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Marketing and Strategy lecture 6

Part 6 Operating in an international business setting and global markets

Part 1: theories of international trade and investment

There are different reasons why there is international trade and investment. First of all the national-level explanation: why do countries trade (classical theories) and how can countries achieve competitive advantage (contemporary theories). Second of all the firm-level explanation: why and how do companies internationalize (firm internationalization) and how can internationalizing companies get and sustain competitive advantage (FDI-based explanation and non-FDI-based explanation).

Classical theories

• Adam Smith; countries have an absolute advantage. Thus a country produces the products in which it has absolute advantages or uses fewer resources in the production than another nation.
• David Ricardo; countries have a comparative advantage. Here countries produce products where they are relatively more efficient.

For example the UK produces 600 corn and 200 wine, France has 200 corn and 100 wine (imagine the countries are equally sized and allocated the resources equally to every industry). Following Smith’s theory, the UK should produce both the corn and the wine. Following Ricardo’s theory, for the UK the opportunity costs of corn are (200/600=) 0.33 wine, the opportunity costs of wine are (600/200=) 3 corn. For France the opportunity costs of corn are (100/200=)0.5 wine and the opportunity costs of win are (200/100=) 2 corn. According to Ricardo France should produce the wine and the UK the corn, because they both have the lowest opportunity costs per category.

Disadvantages of the earlier trade theories are that products are getting more and more differentiated, international transportation costs a lot, economies of scale can put aside a nation’s comparative advantage, governments’ have restrictions, governments’ have subsidiaries and investments, products that are difficult to trade (for example banking) and other services can be traded through Internet.

The primary participants in trades are not nations, but individual companies.

New theories

Paul Krugman discovered that there weren’t competitive differences among countries with no obvious comparative advantage. His solution was to increase the economies of scale.

Nations can enhance their national competitive advantage by stimulating the comparative advantage of its own country and the competitive advantages of firms. For example the British pharmaceutical firm GlaxoSmithKline has skilled labor in the UK, therefore it is likely that this company was found in the UK.

Sources of national competitive advantage are displayed in Porter’s Diamond model:

1. Firm strategy, structure and rivalry; this is related to the rivals in its country
2. Factor conditions are related to the position of a country with respect to production. How can a government make a country more attractive for foreign firms and eventually gain national competitive advantage? For example the Russian company Gazprom uses a lot of Russia’s natural resources; oil.
3. Demand conditions are related to the buyers. For example in Italy Gucci is more important than in the Netherlands.
4. Related and supporting industries are related to the suppliers.

Porter’s Diamond Model can be compared with Porter’s Five Forces Model (but now for countries).

The National Industrial Policy is a plan from the government to develop and support the country’s industries, for example through taxes.

Different stages in the internationalization process:

1. Domestic focus (more focus within a country)
2. Pre-export stage (some products are exported)
3. Experimental involvement (export is getting more and more)
4. Active involvement (there is a system for exporting)
5. Committed involvement (foreign direct investment = FDI)

Three factors will determine if a company will enter a foreign country through FDI and ownership, this will be analyzed with the example of Sony:

• ownership-specific advantage; Sony had different patents and specific products
• location-specific advantage; Sony outsourced some products to China for the lower labor costs
• internationalization advantage; Sony wanted to control its knowledge

The alternative for FDI is the international collaborative venture.  On the one hand there are the equity based alliances, when a firm works together with local partners. On the other hand there are the non-equity based alliances, when firms work together for a short time. Reasons why companies choose for international collaborative ventures are because they want to create synergy, share the business risks and adhere to government foreign ownership regulation.

Part 2: Strategy and Organization in international firms

• International strategic objectives which consists of efficiency (build efficient international value chains through lower costs and act more globally), flexibility (accommodate risks and chances per country) and learning (learn from operating in the global market and exploit this learning worldwide). However it is difficult to achieve these three factors all at the same time.
• Visionary leadership which has four important characteristics: international mindset and cosmopolitan values, willingness to commit resources, strategic vision, willingness to invest in human assets.
• Organizational culture a pattern of sharing values, norms, systems and policies which should be the same for employees everywhere.
• Organizational processes are managerial routines, behaviors and mechanisms which help a company to operate as it should. Firms need to balance between global integration and local responsiveness (this balance is called integration-responsiveness framework, this framework can be found in the book: an introduction into marketing and strategy by Joris Ebbers and Roger Pruppers on page 428). There are four strategies as a result of the I-R framework: 1. global strategy (strong global integration and weak local responsiveness) àsame competitors everywhere 2. transnational strategy (both strong global integration and strong local responsiveness) 3. home replication strategy (weak global integration and weak local responsiveness) 4. multidomestic strategy (weak global integration and strong local responsiveness) à different competitors per market. For example IKEA is transnational, because it has more than 90% of the products the same in different countries. However some products differ by country and local preferences.
• Organizational structure which describes the relationships within a company. The fundamental question is to centralize against decentralize. Different structures in companies: 1. export department (downside: minimum control, fewer opportunities with respect to foreign markets) 2. international division (two separate divisions for both the domestic and international market, downside: competition and limited knowledge sharing between the two departments) 3. geographic area structure (divided into regional divisions, downside: more focus on regional than global activities) 4. product structure (among product lines, downside: focus to much on the product = marketing mytopia) 5. functional structure (among functional activities within the value chain, downside: difficult to coordinate and weak responses to local markets needs and demands) 6. global matrix structure (both the global strategy and local responsiveness to local demands and needs, downside: more managers to report toàlot of contradictions, managing may be difficult).

Part 3 Marketing in the global firm

Global marketing strategy is a strategy focussing on foreign markets, about which consumers a company wants to target (geographic versus global), how to position the company itself and its offerings, how to balance standardization and adaption of the international marketing program. Standardization is to make the global market uniformàone big market. The advantages are cost advantages, better planning and control, build a consistent image and global brands. For example: Sony. Adaption is focussing on specific customers in different markets. The advantages are meeting the needs of customers better, unique appeal, comply with government laws and regulations, get greater successes in order to combat customer resistance. For example: Chicken Maharaja Mac (McDonald’s offers different local preferred products per country, for example this maharaja Mac in India). There are car manufacturers that sell different brands in different countries (or international). For example General Motors has Cadillac global, Daewoo international (in Asia, Europe and Latin-America) and Vauxhall local (United Kingdom). The marketing program consists of similar factors as in the 4P’s:

1. a) Global branding; challenges and opportunities for managers especially within the branding and product development areas. Benefits of global branding are higher trust and confidence, higher loyalty, premium prices, efficiency, more power. For example when there were problems with local milk in China, Nutricia (Europe) could promote its product in China.
1. b) Global product development (product of the 4p’s); managers focus on commonalities within countries instead of differences. Modular architecture contains the standardized components and the global new-product planning team figures out which elements should be distributed global and/or local.
2. International pricing (price of the 4p’s); it is hard to have the same price in every country, because of regulations, different competitors and trade barriers. Elements that influence the international pricing are: nature of the market, nature of the product and industry, type of distribution system and location of the production facility. On page 461 of the Marketing book: an introduction into marketing and strategy by Joris Ebbers and Roger Pruppers, you can find more factors that influence the prices.

There are three different pricing strategies: * rigid cost-plus pricing; fixed prices for all markets + a percentage for doing business abroad. * flexible cost-plus pricing; added costs of doing business abroad + set price per country because of different local market conditions. * incremental pricing; set price to cover all the variable costs, because the fixed costs will be covered already in the domestic market.

3. Marketing and communication (promotion of the 4p’s) focuses on international advertising (for example coca-cola) and international promoting activities (short term in order to stimulate immediate purchases).
4. Distribution (place of the 4p’s); the most inflexible part of the marketing program.