Download Chapter ______

CHAPTER 17
MARKETING IN THE GLOBAL FIRM
II.
LEARNING OBJECTIVES AND THE OPENING VIGNETTE
Learning objectives:
1. Global marketing strategy
2. Standardization and adaptation of international marketing program
3. Global branding and product development
4. International pricing
5. International marketing communications
6. International distribution
7. Ethical dimensions of international marketing
Key Themes
ƒ The first key theme in this chapter is how the marketing mix (or the marketing
program elements) of product, pricing, promotion, and distribution are
affected by international business.
ƒ
The second key theme is the concept of the “balancing act” that managers
must achieve between adaptation and standardization of the marketing mix
when they sell products in international markets.
ƒ
The third theme is factors to consider in international pricing.
ƒ
The fourth theme highlights differences in international distribution and
channel management.
ƒ
Finally, a fifth theme is the importance of ethical considerations in
international marketing.
Teaching Tips
ƒ As indicated in the Lecture Launcher, a good way to teach this chapter is to
use many examples. There are many American products and brands sold in
other countries that are marketed with various degrees of adaptation and
standardization.
ƒ
Many students have traveled overseas, and they can usually give examples
of how different or how similar products were in a foreign country.
ƒ
Students can easily research brands such as McDonald's, KFC, Coca-Cola,
Maybelline, Dell, Apple, Nestle and others to find differences and similarities
in product design, promotion, advertising, and pricing.
ƒ
Students may have more trouble recognizing differences in distribution.
ƒ
Explain to students that there are critical differences in distribution across
countries, but that because distribution is a “back room activity,” it is harder
for us to know about it without visiting the country and talking with agents and
distributors.
ƒ
One way to learn about distribution channels without traveling abroad is to
read the US Commercial Service’s Country Commercial Guides. Visit
www.globaledge.msu.edu for quick links to these documents. Each Country
Commercial Guide has a section about distribution that serves as a starting
point for any vendor wanting to sell in another country.
ƒ
Further, local experts at the US Commercial Service in the US Consulate
Office in each country will help U.S. vendors who are truly serious about
selling internationally find distributors and customers.
Commentary on the Opening Vignette:
Zara’s Unique Model for International Marketing Success
• Key message
The opening vignette is the story of Zara, the flagship division of the Spanish
multinational apparel retailer, Inditex. Zara's managers made critical choices
regarding how much to adapt and how much to standardize to create high sales
and high profits for Inditex. Inditex is now Europe's leading apparel retailer, and
has expanded to Asia, the Middle East, Latin America, and most recently the
United States.
• Uniqueness of the situation described
Three things make Zara unique. First, unlike many other apparel retailers, Zara
manufactures much of its merchandise at company-owned factories in Spain,
rather than in contract facilities in China. Second, Zara spends much less than
other retailers on conventional advertising, yet spends much more on stores in
prominent, pricey locations; three, many US students (including women) have
never heard of Zara although it is very fashion-forward and belongs to the largest
apparel retailer in Europe.
• Classroom discussion
Retail apparel is an industry that most students know something about. Ask
them where their own clothing was manufactured. Chances are that most of it,
even the most fashion-forward item, was made in China. Ask students why
many US retailers, such as The Gap, Abercrombie and Fitch, and Old Navy
source from China. If these are such good reasons, why does Zara keep
manufacturing in Spain? Ask students to think about the fashion cycle. How far
in advance must The Gap design clothing for the following year's summer line?
Generally, for fashion-forward apparel made in Asia, design lead time is one year
and manufacturing lead time is six months. Transportation alone accounts for
30-45 days of that. Lead times can be cut significantly if production is closer to
the point of distribution.
III.
DETAILED CHAPTER OUTLINE
INTRODUCTION
ƒ The opening vignette is titled “Zara’s Unique Model for International Marketing
Success.” See commentary, above.
GLOBAL MARKETING STRATEGY
ƒ Marketing brings customer focus to international business. The goal of this
chapter is to help students recognize that marketing is a strategic activity, and
managers need to carefully assess the foreign environment before they make
choices about market segmentation, targeting, and position.
ƒ
The Exhibit illustrates this well.
The four major components of an
international marketing program are global branding and product
development, international pricing, international marketing communications,
and international distribution.
ƒ
All of that must be done within the context of an overall global marketing
strategy that targets customer segments and positions products accordingly,
and decides to what degree marketing should be standardized or adapted to
local conditions.
ƒ
Further, it all must be done within the broader general environment of the
country and the firm.
ƒ
The first function of the global marketing strategy is targeting customer
segments and positioning. Firms increasingly target global segments, or
groups of customers that share common characteristics across many national
markets.
ƒ
By targeting global segments, companies can create relatively uniform
marketing programs. Three examples of global marketing segments are the
homogeneous youth market, the sophisticated business executive market,
and the international construction industry.
ƒ
By using specific global marketing segments, firms can uniquely position its
products based on similarities within the segment, rather than differences
across national boundaries. This is called a global positioning strategy, such
that the product is positioned similarly worldwide.
•
Starbucks, Sony, and Volvo are companies that use this approach
successfully.
STANDARDIZATION AND ADAPTATION OF INTERNATIONAL MARKETING
PROGRAM
ƒ The second function of the global marketing strategy is deciding whether
standardization or adaptation is appropriate.
ƒ
While the marketing mix contains the same components for international
business as for domestic business (product/service, distribution, pricing, and
marketing communication), international marketing strategy is more complex
because it must consider differences in culture, language, living standards,
economic conditions, regulations, and the quality of business infrastructure.
ƒ
It must consider local or global competition and optimize value chain activities
across all of its markets.
ƒ
Adaptation is when the firm tries to modify one or more elements of the
marketing program to meet specific customer requirements in a region or
nation.
ƒ
Standardization is when the firm tries to make the marketing program uniform
to target entire regions or even the global marketplace with similar product or
service. The trick is to achieve a balance between adaptation and
standardization. The Exhibit shows trade-offs between adaptation and
standardization.
ƒ
The decision depends in part on the industry.
For example,
standardization is more likely in global industries such as aircraft,
pharmaceuticals, and credit cards.
ƒ
Other industries that use a standardized marketing approach are
commodity products, industrial equipment, and high-technology products,
as well as high-end branded fashion accessories, such as Rolex watches
and Gucci handbags.
ƒ
Advantages of standardization include cost reduction, improved
centralized planning and control, a consistent image, and the ability to
build a global brand.
ƒ
ƒ
Adaptation is more common in what is called “multi-domestic industries,” such
as films, books, magazines, and software that need translation into the host
country language.
ƒ
Consumer products such as health, beauty, and food items also tend to
use more adaptation. Flavors, colors, aromas, textures, container sizes,
and packaging of food and beauty products vary significantly from culture
to culture.
ƒ
There are four major reasons why firms may need to adapt their marketing
programs:
• Differences in national preferences, such as food flavors and
culturally-acceptable dress;
• Differences in laws and regulations, such as labeling laws;
• Differences in living standards, requiring lower prices to bring
products in line with local purchasing power;
• Differences in national infrastructure, such as poor roads that
require more lead time getting products to customers.
Many managers use standardization and adaptation at the same time. They
may standardize some parts of the marketing mix, and adapt others.
ƒ
They do this for two reasons.
• First, by standardizing aspects such as design and core manufacturing,
and adapting packaging, pricing and promotion, they take advantage of
efficiencies that allow them the added expense of adaptation.
• Second, it is rarely feasible to produce one product for the whole world.
The Ford Mondeo was a “world car” that failed to meet the approval of
customers and regulators around the world. Firms can often standardize
to meet regional preferences more easily than global preferences.
GLOBAL BRANDING AND PRODUCT DEVELOPMENT
ƒ A global brand is a product or service that is perceived similarly in all the
firm’s international markets.
ƒ
Often the firm can charge higher prices and gain leverage with channel
members and competitors because the brand is so desirable.
ƒ
The Exhibit lists top global brands by region in 2007, according to Interbrand.
The brands with the highest value are US brands.
ƒ
However, European and Asian brands are not far behind. To be included in
the Interbrand ranking the brand must generate at least one billion in annual
sales, with one-third from outside the home market.
ƒ
Common features of global brands include:
•
•
•
•
High touch, conspicuous consumer products such as electronics,
clothing.
Status symbols such as cars and jewelry.
Innovative features that improve quality of life such as mobile phones,
credit cards, and cosmetics.
Country of origin appeal such as U.S. Levis, and Scandinavian-style
IKEA furniture.
GLOBAL PRODUCT DEVELOPMENT
ƒ This section emphasizes the use of a global teams, and often virtual global
teams, to create products with multi-country potential.
ƒ
Many products have some standardized components that can be assembled
in various configurations to meet the needs of different markets.
ƒ
Products such as computers and automobiles often are based on one
standardized platform such that modular components and parts can be added
to suit local needs and tastes.
ƒ
The Global Trend section gives examples of companies using teams located
in different parts of the world to create global products.
ƒ
Unlike in the past, it is now common for global products to be launched
simultaneously across many countries and regions.
ƒ
Coordination costs can be high, and it is not always easy for a virtual global
team to fulfill its mission. However, current communication technology is very
helpful, and sophisticated software allows teams to develop, modify, and
adopt prototypes quickly based on market research.
INTERNATIONAL PRICING
ƒ Pricing may be the most complex aspect of the marketing function in
international business. Variance includes multiple currencies, trade barriers,
additional costs, and long distribution channels.
ƒ
There are four categories of factors that influence international pricing.
•
•
The nature of the product or the industry. A specialized or unique
product can generally command premium prices. The authors give the
example of Microsoft's operating system software. However, in China,
due to intellectual property considerations, Microsoft actually lowered
the price of its operating system to gain a foothold (see Kirkpatrick, D.
2007. How Microsoft Conquered China. Fortune, 156(2): 78-84).
The location of the production facility. Low production costs may lead
to lower prices. Locating factories in or near international markets
•
•
reduce transportation costs and can mitigate the risk of foreign
exchange fluctuations.
The type of distribution system. A firm that exports relies on
independent distributors who may modify the firm's pricing, often up to
200%, to meet its own goals. A company that has its own marketing
subsidiary via FDI or sells directly to end-users can control pricing
better.
Foreign market considerations. Local conditions such as climate,
infrastructure, less concentration of customers, and local government
regulation can lead to higher prices. If climates are hot and humid,
products must be warehoused with care. If roads are poor and
customers are located far from one another, transportation costs
increase. Many governments impose a value added tax (VAT), others
may charge tariffs, and some products may have price controls. The
Exhibit summarizes these factors.
ƒ
Despite this uncertainty, the Exhibit provides a systematic approach for
setting prices internationally. In summary, the steps are:
• Step one. Estimate the landed price of the product in a foreign
country.
• Step two. Estimate the price after the distributor adds its margin.
• Step three. Estimate the target price for end users.
• Step four. Assess the sales potential at the most likely price.
• Step five. Choose a suitable pricing strategy.
• Step six. Verify price consistency with similar products in that country.
• Step seven. Set intermediary and end-user prices, and monitor the
market for changes.
ƒ
To illustrate, walk through the example of Melody Corporation provided in the
textbook.
ƒ
Pricing strategy, outlined in Step Five, suggests three possible tactics:
• Rigid cost-plus pricing means setting a fixed price for all export
markets. It is used by less experienced exporters, and management
simply adds a percentage to the domestic price to compensate for the
added costs of selling abroad. This approach often ignores local
market conditions, buyer power, and competition.
• Flexible cost-plus pricing means adjusting the price to accommodate
local market conditions after all extra costs of doing business are
added to the price. So, the price may be higher or lower than with rigid
cost plus pricing.
• Incremental pricing may be required in very competitive markets.
Here, the firm prices the product to cover only variable costs, not fixed
costs, and assumes fixed costs are covered by sales of the product in
domestic or other markets. When used to the extreme, incremental
pricing may be perceived as dumping – a form of unfair competition.
Dumping is charging a price that is often below manufacturing costs
such that local suppliers may be driven out of business.
ƒ
International price escalation is the problem of exorbitantly high prices in
export markets caused by multi-layered distribution channels, high
intermediary margins, tariffs, and other customer costs. What can an
exporter do to avoid this?
• Shorten the distribution channel, by bypassing some intermediaries.
• Redesign product to remove costly features.
• Ship product unassembled and assemble in the foreign market where
labor costs may be lower and foreign trade zones may be available.
• Reclassify the product using a different tariff classification. Sometimes
imported products fit more than one category for determining tariffs.
However, this must be done carefully, because penalties can be high if
products are found to be improperly classified.
• Produce in another country where labor wages are lower.
ƒ
The Exhibit explains strategies for dealing with varying currency conditions.
ƒ
For example, when the exporter’s home country currency is weakening, or
depreciates, this usually offers a price advantage in the host country.
ƒ
Here, the exporter stresses the benefits of low prices, expands the product
line for added features, tries to collect accounts quickly to repatriate foreign
earned income back home, and spends as little money as possible on things
like advertising and transportation in the expensive host country currency.
ƒ
When the exporter’s home country currency gets stronger, or appreciates,
then the exporter must stress other benefits such as quality and after-sales
service.
ƒ
The seller might also lower prices by reducing production costs, or
concentrating exporting to countries where the currency has not weakened.
ƒ
The exporter may also keep as much foreign earned currency as possible
and delay collection if it is likely that that the host country currency will
appreciate more in the short term.
TRANSFER PRICING
ƒ This is also known as intra-corporate pricing, or the pricing of intermediate or
finished products that are exchanged among subsidiaries of the same
corporation located in different countries.
ƒ
When Ford Motor Company sells parts manufactured in its Spanish plant to
its plant in South Africa, it may charge a price different from that charged to its
external customers.
ƒ
Companies may use transfer pricing to "repatriate" profits from countries that
restrict them from taking earnings out of the country.
ƒ
For example, if South Africa limits Ford from taking profits out of the country,
Ford Spain might charge higher prices to its South African affiliate, as another
way of moving money out of South Africa.
ƒ
Ford might also use transfer pricing to ship products out of a high tax country
into a low tax countries.
ƒ
Transfer pricing is complex, and requires the direction of a tax accountant and
the chief financial officer.
ƒ
Manipulating transfer prices makes it difficult to determine the true profit
contribution of the subsidiary.
ƒ
Many governments closely scrutinize transfer pricing, to make sure that
foreign companies pay their fair share of taxes by reporting accurate ratings.
ƒ
Gray market activity is the legal importation of genuine products into the
country by intermediaries other than authorized distributors.
ƒ
The problem with gray market activity is that an importer can buy a product
that was exported from the home country to the host country, and sell it in the
home country and a higher price than he paid in the host country.
ƒ
Gray market activity is also called parallel importation.
ƒ
The authors give a good example of gray market activity by describing the
sale of pharmaceuticals between the US and Canada.
ƒ
The point is that pricing is very complex: when there is a large difference in
prices of the same product between two countries, gray market activity can
happen.
ƒ
Companies may curb gray market imports in four ways:
• Aggressively cut prices in countries targeted by gray markets.
• Reduce the amount of shipment to the country where gray market
brokers purchase the product.
• Publicize the risk of counterfeit products due to gray market channels.
• Design products with exclusive features that appeal to customers in
that market.
INTERNATIONAL MARKETING COMMUNICATIONS
ƒ
This can vary significantly around the world. Two activities – advertising and
promotion merit mention:
• International advertising. The effectiveness of major media advertising
may be determined by the country's literacy rate, number of
households with television, radio stations, and newspapers.
In
countries where literacy rates are low and media infrastructure is weak,
companies must use creative approaches to advertise.
Buyer
receptiveness of advertising will differ depending on culture and
language. Some companies use a standardized or global approach to
advertising. However, most advertising is quite local to account for
local differences.
•
International promotional activities. These include coupons, point-ofpurchase displays, demonstrations, samples, contests, gifts, and
Internet interface. In some countries, the use of coupons is restricted
and free gifts are seen as unethical. In much of the world, promotional
giveaways are uncommon and may be misunderstood by consumers.
INTERNATIONAL DISTRIBUTION
ƒ This is the process of getting the product or service from its place of origin to
the customer.
ƒ
Distribution is the most inflexible of all the marketing program elements.
ƒ
The two most common approaches to international distribution are to hire
independent intermediaries (distributors, agents, trading companies, and
export management companies in the case of exporters), and to create
marketing and sales subsidiaries (in the case of foreign direct investment).
ƒ
In the case of exporting, a full stocking distributor usually has better product
knowledge, expert staff, physical facilities, and financial resources than an
agent.
ƒ
Creating a subsidiary provides the firm even more control:
investment is greater.
ƒ
Some firms use direct marketing, or selling directly to end-users, bypassing
traditional distribution systems.
ƒ
The authors note that channel length may be greater in foreign markets.
ƒ
The longer the channel, the greater the number of people who must be
compensated, and the costlier the distribution.
ƒ
Japan is known to have long distribution channels, which often increases the
price of exported products.
however, the
ETHICAL DIMENSIONS OF INTERNATIONAL MARKETING
ƒ Most MNEs recognize that their customers in foreign countries expect them to
act as good corporate citizens.
ƒ
This means developing and aligning products and services to create a greater
value for society.
ƒ
Ethical issues in marketing include ensuring that suppliers earn a sustainable
income, needed products are available to low income consumers, and used
products are disposed of responsibly.
ƒ
Examples include Motorola, which sold more than 16 million phones that cost
under $30 to people in over 50 developing countries.
ƒ
This was a responsible move and good business, because in many countries
the number of mobile customers doubles every two or three years, and
cellular networks have leapfrogged landline technology.