Summary Global Marketing (Hollensen)

Chapter 1: International marketing within the firm

We are entering a new phase of globalisation in which an ultimate model for success does not exist and whereby companies from every part of the world compete. This chapter contains an introduction to globalization. We will discuss the process of developing the global marketing plan, the two main types of enterprises, the development of the concept of global marketing, global integration and market responsiveness, the value chain and global experimental marketing.

Globalisation: the trend of companies buying, developing, producing and selling products and services in most countries and regions of the world. It increases the companies’ competitiveness and facilitates innovation.

Internationalisation: doing business in many countries of the world, but often limited to a certain region, e.g. Europe. It is unlikely to be successful unless the company prepares in advance.

The process of developing the global marketing plan contains the decision whether to internationalize, deciding which markets to enter, deciding on the Market entry strategy, designing the global marketing programme and implementing and coordinating the global marketing plan.

There are two types of enterprises:

1. LSEs (Large Scale Enterprises): firms with more than 250 employees. Comprise 1% of all firms.

2. SMEs (Small and Medium-sized Enterprises): small firms have fewer than 50 employees; medium firms have fewer than 250 employees. Comprise 99% of all firms.

There are a few main qualitative differences between marketing and management style in SMEs and LSEs:

Resources:

• Financial: SMEs have a lack of financial resources due to limited equity.

• Business education/specialist expertise: SMEs have a lack of specialist expertise because managers are untrained in formal business disciplines.

Additionally, SMEs managers do not have knowledge about global marketing expertise. Therefore, the owners of SMEs are often closely involved with the firm’s processes.

Formation of strategy/decision-making processes: both the intended (or deliberate) strategy and the emergent strategy result in the realized strategy of a firm, Figure 1.3. LSEs mainly use the intended strategy and SMEs mainly use the emergent strategy. LSEs also use the approach logical incrementalism, Figure 1.4. They implement small adjustments, and when it is proved that they are successful further development of the strategy takes place. If the environmental change moves apart from the changes due to the incremental strategy, strategic drift arises. SMEs use the entrepreneurial decision-making model, Figure 1.5. The strategy is determined by several possible outcomes. There is propensity for change which can lead to changes in the enterprise’s growth direction.

Organisation: SME employees are closer to the entrepreneur compared to LSE employees.

Risk-taking: LSEs are risk-averse. SMEs risk-taking depends on the circumstances, e.g. they are risk-taking when the enterprise is under threat and risk-averse when the enterprise has been damaged by previous risk-taking.

Flexibility: The flexibility in LSEs is low, the flexibility in SMEs is high. SMEs can react in a quicker and more flexible way towards customers.

Take advantage of economies of scale and scope

Advantages of economies of scale: accumulated volume in production, resulting in lower cost prices per unit. LSEs have a bigger market share and therefore will benefit more from economies of scale than SMEs.

Advantages of economies of scope: re-using a resource from one business in additional businesses. LSEs benefit more from economies of scope than SMEs because they serve more different markets and countries.

Use of information sources: The demand for complex information increases when a firm becomes more international and marketing orientated. LSEs use advanced technologies for gathering information. SMEs gather information in an informal manner and it is often incomplete.

The nine strategic windows

Solberg (1997) discusses the conditions under which a firm should ‘stay at home’ or ‘go abroad’. His framework, ‘The nine strategic windows’ is based on two dimensions (p20):

• Industry globalism: depends on the firm’s international competitive structure within the industry.

• Local: the markets are independent form each other. The firm operates in a multi-domestic market environment. For example, a barber.

Potentially global

Global: there are many interdependencies between markets, customers and suppliers. The firm operates in an industry that is dominated by a few powerful players. For example, IT industries.

Preparedness for internationalisation: depends on the firm’s ability to perform strategies in the international marketplace.

Immature: the firm has little international experience and a weak position in the home market.

Adolescent

Mature: the firm has a good basis for dominating the international markets and is able to gain higher market shares.

The development of the global marketing concept

Global marketing: the firm’s commitment to coordinate its marketing activities across national boundaries in order to find and satisfy global customer needs better than the competition. Global marketing has his main purpose in finding or consisting and satisfying the needs of the global customer. The nature of the firm's response to global market opportunities depends on the assumptions of the management. The firm's business can be described to the EPRG framework. This framework contains four orientations:

• Ethnocentric: the home country and its needs are superior. Control is centralised and approaches and equipment implemented in foreign locations are identical to those in the home country.

• Polycentric: each country is unique and should be treated in a different way. Control is decentralised and he firm tries to adapt to the different conditions of different locations in order to maximize profits.

• Regiocentric: the firm tries to integrate, adjust and coordinate its marketing programme within regions (e.g. Europe, Asia), but not across them.

• Geocentric: the firm offers global products with local adaption.

The firm is able to develop a global marketing strategy, exploit the knowledge of the HQs and transfer knowledge and best practises from any of its markets and use them in other international markets. This contains a few key terms as Coordination of its marketing activities, finding the needs of the global customer, satisfying the global customer and performing better than the competition.

‘Think globally but act locally’

This is a global marketing strategy of a firm that coordinates their efforts, exploits their benefits of integration and efficiencies, and ensures their local flexibility through interdependence between headquarters and subsidiaries. Furthermore, it comprises two extremes: globalisation and localisation, which are combined into ‘the glocalization framework’, Figure 1.7. A key concept of glocalization is the aim to transfer knowledge and learning across borders, Figure 1.8. However, due to the cultural context of countries it is not always easy to transfer knowledge.

The strategies of LSEs and SMEs are changing. This is illustrated in Figure 1.9.

There are two dimensions that show the starting points of the LSEs and SMEs strategy, their movement of strategy and their aimed strategy: global integration and market responsiveness.

Global integration: recognizing the similarities between international markets and integrating them into the overall global strategy.

Market responsiveness: responding to each market’s needs and wants.

The strategy that both enterprises aim for is ‘the glocal strategy’. It reflects the ambitions of a global integrated strategy, while recognizing the importance of local adaptions.

Forces for global integration. These forces support a shift towards integrated global marketing.

Removal of trade barriers (deregulation): it reduces time, costs and complexity.

Global accounts/customers: LSEs are demanding suppliers (SMEs) to provide them with global products and services to meet their unique global needs. SMEs need cross-functional customer teams in order to manage these demands.

Relationship management: the increasing importance of relationships with external organisations and internal units (e.g. subsidiaries). These relationships reduce market uncertainties, especially in dynamic environments, but increase the need for coordination and communication.

Standardized worldwide technology: the customers’ electronic demands are high for homogeneity products, this increases the need for scale and scope production.

Worldwide markets: they are growing because they can rely on world demographics.

Global village: similar products and services can be sold to similar groups of customers in any country in the world.

Worldwide communication: due to internet it is easier and less expensive to communicate and trade across different countries. Consequently, customers are able to buy the same products and services in foreign countries as in their home country.

Global cost drivers

Forces for market responsiveness. These forces support a shift towards a national, market responsive marketing.

Cultural differences: there are difficulties in international negotiations and marketing management because of the differences in personal values and assumptions of people.

Regionalism/protectionism: the grouping of countries into regional clusters based on geographic proximity. These regional clusters form trading blocs and create outsiders as well as insiders, which can result in protectionism.

Deglobalization trend: moving away from the globalization trends and regarding each market as special, with its own economy, culture and religion. This trend develops due to the fear of (cultural) imperialism.

Value chain: a categorization of the firm’s activities providing value for the customers and profit for the company. It can be used as a framework for identifying international competitive advantages. Each stage of the value chain is an opportunity to perform better than competitors, which is a competitive advantage.

Simplified version: R&D > Production > Marketing > Sales and services

Value: the amount that buyers are willing to pay for what a firm provides them with (perceived value). Besides, value is the element used to analyse the competitive position of a firm rather than the costs.

The strategy of a firm is aimed at being profitable. Therefore a firm needs to provide more value than the costs of creating the product.

Margin: the difference between the total value (price) and the collective cost of performing the value activities.

A firm’s competitiveness can be created through: lower cost: providing comparable buyer value more efficiently than competitors, and differentiation: providing more buyer value than competitors at comparable cost.

There are two types of value activities, Figure 1.10:

Primary activities: physical creation of the product, its sale and transfer to the buyer, after-sales assistance. The activities can be divided into five categories:

1. Inbound logistics: receiving, storing and distributing the inputs to the product.

2. Operations: all activities concerning the transformation of inputs into the final product.

3. Outbound logistics: collection, storage and distribution of the product to customers.

4. Marketing and sales: the means used to make consumers aware of the products and services and being able to purchase it.

5. Services: all activities that improve or maintain the value of the product or service.

Support activities: support the primary activities. The first three activities are associated with specific primary activities; the last one supports the entire chain.

Procurement: providing purchased inputs.

Technology development: key technologies are involved directly with the product, the processes or the resources.

Human resources: goes beyond all primary activities. Activities involved with recruiting, training, developing and rewarding people.

Infrastructure: systems of planning finance, etc. Furthermore it consists of structures and routines to maintain culture.

The distinction between upstream (production-oriented) and downstream activities (marketing-oriented) is further elaborated in Figure 1.11.

Linkages: The value chain is not a collection of independent activities, but a system of interdependent activities. The activity of value is related by horizontal linkages within the chain. Linkages are relationships between the way in which one value activity is dependent on the performance of another.

There are two types of linkages: Internal and external linkages.

Internal linkages: between activities within the same value; so between two primary activities or between one primary and one support activity. The value chain requires that the primary activities are in harmony; otherwise they will weaken each other. The link between a primary and a support activity is the basis of competitive advantage, e.g. a firm has a unique system for procuring materials. Figure 1.12 shows the link between the value chain activities and the strategic levels of a firm.

• Strategic level: responsible for formulation mission statement, determining objectives, identifying resources to attain objectives and select most appropriate strategy.

• Managerial level: translating objectives into functional objectives and making sure resources are used effectively.

• Operational level: responsible for effective performance of tasks, achievement of functional objectives.

External linkages: between different value chains ‘owned’ by different actors in the total value system; so between the firm and their suppliers and distribution chains, and the part of the buyer’s value chain. Gaining competitive advantage depends on the fit of the firm in the overall value system.

The internationalisation of the value chain.

Decision to make: Should the responsibility for the single value chain function be handled by the export markets or should it remain in the hand of the centralized head office?

Answer: value chain function must be performed where the highest competition and cost-effectiveness is. However, the downstream activities should be, in contrast to the upstream activities, be performed where the buyer is located, Figure 1.14.

Implications: 1. Competitive advantages are country specific because downstream activities are performed in the country of the buyer. 2. A multi domestic pattern of international competition can be created when the downstream activities become essential for competitive advantages. Global competition is more common when upstream and support activities are essential for competitive advantages. 3. It is more difficult to maintain a price differentiation across markets when customers enjoy regional cooperative buying organisations.

Two dimensions of how a firm competes internationally:

1. Configuration: each activity in the value chain is performed in a different location.

2. Coordination: how identical activities that are performed in different countries are coordinated with each other.

Stabell and Fjeldstad identified two models of value creation. They state that the value chain is a model only for making products.

Value shops: a model for solving customer problems in a service environment. Value is created by preparing resources and applying them to solve a specific customer problem. They are similar to workshops, not stores.

Value networks: the formation of several firms’ value chains into a network, where each company contributes a small part to the total value chain. The aim is to add more value to customer exchanges. Useful for telecommunications and banks.

Competitive success requires more than performing your primary model. You need to deliver complementary value in order to distinguish yourself from the competition.

Blomstermo distinguished hard and soft services. Hard services are those where production and consumption can be decoupled. Soft services are services where production and consumption occur at the same time, so decoupling is not possible.

A new trend is to combine the product value chain with the service value chain, Figure 1.15. This happens when a company realises that competitors use their products to offer services of value.

Decision to make: will the focus of the service business be on supporting the existing product businesses or on growing as a new and independent business?

The ‘moment of truth’ is a service interaction between the buyer and seller which creates new knowledge and improvements of the existing products/services processes.

Virtual value chain: an extension of the conventional value chain, where the information processing itself can create value for customers, Figure 1.16.

Four ways to create business value through the use of information:

• Managing risks: stimulates the growth of functions such as accounting and finance.

• Reducing costs: focuses on using information as efficiently as possible to achieve the required outputs.

• Offering products and services: aim is to improve customer satisfaction through knowing customers and sharing information with partners and suppliers.

• Inventing new products: using information to innovate.

In order to provide customer value, a firm has to increase their product and service offerings. The process of generating customer value from a product solution, services and finally customer experience occurs when a company uses products in combination with services. This is necessary in order to engage the individual customer in a way that creates a memorable event. This can be characterized into four groups:

• Entertainment

• Educational

• Aesthetic

• Escapist

It is important to know that consumers are involved in the process of both defining and creating value. Pine and Gilmore (1998) suggest that we think about experiences across two bi-polar constructs: Involvement/participation, which refers to the level of interactivity between the supplier and the customer, and intensity/connection, which refers to the strength of feeling forward the interaction.

Chapter 4: Establishing international competitiveness

In this chapter we are going to take a look at how the firm creates and develops competitive advantages in the international market. To understand the development of a firm's international competitiveness, we are going to explain a model in three stages:

Analysis of national competitiveness, macro level(The Porter diamond)

Competition analysis, meso level(Porters five forces)

Value chain analysis, micro level. This is divided in competitive triangle and benchmarking.

Analysis of national competitiveness, macro level (The Porter diamond)

Michael E. Porter called his work The Competitive Advantage of Nations (1990). It analyses the national competitiveness that represents the highest level in the entire model.

Porter’s diamond: the characteristics of the home base play a central role in explaining the international competitiveness of the firm. The elements are:

• Factor conditions: basic factors –natural resources with a low mobility– and advanced factors –human resources and research capabilities–, basic factors cannot create value without the advanced factors.

• Demand conditions: elements are scale economies, transportation costs, the size of the home market and sophistication. A product’s design almost always reflects home market needs.

• Related and supporting industries: the presence of it influences the success of an industry. Cooperation is an important element.

• Firm strategy, structure and rivalry: how companies are organised and manage their objectives and domestic rivalry. High domestic rivalry forces firms to be efficient, cost-saving and innovative.

• Government: it can influence and be influenced by the above four elements. It can encourage development, improve infrastructure and support the use of environmentally friendly resources.

• Chance: random events. The most important instance of chance involves the question of who comes up with a major new idea first.

Firms are determining the industries to compete with, by looking at the home base of foreign competitors. The home base shows a firm’s strengths and weaknesses compared to rivals.

Industrial cluster: a concentration of firms within a certain industry. These firms have relations with other firms in that industry, namely customers, suppliers and competitors. Being part of a cluster is a competitive advantage because it creates an open flow of information.

Competition analysis, meso level (Porters five forces)

The next step is to understand the competitive arena in an industry, which is the top box of the diamond model. Porter says that the state of competition depends upon five basic competitive forces. Together these factors determine the ultimate profit potential on an industry. An Industry is a group of firms that offer products which are substitutes for each other. A market is a set of buyers (actual and potential) of a product and sellers. An industry may contain several different markets. With that in mind, there is an industry level and a market level. The industry level consists of all types of actors that have interest in the industry. The market level consists of actors with a current interest in the market.

Porter’s five forces model. The state of competition and profit potential in an industry depends on five basic competitive forces:

• Market competitors: factors that influence the intensity of rivalry: The concentration of the industry: several competitors of equal size lead to more rivalry. Rate of market growth: slow growth tends towards more rivalry.

• Structure of costs: high fixed costs leads to price cutting to fill capacity.

• Degree of differentiation: commodity products encourage rivalry, high differentiated products discourage rivalry.

• Switching costs: switching from product you sell. High switching costs are associated with specialized products and low rivalry.

• Exit barriers: greater rivalry when exit barriers are high.

Suppliers: the higher the bargaining power of suppliers, the higher the costs for buyers. Circumstances for high bargaining power of suppliers:

• Supply is dominated by few companies.

• Products high switching costs are differentiated.

• They are not mandatory to produce other products for sale to the industry.

• They are a threat of integrating into the industry’s business.

• Buyers do not threaten to integrate into supply.

• The market is not an important customer to the supplier group.

Buyers: circumstances for high bargaining power of buyer:

• Buyers are concentrated and purchase in large volumes.

• They are a threat of integrating to manufacture the industry’s product.

• They purchase standard products.

• Many suppliers of the product.

• They stimulate lower purchasing costs and earn low profits.

• Industry’s product is unimportant to the quality but important to the price of the buyer’s products.

Substitutes: its presence can reduce industry’s attractiveness and profitability. The threat of substitute products depends on:

• Buyer’s willingness to substitute.

• Relative price and performance of substitutes.

• Costs of switching to substitutes.

New entrants: new entrants increase rivalry. The extent of new entrants depends on the number of entry barriers. Entry barriers are affected by:

• Economies of scale.

• Product differentiation and brand identity.

• Capital requirements in production.

• Switching costs: switching from supplier.

• Access to distribution channels.

Aim: firm tries to find the position in industry where it can best defend itself against the five forces, or can influence them in its favour.

Strategic groups: groups of companies that are likely to respond similarly to environmental changes and that have similar business models/combinations of strategies.

Strategic group analysis: a technique used to provide management with information about the firm’s position in the market and a tool to identify the direct competitors. The five forces model is the first step of this process.

The collaborative five sources model: A firm needs to find an appropriate balance between the extent of collaboration and competition with other firms in each of the five dimensions.

Corresponding to Porter's five competitive forces, there are also five potential sources for building collaborative advantages together with the firm's surrounding actors. We will show the five sources model and the corresponding five forces in the Porter model:

The market competitors are corresponding to horizontal collaborations with other enterprises that are operating at the same stage of the production process. The suppliers corresponding to vertical collaborations with suppliers of components or services to the firm. Buyers corresponding with selective partnering arrangements who have specific channels or customers that involve collaboration extending beyond standard. Substitutes corresponding to alliances with producers of both complements and substitutes. New entrants corresponding to diversification alliances with firms based in previously unrelated sectors or a process that opens up the prospect of cross industry fertilization of technologies that did not exist before.

Value chain analysis, micro level. This is divided in competitive triangle and benchmarking.

Success in marketing of products depends on 1. Identifying + responding to customer needs, and 2. Ensuring that the firm’s response is judged by customers as superior to that of competitors. Customer perceived value (CPV): the perceived value compared to the customer’s perceived sacrifice (costs), Figure 4.2. The higher the CPV is, the better the competitiveness.

Competitive triangle: consists of a customer, the firm and a competitor. The firm or competitor ‘winning’ the customer’s favour depends on perceived value offered to the customer compared to the relative costs between the firm and the competitor.

Firms have a competitive advantage when they have:

Higher perceived value than competing firms: perceived value is the customer’s overall evaluation of the product/service offered by a firm. It is required to know what kind of value the customer is seeking for in order to deliver the correct value.

Furthermore, it is important to have a product/service with additional values that will distinguish your product from those of competitors. This can be created through the 4-P marketing mix: product, distribution, promotion, and price, and three additional Ps: people (consumers and employees), physical aspects, and process (assure service availability and consistent quality).

In addition, personnel influence the firm’s image because it influences the customer’s perception of product quality.

Lower relative costs than competing firms: it requires an understanding of the factors that affect costs. The experience curve describes the relationship between real unit costs and cumulative volume. Leapfrogging, Figure 4.4 gives newcomers a special opportunity to enter the market because the experience curve is lower. There are other cost drivers that determine the cost in value chains:

• Capacity utilization: underutilization causes costs.

• Linkages: costs of activities are affected by how other activities are performed. E.g. quality improvement can reduce after-sales service costs.

• Interrelationships: e.g. sharing of R&D lowers costs.

• Integration: e.g. outsourcing can lower costs.

• Timing: e.g. first movers in a market can gain cost advantages.

• Policy decisions: e.g. decisions about the level of service affect costs.

• Location: located near suppliers of customers can reduce distribution costs, or located in eastern Europe lowers wage costs.

• Institutional factors: e.g. government regulations affect costs.

The basic sources of competitive advantage

A firm’s resources and its competences influence the perceived value and the relative costs.

Resources: basic units of analysis – financial, technological, human and organisational resources – found in the firm’s different departments. They will eventually lead to the firm’s performance, Figure 4.5.

Competences: combination of different resources into capabilities and later competences. It is the thing that the firm is really good at. The formation and quality of the competences depends on the specific capabilities and the resource assortment.

Two interdependent categories:

• Personal competences: possessed by individuals.

• Corporate competences: belong to the organisation, embedded in processes and structures.

Competitive benchmarking is a technique for assessing relative marketplace performance compared with main competitors. Performing similar activities is better than competitors performing them. According to Porter it is also important to perform different activities or similar activities in different ways. Factors that can be measured and compared (only a few criteria):

• Delivery

• Reliability

• Ease of ordering

• After-sales service

• Quality of sales representation

These elements are all associated with customers’ perception. They are selected because of their importance to the customer.

Critical success factors: the value chain functions where the customer demands/expects the supplier to have a strong competence.

Core competences: value chain activities in which the firm is regarded as better than its competitors, Figure 4.6. It is a competitive advantage that is difficult to imitate, and has a potential to earn long-term profit

The process of strategy. The model for the strategy process contains four stages:

• Stage 1: Analysis of situation( identification of competence gap)

• Stage 2: Scenarios

• Stage 3: Objectives

• Stage 4: Strategy and implementation

Stage 1: Analysis of situation

Identification of the competence caps. The measurements are subjective and rely on internal assessments of firm representatives complemented by external experts who are able to judge the market’s demand. Two analyses:

• Large gap between critical success factors and firm’s initial position. Firm tries to improve the position of the success factors or it will search for new areas where the success factors and the firm’s initial position better fit together.

• Good match between critical success factors and firm’s initial position. Firm focuses on improving this core competence to create sustainable competitive advantages.

Stage 2: Scenarios

Different scenarios of possible future development are made in order to estimate the future market demand. The gap between the success factors and the firm’s initial position becomes more clear. If knowledge about the market leader’s strategy is available it is possible to complete scenarios of the market leader’s future competence profile.

Stage 3: Objectives

Those scenarios are the basis for a discussion about objectives and competences the company might want to have within a specific period of time.

Stage 4: Strategy and implementation

A new strategy, based on the outcomes of the discussion, is prepared. Furthermore, a implementation plan that includes the adjustments of the organisation’s current competence level is created.

The sustainable global value chain

According to Porter and Kramer, a firm’s strategy should include corporate social responsibility (CSR). CSR is a number of corporate activities that focus on the welfare of stakeholder groups other than investors. Examples are charitable and community organizations, employees, suppliers, customers and future generations. These CSR activities must be designed and implemented in such a way that they contribute to the primary and support activities of the firm, so they improve the context of competitiveness of a firm.

Due to CSR activities a company gains tangible (human resource) and intangible resources (reputation). Two major problems (or business market opportunities) are widespread: poverty and environmental degradation. The value added from CSR activities may occur if revenues increase or costs decrease, Figure 4.9.

CSR benefits : CSR-induced revenue increases due to CSR grants and subsidies, and additional sales. The increase in sales is a result of:

• Better branch value

• Better customer attraction and retention

• Higher employed attractiveness

• Higher employee motivation and retention

Savings from CSR-induced cost decreases due to internal cost savings and duties granted by governments.

CSR costs: One-time CSR costs due to one-time donations, one-time CSR costs and investment costs. Continuous CSR costs due to continuous donations, fees, personal costs and material costs.

Value net: A company’s value creation in collaboration with suppliers and customers (vertical network partners) and complementors and competitors (horizontal network partners), is called a value net.

Red ocean: tough head-to-head competition in mature industries often results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.

Blue oceans: the unserved market, where competitors are not yet structured and the market is relatively unknown. Here it is about avoiding head-to-head competition.

According to Kim and Mauborgne tomorrow’s leading companies will not succeed by battling competitors but by making strategic moves (value innovation).

Value innovation is very customer focused, always searching for a win-win solution. Instead of compromising the value wanted by the customer, costs are eliminated if there is no value placed on the offering by the customer.

A value curve is shown in Figure 4.11; it gives an overview of the customers value placed on the given criteria.

Chapter 6: Economics and politics

The political environment comprises two dimensions: the home country environment and the host country environment.

Home country environment

Political environments can limit the countries that the international firm may enter. This can happen due to:

• The triple-threat political environment: the firm does not face problems in the home or host country but in the third market.

• A market that concerns corruption and bribery, this may lead to a lack of moral standards.

Promotional activities: activities that are sponsored by governmental organisations. These subsidies are for a special interest. E.g. export subsidies are only for the exporting industry.

They are supporting certain activities in order to:

• Make the home country’s products more competitive in world markets.

• Ensure the profitability of industries and individual firms that might not survive if exposed to the full competition.

• Avoid a lack of motivation. A global marketing is viewed as more time consuming, costly and risky, and less profitable, than domestic business.

• Lack of adequate information

• Operation/resource-based limitations

Financial activities

Credit policy: best way to measure the results of a company’s export marketing programme.

The supplier that is able to offer better payment terms and financing conditions can make a sale, even though its price may be higher or the quality is not as good of its competitors.

Export credit insurance: cover certain commercial and political risks that might be associated with any given export transaction.

A few companies are able to collect information they need themselves or can afford it to hire outside research agencies to do research. However, many companies are not able to do so, so their national government is the major source of basic marketing information. A few examples of the type of information that is needed:

• Economic, social and political data on individual countries

• Specific export opportunities

• Lists of potential overseas buyers and distributors

• Information on relevant government regulations

Four national government activities that can stimulate export:

1. Trade development offices abroad.

2. Government-sponsored trade fairs and exhibitions.

3. Sponsoring trade missions of people who go abroad for the purpose of foreign representation.

4. Operating permanent trade centres in foreign market areas.

Non-governmental organisations that stimulate global marketing:

• Industry and trade associations.

• Chambers of commerce.

• Other organisations concerned with trade promotion. Export service organisations, banks, transport companies, freight forwarders, trading companies, etc.

There are a few types of assistance that is available to firms like: information and publication, assistance and education in technical details, and promotion in foreign countries.

Why state trading in private businesses?

• It leads to the establishment of import monopolies that causes the need to make substantial adjustments in export marketing programmes of exporters.

• Private international marketers face difficulties when state traders use their monopolistic power.

Host country environment

Managers should continually monitor the government, its policies, and stability in order to measure the potential for political change that could affect the operations of the firm.

Major types of political risk:

• Ownership risk: exposes property and life.

• Operating risk: interference within the ongoing operations of a firm.

• Transfer risk: when transfer capital between countries.

Government actions:

• Import restrictions: to create markets for local industry. Effects: interruption of operation of established industries.

• Local-content laws: the requirement that sold products within a country must have a certain portion of local content.

• Exchange controls: are implemented when a country faces shortages of foreign exchange. The controls must converse the supply of foreign exchange for the most essential uses. Problem: Transfer risks foreign investor obtains money in the currency of the home country.

• Market control: in order to prevent foreign companies to compete in certain markets.

• Price controls: are carried out on essential products in order to control the cost of living or the inflationary periods.

• Tax controls: used to control foreign investments, it is a political risk. They are often raised without warning and in violation of formal agreements.

• Labour restrictions: associated with labour unions. They have a great political influence.

• Change of government party: the agreements between the government and companies might change when a new government is created. This is an issue that occurs most in developing countries.

• Nationalisation (expropriation): means to takeover foreign companies by the host government. This is the ultimate government tool to control foreign companies.

• Domestication: the ‘creeping expropriation’ is a process whereby the control of the owners of a foreign firm reduces due to controls and restrictions placed by the government.

These controls include: greater decision-making powers accorded to nationals, more products produced locally, gradual transfer of ownership to nationals, e.g. when the demand for local participation in joint ventures increases and promotion of a large number of nationals to higher levels of management.

Trade barriers are trade laws (often tariffs) that favour local firms and discriminate against foreign ones.

There are two main reasons for trade barriers:

• To protect domestic producers: the effective costs of an imported product are higher compared to the domestically produced products due to the import tariffs.

• To generate revenue: tariffs are a source of revenue of the government. It often occurs in less-developed nations.

A protected industry can be destroyed if it encourages inefficiency and later starts to internationalise, and thus faces the international competition.

Trade barriers are grouped into two categories: tariff and non-tariff barriers

Tariff barriers are direct taxes and charges imposed on imports that are used by governments to protect local companies from outside competition. The most common forms are:

• Specific: charges, in local currency, imposed on particular products by weight or volume.

• Ad valorem: chares are a percentage of the import price (the value of the goods).

• Discriminatory: charges against a particular country because of trade imbalance or political purposes.

Non-tariff barriers: unknown quantity and less predictable than tariff barriers. They occur more in times of recession. The most common non-tariff barriers are:

Quotas: a restriction on the amount of a good that can enter or leave the country during a certain period.

The reasons why governments impose import quotas are to protect domestic producers: import quotas help the domestic producers to maintain their market share and price and to force foreign companies to compete against another firm for the limited amount of imports allowed.

The reasons why governments impose export quotas are to maintain supplies of a product in the home market. In particular natural resources that are essential to domestic businesses or the long-term survival of a nation and to restrict supply on world markets in order to increase the international price of the good.

Voluntary export restraint (VER): a quota that a nation imposes on its export usually at the request of another nation. Countries sometimes self-impose a VER in response to the threat of an import quota or total ban on the product by an importing nation.

Embargoes: a complete ban on trade (import and export) in one or more products with a particular country. They are applied to accomplish political goals.

Administrative delays: regulatory controls designed to affect the rapid flow of imports into a county negatively.

Local content requirements: laws stating that a specified amount of a good or service must be supplied by producers in the domestic market.

The political risk-analysis procedure

Goal: to help firms to make a decision whether to enter or stay in a country, or to avoid or leave the country, based on the ratio of the return to risk. The building of relationships with government, customers, employees, and the local community are necessary to deal with political risks.

Laws are susceptible to frequent change. New laws are created and existing ones are adjusted. Mangers try to influence local politics to ensure that changes will positively affect their local activities. There are two ways to do that:

Lobbying: the policy of hiring people to represent a company’s view on political matters. Their goal is getting favourable legislation passed and unfavourable legislation rejected.

Corruption/bribery: to gain political influence and build relationships with political decision makers.

Building relationships with customers, employees and with the local community is important because the customers support companies that provide them with desirable products and services in the past, the employees who are well treated are interested in the survival of the organisation, because it means their own survival as well and the local community because the firm should reinvest in the local community in order to avoid the fear of the local community that companies will only benefit from the environment without giving something in return.

The economic environment. Economic development results from three types of economic activity:

• Primary: agriculture activities.

• Secondary: manufacturing activities.

• Tertiary: service activities, e.g. insurance percentage spend on these activities increases when the income of consumers increases.

Exchange rate: how much of one currency must be paid to receive a certain amount of another currency.

Exchange rates influence business activities:

A weak currency: local currency is valued low compared to other currencies.

 Export is cheap and thus increases; import is expensive and thus decreases.

A strong currency: local currency is valued high compared to other currencies.

 Export is expensive and thus decreases; import is cheap and thus increases.

Adjustments to the value of the currency implemented by the government:

Devaluation: lowers the price of a country’s export and increases the price of import on world markets because the local currency is worth less on world markets compared to other currencies.

Revaluation: increases the price of a country’s export and the price of import on world markets because the local currency is worth less on world markets compared to other currencies.

Preferred is a stable exchange rate, because it improves the accuracy of financial planning and it lowers risks.

The law of one price means that an identical product must have an identical price in all countries when price is expressed in a common denominator currency.

The requirements are identical quality, identical content and produced entirely within a particular country. Useful to determine whether a currency is over or undervalued.

Big Mac Currencies is an exchange-rate index that is based on the theory of purchasing power parity (PPP). This theory states that a certain currency should have the same value in all countries. It tries to eliminate the differences in price levels between countries in order to equalize the purchasing power. Furthermore, it tries to improve comparability by adjusting national income data.

Traded product: one can buy a certain product in low-priced countries and sell them in high-priced countries. Prices of an identical product can differ in different countries, because the product or service is affected by subsidies, the marketing strategies of the product differ or different levels of sales tax.

Calculate over or under valuation:

1 – (Local price of a product / price of the product in its original country) * 100%

Note: it cannot be calculated for individual products, only for a basket of products.

Classification by income

The most classifications are based on national income and the degree of industrialization. The broadcast measure of economic development is Gross National Product (GNP)

The Gross National Product (GNP) is the value of all goods and services produced by a country over a one-year period, including income generated by the country’s international activities. It is equal to the Gross National Income (GNI).

The Gross Domestic Product (GDP) is the value of all goods and services produced by the domestic economy over a one-year period.

GNP per capita: total GNP / population

GDP per capita: total GDP / population

GNP and GDP are used to classify countries. We can describe three types of countries:

1. Less developed countries(LDCs)

2. Newly industrialised countries(NICs)

3. Advanced industrial countries

Less developed countries (LDCs)

Features:

• Low GDP per capita.

• Limited amount of manufacturing activity.

• Poor and fragmented infrastructure: weakness in transport, communications, education, and health care.

• Slow moving and bureaucratic public sector.

• Single-product dependence: reliance on one agriculture crop or mining.

• Heavily dependent on one trading partner.

• High risks by changing patterns of supply and demand.

Quality of distribution channels varies a lot between countries.

Economic circumstances influence the development of LDCs, because without real prospects for rapid economic development and private resources of capital, a company is not willing to invest in a country.

Newly industrialised countries (NICs)

Countries that have an industrial base that is capable of exporting and an infrastructure that shows development and high growth in the economy. However the last one leads to difficulties to produce what is demanded by customers.

Advanced industrialised countries

Countries that have a high GDP per capita, a wide industrial base, a high development in service sector, and an investment in infrastructure.

Economic integration is useful for effective resources and leads to large markets for member-country producers.

The levels of economic integration in regional markets are ranked by intensity, Figure 6.3:

1. Free trade area: no trade barriers among member-countries, however each member-country maintains its own trade barriers against non-members.

2. Customs union: same features as Free trade area + a common external tariff (trade policy with respect to non-members).

3. Common market: same features as Customs union + factors of production are mobile among members (labour, capital, technology) + restrictions on immigration and cross-border investment are eliminated.

4. Economic union: same features as Common market + integration of economic policies (monetary policies, taxation, government spending) + common currency.

The European Free trade Area (EFTA) was formed in 1960 with an agreement by eight European countries. All countries have cooperated with the European Union through bilateral free trade agreements.

After three failed efforts, the US and Canada signed a free trade agreement. It expanded with the inclusion of Mexico in 1994 in the North American Free Trade Agreement (NAFTA).

The European economic and monetary union (EMU).The requirements to enter the EU are:

• Stable democracy

• Respecting human rights

• Rule of law and the protection of minorities

• Have a functioning market economy

• Adopt the common EU-rules, -standards, and –policies.

European Economic and Monetary Union (EMU) include the euro. This should promote trade and greater competition. Even not EU-members use the euro as their currency.

The EMU influences: the accounting, personnel, and financial processes of companies and international competitiveness of European companies.

• Reduction of transaction costs

• Reduction of exchange rate risks

• Intensified domestic competition

• Possibilities of gleaning additional economies of scale

Note: the intensity of the influence power of the EMU depends on the impact of demands for wage equalisation and restrictions imposed by regulations.

Supporters of EMU claim: Greater nominal exchange rate stability, lower transaction costs and price transparency.

This will lower the information costs, increase the internal competitiveness of European businesses, increase consumer welfare, and increase the demand for cheaper products. The European Central Bank (ECB) needs to ensure a low level of inflation and reduction of real interest rates, and stimulate investment, output and employment.

Opponents of EMU claim: Loss of national economic policy tools will have a destabilizing impact, lack of ‘real’ convergence of participating economies is likely to increase the problem of asymmetric shocks, due to differences in concentration of owner occupation and variable interest borrowing, and the common monetary policy affects EU-members differently. That is why a common interest is insufficient to create stability.

BRIC, the new growth market of the world

BRIC stands for Brazil, Russia, India and China, and was coined in 2001 by Goldman Sachs. The markets of these countries have a high future growth. The four BRIC countries account for 42 percent of the world population and 20 percent of the world's gross domestic product (GDP) as measured in 2012. In 2009, the BRIC political leaders met for the first time, where South Africa was invited. In 2011 South Africa joined the BRIC. The BRIC has witnessed a huge economic growth, but recently they have been faced with slowing demand growth. In the future, BRIC economies have to take care of a slow-growing global economy, especially Europe, a reversal of investor risk to safe havens and a loss of confidence in the BRICs.

Benefits of regional integration:

Trade creation: the increase in the level of trade between nations that results from regional economic integration. Outcomes: Consumers and industrial buyers in member nations have a broader selection of goods and services, and due to the lowering of trade barriers, buyers can acquire goods and services cheaper and there are higher demand for goods because of lower costs.

Greater consensus: WTO tries to lower barriers on a global scale. In order to gain a consensus more easily, smaller groups are preferred because they have fewer members that need to be convinced.

Political cooperation: a group of nations often has greater political weight than the nations individually. Thus, political cooperation leads to more power when negotiating and it reduces the potential for military conflict between member nations.

Negative effects of regional integration:

Trade diversion: the loss of, perhaps more efficient, trade between member-nations and non-member-nations.

Shifts in employment: dislocations in labour markets.

Loss of national sovereignty.

The triad of Europe, North-America and Japan creates a market of 600 million with demographic similarities and levels of purchasing power due to: Growth of capital intensive manufacturing, accelerated tempo of new technology and a concentrated pattern of consumption. A reaction to the above mentioned forces will be protectionism.

‘Per capita income’ is used to describe a country’s economic development, the degree of modernisation, and the progress in health, education and welfare. It is commonly available information and a good indicator of the size or quality of a market.

Criticism:

Uneven income distribution: per capita income figures are averages. So, they are less meaningful if there is great unevenness of income distribution in a country.

Purchasing power is not reflected: per capita income is expressed in a common currency through an exchange rate conversion. The impact of speculation of the exchange rate of a currency makes the per capita income figures less meaningful.

Lack of comparability: in developed nations a large part of the income is spent on essential needs (e.g. food). In less developed nations, these needs may be self-provided and thus not reflected in national income totals.

The law of consumption (Engel’s law): poorer families and societies spend a greater proportion to their income on food than well-to-do people.

According to Prahalad, the focus on the Bottom of the Pyramid (BOP), the poor, should be part of the core business of firms because it might create valuable market opportunities. Furthermore, marketers who view the BOP as a valuable, unserved markets, and potential customers, are aware of the obstacle that low income creates. In addition, Prahalad claims that the BOP market size today is way smaller than the BOP market size potential.

Lastly, the requirements of serving the BOP are: a commercial strategy in response to their needs and other players, such as local and central government, financial institutions, etc.

The four key elements to thrive in the BOP:

• Creating buying power.

• Creating expectations through product innovation and consumer education.

• Improving access through better distribution and communication systems.

• Matching local solutions.

Criticism:

• It is unlikely that firms will be able to get profit out of the BOP market.

• BOP customers are dispersed geographically. This reduces the opportunities to obtain economies of scale.

• Consumers at the BOP are price sensitive and thus face difficulties to gain profit.

Maslow claims the existence of five core human motives that are satisfied in a hierarchical manner (1 = final needs, 5 = primary needs):

1. Physiological

2. Safety and security

3. Belonging

4. Self-esteem

5. Self-actualisation

Lower needs must be satisfied first before higher-level needs can be.
Note: this theory does not fit the BOP.

Aspects that should be fulfilled in order to serve the BOP market:

• Access to credit (micro finance): micro finance banks should be set up in order to facilitate the access to money.

• The establishment of alliances: 1) the involvement of private companies that will take the leading role in serving the BOP. 2) the focus of the public sector changes from traditional governmental assistance delivery to different ways of creating a sustainable environment per aiding the BOP.

• Adaptation of the marketing mix

Chapter 7: External sociocultural forces

Hofstede’s definition of culture: culture is the collective programming of the mind which distinguishes the members of one human group from another. It includes systems of values, and values are among the building blocks of culture.

Culture is a source of (in) visible difference that needs to be handled by an international marketer. The differences in underlying attitudes and values of the buyer are hard to understand, Figure 7.1.

Culture develops through repeating social relationships which form patterns that are eventually internalised by members of the entire group. Thus, culture changes over time.

Culture can be explained according to these three characteristics:

• It is learned: people learn the culture over time through their membership of a group that transmits culture from generation to generation. In the first five years of a human life, people learn the most about their national culture: how to use the language, how to interact with other members of their family, how to get rewards and avoid punishments, how to negotiate for what you want and how to cause and avoid conflict.

• It is interrelated: one part of the culture is deeply connected with another part.

• It is shared: basics of a culture extend to other members.

A framework of the different layers of culture can be used to understand the various norms of behaviour and the individual’s decision-making processes, which are important when the firm wants to internationalise, Figure 7.2. Layers:

• National culture: overall view of cultural concepts and legislation for business activities.

• Business/industry culture: every business is settled in a specific competitive industry. The business culture has its own cultural roots and history, and members possess adequate knowledge. The industry culture has similar ways of behaviour and ethics across boundaries.

• Company culture: comprises of sub cultures. Functional culture is expressed through the shared values, beliefs or meaning, and the behaviour of members of a function within a firm.

• Individual behaviour: the core person who interacts with other actors in a firm. Individuals perceive the world differently. They are created through a learning process in different environments.

The level ‘global-culture’ could be added as the outer boundary. It would consist of worldwide enterprises, global brands, etc. that have personnel that shares beliefs. For example: the World Trade Organisation.

Edward T. Hall (1960) introduced the concept of high and low context in order to understand the different cultural orientation

• Low-context cultures: rely on spoken and written language. There is a low degree of complexity in communication, e.g. Swiss.

• High-context cultures: more elements surrounding a message. The social importance and knowledge, and the social setting of a person add extra information to a message, e.g. Japanese.

If the difference in context increases, the difficulty in achieving accurate communication increases as well.

Explicit language: say what you mean, and mean what you say (low-context culture).

Implicit language: indirect communication. The underlying meaning of what you say is what you actually mean (high-context culture).

Networking: using the power of other partners. It is more valued in high-context cultures.

Elements of culture: There are different definitions as it comes to explaining the elements of culture. The following elements are the most common ones in the concept of culture:

Language: the words of a language are reflecting the culture. Language can be divided into two major elements: the verbal and the non-verbal language.

Verbal language: English is often the used language between people of different nationalities. It is about the actual words and the way they are pronounced. Language capability influences global marketing: It is necessary to gather information and evaluate efforts objectively. It is essential to become a part of the global market rather than only observing it, because people are more comfortable speaking their own language.

Non-verbal language: it is more important in high-context cultures. Elements of non-verbal language can be : Time, importance of being ‘on time’, space, conversational distance between people, material possessions, interest in latest technology, friendship patterns, friends are like social insurance in times of stress and emergency, business agreements, rules of negotiations based on laws, morals practices or informal customs.

Manners and customs: understanding of manners and customs is essential in negotiation, because it enables you to interpret all communication correctly.

Technology and material culture: Material culture is about the availability and adequacy of the basic economic, social, financial and marketing infrastructures, and it results from technology. Technological advancement influences cultural convergence.

Social institutions can be business, political, family or class-related. It influences the behaviour of people and their relationships. Reference groups: people that are part of the socialisation process. They provide the values and attitudes and affect behaviour.

Primary reference groups: intimate groups, such as family.

Secondary reference groups: less continuous interaction, such as in social organisations. They determine the roles of managers and subordinates, and their relationships.

Education is the process of transmitting skills, ideas and attitudes, and training in particular disciplines. Function: the transmission of the existing culture to the new generation. Findings: These can be used for change.

The educational background of an employee has impact on his or her business functions.

Foreign employee-training is used to help foreign employees to fit the company’s culture.

Values and attitudes helps to determine what we think is right, what is important, and what is desirable. The more rooted values and attitudes are in beliefs, the more cautiously the manager must act. In industrialised countries change is viewed positively, in tradition-bound countries it is viewed with suspicion. In conservative countries there is more resistance to take change-risks. Training can reduce risks.

Aesthetics are attitudes of a culture towards what is a good taste in art, music, etc. It is important for the understanding of expressions, and for the knowledge of what is acceptable and what is not. For example, sex in advertising. Aesthetics need to be taken into account when designing a product or logo.

There are a few major religions that are shared by a number of national cultures:

• Christianity: most widely practised. Mainly in Europe and America.

• Islam: mainly in Africa, the Arab, Indonesia and around Mediterranean.

• Hinduism: Mainly in India. Emphasizes on spiritual progress of a person’s soul.

• Buddhism: Mainly in South-East Asia, China, Korea and Japan.

Religions can provide the basis for transcultural similarities under shared beliefs. Religion influences the global marketing strategy by:

• Religious holidays differ among countries, e.g. Ramadan. Personnel will not work during those holidays.

• Consumption patterns may be affecting by religion, e.g. taboo against beef for Hindus.

• Islamic worshippers pray five times a day, also during work.

• The economic role of women varies per culture.

The 4 + 1 dimension model (Hofstede's original work on national cultures)

According to Hofstede, the way people in different countries interpret their world varies along four dimensions: power distance, uncertainty avoidance, individualism and masculinity:

Power distance: the degree of in equality between people in physical and educational terms.

High power distance: power is concentrated, decisions are made by a few people at the top. Japan.

Low power distance: power is widely dispersed, relationships are more egalitarian. Denmark.

Uncertainty avoidance: the degree to which people in a country prefer formal rules and fixed patterns of life to enhance security.

High uncertainty avoidance corresponds with risk aversion. Managers engage in long-range planning. Japan.

Low uncertainty avoidance, face the future as it takes. United States.

Individualism: degree to which people in a country learn to act as individuals rather than members of a group.

Individualistic societies, people are self-centred, and search for independence and goal fulfilment of their own goals. United States.

Collectivistic societies, existence of group mentality. Members are interdependent, have high loyalty to the firm, and make decisions decentralised. Japan.

Masculinity: the degree to which ‘masculine’ values prevail over ‘feminine’ values.

Masculine cultures have different roles for men and women and they perceive big as important. United States.

Feminine cultures value the quality of life over materialistic ends. Denmark.

Time perspective: the way members of an organisation exhibit a future-oriented perspective rather than a traditional history.

Long-term orientation: persistence, ordering relationships by status and observing this order. China.

Short-term orientation: personal steadiness and stability. European countries.

Strengths of Hofstede’s research:

• Large sample

• Information population is controlled across countries. Thus, comparison can be made.

• Four dimensions tap into deep cultural values and make comparisons between cultures.

• The meaning of each dimension is relevant.

• Comparison of so many cultures in much detail: the best there is.

Weaknesses of Hofstede’s research:

• It assumes that national boundaries and the limits of the culture correspond. Though homogeneity cannot be taken for granted in a model that includes so many different cultures.

• Hofstede did research only among one single industry and one single multinational. This assumes that the values of a small group represent the values of a whole industry, which is not true.

• There are technical difficulties due to overlap between dimensions.

• The definitions of the dimensions might differ per culture.

Managing cultural differences

In order to avoid the unconscious reference to our own cultural values, Lee suggested a four step approach to eliminate self-reference criterion (SRC):

• Define the problem in terms of home country culture, traits, habits and norms.

• Define the problem in terms of host country culture, traits, habits and norms.

• Isolate the SRC influence and investigate how it complicates the problem.

• Redefine the problem without SRC influence and solve the problem.

There is a difference between the attitudes towards the globalisation of cultures among different age groups. Youth cultures are more global than other age groups. Furthermore, young people tend to reject marketing and promotions that are obviously targeted as ‘youth’.

Ethical decision-making is also affected by culture. Sometimes a culture allows unethical decisions in a specific extent. The company then needs to decide whether to benefit from this allowance or to stay ethical. About what actions are allowed/fair and what are not/unfair within a specific culture, depends on the moral standards of the culture. Figure 7.4 shows ethical decision-making. ‘Most ethical’ requires:

• Organisational relations: competition, strategic alliances and local sourcing.

• Economic relations: financing, taxation, etc.

• Employee relations: compensation, safety, human rights, etc.

• Customer relations: pricing, quality and advertising.

• Industrial relations: technology transfer, R&D, infrastructure, etc.

• Political relations: legal compliance, bribery, corruption, subsidies, etc.

Social marketing: planning, execution and evaluation of programmes to influence the voluntary behaviour of target audiences in order to improve their personal welfare. For example, encourage people to give up smoking. The ‘customer’ of social marketing does not believe that he or she has a problem.

Social marketing is related to commercial marketing. However, social marketing focuses on resolving social problems, whereas commercial marketing focuses on making profit. Furthermore, the ‘customer’ of social marketing does not pay a price equal to the costs, whereas the customer of commercial marketing does.

Socially responsible marketing is commercial marketing while taking into account social responsibilities.

Chapter 8: Selection of the international market

To identify the right markets and which one to enter, a few reasons are important: It can be a major determinant of success or failure, the decision influences the nature of foreign marketing programmes, and the geographical locations which are selected are affecting the abilities of the firm to coordinate foreign operations.

International market selection: SMEs versus LSEs

The international market selection process (IMS) is different in SMEs and LSEs.

In SMEs IMS is often based on opportunities by the given market and intuition. If this is not the case, it is based on three criteria:

• Low psychic distance: enough information available about foreign markets. Differences in language, culture, political system, level of education/industrial development.

• Low cultural distance

• Low geographic distance

Note: young SMEs entered more distant markets much earlier than the old SMEs.

Reason to internationalise: they are selling to global customers that expect delivery of the SME’s product and services in multiple countries. So, the SMEs need global distribution networks. LSEs are drawing on existing operations, this makes it easier to access to primary information. Therefore LSEs are more proactive and make use of a step-by-step analysis.

How to build a model for international market selection?

An international market has two different definitions:

• The international market as a country or a group of countries.

• The international market as a group of customers with nearly the same characteristics.

An international market consists of customers from several countries.

The first definition is the most used one, because: International data are more easily available on a nation compared to the availability of data on a cross-national statistical.

Distribution management and media are also organised on a nation.

The presentation of a market-screening model contains four steps: The selection of the relevant segmentation criteria, the development of appropriate segments, the screening of segments to narrow down the list of markets, and the micro segmentation.

Step 1: The selection of the relevant segmentation criteria

The criteria for effective segmentation are:

• Measurability: the degree to which the size and purchasing power of resulting segments can be measured.

• Accessibility: the degree to which the resulting segments can be effectively reached and served.

• Substantiality/profitability: the degree to which segments are sufficiently large and/or profitable.

• Actionability: the degree to which the organisation has sufficient resources to formulate effective marketing programmes and ‘make things happen’.

A high degree of measurability, accessibility and Actionability indicates general characteristics. A low degree of measurability, accessibility and Actionability indicates specific characteristics, Figure 8.3.

Segmentation criteria in the international environment according to the PEST approach:

• Political/legal

• Economic

• Social/cultural

• Technological

Step 2: The development of appropriate segments

There are a few general characteristics:

• Geographic location: consideration of location needs, such as air-conditioning needs. Countries with a lot of similarities may be clustered.

• Language: good knowledge of the language facilitates communication and provides insight into the culture.

• Political factors: the degree of power that the central government has may be the general criterion for segmentation.

• Demography: the proportion of specific types of people (children, elderly, etc.) and other rates, such as birth- and death rates are taken into account by a firm.

• Economy: consideration of the degree of economic development, the average income level, and other economic aspects.

• Industrial structure: the type of the existing competition at the wholesale level is used to cluster markets. An international marketer wishes to cooperate with strong wholesalers.

• Technological: the degree of technological advancement.

• Social organisation: consideration of the family structure within a country; the number of children and generations under one roof.

• Religion: religious laws, beliefs, assumptions, guidelines, etc. must be considered.

• Education: considered from two points: The economic potential of the youth market: differs due to differences in educational systems among countries and the level of literacy

Specific characteristics:

• Cultural characteristics: helps to understand what drives customer behaviour. The cultural behaviour of the members is constantly changing.

• Lifestyle: activity, interest and opinion are tools for analysing lifestyles.

• Personality: it is reflected in someone’s behaviour. Some personality traits are related to specific countries.

• Attitudes, tastes or predispositions: status symbols are indicators of what people consider to enhance their own self-concept and their perception among other people.

Step 3: The screening of segments to narrow down the list of markets

The screening will be divided into two stages: The preliminary and the fine- grained screening.

1. Preliminary screening: screening only through external screening criteria. Criteria examples: Restrictions in the export of goods, gross national product per capita, government spending as a percentage of GNP and number of cars owned per 1000 of the population

The degree of political, economic and financial stability can be assessed with the macro-oriented Business Environment Risk Index (BERI). Another macro-oriented assessment method is the shift-share approach which is based on the identification of relative changes in international import among various countries. The calculated average growth rate of imports is compared with the actual growth rate; the difference is the ‘net shift’ and shows a decline or growth.

2. Fine-grained screening: the firm’s competitive power and special competences in different markets are taken into account. It uses the market attractiveness/competitive strength matrix, Figure 8.4. This results in three categories of countries:

• A countries: primary markets, best opportunities for long-term strategic development. Firms want to establish a permanent presence here.

• B countries: secondary markets. Opportunities are identified; however, political/economic risk is too high to make long-term investments.

• C countries: tertiary markets. ‘Catch what you can’, perceived as high risk markets. The allocation of resources is minimal, and goals are short term and opportunistic.

The variables related to these two dimensions are listed in Table 8.2. An important variable of market attractiveness is market size. Calculation:

Theoretical market size = production of a country + import – export

Effective market size = theoretical market size –/+ changes in stock size

Step 4: Micro segmentation

Micro segmentation: variables are used to develop segments in each qualified country.

Examples of variables: Demographic factors, lifestyles, behaviour of the buyer, geography, psychographics and consumer motivations

The prime segmentation basis is geographic (by country) and the second segmentation basis is within countries. If a company is trying to achieve a consistent and controlled marketing strategy across all its markets it needs a transnational approach to its segmentation strategy. Cluster analysis is used to identify cross-national segments, Figure 8.6.

Once a certain country is chosen the firm needs to decide what kind of products or services it should provide. Now it is important to make careful market segmentation in order to exhaust the market potential in a differentiated manner, Figure 8.7. The recognition of the existence of similar structures of demands and consumer habits in segments of different markets influences the decision-making rather than the specific market attractiveness.

The whole process of IMS is shown in Figure 8.8.

High market potential is not the same as high sales potential. Restrictions might lead to low sales though the market potential is high. Furthermore, harmony between the firm’s competences and its value chain functions is required to transform high market potential into high sales potential. In addition, firms need to consider the competitors’ current positions in the potential market.

Market expansion strategies. For choosing a strategy to expand in different markets, a firm needs to consider two questions:

3. Will they enter markets incrementally (waterfall approach) or simultaneously (shower approach)? Figure 8.11

4. Will entry be concentrated or diversified across international markets?

Incrementally: a product or technology is so new or expensive that only the advanced countries can use or afford it. Over time the price will reduce and become inexpensive enough for developing and less developed countries. So, this approach gives firms the opportunity to first gain experience and then enter other markets one after the other.

Simultaneously: entering all markets at the same time in order to make use of the firm’s core competence and resources. It enables firms to rapid entry world markets and to achieve economies of scale by integrating operations across these markets. It requires financial and management resources and entails high operating risks.

A SMEs’ expansion strategy is shown in Figure 8.12. The SME creates core competences that give the firm a competitive advantage. These advantages can be used in international markets. The process evolves step by step, while learning , ensuring profit and consolidating by every step.

Concentration: concentrate resources on a limited number of similar markets.

Diversification: resources across a number of different markets. It is used in order to diversify risk with respect to competition or economic recessions.

Figure 8.13 shows the matrix of concentrating/diversification on the country level and the concentration/diversification on the customer level.

1. Few customer groups - segments in few countries.

2. Many customer groups - segments in few countries.

3. Few customer groups - segments in many countries.

4. Many customer groups - segments in many countries.

The Herfindahl index is used to calculate a company’s degree of export concentration. For the calculation see page 281. The outcome is used to compare it with other firms.

C = 1, maximum concentration: all export is made to one country only.

C = 1/n, minimum concentration: all exports are equally distributed over a large number of countries.

The corporate portfolio analysis is a tool to assess how to allocate resources across geographic areas and different product business. An example is shown in Figure 8.15.

By combining the product and geographic dimensions the global corporate portfolio can be analysed at the following levels:

• Product categories by regions

• Product categories by countries

• Regions by brands

• Countries by brands

It may be important to assess the interconnectedness of various portfolio units across countries or regions.

Chapter 9: Choice of entry mode

An entry mode is an institutional arrangement for the entry of a company’s products and services into a new foreign market. The main types are export, intermediate and hierarchical modes.

There are three rules used to identify the strategy for the entry mode selection:

• Naive rule: decision-maker uses similar entry modes in all foreign markets. Ignorance of heterogeneity.

• Pragmatic rule: decision-maker uses a workable entry mode for each foreign market. Exporting firm starts with a low-risk entry mode, if this is not successful it searches for another workable entry mode.

• Strategy rules: before the choice of the entry mode is made, all alternative entry modes are compared and evaluated.

The transaction cost approach

Basic idea: the existence of friction between the buyer and seller concerning market transactions. This friction is caused by opportunistic behaviour in the relation between a producer and an export intermediary.

Recurrent elements that lead to conflicts and opportunistic actions:

• Stock size of the export intermediary.

• Extent of technical and commercial service that the export intermediary must carry out for its customers.

• Distribution of marketing costs between producer and export intermediary.

• Fixing of prices (producer  export intermediary, export intermediary  customers).

• Fixing of commission to agents.

Opportunistic behaviour from the producer:

Export intermediary needs resources to build up a market for the producer’s product programme. Therefore it carries an economic risk; the producer can change the entry mode. The export intermediary should live up the (opportunistic) expectations of the producer in order to avoid replacement.

Approach used by export intermediary to avoid replacement:

The export intermediary makes investments to create bonds that form ‘exit barriers’ (costly to leave the relationship) for the producer. Examples of investments are:

• Establish personal relations with the producer’s key employees.

• Creating an independent identity in connection with selling the producer’s products.

Opportunistic behaviour from the export intermediary:

• There is a fixed split of the sales promoting costs between the producer and the export intermediary. If the export intermediary expects too high sales promotion activities  a higher payment from producer to export intermediary must be paid.

In order to obtain low ex-work prices from the producer, the export intermediary may manipulate information about the market size and the competitor prices. Can be avoided by a commission (compensation calculated as a percentage of the traded value).

There a four groups of factors that influence the choice of entry mode, Figure 9.1:

• Internal factors

• External factors

• Desired mode characteristics

• Transaction-specific behaviour

1. Internal factors

• Firm size: it is an indicator of the firm’s resource availability. SMEs use export modes with low resource commitment. LSEs use hierarchical modes.

• International experience: the extent to which a firm has been involved in operating internationally. According to Dow and Larimo, not all forms of experience are similar due to differences among countries, e.g. differences in psychic distance. It is advisable to exploit each region instead of jumping from region to region. Additionally, it is proven that uncertainty in international markets reduces through experience.

• Product/service: physical characteristics influence the location of production. Products with high complexity will use hierarchical modes. Furthermore, soft service products are more likely to use hierarchical modes than hard service products because of high control.

Additionally, a firm protects its product differentiation advantages (competitive advantages) from distribution through using hierarchical modes.

2. External factors

• Sociocultural distance between home country and host country: comparison of language, education level, business and industrial practices, and cultural characteristics. Sociocultural differences might create internal uncertainty. The greater the sociocultural distance the more likely a firm will chose for a joint venture or a low-risk entry mode.

• Country risk/demand uncertainty: the degree of risk depends on the market and the method of entry. Expanding to high risk countries leads to export modes because of low resource commitment. Existence of economic risks (exchange rate risk, investment risk) and political risks. Unpredictability increases the degree of risk, therefore high resource commitment and flexibility is required.

• Market size and growth: the larger the market size and the higher the growth rate, the higher the resource commitment and the likelihood that the firm will consider a complete owned sales subsidiary or a joint venture. Small markets that are geographically isolated have low resource commitment.

• Direct and indirect trade barriers: these support the local production. Preferences for local suppliers encourage joint ventures and intermediate modes. When the firm establishes local production it uses a hierarchical mode.

• Intensity of competition: high intensity of competition in the host country  less profitable  low resource commitments  export modes.

• Small number of relevant intermediaries available: this creates opportunistic behaviour of the export intermediaries, which will lead to the use of hierarchical models.

3. Desired mode characteristic

• Control: the degree of control of management over operations in international markets. Minimal resource commitment corresponds with little/no control over the marketing conditions abroad. Furthermore, joint ventures reduce the management control. Complete owned subsidiaries (hierarchical modes) provide the most control but require high resource commitment.

• Risk-averse: export or intermediate modes will be used if the decision-maker is risk-averse due to low resource commitment. Joint ventures can share risk.

• Flexibility: hierarchical modes are costly and the least flexible.

4. Transaction-specific factors

• Tacit nature of know-how: tacit knowledge has to do with complex products and services, where functionality is very hard to express. Transferring tacit know-how is costly, difficult and an incentive for the use of hierarchical modes.

Summary:

• Export modes: low control, low risk, high flexibility, low resource commitment.

• Intermediate modes: contractual mode, shared control and risk, split ownership, joint ventures.

• Hierarchical modes: investment mode, high control, high risk, low flexibility, high resource commitment.

Chapter 10: Export modes

Export mode: the firm’s products are produced in the domestic market or a third country and then transferred directly or indirectly to the host market. Export is the most common mode for initial entry into international markets.

Decision to make: which functions will be covered by external agents and which will be handled by the firm itself?

We can define three major types of export channels, Figure 10.1:

1. Indirect export: the producing company does not perform the export activities; this is done by another domestic company.

2. Direct export: the producing company performs the export activities and has direct contact with the first intermediary in the host market.

3. Cooperative export: collaborative agreements with other firms with regard to the exporting functions.

Partner mindshare

Partner mindshare is the level of mindshare that the manufacturer’s product occupies in the mind of the export partner. It is a measurement of the strength of a relationship in terms of trust, commitment and cooperation. High mindshare often leads to higher sales.

Mindshare drivers:

• Commitment and trust

• Collaboration

• Mutuality of interest and common purpose

• Fourth group: ‘hygiene driver’, consists of product, brand and profit.

Measures the perceived attractiveness of the supplier’s product.

Mindshare is damaged when suppliers exclude partners by refusing to share resources.

Indirect export

Exporting manufacturers use independent organisations that are located in the producer’s country to perform the exporting activities.

This is appropriate for a firm with limited resources or international expansion objectives. There are a few risk to be described according to indirect export:

• Manufacturing firm has little/no control over the marketing approach abroad.

• Damage to the reputation of the manufacturing firm due to the poor marketing abroad by the export activities-performing firm.

• Loss of potential opportunities due to the limited effort to the development of the market.

We can describe five main indirect entry modes:

Export buying agent: a representative of foreign buyer who is located in the exporter’s home country. The agent offers services to the foreign buyers, e.g. identifying potential sellers and negotiating prices. The terms of purchase are determined by the export buying agent and the overseas buyer. The exporting firm sells its products to the export commission houses (domestic buyer). Advantages: no problems with physical movement of goods, little credit risk. Disadvantage: dependent on purchaser.

Broker: performs a contractual function. It brings buyers and sellers together, and operates in a specific area of products. For its services the broker receives a commission (a percentage of the sold products) by the principal. A broker may act for the seller or the buyer.

Export management company (EMC)/export house: specialised companies that act as an export department for non-competing companies. Represents a manufacturer and conducts businesses for them, such as dealing with government regulations. Advantage of EMCs: gain wider exposure of their products at lower overall costs than firms could achieve by themselves. There are a number of disadvantages that are worth mentioning: The selection of markets might be based on what is best for the EMC rather than for the manufacturer. This occurs because EMCs are often specialized in an area/product/customer type which might not correspond with the supplier’s objectives, EMCs are paid by commission, this might lead to a focus on products with immediate sales potential instead of those that require more effort but will lead to long-term successes, EMCs might not pay enough attention to the manufacturer’s products due to the many products of other manufacturers they serve and EMCs might promote competitive products in the disadvantage of a firm.

Moving away from using an EMC is difficult because 1. Dependency on their EMC, they possess relationships with foreign customers + knowledge of the firm’s markets. 2. Difficult to withdraw form contractual commitments.

3. EMC may be able to substitute products from another manufacturer and use their customer contacts for competing against the original manufacturer.

Trading company: emphasis on financial services and manage counter-trade activities. Counter-trade activities are about buying goods of a specific market while obtaining other products from the same market in exchange. The role of a trading company is to find a buyer for the in-exchange products.

Piggyback: cooperation between unrelated companies called ‘rider’ and ‘carrier’, they are non-competitive and complementary. The brand name of the rider may change to the carrier’s one.

Piggyback

Piggyback is an abbreviation of pick-a-back. It is about the rider's use of the carrier's international distribution organization. Piggyback marketing is used for products from unrelated companies that are non-competitive and complementary. Piggybacking has the following advantages and disadvantages for the carrier and the rider.

Carrier

The carrier is larger company than rider. Carrier operates in foreign markets already and is willing to help the rider to export to those markets. The carrier is paid by commission, acts as independent distributor. The Advantages: Firm with a gap in its product line can rapidly acquire products outside by piggybacking in order to eliminate the gap. It is an inexpensive way because investments e.g. R&D in a new product is not necessary.

The disadvantages: The quality-risk; will the rider maintain the quality of products that are sold by another firm? This depends on the brand name that’s on the product. Continuity of supply-risk; will the rider develop its production capacity if the carrier develops a substantial market?

Rider

The export-inexperienced SME. advantages: Export without establishing distribution systems. Observe and learn from the carrier’s experience. Disadvantages: Small riders must give up control over the marketing of its products, the lack of commitment of carrier, and the loss of profitable sales opportunities in regions that are not covered by the carrier.

Direct export modes

The manufacturer sells directly to an importer, agent or distributor located in the foreign target market.

Distributor: independent company that stocks the manufacturer’s product. It will have substantial freedom to choose own customers and price. It profits from the difference between its selling price and its buying price from the manufacturer.

Agent: independent company that sells on to customers on behalf of the manufacturer (exporter). Usually it will not see or stock the product. It profits from a commission (percentage) paid by the manufacturer on a pre-agreed basis.

Advantages of the use of distributors or agents:

• They are familiar with the local market, customs and conventions.

• They have business contacts and employ foreign nationals.

• They have a direct incentive to sell through their profits.

Disadvantages of the use of distributors or agents: They might be unwilling to put much effort in developing a market for a new product because their profits are coupled to the sales.

• Limited amount of market feedback because they view itself as a purchasing agent rather than a selling agent for the exporter.

Choice of an intermediary, few examples:

• Obtaining recommendations from e.g. trade associations

• Using commercial agencies

• Stealing a competitor’s agent

The exporter should compare its wish-profile to the performance profiles of potential intermediaries. A few examples of criteria for the wish-profile:

• Size of firm

• Overall experience

• Knowledge of business methods in manufacturer’s country

• Reputation with suppliers, customers and banks

After selecting an intermediary, an agreement is made that covers the general provisions, the rights and obligations of the manufacturer and those of the distributor. This agreement contains the principles of the law of agency in all nations:

• An agent cannot deliver the principal’s goods at an agreed price and resell them for a higher amount without the principal’s knowledge and permission.

• Agents must pass on all relevant information to their principal and they must maintain confidential concerning their principal’s affair.

• The principal is liable for damages to third parties for wrongs committed by an agent.

Current trend: distributors become fewer in number and extend their territories (larger their size) due to regionalisation.

Figure 10.4, the international partner matrix, is used for the evaluation of the international distribution partners. The two dimensions are ‘market (of the partner/distributor) attractiveness’ and ‘partner/distributor performance’. Those dimensions are divided into high, medium or low. The market attractiveness can be evaluated by the use of criteria like market growth, and the performance can be measured through criteria such as achieved turnover.

For the termination of contracts termination laws exist. These laws differ per country; however in the EU they are united by a Directive and thus the same. The Directive states that an agent whose agreement is terminated is entitled to:

• Receive full payment for its work, even if finished after the end of the agency.

• A fixed amount, up to one year’s past average commission.

• Compensation for damages to the agent’s commercial reputation caused by unwarranted termination.

Agents are viewed differently among countries. They might be viewed as employees or clients of the organisation, or self-contained and independent businesses.

Cooperative export modes

Cooperative export is based on different manufactures with their own upstream functions that are cooperating on the downstream functions through a common, foreign-based agent, Figure 10.1. It is often used by SMEs that are unable to achieve sufficient economies of scale due to the size of the local market or the inadequacy of the resources available.

The cooperation can be tight or loose.

• Loose cooperation: separate firms in a group sell their own brands through the same agent.

• Tight cooperation: creation of a new export association that is able to gain economies of scale. Its major functions are:

  • Exporting in the name of the association

  • Focus on freight, negotiating rates and chartering ships

  • Performing market research

  • Nominate selling agents abroad

  • Obtaining credit information and collecting debts

  • Setting prices for export

  • Allowing uniform contracts and the requirements of sale

  • Allowing cooperative bids and sales negotiation

Why SMEs do not join an export marketing group: conflicting views and the strong feelings of independence.

Chapter 11: Intermediate entry modes

Intermediate entry modes are vehicles for the transfer of knowledge and skills between partners, in order to create foreign sales. The ownership and control is shared between the parent firm and the local partner.

The most important arrangements of intermediate entry modes, Figure 11.1:

• Contract manufacturing

• Licensing

• Franchising

• Joint ventures/strategic alliances

Contract manufacturing

Contract manufacturing is an agreement between a contractor and a contractor (home country) and the contracted party (foreign country).

Contract manufacturing means that manufacturing is outsourced to an external partner, specialised in production and production technology. These long-term arrangements take place when a firm possess a competitive advantage, but is unable to exploit this advantage e.g. due to resource constraints. However the firm is able to transfer the advantage to another firm.

Factors that encourage a firm to produce in foreign markets:

• Being close to foreign markets

• Low foreign production costs

• The existence of tariffs and quotas that restrict export

• Government preference for national suppliers

The contracted party is paid on a per unit basis. Furthermore, the product is sold by the contractor in its home country, the country of production or another foreign market. Lastly, the contractor must ensure that the contracted party meets the firm’s quality and delivery standards.

Licensing is an agreement between a licensor (home country) and a licensee (foreign country).

Licensing enables the firm to establish local production in foreign markets without capital investment. Two main approaches:

• ‘Stand-alone’ licensing agreement: license specifies the legal basis for transfer the rights and enable the licensor to earn royalties.

• ‘Licensing plus’ licensing agreement: license supports longer-term relationship with the licensee.

A licensing agreement states that the licensor gives something of value to the licensee in exchange for certain performance and payments. Thereby the licensor may give the licensee the right to use one of the following:

• A patent covering a product/process.

• Manufacturing knowledge that is not stated in a patent.

• Technical or marketing advice and assistance.

• The use of a trademark/trade name

Cross-licensing: mutual exchange of knowledge/patents without cash payment involvement.

Licensing enables the licensor to gain access to the licensee’s technology and product. In addition, the royalties or fees that are paid by the licensee are the licensor’s main source of income from its licensing operations. Usually the payment is a combination of:

• A lump sum not related to output: the sum paid at the beginning of an agreement for the initial transfer of resources.

• A minimum royalty: guarantee of minimum annual income received by licensor.

• A running royalty: a percentage of the normal selling price or the fixed sum of money for units of outputs.

A foreign market with high political risk: licensor should seek high initial payments and implement a timescale of the agreement.

Licensing can be viewed from the point of a licensor (licensing out) and of a licensee (licensing in).

Licensing out: Motives for licensing out:

• The licensor will remain superior concerning the development of technology and is able to focus on its core competences.

• The licensor does not possess the resources for overseas investment.

• The product is at the end of its product life cycle in the advanced countries.

• The direct royalty income and the margins on key components to the licensee.

• Only possible entry mode due to government regulations that restrict foreign direct investment or high political risks.

• Import constraints in licensee’s country.

Licensing in: In licensing the licensee is often disadvantaged in negotiations because of its dependency on the licensor. Licensing improves the net cash flow position of the licensee, but lowers profits in the longer term.

Motives for licensing in:

• Quick access to new technology

• Lower development costs

• Earlier positive cash flow

Franchising

Franchising is an agreement between the franchisor (home country) and the franchisee (foreign country). Franchising means that the production and the sales and services of the value chain are outsourced.

Factors that stimulated the rapid growth of franchising:

• The replacement of manufacturing industries to service-sector activities. Franchising is well suited to service and people-intensive economic activities.

• The growth of popularity of self-employment.

There are two major types of franchising:

1. Product and trade name franchising: a distribution system with contracts between suppliers and dealers of products. These dealers make use of the trade name, trademark and product line.

2. Business format. Business format franchising is an ongoing relationship that includes a product/service and a business concept. The business concept consists of a strategic plan.

In the international business format franchising we can call it a market entry mode that involves a relationship between the franchisor or the entrant and the entity from the host country. There is a business package that has been developed and owned. The entity from the host country can be either a franchiser or a master franchisee. This system can be setup as a direct or indirect system:

Direct franchising model: franchisor controls and coordinates the activities of the franchisee directly. Advantages: access to local resources and knowledge, more adaptation, possibility to develop a successful master franchisee.

Indirect franchising model: franchisor controls and coordinates the master franchisee (sub-franchisor), he/she controls and coordinates the activities of the franchisees within its territory. Disadvantages: monitoring issues due to a loss of control.

The package transferred by the franchisor to the franchisees consists of e.g. trademarks, patents and the design of the store. The franchisees adapt this package to the local circumstances. The franchisor receives initial fees (a percentage of annual turnover) in return from the franchisees. Furthermore, franchisors provide assistance to franchisees in a wide range of areas, e.g. field training.

The package that is transferred by the franchisor contains most of the elements that are necessary for the local entity to establish a business and run it profitably in the host country. The package can contain: trademark or trade names, copyright, designs, trade secrets, patents, business know-how, location selection, etc.

When searching for an appropriate environment for international expanding, the franchisor considers environments that stimulate cooperation and stability, and reduce conflict. First the environment is local and is appropriate for testing and developing a format. Feedback is obtained rapidly due to the ease of communication.

The format is adjusted quickly because of the close local contact. The format is adjusted several times before it meets all market requirements.

Key success factors for the joint contribution:

• Integrity of the whole business system. Integrity of the whole business system.

• Capacity for renewal of the business system.

Standardisation is the basis of franchising, because customers expect the same product or service at every location. There is need for integrity.

The franchisees know the most about customers’ preferences. They identify new trends and opportunities to introduce a new product or service. Not all franchisees are willing to share their ideas with the franchisor, due to a lack of trust or close contact.

Conflicts between the franchisor and franchisee are inevitable since all aspects that are good for the franchisor may not be good for the franchisee. Common conflict topics are:

• Failure to live up the terms of the legal agreement.

• Disagreement over objectives

Solution for conflicts: view franchisors and franchisees as partners in running a business in harmony. Requirements: strong common culture with shared values due to communication.

The difference between licensing and franchising

Joint ventures/strategic alliances

Joint venture (JV): an equity partnership between two partners. The creation of a new company in which foreign and local investors share ownership and control. Reasons to set up JVs:

• Complementary technology/management skills can lead to new opportunities in existing sectors.

• A partner in the host country can increase the speed of market entry.

• Many less developed countries try to restrict foreign ownership.

Strategic alliance: a non-equity joint venture. There is not a new company created. Two existing companies share costs, risks and profits, figure 11.5.

Considering the roles of partners in collaboration, figure 11.6:

• Upstream-based collaboration: collaboration on R&D and production.

• Downstream-based collaboration: collaboration on marketing, distribution, sales and/or services.

• Upstream/downstream-based collaboration: companies have different but complementary competences at each end of the value chain.

Y-coalition: each partner in the alliance/JV contributes with complementary product lines or services. Each partner takes care of all value chain activities within their product line. Partners have the same competences. The first and second type of collaboration.

X-coalition: the partners in the value chain divide the value chain activities between them, because the companies have asymmetric competences. The third type of collaboration.

There are various stages in the joint-venture formation:

Step 1: joint-venture objectives

Nowadays it is required to implement strategies quickly due to the advanced technology and global markets. JVs accelerate product introduction and overcome legal and trade barriers.

The principal objectives:

• Entering new markets: in order to overcome the lack of necessary marketing expertise and serve the new market quickly and effectively.

• Reducing manufacturing costs: to gain economies of scale or increase the use of facilities in order to reduce manufacturing costs.

• Developing and diffusing technology: jointly build on technical expertise in developing products that are technologically beyond the capability of other companies.

Step 2: cost-benefit analysis

Evaluate this entry mode against others with the help of a cost-benefit analysis in order to make sure this entry mode is the best way of achieving objectives.

Step 3: selecting partner(s)

Consists of five stages:

1. Establishing a desired partner profile: examples of criteria are:

• Development know-how

• Sales and service expertise

• Low-cost production facilities

• Reputation and brand equity

• Cash

• Market access and knowledge

2. Identifying JV candidates: candidates are chosen from the personal network of executives with senior managers of other firms. Possible candidates are: competitors, suppliers, customers, and related industries.

3. Screening and evaluating possible JV partners: examples of criteria are:

• Finance

• Organisation

• Market

• Production

• Institutional

• Possible negotiating attitudes

4. Initial contacts/discussions: it is important that top managers of the firm meet personally with the remaining possible partners. Personal and social interests are important for a good business relationship.

5. Choice of partner: partner brings the desired complementary strengths to the partnership. Aim is to develop synergies between the contributions of the partners that lead to a win-win situation. Requirements: 1. Neither partner has the desire to acquire the other partner’s strength. 2. Financial and psychological commitment to the JV.

Step 4: develop a business plan

Issues that need to be negotiated and determined prior the establishment of the JV:

• Ownership split (majority or minority, 50 – 50)

• Management (composition of board of directors, organisation)

• Production

• Marketing (the 4-Ps)

Step 5: negotiation of joint-venture agreement

Final agreement is determined by the relative of bargaining power of both companies, figure 11.7.

Step 6: contract writing

Write down the JV agreement in a legally binding contract covering both the collaboration, ‘marriage’ conditions of the partners and the conditions in a ‘divorce’ situation.

Step 7: performance evaluation

Fail: evaluate partnerships as if they were internal corporate divisions with clear goals operating in low-risk, stable environment.

Inappropriate because:

• Reflecting the short-term orientation, and maximisation of first output too soon can endanger the prospects for alliances for the long-term.

• The goals of the alliance may not be readily quantifiable.

It takes time before an alliance is ready to be judged on output measures.

Explanations for the high ‘divorce’ rate of JVs, figure 11.8:

• Changes in bargaining power: in the first stages of the JV the product and technology provider has the most power, however the unique power usually shifts to the party that controls distribution channels. Furthermore, the degree of learning is important. Easy learning causes better access to its partner’s capabilities which leads to less dependency on its partner.

• Diverging goals: often with a JV between a local partner and a MNE. MNEs goal is to maximise its global income, therefore it might run losses on some affiliates. However, the local partner wants to maximize the profits of the affiliate of which it is part owner.

• Double management: matter of control. If a partner has less than 50% ownership, the other partner makes the decisions.

• Repatriation of profits: Local partner wants to reinvest the profits in the JV, MNE might want to invest them in other operations.

• Mixing different cultures: developing a shared culture is central to the success of the alliance. Avoid the ‘us versus them’ situation. Ignoring the cultural differences will lead to no chances of acceptance.

• Shared equity: a partner has a feeling of unequal sharing. Solutions:

  • Developing trust in JVs: takes time, once the companies find ways to work together opportunities appear.

  • Providing an exit strategy: preparation for a failure by addressing the issue in the partnership contract. This should consist of the distribution of assets, etc.

  • Control mechanisms: positive controls through informal mechanisms. Negative controls include reliance on such mechanisms as formal agreements. Failures occur when control practices are not modified in response to changing circumstances.

  • Split control (50 – 50) or dominant control structure: different opinions about which control structure is the easiest and most successful.

Management contracting: emphasis on the growing importance of services and management know-how.

It is an agreement between a contractor that supplies management know-how and another company that provides capital and takes care of the operation value chain functions. Usually there is not the intention of a contractor to continue operating after the contract expires.

Chapter 14: Product

Product is part of the marketing mix. The decision of the product is one of the first decisions a marketing manager makes to develop a global marketing mix.

The ‘total’ product offer consists of three levels:

• The core product benefits. Contains the functional features, the performance, perceived value, image and technology.

• Product attributes. Contains the brand name, quality, packaging, design, price, staff behaviour, size and colour variants and country of origin.

• Support services. Contains delivery, installation, guarantees, after sales service like repair and maintenance, spare parts.

1 = easy to standardise, 3 = difficult to standardise.

The mix of a product and service elements are shown in Figure 14.2.

Offerings are mixes of objects, services and customer participation. Customers seek satisfaction rather than products. Therefore products must represent vehicles for service.

Before the consideration of possible international service strategies, it is important to know that services have different features to characterize:

• Intangibility: payment is for use or performance.

• Perishability: cannot be stored for future use. Causes problems concerning planning and promotion in order to match supply and demand.

• Heterogeneity: involves interactions between people and high customer involvement; therefore services are rarely the same. Causes problems concerning quality retention.

• Inseparability: time of production is close/even to the time of consumption. Economies of scale and experience curve benefits are difficult to achieve.

Difficulties in marketing services internationally:

• Achieving uniformity

• Pricing: fixed costs can be a significant part of the total service costs.

• Obtaining customer loyalty: difficult due to the need to provide personalised services.

Categories of service

We can describe three categories of service:

• People processing. The customers becomes part of the production process. Examples are education, passenger transport, health care, food service. The possibilities of worldwide standardization are not good and because of the involvement of the customer, many local sites will be needed, making this type of service very difficult to operate worldwide.

• Possession processing. Involves tangible action to physical objects to improve their value to customers. Examples are car repair, freight transport, equipment installation or laundry service. There are better possibilities of worldwide standardization compared with people processing services; this involves a lower degree of contact between the customer and the service personnel. This is not culture sensitive.

• Information based services. To create value, collecting, manipulating, interpreting and transmitting data is needed. Examples are telecommunication services, banking, news, market analysis and internet services. There are very good possibilities of worldwide standardization because of the virtual nature of these services.

e- Services

The behaviour of the consumer has changed, due to the expansion of the internet. It combines the best of mass production and customization. The ultimate tool for mass customizing can treat each customer as being unique. E - Services deliver particular intangible information based products and services through interaction with online users. It can be defined as a business activity of value exchange that is accessible through electronic networks, like internet and mobile phones.

The differences e- services make are rapid developments, low marginal costs of service delivery, high degree of outsourcing, transparent service feedback and continuous improvements.

A core service is surrounded by supplementary elements.

Categories of supplementary services:

• Information: how to use the service. Affected by globalisation (language).

• Consultation and advice: a dialogue to identify customer requirements and then develop a tailored solution. Customers’ need for advice varies around the world.

• Order taking: the ease of placing orders or reservations.

• Hospitality: taking care of the customer. Treat customers as guests. Cultural definitions of appropriate hospitality differ among countries.

• Safekeeping: looking after the customer’s possessions. E.g. car parking.

• Exceptions: outside the routine of normal service delivery. Special requests, problem-solving, handling of suggestions and restitution (compensation).

• Billing: explain how charges are computed. Currencies and conversion rates need to be clarified on the bill.

• Payment: ease and convenience of payment are expected by customers.

• The nature of the product, customer requirements and competitive pressures determine which supplementary service must be offered. The provider of the supplementary services can be located in another part of the world.

Business-to-business markets (B2B) differ from customer markets in many ways:

• Fewer and larger buyers

• A derived, fluctuating and relatively inelastic demand

• Professional buyers

• Closer relationship

• Absence of intermediaries

Firms are more unwilling to exit a relationship due to:

• Loss of investment in bonds

• Costs of changing supplier are high

• Difficult to find a new buyer

Professional service firms differ from business-to-business service firms in their high degree of customisation and their strong component of face-to-face interaction. Furthermore, their emphasis is on the development of long-term relationships. Therefore, they need highly skilled individuals.

The product life cycle (PLC)

The product life cycle (PLC) concerns the life of a product in the market with respect to business/commercial costs and sales measures. It is a theory in which products or brands follow a sequence of stages including introduction, growth, maturity and sales decline. Figure 14.3. It is shown in a graph with the dimensions ‘time’ (x-axis) and ‘profits’ of ‘sales’ (y-axis).

Time to market (TTM)

Time to market (TTM): the time it takes from the idea for a product being conceived until it is available for sale. TTM is important in those industries where products are outmoded quickly.

Rapid TTM leads to competitive success because:

• Competitive advantage of getting to market sooner

• Premium prices early in life cycle

• Faster break-even on development investment and lower financial risk

• Greater overall profits and higher return on investment

Requirements for TTM:

• Clear understanding of customer needs at the start of the project and stability in product requirements.

• Characterised, optimised product development process.

• Realistic project plan based on the product development process.

• Availability of needed resources to support the project and use of full-time, dedicated personnel.

• Early involvement and rapid staffing build-up to support the parallel design of product and process.

• Virtual product development.

• Design re-use and standardisation to minimise the design content of a project.

Managers might also use TTM as a means of cutting expenses, they calculate that the shorter the product development project, the less it will cost.

PLC focuses on the need to review marketing objectives and strategies. However, it is hard to know when a product is leaving one stage and entering the next. Therefore, the PLC is helpful to identify the portfolio of the product.

Limitations of the PLC:

Misleading strategy prescriptions: PLC is a dependent variable that is determined by the marketing mix rather than an independent variable to which firms should adapt their marketing programmes. Management should try to create a recycle in times of declining product’s sale. This can be done through:

• Product improvements

• Reposition perception of the product

• Reach new users of the product

• Promote more frequent use of the product

• Promote new uses of the product

• Fads: fashions that are adopted very quickly by the public peak early and decline very fast. They do not follow the PLC curve.

• Unpredictability: the duration of the PLC stages is unpredictable.

• Levels of product life cycle: the PLC concept can be examined at various levels, e.g. level of a whole industry or just a product. Life cycles for product forms include definable groups of direct and close competitors and a core technology.

When firms produce multiple products, the PLC differs. There is a difference between ‘young’ products, that require investment to finance their growth, and ‘older’ products, that generate more cash than they need. Firms have to spread their limited resources among the competing needs of products in order to achieve the best performance of the firm as a whole.

When firms produce in multiple countries, two different approaches appear concerning the PLC:

International product life cycle (IPLC): macroeconomic approach, describes the diffusion process of an innovation across national boundaries. First the demand of the innovating country grows. The demand of less developed countries begins later, Figure 14.8.

PLCs across countries: microeconomic approach, the time period for a product to pass through a stage might differ per market.

Due to the increasing international competition, time is becoming a success factor for companies that manufacture technologically sophisticated products. Thus PLCs are getting shorter and companies are able to use the latest technology. In addition, the time for marketing and R&D is reduced as well.

Better time competition due to the intensive use of:

• Early integration of customers and suppliers

• Multi-skilled project teams

• Interlinking of R&D, production, marketing activities

• Total quality management

• Parallel planning of new products and the required production facilities

• High degree of outsourcing

Quality deployment function (QDF) is a technique to translate customer needs into new product attributes. It is used to identify opportunities for product improvement or differentiation. It encourages communication between engineering, production and marketing. Due to the customer requirement involvement QDR permits the reduction of design time and cost while maintain the quality of the design.

A new product can have several degrees of newness, e.g. an invention that is new to the world or a slight modification of an existing product. Newness has two dimensions: ‘newness to the market’ and ‘newness to the company’. The risk of market failure increases with the newness of the product.

The product communication mix

• The degree of standardisation, adaptation and newness of the product.

• The degree of standardisation and adaption of the promotion

Both must be considered for international marketing. The five approaches to product policy are:

• Straight extension: introducing a standardised product with the same promotion strategy throughout the world market. Advantage: savings on market research and product development.

• Promotion adaption: a standardised product with a promotional activity that takes cultural differences between markets into account. Advantage: relatively cost-effective strategy compared to strategies concerning adapted products.

• Product adaption: modifying the product while maintaining the core product function, using the same promotion strategy throughout. The adjustments to the product are necessary because the product needs to be adapted to function under different physical environmental conditions.

• Dual adaption: adapting both product and promotion for each market. Often used when the previous three strategies has failed.

• Product invention: adopted by firms, usually from advanced nations, that is supplying products to less developed countries. Products are developed to meet the needs of the individual markets.

Product positioning

Product positioning: an element in the successful marketing of any organisation in any market. It is the activity by which a desirable position in the mind of the customer is created for the product. It starts with describing the products and their attributes that are capable of generating a flow of benefits to buyers and users. The position of a product is the location in the perceptual space.

The country of origin, noticed by ‘made in [country]’, influences the quality perception of the product. Countries may have a good or poor reputation. The country of origin is even more important than the brand name.

Target customers for a product differ per country. Therefore one should realise that product positioning might vary from market to market. Hence, it is very important to establish a consumer’s perception about the product and how it differs from existing and potential competition.

Brand equity

Brand equity is a set of brand assets and liabilities which can be clustered into five categories. Brand equity is the premium a consumer would pay for the branded product or service compared to an identical unbranded version of the same product or service. It refers to the strength, depth and character of the consumer-brand relationship: the brand relationship quality. The categories:

• Brand loyalty: Encourages customers to buy a particular brand and repeat buying the same brand over and over again.

• Brand awareness: percentage of the customers that know the brand name.

• Perceived quality: customers’ perception.

• Brand associations: personal values linked to the brand.

• Other proprietary brand assets: e.g. trademarks, patents.

Functions of branding:

• Distinguish a company’s offering and differentiate one particular product from its competitors

• Create identification and brand awareness

• Guarantee a certain level of quality and satisfaction

• Help with promotion of the product

Goal of branding is to create new sales and increase repeat sales.

There are four levels of branding decisions:

1. Brand - no brand. Branding: advantages: identification and awareness, chance for production differentiation, possible brand loyalty. Disadvantages: higher production, marketing and legal costs. No brand: advantages: lower production, marketing and legal costs and flexible quality control. Disadvantages: hard price competition and a lack of market identity.

2. Private label - co-branding/ingredient branding-manufacturer’s own brand: Private label: external partner takes over branding of the product. Advantages: own labels provide better profit margins and strengthen the retailer’s image (retailer’s perspective). Possibility of larger market share and no promotional expenses (manufacturer’s perspective). Disadvantages: hard price competition, lose control over product promotion and a lack of market identity (manufacturer’s perspective). Co-branding/ingredient branding: brand alliance. Co-branding: cooperation between brands which creates more value for the participants than they would generate on their own. Ingredient branding: supplier delivers an important key component to the final product. Advantages: more value adding to brand, sharing production and promotion costs, increase in manufacturer’s power in gaining access to retailers’ shelves. Disadvantages: consumer confusion, ingredient supplier dependency on final product’s success and promotion costs for supplier. Manufacturer’s own brand: manufacturer keeps control of branding. Advantages: better price due to price inelasticity, brand loyalty, better bargaining power and control of distribution. Disadvantages: difficult for small manufacturer with unknown brand and requirement of brand promotion.

3. Single market: single brand – multiple brands: Single brand: advantages: efficient marketing, more focus on marketing and elimination of brand confusion. Disadvantages: assumption of market homogeneity, brand image harmed when trading up/down and limited shelf space. Multiple brands: advantages: assumption of market heterogeneity, avoiding negative connotation of brand, gains more retail shelf space and does not harm brand image. Disadvantages: higher marketing and inventory costs , and a loss of economies of scale.

4. Multiple markets: local brands – global brand: Local brands: advantages: meaningful names, local identification, avoidance of taxation on international brand and allowance variation of quantity and quality across markets. Disadvantages: higher marketing and inventory costs, a loss of economies of scale and a diffused image. Global brand: advantages: efficient marketing, low advertising costs, no brand confusion, good for culture-free, prestigious product, identification for internationals and a uniform worldwide image. Disadvantages: assumption of market homogeneity, problem with black and grey markets, possible negative connotation, requirement of quality and quantity consistency, legal complications and LDCs’ opposition.

Research findings of Boze and Patton:

MNCs often follow the practice of multiple brands in a single market.

MNCs prefer to acquire some local brands instead of suing a global brand.

Sensory branding

Sensory branding is a brand communication that involves sight, sound, smell, touch and taste rather than just sight and sound.

Sight: appearance, attractiveness, colour, shape

Sound: consistency, texture. Sound details have become powerful tools, e.g. Nokia tune.

Smell: aroma, with the aim of stimulation the memory.

Touch: texture, temperature

Taste: unique and specific taste to associate with a brand. Taste relies on the others, e.g. 80% of taste dependents on the sense of smell. Primarily to food and beverage products.

Note: the more senses a brand appeals to, the stronger the message will be perceived. Stronger bonding leads to higher prices that consumers are willing to pay for a product.

Celebrity branding

Celebrity branding is a type of advertising in which a celebrity uses their status in society to promote a product, service, charity or cause.

The number of ways celebrities can now reach consumers explains the growth of celebrity licensing. However, if an endorsement does not fit a celebrity’s perceived identity, it can work against the star.

When implementing a celebrity branding strategy companies must find a suitable balance between the risk of licensing and the rewards of licensing. The actual value of a celebrity licence depends on:

• The ‘Q score’ (rate of a celebrity’s overall fame).

• What product the celebrity is promoting: to sell the product continuously to the same customers.

• What the quality of the licensed product is: to continuously sell the product to the same customers (obtain customer loyalty).

• The amount of design input the celebrity has in either the marketing or the product itself.

The three basic elements to negotiate in a celebrity licence:

• Identify the rights involved: state precisely the scope of the grant the licensee is receiving. Furthermore, the licensor might need to clear certain rights with other entities besides the celebrity, e.g. the affiliated television producers. Involvement of the intellectual property rights: right of publicity, trademark rights and copyrights.

• Negotiating the terms and scope of the licence: includes the duration of the advertising campaign, the place, the working method and the date.

• Determining the payment and other terms of the licence: Advertising campaign involves a flat fee for promoting a product, a merchandising campaign involves a royal payment based on the relationship between the product and celebrity. Thus, the celebrity is not sharing all the risk with the licensee. Using deceased celebrities, they offer certain advantages but they cannot act in a manner that would hurt the image of the licensor’s product.

Implications of the internet in relation with customer collaboration on product decisions

Internet is an open, cost-effective and universal network. It enhances the ability of firms to engage customers in collaborative innovation. The first stage of customer interaction is the new business platform that recognises the increased importance of customisation of products and services. Therefore, IT is used to get closer to customers, to obtain knowledge about their preferences and to promote special offers to preferred customers. The second stage of customer integration is the focus on the opportunities and challenges in dynamically customising products and services. Dynamic customisation is based on three principles:

• Modularity: an approach for organising complex products and processes efficiently. It requires the distribution of a task into independent modules.

• Intelligence: the continuous information exchange with consumers creates products and processes that lead to the use of the best possible modules. Intelligent sites learn their visitors’ preferences through the match of buyers and seller profiles on internet.

• Organisation: a customer-oriented and flexible approach is required.

The integration of internet in future product innovation, Figure 14.17, implications:

• Design: new product features may be built into the product directly from the internet

• Service and support: fault-finding system, repairing, other services.

• Customer relations: comparison of products by customers, feedback, marketing information.

• Logistics: upgrading of services, more efficient.

• Link to other products: sometimes a product is used as a subcomponent in other products. Through links in the internet such subcomponents may be essential inputs for more complex product solutions.

Note: a shift in thinking from ‘supply chain’ to ‘demand chain’ is required. The demand chain thinking starts with the customers and work backwards.

This shift will lead to product differentiation due to country differences. The information systems required to coordinate companies along the demand chain require a new and different approach.

The characteristics of an innovative product development of the future demands of a company:

• Innovative product development and strategic thinking: contains technology and demand, a strategic overview and knowledge in order to find out if new services are worth aiming at.

• Management of alliances: a company possess innovative product development and the resulting service demands required to enter alliances dynamically and in a structured way.

• New customer relations: buyers buy benefits, not products. Therefore, companies need to understand customers’ needs.

Branding on internet is about creating experiences and understanding customers. As a consequence, web brand building is not cheap, it requires a persistent online presence.

Long tail strategies

Long tail: a graph showing fewer products selling in large quantities versus many more products that sells in low quantities. The low-quantity items (broad product range) stretch out on the x-axis, creating a very long tail that generates more revenue overall. Even though a smaller quantity of each item is sold, there is a much greater variety of these items to sell and these ‘rare’ items are very easy to find via today’s online search tools.

Two distinct but related ideas of Anderson:

• Merchandise assortments are growing because when goods don’t have to be displayed on store shelves, physical and cost constraints on selection disappear. The long tail reveals a previously untapped demand.

• Online channels actually change the shape of the demand curve, because customer value niche products adapted to their particular interest more than they value products designed for mass appeal. The long tail will steadily grow longer, as more products are available, and fatter, as consumers discover products better suited to their tastes.

Chapter 15: Price

Pricing is part of the marketing mix. It is highly controllable and inexpensive to change and implement. Price is the only are of the global marketing mix where policy can be changed quickly without implications of direct cost.

Domestic pricing strategies are based on allocating the total estimated cost of producing, managing and marketing and adding an appropriate profit margin. International pricing strategies are more complex due to the external factors, such as fluctuations in exchange rates, accelerating inflation and the use of alternative payment methods. Pricing decisions include setting the initial price as well as changing the established price of products from time to time.

Factors that are influencing the international pricing decisions

A general framework for international pricing decisions is shown in Figure 15.1.

Internal factors influencing international pricing:

• Firm-level factors: objectives, strategy (short-term or long-term perspective), firm positioning, product development, production location and market entry modes.

• Product factors: stage in PLC, place in product line, important product features (e.g. level of services), product positioning (the extent that the product must adapt to the market) and product cost structure (e.g. length of channel). Price escalation: all cost factors in the distribution channel add up and lead to price escalation. The longer the channel the higher the final price in the foreign market, Table 15.1. Management options to counter price escalation:

Rationalising the distribution process: reduce the links in the distribution channel.

Lowering the export price form the factory: reducing the multiplier effect.

Establishing local production of the product

Pressurising channel members to accept lower profit margins

External factors influencing international pricing:

• Environmental factors: government influences and constraints, inflation, currency fluctuations and business cycle stage.

• Market factors: customers’ perceptions, customers’ purchasing power (ability to pay), nature of competition, competitors’ objectives, strategies and strengths/weaknesses and grey market (parallel importing) appeal. Considering how customers will respond to a given price strategy, nice factors appear that influences the sensitivity of customers to prices: more distinctive product, greater perceived quality of products, consumers are less aware of substitutes in the market, difficulty in making comparisons, the price of a product represents a small proportion of a total expenditure of the customer, the benefits for the customer grows, costs are shared with other parties, the product is used in association with a product that has been bought before and the product or service cannot be stored. The price sensitivity is reduced in all of the above cases.

Three alternatives to determine the price level for a new product, Figure 15.2:

• Skimming: a high price and an aim to achieve the highest possible contribution in a market. Trading off a low market share against a high margin. Product has to be unique; segments must be willing to pay the high price. The success of this approach depends on the ability and speed of competitive reaction. Problems: 1) Small market share causes susceptibility for aggressive local competition. 2) Many resources and a visible local presence are required to maintain high-quality products. 3) Grey marketing is likely when products are sold cheaper in other countries.

• Market pricing: an average price. Similar products already exist. The price is based on competitive prices. This approach requires knowledge of product costs and a PLC that is long enough to warrant entry into the market.

A retrograde calculation is used to identify the price that customers are willing to pay. Firm uses a ‘reversed’ price escalation to calculate backwards from the market price to the net price.

• Penetration pricing: a low price. Approach used to stimulate market growth and capture market shares. It requires mass markets, price-sensitive customers and economies of scale.

Problems: 1) Competitors reduce their prices to the same level. 2) Consumers lose faith in the product’s quality due to the low prices. Motives to use this approach: 1) Intensive local competition. 2) Lower income levels of local consumers. 3) To obtain additional revenue.

Price changes

Price changes occur when there are changes in the overall market conditions. When a decision is made to change prices, related changes must also be considered in order to remain the level of profit. Lowering the prices leads to less flexibility by decision-makers because an existing product is less unique, faces stronger competition and is aimed at a broader segment of the market. The timing of price changes is crucial as well as the extent of the time lag. Price changes usually follow changes in the PLC.

Experience curve pricing

Experience curve pricing is a combination of experience curve (lowering costs per unit with accumulated production of the product) with typical market price development within an industry. Figure 15.3 and 15.4, phases:

• Introduction stage: price is below the total unit cost.

• Growth: profits begin to flow due to less supply.

• Shake-out: within the increased competition inefficient producers will be shaken out.

• Maturity

Product line pricing

Product line pricing (pricing across products): various items in the line are differentiated by pricing them appropriately to indicate a standard version and a top-of-the-range version.

Price bundling: a certain price is set for several items within the product line (a package).

Buy in/follow on strategy: the case where two products are linked together: the original product item is priced very low, in order to get customers ‘in’ and try the product. The follow-on product is then sold at a significantly higher price.

Product-service bundle pricing

Product-service bundle pricing: bundling product and services together in a system-solution product, which increases the value of the product.

If the customer thinks that the entry price is a key barrier, service contracts can be priced higher, which allows for lower entry product pricing. Bundling prices for services and products is a bad idea because the person who buys the service might not be the one that buys the product.

• The competitive advantage for products is the use of economies of scale.

• The competitive advantage for services is the special skills.

Pricing across countries

Problem: how to coordinate prices between countries?

Opposing forces: 1) Achieve similar positioning in different markets by adopting standardised pricing. 2) Maximize profitability by adapting pricing to different market conditions. Figure 15.5.

Price standardisation: setting a price for the product as it leaves the factory. Use a fixed world price that is applied in all markets after taking account of factors such as exchange rates. It is a low-risk strategy, but does not respond to local conditions. It is appropriate if the firm sells to large customers with companies in several countries. The presentation of a consistent image across markets and a potential for rapid introduction of new products are advantages.

Price differentiation: set a price that is appropriate for local conditions. Flexibility to coordinate prices from country to country. Weakness: lack of control of headquarters, a bad image due to different prices in different markets and the encouragement of grey markets.

Solberg suggests that firms’ international strategic behaviour is shaped by two dimensions:

• The degree of globalism of the firm’s industry: varies between two extremes; a monopoly (the right, price-setter) and atomistic competition (the left, exposed to local market forces, follow market prices).

• The degree of preparedness for internationalisation: international prepared companies are able to respond to competitive attacks, are more self-confident in setting pricing strategies and enjoy higher market shares I the export market. Inexperienced firms possess smaller market shares and follow the pricing practices of their competitors.

This leads to taxonomy of international pricing practices (a framework), Figure 15.6:

• Local price follower: limited international experience and market knowledge, use of intermediary as an informant for the firm.

• Global price follower: limited preparedness for internationalisation. Charge a standardised price in all countries due to the operation in interconnected international markets. Firms are under constant pressure from more efficient distribution and globally branded counterparts.

• Multi-local price setter: well-prepared for internationalisation. Have a tight control of their local market distribution networks. Price leaders in local markets, base their pricing strategy on local market conditions. Grey market imports might become a problem if markets want cheaper products.

• Global price leader: strong position in world markets. Use hierarchical entry modes or intermediate modes. A limited number of competitors in each market. Relatively high price levels in their markets. They are not that effective as multi-local counterparts.

Global-pricing contract (GPC): a customer requiring one global price (per product) from the supplier for all its foreign SBUs and subsidiaries.

European pricing strategy

Price differentials are caused by differences in regulations, competition, distribution structures and consumer behaviour. Previously Europe was a price differentiation paradise, however, two developments forced companies to standardise prices across European countries, Figure 15.7:

International buying power of cross-European retail groups.

Grey markets (parallel markets): differences in prices makes it possible to buy a product at a lower price in another country. This is an incentive for customers in lower-price markets to sell goods to higher-price markets.

Transfer pricing

Transfer pricing: prices charged for intra-company movement of goods and services. While transfer prices are internal to the company, they are important externally for cross-border taxation purposes.

Objective is to ensure that the transfer price paid optimises corporate rather than divisional objectives.

A high transfer price is reflected in a poor performance by the foreign subsidiary, whereas a low transfer price would not be acceptable to the domestic division providing the goods.

Three approaches to transfer pricing:

• Transfer at cost: transfer price = production cost. International division is credited with the entire profit. Production is evaluated on efficiency rather than profitability.

• Transfer at arm’s length: international division is charged the same as any buyer outside the firm. Problems occur if overseas divisions are allowed to buy elsewhere when price is uncompetitive or the quality is inferior, or if there are no external buyers.

• Transfer at cost plus: profits are split between the production and international divisions. The greatest chance of minimising executive time spent on transfer price disagreements, etc.

Decision to make: in what currency should the price be quoted? The exporter has the following options:

1. the foreign currency of the buyer’s country (local currency)

2. The currency of the exporter’s country (domestic currency)

3. The currency of a third country

4. A currency unit (e.g. euro)

Advantages of quoting in domestic currency can be more easy administration; risks associated with changes in the exchange rate are borne by customer.

Advantages of quoting in the foreign currency could be a condition of the contract, could provide access to finance abroad at lower interest rates, gaining additional profits when having good currency management or customers are not able to compare goods in their own currency so they do not know the exact price of a good.

The implementation of the European currency, the euro, led to a growth in online shopping which at his turn increased the competition.

Implications of the euro:

• It makes prices transparent across Europe; therefore it is easier to compare products and thus lowers prices for consumers.

• It creates a real single market by reducing ‘friction’.

• It enhances competition because it requires firms to focus on price, quality and production rather than to hide behind weak currencies.

• It benefits SMEs and consumers, because due to Internet it is easier to enter the market and to shop in the lowest-priced markets.

• It establishes inflation and interest rate stability.

• It lowers costs through lower prices, lower interest rates, no transaction costs, no loss through exchanging currencies and the absence of exchange rate fluctuations.

 Increase competition, lower transaction costs and bring about greater certainty.

Terms of sale and delivery

The price quotation describes a specific product, states the price and a delivery location, sets the time of shipment and specifies payment terms. Furthermore, it states whether the shipping costs are included or not in the price and when ownership of goods passes from seller to buyer. Therefore incoterms are used. Those are internationally accepted standard definitions for terms of sale. A complete list of terms is provided on page 537. The most important ones are, Table 15.5:

EXW = Ex-works: the price quoted by the seller applies at a specified point of origin. The buyer is responsible for all charges from this point. Minimum obligation for the exporter.

FAS = Free alongside ship: the seller provides delivery free alongside (but not on board) the transportation carrier at the point of shipment and export. Time and cost of loading are not included. Buyer pays for loading the goods onto the ship.

FOB = Free on board: the exporter pays all charges up to the point when goods have been loaded on to a specific transport vehicle. A specific loading point is the inland shipping point (often the port of export). After this point the buyer is responsible for the goods.

CFR = Cost and freight: seller’s liability ends when the goods are loaded on board/carrier. Seller pays all transport charges, excluding insurance, required to deliver goods by sea.

CFI = Cost, insurance and freight: same as CFR, but the seller must also provide the insurance.

DEQ = Delivered ex-quay: same as CIF, but seller is also responsible for the cost for the goods and other costs necessary to place the goods on the dock.

DDP = Delivered duty paid: exporter is responsible for paying any import duties and costs of unloading and inland transport in the importing country, as well as all costs involve in insuring and shipping the goods to that country. Risks concerning delivering are for the buyer.

Factors that will be considered by the exporter when negotiating terms of payment for goods:

• Practices in the industry

• Terms offered by competitors

• Relative strength of the buyer and seller

Terms of payment

If the exporter is established in the market, price and terms of trade can be set to fit the exporter’s desires. However, if the exporter is breaking into a new market, pricing and selling terms should be used as major competitive tools. Figure 15.8.

Cash in advance: exporter receives payment before shipment of the goods. This minimises the exporter’s risk and financial costs.

Letter of credit (L/C): an instrument whereby a bank agrees to pay a specified amount of money on presentation of documents stipulated in the letter of credit, an invoice and a description of the goods.

Characteristics of letters of credit:

• They are an arrangement by banks for settling international commercial transactions.

• They provide a form of security for the parties involved.

• They ensure payment, provided that the terms and conditions of the credit have been fulfilled.

• Payment by such means is based on documents only and not on the merchandise or services involved.

The process of handling letters of credit

The process of handling letters of credit, Figure 15.9: 1) Sending an enquiry for the goods. 2) Price and terms are confirmed by a pro forma invoice by the supplier. 3) the customer knows for what amount to instruct its bank. 4) Open a L/C. 5) Confirming the letter of credit by a bank in the supplier’s country. 6) Goods are shipped. 7) Shipping documents are submitted by supplier to bank. 8) Shipment is confirmed by supplier’s bank. 9) L/C and other stipulated documents for payment are confirmed. 10) Money is transmitted from the customer’s account via the issuing bank.

Forms of letter of credit:

• Revocable L/C: buyer has maximum flexibility, as the L/C can be cancelled.

• Irrevocable but unconfirmed L/C: is as good as the credit status of the establishing bank and the willingness of the buyer’s country to allow the required use of foreign exchange.

• Confirmed irrevocable L/C: a bank in the seller’s country has added its own undertaking to that of the issuing bank, confirming that the necessary sum of money is available for payment, awaiting only the presentation of shipping documents.

Documents against payment and acceptance: seller ships the goods and the shipping documents. The bill of exchange (draft) is presented to the importer. Two types of bill of exchange:

• Sight draft (documents against payment): buyer must make payment for the face value of the draft before receiving the documents conveying title to the merchandise.

• Time draft (documents against acceptance): credit is extended to the buyer on the basis of the buyer’s acceptance of the draft calling for payment within a specified time and place. Acceptance means that the buyer formally agrees to pay the amount of money. This type allows the buyer a delay in payment.

Open account: exporter ships the goods without documents calling for payment, other than the invoice. Buyer can obtain the goods without paying first. Advantages: simplicity and the assistance it gives to the buyer. Weaknesses: no safeguards for payment.

Consignment: the exporter retains title of the goods until the importer sells them. Exporter bears the risks. Only used with trustworthy importers and where political and economic risk is low.

Export financing

Exporters need financing support in order to obtain working capital and importers often demand terms that allow them to defer payment. Sources of export finance:

• Commercial banks: a bank is more favourable disposed towards granting an overdraft if the exporter has obtained an export credit insurance policy.

• Export credit insurance: these insurances usually cover political risks (non-convertibility of currency) and commercial risks (non-payment by buyers).

• Factoring: means selling export debts for immediate cash. The factor acts as a credit approval agency as well as a facilitator and guarantor of payment

• Forfeiting: exporters of capital goods can obtain medium-term finance.

• Bonding: a bond is a written instrument issued to an overseas buyer by an acceptable third party. It guarantees compliance of its obligations by an exporter; otherwise the overseas buyer will be indemnified for a stated amount against the failure of the exporter to fulfil its obligations under the contract.

• Leasing: two ways of leasing: 1) to arrange cross-border leases directly from a bank or leasing company to the foreign buyer. 2) to obtain local leasing facilities either through overseas branches or subdivision of international banks or through international leasing associations.

• Counter-trade: a variety of trade agreements in which a seller provides a buyer with products and agrees to a reciprocal purchasing obligation with the buyer in terms of an agreed percentage of the original sales value.

Barter: a straightforward exchange of goods without any money transfer.

Compensation deal: export of goods in one direction. The payment of the goods is split into two parts: 1) part payment in cash by the importer. 2) rest of payment through the obligation, made by the exporter, to purchase some of the buyer’s goods.

Buy-back agreement: long-term agreements whereby at least a part of the payment is financed by the exporter’s purchase of some of the resultant output.

Chapter 16: Place

Distribution (place) is part of the marketing mix. Distribution channels are the links between producers and the final customers. Direct distribution: deal with a foreign firm. Indirect distribution: deal with another home country firm that serves as an intermediary.

The role of communication is to obtain information about customer’s preferences and to persuade the customer to buy a product. Tools of communication are: advertising, sales promotions, publicity, etc. Availability of media needs to be taken into account.

Figure 16.1 presents a systematic approach to the major decisions in international distribution. The external factors that influence internal decisions are:

Customer characteristics: the size, geographic distribution, shopping habits, outlet preferences and usage patterns of customers must be taken into account.

Nature of product: transportation and warehousing costs, the product’s durability, its ease of adulteration, its amount and type of customer service required, the unit costs and its special handling requirements.

Nature of demand/location: the perceptions of customers are influenced by income, product experience, the product’s end use, the product life cycle position and the country’s stage of economic development. These perceptions may force modification.

Competition: channels used by competing products are important because channel arrangements that seek to serve the same market often compete with each other.

Legal regulations/local business practices: a country may have specific laws for distribution channels or intermediaries. Local business practices can interfere with efficiency and productivity and may force a manufacturer to employ a channel of distribution that is longer and wider than desired. Due to vertical and horizontal transaction the price might escalate. Keiretsu: a network of businesses that own stakes in one another as a means of mutual security, especially in Japan, and usually including large manufacturers and their suppliers of raw materials and components. The original keiretsu were each centred around one bank, which lent money to the keiretsu’s member companies and held equity positions in the companies. These alliances are not contractual.

The structure of the channel

Market coverage: coverage can relate to geographical areas or number of retail outlets. Three approaches are available: intensive, selective or exclusive coverage, Figure 16.3.

Intensive coverage: distributing the product through the largest number of different types of intermediary and the largest number of individual intermediaries of each type.

Selective coverage: choosing a number of intermediaries for each area to be penetrated.

Exclusive coverage: choosing only one intermediary in a market.

Channel length: number of levels in the distribution channel.

Companies should first lengthen the channels as more intermediaries enter the distribution system, but later shorten as a result of efficiencies. The channel length influences the price escalation. Factors that influence channel width are shown in Figure 16.4.

The control of a member in the vertical distribution channel means its ability to influence the decisions and actions of other channel members. The company must decide how much control it wants to have over how each of its products is marketed. The use of intermediaries leads to a loss of control over the marketing of the firm’s products.

The functions of an intermediary are:

• Carrying of inventory

• Demand generation/selling

• Physical distribution

• After-sales service

• Extending credit to customers

There is often a trade-off between the producer’s ability to control important channel functions and the financial resources required to exercise that control.

A trade-off between the desire to control global marketing efforts and the desire to minimize resource commitment costs.

Degree of integration

Control can be exercised through integration. Channel integration: incorporating all channel members into one channel system and uniting them under one leadership and one set of goals. There are two types of integration:

Vertical integration: seeking control of channel members at different levels of the channel. Figure 16.5: Conventional marketing channels: Manufacturer makes forward integration when it seeks control of businesses of the wholesale and retail levels of the channel. The retailer makes backward integration when it seeks control of businesses at wholesale and manufacturer levels of the channel. The wholesaler can make forward and backward integration. This results in the vertical marketing system.

Horizontal integration: seeking control of channel members at the same level of channel.

Integration can be achieved through acquisitions or tight cooperative relationships.

Managing and controlling distribution channels

Arnold (2000) made guidelines to the manufacturer in order to anticipate and correct potential problems with international distributors:

Select distributors: do not let them select you.

Look for distributors capable of developing markets, rather than those with a few obvious contacts: bypassing the most obvious choice.

Treat the local distributors as long-term partners, not temporary market-entry vehicles: within a short-term agreement the local distributor does not have much incentive to invest in the necessary long-term marketing development.

Support market entry by committing money, managers and proven marketing ideas: in order to retain strategic control.

From the start, maintain control over marketing strategy: distributor should adapt to the manufacturer’s strategy to local conditions.

Make sure distributors provide you with detailed market and financial performance data: the manufacturer’s ability to exploit its competitive advantages in the foreign market depends heavily on the quality of information it obtains from the market. Thus, the contract with the distributor must include the exchange of information.

Build links among national distributors at the earliest opportunity: these could lead to a cross-national transfer of efficient marketing tools.

• Screening and selecting intermediaries

Five categories for selecting foreign distributors:

• Financial and company strengths. Financial soundness, quality of management team, reputation among current and past customers, ability to finance initial sales and growth, raise funding, provide promotion and advertising funds and maintain inventory.

• Product factors. Quality and sophistication of product lines, product complementarily, familiarity with the product, condition of physical facilities, patent security.

• Marketing skills. Marketing management expertise and sophistication, expertise with target customers, sales force, market share, on-time deliveries.

• Commitment. Willingness to invest in sales training, positive attitude towards the manufacturer, undivided attention to product, willing to keep sufficient inventory.

• Facilitating factors. Connections with influential people, network, working experience, government relations, knowledge of particular business.

First listing all important criteria, then select a few for more specific evaluation. Candidates are compared and contrasted. Table 16.1.

2. Contracting (distributor agreements)

Essential elements that should be in the contract:

• Names and addresses of both parties

• Date when the agreement goes into effect

• Duration of the agreement

• Provisions for extending or terminating the agreement

• Description of sales territory

• Establishment of discount and/or commission schedules and determination of when and how paid.

• Provisions for revising the commission or discount schedules

• Establishment of a policy governing resale prices

• Maintenance of appropriate service facilities

• Restrictions to prohibit the manufacture and sale of similar and competitive products

• Designation of responsibility for patent and trade mark negotiations and/or pricing.

• The (non-)assign ability of the agreement and any limiting factors

• Designation of the country and state of contract jurisdiction in the case of dispute

Furthermore, it is normal to prescribe a time limit and a minimum sales level to be achieved, in addition to the particular responsibilities of each party.

Contract duration: the initial contract with a new distributor should stipulate a trial period of three or six months, possibly with minimum purchase requirements.

Geographic boundaries: future expansion of the product might be complicated if a distributor claims right to certain territories.

Payment section: the methods of payment as well as how the distributor or agent is to draw compensation. Distributors obtain various discounts and the agents earn a percentage of the net sales. It should be mentioned which currency is used.

Product and conditions of sale: what kind of products/product line. The functions and responsibilities of the intermediary concerning the product and its sale. Conditions of sale determine which party is to be responsible for some of the expenses.

Means of communication: the marketer should have access to all information concerning the marketing of its products in the distributor’s territory.

3. Motivating

This is difficult since intermediaries are not owned by the company and they are seeking to achieve their own objectives. If the trade margin of a product is poor, intermediaries will lose interest and concentrate on products with more rewarding response. Therefore, it is important to keep in regular contact with agents and distributors.

Furthermore, the firm might hire one person to facilitate distributor-related communications and/or it can implement an exchange of personnel so that employees get further insight into the workings of others.

4. Controlling

Control should be sought through the common development of written performance objectives. It should be exercised through periodic personal meetings. Furthermore, evaluation of performance has to be done against the changing environment.

5. Termination

Reasons for termination of a channel relationship are:

• The international marketer has established a sales subsidiary in the country.

• The international marketer is unsatisfied with the performance of the intermediary.

• Termination conditions are the most important considerations in the distribution agreement. Furthermore, it is important to know what local laws say about termination.

Managing logistics

Logistics: a term used to describe the movement of goods and services between suppliers and end users. There are two important phases in the movement of materials: materials management (movement of raw materials, parts and supplies into and through the firm) and physical distribution (finished products transfer to customers). The goal is to gain effective coordination of both phases to result in maximum cost-effectiveness while maintaining service goals and requirements.

Order handling

• The sale:

• Importer makes enquiry of potential supplier.

• Exporter sends catalogues and price list.

• Importer requests pro forma invoice (price quote).

• Exporter sends pro forma invoice.

• Importer sends purchase order.

• Exporter receives purchase order.

• Importer arranges financing through its bank (issuing bank).

• Importer’s bank sends letter of credit to exporter’s bank (advising bank).

• Exporter’s bank notifies exporter that letter of credit is received.

• Exporter produces or acquires goods.

• Exporter arranges transportation and documentation:

• Space reserved on ship or aircraft.

• Documents acquired or produced, see list on page 563.

• Exporter ships goods to importer.

• Exporter presents documents to one of the banks for payment.

• Importer has goods cleared through customs and delivered to its warehouse.

Most common export documents:

Transportation documents:

Bill of lading: a receipt for the cargo and a contract for transportation between a shipper and a transport carrier.

Dock receipt: acknowledging receipt of the cargo by an ocean carrier.

Insurance certificate: evidence that insurance is provided to cover loss or damage to the cargo while in transit.

Banking documents: Letter of credit: financial document issued by a bank at the request of the importer, guaranteeing payment to the exporter if certain terms and conditions are met.

Commercial documents: Commercial invoice: bill for the products from the exporter to the buyer.

Government documents:

Export declaration: complete information about the shipment.

Consular invoice: signed by a consul of the importing country that is used to control and identify goods shipped there.

Certificate of origin: certifying the origin of products being exported.

Transportation

The four main modes of transport are: Road, Water, Air and Rail. When deciding which mode of transport to use, consider the following: Cost of transport, distance to location, nature of the product, frequency of shipment, value of the shipment and availability of transport (influenced by the level of economic development).

Freight forwarders

They relieve the producer of most of the burdens of distribution across national borders. The services that freight forwarders provide:

• Coordination of transport services

• Preparation and processing of international transport documents

• Provision of warehousing

• Expert advice

Trends that have threatened the freight forwarder: 1) the tendency for transport companies to extend their activities to include an in-house forwarding function. 2) experienced exporters have developed their own in-house transport and documentation expertise.

Inventory (in the factory base)

Purpose of inventory: to maintain product movement in the delivery pipeline, in order to satisfy demand. Management must find a balance between customer service and inventory cost. Decision to make: the level of inventory. Therefore two factors should be considered:

Order cycle time: the total time that passes between the placement of an order by a customer and the receipt of the goods. The delivery times are dependent on the transportation mode. The marketer aims at reducing the order cycle time and thereby reducing costs.

Customer service levels: the ability to fulfil customer orders within a certain time. High customer service levels correspond with high inventory costs.

Storage/warehousing (in foreign markets)

Warehousing decisions focus on three main issues:

• Where the firm’s customers are geographically located.

• The pattern of existing and future demands.

• The customer service level required.

General observations about warehousing facilities:

If products need to be delivered quickly storage facilities will be required near the customer.

For high-value products the location of the warehouse will be of minimal importance as these lightweight products can be air freighted.

Packaging

A good balance needs to be achieved between the costs of the export packing required to eliminate all damage and the price and profit implications that this has for the customer and the exporter. Different countries have different regulations about what materials are acceptable for export packing. Export packing influences customer satisfaction through its appearance and its appropriateness to minimize handling costs for the customer.

Third-party logistics (contract logistics)

Third-party logistics: experts solely at logistics, with the knowledge and means to perform efficient and innovative services for those companies in need. The goal is to improved service at equal or lower cost. Advantage of hiring third-party logistics: benefit from local expertise and image. Disadvantage of hiring third-party logistics: loss of the firm’s control in the supply chain.

Internet and the decisions for distribution

Internet has the power to change the balance of power among consumers, retailers, distributors, manufacturers and service providers. Physical distributors and dealers of goods and services are feeling increased pressure from e-commerce.

Disintermediation: increase direct sales through Internet.

This can lead to channel conflict when manufacturers start competing with their resellers.

Four Internet distribution strategies:

Present only product information on the Internet: manufacturers do not sell their products through the internet and prohibit their resellers from using the Internet for sales. Only product information is provided on the Internet.

Leave Internet business to resellers: distributors leave the Internet business for re sales and do not sell directly through the internet. The effectiveness of the strategy depends on the existing distribution structure. It is effective when manufactures assign exclusive territories to resellers. The global nature of the Internet creates price transparency; this might conflict with the prices charged by the manufacturer. Furthermore, consumers will search for manufacturer’s websites instead of resellers’ websites.

Leave Internet business to the manufacturer only: the manufacturer restricts Internet sales exclusively to itself. The business model of the manufacturer must be aligned with sales through the Internet (able to deal with the numerous small orders). Furthermore, the manufacturers should learn about the new channel of distribution.

Open Internet business to everyone: let the market decide the winners and open the Internet to everybody, for direct sales and resellers.

Retailing shows differences between countries due to different histories, cultures, etc.

The main reason for the lack of growth of large-scale retailing in these countries is legislation. The legislative conditions differ across Europe. It can hamper the development of some forms of retailing. Nowadays, retailers are internationalising their business. Thereby the retailer faces some challenges and problems. These problems begin with the consumers. Retailers’ performance in local markets is highly sensitive to variations in consumer behaviour. These variations cause implications for differentiating merchandise offered along dimensions. Furthermore, retailers need to overcome the shortages of key resources.

The internationalisation of retailers created different styles of operation: 1) Global retailers aim at achieving economies of scale while showing low local responsiveness. 2) Multinational retailers operate as autonomous entities within each country. 3) Transnational retailers seek to achieve global efficiency while responding to national opportunities and constraints.

Smartphone marketing

With the adoption of 3G and 4G smartphones, mobile marketing has grown over the last few years and became more and more important in the advertising of the brand, especially on a global level. The mobile marketing (m-marketing) will allow programs to run through a web browser rather than a specific operating system. The introduction of m-marketing brings a series of benefits to consumers, merchants and telecommunication companies. Benefits for consumers can be the comparison in shopping, to bridge the gap between bricks and clicks, opt-in searchers, travel.

For merchants the benefits can be the impulse buying of the customer, drive traffic. Education of consumers, perishable products, drive efficiency and to target markets on a geographical level

The advantages for telecommunication companies are more airtime used by the consumer and higher fee charged to content providers for each transaction in the m-commerce.

The use of web services on location has increased with the increase of the ownership of the smart phone. Location based marketing services can offer the marketer a better understanding of the behaviour patterns of the consumer. For international marketers, there are two application groups that are worth mentioning:

Shopper apps. Drive consumers into and around stores, scanning products in the shop in exchange for coupons.

Location sharing social media apps. Treasure hunting app. The consumer can check for different locations.

Channel power in international retailing

Channel power: the ability of a channel member to control marketing variables of any other member in a channel at a different level of distribution.

International retailing: worldwide tendency towards concentration in retailing, creating huge buying power in the big international retail chains.

Trade marketing: when the manufacturer (supplier) markets directly to the trade (retailers) to create a better fit between product and outlet. Its objective is to create joint marketing and strategic plans for mutual profitability.

For the manufacturer, this means creating twin marketing strategies, on to the consumer and one to the trade, Figure 16.10. Manufacturers and retailers have a common goal: consumer satisfaction.

Manufacturers can offer retailers a total ‘support package’ by stressing their own strengths. These include marketing knowledge and experience, market position, proven new product success, media support and exposure, and a high return on investment in shelf space.

The increased importance of the individual customer led to key accounts. These accounts are large retail chain with a large turnover, which are able to decide quantity and price on behalf of different outlets. Thus segmentation is based on size, geographic position and customers’ structure of decision making.

Alliances between international retailers: these retailers do not share equity, but they all have a central secretariat with the function of coordinating operational activities. The advantage is obtained through the central purchasing from suppliers. Here price advantages flow to all members.

Grey marketing/parallel importing

Grey marketing/parallel importing: importing and selling of products through market distribution channels that are not authorized by the manufacturer. It occurs when the manufacturer uses significantly different market prices for the same product in different countries and mainly exists for high-priced, high-end products.

In this way an unauthorized dealer is able to buy branded goods intended for one market at a low price and sell them in another, higher-priced, market, Figure 16.11.

Reasons for lower prices: The distributor has unexpected over-supply of a product, lower transportation costs, fiercer competition, higher product taxes.

Grey markets are fed by authorized dealers who can make profit or minimize a loss by selling to unauthorized dealers.

Strategies to reduce grey marketing:

Seek legal redress: prosecute grey markets, time consuming and expensive.

Change the marketing mix: three elements.

Product strategy: introducing a different product for each main market.

Pricing strategy: change the ex-works prices to the channel members to minimize price differentials between markets or narrow the discount schedules for large orders.

Warranty strategy: reduce or cancel the warranty period for grey market products. Required is that the products can be identified through the channel system.

Chapter 17: Promotion

Communication decisions (promotion strategies) are part of the marketing mix.

Aim: to provide information that buyers need to make purchasing decisions.

Decision to make: whether to standardise communication tools worldwide or to adapt the promotion mix to the environment of each country.

The communication process

Communication process, Figure 17.1:

-Without an established relationship between the seller and buyer: the manufacturer (seller) sends a message through a form of media to an identifiable target segment audience.

-With an established relationship between the seller and buyer: the buyer is placing orders (reverse marketing) on the seller.

Note: the relative share of sales volume of the buyer’s initiative will tend to increase over time.

Effective communication consists of a sender, a message, a communication channel and a receiver, Figure 17.2. The degree of ‘fit’ between the communication channel and the message must be considered. Furthermore, the sender’s message might not be clear for the receiver due to ‘noise’ of rival manufacturers. Other factors influencing the communication situation:

Language differences: a slogan might be effective in one language but mean something different in another language. In addition, translation mistakes can occur.

Economic differences: developing countries may not have televisions. Furthermore, low levels of literacy may not be as effective as visual communication.

Sociocultural differences: dimensions of culture – religion, attitudes, social conditions and education – influence the way people perceive their environment and interpret signals and symbols.

Legal and regulatory conditions: government regulations on content, language, type of product and sexism might constrain the promotion of a company.

Competitive differences: competitors differ per county with respect to their size, type, promotion strategy and the number of firms established.

Communication tools

Advertising

Advertising is visible form of communication. Important for the communication mix of goods that serve a large number of small-volume customers that can be reached through mass media.

Advertising methods vary from country to country, but the major objectives of advertising remain the same. This includes the following:

Setting objectives:

• Increasing sales from existing customers: encourage them to increase the frequency of their purchases through maintaining brand loyalty and stimulating impulse purchases.

• Obtaining new customers: increase consumer awareness and improve the firm’s image among the new target group.

Budget decisions:

Affordable approach: percentage of sales, the firm will automatically allocate a fixed percentage of sales to the advertising budget. The advantages and disadvantages are listed on page 591.

Competitive parity approach: duplicating the amounts spent on advertising by major rivals. This is more difficult for foreign competitors than for home-based competitors. Furthermore, competitors might make a mistake. Lastly, the competitor might be in a different situation than the firm is.

Objective and task approach: determining the advertising objectives and then ascertaining the tasks needed to attain these objectives. Including a cost-benefit analysis. Knowledge about the local market is required.

Message decisions

Unique selling proposition (USP): the decisive sales argument for customers to buy the product. This influences the decisions to make for the choice of advertising medium.

Decision to make for international marketers: is an advertising campaign developed in the domestic market able to be transferred to foreign markets with only minor modifications? Thus, a high level of standardisation. This implies a common message, creative idea, media and strategy, and a clearly understood USP by customers in a cross-cultural environment. Advantage of standardising international advertising is the reduce in costs.

Media decisions

Media selection is based on three criteria:

• Reach: opportunity to see (OTS), the total number of people in a target market exposed to at least one advertisement in a given period of time. High reach is necessary when the firm enters a new market or introduces a new product.

• Frequency: the average number of times within a given time period that each potential customer is exposed to the same advertisement. High level of frequency is appropriate when brand awareness already exists and the message is about informing the consumer that a campaign is under way.

• Impact: depends on the compatibility between the medium used and the message. It is the impact on the customer’s brain.

Gross rating points (GRPs): multiplying its reach by the frequency. GRPs may be estimated for individual media vehicles, for entire classes or for the total campaign. Media planning is often based on ‘cost per 1000 GRPs.’

When dealing with two or more national markets the selection of media has to take into account:

• Differences in the firm’s market objectives across countries.

• Differences in media effectiveness across countries.

Main media types:

• Magazines: a narrower readership than newspapers. They reach specific segments.

• Journals: access to daily newspapers in all urban areas. There are often too many newspapers within a country. Though, newspapers are predominantly local and thus serve as the primary medium for local advertisers.

• Directories

• Radio: lower-costs than television, often locally adapted to a certain area.

• Television: expensive, reaches a broad audience, highly regulated by the government.

• Cinema: important in countries where the cost of showing films by running advertising commercials prior to the feature film are subsidised. It has captive audience.

• Outdoor: e.g. posters. Used to develop the visual impact of advertising.

Agency selection

When confronted with many complex problems concerning international advertising, firms may turn to an advertising agency for advice and practical assistance. Firms have several options:

• Use different national agencies in the international market where it is present.

• Use the services of a big international agency with domestic overseas offices.

Criteria for choosing one of the two options:

• Policy of the company: does it have realistic plans for a more standardised advertising approach?

• Nature of the advertising to be undertaken: corporate image advertising is best performed by a single large multinational agency that operates throughout the world via its own subsidiaries.

• Type of product: a standardised advertisement for a product is best performed by a single multinational agency.

Advertising evaluation

Testing advertising effectiveness is more difficult in international markets than in domestic markets due to the distance and communication gap between the domestic and foreign markets. In addition, testing the impact of advertising on sales is difficult since it is difficult to isolate the advertising effect. Furthermore, it is difficult to transfer testing methods used in domestic markets to foreign ones.

Public relations

Public relations (PR) seek to enhance corporate image building and influence favourable media treatment. It carries out programmes designed to earn public understanding and acceptance. It is an integral part of global marketing effort. PR activities involve both internal and external communication. PR target groups are: those directly connected with the organisation, suppliers, customers and the environment.

The degree of control of the PR messages is quite different. PR can be reached through, for instance: Sponsorship of events and press releases of news about the firm’s products, plant and personnel

Sales promotion

It consists of selling activities that do not fall directly into the advertising or personal selling category. It are so-called ‘below the line’ activities e.g. ‘two for the price of one’.

Objectives:

• Consumer product trial/immediate purchase

• Consumer introduction to the shop

• Encouraging retailers to use point-of-purchase displays for the product

• Encouraging shops to stock the product

Factors contributing to the expansion of sales promotion activities:

• Greater competition among retailers, combined with increasingly sophisticated retailing methods.

• Higher levels of brand awareness among consumers.

• Improved retail technology.

• Greater integration of sales promotion, public relations and conventional media campaigns.

Types of sales promotion:

Price discounts

Catalogues/brochures: enables the company to close the gap between buyer and seller in the way that the potential buyer is supplied with all the necessary information.

Coupons: door-to-door, on pack, in newspapers. They are not allowed in European countries.

Samples: gives the potential foreign buyer an idea of the firm and quality of the product that cannot be attained by a graphic picture. They prevent misunderstandings.

Gifts: might be limited or not allowed by government regulations.

Competitions: needs to be communicated to the potential customers.

The success of sales promotion depends on local adaption. The promotion strategy might be constraint by government regulations and the company must be aware of these.

Direct marketing

Direct marketing is the total of activities by which products and services are offered to market segments in one or more media for informational purposes or to answer a direct response from a present or prospective customer or contributor by mail, telephone or personal visit.

Direct mail offers a flexible, selective and potentially highly cost-effective means of reaching foreign customers. Messages can be addressed exclusively to the target market, advertising budgets may be concentrated on the most promising market segments, and it will be some time before competitors realise that the firm has launched a campaign. Furthermore, the size, content, timing and geographical coverage can be varied at will. However, the preparation of a suitable mailing list might cause problems. Using direct mail for business-to-business purposes requires the preparation of an accurate customer profile.

Telemarketing (using telephone) is used today for both consumer and business-to-business campaigns throughout the industrialised world. Though, it is mostly used for business-to-business purposes due to the need for reliability. The administration of international telemarketing often requires the use of a commercial telemarketing agency. They possess language skills and are experienced in identifying decision-makers in target firms. Cold calling (unsolicited calls) is often under close control in the name of consumer protection and respect for privacy.

Personal selling

Difference between advertising and personal selling: advertising is a one-way communication process which faces more noise than personal selling. Furthermore, personal selling is a two-way communication process with immediate feedback.

Personal selling is an effective and expensive way to sell products. It is mainly used to sell to distribution channel members and in business-to-business markets. If personal selling is actually too expensive, it may be used only at the end of the potential customer’s buying process

Assessing sales force effectiveness:

• Is the selling effort structured for effective market coverage?

• Is the sales force staffed with the right people?

• Is strong guidance provided?

• Is adequate sales support in place?

• Does the sales compensation plan provide the proper motivation?

The international sales force organization

When determining the most appropriate international sales force, management should consider three options:

Expatriate salespersons: they are already familiar with the firm’s product, technology, history and policies. They only need knowledge of the foreign market. However, the failure to understand a foreign culture and its customers will hinder the effectiveness of an expatriate sales force.

Host country nationals: hire personnel who are based in their home country (which is the firm’s host country). They have extensive market and cultural knowledge, language skills and familiarity with local business traditions.

The government prefers that their own nationals are hired instead of outsiders, therefore, the firm avoids charges of exploitation while gaining goodwill at the same time. However, these nationals do not have expertise knowledge about the company yet.

Third-country nationals: employees that are born in own country, employed by a firm based in another country and working a third country.

Note: expatriates and third-country nationals are seldom used for long periods of time. They are used 1) to upgrade a subsidiary’s selling performance. 2) To fill management positions. 3) To transfer sales policies, procedures and techniques.

Trade fairs and exhibitions

Trade fair(s) (TF): exhibition, a concentrated event at which manufacturers, distributors and other vendors display their products and/or describe their services to current and prospective customers, suppliers, other business associates and the press. TF are multi-purpose events involving many interactions between the TF exhibitor and numerous parties. Potential buyers can examine and compare the outputs of competing firms in a short period oat the same place.

Advantages: 1) Enables a company to reach a concentrated group of interested prospects within a few days instead of several months. 2) Offers international firms the opportunity to gather vital information quickly, easily and cheaply.

Note: whether a marketer should participate in a TF depends on the type of business relationship it wants to develop with a particular country. A firm looking for long-term involvement may find the investment worthwhile.

Standardisation of the marketing mix allows economies of scale, reducing advertising costs and increasing profitability. However, advertising is based largely on language and images; therefore, it is mostly influenced by the sociocultural behaviour of consumers in different countries.

Example of adaptation strategies: Courvoisier Cognac: in Europe drinking cognac is a symbol of Western capitalist decadence. In China drinking cognac is viewed as a social and conspicuous.

Traditional- versus web- communication tools

Traditional communication tools create awareness which results in consumers’ identification of new needs. From there direct marketing and in-store-promotion take over the promotion. Web communication tools use online marketing only for promotion.

On the Internet it is easier to reach a large a broad audience; however, it is harder for the message to be heard above the noise by the target audience.

Viral marketing

Viral marketing: online word-of-mouth is a marketing technique that seeks to exploits existing social networks to produce exponential increases in brand awareness. From a marketing perspective: the process of encouraging individuals to pass along favourable or compelling marketing information they receive in a hypermedia environment.

Motive: viral marketing utilises the free endorsement of the individual rather than purchasing mass media to spread the world. In addition, viral marketing can be lower cost and more effective than traditional media.

Advantages:

• Low costs since the individual passing on the referral carries the cost of forwarding the brand message.

• It is not an interruptive technique. It delivers exposure via peer-to-peer endorsement. This type of promotion is often viewed favourably by the receiver.

• Effective targeting, the forwarding people will be more likely to know which of their friends, family, etc. have similar interest and thus more likely to read the message.

Disadvantages:

• Viral marketing is more risky than traditional marketing.

• If particular software is needed that is not widely used, people are not able to open the message.

• Many people receive viral marketing messages while at the office, and company anti-virus software can prevent people from receiving such attachment.

• It is required that it is easy to use in order to be successful.

Developing a viral marketing campaign

The technique should not be considered as a substitute for a comprehensive and diversified marketing strategy.

Successful campaigns contain of a combination of approaches in order to maximise the viral effect of the campaign. Furthermore, it is important to evaluate how people will communicate the message to others.

1. Creating compelling content

The content of the message must be funny and of high quality. Furthermore, it muse evoke a response on an emotional level from the person viewing it.

2. Targeting the right audience

The power of reference groups in individual decision-making is significant. Therefore, marketers should ensure that they seek towards the intended audience.

3. Campaign seeding

Seeding is the act of planting the campaign with the initial group who will go on to spread the campaign to others. The Internet provides a wide variety of options for seeding. Marketers should consider what kind of media the target audience uses and to what degree.

4. Control/measuring results

The goal of a viral campaign is explosive reach and participation. To measure the success of a viral marketing campaign, marketers must establish specific and obtainable goals within a time frame. Furthermore, marketers should meet the needs of participant in the event. Lastly, a marketer should have the ability to capitalise on the full success of the campaign.

Social networking

Social networking encompasses a wide range of online, word-of-mouth forums. They are used as communication tools and have two interrelated promotional roles:

• Social networking should be consistent with the use of traditional integrated marketing communications (IMC) tools. Therefore, companies should use social media to talk to their customers.
• Social networking is enabling customers to talk to one another. This is an extension of traditional word-of-mouth communication. In this way companies have the ability to influence consumer-to-consumer (C2C) messages. However, the C2C also limits the company’s amount of control.

Marketers are seeking ways to incorporate social media into their IMC strategies. Social media leads to the availability of market information that is based on the experiences of individual consumers. Moreover, marketers should recognise the power and critical nature of discussions being carried on by consumers using social media. The impact of the discussions among consumers in the social media space on the development and execution of IMC strategies is determined by:

• Internet has become a mass media vehicle for consumer-sponsored communications.

• Consumers are turning away from the traditional sources of advertising. They consistently demand more control over their media consumption. They require on-demand and immediate access to information at their own convenience.

• Consumers are turning more frequently to various types of social media to conduct information searches and to make their purchasing decisions.

• Social media is perceived by consumers as a trust worthier source of information regarding products and services than corporate-sponsored communications transmitted via the traditional element of the promotion mix (radio, television, magazines and newspapers).

Social media marketing

The international selling and buying business is a part of a social process. Apart from the direct interaction between the company and the customer, information and influences from the people around the customer is important. Consumers are much more trusting in friends and colleagues than the advertising. This is called Word- of - mouth (WoM). WoM can be defined as the sharing information about a product between a consumer and a friend or colleague.

Web 2.0

Web 2.0 websites allow users to do more than just retrieve information. It transforms broadcast media monologues into social media dialogues. The popularity increased by using blogs, wikis and social networking. The web 2.0 internet user tends to be proactive and bring in a whole new perspective on established processes and approaches. The user can create innovative ideas for the future development of companies.

The 6C model of social media

The social media are important to carry content and information in the form of words, text, pictures and videos. It is generated by millions of potential customers around the world. We can define six distinct elements that explain the creation and retention of consumer engagement, seen from a company perspective:

• Company and content. The internet remains a pull medium. Before the pull can happen, the content has to be pushed forward in the chain
• Control. In order to accelerate the viral uptake of its brand message, the company gives up the digital rights and blocks in order to encourage online community members to copy, modify, re-post and forward the content. It is intended to spread and copy to social media walls. The company has to embrace the idea that it has not the full control over the product or brand anymore.
• Community. The company creates content and pushes it to the side where the community of (interested) consumers takes it up. It is reflected in the art of commenting: posting reactions to the content. The company can learn about the behaviour of the customer by following the online community discussions. Providers try to target the market mavens. Market mavens are individuals who have access to a large amount of marketplace information. They are proactive in the discussion with other members of the online community and spreading the content.
• Customers and online conversation. This is the best possible way for companies. A multitude of online conversations circle around the brand or product/ topic. Social media extend the conversation further between marketers and consumers through a feedback loop. It also insights into the behaviour of non-consumers. This form of social sharing has opened up the lives of individual consumers, which companies can exploit and offering a better match preferences.

Crowdsourcing

Crowdsourcing can be defined as the act of a company taking a function once performed by employees and outsourcing it to a larger community of people in the form of an open call. (Jeff Howe, 2006)

Chapter 19 : The control and organization of the global market

This chapter contains the organization of global marketing activities, the global account management organization, controlling the global marketing program, the global marketing budget and the process of developing the global marketing plan.

Organization of global marketing activities

The organization is structured in an evolution of international operations. It is important to determine its ability to exploit the opportunities available to it's effectively and efficiently.

There are five stages in the time that is involved in international operations:

Stage 1: Ad hoc exporting

Stage 2: Functional structure

Stage 3: International division structure

Stage 4: Geographical structure and product structure

Stage 5: Matrix structure

The strategic importance and complexity of international operations increases with each stage. We will discuss the different stages starting with the functional structure.

Functional structure

The management of the functional structure is concerned primarily with the function efficiency of the company. The functional export department design is particularly suitable for small and medium- sized enterprises. The company, being new to international business, has no international specialist and typically has few products and few markets.

International divisional structure

The international divisional structure may emerge when the international sales grow. It incorporates international expertise, information flows about foreign market opportunities and authority over international activities. It best serves firms with new products that do not vary significantly in terms of their environmental sensitivity, and whose international sales and profits are still quite insignificant compared with those of the domestic divisions.

Product divisional structure

The product structure is especially a good structure to companies with more experience in international business and markets. One of the major benefits of the approach is improved cost efficiency through centralization of manufacturing facilities for each product line. The main disadvantages of this type of structure are that it duplicates functional resources, it under-utilizes sales and distribution facilities abroad, the marketing of products is taken care of centrally from the home base and the product division tends to develop a total independence from each other in world markets.

Geographical structure

This structure is especially useful for companies that have a homogeneous range of products, but at the same time need fast and efficient worldwide distribution. Many food, beverage, car and pharmaceutical companies use this type of structure. The main advantage is its ability to respond easily and quickly to the environmental and market demands of a regional or national area through minor modifications in product design, pricing, market communication and packaging.

Matrix structure

Some global companies need both the product structure and the geographical structure. In this case they have to adopt a more complex structure: the matrix structure. This consists of two organizational structures intersecting with each other. In this way there are dual reporting relationships. The typical international matrix structure is the two-dimensional structure that emphasizes product and geography. Each product division has worldwide responsibilities for its own business, and each geographical area is responsible for the foreign operations in its region. The structure is useful for companies that are both product -diversified and geographically spread. By combining a product management approach with a market-oriented approach, one can meet the needs of both markets and products.

The global account management organization

The global account management or GAM can be understood as a relationship-oriented marketing management approach focusing on dealing with the needs of an important global customer in the business to business (B2B) market. It is an organizational form in a global supplier organization used to coordinate and manage worldwide activities, by servicing an important customer centrally from headquarters.

A global account is a customer that is of strategic importance to the achievement of the supplier's corporate objectives, a customer that pursues integrated and coordinated strategies on a worldwide basis, and demands a globally integrated product offering. A global account manager is the person in the selling company who represents that company's capabilities to the buying company and brings the two together.

Successful GAM requires an understanding of the logic of both product and service management. The starting point for the following is the firm that wishes to implement GAM.

The firm that wants to implement successful GAM may go through the following four steps:

• Identifying the selling firm's global accounts

• Analyzing the global accounts

• Selecting suitable strategies for the global account

• Developing operational level capabilities to build, grow and maintain profitable and long lasting relationships with global accounts

1. Identifying the selling firm's global accounts

Identifying the selling firm's global accounts is answering the following question: Which existing or potential accounts are of strategic importance to use now and in the future?

The following criteria can be used to determine strategically important customers: the sales volume, age of relationship, the selling firm's share in terms of long-term gains in its share of customer's business, the profitability of the customer to seller and the use of strategic resources.

2. Analyzing the global accounts

This includes activities such as analyzing the basic characteristics of a global account, the history of the relationship, the level and development of commitment to the relationship, goal congruence of the parties and the switching costs.

3. Selecting suitable strategies for the global accounts

Depending on the power position of the seller and the global account. The structure of the power within different accounts may vary significantly.

4. Developing operational level capabilities

This refers to customization and development of capabilities related to:

• Product /service development and performance

• Organizational structure

• Individuals or human resources

• Information exchange

• Company and individual level benefits

The dyadic development of GAM

The dyadic progression of a relationship between buyer and seller can be demonstrated in five stages:

• Pre- GAM

• Early- GAM

• Mid- GAM

• Partnership- GAM

• Synergistic- GAM

Pre- GAM

The Pre- GAM describes preparation for GAM. Both seller and buyer sending out signals or factual information and exchanging interactions prior to the decision to engage into transactions. In the pre- GAM stage, there is a need to develop networks of contacts, to gain knowledge and to begin to assess the potential for relational development.

Early- GAM

At the stage of early- GAM, the selling company is concerned with identifying the opportunities for account penetration once the account has been won.

Mid- GAM

The selling company has established credibility with the buying company. The contacts increase between the two companies and the selling company is now a preferred supplier.

Partnership- GAM

When this stage is reached, the selling company is seen by the buying company as a strategic external source. The two companies will be sharing sensitive information and engaging in joint problem solving. Another advantage is the opening of the global account. The global accounts will test all the supplier company's innovations so that they have first access to, and first benefit from, the latest technology. The buying company will expect to be guaranteed continuity of supply and access to the best material.

Synergistic- GAM

The ultimate stage of the relational development is the synergistic GAM. The relationship gets closer, and the knowledge about the customer increases. The greater the potential for creating entrepreneurial value gets.

The supplier of seller is getting advantages and disadvantages with GAM. The advantages of the seller or supplier contain:

• The providing of a better fulfillment of the customer's global need for having only one supplier of certain products and/or services.

• Smaller supplier enterprises often have significant complementary assets.

• The creating of barriers for competitors.

• An increased sale of existing products and services through a closer relationship with the key customer.

• A high potential for profit increase.

• Through the global network of the customer, the supplier might gain access to new customers around the world.

The disadvantages of the supplier or seller contain:

• The pressure from global customers to improve global consistency.

• Restricted access to the attention of the key-decision makers.

• In a normal situation the supplier would use different prices for the customer's different subsidiaries in the different countries. The global customer may attempt to use GAM as a means to lower prices globally.

• The pressure to standardize all terms of trade on a global basis, and not just a price.

There are three different organizational models in the set-up of global account management:

• Central HQ-HQ negotiation model

• Balanced negotiation model

• Decentralized local-local negotiation model

Central HQ-HQ negotiation model

In this model the product is standardized. The customer HQ will collect the demands from the different subsidiaries around the world. After this, the customer will meet with the supplier and the HQ-to-HQ negotiations will take place. The discussion will come down to a question of the right price. The supplier will always be under pressure to lower the price and cut costs of producing the product package including services.

Balanced negotiation model

The central HQ- to HQ negotiation is supplemented with some decentralized and local negotiations on a country basis. This will take place in the form of negotiations between the local subsidiaries of the customers and the different partners of the supplier.

Decentralized local-local negotiation model

In this model all negotiations will take place on a local basis because the supplier is selling system solutions which require a high degree of adaption to the different markets or countries. The HQ is disconnected from the negotiation process. By using the opportunities for sub-optimization by negotiation only on a local basis, the supplier may be in a better relative negotiation position and may achieve higher or better prices.

Controlling the global market program

The final stage of international market planning is the control process. It completes the circle of planning and providing the feedback necessary for the start of the next planning cycle. The next figure illustrates the connection between the marketing plan, the marketing budget and the control system:

The budget is the basis for the design of the marketing control system. It should represent a projection of actions and expected results. Measuring performance against budget is the main management review process. The purpose of the budget is to pull all the costs and revenues involved in the marketing together into one document. The evaluation and control of global marketing represent the weakest areas of marketing practice in many companies. The function of the organizational structure is to provide a framework where the objectives are met. The global question is to determine how to establish a control mechanism capable of early interception of emerging problems. So, in designing a control system, management must consider the cost of establishing and maintaining it and trade them off against the benefits. The design of the control system can be divided into two groups:

• Output control(based on financial measures)

• Behavioral controls ( based on non-financial measures)

1. Output control

The output control involves regular monitoring of expenditure figures, comparison of these with the budget targets, and taking decisions to cut or to increase expenditure. Measures of output are accumulated at regular intervals and are forwarded from the foreign subsidiary to HQs. At the HQs they are evaluated and criticized based on comparisons to the plan or budget.

2. Behavioral controls

Behavioral controls require the exercise of influence over behavior, which can be achieved by providing sales manuals to subsidiary personnel or by fitting new employees into the corporate culture. It often requires an extensive socialization process, and informal, personal interaction is central to the process. Besides this, a strong tradition of using output (financial) criteria remains.

Marketing control is an essential element of the marketing planning process because it provides a review of how well marketing objectives have been achieved. The marketing control process begins with the company setting some marketing activities into motion. The next step in the control process is to establish specific performance standards that will need to be achieved for each area of activity if overall objectives and sub- objectives are to be achieved. The next figure provides a representative sample of the types of data required.

The next step is to locate responsibility. It is important to consider this issue, because corrective or supportive action may need to focus on those responsible for the success of marketing strategy. In order to be successful, the people involved by the control process should be consulted in both the design and implementation stages of marketing control. A judgment has to be made about the degree of success and failure achieved and what corrective or supportive action is to be taken. This can be failure that is attributed to the poor performance of individuals that may result in the giving of advice regarding future attitudes and action, training and/or punishment, criticism, lower pay, demotion, etc. It also can be failure that is attributed to unrealistic marketing objectives and performance that may cause the management to lower objectives or lower marketing standards. Another thing that is necessary is to determine such things as the frequency of measurement. More frequent measurement means more costs. The impact of the environment must also be taken into account when designing a control system:

• The control system should measure only dimensions over which the organization has control.

• Control systems should harmonize with local regulations and customs.

Feedforward control

The information that is provided by the firm's marketing control system is most of the time feedback. What is accomplished in financial and non-financial terms? The control process can also be used as a forward looking and preventive system. Feedforward control would evaluate plans, and monitor the environment to detect changes that would call for revising objectives and strategies. The result can be controlled before their full impact has been felt. Feedforward control focuses on information that is prognostic: it tries to discover problems waiting to occur.

Key areas for control in marketing

There are four types of marketing control, each involving different approaches, purposes and different allocation of responsibilities.

The global marketing budget

Budgeting is in the first place a representation of action and expected results and should be capable of accurate monitoring. Secondly, budgeting is also an organizational process that involves making forecasts based on the proposed marketing strategy and programs. An important aspect of budgeting is deciding on how to allocate the last available dollars across all of the proposed programs within the marketing plan. A market based business will expand its focus to customers and countries, not just products or units sold. Global marketing strategies that affect customer volume include marketing strategies that attract new customers to grow market share, grow the market demand by bringing more customers into a market and entering new markets to create new sources of customer volume. All marketing strategies require some level of marketing effort to achieve a certain level of marketing share. The costs of this marketing effort are the marketing expenses and they must be deducted from the total contribution to produce a net marketing contribution. The global marketing budget system is used for the following purposes:

• Allocation of marketing resources among countries/markets to maximize profits

• Evaluation of country/market performance.

The traditional marketing budget can be defined as:

The purpose of the global marketing plan is to create sustainable competitive advantages in the global marketplace.

Year of summary

This Summary of Global Marketing: A decision-oriented approach by Hollensen is written in 2015.