase
factor.

7. Potential entrants have sought out willing and able customers. They have usually
carried out their homework in determining the price points paid for competitive
products, the degree ofcustomer willingness and the premium customers will pay for
a better product. This makes the timing of entry into a foreign market a crucial aspect
in international marketing. ,

8. Potential firms have tracked macro-level trends. The macro-environment and specific
business and economic trends are also monitored closely so that their impact on the
national economy can be gauged. The degree of economy reforms, the state ofthe
physical environment, the healthcare system- all these and more can trigger
developments that can' affect the buying preferences of the customers in the selected
country.

9. Potential firms have identified thy most attractive segments and sub-segments. This
also provides the mode of entry into the specific markets, for example, the acquisition
route may be preferable in markets that have good size, good growth potential and
high market share targets in a short time-frame.

10. Potential entrants overcome the regulatory issues such as the trade limitations, tariff
levels, quantitative restrictions and the non-tariffbarriers. Some countries offer more
favourable regulatory conditions than other countries. This issue can become a deciding l~~~~
factor for companies that want to enter into multiple markets.

11. Prospective films have developed the expertise to decide which market will be more
profitable than the offers. This is where they have possessed the additional marketing
acumen to decide the right option.

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Unit 14 Future Trends
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These guidelines are only representative and general in nature. Ultimately, every situation
of market entry or expansion is unique and the decisions will almost always be company
specific and country-specific. There are also sufficient examples of companies that have
based their decision for foreign expansion more on such, than on following a set of guidelines.
However, those that have followed the above guidelines in their decision process have
been invariably successful.

S Activity B:
Three guidelines you will propose to a manufacturer of ayurvedic skin care products that
is attempting to tap the market in Australia and New Zealand are:

1. _

2. ...,.- _

3. _

14.4 A BILATERAL PARTNERSIDPMOVES AHEAD

Companies in India and Europe have benefited to a large extent by the bilateral trade
relationship established between the two governments.

In recent years, the EU has emerged as India's largest trading partner and the country's
biggest foreign direct investor. The current bilateral relationship encompasses political
cooperation, along with cooperation in trade and economic partnership with India (the
fourth-largest economy in the world). Trade between India and Europe has grown steadily
over the last few years. In 2005, the UK, Belgium, Germany, Italy and France were ~~~;E
India's five largest trading partners. .

The Indian-Elf relationship had its origins in the early 60's. India was among the first

developing countries to establish diplomatic ties with the formerly six-nation European
Economic Community. A strong thrust for cooperation came in December 1993 in the
form of the Co-operation Agreement on Partnership and Development. InJuly 1996, the
relationship was further strengthened by the EU-India Enhanced Partnership proposed by
the European Commission. The first EU-India summit in June 2000 marked the evolution
of this relationship, and the summit has been an annual feature since then.
 '1
International Marketing
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Areas of Indian-EU Economic Cooperation

The European Union is the world's largest economic bloc. Being the largest trading partner
and the biggest foreign investor, EU holds strategic importance for India. Both the EU and
India are evolving joint initiatives to promote cooperation in diverse areas such as civil
aviation, maritime transport, science and technology, the space industry, information
technology and telecommunications.

Exports by India to the EU

The EU is India's largest export destination. It accounted for 22 per cent oflndia's total
exports in 2005; India had a 1.6- percent share in the EU's total imports. According to the
Ministry of Commerce. Government of India, exports to the EU from April to August
2006 stood at nearly EUR 6.2 billion, which was 22.42 per cent of India's total exports in
this period.

The major goods exported from India include textiles and clothing, engineering products,
gems and jewellery, chemicals, metal and metal products, leather and leather products,
agriculture and fisheries. India being a developing country, its exports to the EU stand to
gain the benefit of reduced tariffs under the EU Generalised System of Preferences.

This figure shows the export of goods from India to the EU over the period 2001 to 2005.

20

15
EUR 10

Million

0
2001 2002 2003 2004 2005
Years
Fig. 14.1: Exports of Goods by India to EU (EUR billion): 2001 - 2005

EU's Investment in India

The Indian market holds strategic importance for EU companies; this is highlighted by the
fact that approximately 50 per cent ofthe multinational companies present in India are EU
companies.

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Unit 14 Future Trends

The EU is the largest contributor of FD I in India. FDI approvals by the ED between 1991
and September 2004 constitute approximately 25.42 per cent of the total FDI approvals
in India. The major investing countries from the EU were the UK, the Netherlands and
Germany followed by France, Italy and Belgium. The following figure depicts the FDI
inflow from the ED-to India over the period 2001-2004.

1200

1000

EURO

Million

400

200

200! 2002 2003 2004

Years

Fig. 14.2: FDI Inflow from EU to India (Euro Million) from 2001 - 04

India's Investment in ED and abroad

Indian firms began investing abroad since 1992, after the Indian government restructured
its policy guidelines to promote investment opportunities in the country. The government
wanted to provide domestic firms with access to foreign technologies and encourage them
to foray into new overseas markets. This policy change proved to be a watershed in the
history ofIndian economy, and Indian business houses have been increasingly venturing
abroad since then.

Best Practices

Diverse strategies have been adopted by Indian companies for venturing in the ED. Though
some companies such as Infosys and Genpact have preferred to grow organically in the
ED, a majority of the firms have decided to opt for the inorganic route.

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Some of the best practices followed by Indian companies in the EU include:

a) StrategicAcquisition: India Inc., which has been scouting for global acquisitions,
is now headed for Europe. Apart from several European private equity players that
have put their holdings for sale, many old family-run manufacturing companies are
alsosellingout their units.A majorityof Indian firmshave grabbedtheseopportunities
to enter into the EU market. They have used the acquired companies as a platform to
establish a foothold in these companies. Ranbaxy, for example, has made four
acquisitions in Europe in the first eight months of 2006. Even companies such as
Infosys, which earlier chose the organic route, are now exploring acquisition
opportunities.Several companies, such as Aftek Infosys, have been activelyforming
allianceswith other companies to facilitatetheir entry into a segment or geography in
theEU.

b) Establishing synergies with Indian Operation: The India firms with operations
in the EU have continually endeavoured to synergise their European operations with
the domestic ones. This has helped them to leverage the low-cost advantage offered
by India. For example, VIP Industries acquired Carlton in the UK in 2004. The
establishedCarlton brand provided VIP an easy entry into the high-growthEuropean
market. VIP has manufacturing plants in India and China, and it sources its products
from these low-cost destinations to deliver them to its export locations in Europe.
Thus, the combinationof Carlton's reputedbrand and VIP's low manufacturingcosts
provided the latterwith a competitive edge. The successof several Indian companies
can be attributed to such synergies. Another company, Sundaram Fasteners, carries
out its back-end operations in India and caters to the European clients through its
European subsidiaries. Amtek Auto out sources the production of small-batch
components from its EU operations to its Indian locations to gain cost benefits.

c) RecruitmentofLocalTalent: Indianfirms in the EU havebeen hiringlocalpopulation

.
for their European operations. These local employees understand the geography and
provide services in collaboration with the company's core competence. In addition,
they help the company in bridging the cultural gap between India and the country of
operationin the EU. They form a highly educated and multilingual workforcefor the
company. Such a recruitment strategy by the companies also earns them support
from the localgovernment, as it hasa salutaryeffecton the problemof unemployment.
HCL, for example, has made Northern Ireland its hub of operations in the EU. It
figures among the top 10 private employers in Northern Ireland, and the local
workforcehired by it has been instrumental in its profitability,

296
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Unit 14 Future Trends

25 Activity C:

According to you, the two most important outcomes of a bilateral trade relationship are:

1. --------,------:----------
2. _

14.5 THE INFOSYS FORMULA

In a recent survey of Global Services 100, Infosys was ranked #3 among the Top 10 Best
Performing IT Service Providers. f;';=!i-~{;;;-:
,
Global Services 100 is an annual ranking ofthe world's most innovative service providers, I

a survey compiledjointly by Global Services, a CMP-CyberMedia LLC media company

and neoIT, an outsourcing advisory firm. I
In addition, Infosys has also been ranked among the top companies in the following
categories:
I
i

Best Performing Managed Services Providers I

Leaders in Engineering Service Providers

Leaders in Human Capital Development

Partnering with Infosys

INFOSYS has consistently built on customer relationships around the world that has
an
evolved from partial outsourcing to end-to-end strategic partnership. Being a hardcore
technology company itself, the client's expectations and standards on technical competence
are fairly high. The company initially decided to outsource only a small part ofits functions.
But as customers gained confidence in Infosys's ability to deliver, Infosys became a key
partner across all functions like:

IT Support: Production support and all kinds ofdevelopment and maintenance work.

Product Engineering: This involves development of products on various technical

domains such as VoIP, Network Management, Optical and Routing technologies.

Infoysys's team actively participates in creating product blueprints and their realisation.

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BPO Services: Over the last three years, Infosys's BPO arm Progeon been
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providing complete backoffice support on a number of processes -order

management, customer support, maintenance contracts and other service operations.

Consulting: The impact ofthis partnership can be seen from the fact that Infosys has
'I.
gradually moved from handling regular outsourcing work to participating in strategic
initiatives and thought leadership through Infosys Consulting.

The success ofInfosysin managing end-to-end functionality has been powered by its Global

Delivery Model. A special Governance Model has also been created to monitor the progress

through all these functions; in-house tools are used to track all project plans and conduct

regular quality reviews.

Delivering Value

Over the years, clients that are spread across the world have benefited from this relationship

in a number of ways:

Product engineering services have assisted in topline growth by designing the products

faster in a more cost-effecti.ve manner.

Over a period of last 3 years, the Total Cost of Ownership (TCO) has been reduced
by more that 45%.

BPO services have taken over a large part of customer management functions. This
has helped reduce transaction costs by 40% and increased the number oftransactions
by 20%. This has helped achieve high level of customer satisfaction for order
management, making it the only such center across the organisation.

.
Integration of operations and IT has enabled faster implementation of changes, as
requirements can be gathered and understood better.

Better utilisation and management of resources enables the client to focus on its
competence areas.

Process improvement and technology-enabled initiatives have resulted in overall

efficiency and improved knowledge management within the company.

By creating an end-to-end operations management infrastructure, Infosys has not only

helped the client bring down its costs, but has also helped improve the company's
competitiveness by allowing it to focus more on innovation and other long-term strategic

298
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Unit 14 Future Trends

activities.

Inaddition, Infosys believes that the following factors are necessary to become a global
player and are critical to be a successful technology services provider:

Effectively integrate onsite and offshore execution capabilities to deliver seamless

and scalable services.

, ~

Increase breadth and depth of service offerings to provide a one-stop solution.

Develop and maintain knowledge of a broad range of existing and emerging

technologies.

Demonstrate significant domain knowledge to understand business processes and

requirements.

Leverage in-house industry expertise to customise business solutions for clients.

Attract and retain high-quality technology professionals.

Make strategic investments in human resources and physical infrastructure or facilities

throughout the business cycle.

14.6 SUMMARY
This unit has attempted to examine the key factors and concepts that have now become
imperative to achieve success on an international scale. The changes in the world economy
over the last three decades have affected both big and small companies as well as MNCs
and domestic companies. This unit has tried to focus on some of the changes that have
altered the business landscape in both developing and developed countries. Factors such
as growth of developing countries and growth markets have been analysed.

Some general guidelines and principals followed by companies successful in international

markets have been discussed. Countries have benefited tremendously from bilateral trade I>
and trade relationships. The India-European Union bilateral partnership is one such example
that has seen trade and businesses between companies in the two regions grow drastically. !t{l1?I
The final section gives a glimpse of some of the success factors of one of the top five IT
services companies in the world, that essentially puts in capsule form the important lessons
from the previous units in this course material.

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14.7 KEYWORDS j'

Global customers: A term given to a general customer who may be physically present in
one country but who also shares common interests and needs with his/her counterpart in
many countries.
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Global market segment: This refers to a segment consisting of a common set of needs
and wants and markets characteristics, but with customers located in a large number of
countries across all continents.

Unmet market needs: This refers to the needs of customers in more than one country
that have not been specifically satisfied so far by domestic and foreign companies.

Potential entrant: A term that describes a company that is making attempts to tap the
market potential in a foreign country. I

14.8 SELF-ASSESSMENT QUESTIONS

Q1. Describe the major changes that have affected the economies of many countries in
the recent past.

Q2. There is now a need for companies to address the requirements of the international
customer or 'global' customer. Describe the characteristics of such a customer with
specific reference to an example.

Q3. Explain the ways in which small companies are expanding into foreign markets through
e-commerce and the Internet.

Q4. Describe five of the most important principles that companies should follow in
penetrating a foreign market.

Q5. What are the significant benefits companies derive from a bilateral relationship?

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Objectives:

Case Study 1

After reading this case, you will be able to:

GfF evaluate the impactof changesin thebusiness environment
on organisations.
GfF pinpoint some of the n~w challenges that are created as a
result of the changes.

GfF assess the need for innovation and marketing strategies.

GfF analysethe responses to changingenvironmental situations
faced by the UK modular construction industry.

Case Study 2

After reading this case, you will be able to:

GfF state the marketingtrends in the direct selling industry.
GfF analyse the approach of Amway Corp in direct selling.
GfF
gauge the impactof direct sellingpracticesin one country
and how it affects another.
GfF evaluate the opportunities created by the Internet on the
industryand Amway Corp in particular.
GfF
explainhow an internetmarketingstrategycan be effective
in thisindustry.
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Case Study 1

PORTAKABIN - RESPONDING TO THE ENVIRONMENTAL CHANGES

Introduction
I
Changes in the business environment !. .

The business environment in which firms operate, lies outside themselves. It is their external
environment which is always changing. Some changes are so dramatic that everybody
notices them, but others may creep up on an industry over the years and be largely ignored
for too long.

Changes take many forms and create new challenges. For an industry as a whole, it may
well be that:

Customers' needs and requirements change. They look for new, better and cheaper
products.

New technologies become established. These encourage new firms to enter the
industry with better products and cheaper ways of doing things.

Employees' skills need revising to take advantage of new technologies.

New laws are passed that require changes in how businesses operate eg introduction
of a minimum wage, restrictions in working hours and tougher health and safety
requirements.

.
Traditional sources of supplies of raw materials and components begin
to look less reliable.

New supply sources emerge.

Banks and other investors start to lose interest in financing the industry.

a
Pressure groups start to take greater interest in the industry's activities.

The industry ceases to be able to attract new, high caliber recruits.

For individual firms within an industry, the external business environment also includes

their competitors, who may:

304
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Unit 15 Case Studies

introduce new,superior methods of production;

change the ways in which they compete for business;

extend their target markets;

find new ways of attractingkey employees.

One testof a firm and alsoof an industryis how well it recognisessignificantchanges and
adapts to them.

The UK construction industry

The Britishconstructionindustry has to meet the needs of a whole rangeof clients.These

include:

public and privatelyowned businesses and organisationsin all sectors of

British industry

schools,hospitals, universitiesetc.

national and local governments e.g., roads, railways, tunnels, dams, stadiums and
offices

privatecitisens,and particularlyhome owners O'

All these clients want the finishedjob to be:

better suited to their own particular needs

completed more quickly

cheaper than in the past

finishedto higher standards

For this to happen, the UK constructionindustry has to change its approach.The industry
didhave some centersof excellence, but overall,thereweremany problemsto be resolved.
Theseincluded:

lowprofitability, which in tum led to:

low levelsof capitalinvestment

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insufficient research and development

inadequate employee training

outdated methods of production

excessive waste of resources (e.g., time and materials)

many dissatisfied customers

The need for innovation

Customers' requirements could not be met by existing products. There was a need for

new ideas and better techniques. This was because:

Companies were looking for innovative buildings to provide more adaptable office

space with reduced lead times.

Schools, hospitals, universities etc needed better high quality,flexible buildings quickly.

Governments wanted key projects delivered quickly and on time in order to fulfill

their policy commitments.

Government and Local Authorities' requirement for modem affordable housing.

Portakabin was already operating in many of these markets and meeting many of these

requirements. With the goveinrnent itself supporting the drive for change, ongoing innovation

offered Portakabin many business opportunities.

Portakabin

Portakabin belongs to the select group of companies which have made such a mark that,

in popular speech, its brand name is sometimes used (wrongly) for all the products of a

particular industry. Such fame is a mixed blessing - there are some modular buildings and

portable constructions on the market which Portakabin does not manufacture.

'Portakabin' is a registered trade mark and may be used only to describe buildings
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manufactured by Portakabin Limited. The company is protective of its trade mark and

takes action against any infringement/misuse ofthe trade mark. This is mainly due to the

need to protect it from becoming a generic term and the associated risk of the company

losing exclusive rights to the use of the name, as happened to Aspirin and Escalator.

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Unit 15 Case Studies

Portakabin provides quality modular factory-built accommodation. Its products include

modularbuilding systems,re-locatable self-containedaccommodationand alsoflat pack
buildings to export worldwide. (For some buildings, there is a hire service for customers
who prefer not to buy outright.) The Portakabin Group also includes YorkonLimited, a
singlesourcebuildingservicespecialisingin steelframe modularbuildingsystemsfor use
withinhealthcare, education etc as wellas generalcommercialuse.The groupalsoprovides
added-value servicesincludingclimatecontrol,officeplanningand furniture solutions.

Continuous research and development by Portakabin has enabled it to provide state-of

the-art building solutions and to establish market leadership across a range of product
areas.

Modular building expertise

In modularconstruction, buildings are manufacturedand fitted-outin a controlledfactory

environment. In the meantime,the foundations are being preparedon-site.The customer's
modulesarethentakento the siteand cranedintopositionandlinkedtogether. Architectural
features (such as brick claddingto the outside of the building, a pitched roof, glasing,lifts
or a stair tower) are added on-site. The advantages of modular construction include:

Vastly reduced program times

Significantly improvedquality and reducedcosts

Greaterabilityto customisethe building

Minimiseddisruption duringconstruction

Safer, quieter and cleaner work on site

Clearly, modularbuildingtechniques offermany of the improvements thattheEgan Report

calledfor.The Portakabin Group provides organisationswith a fast, effectiveresponseto
their building requirements and provides both building and room modules in a range of
sizesto offerflexibility for buildingand design solutions.

For example, this system allows a building to be extended horisontally or vertically, to

createmultiplestoreybuildings,with littleor no disruption to existingfacilities. Internally,
the modules can be adapted to match a range of specifications for open-plan or cellular
offices, whileexternally, a widechoiceof claddings, colors andtreatments maybe developed
to fit in with other buildings or reflect a corporate style.
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Innovative developments

Housing

In mainlandEurope, housing sitescontain many innovativeforms of building.They

use a high-degree ofpre-fabrication and pre-assembly of factory-built parts which i

are then transported to the designated building site. Similarly, standardisation of

i
components makes it possible to adapt modules to the specific needs of customers.
This wayof constructing buildings meansthatlessworkis done on siteand moretime
is spentfocusing upon thetechnologies associated withtheconstruction. Thisincludes
using design tools such as Computer-Aided-Design(CAD).

In Londonin March 1998,the Peabody Trustreceived planning permission todevelop

30 factory-built, modular homes, in Murray Grove, Hackney. This was the first
development of its kind to be piloted in Britain. The Murray Grove site has opened
up opportunitiesfor affordablehousing.The housing is both distinctiveand durable
and theemphasishas been uponfine materials and a distinctarchitectural image.The
Portakabin subsidiary, Yorkon, started work in Autumn 1998 and assembled the
units on site in Spring 1999i.e. through the winter months. Such an achievement is
more or less unthinkable usingtraditional buildingmaterials and methods.

InYork in early200l , therewere4,500peopleonthecouncil'swaiting listforhousing.

Portakabinis providing 24 affordablehomes on a brown field site on the outskirtsof
thecity. The development occupiesthesiteof a formerschoolcanteen, andis arranged
four-storey high in a L-shaped configuration, with a private landscaped court to the
rear. In keeping with the urban location, and clad in red cedar, the Sixth Avenue
Apartmentsrepresentthe first factory-built, multi-storeyaffordablehousing project
outside London and will take about 6 months to complete.
.
Industrial and other buildings

In business-to-business markets, suchas chemicals, pharmaceuticals andspecialist services,

firms need buildings that they can rapidly adapt to meet market changes, e.g. they may i
need more laboratoryspaceand less dedicatedoffice space withinthe same buildingshell i

and with minimum disruption to ongoing work. To meet this requirement, construction
companies needto find methods of construction that are: 1~"'1\;B
clean,safeand efficient

guaranteequalityand savetime
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Sony UK solved its need for additional office accommodation at its headquarters in
Weybridge, Surrey with a two-storey building comprising 20 Duplex building modules.
Thebuilding provided a flexible solution toaccommodate 120staffwithfittings andfumiture
that can be re-configured as Sony's needs change.

InEssexin March2001when the thenMinistryofAgriculture, Fisheries and Foodurgently

needed office premises on site in order to tackle an outbreak of foot and mouth disease,
Portakabinhad four buildingsup and running, to MAFF's specifications, within48 hours.

When the University of Leeds wanted a new nursery to accommodate 60 children,

Portakabin builtandinstalled theirnewLilliputnursery systemwithinfiveweeks. It includes
specially designedfeaturesfor a child-friendly environment.

Although thesightofa newMcDonald'srestaurant mightbe morefamiliar than theexamples

listed, it mightsurprise students thatmanyoftheserestaurants aremodularbuildings supplied
by the Portakabin subsidiary Yorkon.

Conclusion

The UK constructionindustry is changing its practices. Portakabin is helping to lead that

change. Itsprojectsare customerled, and offerhighqualitysolutionsin much lesstime and
at a lower cost than traditionalbuilding methods require. This approach is in line with the
rethinkingthat the Egan report demanded.Companiesthat have acted are becoming more
competitive as theybecomeincreasingly customerled andin tunewithmodemconstruction
methods and materials. ~ortakabin amply demonstrates this development.

Self-assessment questions

Q1. WhatmethodsshouldPortakabin adoptassuming it decides to entertheIndianmarket? .

Q2. Designa suitable approach andplanforintegrated marketing communications assuming
Portakabin wants to enter the EU.

309
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Case Study 2

AMWAY(UK) BETS ON THE INTERNET

Introduction

Foundedin the USAin 1959,Amway is a globalbusinesswith6,000 corporateemployees

worldwide.It is one of the world's largestdirectsalescompaniesthatservicesand supplies
over 3.3 million Independent Business Owners (IBOs) in more than 80 countries and
territories inAsia, Africa, East and WesternEurope and the Americas.

The criticalrelationship betweenAmway and theseller,or lBO, is at the heartof Amway's

approach to direct selling.This form of selling allows each IBO to focus upon individual
consumers and their needs, with the IBO deliveringdirect to the consumer rather than the
consumerhavingto visita shop. BecauseArnwaymanufacturers its own brandedproducts
anddistributes thesethrough 'directselling',itsoperation differs fromthatof moretraditional
distribution channels.

Having signed a contract to work within Amway's Rules of Conduct and Code of Ethics
(bestpractice), IBOs are self employed and theAmway businessgives them the flexibility
to work where and when they want.

They sell to people they know or meet, introduce others to the Amway business and form
their own salesgroup. The personalcontact and care they provide is an importantelement
in direct selling.To do this they need support, and rely on having ready access to a quick,
efficient supply chain so that they can meet customer needs.

The Internet Opportunity

Increasinguse of the Internethas created real potential for businessesto develop different
types of businessmodels and to try out new approachesto reach users directlyand quickly
in theirhomes.Amway was well placed to make such a move.With high levelsof Internet
use within the UK and Europe, market research showed that IBOs were Internet-ready,
and that the time was ripe for Amway to develop ecornmerce opportunities that would
offer the 24 hour17 day service its customers were ready for.

Having received supporting merchandising materials, literature and training so that they
know the best way to promote the features and benefits of Amway products, IBOs order
the product direct from Amway having taken an order from their customer.Most operate
theirbusiness parttimefrom horne, as many havefulltimejobs and wanta flexible working

310
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Unit 15 Case Studies

pattern with Amway. They want to work at a time convenient for them, which can be any
hour of the day or night, with an organisation they can rely on. The Internet offers the
opportunity to meet these needs.

Strategic development of interactive communications

Amway's IBO customers depend on Amway for more than products. They look to Amway
for support that will help them manage their businesses. For an organisation to be competitive
in a crowded market place it has to be market-focused. Amway knows that it can succeed
only when it can help its customers succeed.

By placing customers at the centre of its focus, an organisation then builds processes
designed to satisfy their needs. For Amway, this involves a whole series of activities that
link the supply ofraw materials to production processes, to physical distribution management
and finally getting the goods in a timely way to the IBOs, who can then meet their
commitments to their customers.

With more than 3.3 million distributors in more than 80 countries and territories and with
own branded products ranging from 'ARTISTRY' brand skin care and cosmetics to
'NUTRILITE' brand nutrition and wellness products, Amway faced a huge challenge in
providing customers with goods at the right time, in the right place and in the right condition.
The starting point was to undertake some market research that would enable Amway to
understand its customers better, and provide a model for how a web e-business opportunity
could best be developed.

Independent Business' Owners (IBOs)

People join this business for a variety of reasons. Some become IBOs simply to be able to
purchase products for their own personal use at a reduced cost. Others join in order to
direct sell the products to others, earning a profit on each sale and additional financial
benefits based on their sales volume. Business builders not only sell products; they also
sponsor others to join the business. They are compensated for their own sales and well as
the sales of those they sponsor, receiving incentive bonuses that increase as their own
sales force increases. All IBOs have the identical opportunity to grow a successful business.
Each business owner is compensated in direct proportion to his or her efforts.

In order to understand what IBO customers want in terms of products and service, Amway
builds up typical customer profiles. These are made as full and accurate as possible. In
that way, Amway can target its current support services. Equally important, it is able to
anticipate the future needs of its various customer groups, and can target them with specific
product information.
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Amway knows that most IBOs are entrepreneurial individuals who want to sell quality
products to people they know or meet. Most also fall into the conventional categories of
socio-economic grouping. This is often used by marketing departments to segment the
total audience and identify particular groups they want to target.

Most ofAmway's IBOs are well educated and ambitious, and many have families. Working
from home, they supplement their family income mainly by working part-time, although
some work full-time. Most of these IBOs have web access, many of them having bought
pes to support their children's educational progress.

The research revealed that many IBOs felt they needed more support for their selling
activities. In particular, they wanted quick, secure access to more accurate, up-to-date
information that related specifically to them. The answer had to lie in a carefully constructed,
properly run, well thought-out Internet operation.

Developing an Internet strategy

Business strategies are designed to be consistent with an organisation's overall purpose or

mission. As a world leader in direct selling, Amway builds opportunities and partnership
with individual customers so that they can share in its success. To support this purpose,
corporate strategy involves making far-reaching long-term decisions that look to match an
organisation's activities with its business environment. With huge changes in technology
and many IBOs ready to make use of web access, Amway felt that the web would be one
of the most effective ways of meeting their needs. For Amway's IBOs the web had many
potential benefits such as: .

providing up-to-date feedback and information with fewer clerical errors

receiving access to valuable business information and advice 24 hours a day, 7 days
a week both from Amway and elsewhere

offering a range ofevolving functions such as live online ordering

enabling IBOs to check the bonuses they receive on their purchases

providing a modem and exciting way in which to run and promote a retail business
opportunity to like-minded entrepreneurs.

Making a strategic decision to develop the Internet for their IBOs enabled Amway to
match technology with a whole range of functions such as marketing, operations and logistics
in a way that would meet its needs more closely. As part of a Pan European decision,

312
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Unit 15 Case Studies

Amway's strategic plan was to increase its use of the Internet by 'e-enabling' all of its
European markets in a phased roll-out plan over 24 months. I ~

In order to develop an online presence, Amway grouped countries together wherever

possible so as to link parts of the business in a way that would serve customer needs. This ~
enabled it to gain economies of scale, e.g. a reduction in distribution costs. Each of the I
following websites have common features for each region as well as services tailored for
each country:

amivo: UK, Italy, Germany, Ireland, Austria, Scandinavia (Denmark, Finland, Sweden,
Norway), South Africa, Netherlands, Belgium, Greece.

v.e.b.s.o. from Amway: Hungary, Poland, Romania, Czech Republic, Slovakia, Croatia,
Slovenia, Turkey.

The more established sites showed that, no matter what the size ofthe business, theArnway
business model works across the Internet. Given this successful outcome, Amway was
able to identify best practices on these older sites and then apply it to new sites such as the
AMIVO site used by mos in the UK.

The AMIVO website development has given UK-based mos an alternative, enhanced
way of managing their businesses. The website rapidly attracted a significant number of
mos keen to try the online service. Promotions helped to encourage repeat use of the site
by demonstrating its unique benefits.

Today, over one third of Amway's UK business is transacted through the AMIVO UK
website and it is well on the way to reaching 50% by the end of 2004. The average value
oforders is 25% larger online than offline. This has resulted in more efficient handling of
orders and lower freight costs per order,

When organisations make strategic decisions they have to take into account many ofthe
changes taking place in their business environment. With mos facing significant competition
from traditional channels of distribution, Arnway believes it has used emerging technology
in a way that provides both it and its partners with a distinct advantage in the marketplace.

(Note: Further information on the products and business opportunities can be obtained
from the website: www.amway.com)

313
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Self-assessment Questions

Q1. Identify some of the reasons how Amway has grown in strength without the use of
conventional channel distribution systems.

Q2. How should Amway (UK) plan its future growth in terms of marketing reach?

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