Mkt Int

Introduction to international marketing If you think about what you have been doing recently, what do you notice? How many of the products and/or the services that you have consumed in the last period originated solely from your own country? As you read this book, the computer on your desk might be produced in Taiwan, the shoes you are wearing might be obtained in Italy, the coffee you are drinking might originate from Latin America. Whether if we talk about the clothes you wear, the music you listen to, the film you have seen last week at the cinema, the soft drinks you drink, there is a good chance that some of these to be produced by a company that is located somewhere else in the world. Welcome to the new world! A global market place has emerged! Consumers’ tastes in many regions are converging. People in different countries welcome quality, service and value in the goods and services they purchase. At the same time, there is a strong movement against globalisation of world’s markets coming from different pressure groups that view globalisation as a way to obstruct the development of the economies of developing countries. However, there is one thing certain in international marketing, and this is the different environment that is evolving and developing permanently. But let’s see first what international marketing is!

International Marketing

1.1 Definition of international marketing This book assumes that the reader has a basic understanding of the principles of marketing and that is why it concentrates more on the application of marketing to international markets. International marketing has been defined by many authors and box, no. 1.1 exemplifies some of these definitions. However, in the simplest way international marketing can be defined as marketing across borders. But what is marketing? And we will go back to the definition of marketing. One of the most well known definitions of marketing was given by the American Association of Marketing that defines marketing as “the process through which the company plans and executes the concept, the price, the distribution and the promotion of goods, ideas, services, in order to create exchanges that satisfy both individuals and organizations”. Under a marketing perspective, the customer is the starting point. The business is built around the customer as a point of reference. In a marketing oriented firm the customer is the centre around which the business evolves. International marketing is about the application of marketing skills and techniques to markets beyond the domestic market. The marketing concepts, skills and techniques are universal, but their application to different markets varies, because of the environmental differences encountered. If marketing concepts, processes and principles are universally applicable and the marketer’s task is the same, than, what is the difference between domestic and international marketing? The concepts are not different, but the environments in which marketing plans must be designed and implemented are different. Foreign markets are unique due to the unfamiliar problems that appear. Elements such as the legal system, government measures, consumers with different tastes, are uncontrollable elements. They cannot be controlled but instead the company must adjust or adapt to them.

Introduction to international marketing

BOX NO. 1.1 Definitions of international marketing

IM is the performance of business activities designed to plan, price, promote and direct the flow of company’s goods and services to consumers or users in more than one nation for a profit (Cateora et al., 2002).

IM is that segment of business concerned with the planning, promoting, distribution, pricing and servicing of the goods and services desired by intermediate and ultimate consumers (Albaum et al., 1998).

IM is the process of planning and conducting transactions across national borders to create exchanges that satisfy the objectives of individuals and organizations. International marketing has forms ranging from export-import trade to licensing, joint ventures, wholly owned subsidiaries, turnkey operations and management contracts (Czinkota et al., 2001).

Actually the marketing’s task is to mould the controllable elements of marketing decisions (product, price, promotion and distribution) within the framework of uncontrollable elements of the market place (competition, consumer behaviour, politics, etc) in such a way that marketing objectives are achieved. At international level the environment in which the companies function (the uncontrollable elements) can change dramatically from one country to another and this is the international marketer’s primary concern: the difficulties created by different environments and how to deal with them. Cateora et al. (2002) present the fact that the international marketer’s task is more complicated than that of the domestic marketer. This happens because the international marketer must deal at international level with at least two levels of uncontrollable variables instead of one (besides the domestic environment of the home market, it is also the foreign environment of the foreign market). Marketing controllable are the elements the marketer controls and he can change at his own will (price, promotion, product, distribution).The controllable elements can be altered in the long run and in the short run, to adjust to changing market conditions, consumers’ tastes or corporate objectives.


Domestic uncontrollable refer to the home country elements that can have a direct effect on the success of a foreign venture and they are out of the immediate control of the marketer. Among the domestic environment elements that can influence the activity of a company abroad are:

political decisions (such as the embargo imposed by USA against Libya because of terrorism, that of USA against South Africa because of its apartheid policy in 1970’s, the UN embargo against Yugoslavia at the beginning of 1990’s because of the civil war) in this country;

domestic economic climate: the capacity to invest in plants either in domestic or foreign markets, is a function of the economic vitality. A company has to have the money first and than to spend it, to invest it home or abroad. So, if it is a good economic climate in the home country, the company prospers and therefore gains the money to invest either home and/or abroad;

competition in the home market: when Kodak started to loose market share on the USA market in favour of Fuji, its strategy was to defend its domestic market, therefore investing a lot in this activity. As part of its funds went to defend the domestic market and did not go to invest internationally. If a company has problems in the domestic market the likely-hood to go international is small. High competition in the home market affects a company’s domestic or international plans, as the company has to invest heavily to protect its home market. Foreign uncontrollable: refer to the elements outside the home country that are not in the immediate control of the company (politics, technology, economic climate). Some of the elements of the foreign environment worth taking into consideration are:

technology: the differences that exist between developed and developing countries as far as technology is concerned determine different understandings of concepts. For instance, the concept of preventive maintenance for equipment means one thing in the developed countries and may mean a different thing in developing countries due to the lack of adequate technical knowledge. In these conditions the company has to take extra steps to make sure that the importance or routine maintenance is understood and carried out everywhere.

political issues. An example of political problems that may appear in a foreign country is the “alien status” of a company, the fact that the company belongs to foreigners and they are seen as outsiders and the company may have an unfair treatment coming from politicians and legal authorities.


The next chapters are dedicated to the study of the foreign environments and their elements. It is important to study the foreign environments, as different solutions to fundamentally identical marketing tasks will be put in place due to the environmental differences. In other words a marketing strategy that is successful in one country might be ineffective in another country, due to differences in political climate, stages of economic development, cultures, level of technology and others. Figure no. 1.1 presents synthetically the international marketer’s task. Figure no. 1.1 The international marketing task

7

Political/legalforces

Economicforces

1

2

Environmentaluncontrollablescountry market A

Competitivestructure Competitive

Forces

Level of Technology

Price Product

Promotion Channels of distribution

Geography and

Infrastructure

Foreign environment(uncontrollable)

Structure ofdistribution

Economic climate

Cultural forces

3

45

6

7Political/

legalforces

Domestic environment(uncontrollable)

(controllable)

Source: Cateora Ph. and Graham J., 2002, International Marketing, McGraw Hill, p. 9.

1.2 Self reference criterion and how to deal with it

The self-reference criterion is the primary obstacle to success in international marketing. Why? Because this is what we usually do: when we are confronted with a set of facts or with a problem, we react spontaneously on the basis of knowledge assimilated over a life time, we do not think, we simply react. Our reaction is based on meanings, values, symbols and behaviours relevant to our own culture, that usually is different from the ones of other countries. Such decisions are not usually valid in a foreign environment. This is what the self reference criterion is. It was defined by Cateora at al (2002) as being “un unconscious reference to one’s own cultural values, experiences and knowledge as a basis for decisions”. The following examples illustrate situations in which the self-reference criterion intervened.


Example no. 1: Two students met in UK in Canterbury at the beginning of October and were discussing about the weather during the winter. Canterbury is situated in the S-E of UK next to the Channel, where due to the influence of the warm stream of water, the weather is mild during the winter, rarely going below zero degrees and very seldom snowing (once at 5 years). The student coming from Egypt who lived in Britain for a couple of years at the time the discussion took place, was explaining (according to his own past experience in the warm Egypt) to the new comer from Romania that during the winter the weather is really very cold. That winter the Romanian student did not wear the winter-coat at all, as the winter was quite mild according to Romanian standards for winters (with many days bellow zero and a lot of snow). Both of them, when judging the weather in UK were making reference to their own past experiences in their own countries, that were quite different. This was an example of how people encounter the self reference criterion when interacting internationally. Example no. 2: Unilever when went for the first time in Brazil with detergents, noticed that people lack washing machines, consequently conceived a simpler soap formula; it noticed that people at the country side still wash at the river, consequently it packed the detergent in plastic bags, rather than paper boxes; it noticed that people are poor and they are price conscious, consequently they packed the detergent in small quantities, in small packages that would be low-priced and affordable to the low income of the consumers. The most effective way to control the influence of the self-reference criterion is to recognize its existence in our behaviour. It is impossible for someone to learn every culture in depth, but a person can be aware, can be open to differences and can also ask questions when does not know the new environment. One way to deal with the self-reference criterion in order to be successful in international marketing is to develop global awareness. According to Cateora et al., to be globally aware, means1:

/ to be objective in order to be able to correctly assess opportunities, assess potential and respond to problems. Many Western companies were very tempted by the one billion consumers of China considering it as a huge opportunity, a huge market potential, without assessing objectively the low income and purchasing power, the poor

1 Cateora Ph. and Graham J.,2002, International Marketing, McGraw Hill, pp. 18-19.


distribution, the inadequate media, the poor infrastructure, elements that would diminish to a large extent the one billion consumers market potential for many products.

/ to be tolerant towards cultural differences. This means to understand and accept cultural differences and accept working with others whose behaviour is different from yours. At the beginning of 1990’s a Romanian student worked as a translator for a few business people coming from an Arab country. At the end of her two weeks tour in more Romanian cities with the Arab businessmen she was outraged by their eating habits. In this way she showed lack of tolerance. You must allow others to be different but equal.

/ to be knowledgeable of culture, history, markets potential and general trends. Culture is important to be known in order to understand behaviour in the market place. Culture is the element of the foreign environment that influences to the larger extent the behaviour of the consumers, the main target of the marketing activities. History is important to be known because the way people think is influenced by their present but especially past history. Looking back at history we can understand why the British were reluctant about the channel tunnel between Britain and France and why Greeks do not like Turkish products. World market potentials must be known because they are changing rapidly. At present all over the world some regions have increasing potential. Some markets, from the developed countries become saturated, while other markets are emerging. The present emerging markets of Asia will become the large potential markets in the next 20 years. General trends such as global economic, political and social trends are important to know as the evolution of a country change according with the change in these trends. A knowledgeable marketer will identify an opportunity long before it becomes evident to others.

We will try to learn how to acquire global awareness while reading this book in international marketing.


1.3 Three main principles of marketing The success in international marketing is the understanding of the marketing discipline. The first and the most fundamental fact about marketing is that it is an universal discipline. The marketing discipline is equally applicable from Romania to New Zealand and from Japan to Brazil. Although the marketing discipline is universal, markets and customers are different and this means that the marketing practice has to vary from country to country. We cannot apply directly the experience from one country to another. An important task in international marketing is to recognize the extent to which marketing plans and programs can be extended internationally and to what extent they must be adapted. Regardless the country and the environment, there are a few principles that contain the essence of marketing and are valid in all markets. According to Keegan (1999), the three main principles that guide the marketing activity are: to create customer value, to have competitive advantage and to focus on the consumer. 1. The task of marketing is to create customer value that is greater than the one created by the competitors. The firm has to have very good knowledge of the customer and of its needs and wants in order to satisfy those and to offer value to the customer. This is more imperative at international level, where customers differ from one country to another and their needs, wants and desires will be different and will have to be satisfied differently. 2. The second important principle of marketing is to create competitive advantage. The company has to offer higher advantages to the customers than the competitors do. The advantage can exist in any of the marketing mix elements: the product, the price, the advertising, the point-of-sale promotion, the distribution of the product. One of the most powerful strategies for penetrating a new international market is to offer a superior product at a lower price. Companies with a cost advantage can use price as a competitive weapon. The price advantage will get immediate customer attention and for those customers who purchase the product, the superior quality will make an impression2. 3. The third marketing principle is to focus on the consumer. In order to create customer value and to create competitive advantage, the company has to focus, to concentrate its attention on the consumer and his wants and needs. When the company focuses on the consumers needs, wants and desires and the ways to accomplish these, will certainly have success, both internally and internationally. 2 Keegan W. J., 1999, Global Marketing Management, Prentice Hall, p. 5.


1.4 The relationship between international marketing and other disciplines

The international marketing discipline is related to other fields of study. As we have seen is related to marketing, as it applies the marketing principles, concepts, techniques at international level. It is also related to international business, as international marketing is part of the international business. In international marketing the concepts of marketing are applied in the context of international business. We are interested in what is more than the simply sum of the two (marketing and international business). International marketing is different from the marketing because even though the concepts are the same, the environments are different and consequently decisions will be different. International marketing is different from international business, as international marketing is only one part of the international business, that also comprises all functions of the company at international level: international production, international finance, international human resource management. When we talk about international trade and its relationship with international marketing, we are talking about a relation of inclusion, as international trade is only a part of international marketing. There are authors who consider that international trade, through export “falls short of international marketing primarily because it does not involve the company in marketing activities directed at the end consumer”3. In international trade (export) the focus of the business relationship is on the intermediary who is purchasing the goods, not on the final consumer. International marketing should not be confused with foreign marketing, which refers to marketing activities carried out by foreign firms within their own countries. Marketing of Bulgarian firms in Bulgaria represents foreign marketing to us and is not the main concern of this book. When the Bulgarian company comes to Romania, we talk about international marketing and this is of interest to us.

3 McAuley A., 2001, International Marketing, John Wiley and Sons, p. 6.


1.5 Stages of international marketing involvement When we talk about the degrees of international marketing involvement, we have to start our discussion from the process of internationalisation. The present interest that firms show towards international marketing can be attributed to the shifts that took place in the demand and the supply of different markets around the world, as well as to the continuous changes in the international competitive environments. This brings about the internationalisation process, and further on international marketing activities. The internationalisation process is seen by Albaum et. al. (1998) as a process, an end result and a way of thinking, while Luostarinen defines the internationalisation process as a “step by step process of international business development whereby a firm becomes increasingly committed to and involved in international business operations through specific products in selected markets”4. The degree to which the companies involve themselves in international marketing activities depends on the degree of their overall involvement internationally. Companies generally develop different marketing strategies depending on the degree of experience and the nature of the operations in international markets. Companies tend to evolve over time, accumulating international business experience and learning the advantages and disadvantages of marketing around the world. As a result it has been developed an evolutionary perspective of internationalisation of the company, characterized by a number of stages of international marketing involvement. When we talk about international marketing involvement, we take into account the degree of market control over marketing activities. According to Cateora et al. (2002), there are five stages of international marketing involvement, namely: no direct foreign marketing- indirect exporting; infrequent foreign marketing; regular foreign marketing; international marketing; global marketing. Kotabe et al. (1998) present the five stages of international marketing involvement as being: domestic marketing; export marketing; international marketing; multinational marketing; global marketing, while Jeannet et.al. (2001) present six stages of international marketing involvement: domestic marketing; export marketing; international marketing; multinational marketing; pan-regional marketing and global marketing. Figure no. 1.2. presents the three models. 4 Loustarinen R., 1994, Internatinalization of Finnish Firms and Their Response to Global Challenges, UNU

World Institute for Development Economic Research , Research for Action, p. 1.


Figure no. 1.2 Levels of international marketing involvement

Cateora et. al. (2002) 1. no direct foreign

marketing 2. infrequent foreign

marketing; 3. regular foreign

marketing; 4. international

marketing; 5. global marketing

Kotabe et al. (1998) 1. domestic marketing; 2. export marketing; 3. international

marketing; 4. multinational

marketing; 5. global marketing

Jeannet et al. (2001) 1. domestic marketing; 2. export marketing; 3. international

marketing; 4. multinational

marketing; 5. pan-regional

marketing 6. global marketing

The marketing involvement in a foreign market refers to the degree of market control. Even through the stages of international marketing involvement are presented in a linear order, the firm does not progress automatically from one stage to another. A firm may begin its international involvement at any one stage and to be in more than one stage simultaneously. These stages are overlapping. If we look at the three models presented above we can notice that two of them consider as the starting point, the point zero of no involvement in international markets represented by the domestic marketing, while the other (Cateora et al) sees as the starting point the simplest form of international involvement - indirect export. However while, two of the models consider all exporting activities as being the same degree of involvement, Cateora et al. consider that there are three stages during exporting showing different degrees of involvement internationally (no direct foreign marketing, infrequent foreign marketing, regular foreign marketing) that should be seen separately, as they require different marketing abilities and skills from the company. Further on, while Cateora et al. see the international marketing stage as comprising the local adaptation to individual markets, the other two models distinguish between international marketing and multinational/multidomestic marketing as being two different stages with potentially different marketing strategies. The shift from international marketing to global marketing is seen differently in the three models: Cateora et al. see a straight direct shift from one to another, while Kotabe et al. see the multinational marketing as a separate stage followed by the global marketing stage, while Jeannet et al. see


the shift from multinational to global marketing as involving an intermediary stage, namely the regional marketing. All three models see global marketing as being the deepest stage of involvement internationally. In the following section we will present all stages of all three models according to the degree of involvement. The domestic marketing is the marketing aimed at a single market, the firm’s domestic market. Before entry into international markets, many companies focus solely on their domestic market. In this case the company develops its marketing strategy based on information about domestic customer needs and wants, industry trends, economic, technological and political environments from the home market. No direct foreign marketing is encountered when the company does not actively cultivate customers outside national boundaries. However, the company sells outside the home market, but sales are done through domestic trading companies that sell abroad without involving the producer or sales are done through foreign customers who come directly to the firm (for instance via internet). Infrequent foreign marketing takes place when the temporary surpluses caused by variations in production levels or demand are sold abroad. When domestic sales increase foreign sales are with drawn. Few companies fit today to this model because usually customers are looking for long term relationships and regular sales. Regular foreign marketing takes place when the firm has permanent production capacities devoted to production to be marketed continuously in foreign markets. Even though the primary focus of operations and production is on domestic market needs. At this stage profit expectations start to shift from being seen as a bonus to regular domestic profits to the position where the company becomes dependent on foreign sales to meet its goals. Export marketing covers all those marketing activities involved when a firm markets its products outside its main (domestic) base of operation and when products are physically shipped from one market or country to another5. International marketing occurs when companies are fully involved and committed to international marketing activities. They plan production for foreign markets. This is seen by all authors as being the next stage after exporting, when the company acquires more experience and becomes more directly involved in the local marketing environment within a given country or market. At this stage companies are fully committed and involved in international marketing activities: they seek markets all over the world, they plan production for foreign markets,

5 Jeannet J.P. et al., 2001, Global Marketing Strategies, Houghton Mifflin Company, p. 3.


some produce goods outside the home market, they adapt the product to local requirements. Multinational marketing comes as a result of the development of the multinational corporation. The company markets its products in many countries around the world and they market their products as if the firms were local companies. It is the case when a company competes with many strategies, each one tailored to a particular local market, therefore being also called the multi-domestic strategy. In this case the main challenge for the company is to find the best possible adaptation of a complete marketing strategy for an individual market. If they do, the major benefit is that the company completely tailor its marketing strategy to local requirements, but the disadvantage is that there is always a duplication of some key resources. Pan-regional marketing occurs when companies start to emphasize strategies for larger regions. These strategies developed due to the given diseconomies of scales of individualized marketing strategies tailored to specific local environments. The regional strategies encompass a number of markets and usually they are the result of a form of economic integration (such as pan-european marketing in EU). Companies that consider regional marketing strategies, try to tie together marketing in one geographical region, rather than at global level, with the aim of increased efficiency. Global marketing is encountered when companies treat the world including their home market, as one market. In contrast to the international OR multinational companies that view different country markets as unique, needing individual marketing strategies, the global company develops a strategy to reflect the existing commonalities of market needs among many countries. The strategy is based on global standardization (when is cost effective and culturally possible) in order to increase returns. The entire set of operations of the company (finance, production, provisioning, marketing) take a global perspective. It is the stage at which a huge change of the company’ orientation and planning for international markets takes place. However a global marketing strategy does not require absolute standardization, but rather a consistent application of the core elements of the marketing strategy across countries with varying degrees of customisation, as the situation requires. One of the well known companies that has global marketing is Coca Cola company. See box no. 1.2.


Companies rarely fit one single of the stages discussed. The definitions are given so we can have a sense of the various degree of international involvement and commitment, as well as control. Also the firms are not progressing regularly from one stage to the other one. A firm may begin its international involvement at any one stage and be in more than one stage simultaneously.

BOX NO. 1.2. Global marketing at Coca-Cola Coca-Cola is one of the most well known companies that pursues global marketing. The following quote of the ex-president of Coca-Cola company reflects the way the company shift towards the global approach in 1980’s. “The culture of the Coca-Cola Co. has moved from being an American company doing business internationally to an international company that happens to be headquartered in Atlanta….. If you go back to our 1981 annual report, you will see references to ‘ foreign sales’ or ‘foreign earnings’. Today (1996) the word foreign is ‘foreign’ to our corporate language” (Roberto Goizueta, former president of Coca-Cola). Even the structure of the company was changed to reflect its global orientation: initially there were two vice-presidents, one in charge with the international operations and one in charge with the USA operations. The international divisions reported to an executive vice president, who together with the vice-president for USA were reporting to the president. The new form of organisation consists of six regional divisions that are all put on equal footing. The USA operation is part of the North American region. In this way the company admitted that the future growth is going to come from emerging markets outside USA. In 2000 the president of Coca-Cola Mr. Daft started to change the strategy and pushed the decision making at the local level worldwide: “This means that the company would encourage local brands and flavours more. The company will have both global brands and local brands, in accordance with what consumers are requiring (International Herald Tribune, February 7, 2000)”.

1.6 International marketing orientations

The way a company responds to international market opportunities depends on management’s assumptions and beliefs about the world and the international activities. The orientations a company’s management and personnel can have are collectively known as the EPRG framework: ethnocentric, polycentric, regiocentric and geocentric. The ethnocentric orientation assumes that the home country is superior compared to the rest of the world. It is also known as the domestic market extension concept. The company assumes that products and practices that


were successful in the home country will be successful anywhere, due to their proven superiority in the home market. The international operations are seen as secondary to its domestic production, the company exports excess production, this being the main reason for selling abroad. The foreign sales are only extensions of the domestic sales and usually they take the form of export. No systematic marketing research is conducted outside the home country and no major modifications are made to the products. Even if consumer needs and wants in foreign markets are different from those in the home country, those differences are ignored. These companies miss opportunities outside the home countries. The Japanese company Nissan in its first years on the USA market showed its ethnocentric orientation when exporting trucks. The vehicles were designed for the mild Japanese winters and were difficult to start in many parts of USA during the cold winter months. Fifty years ago the use of an ethnocentric orientation mainly by companies originating from developed countries could assure success when going internationally. Today such an approach is one of the largest internal threats for a company6. The polycentric orientation is the opposite the ethnocentric one. It is also known as the multi-domestic or multinational concept. The company that bases its activity on this orientation, recognizes the importance of market differences and develops one marketing program for each market. The management beliefs that each country with which the company does business is unique. Consequently each subsidiary will develop its own unique marketing strategy in order to succeed. Unilever is one of the companies that traditionally was guided by a polycentric approach to international business and developed local products for all countries was operating in and adapted marketing plans. The company guided by this orientation thinks that success requires adaptation to local country markets. The company will adapt the product for each market, will have localized advertising and will make local decisions on pricing and distribution strategies. There will be no co-ordination with other country market. In box no. 1.3. it is also presented the difference between the polycentric orientation of Matsushita company and the global orientation of Phillips company.

6 Keegan W.J., Op. Cit., p. 14.


The regiocentric orientation belongs to those managers who view regions as unique and try to develop regionally integrated marketing strategies. Such approaches are usually used in the case of geographic regions that have been integrated economically (such as European Union or NAFTA). The global orientation stands for the philosophy when management considers that there is only one market, the world. These companies are looking for standardization in order to obtain economies of scale and they search for global market segments. Companies guided by the global marketing concept see the world as being one market. They are looking for market segments that are similar, that have similar demands all over the world. They are looking at markets for commonalities, that can be standardized across regions or country market sets. By serving a global market segment, the marketing plan wishes to be standardized wherever it is cost and cultural effective. This can mean:

standard product but country specific advertising a standard brand (image), but adapted products a standard advertising theme, but country specific appeals.

BOX NO. 1.3 Matsushita vs. Philips: two different marketing orientations Up to mid-1990’s Philips Electronics, headquarted in Netherlands was a classic example of a company with a polycentric orientation. Philips relied on autonomous organizations in each country that developed their own strategies. The approach worked well until Philips faced competition from Matsushita, the Japanese consumer electronics company whose management had a geocentric orientation. Matsushita adopted a global strategy and focused to serve the world market for home entertainment products. In TV’s Matsushita offered European consumers two basic models, while Philips offered European customers seven different models. If consumers had demanded variety, Philips would have been a strong competitor. The product designs created by Philips were not based on customer preferences. Customers wanted value in form of quality, features, design and price. Philips polycentric approach was a heritage that was attractive to national organizations that could make their own local decisions and strategies. But it was irrelevant to customers who were looking for value. Customers were getting more value from Matsushita’s global strategy that by lowering costs, offered better prices to customers. As a good price for a good quality was required by customers, as opposed to greater variety but at a higher cost, Philips lost market share. To cope with the new conditions, Philips management abandoned the polycentric approach, getting more closer to a geocentric one. Keegan J.W., 1999, Global Marketing Management, Prentice Hall, pp. 17-18.


The global marketing approach is looking for global market segments, namely significant market segments with similar demands for the same product all over the world. The global approach is applied through standardizing the market plan (standardized product but country specific advertising; standardized brand/product images but adapted products to meet specific needs). To be global is a mind set, a way of looking at the market for commonalities that can be standardized across regions or country markets. The global marketing approach is looking for market segments with similar demands that can be satisfied with the same product, standardizing the components of the marketing mix that can be standardized and where are significant cultural differences, that require parts of the marketing mix to be culturally adapted, to adapt. Theodore Levitt7 is the one who in its 1983 article “Globalisation of Markets” drawn attention to companies that global orientation, is the orientation of the future, (given the evolution of international environments).

1.7 The structure of the book The book is divided in thirteen chapters. The first chapter is an introduction into international marketing, the main obstacles to international marketing and the task of the international marketer. Chapters two to six analyse all elements of the international environment. Chapter two deals with history and geography, as elements to be taken into consideration as they can contribute to the understanding of the differences between markets. Chapter three focuses on the cultural environment, as the main element of the external environment that influences the consumers’ behaviour. It is necessary to recognize the cultural differences and to decide whether to accommodate them or not. Chapter four presents the economic environment and its dynamics at world level as far as international trade is concerned. Economics gives the company a lot of information about the market potential in each particular country and has to be studied. Chapter five and six deal with the legal and the political environments in foreign countries, as other important influencers for the marketing of the company abroad. Chapter seven focuses on the market selection process with its steps as well as on specific methods of market selection. It also presents the main market entry strategies a company can use in the internationalisation process. Chapter eight goes

7 Levitt Th. „The globalization of markets”, Harvard Business Review, May - June 1983.


further and looks at the marketing research process, its steps and peculiarities at international level. Chapters nine to twelve cover the main decisions the company has to take from the marketing mix point of view at international level. Chapter nine focuses on product management, debating the issue of standardization over adaptation of product policy when going internationally, and the main decisions to be taken regarding product policy. Chapter ten takes the reader through the distribution process from the home country to the consumer in the target country market. Chapter eleven talks about pricing strategies and specific issues related to pricing at international level, such as price escalation, counter trade as a payment tool, transfer pricing and parallel imports. Chapter twelve covers promotion at international level by looking at the communication process and its steps, the promotional mix and the relationship between manufacturers and advertising agencies when operating internationally. Chapter thirteen includes four marketing case studies at European level.

The geographical and the historical international environments We remember that we have been discussing the task of the international marketer as being to mold the controllable elements of marketing (product, price, distribution and promotion) to the uncontrollable elements of the environment, coming from both the domestic environment and from the foreign environments. The domestic environments are usually known and do not need to be studied, while the foreign environments are formed of variables that have to be studied in order to adapt the marketing strategy of the company to them. The international environments have more elements, that all have to be studied: geographic environment, historic environment, cultural environment, political environment, legal environment and economic environment. We will be discussing the international environment from the perspective of its components.


2.1 The geographical environment We will look at how the geographic environment of a country can influence the marketing activity of a company in that country. How can geography influence the marketing decisions of a company? Geography can be studied by looking at its elements and their possible influence over the company:

• Climate (temperatures, humidity) • Physical terrain (altitudes, forms) • Resources (raw materials, energy) • Population (size, growth rates, structure)

First of all through its climate. Climate can affect on the one hand the type of products that can be sold or not in a specific market and on the other hand it can affect the use and the function of the product and consequently to require the product’s adaptation. For instance, when we talk about products suitable for certain markets depending on the climate, it does not make sense to sell winter boots in the warm Africa and probably swimming suits or ice-cream are less sold in northern countries with colder climates. Climate of a country/market can also require the adaptation of the product for those specific climates. One of the classical examples is the one of automobiles, that will have air conditioning by design in Southern Europe and in the Arab countries and a better heating system in northern countries. Again, the climate differences in Europe determined Bosch-Siemens company to modify its washing machines: for the north of Europe where the climate is cold they designed the washing machines with a spin cycle of 1000-1600 rotations/minute so that the clothes come out almost dry as consumers do not have the possibility to hang them to be dried by the sun. For the south European countries the number of rotation/minute is usually lower, around 500 rotations/minute, as people would hang their clothes out in the sun to be dried1. Climate can also influence the way the products are distributed in a country. High humidity requires better packaging and cold weather requires too better packaging, while hot weather requires refrigerators for food products. For instance, the Coca-Cola company when expanding in Russia, transferred its transportation trucks from Romania to Siberia. Given the fact that the trucks had

1 Cateora, Ph. et al., 2002, International Marketing, McGraw Hill, p. 59.

The geographical and the historical international environments

only the metal structure and in rest were formed of plastic covers, they were not sufficient to preserve the Coca-Cola bottles in the minus 30-400 Celsius degree winters of Siberia. At the beginning a large quantity of the products ended up damaged (broken bottles) at destination because of the very low temperatures. The company had to equip the trucks with special heating systems in order to be able to use these trucks during winters in the cold Siberia. There are countries where the climate differ from one region to another, such as Canada, USA, Russia, conferring a higher degree of heterogeneity to these markets that would require adapted products, packages and distribution means. Temperature also influences the efficiency of people at work, and the aspect becomes more important when the degree of involvement in that market increases. Empirical research had showed that at a 260C temperature only 80% of the work capacity is used by individuals, at 330C, the work capacity is reduced at 50% and over 350C the work capacity is reduced at 20%. In case of intellectual work, if enough motivated, people will work with similar efficiency up to 330C2.

Another geographical aspect worth studying is the physical terrain or the topography of the land in foreign countries. Physical terrain is important to be studied in a country because it can affect the distribution of the product in that country. High mountains, tropical forests, deserts constitute natural barriers that make transportation and communication more difficult in a country. The countries of Latin America have a topography that is dominated by high mountains and tropical forests. The tropical forest from the Amazon basin is the largest rain forest in the world with a three million square meters surface. This is inhabitable but also impenetrable. Such a landscape represents a strong natural barrier that inhibits national growth, trade and communication. People live in large urban areas that are usually isolated from one another. There are inadequate roads and poor communication between the major cities of those countries. Because of the physical isolation, different cities have different lifestyles and different population characteristics and therefore can be treated as different markets. Existence of rivers, seas and oceans is considered to be a positive aspect for transportation. But even in this case a careful study of the natural phenomena has to take place because otherwise mistakes can be made. For instance, an American food processing company decided to build a plantation of pineapples in Mexico in the delta of the river Mexico. They wanted to transport the ripe fruits on the river down the stream to be canned and afterwards to load 2 Pop. N. et al., 2001, Marketing Internaţional, Editura Uranus, Bucureşti, p. 91.


them directly on ocean ships and send them to various markets of the world. But when the ripe season arrived the company noticed that it had a problem: the crop maturity coincided with the flood stage of the river and the water stream was so strong that the barges could not go up stream up to the plantation. They had to close down the operation3. Also lakes and seas could facilitate transportation and access to that country. At the same time they can also indicate that those countries can be markets for certain products such as entertainment, sport, tourism products.

Another element of geography that will have an influence on the company’s activity is represented by the natural resources, such as raw materials, sources of energy. These are important to be studied in a foreign country, when the company intends to make production investments in that country. The location of the earth’s resources is not equally distributed between countries. In many cases a nation’s demand for a particular mineral or energy does not coincide with domestic supply and the need of imports appear. Also countries that have been self-sufficient in respect to the use of one mineral, run out of it and become net importers of that raw material. Is the case of USA that up to 1942 was completely self sufficient as the petroleum is concerned and who became a major importer by 1950, its degree of dependency on foreign resources increasing from 36% in 1973, to more than 56% in 20004. Knowing the availability of natural resources in one country can be an indication of larger potential for economic development in the future, therefore making that country more interesting for foreign investors.

Another important element of geography is population. Population is a good indicator to estimate the market size in a country for most consumer goods. Even when we talk about industrial goods, population is important given the fact that industrial demand is a derived demand from the demand for other products, in many instances consumer products. Therefore, the study of the population of a country is absolutely necessary when studying a foreign market. The company should be interested in:

• the size of the population, as it gives us an idea about the actual market potential for certain goods (mainly consumer goods, but also industrial goods).

3 David A. Ricks, 2000, Blunders in International Business, Blackwell Publishers, Cambridge, p. 20. 4 Cateora Ph. et al., 2002, Op. Cit., p. 67.


• the growth rate of population is also of interest, as it gives us an idea about the future market potential. It is not enough to have a great market potential now, it is important to see what will happen also in the future. How much is it worth to be involved in that country? The higher the future market potential, the higher the involvement. Sometimes the present market potential is not very high, but there are chances that this will increase in the future, making worth the entry.

• the structure of population according to different criteria such as age, gender, education offers information about potential market segments. The evolution of population on different structures gives an indication about how different market segments will evolve in the future. The increase in the life expectancy in many countries indicates that third age population will increase and there will be market for products designated to this group in the future. An example of future shifts in the structure of population of China is presented in box. no. 2.1.

• the density of population and the urbanization degree is another important indicator. The way the population is distributed between rural and urban areas in a country influences on the one hand the market segments existent in the country, as consumers in urban areas have different characteristics, education, incomes, lifestyles and consequently demands than those in rural areas. Also the way the company will distribute the product and will communicate with people depends on their density. The more dispersed is the population the more difficult distribution and communication will be. The more concentrated the population (usually in urban areas) the easier the distribution and communication will be. It is estimated that by 2025, the population of the world will reach almost 8 billion inhabitants and more than 60% of them will live in urban areas5. Not always living in urban areas, means better life conditions. In Mexico City for instance, that has over 20 million inhabitants there are 2 million families who have no running water and no sewage facilities in their homes. There are produced 14 000 tons of garbage everyday and only 8 000 tons are processed, the rest being left on the streets and getting into the atmosphere. Consequently Mexico City has major pollution problems6.

5 http://www.census.gov 6 Cateora Ph. et al, 1999, International Marketing, McGraw Hill, p. 71.


At present the largest city in the world became Tokyo, that over-passed 26 million inhabitants in 2000, due mainly to the migration from rural to urban areas. The migration from rural to urban areas is a phenomenon met in many countries due to increased desire to access to education, health facilities and better life of people all over the world.

BOX NO. 2.1 Shifts in the population’s gender structure in China In China, due to the large increase of the population, the government took measures to control the population growth, by allowing only one child per couple. This regulatory measure coupled with the traditional values (that dictate the superiority of male over the female), this defined preference of parents for boys and the possibility to prenatal scanning, will disequilibrate the balance of the gender structure in China. Given the fact that in rural areas people are more traditional and willing to have boys they will give up girls before birth, while in the urban areas where people are more educated people will have what God gave them, even if is a girl. Consequently there will be more girls in towns and more boys in villages. It is appreciated that in 10 years time the number of male will be higher than the number of female, with 15% positive difference in favor of males in urban areas and 45% positive difference in favor of males in rural areas. Besides the gender desiquilibrium, it will also take place an educational and lifestyle mismatch. There will be more less educated men in rural areas, while in urban areas will live many educated female. Few of them will find a suitable partner. Cateora Ph. and Graham J.,1999, International Marketing, McGraw Hill, p.75.

Table no. 2.1 presents the structure of the world’s population by its provenience from different groups of countries according to their level of development and table no. 2.2 presents the population of a number of selected countries from the 208 total number of countries existent in 2002.


Table no. 2.1 Structure of world’s population on groups of countries, 2002

(thousand) Group of countries Population

World 6.198.688 Low income countries 2.494.603 Middle income countries 2.737.920 Lower middle income 2.408.492 Upper middle income 329.428 Low and middle income countries 5.232.522 East Asia and Pacific 1.838.485 Europe and Central Asia 472.948 Latin America and Caribbean 524.905 Middle East and North Africa 305.823 South Asia 1.401.455 Sub-Saharian Africa 688.907 High income 966.165 European Union 305.483

Source: http://www.worldbank.org,

Table no. 2.2 Population of selected countries, 2002 (thousand)

Rank in total Country Population 1. China 1.280.400 2. India 1.048.641 3. United States 288.369 4. Indonesia 211.716 5. Brasil 174.485 6. Pakistan 144.902 7. Russian Federation 144.071 8. Bangladesh 135.684 9. Nigeria 132.785 10. Japan 127.150 11. Mexico 100.819 12. Germany 82.485 15. Turkey 69.626 20. France 59.485 21. United Kingdom 59.229 22. Italy 57.690 25. Ukraine 48.717 47. Romania 22.300 90. Bulgaria 7.965

Source: http://www.worldbank.org,

http://www.worldbank.org/



2.2 The historical environment

It is important to know the history of a country because history influences present behaviour of nations and consequently of consumers. Current and especially past events explain a country’s attitudes, prejudices and fears. By studying the history of a country we can find out and understand:

How it perceives its neighbours: as Romanians look suspiciously at Hungarians and vice-versa due to history.

How it sees itself: we remember the well known “history book image” of Romania as a little country attacked by other empires over time. If we look at the map of Europe we are not so little and there are many other countries that are much smaller than Romania. But the image was transmitted over time due to the permanent fight of the Romanian people for autonomy and independence in front of the empires of the past such as Turkey, Russia, Austro-Hungary.

What is the role of government in the business sector in that country; What are the sources of management authority: such as age and

experience in Japan and abilities and skills in USA. Its attitudes towards multinational companies: a country that was

always in war over time, will be reluctant to open to foreigners. Looking back at history we can understand the reluctance of British in building the Channel Tunnel because of their continuous history of war with France. By looking back at history we can understand why Greeks do not like Turkish products, why Arabs (or at least some of them) boycott American products. On the other hand is very important to know the history, as the locals see it, because history is subjective: the same historical event is interpreted in one way in a country and can be recorded and interpreted completely different in the other country. While USA sees itself as the guardian of the Latin America and considers all its interventions in the countries of South America as justifiable acts of foreign policy, Latin American countries see American acts as unwelcome intrusions in their affairs. See box no. 2.2.


BOX NO. 2.2. USA and South America: whose history? A lot of USA activities in the past two centuries in South America is based on the Monroe Doctrine and the Manifest Destiny. The Manifest Destiny meant that Americans were chosen people by God to create a model society. This was justifying for the annexation of Texas, Oregon, New Mexico and California to USA during and after mid 1800’s. The Monroe Doctrine, that is a cornerstone of the USA foreign policy was enuncited by president Monroe and has three basic ideas: 1) no further European colonization in the New World, 2) abstention of the USA from the European political affairs and 3) non-intervention of European governments in the regions of Western Hemisphere. At beginning of 1900’s Theodore Roosevelt further developed the Monroe Doctrine, in what is was known as the Roosevelt Corollary that stated that not only would the USA prohibit non- American intervention in Latin America, but it would also police the area. The Mexican-American war lasted from 1846 to 1848. The event might be dismissed as irrelevant history north of border, but not south of it. During the war the San Patricios (St. Patrick’s Battalion) were approximately 250 Irish men who disserted from the USA army and fought for Mexico. When the region felt to Americans, 30 of the rebels were hanged and the others were inscripted on their face with a D (from desertor). They became a symbol of the Mexican independence and are honored every year both in Mexico and in Ireland. In 1903 the state of Panama was formed in just 67 hours with the American help. After the Colombian Senate refused to sell the Panama Canal zone to USA, a group of Panamian rebels traveled to Washington and agreed to stage a USA backed-revolution. The flag, the constitution and the declaration of independence were created in New York. On 3 November 1903 USA bribed the Colombian garrison to lay down their arms and the revolution began. On 6th of November USA recognized the sovereignty of the State Panama and on 18 November 1903 the Panamian Ambassador signed the Panama Canal Treaty. In 1977, USA agreed to relinquish control of Panama Canal Zone in 1999. In 1905 based on his corollary Roosevelt forced the Dominican Republic to accept the appointment of an American economic adviser, who very quickly became the financial director of the small state. Cateora Ph. et al., 1999, International Marketing, Irwin McGraw Hill, p. 59; pp. 77-81.

The past and recent history of Europe is seen differently by different countries. A group of Central and Eastern European scholars were in Hungary and were making a trip to Visegrad, a well known historical town of Hungary. While presenting the Visegrad castle, the Hungarian guide looked in one direction and said: “In that direction is a country called Slovakia. This country had never existed, the nation was invented at the beginning of the century”. Immediately Anetta from Slovakia reacted to the comments. The guide who had no intention to offend anybody (but she did not ask where from the group was before making her presentation) tried


to justify herself that a very famous Hungarian historian wrote that. And Anetta from Slovakia argued that the Slovakian historians have written completely different. The recent events in Iraq are another proof of the different interpretation of historical events. While USA forces with their allies saw their intervention as being helpful for the Iraqi people, after two years of constant boycott of the American troups and administration, they handed in administration to locals, who perceived Americans and their allies as intruders. If we want to understand attitudes of a country and its behaviour, we have to know, how it sees history.

The cultural environment Another very important element of the international environment to be taken into consideration when extending internationally is culture. Culture has to be studied because buyer behaviour and consumer needs are driven by cultural norms and cultural forces are a major factor in shaping a company’s international marketing mix programs. The marketing concept is focusing on the satisfaction of the consumers’ needs and wants regardless the country they come from. But consumers’ needs and buying behaviours are determined further by the culture they come from. In other words people express their needs and wants differently from culture to culture. They have similar needs and wants, but they express them differently. For instance, an American company producing canned vegetables decided to go abroad and to start with the canned sweet corn, considering that no flavour adjustment will be needed to this product. The company did not need to make adjustments to the flavour, but it had to make adjustment to the way the product was marketed because the product was used differently in different countries: in USA (the home market) corn is used as a side dish being hot, in France corn is used cold and added to the salad, in Britain, corn is used as a sandwich filler and a pasta topping, in Japan, corn is used


as an after school snack and in Korea, sweet corn is put on ice-cream. Consequently, the company adapted its advertising by portraying in each country the actual use of the canned corn1. We can see that is necessary to understand the cultural similarities and differences and to set the marketing strategies for the particular needs of each international market. Culture influences all marketing activities, from product design, packaging, styling to pricing, promotion and distribution and it has to be studied. Actually markets are considered to be the result of the interaction of three aspects: the marketer’s effort (what the company does), the economic conditions of the country and the elements of culture of the country.

3.1 The definition of culture Therefore, we will ask ourselves what is culture? There are an enormous number of definitions of culture (Kroeber and Kluckhohn counted over 160 definitions of culture2). Two definitions among the most representative, are Hofstede’s and Cateora’s. Hofstede defines culture as “the collective programming of the mind which distinguishes the members of one group or category from those of another”3 and Cateora et al. define culture as “the sum of total knowledge, beliefs, arts, morals, laws, customs and any other capabilities and habits acquired by humans as members of society”4. In box no. 3.1. there are presented also other definitions of culture. But all those definitions have a few things in common, that actually represent the essence of culture. The culture deals with the way a group lives and it contains the entire social heritage of a nation, it deals with everyday life and refers to the language, values, attitudes, behaviours, knowledge a nation has. There were identified a number of cultural universals, that the international marketer can use in order to standardize some of the elements of the marketing program. The cultural universals are modes of behaviour that exist in all cultures, such as cooking, dancing, art, aesthetics, education, etiquette, family feasting, food taboos, language, marriage, medicine, religious rituals, status differentiation etc5.

1 Cateora Ph. et al., 1999, Op.Cit., p. 85. 2 Kroeber A. and Kluckhohn C., 1985, Culture: A critical Review of Concepts and Definitions, Randon House,

p.11. 3 Hofstede, G., 1999, Cultures and Organizations: Software of the Mind, McGraw Hill, 1991, p. 5. 4 Cateora, Ph. et.al., 1999, Op.Cit, p. 86. 5 Keegan W., 1999, Global Marketing Management, Prentice Hall, p. 61.

The cultural environment

BOX NO. 3.1 Definitions of culture Culture is a learned, shared, compelling, interrelated set of symbols whose meanings provide a set of orientations for members of society. These orientations, taken together, provide solutions to problems that all societies must solve if they are to remain viable. (Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 84) Culture includes both conscious and unconscious values, ideas, attitudes and symbols that shape human behaviour and that are transmitted from one generation to the next. (Keegan W. Global Marketing Management, Prentice Hall, 1999, p. 59) Culture includes the entire heritage of a society transmitted by word, literature or any other form. It includes all traditions, habits, religion, art and language. (Jeannet J.P. and Hennessey H.D., 2001, Global Marketing Strategies, Houghton Mifflin Company, p. 78) Culture is an integrated system of learned behaviour patterns that are distinguishing characteristics of the members of any given society. It includes everything that a group thinks, says, does, and makes, its customs, language, material artifacts and shared systems of attitudes and feelings. (Czinkota M. and Ronkainen I., 2001, International Marketing, Hartcourt College Publishers, p. 61) Culture may be defined as the ways of living built up by a group of human being transmitted from one generation to another. Culture includes both conscious and unconscious values, ideas, attitudes and symbols that shape human behaviour and are transmitted from one generation to the next. (Bradley F., 1995, International Marketing Strategy, Prentice Hall, p.133)

The common characteristics of culture that are met whatever the way it is defined are the following: The fact that it is learned. Culture is always learned. It is not biologically transmitted via genes. It is cultivated by various groups (family, school, other organizations) and it is transmitted from one generation to other, it consists of learned behaviours in recurring situations. The sooner an individual learns these responses, the more difficult is to change them. Tastes and preferences for food and drink represent learned responses that are highly variable from culture to culture and can have a major impact on consumer behaviour.


• Consists of many parts, interrelated to each other. Culture is formed of

many parts, a number of elements that we are going to study further. These parts are interrelated to one another and one part of culture, for instance status, has an impact on another part, such as the language that the person uses.

• It is shared by individuals as members of society. For instance, if a person eats the sweet corn on the ice cream at home but other people do not share this habit it means that eating sweet corn on the ice-cream is not part of that nation’s culture.

3.2 The process of cultural analysis

In order to make easier the study of culture for both assessing the potential of foreign markets when willing to enter the markets or for evaluating marketing plans when the company already operates in a market, there is a cultural framework that can be used to study culture, a framework that studies all elements of culture and the relationships between them. See figure no. 3.1. Figure no. 3.1 The process of cultural analysis at international level

Material Social Religion Aesthetics Valueculture Language interaction Education systems

* cultural knowledge* cultural sensitivity* cross-cultural comparisons

Elements of culture

The analysis of cultures

Adapt tolocal culture

Change the local culture


The elements of culture (aspects such material culture, language, social interaction, religion, education, value systems, etc) will be studied in order to make an analysis of the culture. Each element will be viewed and searched separately as well as in its interaction with other elements. In the process of culture analysis, cultural knowledge will be gathered and cross-cultural comparisons will be done if required, processes during which the company has to prove cultural sensitivity. After cultures have been studied and analysed the company will make the decision of either to adapt to the local culture or to change the local culture in order to get acceptance for its products.

3.2.1 Elements of culture Let’s see now what are the elements of culture that a company should look at in a foreign market in order to decide how to set its marketing strategies for each foreign market. The culture of a country means:

material culture language social interaction religion education aesthetics value systems

Material culture. The material culture of a country comprises on the one hand the technology, the techniques a country uses to produce goods and on the other hand its economics. Technology refers to the know-how possessed by that society, the techniques in the creation of the material goods, the technical educational system and the technical know-how possessed by the people of the society. In order to appreciate the technological level of a country a company may look at: the production process, the country’s infrastructure, the technical level of the consumer. The material culture affects the level of demand and, the quality and types of products demanded. In the developed countries the technological level is high, the technologies used in production processes are complex and consumers understand many technical concepts while in many developing countries, the technological level is low


and technologies used in production processes are rudimentary or simple and population has no technological knowledge. For instance, if we talked about the concept of preventive maintenance, this is broadly understood in developed countries, while in many developing countries this concept does not have the same understanding. What does this mean from the marketing point view? Consumers will not use properly the product, they have to be instructed, more resistant products should be designed in order to have the same product life length. For low-technological countries, some products should be adapted and simplified because consumer can not use them, do not know to use them if they are too complex. Electrical appliances are sold nicely in France and Britain, but they have less buyers in the societies (such as the African ones) where less 5% of the population have electricity in their homes. The electrical toothbrushes are acceptable and demanded in Western developed countries, but they are seen as a waste of money in the countries where the income can be better used on clothing or food6. Economics is the other element of the material culture of the country, referring to the resources a country employs in production, the distribution, consumption of goods and services and the income obtained through the creation of goods and services. Societies with different levels of income, spend differently this income, use differently resources in production processes and consumers have different consumption patterns. In high income countries consumers buy in large quantities and less frequently, while in low income countries consumers buy in small quantities and more frequently, for instance.

Language is seen by some as being the mirror of a culture7. Language is important in information gathering and also in the evaluation of efforts. By knowing the foreign language the international marketer does not rely completely on the opinions of others, but can also see and hear personally what is going on. Language is multidimensional by nature. There are two aspects related to language that are of interest for the international marketer:

• language as a communication tool, • the diversity of languages spoken across borders.

6 Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 144. 7 Czinkota M. And Ronkainen I., 2001, International Marketing, Hartcourt College Publishers, p. 64.


Language as a communication tool is manifested both through the verbal, the spoken language and also through the non-verbal, the silent language. The verbal language ensures the communication of the company with both employees, but especially customers in the foreign markets. To be able to better communicate with the consumers, translations are used when marketing products across borders. Translations not only that have to be grammatically correct, but they have to keep the cultural meaning. The most difficult to translate are the idioms. In many cases dictionary translation is not sufficient for an accurate translation, as the idiomatic, interpretation is different and reflects the real meaning. Translations that do not take into consideration this fact, not only that they loose their intended meaning but they might suggest something completely different. For example, an American travel company when translated its advertising message “Fly on leather” in Spanish it came out with the meaning “Fly naked”. Another American company producing deodorants wanted to market in Germany a product under the name of ,,Mist’’ that in English means “boare, ceaţă” being willing to suggest a romantic atmosphere, but in German the word “mist” means garbage and animal excrements. Box no. 3.2 presents some other international blunders related to translations and interpretations of meanings internationally.

Another consideration related to language is its capability to convey different shades of meaning. For instance, a one-word equivalent of the English word “aftertaste” does not exist in many languages. To communicate the idea may require a lengthy translation such as “the taste that remains in your mouth after you have finished eating or drinking”8.

The non-verbal language refers to gestures, body language, eye contact, accepted conversational distance (personal distance), etc. These are things that differ from one culture to another and can cause misunderstandings when they are not known. For instance, the sign with the finger and the thumb forming a circle, means O.K in USA but has an obscene meaning in Greece and in Brazil, in southern France the meaning is that the sale is worthless and in Japan the meaning is that a little bribe is asked for9. In Australia, the former USA president Bush senior gave “V for Victory” sign with his palm turned inward, not realizing that this was equivalent to the middle finger salute in the USA10. 8 Ibid., p .65. 9 Ibid., p. 67. 10 Grayson L.James., 1999, ”Gestures: the DO’s and TABOO’s of Body Language Around the World”, Security

Management, March, p.122.


BOX NO.3.2. Blunders at international level (meanings and translations)

The American Motors Corporation’s car „Matador” suggest virility and strength in USA, but in Puerto Rico it means „killer” and this is not a favourable connotation in a place with a high trafic fatality rate.

A private Egyptian airline „Misair” proved to be very unpopular with the French nationals as the name meant in French „misery”.

Pepsi Cola used its ad „Come alive with Pepsi” in different countries, but the translations came out with completely different meanings: in German the literally translation meant „Come alive out of the grave with Pepsi” and in Asia the translation meant „Bring your ancestors back from the dead with Pepsi”. (Ricks D., „How to avoid business blunders abroad” in Business, April 1984). Goldsmith collected a number of hotel signs translated into English, that are translations errors, less harmful but funny:

Paris: „Please leave your values at the front desk” Japan: „You are invited to take advantage of the chambermaid” Zurich: „Because of the impropriety of entertaining guests of the opposite sex in the

bedroom, it is suggested that the lobby be used for this purpose” Romania: „The lift is being fixed for the next day. During that time we regret that you

will be unbearable”. (Goldsmith Charles, „Look See! Anyone Do Read This and It Will Make You Laughable”, The Wall Street Journal, 19 November 1992, p. B1.

Americans have a big personal distance (1 m), but Latin and Arabs have a small personal distance (0,5 m). This may cause misunderstanding when North Americans will step back to restore the normal personal distance (for them), this being interpreted as avoidance by the small personal distance peoples, while for the North Americans the closeness will be an invasion of their personal space. Arabs have an old tradition in seen as following the movement of the eye pupil during negotiations in order to interpret reactions. That is why they look right in your eyes when talking to you and that is why they have sun glasses in many occasions. For Japan it is offending to look straight into eyes for a prolonged period. Touching while talking is very common for Latin countries and for Southern Europe, but not common for Northern European countries. Considering the diversity of languages used across nations, there are countries were more languages are spoken, such as Canada (French, English), Switzerland (French, German, Italian), Belgium (French, Flemish), India were there are 14 official languages and around 750 dialects.


As language is considered to be the mirror of culture more languages spoken in one country may mean more cultures in the same national territory. These are heterogeneous markets that might require different marketing strategies in the same national territory. Even when the same language is spoken in more countries meanings and expressions can differ from one country to another. Spanish is spoken in Latin America. There were found different words for tires: cauchos in Venezuela, cubiertas in Argentina, gomas in Porto Rico, llantas in the other countries like Mexico, Peru, Columbia11. English is spoken in North America, in Britain, in Ireland, in Australia, New Zeeland. Accordingly, in UK you go to the toilet, in USA you go to the restroom and in Canada you go to the washroom. Box no. 3.3. presents some more examples of this kind. We can see that the understanding of the language and the interpretation of the language is very important in international marketing. What companies need when going internationally is a cultural translator, who is a person who translates not only among languages but also among different ways of thinking and among different cultures. Social interaction refers to the ways in which people, the members of a society relate to each other, meaning the roles of men and women in society, social class, the family, group behaviour, marriage and rituals and so on. All these aspects affect marketing as each of them influences the pattern of social behaviour on overall, the value system and the social hierarchy, and consequently the buying and consumer behaviour. Family is the most crucial expression of social interaction in a society. In Europe and most of the Western countries, the family unit is the nuclear family (parents and children). In other countries (Asia, Latin America), the family unit is the extended family (parents and children, grandparents, aunts, uncles and other family members). In some African countries cousins and uncles are called brothers.

11 Hani D.A, Ryan J.K and Vernon I.R., 1995, „Coordinating International Advertising”, Journal of International

Marketing, vol. 3, no. 2, p.56.


BOX NO. 3.3 The same language spoken in different countries English: Britain - petrol and USA - gasoline; Britain - biscuits and USA- cookies; Britain - pavement and USA - sidewalk (Chee H. And Harris R., Global Marketing Strategy, Financial Times Professional, 1998, p. 145) During negotiations, the expression „tabling a proposal” means for the USA negociators to postpone, to delay the decision, while for the British negociators means to make the decision immediately and to take action right away. (Ricks D., Big Business Blunders, Homewood Il.: Irwin, 1983, p. 4) Romanian: Romania – sufragerie and Moldova – sală Romania – castraveţi and Moldova – pepeni Romania – roşii and Moldova – pătlăgele Romania – salam and Moldova – cârnaţ Romania – batistă and Moldova – basma Romania – borcane and Moldova – bănci Romania – fraier and Moldova – şmecher Romania – încălţăminte and Moldova – papuci (Collected by the author)

Family units (either the nuclear or the extended families) play many roles in society including the economic and the psychological support roles. For instance, in Asian countries the responsibility for old persons stays with the children, old people have no material means, they have no pension and they depend on their children. Companies adapt to this economic role of the extended families. For instance, in Sri Lanka banks promote saving programs that allow participants to build up savings to support their parents when they will retire. In Hong Kong when paying income-tax, the income used to support a parent or grandparent is free of tax, the expense is deducted from the sum for which the income tax will be paid. Other companies that do not adapt to the form the families are organized, make mistakes. In Los Angeles a radio contest aimed at Hispanic families offered two tickets to Disneyland. The contest failed mainly because it asked Hispanics to pick two members out of their extended families12. The role members of families play in the family are also important for international marketers as they influence buying and consumption patterns. For instance, the husband has a dominant role in many Latin American countries 12 Kotabe M. et al. , Op. Cit., p. 88.


and Arabic countries and therefore delegate less authority to their wives when acquiring goods such as automobiles, life insurances and even products such as furniture or major home appliances (fridges, cookers, washing machines, etc.). In other countries, most of the developed ones, decisions are taken jointly. Men and women may adopt different roles in the family and in society. In the advanced industrial societies, gender roles are becoming more blurred and less predictable, increasingly women are competing with men at the work place. In the developing countries women and men still play different and usually complementary roles. In many societies there is a social hierarchy and a class system. In the class system members of a society are generally ranked according to a number of criteria based on income, power, religion, wealth. Social classes tend to have quite different consumption patterns that affect the purchasing of different goods. In some societies only a small number of distinct social classes (Scandinavian countries) can be identified, whereas in others (USA, India) there are many different social classes and each of them has its own wants and goods. Upper classes in almost all countries are more similar to each other than they are to the rest of their own society. Lower classes tend to be more culture bound, they are less aware of other cultures, whereas “middle classes” are more prone to participate in the process of “cultural borrowing”. Therefore, the larger the upper and the middle classes are, the more likely a market is to buy products and services that are not culturally bound13. In the Hindu India the social system is formed of „castes”. In the caste system, the classes are ranked according to purity, spiritual quality and power and is defined by birth. Understanding this social stratification system, help marketers to segment the markets and to position their products effectively. Promoting a product as a sign of upward mobility would not work in the Indian market14. Religion plays a major role in many societies as it refers to the belief system of a society. Religion refers to a community’s set of beliefs that relate to a reality that cannot be verified empirically15. Religion influences people’s buying motives, customs, practices, understanding, habits. In one word religion influences the value systems of a society and the value systems of a society affect marketing, as they

13 Bradley F., Op. Cit., p. 142-143. 14 Idem, p. 147. 15 Terpstra V. and David K.., 1991, The Cultural Environment of International Business, South-Western

Publishing Co, p.73.


influence: the products people buy, the way they buy them, the reasons for buying, the newspapers they read etc. The major religions of the world in terms of number of adherents are Christianity, Islam, Hinduism, Buddhism, and Confucianism. Box no. 3.4 presents these religions shortly. Religion taboos often force companies to adapt their products and their other marketing mix programs. Certain types of food, clothes and behaviours are accepted or rejected by different religions and what might be innocent and acceptable in one country is unacceptable and offending in another country. This is how a French shipment of perfumes was rejected by the Saudi Arabian customs because the bottle cap was in the shape of a naked woman. Religious taboos often force companies to adapt their marketing mix programs, as McDonald’s did in India by not selling hamburgers that contain beef and in the Arab countries by not including pork on the menu. Superstitions are also to be known as they affect people’s behaviours and belief system. In USA, there is not numbered the 13th floor in any building as it has bad luck, breaking a mirror brings bad luck, too; in Romania the black cat crossing your way brings bad luck and spilling the salt means quarelling with someone; in China the “feng shui” the belief of a harmonious environment influences the position of buildings and the way houses and offices are furnished. Even within the same religion sometimes traditions are celebrated differently. For many Christian countries, during the celebration of Christmas, there are presents offered on 24-25 of December. In Holland, the presents are given on 6th of December with the occasion of St. Nicholas. In some countries, there are presents offered on 6th of December (usually smaller presents) and also for Christmas on 24-25 December. Romania is one of them, and also France, where 6th of December is also called ”the little Christmas”16. Consequently international marketers have to be aware of differences between religions, but also within the same religion in different countries.

16 Jeannet J.P. et. al, Op. Cit, p. 84.


BOX NO. 3.4 Religions in the world Christianity has more than 2 billion followers. It is based on the Old and the New Testament and it has as its founder Jesus Christ. In the year 1054 the Catholicism has separated from Orthodoxism. The Catholicism recognizes the supremacy of the Pope and his strength as far as faith is concerned. Later, on the Protestantism has siplified the Catholicism by proclaiming that more important is the power of the faith of the individual, not the following of religious rituals. The attitude towards making money is different in Catholicism and Protestantism. While the first is questioning it, the second emphasizes the importance of work and of accumulation of wealth. Islam has 1.2 billion adherents in the world who spread from the West coast of Africa to the Philippines, including Tanzania, central Asia, western China, India and Malaysia. The main fundamental islamic concepts are: - unity = the concept of centrality, oneness of God, harmony in life - legitimacy and equality of people = fair dealings, reasonable level of profits - zakaat = 2.5% per year compulsory tax to all those classified as not being „poor” - usury = charging interest on loans is not possible - supremacy of human life = compared to other forms of life objects, human life is of

supreme importance - community = pilgrimage to Mecca is required at least once in their lifetime if they are

able to do so - abstinence = during the month of Ramadan Muslims are required to fast without food

and drink from the dawn to sunset; consumption of alcohool and pork as well as the gambling are forbidden.

Hinduism has 860 million followers mainly in India, Nepal, Malaysia, Guyana, Suriname and Sri Lanka. In addition of being a religion is also a way of life, based on the caste or class in which you were born. The followers place value on spiritual rather than materialistic achievement. The family is an important element in the Hindu society, with the caste system being the norm. Buddhism has 360 million followers and is spread from Asia to Sri Lanka and Japan. It is a newer version of Hinduism, but it has no caste system. The emphasis is on spiritual achievement, with achieving nirvana, a state marked by an absence of desire. Confucianism has over 150 million followers in Asia, mainly among Chinese. It is more a code of conduct than a religion, stressing loyalty to central authority and placing the group before the individual. (Czinkota R.M and Ronkainen I.A., 2001, International Marketing, Hartcourt College Publishers, p. 67-69; Kotabe M and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 90-92; Sasu C., Marketing Internaţional, 1998, Editura Polirom, Iaşi, p.73-77.


Education is a means of transmitting culture from one generation to another. Education, formal and informal plays a major role in passing on and sharing culture. Education shapes the wishes and the motivations of people. The level of education in a country has an impact over the receptivity of consumers from that country to foreign marketing methods. An educated consumer is easier to be instructed about how to use a new product. The level and the quality of education is influencing the potential consumers of a country, but also the potential employees of companies, the types of employees and managers that can be hired in that country. Usually societies with a low level of education, have low incomes and consequently the consumption potential is also low. Both quantitative and qualitative aspects related to education have to be taken into consideration when analysing the environment of a foreign country. Consequently when studying the education in a foreign country, the company should be interested in: 1. The type of educational system. There are different types of educational systems in the world that may result in different way of thinking of consumers around the world. The educational systems can take many forms and it is important to the marketer to understand the differences because it can indicate the type of consumer market available. For instance, the traditional European system emphasizes accumulation of knowledge while the American education system emphasizes on the development of analytical and problem solving abilities. Japan and Korea emphasize the sciences, especially engineering to a greater extent than some Western countries do17. People who go through different educational systems develop different ways of thinking and different aptitudes and they are valuable for the international company. 2. The level of education and the enrolment levels. The following indicators should be of interest in order to evaluate the level of education in a foreign country:

number of years of compulsory education (four classes in Mexico, eight classes everywhere, twelve classes in Romania before 1990). The level of education and participation of young people in educational systems drives a country’s level of literacy and knowledge.

the education forms (full-time day, part time evening, distance learning) and number of hours allocated. For instance, there are differences in the number of hours spent by high school pupils on core subjects such as mathematics, science and history in different

17 Czinkota M. and Ronkainen I., Op. Cit., p. 78.


countries: 1460 hours per year in USA, 3170 hours per year in Japan, 3280 hours per year in France, 3528 hours per year in Germany18.

the access of women to education. In Muslim countries education is largely preserved to males and often males are better educated in such societies than females.

Table no. 3.1 presents countries that have the degree of illiteracy above 50%. Table no. 3.1 Selected economies with illiteracy rates of 50% and over, 2001

Illiteracy rate both male and female – country, 2001

% Male % Female %

Niger 83.5 Niger 75.6 Niger 91.1 Burkina Faso 75.2 Burkina Faso 65.1 Burkina Faso 85.1 Mali 73.6 Mali 63.3 Mali 83.4 Gambia 62.2 Gambia 55 Iraq 76.3 Senegal 61.7 Ethiopia 51.9 Benin 75.4 Iraq 60.3 Senegal 51.9 Guinea Bissau 75.3 Ethiopia 59.7 Bangladesh 50.1 Nepal 74.8 Bangladesh 59.4 Yemen 73.1 Mauritania 59.3 Senegal 71.2 Nepal 57.1 Pakistan 71.2 Pakistan 56 Mozambique 70 Mozambique 54.8 Bangladesh 69.2 Yemen 52.3 Morocco 62.8 Burundi 50.8 Egypt 55.2 Morocco 50.2 India 53.6 Sudan 52.3 Haiti 51.1

Source: www.uis.unesco.org, 3. The literacy rate it is also of interest for the international marketer. A high level of illiteracy will suggest he use of visual aids rather than printing materials in advertising. For instance, in some African countries a baby-food company found out that one reason for its low sales in the region was the fact that

18 Jeannet J. P. and Hennessey H. , Op. Cit. p. 92-93.

http://www.uis.unesco.org/


the picture on the label showing a baby, was interpreted by locals (due to their low level of education) as containing babies19. Education is important as it can influence the marketing activities of the company in a country. For instance:

a high level of illiteracy especially for women means that products have to be modified, simplified and packaging and labelling have also to be adapted; promotion has to be adapted: no written ads will be used and the message will be simple and explanatory.

a high level of illiteracy affects marketing research as communication with consumers is difficult and qualified researchers and operators are difficult to find.

the cooperation with the members of the distribution channels depends on their level of education.

the nature and quality of marketing support services (such as advertising agencies) depends on the way the educational system of the country trained people for such occupation.

Aesthetics refers to the ideas of a culture about beauty and good taste that are expressed through art, music, dance, colours, shapes. Such things are very important in international marketing because they show how each culture interprets symbols, colours and what are the beauty standards of a culture. Colours are often used as a way to identify brands and to differentiate products. Colours have different connotation and symbolic value in international markets. While in Europe black is the symbol of death in some countries of Asia (Japan) white is the symbol of mourning for the deceased. Green is the symbol of illness in Malaysia and symbolizes death in Singapore. Red is a good luck colour in many Oriental countries, while in African countries has a negative connotation. Colours have different meanings in different countries and international marketers have to know the symbols of colours in different countries before using them. Customers everywhere respond to images and myths that help them to define their personal and national identities. If these are not taken into consideration, mistakes can take place. In 1997 the shoemaker Nike had to recall one model from the international market because it had a logo intend to represent flames but that was resembling the Arabic script of the word ”Allah”. Muslim leaders complained as

19 Kotabe M. and Helsen K., Op. Cit., pp. 94-95.


finding offending the logo and the company withdraw the shoes from the world market20. Standards of beauty also differ from one country to another: what is beautiful for some countries might be ugly for others. Imagine an ad for a Chinese product that is done in Romania using Chinese music. The international marketer has to know what are the aesthetic standards in a country in order to design the product styling, the packaging and the adverts. The value systems shape people’s norms and standards and they vary a lot across cultures. They have their origin in history and cannot be changed in a short time. Most of the human behaviour depends on values and attitudes. Values and attitudes help us to determine what we think is right and wrong and what is important and desirable and what is not. Both consumption and business behaviour are directly related to values. And international marketers have to understand them. Social norms represent models of behaviour and the accepted roles and standards in a society. A belief is a person’s opinion about something and may be based on a real fact, subjective opinion or faith21. For instance, someone can believe that Dove soap is a very smooth and creamy soap. Marketers should be interested in people’s beliefs, as they act according to these beliefs. An attitude is a person’s point of view towards something and usually involves liking or disliking22. Someone may think that the German products are the best quality products and this will lead to a certain behaviour towards German products. Attitudes are usually difficult to change and marketers can try to fit their products into existing attitudes rather than trying to change them. Values are shared beliefs or group norms23. They are important to be known in order to communicate effectively with the consumers. People’s attitude towards time vary across cultures and consequently will affect the operation of the company in a foreign market. Edward Hall defines two time systems24 that can be found in different cultures: the monochronic time and the polychronic time. In the societies that are based on the monochromic time (M-time) people do one thing at a time, people are very punctual, they have an organized agenda, they do not waste time, they are the “time is money” type

20 Cateora Ph. and Graham J., 2002, Op. Cit., p. 106. 21 Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 147. 22 Ibidem. 23 Ibid. 24 Hall. E. T., 1976, Beyond Culture, Anchor Press, New York.


of people. These are North Americans, Swiss, Germans, Scandinavians. In the societies that are based on the polychronic time (P-time), people have a completely different concept of time: people do several things at a time, they are less organized, they are less punctual, they are less rigid regarding the schedule, for them business is a way of socializing, not the other way around, people allow for relationships to be built. These are Latin American peoples. Most cultures represent a mixture of M-time with P-time, but they have a tendency to be either M-time or P-time. An example is Japan, where people arrive at meetings on M-time but allow for P-time once the meeting begins. Recently most business-people from P-time cultures are adapting to M-time. Formality also differs from country to country and is important to be known as it affects the communication between people. For instance, in USA and UK people talk on their first name even in business environment (there is only one form of addressing in English); in Germany, France and Romania people should use the polite form in the business environment (these languages have two forms of addressing); in Japan there are three forms of addressing/greeting according to the social status and the hierarchical level (superior, equal, inferior). Attitudes towards achievement differ from one society to another. In Western societies achievement is well rewarded and this motivate people to work more and to accumulate more, by acquiring goods and services. In other societies, such as some Asian societies, achievement does not motivate people and spiritual rewarding is more important. Attitudes towards change can also differ from one country to another. There are countries more resistant to change than others, where innovations and new products are accepted more slowly and with higher difficulty. Japan is seen as a conservative country, more resistant to change, while Scandinavian countries are more innovative and more open to change. Attitudes towards foreign cultures will affect activities such as positioning in marketing. At the beginning of 1990’s American cigarettes were promoted in Romania using the theme of the American dream, as it was a positive image of this country in Romania. Later on, the well known slogan ”We don’t sell our country!” influenced more the acquisition of Romanian companies by foreign investors, rather than the acquisition of foreign products by Romanian consumers.


The Japanese raise a huge wall against foreigners (gaijin) and many middle aged bureaucrats and company officials think that buying foreign products is unpatriotic. The Chinese think that one should build relationship (guanxi) first and if that is successful the transaction will follow25. Social behaviours are also important as they might have different meanings in different countries. In most countries is impolite to make noises when eating and to belch. In China it is polite to belch at the end of the meal as a sign of satisfaction with the food. In UK is polite to eat all what is placed on the plate, while in China if you eat all on the plate it is considered that the food was not enough and you receive more food. In Saudi Arabia it is an insult to question a host about the health of his spouse or to show the soles of your shoes. In Korea you should use your both hands when you hand in an object to another person. In Indonesia it is considered rude to point a finger at another person.26

3.2.2 The analysis of cultures The cultural analysis implies gathering cultural knowledge that should be interpreted by showing cultural sensitivity in order to make cross-cultural comparisons.

3.2.2.1 Cultural knowledge When analysing the culture of a country the marketer will gather information in order to get knowledge about that country’s culture. There are two types of cultural knowledge relevant to the international marketer, the factual knowledge and the interpretive knowledge. The factual knowledge refers to straightforward information about a cultural environment, the facts that a marketer can study and understand, it is usually obvious and it has to be learned. Such factual knowledge can be the meanings attached to different colours and tastes, or statistics about a country’s population etc.

25 Czinkota M. and Ronkainen I., Op. Cit., p. 69. 26 Keegan K., Op. Cit., p. 67.


The interpretive knowledge about culture refers to the ability to understand and appreciate the nuances of different cultural patterns and traits. This type of knowledge requires a degree of insight that may be described as a feeling and goes beyond factual knowledge. The international marketer has to have both types of knowledge: the factual knowledge and the interpretive knowledge. For example, factual knowledge is the fact that 98% of the Mexican population is Catholic, but what it actually means this? What is the interpretation of this information? Do they have the same traditions like other Catholics around the world or do they have different traditions?27

The interpretive knowledge is also known as experiential knowledge as it is usually acquired based on experience in that particular cultural environment. In case that experience does not exist in a particular country, it is advisable to work with locals in order to be able to identify and use the interpretive knowledge.

3.2.2.2 Cultural sensitivity When analysing culture, the international marketer has to show cultural sensitivity or cultural empathy. They should try to get rid of the self reference criterion (SRC), they should stop judging other cultures based on their own experience, and based on the belief that one’s culture is superior to another culture. James Lee was the one who has introduced the concept of self-reference criterion (discussed in chapter no. 1) as being the root to most international business problems. He also proposed a four steps analytical approach in order to reduce the influence of one’s own cultural values28:

1. Define the problem or goal in terms of domestic cultural traits, habits and norms.

2. Define the problem or goal in terms of foreign cultural traits, habits or norms. Make no value judgments.

3. Isolate the self-reference criterion in the problem and see how it complicates the problem.

4. Redefine the problem without the self-reference criterion influence and solve for optimal the goal situation.

27 Cateora Ph. and Graham J., 2002, Op. Cit, p. 108. 28 Lee James A., 1966, „Cultural Analysis in Overseas Operations”, Harvard Business Review, no. 44,

March - April, p. 106-114.


Cultural sensitivity or cultural empathy means that international marketers have to admit from the very beginning that there are no right or wrong cultures, there are simply different cultures. Marketers should accept that cultures are different but equal. Just because a culture is different does not make it wrong. The belief that one’s own culture is better just because it is his own depicts the philosophy of ethnocentrism, one of the main dangers for the international marketer. If there is no cultural empathy, tolerance and flexibility, conflict and miscommunication arises. Another important aspect when going internationally is the feeling of people, going to work abroad. Business people moving to another culture usually experience stress and tension, that is known as the cultural shock. An individual who enters a new different culture has to learn how to cope with the new cultural values, as well as to identify which ones of the old ones do not work in the new environment. Harris and Moran presented ten tips in order to deflate the stress and the tension of cultural shock29:

1. Be culturally prepared. 2. Learn local communication complexities. 3. Mix with the host and nationals. 4. Be creative and experimental. 5. Be culturally sensitive. 6. Recognize complexities in host cultures. 7. Perceive oneself as a culture bearer. 8. Be patient, understanding and accepting of oneself and one’s hosts. 9. Be most realistic in expectations. 10. Accept the challenge of intercultural experiences.

Also in order to diminish the cultural shock when going internationally and also to foster cultural sensitivity and acceptance of new ways of doing things, training and educational programs are needed. Czinkota and Ronkainen present a few cultural training methods30:

1. Area studies programs through which is provided factual information about a particular country. It is of little use to the international manager, but should be the prerequisite for other training programs.

29 Harris Ph. and Moran R., 1987, Managing Cultural Differences, Gulf Publishing,, p. 212-215. 30 Czinkota M and Ronkainen I., Op. Cit., p. 86-89.


2. The cultural assimilator is a program in which trainees must respond

to scenarios of specific situations in a particular country. The results are evaluated by a panel of judges and the program is usually used to assess the suitability of assigning a new manager abroad on a very short notice.

3. Sensitivity training programs focus on enhancing a manager’s flexibility in situations that are quite different from those in the home country.

4. On-line training based on detailed scenarios, on relevant exercises and on-line discussions that are delivered gradually and based on a set of support materials.

5. Field experience that consists of sending the manager in to the different cultural environment for a limited period of time. 3.2.2.3 Cross cultural comparisons

The analysis of culture in order to understand the environment of a country and also to make cross-cultural comparisons envisages both macro analysis and micro analysis. The macro-analysis of the cultural environment includes an examination of the variability, complexity, cultural hostility, heterogeneity and degree of interdependence of a country’s culture. The macro-analysis is trying to identify the climate in a country and its attitude towards business and products. The micro-analysis focuses on the cultural impact on the target market or segment. It tries to identify how cultural influences affect individuals in the market place. Aspects discussed under cultural values are relevant for micro-analysis. Further we will be discussing a few aspects relevant to micro-analysis of cultures. From the point of view of complexity, cultures were divided by Hall in low-context cultures and high-context cultures31: The low-context cultures are those in which words carry most of information (message), they depend on explicit verbally expressed communication, what is meant is what is said, the context in which things are said does not matter. Countries with low context cultures are USA, Germany, Switzerland, the Scandinavian countries. The high context countries are those in which communication depends on context and non-verbal language, less information is contained in the verbal part of the

31 Hall E. T., 1976, Beyond Culture, Anchor Press, New York.


message, a lot is implicit. Countries with high context cultures, or implicit cultures are Japan, China, Asian countries, Arab countries, Latin American countries. To know the contextual background of countries is important for communication in business between people from different contextual backgrounds as well as for planning marketing activities. For instance, if we talk about distribution based on personal selling, in low-context cultures like USA sales people are rotated across territories. In high context cultures where trust and friendship and social relationship play an important role in business they are not rotated. See also table no. 3.2. Although countries can be classified as high or low context in their overall tendency, there are exceptions to the general tendency in a country and these exceptions are found in subcultures. For instance, in USA that is a low-context culture, there is Mafia that has a high context culture that is based on language, ritual and a strong sense of distinct identity32. Table no. 3.2 Dimensions of the high and low-context cultures

Dimensions High context Low context Lawyers Less important Very important A person’s word Is his or her bond Is not to be relied on; “get

it in writing” Responsibility for organizational error

Taken by highest level Pushed to lowest level

Space People breathe on each other

People maintain a bubble of private space and resent intrusions

Time Polychronic – everything in life must be dealt with in its own time

Monochronic – time is money. Linear – one thing at a time

Negotiations Are lengthy – a major purpose is to allow the parties to get to know each other

Proceed quickly

Competitive biding Infrequent Common Source: Keegan W., 1999, Global Marketing Management, Prentice Hall, p. 64. Cultural homogeneity/heterogeneity refers to the degree to which separate cultures are similar or dissimilar. This is another aspect based on which one can make 32 Keegan W., Op. Cit., p.63.


cross-cultural comparisons. There are countries that have homogenous cultures and there are countries that have more heterogeneous cultures. In the countries with homogenous cultures people speak the same language, they have the same religion and they have the same believes. Such countries are Japan, Korea, Scandinavian countries. New products diffuse more rapidly in homogenous countries. Heterogeneous cultures usually have more religions and people’s beliefs differ. One such example is China, where each province it is a culture in itself. India is another example with its 14 official languages and the 750 dialects. For countries with heterogeneous cultures differentiated marketing strategies are needed.

Cultural hostility refers to the degree to which conditions in a culture are threatening to organizational goals. The extent of hostility depends upon the perceived acceptability and legitimacy of the firm. Hostility means that the firm will be less able to acquire raw materials, capital, personnel, information. Goodwill, political favours and other resources. Hostility may also reduce a firm’s ability to dispose of its products and services33.

Hofstede’s cultural dimensions are also used to make cross-cultural comparisons. The Dutch professor Hofstede made a research in 66 IBM subsidiaries worldwide and based on this, identified four cultural dimensions that were used to classify countries into groups according to the way they respond to business and market context. It was noticed that there is a close link between consumer behaviour patterns and the four cultural dimensions identified by Hofstede. The four dimensions identified by Hofstede are: individualism/collectivism, power distance, uncertainty avoidance and masculinity/femininity. A. Individualism/collectivism refers to the degree to which people prefer to act as individuals rather than group members, the view they have about themselves. There are individualist societies (the “me” societies) where people have an independent view of themselves, individual initiative is accepted and rewarded, ties between individuals are loose, everybody is expected to look after himself and his immediate family. Such countries are USA, UK, Germany, France. There are collectivist societies (the “we” societies) where people have an interdependent view of themselves, they are willing to connect with others, people are integrated into strong, cohesive groups and these groups protect people during their life’s in exchange of unquestioning loyalty. Such countries are Asian countries, Arab countries and some Latin countries.

33 Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 147.


B. Power distance refers to the degree to which social inequality is tolerated in a society, to the authority orientation of a society. There are countries that score high on power distance meaning that: they see as acceptable a high inequality between members of the society, these societies are hierarchical and force and manipulation are used as sources of power. Such countries are Arab countries, Latin America, West Africa. There are countries that score low on power distance: they value equality between members of society, they use knowledge as a source of power. Such countries are USA, UK, Germany, Netherlands. C. Uncertainly avoidance refers to the degree to which uncertainty is accepted or avoided in a society, to the willingness of a society to take risks or not. There are countries that score high on uncertainly avoidance, that try to avoid uncertainty, are not willing to take risks, they are intolerant to ambiguity, they are distrustful to new ideas and behaviours, they prefer structured situations and clear rules. These societies are more rigid, they stick to historically tested patterns of behaviour and they do not like and do not take risks, they look for the absolute truth. Examples of such countries are Japan, Mexico, France. There are countries with low uncertainly avoidance. These countries tolerate and accept uncertainty, they are willing to take risks, people are more easy going in these countries, they take a more empirical approach to understanding and knowledge. Such countries are USA, UK, Hong Kong. D. Masculinity/femininity refers to the importance given by society to either male values (assertiveness, competition, success, acquisition of money, not caring about others) or female values (quality of life, human relationships, solidarity, respect for others). There are masculine societies that score high on masculinity where male values prevail, these values are dominant in the society. Such societies are Japan, Mexico, Germany. There are feminine societies that score low on masculinity where female values are dominant. Such countries are Netherlands, France, Scandinavian countries. Follow up research of Hofstede’s work in Asia led to a fifth dimension, long-termism. There are societies with a long term orientation, where people have values that centre around the future (such as perseverance) and there are countries that score low on long-termism and are short term oriented where values are based on the past and the present (such as respect for tradition). Table no. 3.3 shows the differences in the family, at school and at the work place according to Hofstede’s dimensions.


Table no. 3.3 Differences according to Hofstede’s dimensions

A. Differences according to individualism/collectivism Collectivist societies Individualist societies

In the family: Education towards “we” consciousness Opinions pre-determined by group Obligations to family or group (harmony, respect, shame)

In the family: Education towards “I” consciousness Private opinion respected Obligations to self (self-interest, self-actualisation, guilt)

At school: Learning is for young only Learn how to do

At school: Permanent education Learn how to learn

At workplace: Values standards differ for in-group and out-group Relationship prevails over task Moral model of employers-employee relationship

At workplace: Same value standards apply to all (universalism) Task prevails over relationship Calculative model of employer-employee relationship

B. Differences according to power distance Small power distance Large power distance

In the family: Children encouraged to have a will of their own Parents treated as equals

In the family: Children educated towards obedience to parents Parents treated as superiors

At school: Student-centred education

At school: Teacher-centred education (order)

At workplace: Subordinates expect to be consulted Ideal boss is resourceful democrat

At workplace: Subordinates expect to be told what to do Ideal boss is benevolent autocrat

C. Differences according to uncertainty avoidance Weak uncertainty avoidance Strong uncertainty avoidance

In the family: What is different is ridiculous or curious Ease, indolence, low stress Aggression and emotions not shown

In the family: What is different is dangerous Higher anxiety and stress Showing aggression and emotions accepted

At school: Students comfortable with unstructured learning situations, vague objectives, broad assignments, no time tables Teachers may say “I do not know”

At school: Students comfortable with structured learning situations, precise objectives, detailed assignments, strict time tables Teachers should have all the answers

At workplace: Dislike of rules – written or unwritten Less formalisation and standardisation

At workplace: Emotional need for rules – written or unwritten More formalisation and standardisation


D. Differences according to femininity/masculinity Feminine societies Masculine societies

In the family: Stress on relationships Solidarity Resolution of conflicts by compromise and negotiations

In the family: Stress on achievement Competition Resolution of conflicts by fighting them out

At school: Average student is norm System rewards students’ social adaptation Student’s failure at school is relatively minor accident

At school: Best students are norm System rewards students’ academic performance Student’s failure at school is disaster

At the workplace: Assertiveness ridiculed Undersell yourself Stress on life quality Intuition

At the workplace: Assertiveness appreciated Oversell yourself Stress on careers Decisiveness

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 153-154.

Hofstede supports the view that management practices in a country are culturally dependent, leading to the conclusion that what works in one country might not work in another. The dimensions can be also extended to marketing practices. A high masculine society can mean preference for “high performance” products and the use of the “successful achiever” theme in advertising. A strong uncertainty avoidance may require strategies for reducing the perceived risk in product purchase and use, such as emphasizing the functionality of the product. A low uncertainty avoidance means a weak resistance to new products and a strong desire of the consumer for novelty and variety, ensuring a faster spread of new products. A feminine society will have consumers preoccupied by “environmentally friendly” products and will accept socially conscious firms.


3.2.3 Strategies related to the cultural environment in foreign countries

After analysing the culture of a country, the company that wishes to enter that market may decide either to adapt to that culture or to change the local culture.

3.2.3.1 Cultural adaptation In terms of marketing, cultural adaptation is based on cultural congruence. The strategy of cultural congruence involves selling products that are similar to those that exist on the local market, products that correspond to the local cultural norms, by trying to decrease in this way resistance of locals. The cultural adaptation of products is recommended for the traditional societies, resistant and reluctant to novelty, such as Asian cultures (Japan). For instance, Mc Donald’s in Japan started initially with a USA style menu. The company realized that if it wants to go further it has to adapt its menu to the Japanese culture. It introduced McChao a Chinese fried rice, as 90% of the population eat rice daily. The result showed up immediately as, sales increased 30%. It was noticed that 70% of the McChao sales have been in the form of take out food bought by single businesspeople34. The process of acculturation, of adjusting and adapting to a specific culture other than one’s own, is one of the keys to success in international operations. In terms of business customs a company entering a foreign market has to adapt locally. Adaptation means to be aware of local customs and to be willing to accommodate those differences that can cause misunderstanding, to be aware of the self-reference criterion (SRC) and to avoid it. Business customs have been grouped by Cateora and Graham in three categories35: 1. Cultural imperatives are business customs that must be known and conformed to or avoided. For instance: in China you are not allowed to raise your voice, you have to avoid to make your partner to “lose face”. In Japan prolonged eye contact is considered offensive and therefore imperative to avoid. In Latin America if you do not make a strong eye contact you risk to be considered evasive or not to be trusted. This shows that it can happen that what is imperative to avoid in one culture, it is imperative to do in another.

34 Jeannet J.P. and Hennessey H.D., Op. Cit., p. 108. 35 Cateora Ph. And Graham J., 2002, Op. Cit, p. 128-131.


2. Cultural adiaphora are business customs and behaviours that foreigners may conform to or participate if they wish, but they are not required. For example, to eat and drink local specific food and, to bow your head in Japan as they do. Most of the customs fit into this category. A symbolic attempt to participate in adiaphora customs it is always welcomed as it helps to establish a rapport with the foreign person. The marketer has to pay attention because what is considered adiaphora in one culture may be perceived as an imperative in another. In China, during negotiations, large quantities of alcohol are consumed and numerous toasts are made. It is imperative to participate in the toasts and raise your glass but to drink is optional. Arabs offer coffee during negotiations and a person has to accept it even if he does not drink it all. 3. Cultural exclusives are those customs or behaviours that are reserved for locals, from which foreigners are excluded. For instance, praying like a Muslim when you are not one, is not acceptable, to criticize a country’s politics and morals, is not advisable either. There are few cultural customs that are reserved exclusively for locals. There are not many imperatives or exclusives but most offensive behaviour results from not recognizing them.

3.2.3.2 Cultural change Culture has two contradictory characteristics, it is both conservative as it resists change and is also dynamic because it changes continuously. The changing character of culture is the one that is of interest for the international marketer, when he is willing to try to change the local culture. Change is a result of the society seeking ways to solve its problems. In many occasions societies have found answers by looking to other cultures from which they borrow ideas. Cultural borrowing is common to all cultures. Cultural borrowing is the process through which cultural ways are borrowed from other cultures in order to find better solutions to a society’s particular problems. Cultures are unique but they are the result of borrowing from other cultures, the behaviours they borrow are combined in an unique manner that becomes typical for that society. Once a particular behaviour is seen as acceptable by the society, it becomes approved way and becomes part of the society’s culture. The process of cultural borrowing is the one that helps the company when, after analysing the culture it decides that wishes to change the culture, not to adapt to it.


The process of cultural change can take two forms:

1. The process of unplanned cultural change, when the company introduces the new product to a country and hopes for the best. In this case only the fact that the company introduced a new product whose acceptance requires a change in consumer behaviour even if it does nothing else, initiates the process of cultural change in that country. An innovation that offers advantages but it requires a culture to change in order to benefit of those advantages establishes the bases for cultural change. For instance, USA occupation forces introduced milk, bread and steak to the Japanese culture during the second World War.

2. The process of planned cultural change takes place when the company deliberately acts to change those aspects of the cultures that are resistant to the company’s marketing goals. Through the planned cultural change the process is accelerated by the company that acts as a change agent. The company acts as agent of change when designs a strategy to change certain aspects of the culture in order to overcome resistance to an innovative product. For example, an American company producing frozen vegetables, in order to overcome the resistance of Asian women to frozen vegetable had to convince Asian mom’s (who were proud of the time spent to cook for the family- this was a sign of love and care for them) that by using frozen vegetables they will have the opportunity to cook more often the favourite meals for the family. When a strategy of planned change is implemented the company has the responsibility for the consequences of introducing that innovation. If dysfunctional results happen as a result of marketing efforts, even if they are intentional or not, the company is responsible.

The economic environment The international economic environment is very important when studying foreign environments, as it shows us what is the degree of economic development of different regions and countries, what are the relationships between them and consequently can help in identifying where is the greatest market potential for the company. There are authors1 who consider the economic dimension as being the single most important characteristic of the global market environment, as without money many things are impossible to the marketer. The economic environment changed a lot after the second World War and an analysis of its evolution is of interest to any marketer. The international economic environment, can be looked at from two perspectives:

as the international economic environment, namely the world economy, and;

the economic environment within a nation, the characteristics of a country’s economy.

1 Keegan W., Op. Cit. p. 37.


4.1 The international economic environment

We will start our discussion about the international economic environment from the definition of the world economy. The world economy can be defined as the totality of economies of the world’s countries and the relationships between them. Therefore we take into consideration the relationships, the interdependence of these economies, that are manifested mostly through international trade. Therefore, we can say that the international economic environment is also the international trade environment. The world economy has changed profoundly after the second World War and one of the most fundamental changes was the emergence of global markets, as global competitors started to replace local ones, by responding to new opportunities. Also the integration of the world economy has increased significantly.

4.1.1 International trade flows As the interdependencies between the world markets are reflected in the international trade environment, we will look at world trade statistics to see what are the trade patterns between countries. If we look at the evolution of international trade, we can notice that merchandise trade (import/export) has increased faster than the production. In the last 20 years the trade patterns showed that there are three major trading areas that have emerged and dominate the world trade: the European Union, the Pacific Rim (led by Japan) and NAFTA (led by USA). These trading areas, that are also known as “the Triad” account for more than 80% of the world output and more than 80% of the world’s trade (see table no. 4.3), while they account only for 16% of the world’s population. In spite of globalisation, if we look at the world trade statistics we can notice that most of the trade and the trade increases take place between neighbouring countries. Trade is more localized. For instance, forty percent of the North American trade is done with North America, 67% of the Western European trade takes place within EU and 48% of the Asian trade takes place within Asia. See table no. 4.2. There are a few exceptions, such as Central and Eastern Europe that deals more with Western Europe (56.2% of its trade) than within the region (25.5%). Also Middle East that deals more with Asia and Africa that deals more with Europe. See tables no. 4.1, 4.2 and 4.3.

The economic environment

Table no. 4.1 Intra and inter-regional merchandise trade, 2002

Billion $ Destination

Origin North America

Latin America

Western Europe

CE Europe

Africa Middle East

Asia World

North America

382 152 170 7 12 20 204 946

Latin America

215 54 44 3 4 5 23 350

Western Europe

270 55 1787 168 66 68 208 2657

CE Europe

14 6 176 80 4 7 24 314

Africa 24 5 71 1 11 3 24 140 Middle East

38 3 40 2 9 17 116 244

Asia 394 39 260 21 26 48 792 1620 World 1336 315 2549 282 133 169 1391 6272

http://www.worldbank.org, “World Bank indicators, 2002” Table no. 4.2 Share of inter-regional trade flows in each region’s total

merchandise exports, 2002

% Destination


Latin America

Western Europe

CE Europe

Africa Middle East

Asia World

North America

40.3 16.1 17.9 0.7 1.2 2.1 21.5 100

Latin America

61.3 15.4 12.6 1.0 1.2 1.3 6.7 100

Western Europe

10.2 2.1 67.3 6.3 2.5 2.6 7.8 100

CE Europe

4.5 1.9 56.2 25.5 1.2 2.4 7.7 100

Africa 17 3.3 50.9 0.7 8.1 2.3 16.8 100 Middle East

15.5 1.4 16.4 0.8 3.8 7.1 47.7 100

Asia 24.3 2.4 16.0 1.3 1.6 3.0 48.9 100 World 21.3 5.0 40.6 4.5 2.1 2.7 22.2 100

http://www.worldbank.org, “World Bank indicators, 2002”




Table no. 4.3 Share of regional trade flows in world merchandise exports, 2002

% Destination


Latin America

Western Europe

CE Europe

Africa Middle East

Asia World

North America

6.1 2.4 2.7 0.1 0.2 0.3 3.2 15.1

Latin America

3.4 0.9 0.7 0.1 0.1 0.1 0.4 5.6

Western Europe

4.3 0.9 28.5 2.7 1.1 1.1 3.3 42.4

CE Europe

0.2 0.1 2.8 1.3 0.1 0.1 0.4 5.0

Africa 0.4 0.1 1.1 0.0 0.2 0.1 0.4 2.2 Middle East

0.6 0.1 0.6 0.0 0.1 0.3 1.8 3.9

Asia 6.3 0.6 4.1 0.3 0.4 0.8 12.6 25.8 World 21.3 5.0 40.6 4.5 2.1 2.7 22.2 100

http://www.worldbank.org, “World Bank indicators, 2002”

4.1.2 International Agencies promoting economic stability

and trade

Stability in the international economy is a prerequisite for world peace and prosperity. That is why there are a number of organizations that were set up in order to contribute to the economic stability of the world. We will shortly discuss some of them.



The General Agreement on Tariffs and Trade/The World Trade Organization2. In 1947 after the second World War, part of the world’s countries have chosen trade liberalization. Consequently the General Agreement for Trade and Tariffs was formed (GATT). The GATT was set up in 1948 and its membership gradually increased over time, as countries perceived the benefits of working together to reduce barriers to trade. The principles included in GATT’s articles were reciprocity, non-discrimination and transparency. The main objective of GATT was to reduce and if possible eliminate trade restrictions and to create an international forum in which nations to discuss trade issues and to solve trade conflicts and plan trading policies by setting regional agreements (agreements for geographical zones) and sectorial agreements (agreements for certain industries). GATT was a multilateral agreement that even though had no biding authority over its members, acted to persuade its members to eliminate tariffs and quotas among members, to improve the trading environment through negotiations, to follow the most favoured nation (MFN) rule by which all members treat each other equally and without discrimination and to treat exports from developing countries preferentially. GATT reduced tariffs from 40% in 1947 to less than 5% in 19903. On January 1, 1995 GATT was transformed in the World Trade Organization (WTO) that provides a more formal framework to deal with trading issues. WTO continues to pursue reductions in tariffs on manufactured goods as well as liberalization of trade in agriculture and services. WTO concentrates its efforts in four areas: the liberalization of trade of goods and services, decide how to integrate China, to deal with “new issues” such as foreign investment, competition policy and labour standards.

The International Monetary Fund4 (IMF) was established in 1944 and has as main goal to promote orderly and stable exchange rates, to maintain free convertibility among currencies of member nations, to reduce impediments to trade and provide liquidity to counteract temporary balance of payments disequilibria (offers short term loans).

The World Bank5 (also known as the International Bank for Reconstruction and Development) has as main goal the reduction of poverty and the improving of living standards by promoting sustainable growth and investments. It provides long term loans (usually for fifteen to twenty-five years) and technical assistance and policy guidance to developing-country members to achieve its objectives. 2 http://www.wto.org 3 Jeannet J.P. and Henessey H.D., Op. Cit, p.70. 4 http://www. imf.org 5 http://www.worldbank.org


The Organization for Economic Cooperation and Development (OECD)6. OECD has 29 members: Western Europe, the United States, Australia, Canada, the Czech Republic, Hungary, Japan, Mexico, New Zealand, South Korea and Turkey. It is also known as the “rich man’s club”, as it focuses on the interests of a minority of the world’s population, the countries with the highest level of economic development. The OECD conducts numerous research projects, it does economic forecasts, provides economic data about the member states, the advanced economies, but also about developing countries, it also conducts studies in international trade, foreign investment and other areas. The Group of Seven. The world’s leading industrial nations have established a Group of Seven, which meets regularly to discuss the world economy. Finance Ministers and central bank governors from the United States of America, Japan, Germany, France, Britain, Italy and Canada make up this group, referred to as the G7. The group works together informally to help stabilize the world economy and reduce extreme disruptions. Sometimes this group extends to the Group of Ten (including Sweden, the Netherlands and Belgium). The United Nations Conference of Trade and Development (UNTCTAD). The less developed countries felt that they were treated unfair therefore they have chosen a redistribution system of the world trade, a system that would favour certain sectors, those sectors where these countries were more powerful (such as raw material sectors). The organization makes sectorial agreements mainly on primary goods. 4.1.3 The economic integration The interdependence between the economies of the world can also be seen by looking at the forms of regional economic integration. The main forms of regional economic integration are:

• Free trade areas (NAFTA, CEFTA) • Custom unions (ASEAN) • Common markets (MERCOSUR) • Monetary unions (European Union) • Political union

6 http://www.oecd.org

http://www.oecd.org/


Free Trade Areas are the simplest form of economic integration. Within a free trade area nations agree to give up to trade barriers among themselves but each nation is allowed to maintain independent trade relations with non-group countries. Custom Unions are a more advanced form of economic integration that has the same characteristics as a free trade area but adds a new feature of a common external tariff/trade barrier for non-members countries. Individual countries can have their own independent trade agreements with non-group countries. Common Markets are the third level of economic integration. Countries members to the group have all characteristics of a custom union (free-trade between the members and common tariffs for tertiary countries) and more it encourages free flows of capital and labour. Monetary Unions are the highest form of economic integration. This is a common market (free flows of goods, labour and capital among member countries and common tariff barriers for non-members) that have a common currency. Member countries no longer regulate their own currencies, there is a common currency that is regulated by a supra-national central bank. EU became the first monetary union in 1999. Political Union represents the culmination of the process of integration, in which member states have a common political system. There is no such a union so far, but EU is aiming towards it. Figure no. 4.1 presents the characteristics of the main forms of economic integration. The main regional economic agreement in the world are also presented in table no. 4.5 and box no. 4.1 presents a few details about the economic integration in the world.

Figure 4.1 The forms of regional economic integration

MONETARY UNION

+ common currency

COMMON MARKETS

+ free flow of goods (already existing) labour

capital

CUSTOM UNION

+ common custom tariffs common custom border

FREE TRADE AREA

No tariffs between member countries


Table no. 4.5. Major regional trade agreements

Trade agreements Member countries

ASEAN Free Trade Area AFTA Brunei, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam Andean Common Market ANCOM Bolivia, Colombia, Ecuador, Peru, Venezuela Asia Pacific Economic Cooperation APEC Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, Vietnam, United States Central American Common Market CACM Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua Caribbean Community CARICOM Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-Nevis, St. Lucia, St. Vincent, the Grenadines, Suriname, Trinidad-Tobago Economic Community of West African States ECOWAS Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo European Free Trade Association EFTA Iceland, Liechtenstein, Norway, Switzerland European Union EU Austria, Belgium, Cipru, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom Gulf Cooperation Council GCC Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates Latin American Integration Association LAIA Argentina Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela Southern America Common Market MERCOSUR Argentina, Brazil, Paraguay, Uruguay North American Free Trade Agreement NAFTA Canada, Mexico, United States South Asian Association for Regional Cooperation SAARC Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka

Sources: http://www.aseansec.org; http://www.apec.org; http://www.caricom.org; http://www.eurunion.org; http://www.mercosur,org; http://www.nafta.org

http://www.aseansec.org/

http://www.apec.org/

http://www.caricom.org/

http://www.eurunion.org/

http://www.mercosur,org/

http://www.nafta.org/


Integration in Latin America. The Latin American countries have been reforming their economies since 1980’s and they looked at trade as a way to escape stagnation, inflation and debt. There were a number of initiatives to integrate some for the region economies (in 1991 few countries formed the New Common Market of Central America, also in 1991 the Mercosur). Many of the Latin American nations realized that if they do not unify they will be marginalized in the global market. For economic and political reasons many of these attempts have not reached their objectives, but the opening of these economies had a significant impact on their trading relationships. Integration in Asia. One of the major features of the Asian countries is their heterogeneity. However market forces have driven formal integration in Asia, too. ASEAN had no formal structure before 1991 as consensus was based only on informal consultation. In October 1991 the AFTA was formed. Another Asian economic arrangement is APEC that has as objective to achieve free trade by 2010. Integration in Middle East. The GCC was formed in 1980 as a defences measure due to the perceived threat of the Iran-Iraq war. Its objective is to reach free trade arrangement with Europe. Integration in Africa. In 1975, 16 west African countries formed the ECOWAS, but most of its objectives have not been reached due to small membership and lack of economic infrastructure. Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College Publishers, p. 121-129.

BOX NO. 4.1 Economic integration in the world Integration in Europe. The integration agreements in Europe are the EU and the EFTA. The Single European Market started on 1 January 1993. The most important consequence of the freedom of movement of products, services, people and capital is the economic growth. Sources of increased growth in the European Union come from eliminating the transaction costs associated with border controls and patrols, custom procedures; obtaining economies of scales by concentrating production facilities; more intense competition among European companies. The process of harmonizing regulations and laws on products, trade and people has give EU a strong position in the international economic and political community. EU is the most successful integration agreement known so far at world level. Integration in North America. The North American Free Trade Agreement (NAFTA) has been signed in 1992 by USA, Canada and Mexico. Among the key issues in NAFTA are the stage elimination of customers barriers over 15 years, includes intellectual property rights and services, wage differentials may increase competitiveness where productivity allows, no political union envisaged etc. The ratification of NAFTA created the largest free market of the world with more than 390 million consumers. Canada gains very little from NAFTA, therefore much of the controversy centred around USA and Mexico. USA firms will have access to low waged Mexican labour force, and new jobs will be created in Mexico. Both countries will have access to millions of additional consumers and the liberalized trade will bring higher economic growth in both countries.


Why do we need to know in which regional economic agreements is a country member? First of all to know what facilities we can benefit and secondly by entering a country that is part of an economic regional agreement, it means accessing the whole region, it means a larger market in terms of size. Even though from the marketing point of view the company has to be careful, as a larger economic market (such as European Union for instance) does not necessarily mean a market completely homogenous. Cultural differences between countries can hinder a standardized approach for the whole EU. However, a company that wishes to internationalise on one or another market has to know these agreements and to which of them are the different countries part of, in order to benefit of the facilities offered.

4.1.4 Major players in the international trade

Among the main players in the world trade are multinational companies (MNC) originated from the developed countries of North America and Western Europe, and structures specific to the Asian countries such as Keiretsu, Sogo Shosha, Zaikai, Chaeobol. Recently more small and medium size enterprises (SME) at world level became involved in international trade. Multinational companies (MNC) United Nation conducted a study that showed that there are over 36.000 MNC’s with more than 180.000 affiliates in the world. The top 100 MNC’s account for 16% of the world’s productive assets7. They play an important role in the global economy and also in the international trade. MNC’s are among the major players in the world trade. From the total world trade one third takes place between branches of MNC’s in different countries, it is an intra-firm, intra-MNC’s trade. Another third of the world trade takes place between MNC’s and other corporations and the last third of the world trade takes places between non-MNC’s companies. So, we can see that MNC’s play a major role in the world trade, as they are involved in selling and buying two thirds of the total volume of trade at the world level. We have seen that intra-firm trade accounts for one third of the world trade. There is also another type of trade that is of importance, the intra-industry trade, the trade that occurs between similar industries from different countries. The intra-firm

7 „Multinational: A Survey”, Economist, March 27, 1993.


trade is a business-to-business trade and its main marketing role is to reach the objectives of the company on different markets. For instance, Colgate Palmolive Romania buys soap from the Turkish subsidiary to sell it in the Romanian market. These types of sales envisage usually to offer the whole range of company’s products in foreign markets. The intra-industry trade is a trade of one good that goes both ways between two different countries. For instance, China sells clothes to USA and USA sells clothes to China. In this situation, its marketing role is diversification. Intra-industry trade occurs when the production of a good takes place sequentially in more stages distributed over several countries: computers are produced in this way and buying and selling intermediate products is intra-industry trade. In Western Europe between 50-60% of the imports of manufactured products are intermediate products and represent intra-industry trade and in USA 47% of the imported goods are intra-industry trade8. Besides MNC’s (original from North America and Western Europe) there are also other actors that play an important role in the international trade environment and in the world economy. In Japan there are cartels and cooperation on a scale not possible in the West because of anti-trust and competition rules. In Japan there are three main forms of organizations (Keiretsu, Sogo Shosha, Zaikai) that have a great influence over the internal economic life as well as over external economic life. Keiretsu is an industrial group, a group of companies that have limited ownership in one another, so that there is a mutual interdependence between them. The members of a Keiretsu buy goods from one another, they practice reciprocal purchasing. They represent cooperative networks in an industry and have the following characteristics:

cross-shareholding of stock and linkage (exchange of directors) the formation of a presidents club where top executives meet on a

regular basis to discuss business and the relationships between the group members and between those and other groups

they make joint investment among member companies keiretsu member banks provide financing to keiretsu companies they buy and sell among members

8 Cateora Ph. and Graham J., 1999, Op. Cit, p. 30-31.


Toyota has its Keiretsu by owning shares in a number of companies that supply it with part components. Similarly in Toyota Keiretsu there are companies that sell the product. Box no. 4.2 presents more details about the Japanese keiretsu system. Sogo Shosha are major Japanese trading companies, they have offices in other countries and they represent cooperative networks in distribution. There are thirteen Sogo Shosha in all, they dominate the commodity and capital goods imports, as they collectively handle more than half of Japan’s internal and external trade. They are particularly interested in high volume and high value trade and offer market intelligence based on world-wide local office networks. The largest Japanese Sogo Shosha are Mitsubishi, Mitsui, Marubeni and Sumitomo. Zaikai is like a product club formed of the top managers of the most important companies from Japan. It has close links with the government, use contacts with politicians, influence networks, generous funds, put pressure on government and labour and influence trade negotiations. Even the origin of the name is illustrative for the activity of zaikai (in Japanese zai = money and kai = world). In Korea there are a number of conglomerates, called Chaebols. And they dominate every aspect of Korea’s economy. In 1960’s Korea decided to concentrate the country’s resources in the handful of a few companies. They were given cheap credit were protected from foreign competition in this way forming the chaebols. Chaebols get the best graduates and managers and in the last years they have expanded into areas such as entertainment and retailing. There are 30 large groups that dominate the Korean economy, but the largest four chaebols are Hyundai, Samsung, LG and Daewoo. Their combined sales account for 80% of the GNP, they control almost 60% of exports and employ 3% of the workforce. There are small companies in Korea that have only one Chaebol as customer, but there is no sense of “shared destiny” as in the case of the Japanese Keiretsu’s and their suppliers.


BOX NO. 4.2 Keiretsu’s in Japan A keiretsu is a strategic infrastructure that contains diverse companies and is also called an industrial group. There are a few types of keiretsu’s: The capital keiretsu is formed of a federation of independent firms that are clustered around a bank and a general trading company. Cross shareholding is common among members firms, as well as exchange of corporate directors. The mentality of buying from member groups is still strong. Among those are Mitsui, Mitsubishi, Sumitomo and Fuyo Group. The production keiretsu is typical for the automotive industry and has as main characteristics the vertical integration of manufacturers and their suppliers. The large manufacturing firms have a group of primary subcontractors that further distribute work to thousand of other little firms. All subcontractors are integrated into the manufacturer’s production processes and receive technological, managerial and financial support. Sales-distribution keiretsu involve vertical integration of product distribution from factory to the retail outlets. Matsushita and Hitachi are companies engaged in this type of keiretsu and they are also involved in capital and production keiretsu’s. The distribution keiretsu’s are in decline as: 1) keiretsu stores charge high prices and the consumers switched to discount stores looking for lower prices and 2) maintaining keiretsu retail stores causes inefficiencies in the manufacturer’s production system, as each store has to maintain the full line of company’s products regardless of the pace of sale. Specific to keiretsu is the „buy group products” mentality and reciprocal purchasing. If one company buy from another one will expect that company to also buy from it. However, no company will harm itself for the sake of the group. No single company dominates in a keiretsu, and most member companies depend on other for no more than 15-20% of their supplies or sales. In 1990’s responding to the increased competition, many keiretsu affiliated firms started to extend outside their keiretsu by buying from either independent or other keiretsu-affiliated suppliers. Sources: Lafayette De Mente B., How to do business with the Japanese, 1994, NTC Business Books, p. 205; Johnston CB and Kwan A., 1999, „Note on the Japanese Keiretsu”, Ivey Publishing,: Keys J.B., Wells R.A. and Denton L.T. „Japanese Managerial and Organizational Learning”, Thunderbird International Business Review vol. 40 no. 2, p. 119-139, March/April 1998.

Small and Medium Enterprises (SME’s) are becoming key players in the global economy and have a growing role in the world trade. A popular myth is that it is more difficult for small firms to become involved in exporting or international marketing. The assumption is based on three interrelated issues: smaller firms have less awareness and knowledge of foreign markets, they cannot achieve the same economies of scale as large firms do and they usually lack the necessary managerial and financial resources to internationalise. Recent studies in Europe showed that almost half of SME’s have the potential to compete internationally


given growth, improvement and perseverance. SME’s were seen as being customer oriented, response focused and concerned with new products. Therefore, their competitive advantage will come from speed, responsiveness and closeness to customers9. SME’s have both constraints (such as exchange rates, getting paid when doing business internationally, sources for financing, political instability that can throw them out of the markets, lack of production capacity and sometimes the attitude of the management) but also opportunities to compete in the global economy. There are always opportunities for the smaller firm in international markets given the fact that they are willing to take risks. The best SME’s have an entrepreneurial management style, characterized by informal approaches to planning, and heavy reliance on networks rather than bureaucratic planning procedures associated with large organizations.

4.2 The economic environment within a nation We have seen that when a company goes international has to look at the economic environment of each particular market it wants to enter (by looking at the market characteristics, the degree of protectionism/liberalism and its financial situation, the relationships between the economies of different countries), as well as at that particular country in the context of the world economy, how much it trades and with whom, from what economic agreements is part? We have been talking so far about the international economic environment or the international trade environment. We will continue by looking at the characteristics of an economy that the marketer should be interested in. First the company should know what is the type of economic system of the particular country of interest. There are three types of economic systems: capitalist, socialist and mixed. The classification is based on the method of resource allocation: market allocation, command (central planned) allocation and mixed allocation. The market allocation system relies on consumer to allocate resources. The market system is an economic democracy, through which consumers decide what will be produced and by whom by buying or not buying certain goods from the market. USA and the Western European countries are examples of predominantly market

9 McAuley A., 2001, International Marketing, John Wiley and Sons, p. 107-118.


economies. The system’s superiority in the allocation of goods and services according to people’s needs and wants is seen as the reason for which the former socialist countries voted for it10. The command allocation system is a system in which the state has the power to serve the public interest and this includes deciding which products to make and how to make them. Consumers are free to spend their money on what is available, but decisions about what is produced and therefore, what is available are made by state planners. As demand is higher than the supply in these economies, the elements of the marketing mix are not used as strategic variables. China, the former USSR countries and India are examples of economies that rely on command allocation systems. The mixed allocation system is based on the fact that in reality there are no pure market or command allocation systems in the world. All market system have a command sector and all command systems have a market sector, other said they are mixed. In a market economy the command allocation sector is measured through the proportion of the gross domestic product (GDP) that is taxed and spent by the government. Among the member countries of the OECD this proportion varies from 32% of the GDP in the USA to 64% in Sweden11. On the other hand in China 1-2% of the national output belongs to the private sector12. Than the company should look at the market characteristics of each specific country in order to be able to appreciate market potential. Among the aspects of interest should be:

Population GNP, GNP/capita; PPP Household size and income Consumption patterns Inflation Infrastructure The rapport liberalism/protectionism

Population is the indicator that gives a close idea about the market potential for a large variety of goods, especially consumer goods, but not only. Under the demographic environment we have discussed what are the aspects related to population that are of interest for the company studying the foreign environment

10 Keegan W. Op. Cit, p. 40. 11 OECD Economic Outlook no. 50, December 1991, Paris-OECD, p. 206. 12 Goldstone J., „The Coming Chinese Collapse”, Foreign Policy, summer 1995, p. 35-52.


and these includes size, growth, structure on different criteria, density and the degree of urbanization. Urbanization that refers to the proportion and concentration of population living in the cities, is important to be studied as urban areas represent a concentration of potential customers and as urban and non-urban areas have different consumption patterns and consequently distinct customer requirements. When doing so, it is important to know how different countries define urbanization as this can differ a lot from one country to another. For instance, in USA the urban area is defined as a place with 2.500 or more inhabitants, while in Sweden is a built-up area with at least 200 inhabitants with no more than 200 meters between honses13. In many cases developing countries are less urbanised and they are less attractive markets, as customers are difficult to reach and greater promotional effort is required to reach a dispersed population that in many cases has a high level of illiteracy. In many cases the degree of urbanization is a good indicator for the size of the market and show what type of marketing strategies can be used in that particular country. Population is a good indicator for market potential, but besides the existence of consumers companies also need consumers with money. Therefore, the income has to be studied in a foreign country in order to appreciate market potential. Among the best indicators to evaluate the income of a country (and of consumers), as well as its degree of economic development are the Gross National Product (GNP), the Gross National Product/capita (GNP/capita), the Purchasing Power Parity (PPP). The Gross National Product (GDP) is a country’s output of goods and services in a year and reflects the income that a country has. The GDP generally shows what is the degree of development of a country. The GNP/capita shows how much each person would have if the GDP would be divided equally. Knowing a country’s GNP/capita is the first step in understanding the general standard of living that the average citizen has in a country. Country markets are at different stages of development. GNP/capita it was used by the World Bank to group countries in four categories. These are presented in table no. 4.6. The Low Income Countries are also known as pre-industrial countries, as they have the income lower than 755$/capita. These countries have limited industrialization and high percentage of the population is engaged in agriculture and subsistence

13 Czinkota M and Ronkainen I., Op. Cit, p. 100.


farming, they have high birth rates, low literacy rates, political instability and unrest. These countries concentrate in Africa south of Sahara desert and in Asia: Angola, Bangladesh, Cameroon, Congo, Etiopia, Ghana, Haiti, India, Kenya, Liberia, Mongolia. Table no. 4.6 Country Income groups (Atlas Method)

Development Status Income group US/capita Industrial countries High income > $9.266

Middle income - upper middle - lower middle

$2.966-$9.265 $756-$2995

Developing countries

Low income <$755

Source: World Bank, World Development Report 2000, http://www.worldbank.org Lower-Middle-Income countries are also known as less-developed countries, and they have the income comprised between $756-$2995. These countries are at the first stages of industrialization and they have factories that supply a growing domestic market with goods such as clothes, packaged food, building materials, batteries, etc. Consumer markets in these countries are expanding, and these countries are seen as an increased competitive threat as they mobilize their relatively cheap labour to serve target markets in the rest of the world14. Such countries are Guatemala, Philippines, Turkey, Indonesia. Romania is included in this category as it had its GNP/capita in 2002 of 1870$. Upper-Middle-Income countries are also known as industrializing countries and they have their GNP/capita comprised between $2966-$9265. In these countries the percentage of population engaged in agriculture decreased fast as people move to the industrial sector and consequently the degree of urbanization increases fast. These countries have rising wages, high rates of literacy and advanced education. They are seen as becoming strong competitors in the international markets as they experience export-driven economic growth. Such countries are: Chile, Hungary, Malaysia, Mexico, Uruguay, Venezuela.

14 Keegan W., Op. Cit., p. 42.



High Income countries are also known as advanced, industrialized, post-industrial countries. They have the GNP/capita more than $9266. The characteristics of these countries are that more than 50% of GNP comes from the service sector, the knowledge overpasses the capital and is seen as a key strategic resource, technology is given high importance. Such countries are: United States, Japan, Germany. One important aspect when we talk about income, it is also the distribution of income. When the income that a country produces during an year is not distributed relatively equal, than we have the so-called bipolar societies. These are countries in which a small portion of the population (for instance 10% of the population) holds the largest part of the GNP (50% of the GNP). The Latin American countries are typical examples of bipolar societies. Brazil is one of the most unequal societies. Here one fifth of the population earns around 65% of the national income, while the bottom fifth earns 3% of the national income15. Other countries with unequal distribution of the income are Bangladesh, China. One indicator that evaluates closer the purchasing power of consumers in a country is the Purchasing Power Parity (PPP). PPP adjust the GNP for the cost of living, it shows what the money can buy in a country by measuring the purchasing power of different countries over the same type of goods and services. In this way it allows for comparisons of standards of living across countries. PPP makes the comparison of the purchasing power of other currencies with the American $. Table no. 4.7 shows the GNP/capita and the PPP/capita of a number of countries. The table shows how the differences between the GNP and PPP for the same country is in fact a reflection of different standards of living and purchasing powers in those countries. Where the GNP is higher than the PPP the cost of living is higher, it is more expensive to live in that country than to live in the USA (the comparison is done with the US dollar, as the USA was the one who conceived the indicator in order to be able to compare countries). In the countries were the GNP is lower than the PPP, the cost of living is lower, it is cheaper to live in that country than in USA. In other words with the same amount of money, you can buy more goods and services in that country than in USA.

15 Ibid, p.48.


Table no. 4.7 The GNP/capita and the PPP/capita for selected countries, 2002

Country GNP/capita ($) PPP/capita ($) Argentina 4.220 10.190 Australia 19.530 27.440 Bulgaria 1.770 7.030 Canada 22.390 28.930 Estonia 4.190 11.630 France 22.240 27.040 Germany 22.740 26.980 Greece 11.660 18.770 Hungary 5.290 13.070 India 470 2.650 Japan 34.010 27.380 Moldova 460 1.600 Norway 38.730 36.690 Poland 4.570 10.450 Romania 1.870 6.490 Singapore 20.690 23.730 Slovenia 10.370 18.480 Switzerland 36.170 31.840 Turkey 2.490 6.300 Ukraine 780 4.800 United States 35.400 36.110

Source: World Development Indicators, Table 1.1 “Size of the Economy”, http://www.worldbank.org,

The household size and income is another aspect of interest to the international marketer. A household is defined as all the persons, both related and unrelated, who occupy a housing unit16. The size of the household is important as consumption patterns will differ according to size, as well as the income available to be spent. In Western societies, the trend of the last years was the increase in the number of households, as the size of the household was diminishing. This happened due to the increased number in divorces and the formation of more single households or single parent households. In developing countries the size of the household is much larger due to the extended family structures (who leave in the same household) and also the higher number of children per family. The size of the

16 Blackwell R. D., Miniard P. W. and Engel J. F., 1997, Consumer Behaviour, Dryden Press: Hyndale, p. 311.



household can influence the size of the packed meat for instance: family sizes (with 8-10 pieces) for large household countries or single packages (2-3 pieces) for small household countries. Developed countries calculate also the household income and this can give a very good idea about the purchasing power of families in these countries.

Consumption patterns refer to the structure of expenses of consumers for different categories of goods (food, household, savings). The share of income spent on necessities provides an indication of the market’s development level and an approximation of how much money the consumer has left for other purchases. It is known that once the income of a family increases, the proportion of food expenditure will decrease, the household expenditure will remain relatively constant, while spending on other goods and savings will increase. In developed countries the percentage of the income spent on food is much smaller than in the developing countries. In 1997 the percentage spent on food in USA was 10% while in India it was 49%, in Nigeria 49%, in Indonesia 44% in Brazil 38%17. Transportation is more expensive in developed countries, therefore the percentage of the income spent on transportation is much higher in these countries. In USA in 1997, 18% of the income was spent on transportation, In Australia 11%, while in Indonesia 1.2% and in India 3.2%18. When we talk about consumption patterns, we can obtain data about the average consumption of a certain product in a country. The availability of such data depends on the degree of development of the data collection system in that country. Developed countries have more sophisticated data collection systems, that offer more detailed data that can give a marketer a better “feeling” of the market. Western Europe has very well developed data collection systems regarding the consumption of different products. For instance, in 1993 in Italy there were consumed 25 litres of beer per capita, 58 litres of wine per capita and 0.9 litres of spirits per capita, while in Germany the consumption was of 135 litres of beer per capita, 23 litres of wine per capita and 2.6 litres of spirits per capita. Data about consumption of different goods and their percentages in the total income are valuable but they also have to be treated with caution, as the way the data has been produced can differ from one country to another and to achieve consistency might be difficult. For instance, while a unit of soft drink might mean in a country a pack of six bottles, in other might mean a single bottle.

17 International Marketing Data and Statistics 1999, London, Euromonitor. 18 Ibid.


Inflation in a country has to be known by the international marketer, as it usually complicates his life as it influences the consumers’ behaviour and the pricing policy of the company. Inflation affects the ability of both industrial customers and consumers to buy and introduces uncertainty in the buying habits. Further, this makes it difficult for the company to predict demand. Consequently there is higher difficulty for the company to plan its activity and to set its pricing policy. The developed countries were able to keep inflation at single digits, while in other countries inflation is high. See table no. 4.8. In the high inflation countries the marketer might have to make changes in the elements of the marketing mix in order to meet customer needs and to maintain the level of demand (more economical products, more rational promotion, more customer involvement in distribution). Infrastructure of a country can give us an image over the type of business a company can have in that country. The availability and the quality of a country’s infrastructure it is important for the international marketer, as he is going to rely heavily on services provided by the local market. The study of the infrastructure has to take into consideration primarily the following aspects:

• transportation • communications • commercial infrastructure • financial infrastructure

Transportation and related indicators about the transportation networks in a country will give us an idea about how the company can distribute its products in that country. In case of consumer goods that have to reach individual consumers all over the country transportation infrastructure becomes crucially important, especially if population is dispersed. Therefore, indicators such as: length of railroads, length of paved streets and number of vehicles (trucks, buses) have to be study in order to know how easy it will be to distribute the product. Is there any possibility to transport by water? Than indicators specific to water transportation (such as lengths of rivers, number of ships, size and tonnage of ships) have to be studied.


Table no. 4.8 Inflation (at consumer prices) in a number

of selected countries, 2004

Countries 2004 Canada 2.0 Mexico 4.5 United States 3.0 Autralia 2.6 Japan -0.1 Korea 3.3 New Zealand 2.7 Austria 2.9 Belgium 2.6 Czech Republic 1.7 Denmark 1.0 Finland 0.2 France 1.6 Germany 1.6 Greece 4.1 Hungary 4.1 Ireland 2.3 Italy 1.9 Luxembourg 2.0 Netherlands 1.5 Norway 1.1 Poland 4.2 Portugal 2.0 Slovak Republic 3.2 Spain 3.1 Sweden 0.0 Switzerland 1.4 Turkey 9.2 United Kingdom 3.2

Source: http://www.oecd.org However, such indicators show what is the availability of different transportation means, but they give little indication over the quality of these transportation networks. To be able to appreciate the quality of the transportation infrastructure other indicators related to the volume of transport, are to be studied: rail traffic by freight tons per kilometre, number of passenger cars etc.



Communication in a country is as important as transportation as the company has to be able to communicate within and outside the market. Communication infrastructure usually depends on the general level of economic development and can be estimated by looking at indicators such as: number of phones/100 inhabitants, number of newspapers/1000 inhabitants, number of computers/1000 inhabitants, number of servers/1000 inhabitants, number of TV’s/1000 inhabitants, number of radios/inhabitant. These will give us an indication over how the company can communicate with its consumers, how it can reach them both to research them and to promote its products. Such communication means are necessary for a country in order to be able to compete in the world and to attract foreign investors. In the last years the diffusion of the internet technology in businesses and in the consumers daily lifestyles has been rapid. The penetration is higher in the developed industrialized countries, but the study of such facilities in any international market is important. Indicators such as number of internet hosts, number of people using the internet. In January 2005, there were 317.6 million internet hosts at world level that increased from 72.3 million in 2000, 43.2 million in 1999 and from 9.4 million in 199319. The total number of people using internet was in 2000 304.36 million persons at world level, of which 44.9% in North America, 27.3% in Europe, 22.4% in Asia-Pacific, 3.5% in Latin America, 0.8% in Africa and 0.3% in Middle East20. The development of wireless technologies (television, cable, cell phone) are also important as they influence the way we can communicate with our consumers. Cell phones for instance, were more successful in Europe and Japan than in United States.

The commercial infrastructure refers to advertising agencies, market research companies, distributing organizations, that can influence both the promotion and distribution strategies in that country. If the commercial infrastructure is week in a country, the company has to fulfil those functions and this means higher financial and human involvement and investment.

The financial infrastructure refers to the financial institutions (banks, insurance) from a country that can facilitate the financial transactions of the company within that country and in relationship with other countries. The more developed these are in a country, the better the company can reach its objectives.

The rapport liberalism/protectionism in a country is also of interest for the international marketer. In other words we are interested in the level of protectionism in that country. Governments use barriers against imports

19 http://www.isc.org, Internet Domain Survey, January 2005. 20 http://www.nua.ie/survey/how_many_online/index.html, How many on line

http://www.isc.org/

http://www.nua.ie/survey/how_many_online/index.html


and foreign businesses in order to protect local industry and to raise money for the state budget. We can appreciate that among the most frequent goals of imposing barriers are: protect local jobs by keeping out rival imports, protect infant industries until they are strong enough to cope to foreign competition, encourage investment in “home” industries, reduce or eliminate balance of payments problems, prevent foreign firms from dumping, promote political objectives. There are two types of barriers that a government can use against imports: tariff barriers and non-tariff barriers.

The tariff barriers refer to a tax imposed by a government on goods entering at its borders, either to discourage imports or to raise money for the state budget or for both reasons. There are also tariffs on exports or transitory goods, but most common are the import tariffs. Countries that have high tariff barriers are highly protected, while those with low tariff barriers are more liberal in their international trade. In 1993, Thailand was one of the most protected countries with a 41.5% average tariff, while in mid 1990’s Estonia, Lithuania and Norway were among the most liberal countries with a 0.4% average tariff, respectively 1.9% and 2.2%21. Most of the countries have some tariff barriers in order to protect local industries. GATT and the World Trade Organization militated and managed to obtain reductions on tariffs for many products. Consequently, lately governments started to use non-tariff barriers as a means of protection, as some of them are more difficult to prove that they represent a protectionist measure.

Among the non-tariff barriers there are quotas, standards, export subsidies, voluntary export restraints and others. Quotas are physical limits on the amount of goods that can be imported into a country. As opposed to tariffs that restrict trade by directly increasing the prices, quotas increase prices by directly restricting trade and inducing a higher demand than supply situation. Voluntary Export Restrictions (VER) function on the same principle as quotas and consist of an agreement between the importing country and the exporting country for a restriction on the volume of export. They are common on textiles, clothing, steel, agricultural products, etc. Japan has a VER with USA and with EU. Formal and administrative non-tariff barriers include charges, requirements and restriction such as surcharges for border crossing, licensing regulations, packaging and labelling regulations, size and weights requirements. These can be the most problematic and are the least quantifiable. In the chapter about the political environment and the economic policies of governments we will come back again to the topic of protectionism.

21 http://www.worldbank.org, World Bank Indicators 1999.


The legal environment When going international, the international marketer has to understand two types of legal environments: the broader international legal environment and the local legal environment. In this context the international marketer has to look at:

international laws the legal system in each country of interest, as companies have to

comply to the local laws and they can do this by knowing the way the laws are applied (according to the type of legal system)

to the way that international legal disputes can be solved, as the marketer might be in a dispute at international level

specific laws of interest for the international marketing activity in the countries of interest.

In this chapter, we will shortly discuss each of these aspects.

5.1 International laws There are no international laws as such. Therefore, international law may be defined as rules and principles that nation-states consider biding upon themselves that are usually established through certain treaties and agreements. These can be bilateral agreements and treaties of friendship or multilateral agreements and treaties between nations such as the World Trade Organization, the International Convention for Protection of Industrial Property etc. (some of them discussed


previously under the economic environment and some more will be discussed later in this chapter under types of laws). Most of the international law refers to the commercial laws and treaties that regulate the trade and commercial relationships between countries.

5.2 Legal systems Countries have developed legal systems that are the bases for any legal decision and action in that country. As there are no international laws, foreign subsidiaries and expatriate employees live within the legal bounds of the host country legal systems. The international marketing managers must be aware of the laws that will govern all business decisions and contacts, as countries differ in their laws and their use of these laws. They have to comply to the national laws of that country, as normally all economic activity within a nation is governed by the nation’s laws. That’s why it is useful to see what are the major legal systems in the world and what are they based on. There are three main legal systems in the world:

1. the common law 2. the code law 3. the Islamic law

The common law system belongs to the countries that were at one time under British influence or former colonies of Britain. In this system:

there are no laws written to cover all foreseeable situations cases are decided on the basis of tradition, common practice and

interpretation precedents are very important in understanding the common law the common law does not differentiate between civil, criminal and

commercial activities and a business may be liable under any of these laws.

Such legal systems are seen as being flexible and evolving over a period of time. The code law (or civil law) has its origin in the Roman law and later on in Napoleonian Code. In this system:

there are sets codes of conduct inclusive for all forseable situations (rules for all situations);

The legal environment

there are three separate codes: civil, criminal, commercial. In some areas codes are not sufficiently specific and must be interpreted by the court;

laws themselves are very important in understanding the code law; the code law accepts unforeseeable events such as flood, earthquake as

“acts of God”, for which the company is not responsible. The common law applies in most USA (except Louisiana state), in most Canada (except Quebec province), in all ex-British colonies such as Australia, New Zealand and some of the Asian countries: India, Pakistan, Malaysia, Singapore and Hong-Kong. The civil/code law applies in most Western Europe (except UK), in Central and Eastern Europe, in Latin America, in Japan and other Asian countries: Korea, Thailand, Indochina, Taiwan, Indonesia and China. It is appreciated that although in theory the differences between the common law and the code law are large, in practice they are not always so broad. For instance, many common law countries (among which the USA) have adopted commercial codes to govern the conduct of business. In UK for instance, where the common law system is in practice, function also the EU regulations, based on the code law system. The Islamic law relies on the legal interpretation of the Koran, it is based on religious principles. Islamic law defines a complete system that prescribes specific patterns of social and economic behaviour for all individuals. Unlike the common and the code law systems, which say that the law should be man-made and that it can be improved through time, the Islamic legal system says that God established a ”natural law” that embodies all justice. Because the laws are based on the interpretation of Koran, the international marketer must have knowledge of the religion’s principles and understand the way the law may be interpreted in each region In this system:

there is the prohibition of payment of interest: the common practice is that both the borrower and the lender share the rewards and the losses in an equitable way (the banking system function differently in these nations)

business with alcohol and gambling are forbidden the objective of the Islam law is social justice, it emphasises on

equality and fairness for the good of society.


For instance, if one is in Saudi Arabia and takes a cab and while he is in the cab, the driver makes an accident, he has to pay for the damage. It is not a matter of who is guilty but who has the ability to pay! He has the money (as he took a taxi!), he should pay. It is matter of social justice for them.

5.3 International legal disputes Suppose that your company has an import contract for two industrial equipments from US. You do not manage to come to terms with the American company, as far as the installation of the equipment is concerned: they do not want to install it unless you pay an extra fare. The contract stipulations are ambiguous. What do you do? Do you go to court? To which court? Their court? Your court? Is there any other solution? We can see that it is really important to have knowledge about the international legal environments when doing business internationally. We know that there are no international laws from the legalistic point of view. The main question that arises is whose legal system is going to be used when international dispute arises? Conflicts can arise between governments, between governments and corporations and between corporations. When the conflicts arise between nations, between governments they will be solved by the International Court of Justice (ICJ), also called the World Court, that was set by the United Nations in Hague in 1946. The other two cases are solved by the national court of one of the parties involved or through arbitration. The ICJ solves only conflicts between nations based on the international conventions (that represent the international law). If a nation has allowed a case against it to be brought before ICJ and then refuses to accept a judgement against it, the plaintiff nation can seek recourse through the UN’s highest political arm, the United Nations Security Council which can use its full range of powers to enforce the judgement. When disputes arise between companies situated in two countries or between companies and governments, there are three types of gradual formal actions that may be taken: conciliation, arbitration and litigation. It is recommended that before any formal action to try to settle the dispute informally. If this is not possible, one option is the conciliation. Conciliation is a non-binding agreement between parties to solve disputes by asking a third party to mediate differences.


When a dispute arises in a commercial transaction, the two parties involved can try to solve the problem by asking a third party to conciliate, to mediate the conflict. The third party can be a court on which the two parties agreed. The conciliation sessions are private and all information disclosed during sessions is confidential. However the conciliation agreement is not binding and if one of the parties is not content it can go further, for arbitration or for court. Chinese believe that when a dispute occurs, informal friendly negotiation should be used first to solve the problem. If it fails conciliation should be triad. Some Chinese companies might refuse to do business with companies that want to use directly arbitration in case of disputes1. Arbitration consists of the use of an arbitrator from an ”arbitration commission” whose resolutions are binding. Many firms engaging in international business include in the contracts an agreement of arbitration. Through this agreement all parties commit to take disputes (if they arise) to an arbitrator before pursuing other legal resources (going to court). An experienced arbitrator is chosen and both parties agree to honour its judgement. Arbitration, as conciliation is also confidential. In many countries, decisions reached in formal arbitration are compulsory under the law. There are a number of arbitration centres established by countries, organizations and institutions and they follow formal rules for the process of arbitration. See box no. 5.1. Cateora and Graham gave an example of a situation that was solved through arbitration: an English businessman had a contract to buy from a Japanese manufacturer 100.000 dolls at the price of 80 cents each, for which he found a contract to sell them at 1.40$ each. Before the dolls were delivered a strike took place at the Japanese plant and the consequence was that the price per doll increased from 80 cents to 1.50$. The English claimed that he had a contract for 80 cents/doll and the contract should be respected, while the Japanese company justified that they could not foresee the strike and this is “an act of God” (code law). At the same time the British used to the common law and precedents in similar situations, argued that strikes are part of running a business, not “an act of God” and the initial contract should be respected. They went to an Arbitration Centre that decided that they both should share the loss and both parties were content and complied2. In general, most arbitration is successful, but its success depends on the willingness of both parties to accept the arbitration’s rulings.

1 Cateora Ph. and Graham J., 2002, Op. Cit, p. 184-185. 2 Ibid., p. 185-186.


As we already said in many countries, arbitration’s ruling is enforceable. There is a convention signed by 120 countries, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the so called New York Convention, through which member countries have agreed to accept and enforce foreign arbitration decisions from all the others member states. There are a number of arbitration centres around the world that are recognized as being fair and efficient. Recently, China increased its number of arbitration centres that became recognized at the world level.

BOX NO. 5.1 Arbitration Centers

• The London Court of Arbitration • The Zurich Court of Arbitration • The American Arbitration Association (AAA) • The International Chamber of Commerce (ICC) located in Paris • The Commercial Dispute Resolution Centre of the Americas • The Swedish Arbitration Institute of the Stockholm Chamber of Commerce (used

to administer disputes between Western and socialist countries) • China’s Beinjing Conciliation Centre • The World Arbitration Institute in New York • The Advisory Conciliation and Arbitration Service (ACAS) • Other active centres in Vancouver, Hong Kong, Kuala Lumpur, Buenos Aires,

Bogota, Mexico City

The international Council for Commercial Arbitration (ICCA) was established to coordinate the activities of arbitration organizations. The ICCA meets every four years in different locations around the world. Litigation, meaning going to a public law suit, is the last solution to solve a dispute, as it has high negative effects:

law suits have high costs, law suits are time consuming as they create delays in the economic

activity of the company (if we are talking about some fashionable products, they will be out of fashion until the law suit is over),

going to court and pursuing a law suit is bad image for the company, the issue will be judged according to the that country’s national laws

and the fact that the suit takes place in the foreign country might result in an unfair treatment in the foreign court,


there is less of confidentiality as compared to conciliation or arbitration, as law suits are usually public,

it is difficult to enforce in one country, decisions made by a court in another country.

Companies can minimize international legal problems by: first of all be aware of the commercial laws within each country the

company is doing business in. Each country has laws regarding activities in promotion, product development, labelling, pricing, channels of distribution.

you have to know the international conventions, as there has been an effort to standardize regulations regarding customs, units of measurements, so on.

design a good contract, by using contract terms that are not bound to one culture, using clear units of measurement, specify the jurisdiction in the event of a dispute, include an arbitration clause.

5.4 Types of laws

Another aspect very useful for the international marketer, when studying the legal environment in the countries of interest is to look at specific laws that can influence the marketing activity of the company in that market. There are a few types of such laws that should be envisaged by the company:

laws regarding the protection of intellectual property rights commercial laws laws regarding the ethical business behaviour

5.4.1 Laws regarding the protection of intellectual property rights

Companies spend large amounts of money to discover patents, to establish brand names and trademarks, as they wish to be successful on the market by offering consumers good products. Therefore, patents, brand names, trademarks are important assets for any company and they have to be protected. Patents and trademarks that are protected in one country are not necessarily protected automatically in another, so global marketers must ensure that patents


and trademarks are registered in each country where business is conducted. For instance, in France the designer Yves Saint Laurent was denied to market a new luxury perfume called “Champagne”, as the law allows the name to be applied only to sparking wines produced in the Champagne region. Saint Laurent launched the perfume “Champagne” in USA, UK, Germany and Belgium, as the name “Champagne” was not protected in these countries. The perfume is sold without a name in France3.

Intellectual property refers to ideas that are translated into tangible products, writings and so on, and that are protected by the state for a limited period of time from unauthorized commercial exploitation. There are a few categories of intellectual property that a company can hold and consequently that need protection4:

/ a patent is granted to a person who first invented a product or technology.

/ a copyright protects original literary, dramatic, musical, artistic and other intellectual works. A copyright provides its owner the exclusive rights to reproduce and distribute the material.

/ a trademark is a word, symbol or device that identifies the sources of goods and may serve as an index of quality.

/ a trade secret is another means of protecting intellectual property and it fundamentally differs of the other three presented, as protection is ought without registration, but through secrecy. Consequently, a trade secret it is not legally protected. However, it can be protected in courts, if the company can prove that it took all precautions to protect the idea from its competitors and that they obtained it illegally through espionage or other illegal means. The Coca Cola formula is a secret that is well kept at Coca-Cola company’s headquarters in Atlanta, USA.

The ownership over intellectual property (patent, trademark or copyright) is established differently in different countries. Generally speaking, there are two systems:

1. the “first to use” or the “first-to-invent” system where the ownership over a patent or trademark belongs to the company that first invented/used it. This is compatible with the principles of the common

3 Keegan W., Op. Cit, p. 96. 4 Kotabe M and Helsen K., Op. Cit., p. 138-139.


law. In USA for instance, patents and trademarks are usually protected based on the “prior use” principles, while for the copyright registration is required for the protection of intellectual rights. Even if for the trademarks registration is not mandatory, it is highly recommended,

2. the “first-to-file” or the “first-to-register” system is the system that gives ownership to the company that fills in the registration form first. Most countries have this type of intellectual work protection system. However, in most situations the protection is granted with a grace period, meaning that the product has to be introduced and sold on the market within a given period from registration. The period varies between one to five years, on average being three years. McDonald’s lost its right to use its trademark in Venezuela, as after the registration did not use it for two years, the grace time allowed by law to start using a registered trademark. A Venezuelan company registered the name and the golden arches and used it.

Due to the differences in protection systems over the world and legislation, different situations can occur. For instance, an American attorney working in South Korea noticed that when a foreign company would come to Korea and start to negotiate for distribution or licensing, the Korean company would register the trade name in its own name, and later on would use it as an advantage in negotiation or would sell back the trademark to the company. Similarly, McDonald’s had to re-buy the right to use its symbol “the golden arches” in Japan where another company registered it first5. In Japan, the patent system is very slow and tends to pressure companies to reach agreements rather than assign penalties. It took AlliedSignal eleven years to get a patent on amorphous metal alloys. The company alleged that the Japanese Patent Office delayed the process, while the Ministry for Trade and Industry (MITI) launched a catch up program with thirty-four Japanese companies6. In Japan, the intellectual protection legislation intents more to share technology rather than protect it, they think that an invention should serve a larger, national goal, with rapid spread of technology among competitors in a way that promotes cooperation. USA managed to obtain promises for change from Japan: after years of discussion

5 Cateora Ph and Graham J., 1999, Op. Cit., p. 177-178 6 Jeannet J.P. and Hennessey H. D., Op. Cit., p. 157.


both USA and Japan have agreed to make changes to their systems. Japan has promised to speed up patent examinations, eliminate challenges to patent submissions and allow patent applications to be filed in English. The infringement of trademarks and copyrights is a critical problem in international marketing. There are different such forms: 1) counterfeiting that is the unauthorized copying and production of a product. 2) imitation that is the use of a product name that differs slightly from a well-known brand but it is close enough to it, so that the consumers will associate it with the genuine product (for example Levy’s from Levi’s or Nikee from Nike). Similarly symbols can be imitated. 3) piracy that is the unauthorized publication or reproduction of copyright work. There are many products that are subject to infringement in the world and the problem became more acute in 1980’s: shoes, apparel, software, videos, electronics, watches, jewellery, industrial products etc. For instance in 1998, the worldwide cost of software piracy was estimated at 11.4 billion $ with 96% of the Chinese software being pirated, 77% in Eastern Europe and 27% in the United States7. Over time a number of international conventions were signed between countries in order to protect intellectual rights:

• The Paris Convention or the International Convention for the Protection of Industrial Property, was established in 1883 and has almost 100 signatory countries. The treaty facilitates multi country patent registration by ensuring “the right of priority”. Practically once an application for protection for a patent is filled in one member state, the applicant has twelve months to fill in the application in any other member country, otherwise looses the right for protection.

• In Europe there is an European Patent Convention (administered through the European Patent Office) through which an applicant can fill in a single patent application that will cover all convention states for a period of 20 years, if approved.

• The Patent Cooperation Treaty (PCT) has 39 signatories. Members constitute a union that provides technical services and cooperates in filling, searching and examination of patent applications in all member countries.

7 Ibid, p.158.


• The Trade-Related Aspects of Intellectual Property Rights (TRIP’s) is an agreement done under the World Trade Organization that is the most comprehensive multilateral agreement on intellectual property to date. TRIP’s sets standards of protection for a full range of intellectual property rights that are embodied in current international agreements.

5.4.2 Commercial laws within the country8

There are numerous laws affecting the commercial activity of a company within a country. Some of the laws of interest are the marketing laws (regarding promotion, labelling, channel of distributions, pricing), green marketing laws (regarding packaging, waste disposal, deforestation), antitrust laws (anti monopoly, price discrimination, supply restrictions) and bankruptcy laws. The marketing laws are present everywhere. All countries have laws regulating marketing activities in: promotion, product development, labelling, pricing, channels of distribution. These laws have to be studied to know what marketing activities can the company pursue in each country. Legal differences between countries may prevent a standardized marketing program. There are laws regarding product liability and the differences between laws in different countries can cause problems. For instance in USA, the plaintiff has to prove that the product was defective at the time it left the producer’s premises, while in EU manufacturers have to prove that the product was not defective when it left the company. More differences rise from the different legal system, as in USA the court judgement is given by jurors, while in UE by judges. Also, in Europe the losers in a product liability suit will bear the legal costs. If a company is found to owe damages to a plaintiff, it also has to pay the plaintiff’s legal costs, and so on. There are laws regulating promotion that differ from country to country. For instance:

in Austria and France offering premiums as a promotional tool is illegal,

in Germany if you make a comparative advert, your competitor can go to court to ask for proof of any implied or stated comparison,

8 Cateora Ph. and Graham J., 2002, Op. Cit.; Jeannet J.P. and Hennessey H D, Op. Cit.; Kotabe M. and Helsen K.,

Op. Cit.


in Canada all claims and statements must be examined to ensure that

they are not false or misleading. If any reasonable person could possibly misunderstand the statements, than they are considered to be misleading.

There are laws regulating pricing: in 1994, in China, the government allowed foreign passenger cars to be priced only in the range of 15.600$ to 26.000$. That means that by law no foreign car manufacturer could either under price or overprice the car. In the circumstances in which production volumes were low, few foreign manufacturer can realize profits. There are laws regulating distribution. For instance, in France, selective or exclusive distribution is permitted by law. A French company (Consten) had the exclusive right to import and distribute consumer electronics products from the German company Grundig. This company sued another French company for bringing Grundig electronics illegally (through parallel imports) into France by buying from various foreign suppliers and selling in France. Even though two French courts considered they are right, the appeal made at the Paris Court of Appeals by the company, suspended the judgement on the grounds that “territorial protection is damaging the realization of the Common Market” by impending the free flow of goods. The EU law takes precedence to the national laws of countries.

Green marketing laws started to emerged in the recent years in different countries. Germany is one of the countries with the most stringent green marketing laws. Germany regulates the recycling of packaging waste: they have the Green Dot Ordinance through which: retailers are required to take back boxes, cartons and other primary packaging and consumers have to pay a refundable deposit for non-refillable containers. A non-profit organization was set up (DSD= Duales System Deutschland) that is responsible to collect and recycle materials. Retailers pay a fee to DSD and in exchange they have the right to display the green dot on packaging. This arrangement eliminates the need for consumers to pay deposits. The program was successful.

Anti-trust (anti-monopoly) laws have their origin in USA at the end of the last century (1890 Sherman Antitrust Act). The USA antitrust laws have been concerned from the beginning with the maximization of consumer welfare by preventing arrangements that will increase the market power without concurrently increasing social welfare through reduced costs and increased efficiency. In 1914 the Clayton act strengthened the USA antitrust law, by forbidding exclusive dealing and price discrimination. The USA antitrust laws were originally aimed at


domestic monopolies and cartels. Later on, in 1945 they have been extended to foreign companies if they have an adverse effect on foreign or domestic trade of USA (even if the companies are located outside USA). The extraterritoriality of the USA anti-trust laws was reinforced with regulations and legislations such as the 1977 Antitrust Guidelines for International Operations and the 1982 Foreign Trade Antitrust Improvements Act. For instance, at the beginning of 1990’s Bayer company granted an exclusive patent license for a new household insecticide to Johnson&Sons for the USA market. Both companies were sued, as the licensing deal would have allowed Johnson&Sons company to monopolize the USA household insecticide market. In the last years, European Union as well as Japan and other countries started to enforce anti-trust laws. Similarly, before P&G was allowed to buy a German company producing hygiene products, it had to agree to sell off one of its German divisions that was producing sanitary napkins. P&G was already marketing a brand of sanitary napkins in Europe and the Commission was concerned that allowing them to keep all brands and production facilities would give them control over 60% of the German sanitary products market and 81% of the Spanish sanitary products9.

Bankruptcy laws vary also from country to country. We have here a few examples10: In UK, Canada and France the laws favour the creditors, When a firm enters bankruptcy, it is appointed an administrator who has to recover the creditor’s money. In USA the law tends to protect the business from the creditor, when the company is in a bankruptcy situation, the management prepares a reorganization plan, which is then voted by the creditors. In Germany and Japan bankruptcies are usually handled by the banks, behind the closed doors.

5.4.3 Laws regarding the ethical business behaviour Corruption is often met in international marketing, as some countries are more corrupt than others. Table no. 5.1 presents the Corruption Perception Indexes (CPI) (compiled by the independent organization Transparency International) for a number of countries for the year 2003. 9 Cateora Ph. and Graham J., 2002, Op. Cit., p. 196. 10 Jeannet J.P. and Hennessey H. D., Op. Cit, p. 156.


The CPI relates to perceptions of the degree of corruption as seen by business people, academics and risk analysts and ranges from 10 (high clean) to 0 (highly corrupt). At least three surveys were required for a country to be included in the CPI. Bribery was defined as a means for one party to get from another party (at the cost of a third party) some special treatment that would otherwise not normally be obtainable. Bribery is viewed differently by executives from different countries and what constitutes bribery for some might not be bribery for others, depending on local customs and practices.

Table no. 5.1 Corruption Perception Index for selected countries, 2003

Rank Country CPI Score 2003

Survey used High-low range

1. Finland 9.7 8 9.2-10 2. Iceland 9.6 7 9.2-10 3. Denmark 9.5 9 8.8-9.9 New Zealand 9.5 8 9.2-9.6

5. Singapore 9.4 12 9.2-9.5 6. Sweden 9.3 11 8.8-9.6 7. Netherlands 8.9 9 8.5-9.3 8. Australia 8.8 12 6.7-9.5 Norway 8.8 8 8.0-9.3 Switzerland 8.8 9 7.8-9.2

11. Canada 8.7 12 6.5-9.4 Luxembourg 8.7 6 8.0-9.2 United Kingdom 8.7 13 7.8-9.2

16. Germany 7.7 11 4.9-9.2 18. USA 7.5 13 4.9-9.2 21. Japan 7.0 13 5.5-8.8 35 Italy 5.3 11 3.3-7.3 40. Hungary 4.8 13 4.0-5.6 54. Bulgaria 3.9 10 2.8-5.7 83. Romania 2.8 12 1.6-5.0

100. Moldova 2.4 5 1.6-3.6 106. Ukraine 2.3 10 1.6-3.8 132. Nigeria 1.4 9 0.9-2.0 133. Bangladesh 1.3 8 0.3-2.2

Source: http://www.transparency.org/cpi/index.html

http://www.transparency.org/cpi/index.html


USA was the first country to impose high ethical standards for USA firms doing business abroad, by passing legislation to regulate bribery abroad. The USA Foreign Corrupt Practices Act was enacted in 1997 and it prohibits USA corporations to bribe official of foreign governments or political parties in order to obtain or retain business. Payments to third parties are also prohibited when the company has a reason to believe that part or all money would go to foreign officials (only if it knows). Convictions for enfringing the law are severe: jail sentences of 1 to 5 years for persons involved, fines up to 10.000$ for persons and of 1 mil $ or more for companies involved. In 1993 an American business executive was convicted for giving money and airplane tickets for his honey moon to a Nigerian government official hoping to secure a contract11. Similarly in 2000 a USA environmental engineering firm was found that made corrupt payments to an Egyptian governmental official to assist the company to gain a contract. The company paid a civil fine of 400.000$ and reimbursed the Department of Justice the costs of the investigations. USA companies continuously protested that they are loosing business to foreign competitors that do not have restrictions on paying bribes abroad. European and Japanese view such payments as a cost of business. The German government used to consider payoffs legal as long as they are made outside Germany. They were even tax deductible12. Therefore, in 1988 in USA the Foreign Corrupt Practices Act was amended through the Omnibus Trade and Competitiveness Act. The changes excluded from being considered a bribe and therefore being illegal grease payments, facilitating and lubrication payments. These are small payments given to lower level officials in order to perform their duty properly. Such things include: getting shipments through customs, red tape as realising permits, scheduling inspections, getting the visas, etc. These small payments are considered as tips. However, the law does not prohibit to pay bribes to non officials (non-governmental). As American companies always complained that they are disadvantaged in doing business internationally as compared to other foreign companies, the American government lobbied other countries to adopt legislation that would outlaw the practice of bribing foreign government officials. In 1997, 20 years after USA outlawed bribery of government officials abroad, an anti-bribery treaty was

11 Keegan W., Op. Cit, p. 101. 12 Jeannet J..P. and Hennesey H.D., 1988, International Marketing Management, Houghton Mifflin Company,

p. 126.


negotiated by the countries members of OECD. The central provision of the treaty was that member countries would prosecute corporations for paying bribes to foreign government officials in the same way the bribery of its own officials in the home country is prosecuted as being illegal. Twelve countries have changed the national laws to comply to the treaty among which Germany, Japan, United Kingdom, South Korea etc. It was noticed that worldwide the level of ethical behaviour is rising over time, and what represented acceptable behaviour at one time may suddenly be cause for prosecution under new local laws.

The political environment

The political environment is another element we are interested to analyse when operating internationally. The global political scene is changing rapidly as changes in governments, changes in policies, revolutions and political upheavals occur daily in different corners of the world. As such events can have a strong impact, either positive or negative on businesses, the importance of knowing the political environment is obvious. The process of analysing the international political environment would start with a study of the home country political environment, the host country political environment by looking at the political forces on the one hand and governmental actions on the other hand and international agreements (treaties conventions, organizations). Then the political risk is assessed and in the last stage the company will decide over what risk reduction strategy to adopt if it considers that it is necessary and if it decides to internationalise in that market. Figure no. 6.1 presents the process of international political environment analysis. At global level the main players in the political arena are home country governments, host country governments and trans-national bodies and organizations. The interactions between these groups results in a given political climate. We are going to discuss each of these actors and their actions and how the interaction between them can influence businesses either in a positive or a negative manner.


Figure no. 6.1 The process of international political environment analysis

Home country political environment

Host country political environment

International agreements

Political risk assessment

Risk reduction strategies

6.1 The home country political environment The political environment in the home country can influence the activity of a company on international markets. The political development in a company’s home country can affect either the role of the company in general or some particular aspects of its operations. How it can do this? In two ways:

through the actions of home country governments, through the actions of different pressure groups in the home country.

Home country governments can prevent companies from doing business on ideological, political or national security grounds. This can result in an embargo on trade with the particular country. The embargoes can be unilateral, when they are imposed by one country only. USA is a country that over time had many unilateral embargoes towards other countries:

/ USA embargo towards Cuba, trying to convince this country to change its political ideology. The embargo was imposed in 1961, when Fidel Castro came into power, and since than USA businesses can neither buy from or sell to Cuba. Since 1993, USA companies can trade with Cuba if apply for a special licence. In 1998, the Clinton administration resumed the direct fights with Cuba and started to open up as far as mail deliveries and restrictions to travel


of academics, cultural and sport groups are concerned. However, trade between USA and Cuba is still under embargo.

/ USA embargo towards Vietnam was imposed in 1975 and it was lifted in 1994. Unilateral embargoes are seen to pose a risk on the competitiveness of the company in that particular country, putting in advantage the companies from other countries that do not have an embargo with that particular country. Therefore, lately it is a larger emphasis on multilateral embargoes, with coordinated actions of more countries. Multilateral embargoes usually come from a group of countries or increasingly from the United Nations. Such multilateral embargoes were:

the trade embargo of the global community that was imposed against South Africa as a protest to its apartheid regime in 1980’s. In 1991, when the regime changed many countries lifted the embargo.

the embargo of United Nations against Iraq as a result of the Gulf War from 1991 until 2001.

the embargo of United Nations against Yugoslavia imposed in 1992 and continued afterwards in 1993 and in 1999 until de removal of Slobodan Milosevic. Romania adhered to this embargo towards Yugoslavia/Serbia and Romanian companies and individuals that were doing business were affected.

Export controls represent another way in which home governments can influence the activity of a company in foreign markets. By law there are certain products that in different countries are banned or restricted to export. It is the case of weapons in many countries or other goods that are considered to be either needed in that country (as being scarce in the country) or strategic products. Such sensitive products can be the high technological products. The limitation of exports is done usually through the requirement of export licenses that are written authorizations for exports.

Pressure groups from the home market can also influence the company’s activity abroad. Pressure groups are special interest groups that through their actions are trying to mobilize support to get the home country government to sponsor specific regulations favourable to their point of view. Pressure groups from the home country can influence companies:

for the choice of the market. For instance in 1970’s, USA civil rights groups and church groups pressured American companies to reduce their business with South Africa due to its apartheid policy.


also the methods of doing business can be influenced by pressure

groups from the home-country. International companies can be influenced in areas such as product policies, promotional policies and pricing policies. Product policies include the decision to cease to market a certain product (such as pharmaceutical or pesticides) in a market due to safety reasons. Pricing policies can be influenced on the reason of charging higher or unfair prices. Promotional policies used by companies abroad can also be influenced by pressure groups. Nestle had to adjust its marketing promotion strategies while marketing its infant formula product in developing countries as it was accused that the product was harming babies due to the improper sanitary conditions and the use of contaminated water in the preparation of the product in the Third world countries. In 1974, based on an article published by a British journalist a boycott was launched against Nestle by an organization specially formed called INFACT (the Infant Formula Action Coalition). As a result of the public protest of the pressure groups, a new code for marketing infant formula was endorsed by the World Health Organization, code that was subject to voluntary participation by WHO member governments. Boycotts organized by pressure groups can have a great influence over businesses as we have seen in the case of Nestle. In 1990 a boycott was launched by environmentalists against tuna caught in nets that trap and kill dolphins. This caused the company Heinz to switch to tuna that was caught without trapping dolphins. Companies have to look at home country pressure groups and identify if there is any way in which their businesses can be affected.

6.2 The host country political environment Companies that operate in international environments have to have knowledge of multiple sets of political relationships in order to decide how to further act in each country. In each country the political climate is determined by the interaction of different participants that relate to each other, such as host governments through their philosophies and actions and the local interest groups. Analysing the host country political environment we are interested to study its political stability, the political risk encountered there, to see how to assess the political vulnerability and how to reduce the political risk.


Political stability is defined as the continuity of the set of rules or code of behaviour regardless of which government is in power1. Stable political environments are those in which the existing relationships among the key players are not expected to change. Companies can plan their affairs with some degree of certainty when they operate in stable environments. Therefore, an ideal political climate for an international company is a stable and friendly environment. Stable political systems and their governments provide continuity. Continuity means stability: continuity of laws, of rules, of regulations in a country provides a stable political environment desired by companies. Political stability can shift to political instability because of change. When the interaction between the key players on the political arena in a country and their outcomes are unpredictable, we meet political instability. Change is the main source of political instability and political risk. Change can occur as a change in government that will bring new political parties or as a change in the political philosophy through new policies of the same party. Such changes are seen as being customary for developing countries, but do not happen only there. And we have here the example of the Norwegian government that had a sudden change of policy. At the beginning of 1980’s an American company went to Norway to exploit petroleum in the North Sea. It wanted to form a joint venture: the American company would come with the technology and Norway had to come with an amount of capital. But the Norwegian government said that does not have the money, and ask it from the American company. The American company gave them the money with a low interest rate of 6 % in exchange of receiving a tax exemption on profits. In the meantime the price of oil grew and the Norwegian government thought that the American company was doing a lot of money and that they do not need a tax exemption. Consequently, they change the law retroactively. The American company complained that the measure was not constitutional. Probably this was forbidden in the American Constitution but was not in the Norwegian Constitution! This was a matter of political stability! Political stability is influenced by political parties, their philosophies, interests and their actions, by nationalism and by pressure groups. In order to assess the political stability of a country the company should look at:

4 the type of political system: single party system (communist regions –Mexico),

1 Cateora Ph. and Graham J., 1999, Op. Cit, p. 145.


dual party system: USA (Republicans, Democrats), UK (conservative, labours). Their ideology is not divided. They rather have different constituencies,

multi-party system (Italy, Japan, Romania) when continuity and stability suffers as there are formed coalition governments, in which different parties have different goals.

4 the longevity of the political system and parties, 4 the philosophies of all major political parties within a country, as any

of them can become dominant and to change the existing attitude towards foreign investment. For instance, in 1994 the Chinese government announced that they would not approve any more joint ventures in the automobile industry for up to three years and new car manufacturing plants will be approved only if they buy at least 40% of their components in China and increase this domestic content up to 60% in three years.

As usually businesses operate in a country based on the decisions taken by its government, it is important to try to understand the governmental behaviour and its actions. A government’s actions have their bases in the self-interest of the government and consequently the study of the possible governmental interests or national interests is useful, as they can either favour and encourage or limit or discourage a business. Jeannet and Hennessey2 see as typical goals of governments the following:

self preservation, as primary goal of any entity including states and governments.

security, as each entity seeks to maximize the opportunity for continued existence and to minimize outside threats.

prosperity, as the improvement of living conditions of the citizens of a country is a concern for many governments.

prestige is sought for by many governments, as a means for reaching other objectives or as an end in itself.

ideology is often protected and promoted by governments. cultural identity is also protected by governments through their

interventions.

2 Jeannet J.P. and Hennessey H., Op.Cit. , p. 119-126.


Nationalism is another source of political instability and it refers to an intense feeling of national pride and unity and in its extreme form is the chauvinism. Nationalism can take anti-foreign business forms. We remember the Romanian slogan from the beginning of 1990’s: “We don’t sell our country!”. The effect of nationalism on foreign production is the same whether the country is industrialised or developing. In the past feelings of nationalism were very strong in developing countries and many governments acted against foreign companies. For example, between 1960-1990 a total of 1535 firms from 22 countries were expropriated by 76 nations. Today the attitude had changed and foreign investors are seen as a source of capital and technology for the needs of different developing countries. Government rules and regulations. Governments use a variety of policies, programs, laws to pursue their economic and other interests. These policies and actions can affect to a large extent the operations of businesses domestic or foreign in that market. Possible governmental policies, regulations and actions of interest to the international marketer are:

import restrictions, local content laws, governmental procurement, governmental subsidies, operating regulations tax controls, investment regulations (ownership control), exchange controls.

1. Import restrictions regulate the transfer of products and services and have the purpose to protect local producers by diminishing competition from imported products and by trying to force foreign investors to purchase more materials from the country. The most common forms of import restrictions are the tariffs and the quotas. Import duties raise the price of the imported goods, so that the domestic products have a relative price advantage. Import quotas are used to avoid excess dependence on any one country, especially for food. The total embargo for imported goods is a specific type of quota. Up to 1993, Japan imposed an embargo on rice imports, justified by the superiority of the Japanese rice over foreign rice, a very important aspect as rice was sacred and represented the soul of the nation. When the local crop was poor in 1993, the government was forced to lift the embargo on imported rice. This came to the advantage of the Japanese


consumer who noticed that imported rice was cheaper than the local protected rice, and they could not make the difference in quality3. 2. Local content laws. Local content laws require a percentage of a product sold in the country to have local content. For instance, in the European Union the local content requirement is of 45 % for foreign assemblers. This means that both domestic and foreign companies have to procure their raw materials and other materials in a 45% proportion from the region in order to be able to sell in the EU market. This can affect costs and further prices. Similarly, in the NAFTA countries 62% of all cars content should come from the member countries. 3. Governmental procurement. Buy local restrictions appear usually in case of governmental purchasing. Governments can use their purchasing power to favour local companies over foreign importers. 4. Governmental subsidies and incentives Subsidies are given by the host governments in order to encourage exports of local companies. Export is considered to be beneficial for a country as it creates jobs and brings revenues to the country and sometimes is encouraged by governments. Subsidies are a way in which governments support usually local industries. Subsidies can be direct (by offering 1$ for each exported product for instance) or indirect (by supporting a component of the exported product, such as the cotton to produce garments that will be further exported). Incentives are given by the host governments to attract foreign companies to that country. They can take the form of tax exemption or reduction, no tariff imported products, part components or equipment. 5. Operating regulations for foreign investors. Host governments can influence directly the operations of foreign subsidiaries by imposing specific conditions on the company’s operations. India is one country were over time there were many restrictions on foreign imports, investments and foreign operations. In India companies are not allowed to either close down the factory or sack employees without the government permission. Also the 1994 Indian government allowed Pepsi-Cola to establish a joint venture for bottling the refreshment drink, but one of the conditions was to use a local brand name and not the Pepsi Cola brand name, as they believed that global brands gave an international marketer an advantage over the local companies. Therefore, Pepsi Cola was sold in India under the name Lehar.

3 The Economist, 23 April 1994, p. 66; Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 175.


Some countries may control prices for products such as food, gas, pharmaceutical in order to control the cost of living in periods of inflation. The determination of maximum price level, may affect substantially the company’s profits and finally determine its exit from the market. 6. Tax controls refer to increased income taxes for foreign profitable companies when countries wish to increase their incomes. This will increase the price of the product and make it uncompetitive. Differential interest rates for loans can also be used by local financial institutions and governments to favour local companies and put foreign companies at a disadvantage. 7. Investment regulations such as ownership control may be applied in case of products seen as being part of the national wealth: land, natural resources. In India, there was a ceiling of 25% for each investor willing to buy shares in the state-owned petroleum companies that were privatised4. As a general trend in 1960s –1970s many countries tightened their conditions on ownership control, but in 1980s and 1990s a liberalization of both trade and foreign investment took place as the contribution of foreign capital and technologies to a country’s development has been recognized. 8. Exchange controls stem from shortage of foreign currency of a country and envisage to conserve the supply of foreign currency by limiting or totally restricting the currency exchanges. It was the case in 1992 when the Stolojan government in Romania limited free currency exchanges for a short period of time in order to preserve the Romanian hard currency reserve. For the foreign company this raises the issue of profit repatriation on the one hand and of the availability of hard currency to import other components for production, on the other hand. The international agreements with influence over a business and the climate in which it functions are the economic agreements (such as the forms of economic integration) and have been discussed under the economic environment or other type of agreements of different international organizations and they have been discussed under the legal environment.

4 Kotabe M. and Helsen K., Op. Cit, p. 122.


6.3 Political risk assessment

The political risk is the risk of change in government policy that will have a negative impact on the company’s ability to operate effectively and profitably. Or a more detailed definition says that the political risk is the possibility that political decisions, events or conditions in a country will AFFECT THE BUSINESS CLIMATE in such a way that investors will loose money or not make as much money as expected when making decisions to invest5. For instance, in 1994 Brazil suddenly raised the tariff for imported cars from 20% to 70%. This made the price of imported cars to increase dramatically, and an average priced Volvo ended being priced at 85.000$ damaging the company’s positioning strategy in the market. The companies that had local production facilities like Fiat and Ford had a clear cost advantage, and little competitions from external producers6. There is political risk in any country, but the range of risks varies widely from one country to another. Generally speaking political risk is lower in countries that have a history of stability and consistency and is higher in countries that do not have such a history of stability.

Given the existence of political risks when going internationally, the process of political risk assessment before entering a foreign market and during the operations in that market is a necessity. Political risk assessment can have as objectives either to know about any possible instabilities of governments and political climate to decide if to place new investments in that country or not, or to monitor the existing operations and their political climate in order to decide over future courses of action. When assessing the political risk, the answer to the following questions should be looked for by the international companies:

1. How stable is the host country’s political system? 2. How well is the host government enforcing and respecting specific

rules such as ownership or contractual rights, in the context of its own ideology?

3. How long is the government likely to remain in power? 4. How would the rules change in case of change of the present

government? 5. What changes are expected in the specific rules that are to be changed? 6. If changes are to occur what actions should the company take?

5 Howell, L .D. , The International Executive, Vol. 34 (6), December, 1992, p. 485-489. 6 Kotabe M. and Helsen K., Op. Cit., 121.


The forms of political risks that a country may face in a foreign country range from simple forms, such as customs delay, problems in obtaining working visas to the most extreme forms that is the loss of control over assets and ownership. The governmental policies, rules and regulations are measures taken by the political world that have effects mainly in the economic sphere. Therefore, we can say that the main forms of political risks in a foreign country are:

• Loss of control and ownership. • Political sanctions such as embargos. • Interest groups’ actions such as boycotts. • Governmental policies rules and regulations.

The loss of control and ownership are usually due to dramatic political changes, such as coup-de-etat. There are three main processes through which the loss of control and ownership occurs. Confiscation refers to the takeover of the company’s assets with no compensation at all or the seizing of the company’s assets without payment. Expropriation refers to the takeover of the company’s assets with some compensation or the seizing of the company’s assets some reimbursement, that it is usually a lot under the market value of the company or the assets seized. There is also the phenomenon of nationalization that refers to the process through which a government decides to take over ownership of an industry, from both local and foreign firms, in order to control that industry. Usually the respective industry is considered a strategic industry that contributes to the economic sovereignty of the country and companies do receive some level of compensation. Domestication refers to the process of gradually transferring the control and the ownership from the foreign investor to the locals. Imposed domestication can manifest through:

a large number of nationals at top management level in the company. This will increase the decision – making power of locals,

a large number of local employees. These local employees might need training of years for specialized jobs,

greater locally produced components. Such local content requirements may force a company to use inputs of higher costs or lower quality, making the products uncompetitive,

the foreign investor may be forced to sell shares of stock to local investors at a pre-determined price.


Political sanctions such as embargoes that can be imposed by a nation or a group of nations towards another nation, by stopping all trade with the boycotted nation. We have discussed them under the home country political environment. And we have the examples of the long term boycotts of USA with Libya, Iran, Cuba. Interest groups can also put pressures on a company’s activity and launch boycotts against it. We have exemplified under the home country environment. Similar actions can occur in the host countries as well. One of the most mediatized boycott was the boycott launched by the Arab League in 1970’s - 80’s against companies dealing with Israel. In 1997 the German drug company Hoechst AG wanted to launch in the USA market an abortion pill. Because abortion is a politically sensitive issue in USA, protests began against the arrival of the pill, and a coalition of anti-abortion groups tried to boycott other 11 drug products sold by the company in USA. A more recent example is the boycott of the French products in the USA market due to differences in opinion regarding the invasion and the war launched against Iraq in 2003. The rules, regulations and actions are a major source of risk and they have been discussed under the political environment of the host countries.

The political risk can be assessed either in house based on a model development by the company or based on external sources, specialised in assessing political risk. Bradley7 presents the political events that were introduced in the calculation of the Feierabend political risk index in 1970s:

1. Elections 2. Vacation of office 3. Significant change of laws 4. Acquisition of office 5. Severe trouble within a non-government organization 6. Organization of the opposition party 7. Government action against significant groups 8. Micro strikes 9. General strikes 10. Macro strikes 11. Micro demonstrations 12. Macro demonstrations

7 Bradley F., Op. Cit, p. 165.


13. Micro riots 14. Macro riots 15. Severe macro riots 16. Arrest of significant persons 17. Imprisonment of significant persons 18. Arrest of few insignificant persons 19. Mass arrests of insignificant persons 20. Imprisonment of insignificant persons 21. Assassinations 22. Martial law 23. Execution of significant persons 24. Execution of insignificant persons 25. Terrorism and sabotage 26. Guerrilla warfare 27. Civil war 28. Coup d’etat 29. Revolts 30. Exile

In recent years such extreme events as the ones presented in the above political index are less frequent and are encountered in less and less countries as compared to 1970s and 1980s, mainly developing countries. The political risk in developed countries is given mainly by the governmental rules, regulations and actions. However, conflict and violent change it is a major political risk. The company has to seriously consider if either to enter or not countries were the likelihood of violence is high. When guerrilla wars, civil disturbances and terrorism takes place in a country, it is a possibility that violence to also be directed towards a company’s property and employees. In 1991, Detlev Rohwedder, the chairman of the German Treuhand, the institution in charge with the privatisation of the former state companies of East Germany, was assassinated by the Red Army Fraction because he was a “representation of capitalism”8. McDonald’s establishments (seen as a symbol of USA) have been many times ravaged and burned in different countries due to anti-USA feelings. Figure no. 6.2 presents an evolution of the terrorist acts at world level over a number of years. The largest number of terrorist acts in period 1998-2003, took place in Latin America, peaking in 2001 with 201 terrorist attacks, followed by

8 Czinkota M.R. and Ronkainen I.A, Op. Cit., p.174.


Asia and Middle East. The highest number of casualties in the period 1998-2003 were in USA with September 11th attack followed by Africa. The highest number of facilities struck were businesses, as opposed to diplomatic, governmental or military facilities.

Figure no. 6.2 International terrorist incidents in the period 1982-2003

Year Number of terrorist acts 1982 500 1983 506 1984 565 1985 635 1986 612 1987 665 1988 605 1989 375 1990 437 1991 565 1992 363 1993 431 1994 322 1995 440 1996 296 1997 304 1998 274 1999 395 2000 426 2001 355 2002 205 2003 208

Source: http://www.state.gov/www/global/terrorism

Political vulnerability plays an important role in appreciating political risks both in developing and developed countries. When assessing political vulnerability in a country, the product itself plays an important role. Some products are more politically vulnerable than others. Products that are perceived to have an effect on environment, national and economic security, welfare of people and are subject of public debate are more likely to be politically sensitive and to receive more political attention. Health products are an example and we have seen the example of the abortion-pill on the American market. Food products are another example and we have seen the case of Nestle in the third world countries.

http://www.state.gov/www/global/terrorism


Favourable political attention can mean protection, reduced tax rates, exemption from quotas and any other forms of protection for local products and can lead to labour agitation and different forms of governmental harassment in the case of undesirable products. For instance, the production and sale of missiles and missile technology can bring about political sanctions.

6.4 Reducing the political risk

In spite of the political risks, companies will still exploit opportunities that a particular market offers. Although there are countries in which, the political risks are extreme, most countries have a moderate political risk. The company should look for ways to be accepted politically by the host country and to lessen the political risk.

1. One way to reduce political vulnerability is to be a good corporate citizen. A company is a good corporate citizen in a country if it helps the country to achieve progress. Companies that are good corporate citizens have a good relationship with the government and use locally produced products, transfer capital, technology and skills into the country, create jobs, make tax contributions and support cultural events. For instance, Pepsi-Cola sponsored opera and ballet in Argentina, Coca-Cola supports education in Romania.

2. In spite of efforts of being “a good corporate citizen”, long term solutions to politically hostile environments are those that reduce their risk. These include9: a. Forming joint ventures with locals as this helps to diminish anti-

multinational feelings. Also partnering with locals that have excellent contacts among the host country governing officials is another possibility.

b. Expanding the investment base by including more investors and banks in the financing of the investment, diminishing the risk in this way. If the banks have made loans to that particular country that threatens with expropriation the power of the bank can be used.

c. Local borrowing is a way of financing local operations from local banks. If the government expropriates the company, creates problems to its own financial institutions. Government are reluctant to create problems to its own institutions and this comes in the favour of the international company. Local borrowing is not always possible due to restrictions imposed towards foreign companies.

9 Cateora Ph. and Graham J, 1999, Op. Cit., pp. 158-159; Jeannet and Hennesey, Op. Cit, p. 149-151.


d. Licensing of technology for a suitable fee, can be used when risks are high and the company does not want to invest the money or when the technology is unique and the host country wants the technology.

e. Planned domestication may be adopted by companies in order to reduce risks. They would gradually support locals in participating in all phases of the company operations. The parent company would still have a reasonable control even though nationals would take important decisions in management and ownership. It was noticed that company trained nationals tend to have strong corporate views rather than a national perspective.

f. Minimizing fixed investments can be used to diminish risk as political risk is related to the amount of capital invested. The lower the invested capital, the lower the risk as the exposed assets are kept to a low level. Leasing equipment can be a solution instead of buying the equipment.

g. Horizontal integration. Companies that have specialized plants in various countries encounter less political risks than those that have integrated, independent plants in each country. In this way economies of scale can be obtained at the local plant. Further, the risk can be reduced by having at least two plants that are engaged in the same operation in two different countries.

3. Political payoffs refer to the process of paying those in power (officials) to intervene in favour of the international company. OECD countries are not allowed to use political payoffs. Korea is a country known for using this method when going internationally.

4. Political risk insurance is an option for the companies from developed countries, whose governments created systems for insuring against political risks, when going internationally. In USA for instance, exist both governmental and private sources for international protection. In 1969 the Overseas Private Investment Corporation (OPIC) was formed in order to facilitate the operations of USA firms in developing countries10. OPIC offers three types of insurances: currency inconvertibility insurance, expropriation insurance and war or revolution insurance. In Germany there is the Hermes Kreditanstalt that provides exporters with insurance. Usually insurance policies cover only the actual loss, and not the lost profits.

10 Jeannet J.P and Hennessey, Op. Cit, p.151.

External markets selection and market entry We have been presenting so far the macro-environment of foreign markets and the variables that a firm would be interested to study in order to know the foreign macro-environment. Further on we will see how the aspects discussed so far (meaning all aspects of the foreign environment: economic, political, cultural and legislative) are used to assess market opportunities and to select markets. The external market selection process is very important for the company that is willing to internationalise for a number of reasons:

/ the errors that occur in an international environment are more expensive than the errors that take place in the internal market

/ by choosing wrongly a foreign market, the company pays two types of costs: a) the effective cost of the unsuccessful try to enter the foreign market and b) the cost of the lost opportunity, by loosing the occasion to enter a market in which the company could have been successful.

This chapter discusses the possible approaches that a company can adopt when going international, the market selection process and market selection methods and techniques.


7.1 Market selection approaches A company may use one of the following approaches to market selection: the systematic approach, the non-systematic approach and the relational approach. The systematic approach is encountered when the selection of markets takes place based on a planned and well structured process through which countries are compared and then selected. The non-systematic approach (that is also called the opportunistic approach) depicts the situation when a company internationalise because receives some external stimuli that indicates some opportunities abroad: such stimuli are orders for the company’s products or requests for information about the company’s product from foreign potential clients, clients with which the company does not cooperate at present. The relational approach is the approach in which the company bases its internationalisation process on the relationship it has with companies or partners from foreign countries.

7.1.1 The systematic approach The systematic approach compares in a systematic way and prospects markets by setting market selection criteria based on which the foreign markets potentials are searched, countries are classified and grouped and are selected those countries with the highest market potential that correspond to the strategies and future intentions of the company. The systematic approach is a rational decision making process that has a normative nature, it prescribes how things should be done in order to select a market. A systematic approach to market selection is recommended in order to diminish the risks of errors. 7.1.1.1 The market selection process As part of the systematic approach, the market selection process has been defined as a process of gathering information and screening countries by collecting data about countries and passing them through a number of filters in order to eliminate the less promising opportunities. Figure no. 7.1 presents the market selection process.

External markets selection and market entry

Figure no. 7.1 The steps of the market selection process Filter 1 MACROLEVEL RESEARCH = General market potential

* economic (GNP; GNP/capita; Income/capita) * political (political structure)

* demographic (total population; growth rate, structure) * social (religion, race) rejected * geographic (surface, climate, landscape) countries

Preliminary opportunities Filter 2 INDUSTRY LEVEL RESEARCH = The industry market

potential

* growth trends for similar products * cultural acceptance of the type of products rejected * taxes and duties for the category of products countries

Possible opportunities Filter 3 MICROLEVEL RESEARCH (MARKET

POTENTIAL FOR THE COMPANY) = Expected company

profit

* competitors * market entry costs, ease of entry rejected * forecasted sales countries

Probable opportunities Filter 4 COMPATIBILITY WITH THE FUTURE COMPANY STRATEGY

* resources Country * objectives, strategies priority list

Source: Figure adapted after Jeannet J.P. and Hennessey H.D., 1988, International Marketing

Management, Houghton Mifflin Company, p. 139.


1. Filter 1 is the evaluation of the general potential of the market (the

macrolevel research). The first stage of the market selection process uses macro variables in order to filter the countries. At this stage the general market potentials are evaluated in terms of economic activity, social forces and political structure. The macro indicators used to assess the general market potential are: economic indicators, political indicators, geographical indicators and demographic indicators. Most of these indicators have been discussed under the type of environment they are part of, but we will shortly present them here in the context of market selection. The macro indicators generally show what is the general potential of the market. They are used in the first stage of the market selection as data are readily available and can be used to quickly eliminate countries with little or no potential demand and with excessive risks. The economic indicators such as total GNP, GNP/capita show us what is the wealth of a country. The wealth of a country determines the purchasing power and the consumption patterns, that are of primary interest for the international marketer. Per capita income is an indicator of people’s earnings in that country, but the income distribution is another very important indicator, as it shows the number of persons who actually earn much enough to buy the company’s product. For instance, if in a country with a per capita income of 3000$, only 10% of the population gets most of the country’s income and the rest lives in poverty, the potential size of the market for house product (cookers, fridges) will be the 10% of the population. It is the case of the bipolar societies. If available, the household or personal disposable income is another valuable indicator that shows how much on average may a household spend. It is the income after tax. The indicator discretionary income shows how much is left after they fulfil the current necessities. These indicators are available mainly in developed countries. The macroeconomic indicators will indicate if the country is too small, to be considered (GNP may be large enough but disposable income too low). Geographic characteristics, such as size of the country, the climate conditions and topographical characteristics are taken into consideration in order to evaluate the possibility to serve the market segment. Also characteristics such as natural resources and energy are of interest in the case the company wishes to produce locally.


Political indicators try to measure the political risk, as political instability can remove a country from the screening process right from the first stages. The political risk tends to be more subjective than the quantitative indicators of the market size. However, marketers can use a number of indicators to assess the political risk: the probability of nationalization, the number of expropriations, the political executions, government interventions, limits on foreign property, restrictions on capital movement and others, industrial disputes. There are syndicated services that rate political risk: the World Political Risk Forecast by Frost and Sullivan or the Political Risk Index of the Economist Intelligence Unit. Data provided by such organizations are good in the long term, but they cannot predict critical events that occur in different countries (such as the invasion of Kuwait in 1991 or the collapse of the Berlin Wall in 1989). The company has to be attuned to such current events in the countries of interest, as they have a profound impact on the business.

Demographic characteristics. Demographic statistics will show the market potential as population is an indicator for market potential for many consumer goods, age structure will also show the size of the market taking into account the age market segment we are willing to serve. Again countries that do not have a largely enough population potential can be eliminated market. The countries that do not have a large enough general potential are rejected and the countries that remain are considered to be preliminary opportunities and are passed further to be researched in more detailed.

2. Filter 2 consists of the evaluation of the general potential of the market related to the product (industry level research). Through this filter all the countries that passed the previous filter, the ones that had a large enough general market potential, are evaluated further in order to evaluate the potential market size for that particular type of product. The stage is also called the evaluation of the potential in the industry and will show the marketer how many products of that type the market can absorb. At this stage micro indicators are used to estimate the market size for that particular type of product. The micro indicators are specific to the product and they indicate the actual consumption of that type of product in the country. When consumption figures are not available the marketer can evaluate the market size by looking to local production as well as the imports of that specific product. Therefore, micro-indicators to be looked at can be the consumption or the production and imports of radios, passenger cars, coffee, rice, alcohol beverages, etc or the consumption of electricity, of gasoline, or the number of hospital beds,


the number of farms, the number of tourist arrivals etc. These indicators are specific to the company’s product. By looking at the consumption figures, the company will have an indication over the perceived need. Sometimes the actual consumption statistics may not be available for a certain product, and in this case proxy variables are used: consumption of similar, substitute products, complementary products. For instance, the number of farms may indicate the potential demand for tractors or in order to determine the market for medical equipment, marketers may use the number of hospital beds or the number of doctors per 1000 inhabitants as a proxy variable, the number of tires consumed after the number of cars. Other indicators to be studied at this stage relate to:

( taxes and duties requirements, as a high custom duty for the company’s product may eliminate a country from the screening process, if the company does not want to manufacture locally.

( the cultural acceptance of the product is also taken into consideration at this stage. Indicators might indicate a good general market potential, but the cultural acceptance of the product might be low and consequently the product market potential will diminish. For instance, swimming suits or alcohol in Muslim countries.

The potential market size in the industry will be appreciated based on the current size and on the growth rate. The countries that do not have market potential for that type of product are rejected and the remaining countries after this second filter are possible opportunities and are studied further.

3. Filter 3 is the evaluation of the company’s sales potential (microlevel research). In the third stage of the selection process, the potential sales of a company’s product in a foreign market are evaluated. After the general market potential of a number of countries was evaluated and the attractive ones have been retained and have been evaluated from the industry potential point of view, at the third filter stage, the evaluation shifts from the evaluation of the market potential towards the potential profitability of the company and the size of the market for the specific product of the company. In order to evaluate how much the company can sell on the respective market, aspects such as the competitors, the ease of entry, the cost of entry will be considered. At this stage the company tries to forecast the sales and the potential profits.


The competitive structure of foreign markets it is difficult to determine and that is why it is usually left for the last stages of the screening process, when only a limited number of countries are screened. The company has to find out what is the number of competitors in the market, what is their size, what is their origin, either local or international and what is the quality of competition. Sources that can be used to gather information about competitors are: research reports of research organizations1, Chambers of Commerce, as secondary data, as well as from primary data collection from potential consumers, distributors, trade officials. How much is going to cost the company to enter that market given the investment needed and the local costs, the taxes of the country and the entry procedure? Given the cost of entry and the expected sales, the company will try to forecast what is the expected profit. Both quantitative and judgemental ways to evaluate the expected profits can be used. The countries where the company does not expect to sell enough are rejected and the countries considered to have sales potential for the company represent the probable opportunities and will be further researched.

4. Filter 4, the last stage of the selection process takes into consideration the corporate factors influencing the decision (the compatibility with the strategy of the company). At this stage countries are ranked based on corporate: resources, objectives, strategies. For instance if, South Africa has an expected potential equal to Venezuela, Venezuela may be given priority if the company’s strategy is to enter later Columbia and Bolivia. After the last filter a list of country priorities results and this is used to make the final decision. 7.1.1.2 Market selection methods It is also of interest to look to a few MARKET SELECTION METHODS that the company can use in order to systematically select markets: the listing of selection criteria, the scoring market selection model and the compensatory model.

1. The listing of selection criteria The listing of selection criteria method consists of developing a set of criteria and certain level limits (minimum or maximum) for these criteria required for a country to move through the stages of the screening process. The levels (limits) for each criterion will be established by the management according to what they consider acceptable or not in respect of a certain aspect. 1 The international Market Research Mall publishes an online listing of the available research reports at:

www.ecnext.imrmall.com .

http://www.ecnext.imrmall.com/


We have here an example of using this method for a dialysis equipment (the model was used for the external market screening process by an USA company in 1980’s). Figure no. 7.2 presents the model. Figure no. 7.2 Screening process to target countries for kidney dialysis

equipment

FILTER 1: Macro-level research Gross Domestic Product over $15 billion Gross Domestic product per capita over $1500

FILTER 2: General Market Factors Relating to the Product

Less than 200 people per hospital bed Less than 1000 people per doctor Government expenditure for the health care over $100 million Government expenditures for health care per capita over $20

FILTER 3: Micro Level Factors Specific to the Product

Kidney-related deaths over 1000 Patient use of dialysis equipment over 40% growth in treated population

FILTER 4: Final Screening of Target Markets

Number of competitors Political stability

Source: Jeannet J.P. and Hennessey H. D., 2001, Global Marketing Strategies, Houghton Mifflin Company, p. 181.

At the first stage minimum levels of the GDP ($15 billion) and the per capita GDP ($1500) are established by the management, levels considered to be large enough to allow governmental expenses for dialysis equipment. The lower the GDP/capita in a country, the lower are the expected governmental expenditures for the health system and consequently for dialysis equipment. The remaining countries are the preliminary opportunities and they will be passed through the second filter, the evaluation of the type of product market potential or the industry potential, in our case the health industry. A number of indicators will be studied, indicators related to the product. Dialysis is a complicated procedure that needs specialized personnel to conduct it. In order to conduct such procedure a country needs a high level of specialization. The higher levels of medical concentration, the higher the chances for medical specialization.


Therefore, by looking at indicators such as the number of people/doctor and the number of people/hospital bed, we can evaluate the level of medical development. Indicators such as the governmental expenditure for health, total and per capita, whose lower level (limit) is established by the management are important, as countries that do not invest in health care tend not to be interested to make more substantial investment in specialized programs. The next stage, filter 3 will take into consideration indicators specific to the product, such as the number of deaths related to kidney problems/1000 loc. This indicator gives an indication over how many people could have been treated. It is not enough for people to die from kidney diseases, but they also have to be treated in order to have market potential in that country. Therefore, a minimum 40% annual growth in the number of patients suffering from the disease, who use the equipment, was considered an acceptable level. Filter 4, the last stage of this screening model, took into consideration the competitive structure of each country and the political stability.

2. The scoring market selection model The scoring model or the scoring technique consists in using a number of indicators that are compiled in a final score and that are given different percentages according to the degrees of importance assigned to each of them. In order to use this selection model, the marketer has to follow a number of steps:

1. The first step is to set the criteria based on which the selection will take place. The criteria can be grouped in broad categories, such as market characteristics (market size, buying behaviour) or entry barriers (tariff barriers, non-tariff barriers).

2. Set the ranking procedure. For instance, on a scale from 1 to 10, where 1 is the lowest and 10 is the highest.

3. Set weights of selection criteria. At this stage each indicator will be given a percentage according to its importance in the selection process.

4. Gather data concerning indicators. At this stage data will be collected for all countries of interest that are included in the selection process, according to the criteria set.


5. Calculate scores for each country. Based on all indicators, their

ranking (based on their sizes) and the importance given to them, the marketer will calculate for each country scores for each indicator that will be added up in a final score. See table no. 7.1.

6. The final stage will be to select the country/countries based on the rankings of the final scores.

Table no. 7.1 presents a hypothetical scoring market selection model for Europe. Based on this principle different scoring models can be constructed and used. We have here an example of a scoring selection model used by an USA can producer in 1980’s for external market selection. The model was called the customized weighted multivariate technique and it is presented in table no. 7.2.

In the hypothetical model presented in figure no. 7.1., there were six criteria used to select markets, namely the market potential, tariffs, non-tariff barriers, the product fit, the competitive intensity and the shipping costs. For each of them there have been established weights (W = 15%, 5% etc). “E” represents the estimates used for the ranking procedure, where 0 = very bad conditions, 1 = bad conditions, 2 = acceptable conditions, 3 = favourable conditions, 4 = very favourable conditions and “W x E” represents the weighted estimate for each indicator. At the end all weighted estimates for all indicators are added up in a final score for each country. Then the countries are ranked according to the size of the final score. When the differences between the final scores are higher, the selection decision is easier. When there are very close final scores (for instance 202 with 208), the company might take a multiple entry decision or it can group countries in groups with similar scores. Further on, the countries can be treated as a group or the selection process can be continued by introducing more criteria, in order to differentiate the countries.

Table no. 7.1 A hypothetical scoring model for international market selection

Selection criteria

Market potential

Tariffs Non-tariff

barriers Product

fit Competitive intensity

Shipping costs

Weights W=15 W=5 W=17 W=25 W=22 W=16 Countries E WxE E WxE E WxE E WxE E WxE E WxE

Final score Max 400

Rank

Denmark 2 30 2 10 1 17 3 75 1 22 3 48 202 4 Sweden 3 45 4 20 3 51 2 50 2 44 3 48 258 2 Norway 2 30 3 15 2 34 3 75 1 22 2 32 208 3 Finland 4 60 4 20 3 51 3 75 4 88 1 16 310 1 Portugal 0 0 3 15 1 17 0 0 2 44 2 32 108 5 Spa in ….


Table no. 7.2 The customized weighted multivariate technique

for a can producer

Payback index Percentage Desirability index Percentage Political stability 26.0 Quality of infrastructure 13.6 Political freedom 7.0 Availability of financing 10.1 Civil liberties 7.0 Labour situation 9.1 Quality of infrastructure 6.7 Market growth 8.6 Nationalization probability

6.3 Currency convertibility 6.6

Desire for foreign investment

5.6 Per capita income 7.1

Bureaucratic delays 5.4 Market size 7.1 Market size and growth 4.4 Inflation 6.8 Inflation 3.6 Physical quality of life 6.0 Labour situation 3.5 Bureaucratic delays 5.1 Currency stability 3.3 Enforceability of

contracts 4.4

Balance of payments 3.3 Balance of payments 3.4 Availability of financing 2.4 Currency history 3.2 Restrictions on capital movements

2.3 Corporate tax level 2.2

Government interventions

1.5 Local management 2.0

Limits on foreign ownership

1.4 Cultural interaction 1.7

Cultural interaction 1.4 Government intervention 0.8 Corporate tax level 0.8 ………… …………..

Source: Douglas S.P. and Craig C.S., 1983, International Marketing Research, Prentice Hall, p. 289-292.

We have here the example of an USA company that developed in 1980’s two customized indices in order to evaluate and select markets:

& the index of desirability, & the payback index (risk).

Each index comprises a number of indicators that have different weights according to the importance given to them by management. A number of factors are used in both the risk and the desirability index, as they can represent both a risk factor


and a desirable factor according to their evolution. But they have different weights in the two indices according to the contribution they bring to the country risk or country desirability. For instance, the quality of infrastructure is the most important variable (13.6% degree of importance) in considering the desirability of one country (as they are going to have an extensive distribution), meaning that a good infrastructure of a country will increase its desirability index, while in the risk index, there are other variables more important in evaluating the country risk, meaning that a bad infrastructure will affect less the risk (payback) index. The higher the desirability index, the more desirable is the country. The higher the risk/payback index, the less desirable and the more risky a country is. Obviously the most developed countries will always score the highest, therefore is recommended that the method to be used on groups of countries, in order to differentiate them within the group. 3. The compensatory model This is a new model that proposes the use of two key constructs, a trade-off between demand potential and trade barriers in the context of the firm strategy. Through this model the company will screen many markets directly at industry level. It is a compensatory model because is trying to compensate, to express a trade-off between pluses and minuses, in our case between the demand potential as a plus and the trade barriers (as a minus) for the countries under review. The model is suitable to systematically screen markets in order to internationalise by exporting. The two constructs used by the compensatory industry model are the demand potential and the trade barriers, each of them being formed of four variables. The two constructs are built for each country and are evaluated in the context of the company’s strategy. Figure no. 7.3 presents the synthesis of the compensatory model. The demand potential construct will be built based on four variables, namely the apparent consumption, the import penetration, the origin advantage and the market similarity. The apparent consumption refers to how much a country consumes from a certain product. The consumption of a product is a good indication for the market potential in that country, as it can be sold on the market according to how much they consume. A country will consume from a product how much it produces locally to which will be added how much it imports from that product and will be deducted how much it exports towards other countries. Therefore, the apparent consumption is calculated as the domestic production plus the imports minus the exports of that product.


Figure no. 7.3 The demand versus barriers compensatory model Demand potential Apparent Origin advantageconsumption Import Market similaritypenetration

Trade barriers Tariff Geographic barriers distance Non-tariff Exchange rate barriers

Strategy

Defensive Offensive

International market selection

Source: Papadopoulus N., Chen H. and Thomas D.R. ,”Toward a trade-off model for international market selection”, International Business Review, vol. 11, 2002, p. 170. The import penetration is the second variable included in the demand potential construct. Import penetration shows how much from the apparent consumption comes from imports. A high percentage of imported goods will show an openness of the market toward foreign products. On the other hand it can also indicate a low competitiveness of the domestic producers, signalling an attractive target market. Further on, the origin advantage variable, will show how much from the imported goods originated in the country of origin of my product. A high share of the country of origin in the total imports of the targeted country, shows that the company has a number of advantages in that country. Such possible advantages are:

other exporters from the country of origin can help with market information,

there is already a favourable image of the products coming from the country of origin (in a given industry),

there are strong trade relations between the exporting and the importing countries that result in a greater trade promotion effort at local foreign level.


Market similarity is the last variable of the demand potential construct, the one that shows the pluses of the external markets. Market similarity is considered based on the idea that demand tends to be higher in markets that are similar to the market where the product was initially developed. High similarity between markets reduces usually the risk and the uncertainty. It is calculated as a compilation of a number of indicators such as life expectancy, GDP/capita, electricity production, percentage of imports in GDP. The trade barriers construct is also formed of four variables: the tariff barriers, the non-tariff barriers, the geographic distance and the exchange rate. Tariff barriers can influence market selection either positively or negatively. The lower the tariff barriers, the more attractive the market is. Tariffs influence the exporter’s prices and the pricing strategy of the company on that market. In this model tariff barriers are measured by the weighted mean annual tariff rate over the studied period. The non-tariff barriers are in many cases more important than the tariff barriers in exporting. They refer to:

/ Quotas. Governments can impose limits or restrict the number of units or the total value of a product or product category that can be imported in the country.

/ Trade control. The state can control the trade with certain commodities when monopolizes it. It is the case of Sweden, where the Swedish government controls the import of all alcoholic beverages and tobacco products.

/ Voluntary quotas. These are encountered when exporters voluntary agree to restrict its exports to a certain amount or quantity. Japan voluntary restrained its exports of cars to EU and USA and its exports of TV’s to USA.

/ Other non-tariff barriers such as custom procedures, administrative and technical regulations.

The larger such non-tariff barriers are the less attractive the market becomes. And the low overall incidence of non-tariff barriers suggests an openness of the market. As we have seen most of the non-tariff barriers are qualitative and it is needed a quantification scheme in order to include them in the compensatory market selection model. Papadopoulus et al. suggest the quantification of the non-tariff barriers by developing a composite index that consists of the 20 barriers items


in the World Trade Organization’s Trade Policy Review, by weighting each item by its frequency of occurrence in the target market. The geographic distance is directly related to the transportation costs and can act as a major barrier through its effect on the export price. The higher the geographic distance is the higher the cost of transportation and the less attractive the market is. In the barrier construct it will be included as the mileage between exporting and targeted countries. The exchange rate is the last variable in the trade barrier construct of the compensatory model. Exchange rates are volatile and currency exchange rates between exporting and importing countries represent a major risk element in exporting as they can have a major impact on pricing strategies and the overall strategy of the company in the market. As measurement for the compensatory model it was considered the change in the official exchange rate as compared to the previous year. The two constructs that compensate one another will be used for market selection differently by different companies, in concordance with the strategy they follow, either an offensive or a defensive strategy. The companies that will follow an offensive strategy will seek growth at the expense of the competitors and will value opportunities more than being concerned by risks. The companies that will follow a defensive strategy will concentrate more on preventing competitors from grabbing their market share. Each construct will be given a mark and for each country will be two scores, one for the market potential and one for the trade barriers. A matrix will be formed (see figure no. 7.4) and based on this matrix information the company will select the countries with the high market potential and the low trade barriers for its particular product. Figure no. 7.4 The final matrix in the compensatory model

Export markets High barriers Low barriers

High market potential XXXX Products

Low market potential


Talking about the systematic approach for market selection we have to mention that there are syndicated sources that evaluate country risks and offer country indices. Such sources are BERI- Business Environmental Risk Intelligence, The Economists (EIU), the Moody’s, Standard and Poor’s and others. Such sources evaluate the country risk with its components: political, economic, financial. Table no. 7.5 shows some of the types of variables that are used when calculating different country risk indices. When using such country indices the company has to bear in mind that many of them are calculated in order to evaluate the financing risk2 and not the investment risk3. The type of information needed when evaluating the two types of risks is different and most of the country risks indices calculated by different agencies envisage the financing risk and not the business risk or the risk of investment. One agency that also develops market indices for market selection is the Economic Intelligence Unit (EIU). The EIU published for the last thirty-seven years market indicators that allow managers to quickly compare country opportunities. EIU combines statistical data by using a large number of variables in three main indices: market size, market growth and market intensity. The market size index measures the total potential of a market based on a number of indicators such as population (double weighted), urban population, private consumption expenditure, steel consumption, cement and electricity production, ownership of telephones, cars and televisions, buses, trucks, etc. The market growth is an indicator of the rate of increase of the market size. Is calculated by averaging the above mentioned indicators over five years. The market intensity is an index that measures the concentration of the purchasing power in a country or the richness of the country. It is calculated by averaging per capita consumption of different products (above mentioned) and the percentage of urban population –double weighted. The average world intensity is considered to be 1 and each country index is calculated in proportion with the world intensity.

2 The financing risk is the risk encountered when a fnancial institution lends money to a country/government. 3 The investment risk is the risk encountered when a company is willing to expand and invest in an external

market.


Table no. 7.5 Variables included in different types of country indices

Indices Variables included Standard and Poor’s Political environment (stability,

governmental alternation, system’s flexibility, political support, the orientation of the political parties). Social environment (standard of living, income distribution, labour market conditions, the urbanization degree, the literacy rate, the relations with the neighbours, frontier conflicts) Economic environment (international investments, GNP, exports, the economy’s structure, natural resources, currency regime, the taxes level).

Moody’s Political extremism, legislative system, political structure, income distribution, ethnical and religious differences, liquidity, the balance of payments, the independence of the Monetary Authority, interest rate, exchange rate, capital international flows, dependency on imports/exports, labour force mobility).

EIU The economic growth (GNP), inflation, external debt, the export degree of prelucration, unfavourable neighbourhoods, government legitimacy, army involvement in politics, ethnical tensions, internal conflicts.

At the beginning of years 2000, according to EIU market indices, USA, most of Europe and Japan were countries with large market sizes, low growth and high intensity, while countries such as China, Indonesia and Germany had high market growth and low market intensities.


When selecting market opportunities, every company has specific needs and interests. The syndicated sources of information are not usually relevant to the company’s product. They offer information about the general market potential, but not about the market potential for the company’s specific product. That is why there are firms that develop their own systems of country evaluation and selection based on a number of variables weighted specifically for that firm according to the importance given by management to each criterion. This is the approach that we recommend, to develop specific market selection models that will illustrate the market potential for the company’s specific product. Syndicated sources can be used in the primary phases of the screening process, when evaluating the general market potential. The systematic approach has a normative character, as it shows what companies have to do in order to select markets.

7.1.2 The non-systematic approach to market selection The non-systematic approach, also called the opportunistic approach occurs when a company enters in a foreign market as:

a consequence of receiving orders from abroad. In this case the selection of the foreign market is given by chance, not by an organized selection process. There is little or no information search, as firms are expanding internationally on an opportunistic basis.

or when markets are selected by rules of thumb. There were studies that showed that many, companies do not have a systematic approach to market selection, the explanations varying from the limited capacity of companies to collect the numerous necessary statistical data to the fact that companies generally use a more opportunistic manner when internationalising. The criteria used when selecting markets through the opportunistic approach are subjective. One of these criteria is the psychic distance. Many firms expand internationally at the very first stage based on the psychic distance. The psychic distance refers to those factors that are preventing or disturbing the flow of information between firms and the market and include aspects such as differences in language, in culture, in the level of education, in political systems or the level of industrial development. The smaller is the psychic distance the more attractive is the market and vice-versa.


This method is used by small companies at their first stages of internationalisation when they tend to approach the neighbouring countries, rather than large companies that usually search more thoroughly external markets before making the entry decision. However, generally speaking firms start their internationalisation process by entering those markets that they can understand more easily, meaning those with a small psychic distance, leaving the more distant markets for a later stage. While the systematic approach has a normative nature, as it tells how to select markets, the non-systematic approach has a descriptive nature, as it tells what companies have done when going internationally. Sometimes companies use a mixed approach to market selection. The mixed approach combines the two approaches discussed previously by transforming a non-systematic approach, an opportunistic approach into a systematic one. Once the order comes from abroad, the company realizes that there are opportunities abroad and starts searching for the best options.

7.1.3 The relational approach to market selection

More recently, as more importance is given to customer satisfaction and to relationship marketing, the relationship approach to market selection started to develop. In contrast to the other selection approaches that were focusing on selecting countries, the relational approach focuses on the business relationship and the foreign customer as the unit of analysis. Using this approach the company will focus on the decision process through which it identifies and selects exchange partners. In other words through this approach it takes place the assessment of potential international exchange partners and the screening process involves gathering information about each partner and filtering out the less desirable partners. Figure no. 7. 4 presents the model for choosing an international partner through the relational approach. The exchange partner screening process has three stages:

1. Awareness. At this stage the company searches in order to identify a number of feasible international partners. It uses many information sources, including the firm’s network. It will start by looking at those with which it has direct relations (customers, suppliers) and will continue later with those with which it has indirect relations (customers of customers and suppliers of suppliers). The company envisages to identify the skills and the qualifications of potential partners.


Figure no. 7. 4 The choice of an international partner – the relational approach

Awareness

Exploration Choice

Source: Figure adapted after Andersen P. and Buvik A., “ Firms’ internationalisation and alternative approaches to the international customer/market selection”, International Business Review, vol. 11, no. 3, 2002, p. 353.

2. Exploration. At this stage the company tries to identify which of the potential partners are attractive. The attractiveness of one partner depends a lot on his willingness to negotiate further. If the potential partner perceives as beneficial a future collaboration with the company, as the benefits of such a relationship exceed the costs of the relationship, this is a signal of attractiveness and further communication and bargaining is likely to occur. At this stage are considered obligations, benefits, burdens, attitudes and standards of conduct. There are also taking place trial purchases. The exploration stage can be very short, when one of the partners does not find attractive such a collaboration and prefers an alternative partner.

3. The choice of partner(s). This is the last phase when the company will select one or more partners by choosing among the existing alternatives. The company will use criteria such as goal compatibility and performance to make the decision. Usually these criteria are appreciated based on direct experience and each such screening process brings more experiential knowledge to the company.


This approach is usually used in the case of industrial markets and of institutional markets. Also, where the uncertainty of the environment is perceived as being high, it is more probable the use of a relational method for market selection rather than a traditional method.

Among the market selection approaches, the systematic approach is usually used by large MNC’s that are screening a large number of markets based on a large number of variables. The approach is used in case of non-contractual entry modes, such as export or investment. The relational approach is suggested in case of organizational customers, when there are envisaged high risk countries and when the company uses contractual entry modes such as licensing, franchising, production management.

7.2 Market entry strategies

The company that goes international has also to decide on the market entry strategy. The decision can take place prior to market selection and the selection process is done starting from the chosen market entry mode, or the market entry mode is decided according to the condition of each market. There are a number of aspects a company has to take into consideration when deciding on the entry mode: the internal or the firm-specific criteria and the external or the environment specific criteria. Table no. 7.6 presents the two categories of criteria.

External criteria Market size and growth: large markets (current size and potential future size given by the growth rate) justify major commitments. Risk: the greater the risk factor, the less resources are recommended to be committed in the country concerned.


Table no. 7.6 Decision criteria for mode of entry

Internal firm-specific criteria External environment specific criteria Company objectives Need for control Internal resources, assets and capabilities Flexibility

Market size and growth Risk Government regulations Competitive environment Local infrastructure

Source: Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 246-249.

Government regulations: such as trade barriers or local content laws can constrain the available options for the company. Local infrastructure: the poorer the local infrastructure is, the more reluctant the company is to commit major human and monetary resources. The external factors determine the overall attractiveness of the country. Internal criteria Company objectives: companies that have limited aspirations usually chose an entry mode that require a minimum amount of commitment (such as licensing). Proactive companies with more ambitious objectives usually choose an entry mode that gives them more flexibility and control. Need for control. The level of control is directly related with the amount of resource commitment, the smaller the commitment, the lower the control. Most firms decide based on a trade off between the degree of control desired and the level of resources committed. Internal resources, assets and capabilities: the tighter the resources are, the less commitment the company will have for foreign markets (such as exports and licensing). Flexibility. To cope with market environmental changes, international companies need a minimum of flexibility. Contractual arrangements such as joint ventures and licensing provide very little flexibility, while wholly owned subsidiaries, again offer little flexibility when the company takes a market exit decision. The different modes of entry can be classified according to the degree of control the company can have over marketing activities from low control entry modes (indirect exporting) to high control entry modes (wholly owned subsidiary).


There are three major strategies the company can adopt in order to entry in a foreign market, as presented in table no. 7.7. Table no. 7.7 Type of market entry strategies

Type of strategy Strategies Export entry modes Indirect exporting

Direct exporting (agent/distributor) Direct exporting (branch/subsidiary) Cooperative exporting (piggybacking)

Contractual entry modes

Licensing Franchising Technical agreements Service contracts Management contracts Construction/turn key contracts Contract manufacture Co-production agreements Strategic alliances

Investment entry modes Sole venture/wholly owned subsidiary (new establishment) Sole venture/wholly owned subsidiary (acquisition) Joint venture (new establishment/acquisition)

Source: Root F.R., Foreign Market Entry Strategies, 1982, Amacom, p. 7; Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 250-266.

We will present some of them in the coming section. Export entry modes are used by companies that first internationalise and by companies that are not willing to commit a lot of resources in that particular market. Indirect exporting takes place when the company used domestic intermediaries (such as brokers, export agents) to go abroad. It is suitable for companies with little or no experience abroad and it has the advantage that the company can use the intermediary’s experience of foreign markets.


Direct exporting takes place when the company exports through intermediaries located in foreign markets. This export method requires higher level of expertise from the manufacturer than the previous one, but at the same time allows for larger control over its distribution channel. Cooperative exporting or piggyback exporting takes place when the company uses the overseas distribution network of another company (domestic or foreign) to sell goods in the foreign market. Contractual entry modes consist of forming non-equity contractual associations with foreign entities. Licensing involves an agreement of a company (licensor) that grants rights under a contract to another company (licensee) from overseas. In a licensing agreement rights are granted over intangible property such as patents, copyrights, trademarks, procedures in exchange of a fee or royalty. Such contracts are signed for different periods of time. Using licensing as a market entry method, the company can gain market presence without any equity investment. Usually companies use licensing when they do not have the time and the knowledge to engage in international markets. Having a foreign partner offers the advantage as no investment is necessary and better knowledge about the foreign market is available. The disadvantage is that the company depends on the foreign licensee to produce sales, from which it receives a percentage. So, the company’s revenues depend on the capacity of the licensee to produce sales. Franchising is a form of licensing through which the franchiser makes a total marketing program (including brand name, logo, products and methods of operations) available to the foreign franchisee. Franchising is prevalent in industries such as services and retail. Contract manufacturing takes place when a company arranges its products to be produced by an independent foreign company on a contractual basis. The manufacturer’s responsibility is restricted only to production, then products are given to the international company and that usually takes over the marketing responsibilities. Contract manufacturing is usually chosen for countries with a low volume market potential combined with high tariff protection: the local production is advantageous to avoid high tariffs, but the foreign market does not support the volume to justify the building of a plant.


Investment entry modes involve ownership of production units or other facilities in the overseas market. Joint ventures (equity based) involve the creation of a new separate business entity under the joint ownership and control of two or more partners. The major advantage of joint ventures as compared to lesser forms of resource commitment is the return potential. Then is a possible high commitment entry mode, where foreign governments discourage wholly owned ventures. For most joint ventures control is the biggest shortcoming along with the lack of trust and the raise of mutual conflicts. Wholly owned subsidiary consists in 100 percent owned companies. Fully ownership strategies can take two routes: acquisitions (when an existing foreign company is bought) or green-field (a new plant is built from scratch). The main benefit consists of full control over all operations, as well as getting all profits. The disadvantages are that is expensive and demanding for the company’s resources and the company bears the whole risk in case of failure.

External markets selection and market entry We have been presenting so far the macro-environment of foreign markets and the variables that a firm would be interested to study in order to know the foreign macro-environment. Further on we will see how the aspects discussed so far (meaning all aspects of the foreign environment: economic, political, cultural and legislative) are used to assess market opportunities and to select markets. The external market selection process is very important for the company that is willing to internationalise for a number of reasons:

/ the errors that occur in an international environment are more expensive than the errors that take place in the internal market

/ by choosing wrongly a foreign market, the company pays two types of costs: a) the effective cost of the unsuccessful try to enter the foreign market and b) the cost of the lost opportunity, by loosing the occasion to enter a market in which the company could have been successful.

This chapter discusses the possible approaches that a company can adopt when going international, the market selection process and market selection methods and techniques.


7.1 Market selection approaches A company may use one of the following approaches to market selection: the systematic approach, the non-systematic approach and the relational approach. The systematic approach is encountered when the selection of markets takes place based on a planned and well structured process through which countries are compared and then selected. The non-systematic approach (that is also called the opportunistic approach) depicts the situation when a company internationalise because receives some external stimuli that indicates some opportunities abroad: such stimuli are orders for the company’s products or requests for information about the company’s product from foreign potential clients, clients with which the company does not cooperate at present. The relational approach is the approach in which the company bases its internationalisation process on the relationship it has with companies or partners from foreign countries.

7.1.1 The systematic approach The systematic approach compares in a systematic way and prospects markets by setting market selection criteria based on which the foreign markets potentials are searched, countries are classified and grouped and are selected those countries with the highest market potential that correspond to the strategies and future intentions of the company. The systematic approach is a rational decision making process that has a normative nature, it prescribes how things should be done in order to select a market. A systematic approach to market selection is recommended in order to diminish the risks of errors. 7.1.1.1 The market selection process As part of the systematic approach, the market selection process has been defined as a process of gathering information and screening countries by collecting data about countries and passing them through a number of filters in order to eliminate the less promising opportunities. Figure no. 7.1 presents the market selection process.


Figure no. 7.1 The steps of the market selection process Filter 1 MACROLEVEL RESEARCH = General market potential

* economic (GNP; GNP/capita; Income/capita) * political (political structure)

* demographic (total population; growth rate, structure) * social (religion, race) rejected * geographic (surface, climate, landscape) countries

Preliminary opportunities Filter 2 INDUSTRY LEVEL RESEARCH = The industry market

potential

* growth trends for similar products * cultural acceptance of the type of products rejected * taxes and duties for the category of products countries

Possible opportunities Filter 3 MICROLEVEL RESEARCH (MARKET

POTENTIAL FOR THE COMPANY) = Expected company

profit

* competitors * market entry costs, ease of entry rejected * forecasted sales countries

Probable opportunities Filter 4 COMPATIBILITY WITH THE FUTURE COMPANY STRATEGY

* resources Country * objectives, strategies priority list

Source: Figure adapted after Jeannet J.P. and Hennessey H.D., 1988, International Marketing

Management, Houghton Mifflin Company, p. 139.


1. Filter 1 is the evaluation of the general potential of the market (the

macrolevel research). The first stage of the market selection process uses macro variables in order to filter the countries. At this stage the general market potentials are evaluated in terms of economic activity, social forces and political structure. The macro indicators used to assess the general market potential are: economic indicators, political indicators, geographical indicators and demographic indicators. Most of these indicators have been discussed under the type of environment they are part of, but we will shortly present them here in the context of market selection. The macro indicators generally show what is the general potential of the market. They are used in the first stage of the market selection as data are readily available and can be used to quickly eliminate countries with little or no potential demand and with excessive risks. The economic indicators such as total GNP, GNP/capita show us what is the wealth of a country. The wealth of a country determines the purchasing power and the consumption patterns, that are of primary interest for the international marketer. Per capita income is an indicator of people’s earnings in that country, but the income distribution is another very important indicator, as it shows the number of persons who actually earn much enough to buy the company’s product. For instance, if in a country with a per capita income of 3000$, only 10% of the population gets most of the country’s income and the rest lives in poverty, the potential size of the market for house product (cookers, fridges) will be the 10% of the population. It is the case of the bipolar societies. If available, the household or personal disposable income is another valuable indicator that shows how much on average may a household spend. It is the income after tax. The indicator discretionary income shows how much is left after they fulfil the current necessities. These indicators are available mainly in developed countries. The macroeconomic indicators will indicate if the country is too small, to be considered (GNP may be large enough but disposable income too low). Geographic characteristics, such as size of the country, the climate conditions and topographical characteristics are taken into consideration in order to evaluate the possibility to serve the market segment. Also characteristics such as natural resources and energy are of interest in the case the company wishes to produce locally.


Political indicators try to measure the political risk, as political instability can remove a country from the screening process right from the first stages. The political risk tends to be more subjective than the quantitative indicators of the market size. However, marketers can use a number of indicators to assess the political risk: the probability of nationalization, the number of expropriations, the political executions, government interventions, limits on foreign property, restrictions on capital movement and others, industrial disputes. There are syndicated services that rate political risk: the World Political Risk Forecast by Frost and Sullivan or the Political Risk Index of the Economist Intelligence Unit. Data provided by such organizations are good in the long term, but they cannot predict critical events that occur in different countries (such as the invasion of Kuwait in 1991 or the collapse of the Berlin Wall in 1989). The company has to be attuned to such current events in the countries of interest, as they have a profound impact on the business.

Demographic characteristics. Demographic statistics will show the market potential as population is an indicator for market potential for many consumer goods, age structure will also show the size of the market taking into account the age market segment we are willing to serve. Again countries that do not have a largely enough population potential can be eliminated market. The countries that do not have a large enough general potential are rejected and the countries that remain are considered to be preliminary opportunities and are passed further to be researched in more detailed.

2. Filter 2 consists of the evaluation of the general potential of the market related to the product (industry level research). Through this filter all the countries that passed the previous filter, the ones that had a large enough general market potential, are evaluated further in order to evaluate the potential market size for that particular type of product. The stage is also called the evaluation of the potential in the industry and will show the marketer how many products of that type the market can absorb. At this stage micro indicators are used to estimate the market size for that particular type of product. The micro indicators are specific to the product and they indicate the actual consumption of that type of product in the country. When consumption figures are not available the marketer can evaluate the market size by looking to local production as well as the imports of that specific product. Therefore, micro-indicators to be looked at can be the consumption or the production and imports of radios, passenger cars, coffee, rice, alcohol beverages, etc or the consumption of electricity, of gasoline, or the number of hospital beds,


the number of farms, the number of tourist arrivals etc. These indicators are specific to the company’s product. By looking at the consumption figures, the company will have an indication over the perceived need. Sometimes the actual consumption statistics may not be available for a certain product, and in this case proxy variables are used: consumption of similar, substitute products, complementary products. For instance, the number of farms may indicate the potential demand for tractors or in order to determine the market for medical equipment, marketers may use the number of hospital beds or the number of doctors per 1000 inhabitants as a proxy variable, the number of tires consumed after the number of cars. Other indicators to be studied at this stage relate to:

( taxes and duties requirements, as a high custom duty for the company’s product may eliminate a country from the screening process, if the company does not want to manufacture locally.

( the cultural acceptance of the product is also taken into consideration at this stage. Indicators might indicate a good general market potential, but the cultural acceptance of the product might be low and consequently the product market potential will diminish. For instance, swimming suits or alcohol in Muslim countries.

The potential market size in the industry will be appreciated based on the current size and on the growth rate. The countries that do not have market potential for that type of product are rejected and the remaining countries after this second filter are possible opportunities and are studied further.

3. Filter 3 is the evaluation of the company’s sales potential (microlevel research). In the third stage of the selection process, the potential sales of a company’s product in a foreign market are evaluated. After the general market potential of a number of countries was evaluated and the attractive ones have been retained and have been evaluated from the industry potential point of view, at the third filter stage, the evaluation shifts from the evaluation of the market potential towards the potential profitability of the company and the size of the market for the specific product of the company. In order to evaluate how much the company can sell on the respective market, aspects such as the competitors, the ease of entry, the cost of entry will be considered. At this stage the company tries to forecast the sales and the potential profits.


The competitive structure of foreign markets it is difficult to determine and that is why it is usually left for the last stages of the screening process, when only a limited number of countries are screened. The company has to find out what is the number of competitors in the market, what is their size, what is their origin, either local or international and what is the quality of competition. Sources that can be used to gather information about competitors are: research reports of research organizations1, Chambers of Commerce, as secondary data, as well as from primary data collection from potential consumers, distributors, trade officials. How much is going to cost the company to enter that market given the investment needed and the local costs, the taxes of the country and the entry procedure? Given the cost of entry and the expected sales, the company will try to forecast what is the expected profit. Both quantitative and judgemental ways to evaluate the expected profits can be used. The countries where the company does not expect to sell enough are rejected and the countries considered to have sales potential for the company represent the probable opportunities and will be further researched.

4. Filter 4, the last stage of the selection process takes into consideration the corporate factors influencing the decision (the compatibility with the strategy of the company). At this stage countries are ranked based on corporate: resources, objectives, strategies. For instance if, South Africa has an expected potential equal to Venezuela, Venezuela may be given priority if the company’s strategy is to enter later Columbia and Bolivia. After the last filter a list of country priorities results and this is used to make the final decision. 7.1.1.2 Market selection methods It is also of interest to look to a few MARKET SELECTION METHODS that the company can use in order to systematically select markets: the listing of selection criteria, the scoring market selection model and the compensatory model.

1. The listing of selection criteria The listing of selection criteria method consists of developing a set of criteria and certain level limits (minimum or maximum) for these criteria required for a country to move through the stages of the screening process. The levels (limits) for each criterion will be established by the management according to what they consider acceptable or not in respect of a certain aspect. 1 The international Market Research Mall publishes an online listing of the available research reports at:

www.ecnext.imrmall.com .

http://www.ecnext.imrmall.com/


We have here an example of using this method for a dialysis equipment (the model was used for the external market screening process by an USA company in 1980’s). Figure no. 7.2 presents the model. Figure no. 7.2 Screening process to target countries for kidney dialysis

equipment

FILTER 1: Macro-level research Gross Domestic Product over $15 billion Gross Domestic product per capita over $1500

FILTER 2: General Market Factors Relating to the Product

Less than 200 people per hospital bed Less than 1000 people per doctor Government expenditure for the health care over $100 million Government expenditures for health care per capita over $20

FILTER 3: Micro Level Factors Specific to the Product

Kidney-related deaths over 1000 Patient use of dialysis equipment over 40% growth in treated population

FILTER 4: Final Screening of Target Markets

Number of competitors Political stability

Source: Jeannet J.P. and Hennessey H. D., 2001, Global Marketing Strategies, Houghton Mifflin Company, p. 181.

At the first stage minimum levels of the GDP ($15 billion) and the per capita GDP ($1500) are established by the management, levels considered to be large enough to allow governmental expenses for dialysis equipment. The lower the GDP/capita in a country, the lower are the expected governmental expenditures for the health system and consequently for dialysis equipment. The remaining countries are the preliminary opportunities and they will be passed through the second filter, the evaluation of the type of product market potential or the industry potential, in our case the health industry. A number of indicators will be studied, indicators related to the product. Dialysis is a complicated procedure that needs specialized personnel to conduct it. In order to conduct such procedure a country needs a high level of specialization. The higher levels of medical concentration, the higher the chances for medical specialization.


Therefore, by looking at indicators such as the number of people/doctor and the number of people/hospital bed, we can evaluate the level of medical development. Indicators such as the governmental expenditure for health, total and per capita, whose lower level (limit) is established by the management are important, as countries that do not invest in health care tend not to be interested to make more substantial investment in specialized programs. The next stage, filter 3 will take into consideration indicators specific to the product, such as the number of deaths related to kidney problems/1000 loc. This indicator gives an indication over how many people could have been treated. It is not enough for people to die from kidney diseases, but they also have to be treated in order to have market potential in that country. Therefore, a minimum 40% annual growth in the number of patients suffering from the disease, who use the equipment, was considered an acceptable level. Filter 4, the last stage of this screening model, took into consideration the competitive structure of each country and the political stability.

2. The scoring market selection model The scoring model or the scoring technique consists in using a number of indicators that are compiled in a final score and that are given different percentages according to the degrees of importance assigned to each of them. In order to use this selection model, the marketer has to follow a number of steps:

1. The first step is to set the criteria based on which the selection will take place. The criteria can be grouped in broad categories, such as market characteristics (market size, buying behaviour) or entry barriers (tariff barriers, non-tariff barriers).

2. Set the ranking procedure. For instance, on a scale from 1 to 10, where 1 is the lowest and 10 is the highest.

3. Set weights of selection criteria. At this stage each indicator will be given a percentage according to its importance in the selection process.

4. Gather data concerning indicators. At this stage data will be collected for all countries of interest that are included in the selection process, according to the criteria set.


5. Calculate scores for each country. Based on all indicators, their

ranking (based on their sizes) and the importance given to them, the marketer will calculate for each country scores for each indicator that will be added up in a final score. See table no. 7.1.

6. The final stage will be to select the country/countries based on the rankings of the final scores.

Table no. 7.1 presents a hypothetical scoring market selection model for Europe. Based on this principle different scoring models can be constructed and used. We have here an example of a scoring selection model used by an USA can producer in 1980’s for external market selection. The model was called the customized weighted multivariate technique and it is presented in table no. 7.2.

In the hypothetical model presented in figure no. 7.1., there were six criteria used to select markets, namely the market potential, tariffs, non-tariff barriers, the product fit, the competitive intensity and the shipping costs. For each of them there have been established weights (W = 15%, 5% etc). “E” represents the estimates used for the ranking procedure, where 0 = very bad conditions, 1 = bad conditions, 2 = acceptable conditions, 3 = favourable conditions, 4 = very favourable conditions and “W x E” represents the weighted estimate for each indicator. At the end all weighted estimates for all indicators are added up in a final score for each country. Then the countries are ranked according to the size of the final score. When the differences between the final scores are higher, the selection decision is easier. When there are very close final scores (for instance 202 with 208), the company might take a multiple entry decision or it can group countries in groups with similar scores. Further on, the countries can be treated as a group or the selection process can be continued by introducing more criteria, in order to differentiate the countries.

Table no. 7.1 A hypothetical scoring model for international market selection

Selection criteria

Market potential

Tariffs Non-tariff

barriers Product

fit Competitive intensity

Shipping costs

Weights W=15 W=5 W=17 W=25 W=22 W=16 Countries E WxE E WxE E WxE E WxE E WxE E WxE

Final score Max 400

Rank

Denmark 2 30 2 10 1 17 3 75 1 22 3 48 202 4 Sweden 3 45 4 20 3 51 2 50 2 44 3 48 258 2 Norway 2 30 3 15 2 34 3 75 1 22 2 32 208 3 Finland 4 60 4 20 3 51 3 75 4 88 1 16 310 1 Portugal 0 0 3 15 1 17 0 0 2 44 2 32 108 5 Spa in ….


Table no. 7.2 The customized weighted multivariate technique

for a can producer

Payback index Percentage Desirability index Percentage Political stability 26.0 Quality of infrastructure 13.6 Political freedom 7.0 Availability of financing 10.1 Civil liberties 7.0 Labour situation 9.1 Quality of infrastructure 6.7 Market growth 8.6 Nationalization probability

6.3 Currency convertibility 6.6

Desire for foreign investment

5.6 Per capita income 7.1

Bureaucratic delays 5.4 Market size 7.1 Market size and growth 4.4 Inflation 6.8 Inflation 3.6 Physical quality of life 6.0 Labour situation 3.5 Bureaucratic delays 5.1 Currency stability 3.3 Enforceability of

contracts 4.4

Balance of payments 3.3 Balance of payments 3.4 Availability of financing 2.4 Currency history 3.2 Restrictions on capital movements

2.3 Corporate tax level 2.2

Government interventions

1.5 Local management 2.0

Limits on foreign ownership

1.4 Cultural interaction 1.7

Cultural interaction 1.4 Government intervention 0.8 Corporate tax level 0.8 ………… …………..

Source: Douglas S.P. and Craig C.S., 1983, International Marketing Research, Prentice Hall, p. 289-292.

We have here the example of an USA company that developed in 1980’s two customized indices in order to evaluate and select markets:

& the index of desirability, & the payback index (risk).

Each index comprises a number of indicators that have different weights according to the importance given to them by management. A number of factors are used in both the risk and the desirability index, as they can represent both a risk factor


and a desirable factor according to their evolution. But they have different weights in the two indices according to the contribution they bring to the country risk or country desirability. For instance, the quality of infrastructure is the most important variable (13.6% degree of importance) in considering the desirability of one country (as they are going to have an extensive distribution), meaning that a good infrastructure of a country will increase its desirability index, while in the risk index, there are other variables more important in evaluating the country risk, meaning that a bad infrastructure will affect less the risk (payback) index. The higher the desirability index, the more desirable is the country. The higher the risk/payback index, the less desirable and the more risky a country is. Obviously the most developed countries will always score the highest, therefore is recommended that the method to be used on groups of countries, in order to differentiate them within the group. 3. The compensatory model This is a new model that proposes the use of two key constructs, a trade-off between demand potential and trade barriers in the context of the firm strategy. Through this model the company will screen many markets directly at industry level. It is a compensatory model because is trying to compensate, to express a trade-off between pluses and minuses, in our case between the demand potential as a plus and the trade barriers (as a minus) for the countries under review. The model is suitable to systematically screen markets in order to internationalise by exporting. The two constructs used by the compensatory industry model are the demand potential and the trade barriers, each of them being formed of four variables. The two constructs are built for each country and are evaluated in the context of the company’s strategy. Figure no. 7.3 presents the synthesis of the compensatory model. The demand potential construct will be built based on four variables, namely the apparent consumption, the import penetration, the origin advantage and the market similarity. The apparent consumption refers to how much a country consumes from a certain product. The consumption of a product is a good indication for the market potential in that country, as it can be sold on the market according to how much they consume. A country will consume from a product how much it produces locally to which will be added how much it imports from that product and will be deducted how much it exports towards other countries. Therefore, the apparent consumption is calculated as the domestic production plus the imports minus the exports of that product.


Figure no. 7.3 The demand versus barriers compensatory model Demand potential Apparent Origin advantageconsumption Import Market similaritypenetration

Trade barriers Tariff Geographic barriers distance Non-tariff Exchange rate barriers

Strategy

Defensive Offensive

International market selection

Source: Papadopoulus N., Chen H. and Thomas D.R. ,”Toward a trade-off model for international market selection”, International Business Review, vol. 11, 2002, p. 170. The import penetration is the second variable included in the demand potential construct. Import penetration shows how much from the apparent consumption comes from imports. A high percentage of imported goods will show an openness of the market toward foreign products. On the other hand it can also indicate a low competitiveness of the domestic producers, signalling an attractive target market. Further on, the origin advantage variable, will show how much from the imported goods originated in the country of origin of my product. A high share of the country of origin in the total imports of the targeted country, shows that the company has a number of advantages in that country. Such possible advantages are:

other exporters from the country of origin can help with market information,

there is already a favourable image of the products coming from the country of origin (in a given industry),

there are strong trade relations between the exporting and the importing countries that result in a greater trade promotion effort at local foreign level.


Market similarity is the last variable of the demand potential construct, the one that shows the pluses of the external markets. Market similarity is considered based on the idea that demand tends to be higher in markets that are similar to the market where the product was initially developed. High similarity between markets reduces usually the risk and the uncertainty. It is calculated as a compilation of a number of indicators such as life expectancy, GDP/capita, electricity production, percentage of imports in GDP. The trade barriers construct is also formed of four variables: the tariff barriers, the non-tariff barriers, the geographic distance and the exchange rate. Tariff barriers can influence market selection either positively or negatively. The lower the tariff barriers, the more attractive the market is. Tariffs influence the exporter’s prices and the pricing strategy of the company on that market. In this model tariff barriers are measured by the weighted mean annual tariff rate over the studied period. The non-tariff barriers are in many cases more important than the tariff barriers in exporting. They refer to:

/ Quotas. Governments can impose limits or restrict the number of units or the total value of a product or product category that can be imported in the country.

/ Trade control. The state can control the trade with certain commodities when monopolizes it. It is the case of Sweden, where the Swedish government controls the import of all alcoholic beverages and tobacco products.

/ Voluntary quotas. These are encountered when exporters voluntary agree to restrict its exports to a certain amount or quantity. Japan voluntary restrained its exports of cars to EU and USA and its exports of TV’s to USA.

/ Other non-tariff barriers such as custom procedures, administrative and technical regulations.

The larger such non-tariff barriers are the less attractive the market becomes. And the low overall incidence of non-tariff barriers suggests an openness of the market. As we have seen most of the non-tariff barriers are qualitative and it is needed a quantification scheme in order to include them in the compensatory market selection model. Papadopoulus et al. suggest the quantification of the non-tariff barriers by developing a composite index that consists of the 20 barriers items


in the World Trade Organization’s Trade Policy Review, by weighting each item by its frequency of occurrence in the target market. The geographic distance is directly related to the transportation costs and can act as a major barrier through its effect on the export price. The higher the geographic distance is the higher the cost of transportation and the less attractive the market is. In the barrier construct it will be included as the mileage between exporting and targeted countries. The exchange rate is the last variable in the trade barrier construct of the compensatory model. Exchange rates are volatile and currency exchange rates between exporting and importing countries represent a major risk element in exporting as they can have a major impact on pricing strategies and the overall strategy of the company in the market. As measurement for the compensatory model it was considered the change in the official exchange rate as compared to the previous year. The two constructs that compensate one another will be used for market selection differently by different companies, in concordance with the strategy they follow, either an offensive or a defensive strategy. The companies that will follow an offensive strategy will seek growth at the expense of the competitors and will value opportunities more than being concerned by risks. The companies that will follow a defensive strategy will concentrate more on preventing competitors from grabbing their market share. Each construct will be given a mark and for each country will be two scores, one for the market potential and one for the trade barriers. A matrix will be formed (see figure no. 7.4) and based on this matrix information the company will select the countries with the high market potential and the low trade barriers for its particular product. Figure no. 7.4 The final matrix in the compensatory model

Export markets High barriers Low barriers

High market potential XXXX Products

Low market potential


Talking about the systematic approach for market selection we have to mention that there are syndicated sources that evaluate country risks and offer country indices. Such sources are BERI- Business Environmental Risk Intelligence, The Economists (EIU), the Moody’s, Standard and Poor’s and others. Such sources evaluate the country risk with its components: political, economic, financial. Table no. 7.5 shows some of the types of variables that are used when calculating different country risk indices. When using such country indices the company has to bear in mind that many of them are calculated in order to evaluate the financing risk2 and not the investment risk3. The type of information needed when evaluating the two types of risks is different and most of the country risks indices calculated by different agencies envisage the financing risk and not the business risk or the risk of investment. One agency that also develops market indices for market selection is the Economic Intelligence Unit (EIU). The EIU published for the last thirty-seven years market indicators that allow managers to quickly compare country opportunities. EIU combines statistical data by using a large number of variables in three main indices: market size, market growth and market intensity. The market size index measures the total potential of a market based on a number of indicators such as population (double weighted), urban population, private consumption expenditure, steel consumption, cement and electricity production, ownership of telephones, cars and televisions, buses, trucks, etc. The market growth is an indicator of the rate of increase of the market size. Is calculated by averaging the above mentioned indicators over five years. The market intensity is an index that measures the concentration of the purchasing power in a country or the richness of the country. It is calculated by averaging per capita consumption of different products (above mentioned) and the percentage of urban population –double weighted. The average world intensity is considered to be 1 and each country index is calculated in proportion with the world intensity.

2 The financing risk is the risk encountered when a fnancial institution lends money to a country/government. 3 The investment risk is the risk encountered when a company is willing to expand and invest in an external

market.


Table no. 7.5 Variables included in different types of country indices

Indices Variables included Standard and Poor’s Political environment (stability,

governmental alternation, system’s flexibility, political support, the orientation of the political parties). Social environment (standard of living, income distribution, labour market conditions, the urbanization degree, the literacy rate, the relations with the neighbours, frontier conflicts) Economic environment (international investments, GNP, exports, the economy’s structure, natural resources, currency regime, the taxes level).

Moody’s Political extremism, legislative system, political structure, income distribution, ethnical and religious differences, liquidity, the balance of payments, the independence of the Monetary Authority, interest rate, exchange rate, capital international flows, dependency on imports/exports, labour force mobility).

EIU The economic growth (GNP), inflation, external debt, the export degree of prelucration, unfavourable neighbourhoods, government legitimacy, army involvement in politics, ethnical tensions, internal conflicts.

At the beginning of years 2000, according to EIU market indices, USA, most of Europe and Japan were countries with large market sizes, low growth and high intensity, while countries such as China, Indonesia and Germany had high market growth and low market intensities.


When selecting market opportunities, every company has specific needs and interests. The syndicated sources of information are not usually relevant to the company’s product. They offer information about the general market potential, but not about the market potential for the company’s specific product. That is why there are firms that develop their own systems of country evaluation and selection based on a number of variables weighted specifically for that firm according to the importance given by management to each criterion. This is the approach that we recommend, to develop specific market selection models that will illustrate the market potential for the company’s specific product. Syndicated sources can be used in the primary phases of the screening process, when evaluating the general market potential. The systematic approach has a normative character, as it shows what companies have to do in order to select markets.

7.1.2 The non-systematic approach to market selection The non-systematic approach, also called the opportunistic approach occurs when a company enters in a foreign market as:

a consequence of receiving orders from abroad. In this case the selection of the foreign market is given by chance, not by an organized selection process. There is little or no information search, as firms are expanding internationally on an opportunistic basis.

or when markets are selected by rules of thumb. There were studies that showed that many, companies do not have a systematic approach to market selection, the explanations varying from the limited capacity of companies to collect the numerous necessary statistical data to the fact that companies generally use a more opportunistic manner when internationalising. The criteria used when selecting markets through the opportunistic approach are subjective. One of these criteria is the psychic distance. Many firms expand internationally at the very first stage based on the psychic distance. The psychic distance refers to those factors that are preventing or disturbing the flow of information between firms and the market and include aspects such as differences in language, in culture, in the level of education, in political systems or the level of industrial development. The smaller is the psychic distance the more attractive is the market and vice-versa.


This method is used by small companies at their first stages of internationalisation when they tend to approach the neighbouring countries, rather than large companies that usually search more thoroughly external markets before making the entry decision. However, generally speaking firms start their internationalisation process by entering those markets that they can understand more easily, meaning those with a small psychic distance, leaving the more distant markets for a later stage. While the systematic approach has a normative nature, as it tells how to select markets, the non-systematic approach has a descriptive nature, as it tells what companies have done when going internationally. Sometimes companies use a mixed approach to market selection. The mixed approach combines the two approaches discussed previously by transforming a non-systematic approach, an opportunistic approach into a systematic one. Once the order comes from abroad, the company realizes that there are opportunities abroad and starts searching for the best options.

7.1.3 The relational approach to market selection

More recently, as more importance is given to customer satisfaction and to relationship marketing, the relationship approach to market selection started to develop. In contrast to the other selection approaches that were focusing on selecting countries, the relational approach focuses on the business relationship and the foreign customer as the unit of analysis. Using this approach the company will focus on the decision process through which it identifies and selects exchange partners. In other words through this approach it takes place the assessment of potential international exchange partners and the screening process involves gathering information about each partner and filtering out the less desirable partners. Figure no. 7. 4 presents the model for choosing an international partner through the relational approach. The exchange partner screening process has three stages:

1. Awareness. At this stage the company searches in order to identify a number of feasible international partners. It uses many information sources, including the firm’s network. It will start by looking at those with which it has direct relations (customers, suppliers) and will continue later with those with which it has indirect relations (customers of customers and suppliers of suppliers). The company envisages to identify the skills and the qualifications of potential partners.


Figure no. 7. 4 The choice of an international partner – the relational approach

Awareness

Exploration Choice

Source: Figure adapted after Andersen P. and Buvik A., “ Firms’ internationalisation and alternative approaches to the international customer/market selection”, International Business Review, vol. 11, no. 3, 2002, p. 353.

2. Exploration. At this stage the company tries to identify which of the potential partners are attractive. The attractiveness of one partner depends a lot on his willingness to negotiate further. If the potential partner perceives as beneficial a future collaboration with the company, as the benefits of such a relationship exceed the costs of the relationship, this is a signal of attractiveness and further communication and bargaining is likely to occur. At this stage are considered obligations, benefits, burdens, attitudes and standards of conduct. There are also taking place trial purchases. The exploration stage can be very short, when one of the partners does not find attractive such a collaboration and prefers an alternative partner.

3. The choice of partner(s). This is the last phase when the company will select one or more partners by choosing among the existing alternatives. The company will use criteria such as goal compatibility and performance to make the decision. Usually these criteria are appreciated based on direct experience and each such screening process brings more experiential knowledge to the company.


This approach is usually used in the case of industrial markets and of institutional markets. Also, where the uncertainty of the environment is perceived as being high, it is more probable the use of a relational method for market selection rather than a traditional method.

Among the market selection approaches, the systematic approach is usually used by large MNC’s that are screening a large number of markets based on a large number of variables. The approach is used in case of non-contractual entry modes, such as export or investment. The relational approach is suggested in case of organizational customers, when there are envisaged high risk countries and when the company uses contractual entry modes such as licensing, franchising, production management.

7.2 Market entry strategies

The company that goes international has also to decide on the market entry strategy. The decision can take place prior to market selection and the selection process is done starting from the chosen market entry mode, or the market entry mode is decided according to the condition of each market. There are a number of aspects a company has to take into consideration when deciding on the entry mode: the internal or the firm-specific criteria and the external or the environment specific criteria. Table no. 7.6 presents the two categories of criteria.

External criteria Market size and growth: large markets (current size and potential future size given by the growth rate) justify major commitments. Risk: the greater the risk factor, the less resources are recommended to be committed in the country concerned.


Table no. 7.6 Decision criteria for mode of entry

Internal firm-specific criteria External environment specific criteria Company objectives Need for control Internal resources, assets and capabilities Flexibility

Market size and growth Risk Government regulations Competitive environment Local infrastructure

Source: Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 246-249.

Government regulations: such as trade barriers or local content laws can constrain the available options for the company. Local infrastructure: the poorer the local infrastructure is, the more reluctant the company is to commit major human and monetary resources. The external factors determine the overall attractiveness of the country. Internal criteria Company objectives: companies that have limited aspirations usually chose an entry mode that require a minimum amount of commitment (such as licensing). Proactive companies with more ambitious objectives usually choose an entry mode that gives them more flexibility and control. Need for control. The level of control is directly related with the amount of resource commitment, the smaller the commitment, the lower the control. Most firms decide based on a trade off between the degree of control desired and the level of resources committed. Internal resources, assets and capabilities: the tighter the resources are, the less commitment the company will have for foreign markets (such as exports and licensing). Flexibility. To cope with market environmental changes, international companies need a minimum of flexibility. Contractual arrangements such as joint ventures and licensing provide very little flexibility, while wholly owned subsidiaries, again offer little flexibility when the company takes a market exit decision. The different modes of entry can be classified according to the degree of control the company can have over marketing activities from low control entry modes (indirect exporting) to high control entry modes (wholly owned subsidiary).


There are three major strategies the company can adopt in order to entry in a foreign market, as presented in table no. 7.7. Table no. 7.7 Type of market entry strategies

Type of strategy Strategies Export entry modes Indirect exporting

Direct exporting (agent/distributor) Direct exporting (branch/subsidiary) Cooperative exporting (piggybacking)

Contractual entry modes

Licensing Franchising Technical agreements Service contracts Management contracts Construction/turn key contracts Contract manufacture Co-production agreements Strategic alliances

Investment entry modes Sole venture/wholly owned subsidiary (new establishment) Sole venture/wholly owned subsidiary (acquisition) Joint venture (new establishment/acquisition)

Source: Root F.R., Foreign Market Entry Strategies, 1982, Amacom, p. 7; Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 250-266.

We will present some of them in the coming section. Export entry modes are used by companies that first internationalise and by companies that are not willing to commit a lot of resources in that particular market. Indirect exporting takes place when the company used domestic intermediaries (such as brokers, export agents) to go abroad. It is suitable for companies with little or no experience abroad and it has the advantage that the company can use the intermediary’s experience of foreign markets.


Direct exporting takes place when the company exports through intermediaries located in foreign markets. This export method requires higher level of expertise from the manufacturer than the previous one, but at the same time allows for larger control over its distribution channel. Cooperative exporting or piggyback exporting takes place when the company uses the overseas distribution network of another company (domestic or foreign) to sell goods in the foreign market. Contractual entry modes consist of forming non-equity contractual associations with foreign entities. Licensing involves an agreement of a company (licensor) that grants rights under a contract to another company (licensee) from overseas. In a licensing agreement rights are granted over intangible property such as patents, copyrights, trademarks, procedures in exchange of a fee or royalty. Such contracts are signed for different periods of time. Using licensing as a market entry method, the company can gain market presence without any equity investment. Usually companies use licensing when they do not have the time and the knowledge to engage in international markets. Having a foreign partner offers the advantage as no investment is necessary and better knowledge about the foreign market is available. The disadvantage is that the company depends on the foreign licensee to produce sales, from which it receives a percentage. So, the company’s revenues depend on the capacity of the licensee to produce sales. Franchising is a form of licensing through which the franchiser makes a total marketing program (including brand name, logo, products and methods of operations) available to the foreign franchisee. Franchising is prevalent in industries such as services and retail. Contract manufacturing takes place when a company arranges its products to be produced by an independent foreign company on a contractual basis. The manufacturer’s responsibility is restricted only to production, then products are given to the international company and that usually takes over the marketing responsibilities. Contract manufacturing is usually chosen for countries with a low volume market potential combined with high tariff protection: the local production is advantageous to avoid high tariffs, but the foreign market does not support the volume to justify the building of a plant.


Investment entry modes involve ownership of production units or other facilities in the overseas market. Joint ventures (equity based) involve the creation of a new separate business entity under the joint ownership and control of two or more partners. The major advantage of joint ventures as compared to lesser forms of resource commitment is the return potential. Then is a possible high commitment entry mode, where foreign governments discourage wholly owned ventures. For most joint ventures control is the biggest shortcoming along with the lack of trust and the raise of mutual conflicts. Wholly owned subsidiary consists in 100 percent owned companies. Fully ownership strategies can take two routes: acquisitions (when an existing foreign company is bought) or green-field (a new plant is built from scratch). The main benefit consists of full control over all operations, as well as getting all profits. The disadvantages are that is expensive and demanding for the company’s resources and the company bears the whole risk in case of failure.

International marketing research Market information is a key element in the company’s international success and therefore marketing research is crucial if the firm wants to reduce the risks of undertaking business in international markets. Marketing research is an important tool for reducing the risks in the decision making. Marketing research has been defined as “a set of techniques and principles for systematically collecting, recording, analysing and interpreting data that can help decision makers who are involved with marketing goods, services or ideas”1 or as “the systematic collection, objective search for, and analysis and interpretation of information relevant to the identification and solution of any of the firm’s marketing problems”2. International marketing research has the same purpose as the domestic marketing research: to provide information to the decision - makers in order to take a more documented decision. Even though the purpose is similar, the scope of international marketing research is broader than the one of the domestic marketing research, for the following reasons:

1. the research takes place in a larger number of countries and each country is unique in its own way,

1 Parasuraman A. Marketing Research, 1991, Addison-Wesley Publishing Company, p. 5. 2 Chee H. and Harris R., Op. Cit, p. 193.


2. in international market research there are a higher number of variables needed to be collected: • there are variables that are relevant to each country, aspects that in

the domestic marketing research are constant and usually known (laws, the political systems, the channels of distribution, culture) but which become unknown variables that need to be researched in other foreign country

• there are international variables that derive from the international activity such as exchange rates, international policies, duties, international documentation, port facilities etc.

3. the nature of decisions differ in the international marketing and therefore specific knowledge and information are required in order to make decisions when penetrating a new market, choosing what country to enter, deciding how to reach the target-markets in foreign countries,

4. the costs of doing research internationally is higher than in the domestic market,

5. international marketing research encounteres besides the usual difficulties (that are encountered in the domestic research), specific difficulties at international level: the co-ordination of the research in more countries, the availability and accuracy of secondary data, setting the comparability of data obtained from different countries.

The international marketing research is much more complex than the domestic marketing research and at the same time is more necessary for the company. In international marketing intuition or decision taken when little information is available is not enough to enable the success of the company. In 1970’s P&G launched the diapers Pampers in Japan. Initially, sales were growing fast, but Pampers proved to be too bulky for Japanese mothers, who change diapers twice as frequently as Americans. Given the scarcity of space, Japanese mothers desired thiner diapers. A Japanese competitor was able to see this and designed thinner diapers, grabbing market share from P&G. P&G in Japan would have been able to meet the market’s requirement if adequate marketing research would have been undertaken3. This example shows that here are firms that engage in international marketing that do not benefit of complete, detailed information about countries. Some of these firms do not appreciate information (through company culture)

3 Kotabe M. and Helsen H., Op. Cit., p. 151.

International marketing research

and some others do not have the resources (financial, human and of time) to undertake international research, and this is usually the case of small companies. As a firm becomes more committed to international marketing, the cost of failure increases and therefore more emphasis is placed on research, as marketing research provides the necessary information to avoid costly mistakes of poor strategies or the cost of lost opportunities. By doing research the Pepsi Cola company found out that the Canadian market was ready for a new cola that did not contain sugar, but it also found out that the youth market, especially males was adverse to the diet soda. Consequently, Pepsi Cola company launched the drink Pepsi Max as a trendy, cool, with no sugar cola. The TV advertising campaign showed Pepsi drinkers who were “Living Life to the Max”, by performing death-defying actions4. There are different types of researches that would gather different type of information:

1. General research in international markets that gathers general information about the country/market, information about technologies and about the competitive environment. This information is used to make decisions at corporate level,

2. Industry research that gathers information about specific markets such as market potential, market share, supply and demand trends, as well as a detailed competitors’ research (industry structure, actions of competitors etc.),

3. Marketing research that gathers information relevant to the main marketing activities. There are more types of marketing research: consumer behaviour studies (consumers preferences and attitudes,

segmentation), product studies (testing new products, measuring the consumers’

loyalty towards products, how the packaging is appreciated, brands’ studies),

price studies (the analysis of knowing the price, the consumers sensitivity to price according to the demand elasticity to price),

distribution studies (identify distribution channels, measuring distribution channels length and efficacy),

promotion studies (searching the promotional media, measuring the ads efficacy).

4 Jeannet J.P. and Hennessey H.D., Op. Cit, p. 220.


Some companies treat the three types of research distinctly, while others would consider them as one comprehensive research activity. 8.1 The international marketing research process The international research process consists of a number of subsequent activities, as also shown in figure no. 8.1:

1. Problem and research objectives definition. 2. Planning the research process. 3. Collecting the data. 4. Analysing and interpreting the data. 5. Communicating the results.

The steps of the research process at international level are similar to those of the research process at national level, but at each stage there are specific issues that appear at international level. The different stages will be discussed briefly, mainly through the perspective of their peculiarities at international level. 8.1.1 Step 1: Problem and research objectives definition The research problem definition or formulation is one of the most important steps of the research process to be understood. When a problem or an issue appears in the company (such as the decrease of sales), management has to make decisions and sometimes they need more information to make these decisions, information that can be obtained through marketing research. In order to be solved this managerial problem or issue has to be translated into a research problem. The questions that arise are: What we are going to study? What is that we want to find out? In the example given above the problem of decreasing sales can be transformed in the research problem: Why the sales have decreased? Further the research objectives would be to identify the causes of sales decrease. The cliché of a well defined problem being a half solved problem definitively applies at international level, too. A very well designed research is not going to compensate a wrongly defined problem.

Figure no. 8.1 The steps of the marketing research process

* Problem * Sources of data * Editing * Written report - secondary

* Objectives - primary * Codifying * Oral presentation * Information * Research meethods * Data analysis - observation - interview - survey

- experiment

* Instruments - questionnaires - mechanical instruments

* Sampling

* Contact methods

Problem and research objectives definition

Planning the research process

Collecting the data

Analysing and interpreting the data

Communicating the results

- mail - phone - personal

Source: Figure adapted after Nicolescu L., 1996, “Studiile de Marketing – Baza Proiectării Strategiei Firmei” in Strategii Manageriale de Firmă, Editura Economică, p. 214.


Therefore, maximum attention has to be paid at the problem definition stage. At international level, problems may not be the same in different countries and cultures for the same product. There are some aspects that should be taken into consideration when considering doing research internationally:

1) The structure of the market: the size of the market, the phase from product life cycle in which the product is in every country, the number of competitors. All these aspects might generate different company problems and therefore different research needs resulting in non-comparable data for multi country research.

2) The functional equivalence. Even if we are talking about the same product its functionality may differ from one country to another and this should be acknowledged when defining the research problem. For instance: a. The bicycle is used as a leisure product in USA, while in China

and in Holland is used as a transportation mean. Consequently, in USA the bicycle will compete with other recreational goods (such as skis, exercise equipment), while in China it will compete with small cars, scooters, motorcycles5.

b. Hot milk base chocolate drinks are consumed differently from one country to another. While in USA and in UK it is consumed in the evening, before going to sleep, being seen as a relaxes, in Latin America it is consumed in the morning, being seen as a waking up, energizer. Functional equivalence is reached neither in the time period nor in the purpose of use6.

The function served by a particular good has to be considered in the country context and has to be defined in each country, and according to it to search the market and decide on marketing strategies. 3) The conceptual equivalence deals with the extent to which concepts

have the same significance in different cultures. a. The concept of women rights in a Muslim country is non-existent. b. The concept of product quality is likely to differ for the Western

European consumer from the one of an Eastern European consumer. This becomes obvious if we look at the quality of services in Romania as compared to other Western European countries.

5 Jeannet J.P. and Hennessey H.D., Op. Cit, p. 229. 6 Usunier J.C., 1996, Marketing across cultures, Prentice Hall, p.144.


c. The use of the word “family” has different meanings in different countries according to the social organisation: in Romania, as in USA and other countries the concept of family includes the parents and the children. In Mexico and other Latin American countries, the concept of family refers to the extended family formed of parents, children, uncles, cousins and other relatives.

The issue of equivalences appears very frequently when researching internationally, at every stage in the research process. Some of them will be further discussed under the other steps of the research process. Box. no. 8.1 presents the main types of equivalences that have to be ensured when researching internationally. A major difficulty in formulating research problems at international level is the unfamiliarity with the foreign environment. The lack of familiarity with the local environment may lead to false assumptions and wrongly defined research problems and further on, to false conclusions about the foreign market. Many companies conduct exploratory research at early stages of the research process in order to get more familiar with the foreign environment and understand better consumers’ actions. Also, in multi-country research studies, the self-reference criterion (SRC) may hinder the problem definition, therefore a tight collaboration between headquarters and local subsidiaries should take place at all stages of research including problem definition.


BOX NO. 8.1. Cross-culture equivalences in international marketing research

A. Construct equivalence relates to the question of whether the researcher is studying the same phenomenon in different countries. a. Functional equivalence: Is the function of the product the same in different

countries? b. Conceptual equivalence: Are the concepts used to identify activities in the

different markets similar? c. Definition equivalence: Are categories used by the researcher in different

markets equivalent from the conceptual point of view? d. Temporal equivalence: Is the product researched at the same stage of the life

cycle in different countries? B. Translation equivalence relates to the question of whether the researcher is

asking the same questions in different markets as a result of translations of original research questions. a. Lexical equivalence: is the one provided by dictionaries b. Idiomatic equivalence: consists in ensuring the same meaning of idioms in

different languages c. Grammatical-syntactical equivalence: refers to the order in which words are

used in different languages d. Experiential equivalence: refers to ensuring the same meaning of words and

sentences in the daily life of consumers C. Sample equivalence relates to whether the sample used in different countries are

equivalent and representative. a. Sampling unit equivalence: Did we include in the sample unit of each country

the persons who really influence the aspect we are researching? b. Frame equivalence: Does the listing frame used ensure equivalence of samples

in different countries? c. Sample selection techniques: Do the selection technique used ensure

comparability of samples in different countries? D. Measurement equivalence relates to the question whether the phenomenon is

measured in the same way in different countries. a. Gradation equivalence: Are the measurement units for weight, volume

equivalent in different countries? b. Scalar equivalence: Are the scales used in different countries equivalent?

E. Data collection equivalence relates to the similarity of the data collection a. Respondents cooperation equivalence: Do respondents cooperate to a similar

extent in different countries b. Context equivalence of data collection: What are the elements of context that

can influence responses in different countries? c. Response style equivalence: Is there any pattern in the response style of

respondents from different countries that make results not equivalent? Sources: Usunier J.C., 1996, Marketing across cultures, Prentice Hall, p. 143-159; Chee H. and Harris R., Global Marketing Strategy, 1998, Financial Times Pitman Publishing, p. 197-199.


8.1.2 Step 2: Planning the research

As it is shown in figure no. 8.1. at the research planning stage, the researcher has to make decision over how the study is going to be conducted. In order to design the plan of the research, he will decide over a number of few important aspects:

/ sources of data, / research methods, / research instruments, / sampling, / contact methods.

We are going to see at the level of each of the aspects what should the researcher do at international level.

8.1.2.1 Sources of data in international research At international level as at national level, there are two types of data that can be collected: the secondary data and the primary data. The secondary data are those that already exist, that have been collected with a different purpose, but can also be used in the present research study. The primary data are the data that are collected especially for reaching the objectives of the present study. Any research should start with the collection of secondary data, as these already exist and are cheaper. They are not always relevant to the problem to be solved and do not always offer all the information needed for a more documented decision. The information still needed, will be gathered based on primary data, for which a primary data collection plan will be designed. At international level there are numerous sources of secondary data that can be used, such as government publications, trade journals, banks, advertising agencies, international organizations, including information from internet sources. Table no. 8.1 presents some of the main secondary data sources that can be used at international level with their web pages addresses. When collecting secondary data at international level, there are a number of difficulties that can appear: 1. Availability of data. In developed countries sources of secondary data are usually rich (USA is seen as the best equipped country with international market data gathered by both governmental agencies and private companies). This is not the case in less developed countries were secondary data is scarce (an exception is India). Where data is missing, the researcher needs to infer data by using proxy variables values from either previous periods or from complementary or similar products, if available.


Table no. 8.1 Secondary sources of data at international level

Organization Type of information Web site address European Union server for all institutions

European Union www.europa.eu.int

CORDIS Information on EU research programs

www.cordis.lu

European Parliament European Parliament’s activities

www.europarl.eu.int

Euro The single currency www.euro.eu.intUnited Nations General UN www.un.orgUnited Nations International Trade Centre

UNCTAD/WTO www.intracen.org

United Nations UN publications www.un.org/pubs/Association of South East Asian Nations (ASEAN)

General ASEAN www.asean.or.id

World Bank (WB) General WB www.worldbank.orgInternational Monetary Fund (IMF)

General IMF www.imf.org

Organization for Economic Cooperation and Development (OECD)

General OECD www.oecd.org

Transparency International

Corruption www.transparency.de

New York Times New York Times Index www.nytimes.comWall Street Journal Wall Street Journal Index www.wsj.comAdvertising Age General www.adage.comBusiness Week General www.businessweek.comThe Economist General www.economist.comThe Economist EIU World Outlook

forecasts of trend for 160 countries

www.eiu.com

USA Government Statistics www.stat-usa.govPolitical Risk Group Political Risk Yearbook www.prsgroup.comEuromonitor European marketing data

and statistics www.euromonitor.com

Country data www.country.data.comEsomar Statistics www.esomar.nl

http://www.europa.eu.int/

http://www.cordis.lu/

http://www.europarl.eu.int/

http://www.euro.eu.int/

http://www.un.org/

http://www.intracen.org/

http://www.un.org/pubs/

http://www.asean.or.id/


http://www.imf.org/


http://www.transparency.de/

http://www.nytimes.com/

http://www.wsj.com/

http://www.adage.com/

http://www.businessweek.com/

http://www.economist.com/

http://www.eiu.com/

http://www.stat-usa.gov/

http://www.prsgroup.com/

http://www.euromonitor.com/

http://www.country.data.com/

http://www.esomar.nl/


2. Reliability of data. Even where data exist it may not be accurate and reliable. Some official statistics may be too optimistic for reasons of national pride or to fulfil conditions for obtaining international funding (IMF, WB) and this is usually the case of less developed countries. Providing inaccurate data may occur in the case of developed countries for reasons such as the tax structures: the fear of tax collection may determine adjusted data on production statistics, in EU countries foreign trade statistics may be blown up as there are subsidies offered for exports. In order to try to increase the reliability of data the researcher may:

Triangulate the data: to obtain the same information from at least three different sources and speculate on possible reasons behind the differences. Such reasons can be the calculation of some indicators based on value not on volume, or due to the fact that definition of category is not the same.

Validate data: checking the consistency of one set of secondary data with other data known as valid. In this way a correlation of variables takes place. For instance, we can check the sales of baby product with the number of women of childbearing age or with the birth rates.

Sometimes the accuracy of data suffers because of the black or grey market economy. In the GDP calculations this is not included and in some countries it can be as high as 40% - 60% of the economy. Similarly when we talk about trade statistics, the smuggling activities are not included in the official statistics, but it can influence the availability of a certain product on a market, when they are high. 3. Comparability. Cross-country research requires comparison of indicators across countries. Sometimes data coming from one country may not be comparable with data coming from other countries and cross-country comparisons are difficult to make when:

there are no universally accepted systems for reporting indicators and sometimes data needed is aggregated into different indicators, that have different definition from country to country.


Here are few examples7:

Germany classifies TV sets purchasing as “recreational and entertaining”, while the same expenditure is classified as “furniture, furnishings and household equipment” in USA.

the youth market has been defined as 10-14 age group, 13-20, 14-18, 15-24 age, group and others in different countries. Table no. 8.2 presents the age categories in a number of countries

Table no. 8.2 Age groups classifications in different countries

Mexico Venezuela Argentina Germany Spain Italy Philippines 14-18 19-25 26-35 36-45 46+

10-14 15-24 25-43 35-44 45+

14-18 19-24 25-34 35-44 45-65

14-19 20-29 30-39 40-49 50+

15-24 25-34 35-44 45-54 55-64 65+

13-20 21-25 26-35 36-45 46-60

14-18 19-25 26-35 36-50

Source: Keegan W., Op. Cit., p. 189.

local definitions of consumption of refreshment drinks were found to be different in different countries as presented in table no. 8.3.

Table no. 8.3 Definitions of consumption of refreshment drinks in different

countries

Country Definition Mexico Count of number of occasions product was consumed on day

prior to interview Argentina Count of number of drinks consumed on day prior to interview Germany Count of number of respondents consuming “daily or almost

daily” Spain Count of number of drinks consumed “at least once a weak” Italy Count of number of respondents consuming product on day

prior to interview Philippines Count of number of glasses of product consumed on day prior

to interview

Source: Keegan W., Op. Cit., p. 190.

7 Keegan W., Op. Cit, p. 189.


when data is calculated with different base years and result in not comparable data.

In order to ensure comparability data has to be tested by trying to answer to the following questions:

o Who collected the data? o How was collected? o For what purpose? (if it is any reason to make the data unreliable).

4. Timeliness (up-to-date) refers to the age of data. Data may be out of date or infrequently collected and in this case is irrelevant to the current situation. There are differences in the frequency the data is collected in different countries. For instance, in USA a population census takes place every 10 years, while in Bolivia every 25 years8. There are data more perishable in time (political opinions, inflation, productions) and data variables, that change rather slowly (population density, income distribution). Industrial production statistics can be one or two years old, while statistics related to population can be two to five years old, as data is not so perishable. In countries where inflation is high (of three or four digits), data such as income and production or GDP should be very recent, of months or even days old. In countries where inflation is stable (of low number of one digit) data can be one year or more old. 8.1.2.2 Research methods The main research methods that can be used and the international marketer has to choose from or combine are the observation, the in-depth interviewing, the focus groups, surveys and the experiments. Box no. 8.2. presents shortly each of them. There are research methods that are more suitable in some countries than others, in the sense that they are preferred or more culturally acceptable traditional and give better results:

& in USA both quantitative data and qualitative data is collected through surveys and focus groups,

& when using focus groups a high cultural sensitivity is required. In Asian cultures, strangers from outside the group are excluded.

8 Jeannet J.P. and Hennessey H. D., Op. Cit. p. 233.


BOX NO. 8.2. Research methods Observation is a reviewing of relevant persons (consumers) and environments. There are more types of observation:

the open observation when the subjects do know that they are researched, the hidden observation when the subjects do not know that they are observed, the direct observation when the consumer behavior or the phenomena of interest is

directly searched, the indirect observation when the results and the consequences of the costumer

behavior are searched, the structured observation when the data to be collected is preset on categories of

information, the unstructured observation when the data to be collected is not set from the

beginning. In-depth interviewing is a detailed personal discussion between a researcher and one consumer. Focus groups are discussions organized between a mediator and a group of 6-10 persons on a given topic in order to produce a detailed insight. Surveys are interviews (personal, mail, telephone, internet) with a large number of people in order to find out their preferences, knowledge, satisfaction related to different products, for which statistical generalization can be done. Surveys can be also:

structured, when they use a list of preestablished questions, unstructured, when the interviewer leads the discussion with each respondent

according to his answers. Experiments are research processes through which a cause (Ex: moving the position of the product on the shelf) – effect (Ex: evolution of sales) relationship is tested. Through the method one or more causal variables are changed systematically, being collected the effect variables, while other factors that can influence the effect variables are kept under control.

As a result, getting the right group dynamics necessary to get the information is hard to obtain.

& Japanese do not trust and are sceptical about quantitative methods, they think that personal interviews can offer better information than data collected by mail or telephone surveys. They also prefer observation. Nissan Company has sent a researcher to spend time in an American family (by renting a room in their house for six weeks) only to observe how Americans use their cars. Toyota Company send a researcher team in California to observe how women are using cars. They noticed that women with long nails had difficulties in opening doors and using


certain knobs on the board. Consequently, Toyota altered the interior and exterior design of the cars designated to the American market. What is interesting is that the Japanese research teams include besides the marketing people the product engineers, so they would see the reaction of customers’ and make the required changes to the product. The use of one research method or another in different markets depends also on the:

& availability of qualified personnel. For the focus groups well trained moderators are needed and this is dependent on educational services available in the market and for interviews trained operators are necessary.

& services available in the market. In order to conduct large scale surveys, specialized companies are needed.

8.1.2.3 Research instruments The most frequently used research instrument (especially in surveys) is the questionnaire. The questionnaire is a list of questions presented to respondents to which they have to respond. In multi-country research, the research instrument (the questionnaire) has to be translated from one language to another. The master questionnaire (the questionnaire conceived in the language of origin) has to be translated adequately into other languages. When translating from one language to another lexical equivalence, idiomatic equivalence, grammatical-syntactical equivalence and experiential equivalence have to be insured. This means that the translation should be grammatically correct and not only the translation of words should be done, but also the translation of concepts. Cultural nuances should be incorporated so that the appropriate message to be conveyed. Careless translations of questionnaires can lead to embarrassing mistakes and good translations are hard to accomplish. Mistakes have been made by companies, organizations and individuals throughout time due to translation difficulties. In 1994 at the United National World Conference on Population Development, held in Cairo, the concept of “reproductive health” was translated in numerous ways (that would not reflect the real meaning), due to the inexistence of the expression in many languages. In German the translation had the meaning “health of propagation”, in Arabic the formula “spouses takes a break from each other after childbirth”, in Russian the expression became “the whole family goes on holiday”, Chinese translated it as


“a holiday at the farm”, showing practically that the expression was not translatable9. In order to minimize translation errors, there are a number of recognized methods that can be used. 1. Back translation is a two phases process:

in phase one the master questionnaire is translated from the home language into the foreign language by a bilingual who is a native speaking of the foreign language,

in phase two the translated version is translated back into the home language by a bilingual who is a native speaker of the home language.

2. Parallel translation involves more than two translators translating the questionnaire independently and simultaneously. Than, results are compared and differences discussed and the most appropriate translation chosen. 3. Committee translation takes place when a group of translators are translating and discussing the questionnaire together. 4. Decentering takes place when successive translations and back translations are done, each time a different version by a different translator. The process is repeated until the original version, is translated, in a foreign language and than translated back in the same language in the same words. When building the questionnaire measurement equivalence has also to be ensured and aspects such as scalar equivalence and gradation equivalence have to be considered. Scalar equivalence refers to the fact that scores from subjects from different countries should have the same meaning and interpretation. But the standard format of scales used in survey research differs across countries:

in USA, 1 to 5 or 1 to 7 point scales are most common, while in France a 10-20 point scale is common, when measuring attitudes preferences for instance.

in some countries 1 is seen as the best regardless of how the scale is designed and in other countries 1 is seen as the worst, whatever.

The use of an uncommon scale can result in misunderstanding and frustration when reading the questionnaire and unintentional response errors. Japanese for instance,

9 Usunier J. C., Op. Cit., p. 147.


had problems in understanding the agree/disagree scale, as the consensus is the rule there, not the disagreement. Where levels of education are low, companies can use graphics and illustrations such as the funny face scale. One solution is to design cultural accepted scales for each cultural context where the questionnaire will be distributed. 8.1.2.4 Sampling The researcher has to obtain results that represent the true market situation and he can do this by reaching representative members of the population that is searched. Very rarely the entire population is examined and usually a sample is selected. In order to select a sample:

a sampling unit has to be defined a sample size a sampling procedure has to be chosen

The sampling unit refers to the definition of the population that is going to be researched. In cross-country researches comparable populations have to be identified. The population to be researched can be defined either externally (imposed criteria such as location, age, income, education based on statistical data) or internally (by internal variables such as psychological and personality characteristics that can be obtained from syndicated researches or company’s databases). There are two problems that may appear related to the sampling unit, the population to be researched:

1. Lack of secondary data. In many countries there is a lack of detailed socio-economic information. There are no breakdowns on age or on type of retailers or other detailed information that can help to build a representative sample. For instance, if we do not have the breakdown on types of retailers we cannot build a representative sample. We do not know if from 100 retailers 20% or more are boutiques, or 10% or more are supermarkets.

2. The absence of a sampling frame, a listing of the target population to be researched. This means a telephone directory for population or a database for businesses. In developed countries such listings are very


detailed, while in less developed countries, such listings may not exist simply or may be incomplete or out of date.

The sample size, refers to the number of subjects from the total targeted population to be researched (for instance, a 3 % sample of the total population). When the size of the total population is not known due to the scarcity of economic/social data, the desired sample size becomes more a guesswork. Sample sizes may vary across cultures. Heterogeneous countries (such as India where there are spoken 14 official languages) demand bigger sample sizes than homogeneous cultures (such as Thailand). The sampling procedure. Researchers prefer probabilistic sampling procedures, when each subject has an equal chance to be selected in the sample, as this enables them to make statistical generalisations. If due to the lack of secondary data and a sampling framework, there is no possible to build a probabilistic sample, a convenience sample will be used. Convenience samples will be used when data is missing as a non-probabilistic method that does not allow statistical inferences, but allows to interview those who are the most easily and convenient to reach. A convenience sample should be six time larger than a probabilistic sample in order to get results with the same reliability. The lack of detailed data does not prevent sampling, it only makes it more difficult and less reliable. The construction of the sample will depend heavily on experience and judgement. Detailed data and sampling frames are available in developed countries and less available in less developed countries. There are also exceptions, as China has a very good and detailed evidence of households from cities.

8.1.2.5 Contact methods The contact method should be taken into consideration when the sampling takes place. The main contact methods that can be used are: personal, by telephone, by mail and via internet (in some countries). The choice of the contact method to be used in a country is influenced by cultural norms and infrastructure.


cultural norms often rule out certain data collection methods. Here we have some examples: in some Muslim countries (Saudi Arabia) telephone interviewing

during daytime is not accepted as housewives do not respond to calls from strangers. They are also not allowed to remain alone with a stranger (the personal interview is also excluded).

Germans tend to show greater resistance to telephone interviewing than other Europeans.

infrastructure can also influence the data collection method that can be used. The use of mail services requires both literacy and reliable postal service. Some countries have inadequate infrastructure and this makes some contact methods to be unattractive: in Brazil and Nicaragua and some other Latin American countries a

large proportion of the mail faces huge delays or never gets delivered,

in Jordan and also in some Asian countries houses are not numbered and streets are not identified, so it is difficult to mail to them,

in some Latin American countries the letter is paid at destination, so it is difficult to send them something that they possibly do not want and ask them to pay for it,

the coverage with telephone in households varies widely between countries from the upper end: USA 93%, Sweden 90%, 80% in UK to the lower end 7% in China, 1% in the rural India. Other countries are situated in-between: 10% in Sri Lanka, 33% in Portugal10,

the state of roads and the state of regular public transportation in some countries of Africa is so poor that personal contact with certain subjects may be difficult.

The market researchers must often improvise and choose the second best alternative as a research method in order to accommodate both cultural and infrastructure local conditions. 10 Pop N.Al and Dumitru I., 2001, Marketing Internaţional, Editura Uranus, p. 148; Kotabe M. and Helsen K, Op. Cit., p. 164.


8.1.3 Step 3: Collecting the data It is important to check the quality of data collection process in order to ensure data quality. Also in multi-country research the data collection equivalence has to be ensured. There are a number of biases that can be encountered at the data collection stage:

− the non-response bias is the most severe problem that may be encountered and is due to reluctance to talk to strangers and fears about confidentiality: In Eastern Europe it was noticed a high level of reluctance to

answer to interviews. In China, surveys that were sanctioned by local authorities obtained

higher response rates. USA respondents were more inclined to answer personal questions

than the UK respondents. − the courtesy bias refers to the respondents in some cultures who give

researchers answers they feel are desired by the interviewers, they try to be polite to the researcher they try to give answers they think will please the interviewer, they do not tell what they really think. And this does not help the research. This is most commonly met in Asia and Middle East. In the Japanese culture every person has the obligation to ensure that the other person is not offended and this might induce the courtesy bias.

− the social desirability bias refers to the situation in which respondents attempt to give answers that they believe reflect a particular social status or educational level. This type of bias was noticed among well-educated respondents or upper level social classes, across countries. For instance, for questions such as What types of newspapers and magazines do you read? and How often do you go to opera? they would answer what they think a person in their position will do, not what they really do.


− the topic bias refers to the social sensitivity of particular topics in different countries: in India the discussion about sex tends to be taboo and in Thailand

signs of affections between people of the opposite sex are not allowed in public. In Asian countries respondents are more reluctant to discuss topics related to sex.

women’s role in society in Middle East countries is a sensitive topic.

discussions about taxes in European Union represent again a sensitive topic.

− the researcher bias relates mainly to the self-reference criterion when the researcher is involved in interviewing. It is recommended that a local agency to be hired to collect the data.

8.1.4 Step 4: Analysing and interpreting data The researcher must have a high degree of cultural understanding of the market where the research is conducted. In order to be able to analyse and interpret the data, he should know:

the social customs, the semantics, the current people’s attitudes, the business customs.

Therefore, it is absolutely necessary for the researcher to have a feeling of the target country either by conducting the research or at least being involved in the research process in the respective country.

8.1.5 Step 5: Communicating the results The research report is the culmination of the research process and the focus of the presentation is communication. The report has to be complete in the sense that it contains all the information required as formulated in the research objective and it


also must be concise. When reporting back to headquarters, cross-cultural communication takes place and the results of the research have to be translated in a language that is comprehendible for managers at headquarters. Specific to international research reports is to identify data sources (to ensure the accuracy and reliability of information) and to identify interviewed officials (banks, governments), but not the consumers, with names and positions. The managerial team will be the one that will use the results of the research and will make the decision based on the analysis presented.

8.2 Other international marketing research issues

8.2.1 Qualitative and quantitative research

Usually Western companies’ studies include both qualitative and quantitative research when more detailed information is needed the study starts through collecting qualitative information (detailed information about one’s thoughts and feelings of consumers for instance) through focus groups (most commonly) or observation. Than the information obtained through qualitative research is validated through a quantitative survey, whose results are generalized. Starting with qualitative research is even more necessary in an international context as we already discussed the number of unknown variables (such as habits, behaviour, attitudes influenced by culture) is much higher than in the domestic environment. Procter and Gamble was selling the Ariel detergent to the 5% of the Egyptian market that had automatic washing machines. The company wanted to extend in the market and therefore organized a “Habits and Practices” study through home visits and discussion groups (qualitative research) through which they wanted to find out the likes, dislikes and habits of Egyptians house-wives. Among 95% of homes that washed in a non-automatic washing machine or by hand the washing process consisted of soaking, boiling, bleaching and washing each load several times. Several products were used in the process. This process showed that there is potential in the market for a high performing detergent that would accomplish everything. After the basic product concept was conceived (one product instead of several to do the laundry) the company organized again a focus group to assess reaction for different brand names and later on for refining advertising and


promotion wording. The results of the qualitative research were validated through a survey (quantitative research)11. 8.2.2 Multi-country studies When conducting multicultural research, the comparability and equivalence of results must be ensured. Even through different research methods have different reliabilities sometimes in order to ensure comparability of results, different research methods have to be applied in different countries. For example, a study conducted in USA and Japan, was done by means of mail survey in USA and by means of personal contact through contact people already known by the managers (in Japan business people do not usually answer to mailed questionnaires). 8.2.3 Marketing information systems (MIS) Many companies need information and data that goes beyond specific international marketing research projects. Most of the time, daily decision are made and there is no time or money for special research. An information system already in place is needed to provide managers and other decision makers with the basic information for most of the ongoing decisions. For the global company the design of a MIS at international level is a necessity in order to be able to make comparisons between countries and in order to understand customers from different cultures and cultivate a relationship with these customers that will constitute a competitive advantage in the future. The function of the MIS is to systematically provide information resources to the company to evaluate the markets it wishes to enter. As the basis for competitive advantage shifted from having a good product to cultivating good relationships with customers, markets and suppliers, the existence of market intelligence has a key role in these relationships and represent an asset for the company. To be useful such a MIS needs to have a number of attributes12:

to be relevant, so that the data gathered to have a meaning for the decision maker,

11 Cateora Ph. and Graham J., 1999, Op. Cit, pp. 201-202. 12 Czinkota M.R. and Ronkainen I.A., Op. Cit., p. 250.


to be timely, so that the necessary information to be available when

needed, not later,

to be flexible, so that to be in the form needed by the management, to be accurate, especially information coming from the international

environment, as very quickly this can becomes outdated due to major changes,

to be exhaustive and to be based on a broad variety of factors, as there are numerous interrelationships between variables,

to be convenient to be used and to be accessed. The use of internet in research is a new opportunity not only for offering secondary data through data bases but by offering the possibility to conduct primary data collection through:

on-line surveys, on-line focus groups, e-mail marketing list.

International product policy

When going internationally product decisions are critical for the firm’s marketing activity, as they define its business, customers, competitors, as well as the other marketing policies, such as pricing, distribution and promotion. Improper product policy decisions are very easily made with negative consequences for the company as the following examples illustrate1:

• Ikea, the Swedish furniture chain insists that all its stores carry the basic product line with little or no adaptation to local tastes. When it entered the USA market with the basic product line they did not understand the reluctance of the USA customers to buy beds. Eventually the firm discovered that the Ikea beds were a different size than the USA beds and the bed linen the consumer had did not fit to the bed. They would have had to specially buy bed linen from Ikea to fit to the bed. Ikea remedied the situation by ordering larger beds and bed linen from its suppliers.

• When Ford introduced the Pinto model in Brasil was unaware of the fact that pinto in the Brazilian slang meant small male genitals. Not surprisingly sales were small. When the company found out why the sales for the Pinto model were so small it changed its name to Corcel (that means horse).

1 Kotabe M. and Helsen K., Op. Cit, pp. 301-302.


These examples show how easily companies, even the experienced ones commit international „blunders”, and emphasize once again the importance of the product policy at international level. The main product policy decisions that a company faces when going abroad comprises aspects such as:

1) What is the degree of adaptation /standardization of the company products on each foreign market?

2) What are the products that the company is going to sell abroad (product portofolio decisions)?

3) What products have to be developed for what markets? 4) What is the branding strategy abroad?

We will start our discussion about product policy by first looking to what a product is and how it can be defined.

9.1 Product concepts Most of the product concepts learned in basic marketing are applicable in international marketing, too. Therefore, we can define the product as a bundle of attributes both tangible (physical attributes) and intangible (emotional attributes) that offer satisfaction to the consumer. However, the product can be seen at different levels according to the degree of inclusion of different physical or non-physical benefits. Figure no. 9.1 presents the levels of the product and the type of benefits offered at each level.

Cateora and Graham see a product concept, whatever the product is, as being formed of three components: a) the core component: including the main functional features of the product that fulfils a basic need and offers a core benefit, such as design features and technical features, b) the packaging component that includes other elements such as styling, quality, packaging, brand name and c) the support services component that refers to the services associated to the product: installation, instruction of use, repair and maintenance, warranties, spare parts a.s.o.

Kotler sees the product concept at three levels (that are assimilated with the components from Cateora’s model): core product, actual product and augmented product. The core product fulfils a basic need and offers core benefits, the benefits that consumers attain when purchasing the good or the service. It includes aspects such


as the product platform and the basic functional and design features of the product, as well as corresponding legal requirements. The actual product offers usually physical benefits and consists of styling, packaging, trademark, brand, quality and corresponding legal requirements. Figure no. 9.1 Levels of product and associated benefits

Augmented product

Actual product

Core product

Core benefits

Physical bene fits

Services

benefits The augmented product usually offers benefits through services and includes aspects such as installation, instruction, delivery, warranty, after-sale services, credit facilities, repair and maintenance, spare parts availability and other related services. Either if it deals with the domestic market or with foreign markets, the company should be aware that the consumer looks for benefits at all three levels or in all three components of the product. In international marketing, the company should identify the changes needed at each level in order to fit the market. The consumer when it acquires a product, sees it as a whole package including aspects of all three levels and therefore, producers should also decide what they are going to offer to consumers at each level.


At international level requirements at each level can be different as we will see in the following section.

9.2 The degree of adaptation/standardization One of the main decisions in international marketing is whether to adapt or standardize the product for different markets. Standardization means offering the same product in all markets, while adaptation refers to complying to local tastes and requirements and make changes to the product to satisfy local needs by offering different products in different markets. Complete standardization is only an utopia, as even the most standardized products, (such as McDonald’s, Coca-Cola) known as global products did suffer adaptation in foreign markets. The issue is not if it is necessary or not to adapt, because there is always the case, but what is going to be the degree of adaptation required. In order to decide over the degree of standardization/adaptation the company should start by looking at the factors that possibly favour standardization and those that possible favour adaptation and identify their presence in each company/market relationship. Table no. 9.1 presents the main factors influencing both standardization/adaptation. Table no.9.1 Standardization or adaptation?

Factors in favour of standardization Factors in favour of adaptation 1. Common consumer tastes 2. Production and research and

development economies of scale 3. Marketing economies of scale 4. Centralized management 5. Strong positive country of origin

effect 6. Global competition

1. Different consumer tastes 2. Different levels of economic

development 3. Government influence and legal

requirements 4. Different use conditions 5. Local competition

Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College Publishers, p. 306.


If we take into consideration the factors that favour standardization we can see their influence: Common customer tastes refer to the market homogeneity, as there are products for which there is a world market, there is a homogenous market world-wide and they do not need modifications. These are the products for which there is a global market segment. The youth market, for instance, is a relatively homogenous market world-wide for products such as jeans, pop music, fast food, rich people. In relationship to common consumer tastes is the convergence of tastes, as another phenomenon that is taking place in recent years. Due to the fact that people travel more, communication means are more developed-cable TV, internet-, and people started to have similar tastes and wishes across the globe. Economies of scale in production and research. A standard product brings economies of scale in production, due to mass production, it also brings economies of scale in researching as the process takes place in a centralized way and is focusing on creating new global products (innovations) instead of researching in order to adapt produces to local tastes. Economies are also realised because of sourcing, as many global companies are using global sourcing for supplying their different production and selling utilities in the world. In most cases economies of scale are the key driver behind standardization, most companies standardize their products in order to be more cost effective through economies of scale. Marketing economies of scale. Standardized products facilitate standardized promotion resulting in savings on advertising. For instance, Colgate Palmolive used only two TV ads in order to promote its anti-tartar toothpaste in 47 countries, resulting in large economies on advertising. Centralized management refers to the fact that it is much easier to administer and manage one standard product in many markets than many products in many markets. The factors that discourage product standardization and encourage adaptation are discussed here:


Different consumer tastes. Consumer tastes and preferences are highly specific and often vary between countries for many products. Levitt (1983) argued that lower prices, better quality reliability and heavy promotion will make consumers world-wide to compromise on local preferences and to choose the global product. This is not always the case. Research conducted in European countries showed that in spite of European integration, customer preferences for washing machines vary across countries with respect to dimensions: British, French and Italians preferred narrow washing machines, while Germans and Swedes preferred wider washing machines2. Different levels of economic development are reflected in differences in the standards of living that further encourage product modification. Markets where there is a low per capita income have a lower purchasing power, that in many cases requires the simplification of products to make them affordable. Such countries usually have lower levels of users’ skills, that also require customisation of the product in order to make it either easier to use or with less maintenance required. Local competition usually calls for adaptation, as in very competitive markets customisation may be necessary to gain competitive advantage against other companies. Governmental and legal requirements are the main factors requiring adaptation at international level. Governmental requirements often materialise in protectionist measures. For instance, high tariffs may determine the company to buy components and produce locally, without standardization. Or the “local content” rule may determine companies to buy or manufacture locally, modifying in this way the product. Legal requirements can also determine changes of the product. For instance, perfumes sold in the Middle East cannot contain alcohol in their composition due to religion mores play the role of law. In UK and Holland margarine has to be improved with vitamins by law, while in Italy, extra vitamins in margarine are forbidden. This definitively requires adaptation to local legal conditions in order to be able to sell on those markets.

2 Chee H. And Harriss R., Op. Cit., p. 380.


Use conditions. Even if a product is used in the same way, has similar functions in different countries, the conditions in which it is used may differ substantially. Such differences may determine the product modification in order to cope with the specific use conditions and at the same time to be able to fulfil the same functions. For instance, Avon produces a moist lipstick for hot and dry climates in order to avoid melting of the solid ones. The issue is what should be the degree of globalisation, what elements of the product policy should be adapted to local conditions and which ones can remain unchanged? The company should always balance between standardization and adaptation according to local conditions. When a company wants to decide whether or not to standardize or adapt or the degree of standardization, it should look at three main elements that combine the factors of influencing the adaptation/standardization relationship with the company’s activity. The three elements are market environment, product characteristics and company considerations, as presented in table no. 9.2. Table no. 9.2 Elements to consider for standardization/adaptation

Market environment Product’s characteristics Company’s

considerations

Government influence Legal requirements Non – tariff barriers Geography and climate Level of economic development Supporting infrastructure Buying and consuming models Cultural interpretation of symbols

Product attributes Services associated to the product Brand Country of origin effect Packaging

Objectives Profitability Cost/benefits analysis Organizational capacity

Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College Publishers, p. 309.


The first thing to be studied is the market environment from each country through all its components the economic, the cultural, the political and the legal environment and to decide what are the elements from the country environment that may require or impose adaptation. Secondly, the company should look at the product’s characteristics and identify what are the characteristics of a product that should be modified in order to fit the environment. The third aspect a company should take into consideration when deciding whether or not to standardize or the degree of standardization is the company’s situation and the compatibility of this aspect with the previous two. Even if the company finds what are the elements of the environment that require some adaptation, even if it decides what are the characteristics of the product that should be adapted or standardized, the company should still look at the compatibility with other elements: Do these changes fit into the company’s objective? Is it profitable to make the changes for that particular market? Is the market large enough to bring me a profit, given the costs of adaptation? Does the company have the organizational capacity (number of employees, qualified employees, distribution systems) to adapt or to standardize? Some of the elements of the market environment a company should look at when considering the degree of standardization have been discussed under the influencing factors. Some other we will shortly discuss here. Non-tariff barriers are a specific type of protectionist measure that can influence to a large extent the degree of standardization of a company’s products in a foreign market. One of the main types of non tariff barriers are the different standards. There are more type of standards that can differ from one country to another and require adaptation: hygienic standards (for food, chemical products, pharmaceutical products), safety standards (in the auto industry: brakes, lights, airbags, seat belts), technical standards (the voltage – 220V in Europe and 110V in North America, the different shapes of plugs). Besides the standards, but also part of the non-tariff barriers are procedures such as approvals or tests of the products, that ultimately may require adaptation, after long delays. For instance, in Japan the imported pharmaceutical products have to be tested in Japanese laboratories before getting access to the market. This is justified by the argument that Japanese are physiologically different from other peoples.


The climate and the geography as part of the environment, can influence the characteristics of the product or the packaging. Cars have all air conditioning for hot climates and better heating systems and radiators for cold whether. Nestle introduced a new ingredient that has a low content of fat, in the chocolate it sells in hot climates, in order to increase its melting point. Supporting infrastructure refers to the availability, structure and type of activity of institutions of distribution en-gross and en-detail, logistical infrastructure (such as warehousing and transportation), media infrastructure (such as advertising agencies and national televisions), financial institutions (such as banks and insurance companies). Distribution and logistical infrastructure may influence the packaging of the products: when the product changes many hands until it gets to the consumer, it needs more resistant packaging. Buying and consuming models. Buying models refer to: frequency of buying (daily, weekly, at fortnight, monthly) and the quantity of buying (small quantities, large quantities). This will influence the size of packaging: in developed countries consumer usually buy in large quantities and less frequent and therefore products have to be packed in large number or large quantities. In developing countries, people buy in small quantities but more frequent, so packaging will be in small numbers or small quantities. Consuming models of the same product can differ from one country to another and consequently to require adaptation of its characteristics. The product might have a variety of utilizations. The Knorr soups are used in Western Europe to make soups, while in Latin America, as well as in Romania are used to improve the soups, therefore the product’s characteristics have been modified accordingly. The degree of literacy of consumers can influence labelling and the formulation of use instructions: in some Arab countries where the level of literacy is low, use instructions are done through drawings. The level of users’ skills that is also related to the degree of literacy, can induce product adaptations: where the level of users’ skills is low, the product will be simplified. Cultural interpretation of symbols, as part of the cultural environment can play a part in adapting products. Things, activities, symbols may have different interpretations in different countries. The marketer should know if the symbol he wants to use on the package will have the same meaning, interpretation as in the home market, or as intended. A French company exported to Germany cheese that


it was produced in the Pirinei Mountains. In order to transmit the idea of a natural product, a home-made product they had on the packaging the image of a shepard between his sheep. After an initial failure, they researched the market and found out that for the Germans the image of the shepard was associated with the dirtiness in which a shepard lives. The company changed the image of the shepard with a mountain landscape and were successful in the German market. When the company look at the product characteristics in order to decide if either to adapt or standardize it can use the three levels of the product and the three components of a product, as an analysis framework: the core component, the packaging component and the service component. The core component (the physical product with its functional features) may require both discretionary or mandatory adaptation as alterations in design, functional features, flavours, dimensions or colour might be required. A company might have to change the dimension of the product according to the consumers dimension or the dimension of the environment the product is used in, as the following examples illustrate:

• clothes, footwear, watches sold by Westerns to Asian people have to be adapted to their small dimensions and those sold by Asians to Westerns have to be adapted to their larger dimensions.

• warehouse and decorations for Japan have to be smaller as there, the space in which people live is much smaller than in Europe or America.

• in Spain, Coca-Cola failed with the 2l bottle to find out that the bottle it did not fit into the Spanish fridges. They introduced the smaller 1.5l bottle.

The colour might be changed according to the association given to a certain colour in different countries. For instance, white symbols purity in Western countries and mourning and death in some Asian countries. Green means hope in Western countries and illness in Malaysia and other Asian countries where green is associated with the jungle. P&G sold pink diapers in China and failed because pink is associated with girls. In the one-child policy China where boys are wanted, people did not want other people to think that they have a girl even when they had, so they would not buy pink Pampers3.

3 Cateora Ph. and Graham J., 1999, Op.Cit, p. 371.


The smell may also need adaptation. In 1980’s a British company sold in Japan a product for furniture polishing that proved to be unsuccessful for the older generation. When they researched to find out the causes they learned that the smell was similar to a disinfectant used to wash the toilets in 1950’s. Sales increased after they changed the smell. Also Japanese prefer for the floor washing lemon smell, as opposed to pine tree smell, as they sleep very close to the floor and the lemon smell is more pleasant to them. The packaging component includes aspects such as style features, packaging, labelling, trademarks, brand name, quality and may require both discretionary and mandatory changes. Labelling may need adaptation and in many instances is mandatory adaptation, as the following examples illustrate4:

− in Venezuela prices have to be written on the label, while in Chile is illegal to put the price on the label. This imposes a mandatory adaptation for the Latin America continent,

− in China no “temporary labels” are accepted any longer. Information should be written in Chinese on the original package,

− labels may be required to be written in more languages in multilingual countries, such as Canada, for instance.

Quality may be seen from two perspectives, as performance quality (the perspective of the firm that is to fulfil the function for which it is produced) and as market perceived quality (the perspective of the consumer: what sees a consumer as being quality and this is usually more than the performance quality). Marketers should find out what would be perceived as quality in each country/market and to comply. Packaging has in both domestic and foreign environments the same two functions, the protective function and the promotional function. The protective function aims to protect the product on its way from the producer to the consumer. At international level, when designing the packaging, the company has to take into consideration the climate of different countries and to adapt the package to it, against humidity, hot weather or cold weather. Also, the package should be adapted to the way the product is going to be handled in each country. In Japan strong packages are required, as there are a large number of intermediaries involved in the distribution of products.

4 Ibidem, p. 372


The promotional function aims to attract the customer and make a positive impression. What is attractive in one country may not be in another. The symbolic interpretation is different and should be known. Few examples are presented5:

• in Mexico yellow flowers used as a trade mark where rejected because it symbolizes death and disrespect,

• in some Asian countries the red circle trademark of one company was rejected as was associated with the Japanese flag and had a negative connotation due to the Asian history.

The support services component includes services such as repair and maintenance, instructions, installation, warranties, deliveries, availability of spare parts, etc. The level of required associated services dependy on the behavioural patterns, literacy and educational levels in different countries. The support services component is very important for industrial goods and for durable consumer goods. The offering of services depends on distributors to a large extent and a weak and inadequate distribution system may make it difficult for the company to offer such services and to standardize services across countries. The country of origin effect (COE) is one of the main factors that can affect the product policy internationally. The COE is defined by Cateora and Graham as any influence that the country of manufacture has on consumer’s positive or negative perception of the product. There are two main types of COE that are met at international level and should be taken into consideration: the country stereotypes and the country/ product stereotypes. Country stereotypes refers to the image that consumers in one country have about the product according to the country from which the product originates. Consumers have cultural stereotypes about countries that will influence their product assessment. A country image stereotype can either help or hurt a company’s product. The company has to identify to what degree does the COE hurt or help the product’s evaluation. Japanese products are perceived in the West as reliable and technically advanced. Japan is perceived as offering technically advanced and reliable products (positive influence for such products) but with no style and emotions (“short of soul” was mentioned in a study made in Europe about Japanese products). This is a negative

5 Ibid., p. 370


influence for products that would need style, design, emotions, products such as clothes or cosmetics. Kao and Shiseido, the two Japanese cosmetics companies that are very successful in Asian countries, had difficulties in Europe and North America because there is a poor image about Japanese cosmetics in these regions. We can see that there are attributes on which a country is perceived positively (high-tech in Japan) and other attributes on which a country is perceived poorly (style, design in Japan). Generally speaking products from developed countries are affected by a positive COE, while products from developing countries are affected by a negative COE. It was also noticed that in general, consumers prefer domestic products over imports (mainly in Western countries), but this is not a rule. In some Central and Eastern European countries (Russia, Romania) there is a COE against products made locally, especially technical products. However, there is a positive COE for local food and some clothes. The place of manufacture has a higher influence in many cases than the location of the headquarters. An Italian silk scarf made in China, looses from its perceived quality product attributes due to a negative COE of Chinese products. COE affects especially people who are more conservative, and less educated. Consumer expertise also makes a difference, as when few things are known about the product, the COE is higher, while when more information is known about the product and about the brand, the COE is smaller. COEs are not stable, they change over time, as consumers become more familiar with a country and products supplied by it. Country/product stereotypes refer to the fact that there are products that are associated with certain countries. For instance, perfume with France, silk with China, fast food with USA, electronics with Japan, tea with Britain, industrial equipment with Germany, pizza with Italy a.s.o. Such stereotypes are product specific they have a positive influence over products of that category, but they do not extend to other categories of products from those countries. As we have seen, products may pursue two types of adaptation, the mandatory adaptation and the discretionary adaptation. When the company is obliged to adapt if it wants to enter the market, we deal with mandatory adaptation. The mandatory/obligatory adaptation is imposed by legal requirements (safety


and hygienic standards), by existent technical standards and also by geographical climate. Discretionary/voluntary adaptation is up to the company, it is at the company’s discretion and depends on tastes, preferences, buying and consumption patterns, in one word by cultural factors. A recent study showed that the most frequent reasons for adaptation mentioned by international companies, were the mandatory reasons. Companies can pursue different degrees of adaptation/standardization that gives an indication over the marketing strategy of the company. If the company has 0-3 adaptations to its product, there is a relative standardization and on ethnocentric approach. If the company does 4-8 adaptations to its product, there is substantial adaptation and an geocentric approach. If the company has 9 or more adaptations to its product, there is total adaptation and a polycentric approach.

9.3 Product portofolio and product line management

In every country in which a company operates, it has to set what is its product mix, what are the products that the company is going to sell in that market, the products considered to be suitable for that market as well as profitable. The product mix refers to all the items a firm offers in a country. Usually companies manage their products by grouping them in product lines. A product line is a group of products that are closely related in one or another direction: they function similarly or they are sold to the same customer group or they are marketed through the same type of outlet etc. For instance, Procter&Gamble has a product mix formed of four product lines, namely detergents, toilet soaps, shampoos and household cleaners. Each product line has its depth according to the number of products contained. The detergent product line comprises products such as Tide, Ariel, Daz and others, the toilet soap product line comprises Camay, Oil of Ulay and Zest, the shampoo product line comprises Head & Shoulders and Vidal Sasson and the household cleaners product line comprises different flash liquids, flash cream, flash spray products. Usually companies sell abroad a smaller number of product lines and of items than in the home market.


In international markets, companies have to set their product portofolios by making the following decisions:

What products to maintain? What new products to add to the existing product lines? Which of the existing products to drop from the existing product lines?

These product line decisions are influenced by the firm’s international strategy. If the company’s strategy is to expand, new products will be added. If the general company’s strategy is to restrain its international operations, products will be dropped. A company’s foreign product line should not be too narrow, otherwise the few products have to bear a high, disproportionate cost of the entry due to high marketing and management costs. A company will maintain in its product portofolio all the products that are profitable and contribute to a positive image of the company in that respective market. A company has also to search its product portofolio and to drop the products that are not profitable. But the company should be aware that dropping a line in one market could result in increased overheads in other national markets for global products. When a firm adds new products to its lines in the international context, it needs to consider the overall profits, the global profits that can be obtained rather than those obtainable in a particular national market. A company can use a few strategies when adding new products in a foreign market: 1. Sell the same product as in the home market, strategy also known as the domestic market extension or the ethnocentric strategy. Usually is the case when the company thinks its home product is the best and tries to sell it elsewhere. 2. Adapt existing products to each local market, also known as the multi-domestic or the polycentric strategy. The company thinks that adaptation to local conditions is the key for success. 3. Develop a new standardized product for all markets, also known as the global or the geocentric strategy. The company thinks that success may be obtained by standardization that offers the advantage of economies of scale. In this case the company will focus on the commonalities and similarities between countries,


trying to serve the common needs through a unique standard product designed from the very beginning for the global market. 4. Acquire local brands and reintroduce. The company may acquire local production facilities, local companies that will have their own local brands. These local brands are known and have a high degree of awareness and in many cases positive image on the market, of which international companies can benefit. Therefore, the international company can keep the local brands and reintroduce them by modifying and improving the product, by changing the package and by repositioning the product. Unilever used this strategy extensively in Eastern Europe by acquiring local companies and keeping local brands along its global brand. The company sells the global brand Omo as well as local brands that have been reintroduced (in Romania Dero, in Hungary Biopan and in Poland Pollena 2000).

9.4 New product development When developing a new standardized product for all markets, the company goes through the process of new product development. The process of new product development is similar for all firms, whether they operate in the domestic market or overseas, in the sense that they do follow the same steps as presented in figure no. 9.2. Idea generation. New product development begins with ideas that emanate from many sources: employees, customers, competitive products, retailers, inventors from outside the company. The more ideas are initially considered the higher the chances to improve the process. International companies often capitalize on their global know-how by transferring new product ideas that are successful in one country to another country or market. For instance, the Dockers line of casual jeans was introduced in Japan in 1985, by the Levi Strauss Company. As the line became very successful in Japan, the company decided to launch the product in USA and Europe as well6. Screening. In the screening phase ideas with potential are separated from those that do not meet company objectives. All ideas that are interesting and also compatible with the companies’ objectives are retained for further consideration.

6 Kotabe M. and Helsen K. , Op. Cit. p. 316.


Product concept testing is the stage at which the product concept, namely the idea on which it was based the development of a new product, is tested. The product concept is a detailed description verbally and visually sometimes of the new product/service. The concept testing can play a major role in the whole process as ideas that do not attract consumers can be eliminated. Through concept testing, the new product concept is tested on the market: a marketing research project is done in order to measure consumer attitudes and perceptions towards the new product idea. A series of focus groups with the consumers are usually used to conduct concept testing.

Business evaluation or the business concept testing is the following phase. Product ideas that enter this stage undergo a thorough business analysis: market potential is evaluated, the prospective growth rate, the competitive environment, as well as the company resources necessary to transform idea into product and to launch the product in the market.

Figure no. 9.2 The process of new product development

New ideas generation

Ideas screening

Testing the product concept

Testing the business

Testing the prototype

Market test International launching Prototype development is the next phase in which the ideas with profit potential are converted into a physical product.


Market testing is the phase in which the prototyped products are tested in the real world. Market testing or test marketing is a field experiment through which the new product is marketed in a certain area (a city, a few cities or even a country) considered to be representative for the total market. A complete marketing campaign comes together with the launch of the new product. A test market can be considered a rehearsal before the product launch, as the goal of the market test is to project market share and sales volume. In international marketing a whole country may be used for market test, country called “the lead country” and according to the product performance in that country, it will be launched in other countries as well. For instance, Pepsi used Canada as a test market for its product Pepsi Max and rolled it out globally afterwards, Unilever used Thailand as a test market for its shampoo Organics, Kentucky Fried Chicken (KFC) used Singapore as a test market for the breakfast menu7. Test markets also have shortcomings, they are time-consuming, are expensive and the major inconvenient is the fact that they might alert competitors. Many MNC’s often prefer to skip the test market stage and to go directly to full-scale production and commercialisation. An alternative to real life test markets are the laboratory test markets. These may be organized in a simulated store setting in which consumers are exposed to many products, among which the new product. They are given an amount of money and asked to buy a product. Some buy the new product and those who do not, are given a free sample of the new product. All are asked to give feedback after they consume the product. The advantage of the laboratory tests markets is that it keeps it safer from competition, but they have the disadvantage that are not so accurate as the real life test markets. The launching on the market stage is the one in which products are commercialised through full scale marketing. An important issue in international marketing is the timing of entry of the new product. There are two possibilities when the company wishes to enter more country markets, as presented in figure no. 9.3:

1. the waterfall model or the sequential model, in which products are launched in one market and afterwards in more markets one after the other. It is usually used when the product is customized to local markets and this takes time.

7 Ibidem, p. 324.


2. the sprinkler model or the parallel model, when the new product is launched almost simultaneously on a global or regional scale.

Figure no. 9.3 International product launching strategies The waterfall model/the sequential model

… over 3 years The sprinkler model/the parallel model

Country D

Country C

Country B

Country A

Home country

Hom e country

Country A

Country Country Country D

Couyntry E B C

1-2 years Source: Kotabe M. and Helsen K., 2001, Global Marketing Management, John Wiley and Sons,

p. 326.


9.5 Innovations and diffusion of innovations at international level

When products are added to the product line in one country, regardless the way they are added (as imported from the home market of the company, modified for the local conditions or new global products), if they are new to that country they represent innovations for that market. When launching a new product in a foreign market, one of the most important aspects for the company becomes the process of innovations’ diffusion. The diffusion of innovations refers to the spread of new ideas/products and is the time between the introduction of the product in the market and the full adoption of the product. The goal of diffusion is to shorten the time lag between introduction of an idea/product and its widespread adoption. At international level, the process of geographic expansion can last up to few decades. For instance, McDonald’s had the time span between the USA launch and the foreign launch of twenty two years, Coca-Cola of twenty years and Marlboro of twenty five years8. The acceptance of new products by the consumer is a major concern for international companies. Usually for the adoption of a new product consumers go through step-by-step process in order to decide whether to accept or reject the new product. There are five stages in the product acceptance: awareness, knowledge, evaluation, trial and adoption. Not all the consumers have to pass through all these stages and the time taken between different stages will also differ from one consumer to another. Research revealed that there is a distribution tendency in the number of consumers adopting the product and the time period involved as presented in figure no. 9.4. There can be identified five categories of consumers: innovators (2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and laggards (16%). It is only when the early and late majority adopters enter the market that the potential of the market develops. However, a prominent role is played by the early adopters and the influence they have. Word-of-mouth spread by previous adopters has often a higher influence and impact on the adoption decision, than the non-personal factors such as media advertising have.

8 Kotabe M. and Helsen K., Op Cit, p. 325.


Figure no. 9.4 New product adoption segments

Innovators

Early adopters

Early majority Late majority

Laggards

2 ½ 13 ½ 34 34 16

x* - 2σ x - 2σ x x + σ Time of adoption of innovations

* x = mean time for adoption

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Pitman Publishing, p. 398. The diffusion of innovation in a foreign market depends on the degree of newness of the product, in other words how new is the product for the foreign consumers. Cateora and Graham9 identified more degrees of newness that a product can have in a foreign market, according to the product’s influence on existing consumption patterns:

• Congruent innovation is actually not an innovation at all it has no effect on consumption patterns, the market perceives no newness. The product concept is accepted by the culture and the innovatess consists in the introduction of variety and quality in the functional features of the product or even an exact duplicate of an existing product is introduced in the market. An example would be the sugar made either from cane or from beet.

• Continuous innovation has the least disruptive influence on consumption patterns. Usually an alteration of the product is involved rather than the creation of a new product. The modifications of the product are usually perceived as improved satisfaction due to the product use. An example would be the toothpaste with fluoride that it does not change the consumption pattern, but gives more satisfaction through higher protection. Similarly is the coffee with different flavours.

9 Cateora Ph. and Graham J., 1999, Op. Cit., p. 360-361.


• Dynamically continuous innovation has more disruptive effects on consumer behaviour and consumption patterns, but does not involve new consumption patterns. It consists of the creation of new product or considerable alteration of an existing one, fulfilling new needs. Through dynamically continuous innovations new needs are fulfilled, needs that arise from new expectations, new lifestyles. An example would be the electric toothbrush that fulfils a new need, but requires serious changes in consumption patterns. Similar are the cellular phones.

• Discontinuous innovation consists in the creation of new previously unknown products that introduce completely new consumption patterns. It introduces an idea/behaviour where there was none before. For instance, the television; computer; microwaves; internet; ATM (automatic teller machines) when they were first introduced.

The higher the degree of newness and the more changes required in consumption patterns, the more difficult is the diffusion of innovations, and the longer is the diffusion process. By analysing the degree of newness that its product brings to a society, the company may alter the degree of newness in order to gain quicker acceptance. An USA company introduced a cake mix in the UK market to cook fancy cakes with ice cream. This was customary in USA but in UK the usual cakes are dry sponge cakes. They also use fancy cakes with ice cream but only at special occasions when they buy it from the bakery, a cake mix not being good enough for a special occasion. As the UK market was unfamiliar with the cake mix, the product was a dynamically continuous innovation. By introducing the cake mix for sponge cake (a familiar cake in UK market) the innovation changed from a dynamically continuous innovation to a continuous innovation10. When a new brand of cake mix appears in the USA market there is a congruent innovation as consumption patterns do not change and the product is not perceived as something new. When a new unique flavour of a cake mix is introduced, that is a continuous innovation as minimum disruptive effect is on the consumption patterns and the product is perceived as offering improved satisfaction. When the cake mix (for fancy cakes) was introduced in the UK market, it was a dynamically continuous innovation as the consumers where not used with using cake mixes for fancy cakes

10 Ibid., p. 362.


and they used to buy the fancy cakes only for special occasions and only from the bakery. The product required a change in consumption patterns, therefore it was a dynamically continuous innovation. If the cake mix would be offered in a country where no previous knowledge of cakes exist, than we deal with a discontinuous innovation, as involves introduction of a completely new product and new consumption patterns.

As we have seen the more innovative a product is perceived to be, the more difficult is to gain market acceptance. Marketers can change the consumers’ perceptions about innovations, but first of all they have to understand what is the consumers’ perception about that innovative product. To do so, the marketer has to analyse the five characteristics of innovations and determine the rate of resistance or acceptance of the market to that particular product: 1. What is the relative advantage of the new product? Does the consumer perceive the new product as offering higher value than the existing products? If a high relative advantage is perceived, the acceptance rate will be high. For instance, when the electrical toothbrush is seen as better than the manual toothbrush as it is more efficient, the acceptance is high. 2. Compatibility: Is the new product compatible with the culture, the norms, the values, the acceptable behaviours? If the product is perceived as culturally compatible, the rate of acceptance will be high. For instance, the hygienic women tampons Tampax in Islamic countries illustrate the lack of compatibility of the product with the local culture. 3. Complexity: Is the product perceived as being a complex product, difficult to use? If the product is perceived as being complex and difficult to use, the rate of acceptance will be low. The microwave in a country with a low technical education would be a difficult product to use. 4. Triability: Is the product perceived as being risky? Is it economically risky, meaning too expensive for the value it will offer or is it socially risky, will people not agree with that product? If the perceived risk is high its triability will be low so its acceptance/rate will be also lower. 5. Observability: Can the benefits of the product be easily communicated? If yes, it means the product has a high degree of observability and will probably have a higher rate of acceptance.


By analysing the new product from the perspective of these five characteristics, the marketer can find out what are the consumers’ perceptions about the new product and once these perceptions have been identified they can be changed in order to accelerate product acceptance.

9.6 Branding strategies at international level For a company that goes international branding is important, as it is more difficult than branding in the domestic market. Branding is usually rooted in the culture of a country and brand names designed for one country can have different meanings in other languages or no meaning at all. A brand is a name, a sign, a symbol, a logo, a term or a combination of these used by a firm to differentiate its offerings from those of the competitors. In most product categories, companies do not compete with products, but with brands, with the way the augmented products are differentiated and positioned as compared to other brands. All brands are products or services in that they serve a functional purpose, but not all products or services are brands. A product is a physical entity, but is not always a brand, as brands are created by marketers. A brand is a product or a service that besides the functional benefits provides also some added value, such as11:

familiarity, as brands identify products, reliability and risk reduction, as brands in most instances offer a quality

guarantee, association with the kind of people who are known users of the brand,

such as young and glamorous or rich and snobbish. For many firms the brands they own are their most valuable assets. Associated to the brand is the brand equity that refers to brand name awareness, perceived quality or any association made by the customer with the brand name. A brand can be an asset (for Coca Cola the brand is an asset) or a liability (for Nestle the brand was a liability when the boycott for the infant milk formula was launched internationally).

11 Bradley, F., Op. Cit, p. 460.


How a company chooses a brand is an elaborated process. In France there is a company that specializes in finding international brands names. Jeannet and Hennessey present the steps undertaken by this company12: 1. The company brings citizens of many countries together and asks them to state names in their particular language that they think would be suitable to the product to be named. Speakers of different languages can immediately react in case names that sound unpleasant in their language or have unwanted connotations appear. 2. The thousands of names that are accumulated in few such sessions, are than reduced to five hundred by the company. 3. The client company is asked to choose fifty names from the five hundred. 4. The fifty chosen names are than searched to determine which ones have not been registered in any of the countries under consideration. 5. From the usually ten names that still remain in the process after this phase, the company together with the client will make the final decision. When choosing a name for products to be marketed internationally a company may consider different naming strategies, as those exemplified in box no. 9.1. There are a number of branding strategies that a company may use at international level: 1. According to the existence or not of a brand there are:

the no branded products that have the advantage of lower production costs and lower marketing costs but they have the disadvantage that do not have market identity and compete severely on price,

products with brands that can benefit a lot from their brands if brand awareness is high and the image is positive. Sometimes the brand can be considered the most valuable asset of the company.

12 Jeannet J.P. and Hennessey H.D., 2001, Op. Cit, p. 542-543.


Source: Jeannet J.P. and Hennessey HD., 2001, Global Marketing Strategies, Houghton Mifflin Company, p. 543.

6. A design, a number, a letter or some other element that is not a word or a combination of words (3M).

5. A geographical place or a common surname (Kentucky Fired Chicken). 4. A word that is descriptive to the product (Mr. Clean).

3. A word (in English or another language) that suggests some characteristics or purpose of the product (Head and Shoulders).

2. A recognizable word (in English or other language), but totally unrelated to the product (Dove).

BOX NO. 9.1 Strategies for for searching brand names 1. An arbitrary or invented word not found in any dictionary (Coca-Cola).

For instance, Coca-Cola brand’s equity was evaluated at over 35 bill. $ according to one source. The fact that brands are assets for companies is illustrated by their market value. In 1987 Nestle bought the UK chocolate maker Rowntree with 4.5 billion $, five times the book value, due to its ownership of well known brands such as After Eight, Kit Kat and Rolo. Similarly Philip Morris bought Kraft with 12.9 billion $, a price four times the book value13.

2. According to the number of products that have the same name, there are: individual brands, when each company’s product has its own name

usually with no association with the company name. Individual brands are used when the company addresses different market segments. In the cigarettes industry one producer has Camel, Winston and Winchester brands, each of them addressing different market segments,

family/umbrella/ corporate brands. When all products of the company or a group of products of the company have the same name, we have the family or umbrella branding. When this name is the corporate name, we have corporate branding. Such corporate brands are Shell, Levi’s, Sony, Kodak, Daewoo, Virgin etc.

13 Bradley F., Op. Cit, pp. 475-476.


Sometimes companies use both a specific individual name with the name of the corporation. For instance, Chocapic from Nestle, or Toyota Lexus.

3. According to the number of brands commercialised in one market, the

company may have: single brand and it is usually the case when there is a high market

homogeneity. The main disadvantage of having just one brand in a country is the limited shelf space at retailer level, resulting in lower exposure of the company. The advantage is that brand confusion for the customer is eliminated and more focused and efficient marketing is permitted for the company,

multiple brands when a company has more brands in one market. This strategy is to be used when the market is segmented and consumers have various needs. Coca-Cola company has on the Romanian market multiple brands, among which Coca-Cola, Sprite, Cappy, Fanta, etc. The advantage of this strategy is that more shelf space is gained by the company (if the consumer does not buy Coca-Cola but buys Fanta the money goes to the same Coca-Cola company). Among the disadvantages are the fact that there are higher marketing costs, as different marketing plans and programs are designed for each brand and the economies of scale are lost.

4. According to the owner of the brand

there are manufacturer’s brands as most brands we know: Levi’s, Coca-Cola, Nike, Levi’s, Adidas, etc.

there are private brands that are retailers’ brands or store brands. Retailers started to buy products and than resell them under their own name. The private brands recently became very popular. They offer high margins for retailers as compared to the margins for manufacturers’ brands, they have extensive and better shelf space, they benefit of heavy in-store promotion and they are usually low price/good quality products. In UK they represent one third of supermarket sales and their sale proportion increases in continental Europe, too.


5. According to the geographical spread of the brand, there are: global brands that have been defined by Chee and Harris14 as

brands that are marketed with the same positioning and marketing approaches in every part of the world. Some other authors consider that it is not so easy to define a global brand. However, using global brands (at least the same name everywhere) offers some advantages to the company: obtaining economies of scale, building easier brand awareness, as global brands are more

visible than local brands, by using global brands the company can capitalize on media

overlap that exist in many regions (for instance, Germany with Austria),

using global brands contributes to increased prestige for the company, as it gives consumers a signal that the company has the resources to compete globally and has the will power and commitment to support the brand world wide.

local brands are more indicated to be used in certain conditions, such as the following:

there are legal constraints. A few years ago in India, Pepsi was called Lehar as the legislation was asking that all brand names to be local.

if the brand name is already used for a similar or not similar product in that country, another brand name has to be chosen. Budweiser is an American brand of beer, but in Europe a Czech beer company owned the name. So the USA company called its beer Bud in Europe.

when there are cultural barriers and the global name is either difficult to pronounce or has an undesirable association. A company producing milk from New Zeeland, renamed its powder milk sold in Malaysia from Anchor (domestic name) to Fern (local name) because the name Anchor was a beer brand heavily advertised in Malaysia. The company considered that the consumers will not buy this product used for children if its name

14 Chee H. and Harris R., Op. Cit, p. 385.


would be associated to an alcoholic beverage, especially that a large proportion of the population is Muslim in Malaysia.

Many international companies have used local brands by adapting their domestic brands to the environment of the new foreign markets. Procter and Gamble for instance, adapted the name of its household cleaner Mr. Clean to the European markets by translating it. The brand became Monsieur Propre in France and Meister Proper in Germany15. General Motors, also adapted its brand for Europe, even though was selling the same product. The automobile became Opel in Germany and Vauxhall in U.K..16

Brand name selection procedures for international markets are therefore important, as the company has to choose either to adapt or standardize its brand name. A key issue for companies in international marketing is whether they should use global or local brands. The decision of either to use global or local names should be taken according to what each market dictates. In the countries where patriotism is high and consumers have a strong buy-local attitude local brands are recommended. Also, local brands are to be used in the countries where global brands are not known and where local brands have a strong brand equity. When the brand is strong companies should go global with it. A company should use global brands where is possible and to use national/local brands where necessary.

9.7 Protection of brands The issue of brand protection becomes an aspect to be considered due to the fact that companies are loosing millions of dollars annually, due to product and brand piracy. Products are pirated in many ways across countries:

• Imitation: names or symbols, similar to very well known brands are used. Some examples are: Colgate- Coalgate; Levi’s –Levy’s, Lewis.

• Falsification of the products takes place when the brand is copied but the products are forgeries. Asian countries are the largest suppliers of forgeries: China, Malaysia, Vietnam.

15 Jeannet J.P. and Hennessey H.D., Op. Cit., p. 544. 16 Bradley F., Op. Cit, p. 462.


• Priority. Where the laws give priority to those who register the brand

the first. A person can buy a number of very well known brand names and sell them further to those interested in falsifying or back to the manufacturers of the products, at high prices.

Therefore, a very important issue in international marketing is the issue of brand protection. Companies should protect their brands based on both national and international legislation.

National legislation is developed in accordance to the legal system of the country (see also the chapter on the legal environment):

in the code law system, brands are protected based on priority: it has the right to use the brand the company that registered it first. The system applies in countries such as France, Germany, Bolivia.

in the common law system, the priority to use the brand belongs to the company that used first the name on the market. The system applies in countries such as USA, Canada, Taiwan, Philippines.

systems that are a combination of the previous ones. For instance, in Japan the law says that the one who registered the brand first has the right to use it, but at the same time allows to those who used for a long time the name to continue to use it.

In some countries the company is obliged to “use” the trademarks (brands) in order to benefit of protection, this means to sell in that market significant volumes of the product. Most countries offer a grace period of five years before the owner has to use the trademark. Elements such as: names, signs, any distinctive elements; should be legally registered in order to be protected. International legislation. At international level there are a number of agreements concerning the protection of property rights (including brands). Among those there is the International Convention for Industrial Property Protection from Paris signed in 1883 to which are signatory over 100 countries. The member states extend the national legislation concerning trademarks protection to all member states.


9.8 Industrial goods and services Industrial goods and services when marketed internationally have certain peculiarities, given by their different nature. For both of them the issue of whether to standardize or to adapt is still the main decision as far as the product policy is concerned, when going internationally. Industrial markets are already standardized across countries to a large extent. Therefore, we can appreciate that the issue of standardization versus adaptation is less relevant to industrial products, as compared to consumer goods, as there are already many similarities in the marketing of industrial products across markets. The industrial demand influences the product policy decisions of companies. The demand for industrial products is influenced to a large extent by two factors:

− professional buyers tend to act in concert. The phenomenon is easily seen on the PC market. Supposing that the demand for PC’s declines, than all PC producers (IBM, Mc Intosh, Toshiba, etc) will decrease their demand of part components, and they all do it simultaneously (acting in concert), as they all have the same signals from the market.

− the demand for industrial goods is a derived demand. Derived demand is the type of demand that depends or results from the demand of another good. For instance, the demand of part components for PC derives from the demand of PC’s on the market. Usually minor changes in consumer demand determine major changes in the derived related industrial demand.

At international level, the product policy of industrial products faces the following specific aspects: 1. The demand for industrial goods is influenced by the degree of internationalisation of the country. The latest, most modern equipment is usually in demand in industrialized countries, while countries less industrialized might demand entire factories, not only equipment. 2. A quality product in industrial markets is a product that reflects exactly the needs and expectations of the buyer, no more, no less. No more because it might be too complicated and difficult to use and no less because it does not fulfil the need the consumer has. This is important to be known in international marketing as the way quality is interpreted in highly industrialized countries differs


of the way quality is interpreted in less developed countries. They have different expectations according to different quality standards, formed based on the different level of technological development and education. 3. The service component of the industrial product plays a major role in the international market. Services such as programming materials, quick delivery, repairs and other after sales services may be determinant in purchasing or not an industrial product. These services have to reflect the exact needs of each market. 4. Relationship marketing is seen as the key to success in industrial markets. It refers to the formation of a long term relationship with the customers, starting with gathering information on the customer needs, providing the product and the associated services and follow up to find out how satisfied is the customer.

Services represent an increasing part of the world economy and because of their peculiarities they should be treated separately. In the developed countries services account for 60% of their Gross National Product. For instance, in USA services account for 69% of the Gross National Product and employ 79% of the work force. Even in the less developed countries services account for 30% of the GNP. Globally, the service sector is growing rapidly and accounts for 25 to 30% of the world trade. The evolution of the service sector in the last years will project the future trends of the sector in the coming years:

4 services have and will have an increasing role (% in GNP) in many national economies due to changing life-styles and increasing standards of living,

4 the demand for premium services will increase, 4 the growth sectors in the world economies will be services: tourism,

transportation, computer systems, financial services, education, 4 trade barriers differ from those of physical goods and deregulation of

the service industry is expected.

When going international service companies have two main reasons and play two major roles, namely:

• Client followers when they go international to serve home-country clients, but once established in the foreign market, service companies expand their client base to local customers. Examples are hotels, accounting, advertising companies.


• Market seekers when they actively seek for customers for their services worldwide. Examples are education, transportation, tourism.

When internationalising, services face specific challenges in foreign markets to which they have to find solutions: 1. Protectionism is still higher with respect to services than to tangible goods. The non-tariff trade barriers are affecting the most services. For instance:

USA government is buying training services only from USA companies- this is a national policy.

Canada gives priority to Canadian citizens for available jobs by prohibiting employment of foreigners.

Indonesian government has monopoly on telecommunication. North Korea limits the number of tourists allowed to enter and exit the

country. GATT rules favouring world trade and diminishing protectionism referred only to goods for a numerous number of years. Since the creation of the WTO in 1995, the service industry started also to be deregulated in the international trade. An illustrative example is Japan. 2. Culture plays a much bigger role in services. Because there is a person to person (people-to-people) contact, cultural barriers may be more prominent for services. If we talk about education, classroom interaction varies substantially around the world. Students in Japan listen to lectures, take notes and ask questions (if they do it at all) only after class. Consequently in Japan the idea of grading class participation is nonsense. At the same time in Spain communication is more intense. Undergraduate classes are very large up to 100 students and students talk to their friends, among themselves, even when the instructor is talking. That is why service companies often customize the product to the local market. But even if services are less standardized than tangible products are, companies are willing to provide a consistent quality image world wide. The cultural barriers manifest not only in the relationship of the company with the customer, but also with its own employees. In Poland, at the beginning of 1990’s employees at McDonald’s were revolted that unhappy workers were expected to put on “ happy faces” when serving their clients. In Romania, one employee was


also revolted that she has been penalized 10% of her monthly salary, because she did not smile in the day when a member of her family died. Another example is that of the American transport company that received protests from its drivers in France because they were not allowed to have wine over lunch and in Britain because they were not allowed to have their dogs with them in the delivery trucks. The concept of internal marketing stands for treating the company’s employees as their customers. In other words the company should identify the needs and wants of its employees and try to fulfil them “so that” to make them more efficient. Internal marketing is very important especially for the service industry where the employee has a major role in the delivery of the service.

International distribution systems When planning for international markets, distribution plays a very important role. Sometimes distribution may be the biggest constraint to successful marketing as getting the product to the target market can be a costly process if barriers in a distribution structure cannot be overcome. Distribution channels differ to a great extent from one country to another on a number of dimensions, due to influencing factors such as culture, tradition, customs, legal requirements. There are, however a number of things that are common to all channels regardless the product category or the market. Marketing channels have been defined by Bradley as a set of independent organizations involved in the process of making a product or service available for use or consumption1. One of the main differences in establishing a domestic or an international distribution system consists of the complexity of the variables involved in the choice of “international activities”, when each foreign market has a different distribution system.

1 Bradley F., Op. Cit., p. 546.


This chapter presents the main aspects a company must consider when making international channel decisions. In order to decide over the distribution strategy in a particular country, a company should study:

& What are the general distribution structures in a country. & What are the specific (wholesaling, retailing) distribution patterns in a

certain industry. & What are the middlemen choices in that country. & What are the factors affecting the choice of the distribution channel. & How to locate, select, motivate, evaluate and terminate channel

members. & What alternative distribution strategies can be used. & What are the main logistic decisions to be taken.

10.1 International distribution patterns

In every country and in every market, consumer and industrial products go through a distribution process in order to get to the consumer. Each country has its own distribution structure. Even though distribution decisions are similar in all countries, the way they are put into practice is different because in each country there are different channel alternatives and different market patterns. Each country has its own distribution structure through which goods pass from the producer to the consumer and in each country, the behaviour of channel members is a result of the interaction of cultural environment and the marketing process of companies. Channel structures can vary from little developed distribution infrastructure found usually in emerging markets to highly developed systems found usually in developed industrialized countries. The first thing the company should do is to look at general distribution patterns in a particular country. To do so the company should analyse the types of distribution structures existent in that country, according to criteria such as philosophy and the way the product gets from the producer to the consumer. According to philosophy, there are2:

• Import-oriented channel structures. • Mass consumption structures.

2 Cateora Ph. and Graham J. , 1999, Op. Cit, p. 408-409.

International distribution systems

According to how the product gets from the producer to the consumer, there are: Conventional channel structures (that use intermediaries). Modern channel structures direct channels (to consumer).

Import-oriented distribution structures These structures originated in economies that were/are dependent on imported manufactured goods and are usually met in developing countries. Typically in such structures where the importer controls a fixed supply of goods, develops a philosophy of selling a limited supply of goods at high prices to a small number of affluent customers. It results a seller’s market, as demand exceeds supply and the customer is the one who seeks the supply. In that country the distribution structure developed has a limited number of middlemen that perform both wholesaling and retailing functions. The import-oriented philosophy influences all aspects of market activities and behaviour and determines an import-oriented attitude in which the notion of economies of scale and using the price as a way to stimulate demand are not known. For instance, in Brazil, a bank ordered piggy banks for a local promotion. Because the promotion went well, better than expected, the banker placed a reorder three times higher. The reaction of the local manufacturer was to increase the price based on the theory that with a higher demand the prices go up. This happened in spite of the fact that production costs (due to economies of scale) would decrease. In these countries there is the one-deal mentality of pricing at retail and wholesale levels. The importer controls the supply and he will set the price at whatever the market will bear. Each shipment is a deal and the price of goods will be set for every deal based on landed cost and the assessment of demand and supply at that moment. This type of attitude and mentality affects the development of intermediaries and their functions, in one word the way they perform their jobs. Today there are a few countries that fit perfectly in this model, but even if countries have developed economically and the market systems changed accordingly, if their channel structures evolved from import-oriented system, influences can still be seen. Mass consumption-distribution The philosophy in a mass distribution structure is that a supplier sells to as many as possible customers and one supplier does not dominate the distribution system. The channel structure in these countries is highly developed and has a variety of intermediaries.


The mass consumption distribution structure prevails in industrialized countries. The supply of goods is large and there is a buyer’s market as the buyer has strong negotiation power. Producers try to push the goods towards consumers and highly developed channel structures with a variety of intermediaries are developed in order to do this. The distribution system is formed on the idea that the channel of distribution is a chain of intermediaries that perform specific activities and each of them sells to a smaller unit beneath, until the chain reaches the consumer. Each intermediary has specialized functions and usually in these countries fully integrated distribution systems have developed. Traditional channel structures These are the channels that use intermediaries to get the product from producer to consumer. They also differ according to the length, as well as the form of organization. The length of the channel, according to the number of intermediaries between the producer and the consumer can be short (few intermediaries) or long (a larger number of intermediaries). The form of organization can vary from corporate (chains of retailers), to franchise (when the distributor will be a franchisee of a large company) or independent (such as solitary boutiques). Modern channel structures These are the direct channels that go straight to the consumer. Such methods can be the door-to-door, telemarketing, through catalogues, via internet or through mail. Such direct marketing techniques were initiated in developed countries and are used there on a large scale. They are also used by multinationals as a distribution channel choice in markets with insufficient and/or underdeveloped distribution systems. Traditional direct marketing firms such as Zepter and Oriflame have been successful in Latin America, Asia and Eastern Europe. The Internet gives the possibility to develop the e-commerce as a form of direct selling. E-commerce is developed in industrialized countries where computers are spread to a large percentage of population and the telephone service is cheap enough, where there is a banking system that permits payment by card and where postal and express services are well developed in order to deliver the products (logistics is a key constraint in e-commerce).


In order to emphasize the differences existent between different distribution structures at international level, a short description of distribution patterns in a couple of countries will be done. For instance, if we compare the USA distribution structure with the Japanese distribution structure, we can see that they are completely different. The American structure is characterized by a large variety of retailers, by a diminishing number of wholesalers, a lot of discount stores and large retailers that control the network. The Japanese structure is characterized by many small wholesalers dealing with a large number of retailers, and manufacturers control networks. Small retailers benefit from strong protection through The Large Scale Retail Store Law. The law strictly regulated the retail sector until 1998. The law required that any store larger than 500 square meters needed the approval of the prefecture, of MITI (Ministry of International Trade and Industry) and the agreement of local retailers. The law was designed to protect small retailers against competition coming from domestic and foreign large companies. After 1998 the Japanese distribution system started to restructure. The Retail law has been relaxed in the sense that stores larger than 1000 square meters have to get the above mentioned approvals. Specialty discounters developed in competition with the traditional stores. These type of stores offer low prices as they buy directly from manufacturers. Some of them do this based on “global purchasing” (buy anywhere in the world as long as it is as cheap as possible), global retailers arrived and consequently new choices in price appeared for the Japanese consumer. Japanese prices used to be the highest in the world (2-4 times higher than USA prices) because there was no price competition on the one hand and because of the large number of intermediaries on the other hand. The American structure serves the consumers who make large and less frequent purchases as the time became more limited in families and as people have higher incomes and can afford to spend more money at one shopping trip, while the Japanese structure serves the consumers who make small frequent purchases at small conveniences stores based on the idea that in this way they can get fresh and good quality products and a good service. Box no. 10.1 presents more details about the Japanese distribution systems.


BOX NO. 10.1 The Japanese distribution system The Japanese distribution system is complex, and highly fragmented comprising numerous retail firms and different layers of wholesalers, most of them being small organizations. Japan has traditionally been segregated by product type and the subsequent development of many specialized marketing channels. For instance, meat stores sell about 80% of the meat items. The main features of the Japanese distribution system are: 1. Personal relationship. The system puts a great emphasis on the development of strong

personal relationships with users in order to ensure both stable supply and price over a long period of time. This strong relationship of service, loyalty and commitment to consumers is passed on the whole distribution structure from producers to wholesalers and retailer. See also Box no. 4.2. about keiretsus.

2. Credit and payment. Due to a limited capital equity, producers supply goods to wholesalers who pay back in 6 months time (usually payments take place twice a year in Japan). This type of defferred payment is known as Tegatas and allows wholesalers to manage with small amount of capital.

3. Sale or return. Retailers take back goods from customers and wholesalers are willing to take back unsold goods from the retailers, showing the strong links of the Japanese distribution system and the close ties among Japanese companies.

4. Delivery. The high frequency of deliveries is much part of the system. Wholesalers sell to retailers in small quantities at regular intervals, due to the limited financial resources of the intermediaries. Many Japanese homes are small and they lack storage space, therefore they shop several times a week.

5. Cultural values. The Japanese consumer demands a high level of service, such as availability of credit and free home delivery, long opening hours and the right to return non-defective goods. On the business culture, vertical integration is very strong in Japan based on strong personal relationships.

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Pitman Publishing, p. 467-471.

The Romanian distribution structure underwent visible changes in the last 15 years. It is a distribution structure in transition from a structure dominated by large scale wholesalers that sold to a specified number of retailers certain quantity of goods according to the plan, towards a new distribution structure. During the communism there were a few large wholesalers that had territorial exclusivity and sold according to plan. After 1990 the emerging distribution structure was formed of many small private Romanian wholesalers and retailers. Many international companies have formed their own distribution force, as existing middlemen were not considered to be able to fulfil adequately all distribution functions. Starting mid 1990’s foreign large retailers, wholesalers and “cash and carry-s” entered the Romanian market, as part of their globalisation process (Metro, Sel-Gros, Bila, Carrefour, Cora).


10.2 Distribution patterns for the product category After studying the distribution structures of a country at a general level, the company should study what are the patterns of distribution in the particular industry the company function in, for that specific product. Whatever the distribution decisions the company will take these are dependent of what already exists in each country it wants to enter. Aspects such as the following ones have to be studied:

• Middlemen services. • Line breadth. • Costs and margins. • Channel length. • Nonexistent channels. • Blocked channels. • Power and competition. • Stocking.

Middlemen services. Services attitudes of middlemen vary from one country to another according to culture and to the distribution structure developed in that country. In Egypt for instance, the main purpose of the trading system is to handle physical distribution of available goods. The middlemen are not interested in promoting and selling individual items of merchandise and the manufacturer must undertake much of the promotional and the selling effort. In China, the wholesalers see as their only function to store the goods and wait for the customer to come and take it3. Line breadth refers to the number of product lines carried by wholesalers and retailers. Every country has a distinct pattern of distribution as far as the line breadth is concerned. Some countries have broad lines distribution systems as wholesalers and retailers carry everything and other countries have narrow lines distribution systems, when wholesalers and retailers are specialized on certain products. In UK traditionally wholesalers and retailers are specialized and carry single product lines such as ties, scarves, socks and cards or category product lines such as baby products. In Italy there are numerous specialty houses and in Finland retailers carry general lines of merchandise.

3 Cateora Ph and Graham J., 1999, Op. Cit., p. 416.


Costs and margins of trade companies have to be studied for every country as they differ according to the level of competition, to the services offered, to the efficiencies and inefficiencies of scale, to purchasing power and tradition. In India for instance, in urban areas competition is high and costs and margins are low, while in the rural area competition is low due to lack of capital, traders have monopoly and they practice high prices with wide margins. In USA supermarkets have a 2-3% margin, while in UK the margin is 7-8% and in Romania in the retail industry it goes up to 30%. Channel length refers to the number of intermediaries between producer and consumer. Generally it was noticed that at international level channels are shorter for industrial goods and consumer goods with high prices than for products with low prices. Non existent channels. In many countries (usually less developed countries) adequate market coverage cannot be obtained through only one channel (as in developed countries). In some other countries there are not at all appropriate channels of distribution. For instance, in Peru, the informal distribution system accounts for 25% of sales in retailing. Street markets and ambulatory sellers offer wider market penetration than formal channels. Therefore, a company should use different distribution channels both formal or informal in order to reach different market segments. Blocked channels. An international marketer may be blocked from using the distribution channel he wants due to the fact that competitors already established product lines in various channels and distributors do not want to take supplementary new products. Also, associations and cartels of middlemen may restrict the number of distribution alternatives available to a producer. In UK glasses are sold only based on prescription through registered optical (that are controlled by a few large companies), while in USA reading glasses may be bought in many different types of stores, including supermarkets.


Stocking. Sometimes foreign middlemen carry limited inventories due to lack of capital, the high cost of credit and fear of inflation. For the producer this may mean out of stock conditions and sales lost to competitors. Sometimes manufacturers are providing warehouse facilities and extend long credit in order to encourage middlemen to carry large inventories. However, for small stores large inventories are impossible to carry. Power and competition. Patterns of power concentration should be studied for each country. There are countries where manufacturers and/or wholesalers have larger power, such as Japan and other countries where retailers have larger power such as USA and countries in Western Europe. Retail patterns should be studied separately. The structure of retailing in terms of number of retailers and size is of interest. Producers can sell directly to large dominant retailers, but it can be difficult to sell directly to small retailers, who in the aggregate handle a great volume of sales.

In Italy, there are many small retailers as they are protected by local legislation. In order to open a new retail store, a company must obtain a license from a municipal board formed of local traders people.

In South Africa there are 31.000 stores in total. 1.000 of these are the large stores that concentrate 60% of the grocery sales. The rest of 40% of the sales can be covered through the 30.000 retailers, but they might be difficult to reach4.

In UK the market is dominated by few large retailers (such as Asda, Tesco, Sainsbury’s, Safeway) and access to the market is possible only through them5.

4 Ibid, p. 418. 5 Czinkota M.R. and Ronkainen I.A., Op. Cit., p. 390.


10.3 Setting and implementing

the distribution strategy

After the company studied what is available in the foreign market will decide over its distribution strategy. The main aspects related to the distribution strategy are channel design, channel management and logistics. 10.3.1 Channel design In order to make channel design decisions the company has to look first at the factors that influence the possible designs of the channel. One of the most used techniques to do this, is the so called “C” rule that was proposed by a number of authors as presented in table no. 10.1.

Table no. 10.1 Factors affecting distribution channel design – the “C” method

Cateora et al. Czinkota et. al. Usunier Chee et al.

Cost Capital requirement Control Coverage Character Continuity

Customer characteristics Culture Competition Company objectives Character Capital Cost Coverage Control Continuity Communication

Consumers and their characteristics Culture Character Capital Cost Competition Coverage Continuity Control

Company objectives Capital Cost Coverage Continuity Character of the product Communication Control Customer characteristics Culture Complementary skills Competition Channel power

Sources: Cateora Ph. and Graham J., 1999, International Marketing, Mc Graw Hill, p 436-439; Czinkota M.R. and Ronkainen I. A., 2001, International Marketing, Hartcourt College Publisher, p. 392; Usunier J.C., 1996, Marketing Across Culture, Prentice Hall, p. 349-350; Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 446-455.


Part of these factors have been approached under the study of existing product category distribution systems, as many are the characteristics of the existent distribution systems in different countries. We will be discussing some of those that are considered to be among the most important. Customer characteristics and culture. Distribution channels create utility for customers, therefore customer characteristics, such as the demographic and the psychographic ones, will be a basis for channel design decisions. The company should consider customer numbers, shopping habits, reaction to different selling techniques, income, geographical distribution. Table 10.2 presents a number of cultural influencers over distribution at retailer’s level. Table no. 10.2 Influence of culture on distribution through retailers

Selected aspects of distribution Aspects that might differ according to culture Shopping hours Is time spent shopping seen as wasted

(economic time)? Is the return of goods (complaining) standard behaviour?

Opening hours Religion based arguments in favour of restricted opening hours

Product range Products may be banned because of religious or legal prescriptions

Willingness to service consumers Human nature is good (friendliness towards shoppers) versus bad (indifference/negative view of service to others)

Waiting lines Compliance with rules Self-service versus personnel in contact

Differences according to level of educational and economic development

Source: Usunier J.C., 1996, Marketing Across Cultures, Prentice Hall, p. 352. Cost. There are three categories of channel costs that have to be taken into consideration and compared for all distribution alternatives in a country: the initial costs, the maintenance costs and the logistical costs. The initial costs include all cost for locating and setting up the channel, such as travelling expenses to locate and select channel members, negotiation costs and the capital costs necessary to set up a channel. The maintenance cost includes the cost of auditing and controlling the channel, local advertising expenses, the promotions and the operational


discounts to intermediaries or the salaries of salespeople and sales managers, as well as their travelling expenses where the company has its own sales force. The logistical costs comprise transportation expenses, storage costs, the cost of breaking the bulk shipments into smaller sizes and the costs of customs paperwork. The costs have to be evaluated in a strong relationship with functions that the distributor fulfils. There are two main types of functions that distributors have to deal with, namely the commercial functions and the logistical or the physical functions. Among the commercial functions are the credit (paying the products when they are received, not after they are sold), the promotion of the products, merchandising as one important way of promoting, conducting market studies as they are the closest to the consumer and the transfer of title from one middlemen to another and to the final consumer. Among the physical/logistical functions there are the reception of merchandise (port/airport), the transport local/national/international, warehousing, packaging/ break bulk and after-sale services. It is necessary for the company to estimate the costs of all alternatives in order to be able to choose the most suitable option. High distribution costs are usually reflected in higher prices at the consumer level and may endanger the entry in the new market. Capital requirements refer to the issue of what financial resources are necessary to maintain a distribution channel in terms of cash flows. Maximum investment is usually required when the company establishes its own channels through its own sales force. The distribution through intermediaries requires capital for providing initial inventories or loans. Coverage refers to both the number of areas in which the company’s product is represented and the quality of that representation. Coverage can be therefore assessed on geographical or market segments. The selection of one channel member over another may be influenced by the respective market coverage. It is easier to obtain geographical market coverage in large urban areas than in small cities or less populated areas. In order to determine a distributor’s market coverage the following must be determined: a) location of sales offices that indicates where efforts are focused, b) salespersons’ home base, as they generally have the best


penetration near their homes and c) previous year’s sales by geographic location that indicate the channel member’s success in each geographic area. Control. The use of intermediaries leads to loss of some control over the marketing of the firm’s products. With a direct sales force, a manufacturer can control to a larger extent price, promotion, type of retail outlet to be used and other marketing aspects. Longer channels, especially with distributors who take title to goods, often result in little or no control over the marketing activity.

Character of the product. The nature of the product will have an impact on the design of the channel:

− for the perishable goods or those with a short shelf life will be used shorter channels in order to reach the consumer quickly,

− for the products requiring after-sale services (such as technical products) short channels, such as direct sales or a trained agent, will be used,

− for non-perishable products usually longer channels will be used, − for the bulky products a short channel is preferred in order to minimize

the distance and the number of times the products change hands between channels intermediaries.

Besides the nature of the product, the size of the product line also affects the selection of channel members. For instance, a distributor or a dealer is more likely to stock a broader product line, while an agent usually sells limited product lines.

Continuity is important as channel design decisions are the most long-term of the marketing mix decisions. Therefore, maximum care should be taken in choosing the right type of channel, given the intermediaries available and the environment. Ensuring continuity rests on the company because foreign distributors may have a more short-term view of the relationship. Most middlemen have little loyalty for their suppliers. They handle their brands when they sell and they quickly reject them when they fail to produce profit during a period. Or it might be the case that when one individual retires or moves out of the distribution activity the company may find that it lost its distribution in that area country. In Japan wholesalers believe that it is important for manufacturers to continue to improve the product even after initial success. If no improvements are made local


competitors are likely to enter the market by producing the product at a lower price and distributors will turn to them6. Communication refers to the exchange of information between channel members that is essential to the functioning of the channel. There are various distances between the international company and the potential distributors, that may cause problems. The shorter the distance between the potential channel member and the manufacturer the better chances for increased communication. There are a few types of distance to consider7:

geographic distance – the physical distance separating the two partners: from Bucharest to New York,

cultural distance – the differences in values, norms and behaviour between the two partners: Asian countries have a high context way of communicating, while Westerners have a low-context way of communicating,

social distance – the familiarity with each partner’s operating methods: during Ramadan fasting period in Islamic countries no serious business takes place,

temporal distance – the length in time between the placement of an order and the actual delivery of the product: due to transformation of telecommunication and transportation it is possible at present to deliver goods in just few days from one continent to another,

technological distance – the differences in process technologies between the two partners reflected in compatibility, competitiveness, product experience and quality of the product: exports from less developed countries are perceived as inferior to exports from developed countries.

Competition is necessary to be assessed in order to decide over channel design. Channel competition can occur in a number of ways: first is the competition of products that are placed on the shelves side by side and second through blocking the distribution channel by filling them with competitors’ products and refusing the company access to the market.

6 Czinkota M.R. and Ronkainen I.A., Op.Cit., p. 401. 7 Chee H. and Harris, Op. Cit, p. 451.


The design of the distribution channel should definitively start from the company’s objectives of profitability and market share, objectives to be further translated at the level of distribution objectives once the distribution strategy is set. The main decisions that a company has to take when designing the channel refer to segmentation-targeting- positioning and to setting the channel structure. 1. Segmentation-targeting–positioning starts by dividing the market in groups through segmentation. In distribution, segments are best defined on the basis of demands for the service outputs of the marketing channel. A distribution channel also adds value to the product marketed through it and this is important to the consumer. The value-added services created by channel members and consumed by the end-users along with the product purchased are called service outputs. Service outputs include aspects such as bulk-breaking, spatial convenience, waiting and delivery time and assortment and variety8. End-users in different countries have varying demands for these service outputs and the company has to decide whom to serve and how, through the intermediaries it chooses. When targeting, the company chooses what segments to serve and what segments to ignore, given the way different consumers want to buy products. By positioning, the company will try to define what is the optimal channel to serve each segment, trying to design a distribution channel that meets the segment’s demands. 2. Establishing the channel structure involves taking decisions over the following aspects:

channel length, channel width, types of intermediaries, the use of multiple channels.

Channel length refers to the number of intermediaries involved in the physical or ownership path of the product from the manufacturer to the consumer. The company can choose long channels with a large number of intermediaries or short channels with only a few or no intermediaries at all, according to the influencing factors discussed above. Jeannet and Hennessey consider that the channel length is influenced by three aspects, namely: a) product’s distribution density, as products

8 Coughlan A.T. and Stern L., 2001, „Marketing Channel design and management” in Kellogg on Marketing,

Dawn Iacobucci (ed.), p. 252.


with extensive distribution usually have longer channels of distribution, b) the average order quantities, that often depends on the purchasing power and income of the targeted customer group and c) the availability of channel members9. Figure no. 10.2 presents possible configurations of the distribution channels for different types of products. Looking at the distribution chains, we can say that one can eliminate a middlemen but not the channel functions. Therefore, the real question is who can do the job at the least cost? The wholesaler? The manufacturer? The retailer? If there is no wholesaler, the retailer will fulfil the breaking the bulk function. If the producer sells directly to the consumer, the warehousing function will stay either with the producer or/and with the consumer. Either one buys a 1 kg detergent boxes more often or one buys a 5 kg detergent box, case in which one does not consume more, but takes over the warehousing function. Channel width refers to the number of intermediaries at each level in the distribution chain. Closely related is the distribution density that has to be set by the company. The distribution density refers to the number of outlets or distribution points required for the efficient marketing of the firm’s products. The key for setting the distribution density lays with the consumer’s shopping behaviour, in terms of the effort expended to locate a desired item. This behaviour may vary to a large extent from one country to another. The possible distribution strategies that a company can adopt from the density point of view are:

extensive (intensive) distribution, selective distribution, exclusive distribution.

Extensive/intensive distribution means that a firm tries to place its products or services in as many as possible outlets. This type of distribution is recommended for consumer goods and convenience goods for which the consumer does not make a special effort to get the product (soft drinks, chewing gum, cigarettes, etc.). Selective distribution means that a firm selects a few retail outlets to carry its products. In this case the consumer will search in more outlets before making the decision to buy the product. It is indicated for products that inspire brand loyalty from consumer (clothes, cosmetics etc.).

9 Jeannet J.P. and Hennessey H.D., Op. Cit., p. 604.


Types of intermediaries to be used. There are two basic decisions that the company has to take when choosing intermediaries to serve a particular foreign market. The first is to determine what type of relationship to have with intermediaries, the alternatives being distributorship or agency relationship. The second is that the company has to decide whether to use indirect exporting, direct exporting or integrated distribution to penetrate a foreign market. Distributorship or agency relationship? A distributor (merchant) is a company that purchases the product from the producer and sells it further. Therefore, it has more independence than the agency, being able to better control the marketing activity for product lines carried. The main characteristics are that they take title to manufacturer’s goods, assume trading risks and are less controllable by the manufacturer. An agent operates based on commission, does not usually handle physical goods and has less freedom of movement than a distributor, meaning that the manufacturer has more decision power over marketing activities. The main characteristics are that agents work on commission and do not take title to the merchandise. Middlemen are differentiated according to the fact they take title to the goods or not. Middlemen in different countries have different names but regardless the names they have, that sometimes can be misleading, the marketer should study what are the functions that the middlemen fulfil. Many middlemen in international markets wear many hats and they can be clearly identified only in the relationship with a specific firm. A middleman can fulfil all distribution functions for some companies or only some distribution functions for other companies, meaning that the same company can be an agent for a client and a merchant/distributor for another company. Indirect exporting, direct exporting or integrated distribution? Indirect exporting means to sell your products to another domestic firm that acts as sales intermediary and usually takes over the producer’s operations on the international side. Indirect exporting is practiced by firms in their early stages of the internationalisation process.

Exclusive distribution means that only one retail outlet is used to carry the product. It is assumed that the consumer will searched for the desired product and will not accept substitutes. It is suitable for products such as automobiles.


Direct exporting means that the company takes direct responsibility for its products abroad by either selling directly to a foreign customer or finding a local foreign representative to sell its products in the market. Integrated distribution means that the company makes an investment into the foreign market in order to sell its products in that market or more broadly. Such investment can be a sales office, a distribution network or even a manufacturing facility. Table 10. 3 presents possible types of middlemen that can be involved in international marketing. The use of multiple channels. Another decision that the company has to make is either to go through a single distribution channel or more distribution channels. The addition of new distribution channels is meant to offer alternative ways for current and potential customers, so that to have customized channel approaches for each distinct consumer segment in the market. For many products the use of multiple distribution channels becomes a necessity as one of the executive managers of Bloomingdale, one of the major USA retailers stated, that each product should be sold in three channels at the same time: brick-and-mortar store, catalogue and on-line channel10. However, where multiple channels are managed together, the potential for channel conflict is great. 10.3.2 Channel management The logical steps to be followed when developing international distribution channels, as part of the channel management are:

1. Locating middlemen. 2. Selecting middlemen. 3. Motivating middlemen. 4. Controlling middlemen. 5. Terminating middlemen.

Locating and selecting middlemen are the first steps in the process. In order to locate middlemen, the company establishes a number of criteria to be used in evaluating middlemen. Most companies emphasize on actual or potential

10 Coughlan A.T. and Stern L., Op. Cit., p. 264.


productivity of the middlemen, but there are more criteria that should be taken into consideration. Table 10.4 presents a model for channel member selection. Table 10.3 International channel intermediaries

Domestic (indirect) Foreign (direct) Agents (commission based) Agents (commissioned based) Broker Is a low cost agent

that brings buyers and sellers together

Broker Works based on commission and deals with commodities, operating on a country or on a group of countries basis.

Export agent Is an individual middleman that has a short term relationship with the manufacturer for whom provides a selling service in one or two markets

Manufacturer’s representative

Does not take physical possession of goods, but takes the responsibility for the producer’s goods in a city, regional market area, entire country or several countries

Export management company (EMC)

Works under the name of manufacturer, as a low cost independent marketing department with direct responsibility to the parent firm

Managing agent Conducts business in a foreign nation under an exclusive contract with the parent company, compensation being based on percentage of the profits.

Export jobber Deals mostly with commodities and works on a job-lot


Domestic (indirect) Foreign (direct) basis assuming responsibility for arranging transportation.

Merchants (take title of goods) Merchants (take title of goods) Global retailer/ wholesaler

Buys from local suppliers and sells in their subsidiaries abroad.

Complementary marketing

Arrangements to distribute the product of another company

Trading company

Accumulates, transports and distributes goods from many countries. Generally located in developing countries.

Distributor/ dealer

Has the exclusive rights in a foreign country to sell the products of the manufacturer

Buying office Purchases merchandise on request and does not have long-term relationships.

Retailer/ wholesaler

Buys from foreign manufacturers and sells the goods further.

Complementary marketing

Arrangements to distribute the product of another company. Also called piggy-backing.

Purchasing agent Purchases goods from manufacturers and sells them to wholesalers and retailers

Source: Cateora Ph and Graham J., 1999, International Marketing, Irwin McGraw Hill, p. 426-434; Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College Publishers, p. 403.

Productivity refers to the potential sales volume or how much would the company be able to sell through those middlemen. Financial strength wants to see what is the liquidity of the middlemen.


Managerial stability and capability evaluates the knowledge and managerial stability of the middlemen on which the fulfilment of the distribution functions depends. The reputation of business is important as when the producer is not known in the foreign market, the selling is influenced to a large extent by the reputation of the seller. The location of the potential intermediaries will be done based on screening the possibilities by sending letters of intention, following up the best respondents, checking prospective middlemen via references and also personally checking the promising firms and finally signing the agreement.

Table no. 10.4 Criteria for channel member selection

Characteristics Weight Rating Goal and strategies Size of the firm Financial strength Reputation Trading areas covered Managerial stability and capability Compatibility Experience Sales organizations Physical facilities Willingness to carry inventories After-sales service capability Use of promotion Sales performance (productivity) Relations with the local government Overall attitude

Source: Adapted after Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 459.

According to Cateora et al.11 the screening and the selection process should follow the next steps:

1. a letter of intention, including information about the product and what are the distribution requirements, is sent to each prospective middleman,

11 Cateroa Ph and Graham J., 1999, Op Cit , p. 440.


2. the best respondents will be asked more detailed information such as lines handled, size of the firm, number of salespeople and territory covered,

3. middlemen are checked through references from other clients, 4. personal check of the promising firm (if possible).

After the prospective middlemen have been located, the company should select those that can perform and will be eliminated those that are under financed (if we cannot support them financially through credits), those that have low sales volume, those that cannot be trusted. Experienced exporters suggest that the best way to find the suitable middlemen is to go to that country and talk to ultimate users to find out whom they consider the best distributors. After a middleman has been found, evaluated and selected, an agreement with him should be made. The distribution agreement between the producer and the middleman should include the specific responsibilities of the manufacturer and middleman including the annual sales minimum. It is recommended that initial contracts to be signed only for one year, to see the performance of the middleman for the first year. Motivating middlemen. Once middlemen have been selected, the manufacturer should motivate them in order to keep a high level of interest in the manufacturer’s products. The main motivational tools that can be used are:

• Financial rewards- incentives (discounted products) and margins. • Psychological rewards- publicity, local newspaper, trips in the country

of the manufacturer. • Communication- letters, periodicals with information, personal visits. • Support- credit, special product information, technical assistance,

product service, advertising support. • Close relationship- long term relationship, friendship in some cultures

(Arab, Japan, Latin America). The financial incentives in the form of higher than average gross margins can be used as a powerful inducement at international level, particularly for the management of independent distributors, wholesalers and retailers. The expected gross margins are influenced by the cultural history and by the channel. If a retailer usually gets a 50% margin and the firm offers 40%, the effort of that retailer may be less than expected for the company’s product. A combination of motivational tools is recommended to be used at international level to keep the distributors interested in the company’s products.


Controlling and evaluating middlemen. The company wants to exert enough control over channel members to help guarantee that they interpret and execute the company’s marketing strategies. The company has to make sure that local intermediaries implement price, sales, advertising and service policies. The issue of control becomes more difficult at international level due to the usually longer chain on the one hand and due to differences in culture, tradition, legal systems in distribution on the other hand. The issue of control becomes important when there are no integrated distribution systems and when the company distributes its products through independent intermediaries mainly. There are two types of control a company may pursue when controlling its distribution systems in a country:

Control over the system Control at middlemen level

The control over the distribution system takes place through: & cost and market coverage objectives comparison against the planned

ones, & the existence of grey markets is controlled, when through secondary

wholesaling (unauthorized outlets) the goods of the company are entering the country. Goods intended for one country are diverted (exported) through distributors to another country where they compete with existing retail and wholesale organizations. The company’s products that entered the country through unauthorized channels become the greatest competitors for its own products. Such situations can enter in conflict with exclusive arrangements with distributors and affect the relationship of the manufacturer with these distributors.

Temporary distribution audits are recommended in order to revise existing distribution systems due to changes in circumstances. The analysis should include aspects such as:

different channels used by each product line, costs of maintaining each channel and costs trends, sales trends and sales volume of each channel, types and numbers of end-users served by each channel, number of middlemen involved in channel, degree of control over channel and balance of bargaining power, contractual obligations, contract expiry dates, exclusivity rights, channels used by main competitors.


The control at middlemen level, through which the manufacturer should know and control to a certain degree the activities of the middlemen. At a minimum, marketing channels should provide the products/services as follows12:

− in desired quantities (lot size), − when needed (delivery time), − at different locations (market –decentralization), − where they are displayed and combined with complementary and

substitutable items (assortment breadth) allowing for market demand. Therefore, the company would measure performance by evaluating the outputs of the system based on evaluative criteria, such as: sales volumes, market coverage, services offered, prices, advertising. Controlling can be done through reports and also through personal visits by company representatives. When control fails or the interests of the company are not met the middlemen must be terminated. Terminating middlemen There are two main questions related to the middlemen termination: When do we terminate middlemen and how do we terminate middlemen? When? Middlemen will be terminate when they cannot be controlled, when they do not perform by not meeting the planned sales volume and when the market situation changes and the distribution strategy has to change. How? Middlemen can be terminated through simple dismissal, as in USA or Romania or with compensation because of legal protection. In some countries, legal protection makes it difficult to terminate a relationship with a middlemen. In Columbia, for instance, when a manufacturer terminates an agent, it is required to pay 10% of the agent’s average annual compensation multiplied by the number of years the agent served, as a final settlement. In other countries in order to determine whether the relationship should be ended the company has to go through an arbitration process. Whenever contracts are signed with middlemen competent legal advice is very important, so that termination conditions to be stipulated in the distribution agreement.

12 Bradley F., Op. Cit., p. 558.


10.3.3 Channel relationship After the company established the distribution strategy, it has to implement it by managing the channel through the steps discussed above, but also by managing the channel relationships. Manufacturers and intermediaries in international channels have very different perspectives. Table no. 10. 5 presents the different needs of channel members. It is necessary to achieve a minimum concordance between the objectives and the needs of all parties in the distribution system: manufacturer, intermediary and the consumer. Conflict relationships. Conflict in distribution channels arises when inter-organizational management breaks down, when one channel member’s actions prevents the channel from achieving its goals. Table no. 10.5 The needs of channel members

Factors important to manufacturer Factors important to intermediaries Final consumer considerations Product and/or brand image Company strategic issues Support assistance provided Financial returns Compatibility of the product with the

intermediary’s existing line Probability of effective long-term working relations

Trade reputation of the manufacturer

Potential intermediary’s financial status

Potential profit contribution

Management ability

Source: Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 550. Cooperation is essential for distribution due to the numerous firms involved, many of which being independent decision makers and not under common ownership. The situation is complicated by culture, distance and legal factors in international markets. Channel conflict is common but at the same time dangerous, as one channel member can harm total channel performance.


Channel conflict can have more forms: 1. According to the sources of conflict

differences between channel members’ goals and objectives (goal conflict),

disagreement over the domain of action and responsibility (domain conflict),

differences in perceptions of the market place (perceptual conflict). 2. According to the level it takes place:

vertical conflict that occurs between different levels in a marketing channel. For instance, when a channel member bypasses another member and sells or buys the product direct, or a disagreement over the way the profit margins are distributed among channel members,

horizontal conflict occurs between intermediaries at the same level in a marketing channel, such as between two or more retailers or two or more wholesalers.

In general channel conflict reduction takes place based on the application of one or more sources of power. The company has to make a difference between poor channel design that can affect the channel performance too and the poor performance due to channel conflict. Power relationships. Inducing all channel members to implement the channel design appropriately is essential. But not all of them may have the same incentives to operate in the desired manner. If a channel member does not perform appropriately, the entire channel effort suffers. One way to determine the chain to react appropriately is to have a “channel captain”, who using its channel power to implement the optimal channel design, as in many cases channel leaders use power to coordinate and implement channel strategy. A channel member’s power is “its ability to control the decision variables in the marketing strategy of another member in a given channel at a different level of distribution”13. Firms use power in bargaining, they make commitments, provide rewards, make threats and sometimes compromise in order to manage the conflict. There are five sources of power that leaders of distribution channels can use:

13 El-Ansary A.I. and Stern L.W., 1972, „Power Measurement in the Distribution Channel” in Journal of

Marketing Research, vol .9, p. 47.


& reward power: when a company is perceived as being able to offer

economic advantages (such as wider margins and promotional allowances) to a distributor,

& coercion power: when a company is perceived as being in the position to punish a distributor by reducing margin, slowing shipments and reducing territory rights,

& expertise power: when a company is perceived as possessing special knowledge (such as managerial and technical training) that can be shared to the distributor,

& referent power: refers to the attraction of being associated with other firms of well-known brands in the market,

& legitimacy power: when the company is perceived as having the right to lead (such as in the case of contractual vertical marketing).

Coordination relationship. When the disparate members of the channel are brought together to advance the goals of the channel, rather than their own independent and likely conflicting goals, the channel is said to be coordinated. The term denotes both the coordination of interests and actions among the channel members who produce the outputs of a marketing channel and the coordination of performance channel flows with the production of the service outputs demanded by target end-users. Coordination is the end goal of the entire channel management process. Channel coordination is not a one time achievement but anon-going process of analysis and response to the market, to the competition and the abilities of the members of the channel. 10.3.4 Alternative strategies to distribution When international companies find non-responsive channels abroad, they can develop alternative approaches. Among the most common alternative approaches to gain access to distribution channels are the following:

− piggybacking, − joint ventures, − original equipment manufacturers, − acquisitions, − franchising.


Piggybacking is an arrangement with another company that sells to the same customer segment, to take new products for distribution as if they were theirs. One producer (the carrier) uses their established overseas distribution network to market goods of another producer (the rider) along side their own. The carrier acts as an agent by selling the rider’s products on a commission basis. The new company is practically “piggybacking” its products on the shoulders of the established company’s sales force. The arrangement is very useful for firms that have difficulties in getting intermediaries to pioneer new products for them. In addition the firm retains control over pricing and product positioning. The method is quite common in the pharmaceutical industry. Joint ventures are projects in which two or three parties invest and form a new legal entity. In the case of distribution the foreign producer forms a joint venture with a local partner that has access to the distribution network. This is one of the most frequently used way by foreign producers to get access to the Japanese market. In 1993 the Japanese brewery market was dominated by four domestic producers: Kirin, Asahi, Sapporo and Suntory with a total of 98% market share. In order to get over the locked distribution channels, the USA producer Budweiser, established a joint venture with Kirin, the largest brewer of the four to distribute its imported products. Due to slow increase in the market share in 1998, the USA company asked its distribution partner to produce canned beer locally to assure freshness in the Japanese market14. Original equipment manufacturers (OEMs) agreement occurs when an international producer supplies products to a local firm, who in turn sells the products under the local firm’s established brand name. The international manufacturer gains access to the local firm’s distribution network and the local company broadens its product line. Distributing in foreign markets under a OEM agreement has the disadvantage that the local OEM will put its own label on the imported label and the international company does not have access to local consumers and cannot achieve a strong identity in the market. Acquisitions take place when the foreign producer buys equity in an intermediary or it buys an entire local company in order to gain instant access to the distribution channels. It is important to try to find a company that has good relationships to

14 Jeannet J.P. and Hennessey H.D. , Op. Cit., p. 618.


wholesale and retail outlets. The disadvantage is that it requires a substantial amount of capital. Franchising is another alternative distribution entry strategy to rapidly overcome traditional channel obstacles. This is an agreement in which the franchiser makes a total marketing program (including brand name, product, method of operation and management advice) available to a franchisee in a foreign market. Numerous international companies use these methods of market entry: McDonald’s, Benetton, the Body Shop.

10.4 International logistics International logistics were defined by Kotabe and Helsen as the design and management of a system that directs and controls the flows of materials into, through and out of the firm across national boundaries to achieve its corporate objectives at a minimum total cost15. International logistics comprises the materials management (as the inflow of raw materials, parts and supplies in) and through the firm and physical distribution that refers to the movement of the firm’s finished products to its customers. At international level, international logistics is even more important due to its complexity, given the fact that on average 35% a company’s expenditure is accounted for physical distribution activities. The main components of physical distribution are traffic and transportation management, inventory control, material handling and warehousing, order processing and fixed facilities location management. Table no. 10. 6 presents the main decisions that have to be taken at the level of each logistical component. Table no. 10.6 Main decisions in international logistics

Logistical activity Main decisions to be taken Traffic or transportation management Choose the mode of transport Inventory control Frequency of order in a given period

The amount to order Material handling and warehousing The way products are stored and

15 Kotabe M. and Helsen K., Op.Cit., p. 466.


moved Order processing Ways to shorten order processing Fixed facilities location management Location of warehousing facilities in

relationship to production facilities Traffic and transportation deals primarily with establishing the transportation mode. The main choices are air, sea, rail, truck or a combination of some of them. In order to take the best decision the marketer has to know the specific properties of the different modes of transport. The three most important factors in determining an optimal transportation mode are value to volume ratio, the perishability of the product and the cost of transportation16. The value to volume ratio is determined by how much value is added to the materials used in the product. Perishability of the product refers to the quality degradation over time and or product obsolescence along the product life cycle. The cost of transportation should be considered in the light of the value to volume ratio and the perishability of the product. Ocean shipping is usually used for the transport of heavy, bulky and non-perishable products such as oil, steel, automobiles. They have the advantage that container ships carry standardized containers that facilitate the loading and the unloading of cargo and inter-modal transfer of cargo. Air freight. The total volume of international trade using air shipping is small (less than 2% of the total volume of international trade of goods) even though increasing in the last years. Usually the high value small volume goods are more likely to be shipped by air, such as semiconductors, diamonds and also perishable goods such as flowers. Most goods are transported through inter-modal transportation through which more modes of transportation are employed. When different modes of transportation are involved, the company has to make sure that cargo is utilized at full load, in order to minimize the per unit transportation cost. Inventory control is important as inventory represents tied up capital and the company is preoccupied to reduce its level to the minimum required. In order to do that, many companies have adopted the Japanese system Just In Time (JIT) for delivering parts and components. Order processing has as main concern the shortening of the cycle and the allowance for lower safety stocks. At present the available communication technology influences the time it takes to process an order, where this technology is available. Mail, telephone or fax systems do not work perfectly everywhere. 16 Ibid, p. 469.


However, a rapid order processing can be a competitive advantage, as offers more satisfaction to consumers, and more satisfaction means repeated business. Material handling and warehousing refers to the way the products are handled and stored. These decisions depend on where the firm’s customers are geographically located, on the pattern of existing and future demand and the level of customer service required. For those products that have to be delivered quickly, the storage facilities have to be located near the customer. Warehousing at international level involves dealing with different climates or longer average storage periods that may require changing warehousing practices. More recently automatic warehousing has been introduced in developed countries as a new concept for the handling, storage and shipping of goods. Warehouses are often near the factory and goods are stored automatically in bins up to twelve stories high. The delivery and the retrieval of goods are controlled by a computer system. Although automated warehouses require capital significant investment in technology they have as effect a good reduction in costs. Fixed facilities location management refer to the relationship between the main fixed elements in the logistical flows, namely the production and the warehousing facilities. A balance has to be obtained between satisfying the customer’s requirements (for whom facilities have to be placed as close as possible to him so that delivery to be quick) and the overall logistic costs.

10.5 Trends in distribution

Distribution systems throughout the world are evolving permanently as a result of economic, social and political changes. Therefore, when developing a world-wide distribution strategy marketers have to be aware of possible future developments. There are a number of trends in distribution that manifest at worlds’ level and we will present them shortly here. Internationalisation of distribution is one trend as retailers of all kinds (supermarkets, discount stores, department stores, hypermarkets) are being developed globally shifting from developed countries to emerging economies. Such examples are IKEA, McDonald’s, Pizza Hut, Carrefour, Marks and Spencer, Laura Ashley, etc. The European Union motivated retailers in these countries to expand


overseas, as they saw global retailers entering their markets. Table no. 10.7 presents a number of retailers that are active at pan-European level. Table no. 10.7 The main pan-European retailers

Retailer Headquarters Markets Aldi Germany Pan-european Bata Canada Pan-european Benetton Italy Pan-european Body Shop International United Kingdom Pan-european C&A Holland Pan-european Carrefour France Pan-european Hennes&Mauritz Sweden Pan-european IKEA Switzerland Pan-european La Boutique Melanie France Pan-european Maildex Holland Pan-european Marks&Spencer United Kingdom Pan-european Metro Switzerland Pan-european Mister Minit Germany Pan-european Patagonia USA Pan-european Ter Meulen Post Holland Pan-european Thorn EMI United Kingdom Pan-european Toys R Us USA Pan-european

Source: Samiee S., 1995, “Strategic Considerations in European Retailing”, Journal of International Marketing, vol. 3, no. 3, p. 49-76.

The development of large scale retailers is another trend of the last years. The trends evolves in the existence of fewer but larger supermarkets. The factors that have been identified as contributors to this trend are17: the availability of refrigerators and freezers on a large scale, the development of transportation capacity with increased car ownership and the rise of the two income families with the consequence of a reduction in shopping time but with an increase in cash availability. Information technology influences to a larger extent the developments in distribution world wide. The retail industry moved fast to the use of electronic check-out that scans the bar codes, speeds up the checking out process, reduces 17 Chee H. and Harris R., Op. Cit, p. 443.


errors and eliminates the need to put the label on each product, improves inventory control, gives the opportunity to track consumer behaviour. Both manufacturers and retailers can collaborate in using the data offered by information technology to better satisfy the consumer. The development of direct marketing is another recent trend. The main instruments of direct marketing such as telemarketing (selling by telephone), direct mail and door-to-door sales are developed in many countries. Examples are companies like Amway, Mary Kay Cosmetics, Oriflame, Avon, Zepter, Herba Life, many of them functioning after the multilevel marketing principles. Other trends include the shift from traditional to modern structures (new forms; new alliances, new processes), the development of specialty stores (also known as “category killers”), stores that are specialized in single product lines and are called like this, due to the prices, the variety, the assortment that “kill” this product category in other stores, discount stores and supermarkets extended to a large degree in the last years in developed countries but also in developing countries.

The international pricing policy International pricing is one of the most critical and complex issues that a firm faces. Price is the only marketing mix element that creates revenue, while all the others entail costs. This characteristic of pricing makes it a very important strategic marketing instrument. Price is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service1. From the consumer point of view, price is used to indicate value when it is paired with the perceived quality of a product or service. Value can be defined as the ratio of perceived value to price. The relationship shows that for a given price, as perceived quality increases, value increases too. For some products, the price itself influences the perception of quality and the value to consumer. It is the case of products for which the consumers think that the higher the price the higher the quality. How consumers make value assessments is not fully understood, but they usually make comparative value assessments by judging the worth and the desirability of the product or service relative to substitutes that satisfy the same need. We will be looking in this chapter to the factors that affect pricing internationally, to strategies for price setting at international level and to a number of specific aspects related to price when operating internationally.

1 Berkowitz E.N., Kerin R.A. and Rudelius W., 1989, Marketing, Irwin p. 284.


11.1 Factors affecting international pricing decisions The factors affecting pricing internationally can be grouped in three categories, as presented in table no. 11.1.

Table no. 11.1 Factors affecting international pricing

Company factors Market factors Environmental factors Company objectives and policies

Competition and market structure

Regulations and government policies

Costs Customer demand and income levels

Exchange rates

Profitability Distribution channels Inflation Price control

We will be discussing some of each category. 11.1.1 Company factors Company’s and price objectives and policies. When developing a pricing strategy a company has to decide what it wants to accomplish with this strategy. A company’s pricing objectives should take into consideration the marketing objectives, and these in turn are based on the overall company strategy. The company’s objectives will vary from one market to another and they will also vary in time, as marketers have to adjust their objectives both financial (return on investment) and marketing-related (market share) according to the foreign market conditions. We have seen that pricing takes place based on the company’s objectives (such as maximizing current profits or projecting a premium image), but the pricing may also influence the overall strategic decisions of the company (based on price a company may decide to produce locally rather than export in a country). Chee and Harris presented which are the most common pricing objectives at international level. See table no. 11.2. Costs are often a major factor in price determination, because they provide a floor under which prices cannot go in the long run. The company wants to set a price

The international pricing policy

that will at least cover the costs needed to make and sell its products. Therefore, the structure of the costs becomes important. We know that the company costs consist of two parts: the variable costs (which change with the sales volume) and the fixed costs (which do not vary with the sales volume). The way these two components are taken into consideration in the price determination depends on the pricing strategy used by the company. See the section on pricing strategy. Table no. 11.2 The most common pricing objectives

Pricing objectives Description Return on investment Prices are set at a predetermined level of return on the

capital outlay on the short term Market skimming The firm wants to get as much profit as possible from the

market in a short period of time (through a high price) Market penetration The firm wants to grab as much market share as possible in

a short period of time (through low price) Market stabilisation The firm (usually in a position of market leader) wants to

maintain the status quo Early cash recovery When the firm has a liquidity problem, it wants to generate

high volume of sales and a high cash flow (special gifts, discounts)

Prevent new entrants Setting a low price in order to prevent new entrants from entering the market

Product differentiation Firms with a broad product range that wish to segment the market can do this on the basis of price.

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 483-485.

11.1.2 Market factors Competition and market structure represents another key factor in international price setting. The differences in the competitive situation across countries usually lead to cross border price differentials. In some countries the presence of counterfeit products could force the firm to lower the price in those markets. Also the prices of competitors’ products (the substitute products for the consumer) have an impact on the sale volume attained by the international company. The decision the company has to take is whether to price above, at the same level


or below the competition. Any price differential from competitors has to be justified in the minds of consumers by a differential in utility, namely perceived value. The closer the substitutability of products, the closer prices should be. The type of market structure or nature of competition (oligopoly or monopoly) can influence the firm’s pricing strategy. The firm must price the product more competitively if there are other sellers in the market. A firm entering an oligopoly market where only few sellers dominate the industry, will be under pressure to keep its prices in line with the existing firms. In some African countries where the import of cars is controlled by a few competitors, luxury cars are extremely expensive. On the other hand a sole supplier of a product, has virtually a monopoly position, but it has larger flexibility to set the price. Customer demand and income levels are important elements to be taken into consideration when setting the price. While the costs set the floor for the price, the consumer’s perceived value attached to the product will set the ceiling of the price. Consumer demand depends on the buying power (correlated with the income level), the tastes and habits of consumers, their lifestyles and substitutes. These demand conditions are different from one country to another, with consequences over prices. The income level and the buying power is a key aspect in determining the price. The relationship between price and demand is expressed in the concept of the elasticity of demand, which measures how responsive is the demand to a change in price. In the countries where there are high income levels, consumers have lower price elasticities towards goods such as food, shelter and medical care, one reason being the lack of other alternatives such as “do it yourself” as in lower income countries. In the countries where the per capita income is low, consumers are very price-sensitive. Practicing premium prices is difficult in such countries, therefore an option is considered to be to go for the mass market by adjusting the product (downsizing or lowering the quality of the product)2. Price sensitivities change over time, and even in developed countries with a high per capita income, in periods of recessions, customers become more price sensitive. Each country market should be stratified by estimating the number of customers who will buy at several levels of price, so that to choose whom to address.

2 Kotabe M. and Helsen K., Op. Cit, p. 370.


Distribution channels. When setting the prices the international marketer has to consider distribution channels, too, besides the consumers. The distribution costs add up to the production costs and will increase the final price to the consumer. Distribution costs are function of channel length, gross margin they practice and logistics. Such aspects vary from one country to another, affecting the final price to consumer. The manufacturers and the intermediaries have to co-operate in order to have a successful pricing strategy. Things became more complicated in the last decades as the balance of power went more towards the distributors. Large retailers order in bulk and they heavily bargain for large discounts with manufacturers. 11.1.3 Environmental factors Regulations and government policies have both a direct and an indirect impact on pricing policies. Factors that have a direct impact on pricing policies include taxes rates (such as the value added taxes) and tariffs’ levels, import licenses and antidumping legislation. Tariff levels differ from country to country. In countries where there are high custom duties and the price elasticity is high, the price might have to be set at lower levels if the product is to achieve a satisfactory sales volume. Consequently, profitability will be low in these countries. Also when import duties in a country are high on finished products, but relatively lower for component parts and materials, it might be an incentive to produce or assemble locally. Import licenses are issued by some governments, when they consider that prices are too low or too high. For instance, one company from Brazil needed a product that Brazilian manufacturers were unable to provide due to lack of capacity. Brazilian authorities (supposedly to foster local production) did not permit the importation of the product from USA or Japan because it was available in these countries at a price lower than the Brazilian manufacturers charged3. Antidumping regulations are found in most industrialized countries. Dumping has been defined as the practice of selling in foreign markets at prices below those in the domestic market or below the production cost. Antidumping legislation is enacted by countries that wish to protect certain local industries from price fluctuations that would disrupt local production. Antidumping actions are allowed under the WTO (World Trade Organization) provisions, as long as they meet two

3 Albaum G., Strandskov J. and Duerr E., Op. Cit., p. 366.


criteria: “sales are less than fair price” (it usually means selling abroad at prices below those in the country of origin) and “material injury” to a domestic industry. In 1998 there were 225 WTO antidumping cases opened by twenty-six countries. In 1980’s and 1990’s 80% of the antidumping charges have been brought by USA, Canada, European Union and Australia often against Asian countries. Exchange rates movement is one of the most unpredictable factors affecting pricing. As the exchange rates move up and own, they affect all producers. An appreciation or depreciation in the relative value of a currency can affect the firm’s pricing structure and profitability. A company’s costs are often calculated in the domestic currency and as this currency weakens it means that the company’s goods are cheaper in another currency. This can represent a new opportunity as prices in foreign markets are reduced and sales and market share can be kept or increased. The companies that produce in countries with appreciating currencies have more difficult situations. The goods manufactured in countries whose currency gets stronger against the currency of the exporting country will have higher prices in the exporting market and the export demand will drop. Inflation rate is another major variable that can affect the cost and the pricing of a product. First countries have different inflation rates and second inflation varies over time. In stable economies inflation rate is a single digit inflation (in most EU countries inflation rate is between 0-2%) while in instable economies inflation rate can go up to several hundred or even thousands (it was the case of Brasil in 1980’s). In such highly inflationary environments the company has to adjust the prices permanently to keep up with inflation, in this way product may turn out to be more expensive. In such countries companies may price the product in a stable currency (dollar, Euro, Yen) and translate prices into the local currency on a daily basis. Besides the difficulty in setting the price in highly inflationary countries, there are also other aspects that can influence negatively the company’s activity: costs may rise faster than the inflation rate, in highly inflationary economies price controls are normally implemented and also foreign exchange controls, stopping the firm to remit its profits. Price controls. In some countries governments regulate and control prices either for the entire economy of for specific industries (such as health, education, food and other essential items). The justifications for price control are mainly political,


but also economical: the purpose is to stop inflation and the accelerating wage-price spiral, as well as to protect consumers. In such markets the company functions as in a regulated industry. European Union countries have the drug industry highly regulated: in UK drug prices are established through the Pharmaceutical Price Regulation Scheme that limits the overall profitability of drug companies even though they are allowed to set prices. Also drugs to be included on the list for governmental reimbursement to customer have price limits and consequently there were companies that had to diminish their prices in order to qualify. France and Germany also have restrictive measures in order to limit the overall health costs4. In some countries price controls are so severe by setting maximum ceilings to price, that companies might have to restrain from the market. Cadbury Schweppes sold in 1982 its plant in Kenya as price control made its operations unprofitable5. Company representatives usually sustain that there are a number of negative consequences to price controls:

the maximum price often becomes the minimum price if a sector is allowed to price increase, because all business in the sector will take it regardless of cost justification,

the wage-spiral advances highly in anticipation of price controls, labour often turns against price restrictions because they are usually

accompanied by salary restrictions, authorities raise less taxes because less money is made.

11.2 Pricing strategies International pricing is influenced as we have seen by a number of factors: it starts from the companies’ objectives, is developed through the company policy, is based on product cost and its structure and takes into consideration environmental factors. Considering these factors the company may use different strategies for pricing at international level. According to the pricing situation, presented by Becker6 as being first-time pricing, changing pricing and multiple product pricing, the company may use different pricing strategies. The main alternatives when choosing one way or another of pricing are presented further. 4 Jeannet J.P. and Hennessey H.D., Op. Cit., p. 409. 5 Czinkota M. and Ronkainen I.A, Op. Cit., p. 576. 6 Becker H., 1980, „Pricing an international marketing challenge”, in International Marketing Strategy, eds.

Thorelli H. and Becker H., Pergamon Press, p. 207.


Standardized or adapted pricing? One question related to standardization adaptation of prices is: Can price be standardized? Can we set an uniform price in all countries? In nominal terms, we can set the same value price everywhere. Suppose a hamburger is 4$ everywhere. But what does it mean 4$ in each country? Is the price really the same? We can compare what the 4$ means in every country by comparing how much time one spends in each country to bring up this amount of money. When one buys something one is actually exchanging some of his time. If he makes 4$/h the price of a hamburger is one hour work. For someone who makes 40$/h the price of buying a hamburger is 6 minutes of his work. This can be really a valid criterion to see what price means in every country. The price is not the same because the purchasing power differs from one country to another. To conclude, we cannot standardize price in nominal terms, due to differences in incomes and purchasing power, positioning of the product in different countries, due to product life cycle (the product might be in different stages in different countries requiring therefore a different price). When we talk about standardizing prices we have to distinguish the idea of standardizing prices versus standardizing price policies. We cannot standardize prices, but we can standardize pricing policies. We just have to retain that standardising price is not the same as standardizing pricing policies. We can say that our strategy is to have a competitive price in all markets, to sell the product at a low price and to position it as a mass product and we will set the price to whatever this means in each country. Full cost pricing or marginal pricing? The company can chose any of the two above mentioned strategies. The full cost pricing strategy is also called the cost-plus pricing. This approach adds the international costs and a mark up at the domestic manufacturing costs. In other words, the overseas customers pay for the total production cost of the product (including the fixed costs), as well as for the marketing costs and logistical costs of selling the product abroad. In many cases this method leads to very high prices for the end user, making the product uncompetitive in some instances. The marginal cost pricing is also known as the dynamic incremental pricing. Through this method the price is set based on only variable costs for production and the exporting costs for the product, in other words the costs incurred for the production of that particular item, based on the judgment that the overheads are recuperated


from the previous products. The actual cost floor can be somewhere between direct costs and the full cost. If the export price is much lower than the domestic price (due to non-inclusion of fixed costs) dumping accusations might be triggered from the export market. Among the reasons for pricing exports at less than the full price are7: to assist a dealer organization to grow, to keep a group of employees working together, to sell a special product outside the usual export line, orders for large volumes, the export customer provides his own installation and services and when incremental sales may result. On the short run when the company has excess capacity, prices can be set only on direct costs, such as labour, raw materials, shipping, but on the long run prices should recover full cots. Skimming or penetration pricing? A company may enter new markets either using high prices or low prices. The skimming strategy consists of selling products at high prices in a new market, based on the idea that you are selling a new product, an innovative product and you can maximize your profits until the competition enters the market. This strategy can be used in those countries where there are only two income level groups: the wealthy and the poor. The poor cannot buy the product because its cost is higher than the price they can afford to pay and you address the wealthy segment that is usually in-sensitive to prices. For instance, high tech products: when they are new they are sold at high prices, the market is skimmed by addressing those who are willing to pay a high price for a new product. The skimming strategy deliberately attempts to reach a market segment that is willing to pay a premium price for the product. The strategy is used in the introduction phase of the product life cycle, by limiting the demand to the early adopters who are willing to pay the price. The goals of this pricing strategy are on the one hand to maximize revenue on limited volume and on the other hand to reinforce the customers’ perceptions of high quality, the price being part of the positioning strategy. As a form of the skimming strategy, some companies have the objective to make the largest short run profit possible and than retire from business, little thought being given to the company’s permanent position in the market. Another form of the skimming strategy is what is called the sliding down demand curve that has the objective to become established in the foreign market as

7 Albaum G., Strandskov J., and Duerr E., 1998, International Marketing and Export Management, Addison

Wesley, p. 362.


an efficient producer at optimum volume before foreign or domestic competitors get in. The strategy consists of starting with an entire emphasis on pricing on the basis of what the market will bear and moving from this point toward cost pricing at a planned pace. The pace must be slow enough to pick up profits, but fast enough to discourage competitors from entering the market. It is considered that the companies following this strategy are seeking to recover development costs and to become an established entity in that market8. The other strategy the company can follow is the penetration strategy. In this case the objective is to “penetrate” the market, to get a good market share, to cover the market well in a short period of time and it is done by selling the product at low prices. Obtaining the high market share in a short period of time will compensate for a lower per unit return. It is usually a competitive manoeuvre that envisages the creation of a loyal customer base and such an approach usually requires mass markets, price sensitive customers and decreasing production and marketing costs as the sales volume increase. As forms of the penetration strategies Albaum, Strandskov and Duerr have identified three forms9: the expansionistic pricing, the pre-emptive pricing and the extinction pricing. Expansionistic pricing means that the price goes much lower in order to get a larger percentage of customers who are potential buyers at very low prices. The pre-emptive pricing means to set the prices so low in order to discourage competition, the price level being close to the total unit cost. Temporarily prices can also be set below the cost in order to discourage competition, based on the assumption that profits will be made in the long run. The extinction pricing has the purpose to eliminate existing competitors from international markets, by again setting very low prices, close or under the total unit cost. The strategy may be adopted by large low-cost producers with the purpose of driving weaker marginal and small producers in the industry. Both pre-emptive and extinction strategies are associated with dumping in international markets, case in which foreign governments may impose antidumping sanctions or close the market completely to the producers. If similar products exist in the target market, market pricing can be used, by determining the price based on competitive prices. This strategy is used when the company has no choice but to accept the prevailing market price.

8 Ibid, p. 371. 9 Ibidem.


Whatever the pricing strategy the company uses, the one who finally decides what is the right price is the consumer. He sets the price at the level he perceives, he receives value for the money paid (for that price). Companies from different countries can use different strategies in setting the price for their products as figure no. 11.1 presents the differences between the USA typical system and the Japanese typical system. An important aspect when setting the export price internationally is the price quotation. Different levels of prices can be used when exporting according to who pays the transportation, handling and insurance costs. Table no. 11.3 presents the main price quotations under the INCOTERMS system, that is a voluntary system, but that is applied in courts and arbitration bodies when is the case. Table no. 11.3 Price quotations (INCOTERMS)

INCOTERMS (main terms)

Description

Ex works (point of origin)

The seller’s responsibility and costs ends at this point in his home country (ex factory, warehouse, mine, point of origin)

Free on board (FOB) The seller’s responsibility and costs end in most cases when the goods are loaded on the appropriate carrier (ship or other)

Free along side (FAS) The seller has to provide the delivery of goods free alongside, but not on board of the transportation carrier, but only in the port of shipment.

Cost and freight (C&F)

The seller’s responsibility ends when the goods are loaded on board a carrier or in the custody of a carrier. The seller is responsible for paying for the transportation, but the buyer still has to pay for the insurance.

Cost, insurance and freight (CIF)

The seller responsibility ends when the goods are loaded on board a carrier and also has to provide and pay for the transportation and for the insurance.

Ex dock The seller is responsible to provide and pay all the costs so that the goods arrive on the dock of the overseas port of destination, with the import duty paid.

Source: Albaum G., Strandskov J. and Duerr E., 1998, International Marketing and Export Management, Addison Wesley, p. 380-383.


Figure no. 11.1 Price setting strategies USA and Japan

Market Research Market Research

Product Characteristics Product Characteristics Planned Selling Price Less Desired Profit

United States Japan

Design

Engineering TARGET COSTS Supplier

Pricing Design Engineering Supplier Pricing

Target costs for each component force marketers, designers and engineers from all departments and suppliers

COST

to struggle and negotiate trade-offs If cost is too high, return to design phase

Maufacturing

Continuous Cost Reduction Periodic Cost Reduction

Source: Robert M., 1993, Strategy Pure and Simple: How Winning CEO’s Outthink Their Competition, McGraw Hill, p. 115.

11.3 Specific aspects in international pricing Price escalation occurs when the price in the foreign market ends up higher than the price in the domestic market due to transportation costs, local taxes, custom duties, distribution margins, export documentation charges, insurance etc.

Maufacturing


Transportation costs are important because international marketing requires shipments of products over long distances. The contribution of transportation cots to the final price depends on the type of product. High technology products are less sensitive to transportation costs than standardized consumer goods or commodities. For expensive goods (such as computers and electronic instruments) transportation costs usually represent only a small fraction of total costs and rarely influence pricing decisions, while for commodities, transportation costs represent a higher percentage from the total costs and can decide who gets an order. Tariffs and local taxes also add to the domestic costs. Custom duties can take three forms and contribute to the final price differently: specific (is a flat charge per physical unit imported, such as 15% per machine), ad valorem (is a percentage of the value of goods imported, such as 20% of the value of imported sweaters) and compound (includes both a specific and an ad valorem charge, such as 1$ per camera plus 10% of its value). Administrative costs consist of fees for imports certificates or export or import licenses and other documents. Distribution channel costs. Every time the product goes down the channel towards the consumer, somebody gets a commission every time the product changes hands there are more taxes paid (VAT), there are added more margins and the product gets more expensive. The larger the number of intermediaries the higher the final price, more handling and transportation is needed, more margins. Price escalation it also a problem of poor channel design. All these elements add up and increase the price in the foreign market. Table no. 11.4 presents an example of price escalation for a good that can be sold both through an importer or direct to a wholesaler. Price escalation can increase the export price with few percentages until up to 100% or more. For instance, an USA company exporting household cleaning products to South America, by adding transportation, import duties and taxes, wholesaler distribution margins, retail margins and VAT ended up in an excess of 300%10. This type of escalation provides a strong incentive to locate production closer to the consumer in order to diminish the costs.

10 Keegan. W., Op. Cit, p. 416.


Table no. 11. 4 Price escalation

Cost categories per unit Domestic

channel (Euro) Export channel (Euro)

Firm’s price 40 40.00 40.00 Insurance and shipping costs

4.00

4.00

Landed cost 44.00 44.00 Tariff (20% of the landed cost)

8.80 8.80

Importer’s cost 52.80 Importer’s margin (25% on cost)

13.20

Wholesaler’s cost 40.00 52.80 66.00 Wholesaler’s margin (33.3% on cost)

13.33 17.60 22.00

Retailer’s cost 53.33 70.40 88.00 Retailer’s margin (50% on cost)

26.66 35.20 44.00

Retail price 80.00 105.60 132.00 Price escalation 32% 65%

There are two strategies that the company can follow when price escalation occurs: 1. To adjust the marketing mix and to position the product as a luxury product highly priced. This strategy involves the use of the total cost pricing that adds to the production costs, the export cost. By adopting this strategy the company sacrifices volume to keep a high unit price. Lego, the Danish toy maker sells its building blocks in India with prices comprised between 6$ and 223$, addressing middle-class parents by emphasizing the educational value of the Lego toys.

2. To diminish the price and bring it in line with what the domestic consumers pay, taking also into consideration the foreign market prices. This approach is used when the marginal cost pricing method is used. There are


a number of ways to try to lessen export prices. Kotabe and Helsen and Cateora and Graham present some of these methods for lowering the export price11:

1. Rearrange the distribution channel. Distribution channels are often responsible for price escalation, either due to the length of channel or the high margins practiced by intermediaries. One way to lower export prices is to shorten the channel and to try to negotiate with intermediaries lower margins. Obtaining lower margins from distributors is possible only when a large part of their business depends on the company’s product.

2. Lower the production costs for foreign markets. There are a few ways how the company can lower production costs for foreign markets: A. By using different materials (cheaper materials) of lower quality

and a lower price. B. By eliminating costly features or make them optional. A company

can offer in a foreign market a core product and all other features to become optional. Such an example is represented by the automobiles, that in some markets have a lot of expensive features (such as central locking, leather sofa, air conditioning, etc) optional. The customers buy the core product and they can decide if they want to pay extra or not for the optional features.

C. By down-sizing the product. Another option would be to downsize the product by offering a smaller version of the product or less content.

3. Assemble or manufacture the product in foreign markets. A closer proximity to the customer will lower the transportation costs. But it is not necessary to manufacture in the export market. Another argument in favour of assembling goods in a foreign market would be that usually taxes for raw materials and part components are lower than for manufactured goods, so it is more advantageous to import part components than finished goods.

4. Lowering tariffs: A. If the production costs are lowered, that will also mean lower

tariffs as the tax will be applied to a lower value. B. Modify slightly the product so that it can be reclassified into a

different lower tariff classification or simply trying to persuade

11 Kotabe M. and Helsen K., Op. Cit, pp. 375-376 ; Cateroa Ph. and Graham J., Op Cit., 1999, p. 563-566.


the custom officer to classify it under a lower tariff category. For instance, an American company producing data communication equipment faced a 25% custom duty in Australia as the product was classified as “computer equipment”. They managed to persuade the Australian government to reclassify it as “telecommunication equipment” for which the custom duty was only 3%. This made a big difference in price. Also, when USA introduced an extra 10% tax for luxury cars (over 30000$), Land Rover increased the maximum weight of the Range Rover models so that the Range Rover could be classified as a truck rather than a luxury car, escaping in this way the extra 10% custom duty.

C. Repackaging may be a solution to lower custom duties when the taxes differ for different sizes of the package. In USA tequila bottled in larger bottles is taxed half than in the smaller bottles, so the product was rebottled in larger recipients in order to lower the custom duty.

5. Using free trade zones or free ports when possible. There are more than 300 free trade zones in the world: there are entire countries that are free trade zones (Sri Lanka, Mauritius) or only a simple warehouse in a town can represent a free trade zone. In a free trade zone, the payment of the import duties is postponed until the product leaves the free trade zone and either enters the country or is exported to a third country. Initially the free trade zones were used as storage facilities in order to export to other countries. For instance, an American manufacturer of hair dryers stores its product in a Chinese free trade zone, that acts as a main distribution centre for the entire Asia. Presently, free trade zones are also used now to assemble products and to export them in that country or in other countries. A Japanese company assembles motorcycles in an American FTZ, motorcycles that will be consequently imported in USA and exported in Canada and Latin America. By assembling the product in a FTZ, the prices can be lowered as no duties on labour and overhead costs are paid and no tariffs are paid for local part components that are used to assemble the goods. However, if the finished products are not imported into the country from the FTZ, no tariffs will apply.


Parallel imports and price coordination. A phenomenon that may occur in pricing and distributing internationally is the one of parallel imports. Importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution chain. Through parallel imports the company enters in competition with its own products, that enter the country through unauthorized channels of distribution. The main company’s products competitors, are the same company products that enter the foreign country through another distribution channel and at another price maybe. It blows up the distribution and the pricing policy of the company. Parallel imports are a matter of lack of control over distribution. When do parallel imports occur? When would one import a good that already exist in the Romanian market, imported by somebody else? There are a few situations that encourage parallel imports:

1. Large price differentials, 2. Exclusive distribution, 3. Variations in the value of currencies, 4. Restrictions: import quotas, high tariffs.

1. Large price differentials. When the company sells the same product in two neighbouring countries at different prices and the price difference is higher than the transportation cost between the two countries, there is the possibility of parallel imports. For instance, in Europe in the pharmaceutical industry the difference in prices among countries is up to 20%, encouraging therefore parallel imports. 2. Exclusive distribution. When companies want to maintain an exclusive quality image they use only a few distributors, allow them high margins, in order to obtain extra services for customers or a large inventory assortment. Products such as fragrances and fashion articles (Gucci or Nike) are sold through exclusive distributors at high prices in order to create an exclusive quality image. Consequently, they may be subject of parallel importing. 3. Variations in the value of currencies between countries. In European Union before the introduction of Euro the Germans were buying the Volkswagen cheaper in Italy than in Germany. The lira was weaker than the mark, so by exchanging the marks in liras the German was paying less (calculated in Marks) in Italy than he was paying in Germany.


4. Restrictions such as high tariffs or quotas increase the price of the products on that market and might make it more convenient for the consumer to buy it from the neighbouring country. In this way illegal imports are encouraged. In these circumstances the question raised is how a company can stop or diminish parallel imports? A first sight solution might be the harmonization of prices across countries. But is really price harmonization a solution to parallel imports? In European Union for instance, according to the free movement of goods principle, parallel importing is not restricted. And we have the example of the two French companies importing Grundig equipment from Germany – one was an authorized distributor the other one was an un-authorized distributor. The authorized distributor sued the other company and according to the French law it won. But the un-authorized dealer appealed to the EU Court and won. According to the free movement principle of EU, companies cannot restrict distribution. As the EU laws have precedent over national laws, the parallel import was allowed. One possible solution to stop parallel imports would be to align prices at a pan-regional level through price coordination. Kotabe and Helsen proposed a few steps to the process12: S1. Determine the optimal price for each country. The first step is to find out what is the optimal price for each country, the price that would maximize profits in that country, based on costs incurred and the standard of living of the country. S2: Find out whether parallel imports are likely to occur at those prices. The second step is to find out if parallel imports are likely to occur in the region. And this will be probably the case if there are low-price markets (given the demand and the purchasing power) the high-price markets. S3: Set a pricing corridor. The third step would be to narrow the gap between high price markets and low price markets, by setting a price corridor. Such a solution would sacrifice companies profits by lowering the price in high-price markets and would lower demand by increasing price in low-price markets. Figure no. 11.1 presents the method.

12 Kotabe M. and Helsen K., Op. Cit., p. 390-392.


Figure no. 11.1 Price coordination at regional level

Today Tomorrow

Future price corridor

Old

pric

e di

ffer

entia

l

Highest

Lowest

Source: Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 391. Dumping is an important global pricing strategy issue. Dumping is defined differently by various economists as well as by different governments, either as prices below cost of production or prices below the price of the same goods in the home market. In many cases dumping is defined as an unfair price. But what is an unfair price? Some say, a price below the production cost other say it is a price below the price of the same good in the home market. The problem is that some products are only manufactured for export, they are not produced for the local market and there is no home price to compare to. In 1979 the GATT’s Antidumping Code defined dumping as the sale of an imported product at a price lower than that normally charged in a domestic market or country of origin. In this way imported goods are sold at very competitive prices and this can be detrimental to the local firms producing similar goods. There are a number of causes for dumping, among which the most frequent are:

• Subsidies from government in production. • Subsidies from government in export. • Subsidies from government in transport. • Pricing on marginal cost.

There are several types of dumping and table no. 11.5. presents them shortly.


Table no. 11.5 Types of dumping

Type of dumping Description Predatory dumping A firm is selling the product at a considerable loss to gain access

to the market and drive out competitors. Persistent dumping A firm consistently sells at lower prices in one market than in

others, as a permanent strategy, usually due to different market conditions.

Sporadic dumping A firm wants to get rid of the unsold stocks and dumps the excess in markets abroad where they are not usually exporting to.

Unintentional dumping

Occurs because of the existence of a time lag between the date of the sales agreement and the arrival of the goods. The exchange rates’ fluctuations can cause the final price of the good to be below the usual price in the manufacturer’s home market.

Reverse dumping Occurs when the price of a good is much lower in the manufacturer’s home market.

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 493-494

Whenever companies are suspected of dumping, they can be asked to pay dumping taxes. For instance, Boeing has accused Airbus that is dumping its products into the USA market by selling comparable models with 10-20 million $ below the actual costs. Airbus was thought to be subsidized by the different governments from the countries that formed the consortium. Dumping is considered illegal in many countries and when it occurs it is difficult to prove it. Many countries have their own policies and procedures for protecting national companies from dumping. Also, since the removal of the traditional trade barriers (tariffs, quotas) countries switched to non-tariff barriers such as accusing of dumping to protect their local industry. We can notice that different countries use anti-dumping for different purposes, from legitimate protection from predatory dumping up to local protectionism by limiting foreign competition. Most dumping practices are sporadic and unpredictable and therefore difficult to include in planning. However, very rarely there is also continuous dumping taking place, an example being the sale of agricultural products at international prices, when the farmers are subsidized by governments.


As we mentioned, in the last 20 years most anti-dumping actions have been taken by USA, Canada, European Union and Australia, in many cases against Asian countries. There are a number of strategies that companies can use in order to avoid anti-dumping accusations and still practice lower prices:

1. To base its strategy on non-price competition, such as the use of credit facilities to both consumers and distributors, that is equivalent with a price reduction and avoids the dumping laws.

2. To differentiate the home product from the exported one, by selling different brands in foreign markets for comparable products, so that removing any basis for price comparison and avoiding charges of dumping.

3. To move away from low value to high value products through product differentiation. This is a practice used by Japanese car manufacturers that complete their product lines in foreign markets with up scale products.

4. To move the location of the production in the host market. Counter trade is a pricing tool that involves some form of non-cash compensation. Counter trade comes in a few forms, some of them that involve cash compensations and some others that do not involve the use of money. Forms that do not involve any type of cash payments are barter, clearing agreements and switch trading, while forms that involve some use of money are product buy-back, compensation, counter purchase and offset as presented in table no. 11.6. Table no. 11.6 Types of counter trade

Non cash counter trade forms Cash counter trade forms Barter Product buy-back Clearing agreements Compensation deals Switch trading Counter purchase Offset

Non-cash counter trade forms Barter is a direct exchange of goods between two parties: one product is exchanged for another product without the use of money. In the communist years, Pepsi Cola company was exchanging Pepsi concentrate with Russian vodka and also Pepsi concentrate was exchanged for Romanian wines.


Clearing agreements. Under this form two governments agree to import a specified value of preset goods from one another over a given period of time. Each party sets up an account that is debited whenever goods are traded. Imbalances at the end of the contract period are cleared through payment in goods (and sometimes can be in hard currency too). Switch trading. This is a variant of the clearing agreements, where a third party is involved. The right to the surplus credits between the two governments is sold to specialized traders (switch trader) at a discount. The third party then uses the credits to buy goods from the deficit country. Plus cash counter trade forms Compensation takes place when a company sells industrial equipment to Venezuela and receives 60% of the payment in convertible currency and 40% in wool. The advantage is that as compared with the barter, there is an immediate cash settlement of a portion of the bill. If the seller has to rely on a third party to find a buyer, the cost involved has to be taken into consideration in the original compensation negotiation. Counter purchase consists in signing two parallel contracts. Every party agrees to buy from the other party a certain amount of goods for hard currency. Both parties pay in hard currency, but each party commits to buy goods from the other party. The importer sets up a shopping list with the goods that it wants to sell through counter purchase in the same amount of money (or %) from the goods bought. Counter purchase is the most popular form of counter trade. Product buy-back is usually used when a production plant, a turn key plant, production equipment or technology is sold. The seller of the production facility agrees to be paid integrally or partially with the products manufactured with the equipment. Levi’s agreed to buy Hungarian made jeans in order to be able to set up a factory next to Budapest. The major inconvenient of the product buy back is that the products that are bought back enter in competition with the company’s own products. Offset. Offset is a variant of the counter purchase, in which the seller agrees to “offset” the purchase price by sourcing from the importer’s country or transferring technology to the other party’s country. This form is common in defences industry contracts.


The counter trade is used as a pricing tool in certain situations, when it offers certain advantages:

To gain access to new or difficult markets, markets that lack hard currency in cash and would prefer to pay with goods.

Shortages of hard currency lead to exchange controls. A company may overcome government imposed currency restrictions by using barter agreements.

Companies that have a large amount of overhead need to increase sales. They can use counter trade in order to dispose of the surplus products.

Also companies that accept counter trade as a form of payment will be able to capitalize, to benefit of a long-term good-will from those countries.

Counter trade accounts for about 10-15% of the world trade according to some sources and about 20% according to other sources. However, its use increased over time. While in 1975 only the Central and Eastern European countries were using it, at present the number of countries using it as a method of payment increased from 15 to 100. As developed countries become saturated markets the source for future development will be the emerging, industrializing, developing countries, countries that might be short of hard currency and therefore counter trade may be a good way of payment for them. The conclusion is, that there is future growth potential for counter trade.

However, counter trade is risky and has a number of shortages that companies have to assess before committing to such a strategy.

The goods offered in exchange cannot be used in-house and the company might face a problem of what to do with those goods. Getting rid of those goods might be a major headache, especially if the goods are of poor quality or when it is an oversupply of that particular good. The company may use third parties (specialized brokers) to sell their goods.

Such deals usually involve a longer period of time in order to agree over the goods to be treated and their perspective valuation, the percentage of cash and goods, the time horizon for contracts.

There is always the risk that the price of the goods that will be received to change from the time the contract is signed until the products are delivered and sold. Also, there is always the uncertainty over the quality of the goods.

Transaction costs are usually higher as the company has to find buyers for the goods received, they have to pay commissions to middlemen if they use any.


In conclusion, the company has to balance the advantages and disadvantages of counter trade and decide when to use it or not. Historically Western European and Japanese companies accepted counter trade as a payment tool from countries in shortage of hard currency, more then American companies. Presently, American companies started to use counter trade too, as they realized that this can be a competitive advantage in dealing with new and difficult markets. Transfer pricing. A substantial amount of global business takes place between subsidiaries of the same company. It is estimated that one third of the world trade volume takes place among the largest eight hundred multinationals. The pricing of goods and services bought and sold by operating units or divisions of a single company represent the transfer pricing. So, transfer prices (or the intra-company prices) are prices used in transactions between buyers and sellers that have the same corporate parent. How these prices are set is a major issue for international companies and governments. Transfer prices can create problems because they are not determined in the market place through the interaction of willing buyers and sellers and this can result in a situation where foreign transfer prices are set at a level that does not reflect a fair value. Due to a number of factors related to the context in which multinational companies operate, transfer prices are used to manipulate profits, duties and incomes of the company. Table no. 11. 7 presents the main factors that can influence transfer pricing. Table no. 11.7 Factors influencing transfer pricing

Influences on transfer pricing decisions 1. Market conditions in the foreign country 2. Competition in the foreign country 3. Reasonable profit for the foreign affiliate 4. Economic conditions in the foreign country 5. Import restrictions 6. Custom duties 7. Price controls 8. Taxation in the foreign country 9. Exchange controls

Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Harcourt College Publishers, p. 564.


Different tax, tariff or subsidy policies in different countries invite to the manipulation of transfer prices. By accumulating more profits in a low-tax country, a company lowers its overall tax bill and thus increases profit. At the same time the company is interested to minimize income in high tax countries. The higher the duty rates, the higher the incentive to reduce transfer prices, so that to minimize the custom duties. There are a number of reasons for which multinational companies use transfer prices in their favour. Among those we present the most frequent ones:

1. To minimize tax liabilities. Given the different level of taxation, companies will try to maximise profits in low income countries and to minimize profits in high income countries. a. From countries with low income taxes: transfer prices are set high

for goods and services sold from countries with lower corporation tax to another subsidiary of the firm in a high tax country. By transferring (selling) the goods at high prices the company gets high income that is taxed low, while the partner company in the high income country to which the goods are transferred have higher costs (by buying at high prices) and get less income to be taxed.

b. From countries with a high corporation tax: transfer pries are set low for goods and services transferred from countries with high corporation tax to a country with a low corporation tax. By transferring (selling) the goods at low prices, companies are obtaining low incomes and consequently low profits to be taxed in a high tax country. At the same time the companies from low tax countries to which products are transferred at low prices get large incomes that are low taxed. See table no. 11. 8.

Table no. 11.8 Minimizing tax liabilities

Low corporation tax

High transfer prices

High corporation tax

High corporation tax

Low transfer prices

Low corporation tax


2. To avoid host country government regulation. If the foreign government places restrictions on the repatriation of dividends, interests or royalties, the company can manipulate again the transfer prices in order to shift funds out. Usually it is the case of developing countries that have such restrictions and from where multinational are willing to transfer the funds. a. From the developing country (with restrictions). The goods will

be transfer from the developing country to another country by setting low transfer prices. In this way the company does not accumulate high income and high profits in a country from which it is difficult to repatriate.

b. From the developed country. The goods will be transferred from the developed country to the developing country at high prices, that represent high costs of acquisition for the company in the developing country, and at the same time money (costs paid) get out of the country. See figure no. 11.2.

Figure no. 11.2 Avoid foreign government regulations Low transfer prices High transfer prices

Developed country Developing country (restrictions)

3. Reduce tariff duties (when they are ad valorem). Goods are transferred to countries with high tariffs at low transfer prices, so that lowering the value of goods and services and paying a lower tariff.

4. Avoid sharing profits. When the company has a form of a joint venture and not a wholly owned subsidiary in a foreign country, does not want to share the profits with the foreign partner. In these cases there is an incentive for companies to transfer goods and services in subsidiaries that are joint ventures in foreign countries at high prices, involving high costs for the company and therefore less profits to be shared with the local partners. A low transfer price towards a subsidiary that is a joint venture would mean that profits obtained have to be shared.


Many joint ventures have died due to discussions around the issue of transfer pricing.

There are a number of methods that multinational use to set the transfer prices. They are grouped in two main categories, namely market based transfer pricing and non market based transfer pricing. A. The market based transfer pricing uses the market mechanism as a cue for setting transfer pricing. Such prices are usually referred to as arm’s length prices, meaning that the company charges the price that any buyer, any third party from outside the company would be charged. Prices set based on this approach are very easy to justify to third parties, such as tax authorities. There is also a method known on its own as the market based transfer pricing, through which the price is achieved from the price required to be competitive in the international market. This market price approach is based on an established market selling price, and the products are usually sold at a discount to allow some margin of profit for the buying division. B. The non-market based transfer pricing comprises various policies that deviate from the market based pricing. Among those the most well known are:

a. cost based pricing b. the negotiated pricing.

Negotiated prices can be set at any levels and can solve any of the multinational’s problem from the ones mentioned above. The cost based pricing can also be done in at least three different ways, all having at starting point the cost, but different levels of costs:

a.1. Based on the manufacturing cost, when the transfer price is set at the level of the production cost.

a.2. Cost plus approach: a.2.1. Local manufacturing cost plus a standard mark-up a.2.2. Cost of most efficient producer plus standard mark-up


Countries governments started to monitor the way multinationals use transfer prices, so that to stop them to avoid paying taxes especially in the high-tax countries. Whenever they are suspected, they become subject to a tax audit from authorities risking high fines or other constraining measures (import restrictions, price controls, exchange controls). In the last years many multinationals started to set their transfer prices based on the arm’s length method, that is usually accepted also by foreign governments.

International promotion strategy Communication is a major part of the international marketing activities. It is not enough to produce and make available a product or a service, it is also necessary to provide information that buyers need in order to make purchasing decisions. Communication takes place through the promotional activity. The function of promotion at international level is similar to that in a domestic market, as the firm communicates with its customers and other different audiences with the objectives either to inform, to persuade or to remind, in the attempt to achieve the corporate goals.

12.1 The international communication process The elements of the communication process are the same in the international communication process as in the internal communication process, with the only difference that this time it takes place in two cultural contexts. The different cultural contexts can increase the probability of misunderstandings, because the message is encoded in one culture and decoded in another. Figure no. 12.1 presents the elements of the communication process at international level.


Figure no. 12.1 The elements of the international communication process

Feedback Response

Factors influencing the communication situation • Language differences • Cultural differences • Social differences • Economic differences • Legal differences • Competitive differences • Noise differences

Source / sender Company with product or service

Encoding Message translated into appropriate meaning for market

Message transmission channel Mass communication media, sales promotion etc.

Decoding activity Message interpretation by market

Receiver Action of the potential consumer responding to the message

Noise Competitor activities Communication distractions, confusion

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 522.

1. The communication process starts with the information source/sender, that is the international marketer who has a product about which wants to send a message. The product message is conceived in the cultural context of the country of origin and is conveyed to the cultural context of a foreign country. The product

International promotion strategy

message should contain information that reflects, the needs and the wants of the target market from the cultural context of the foreign country where the customer is. The danger of acting based on the self-reference criterion (SRC) is high. For instance, in USA the toothpaste is seen as a product that reduces the risk of cavity, while in UK toothpaste is seen rather as a breath control product. The same product serves different basic needs and this should be reflected in advertising messages. 2. In the second step of the communication process, the message is encoded. The encoding takes also place in the cultural context of the country of origin and symbols used to encode the message are very important at this stage because, as we have already seen, things have different symbols in different cultures. The SRC can interfere at this stage too. For instance, a perfume company used a drop of rain in one of its ads, that for Europeans symbolizes a clean, cool, refreshing image while for Africans is a sign of fertility. 3. The third stage of the communication process is to send the message through the message channel. The media channel selection is very important, as channels are selected in the foreign country and they have to reach the targeted consumer in order for the communication to be effective. Errors such as ad newspapers addressed to people who cannot read and TV ads addressed to masses when only 15% of the population has a TV in the household, are to be avoided. 4. In the forth stage of the communication process, the message sent through media is decoded by the receiver in the cultural context of the foreign market. There are a number of decoding problems that can appear. For instance, Pepsi’s “ Come Alive” was decoded as “come out of the grave” in some cultures, due to bad translation. Decoding errors may appear accidentally when no symbolism is intended but in the other culture some symbolism is attached to the message or when the intended symbolism has no meaning to the decoder. 5. In the fifth stage, at the receiver level, action is taken based on the decoded message. 6. The company evaluates the results of its actions through a feedback system (marketing research). Errors are to be identified at any stage in the communication process: information source, encoding, media channel, decoding and corrected. This stage takes place in both cultural contexts.


7. The last element of the communication process is the noise referring to uncontrollable and unpredictable influences that can affect the process in any of the six stages (such as competitive advertising, confusion). Noise is disruptive, cannot be controlled and comes from one or another of the cultural contexts or from the interaction of the two cultural contexts.

12.2 The international promotion planning process International promotional planning involves the following steps:

1. Select target audience and positioning theme. 2. Set campaign objectives and the degree of worldwide standardization. 3. Determine the promotional mix. 4. Determine promotional budget. 5. Develop message strategy. 6. Decide on media strategy. 7. Assess effectiveness.

The international promotional plan is designed through a process that usually follows a number of steps: It starts with the selection of target audience: to whom we wish to communicate and also the selection of the positioning theme: meaning what is the position (= the image) the company wishes to transmit about its product. The next step is to set the promotional objectives for that promotional campaign and to determine the degree of standardization for that campaign: Is the company going to have a standard promotional campaign in all countries? Is it going to adapt to local conditions? To what degree shall the company standardize? To what degree shall the company adapt? Then, the promotional mix, the promotional tools to be used in order to reach the promotional objectives are set. The required budget for reaching the objective is also set, as a company cannot start promoting without knowing how much money is available. The development of the most effective message is the next step, when the standardization/adaptation decision has again to be taken. After setting what is going to be the message to be transmitted to the target audience, the company sets the media that is going to be used. The last step of any process is to assess the effectiveness, to compare what was planned to do with what was actually done. We will start looking at these steps in detail.


12.2.1 Select target audience and positioning theme Target audience refers to the market segment: is it going to be a global segment or a local segment? Positioning refers to the image for each country: is it going to be global positioning or local positioning?

The first step in the marketing planning process is to identify the market segment: who are the consumers to whom the company will address the products? The market segment the company chooses to serve is the target audience. To this audience the company is going to send the messages. The issue that arises in international marketing is: shall the company address to a global segment or not? Shall it choose the audience according to the similarities and commonalities between consumers from different countries? Gillette when selling products for wet shaving of legs, found out that in USA 75% of women wet shave their legs, while in Europe only 30% of women wet shave their legs. Therefore, there are two different segments to whom the company can address in Europe according to their behaviour: 1) to those who do not remove their hair at all, the objective being to convince them to start removing the hair and 2) to those who use other method of removing the hair, the objective being to switch to wet shave from other methods based on the argument that it can be done whenever needed.

The company has to set what is the positioning of its product for the international markets, what is the image it wishes to transmit in different markets. The issue whether does the company want to have a global positioning, to transmit the same image all over the world or does it want to adapt to local markets, appears again. Usually global positioning comes with global market segments. 12.2. 2 Set campaign objectives and degree of standardization When talking about the degree of standardization at the level of the promotional activity, one should start with the basic marketing strategy, the segmentation and positioning. Global segments require global positioning. Based on the chosen market segments and the positioning strategy selected, one should decide over the degree of standardization at the promotional activity level. The standardization may concern promotional objectives (to set unique objectives for all countries), the


promotional mix across countries (it can use the same tools everywhere or not), its message (can use the same message everywhere or not), its media strategy (it can use similar or different media means to transmit the message). The company decides over the degree of standardization/adaptation of the promotional activities based on local conditions of the market and the company’s objectives.

The company has also to decide over the promotional objectives, objectives that derive from the company’s objectives. Possible promotional objectives can be related to brand awareness, improving perception or promoting new services.

12.2.3 Determine the international promotional mix After the company has chosen a market segment and the positioning strategy for the product, after setting the promotional objectives of the campaign the company has to choose the promotional mix, to choose the best means to fulfil the promotional objectives. A company may use: advertising, personal selling (that it is also a distribution means), sale promotions and public relations to promote its products. Table no. 12.1 presents the main promotional tools, part of the promotional mix.

Table no. 12.1 Promotional mix tools

Advertising Personal selling Public relations Sales promotions Newspapers Magazines Journals Directories Radio TV Cinema Posters Transport

Sales presentations Sales meetings Telemarketing

Annual reports Corporate image House magazines Press relations Public relations Events Crisis management

Discount prices Samples Coupons Premiums, gifts “Bundle” products Competitions

12.2.3.1 Advertising

One of most debated issues in international marketing is whether advertising should be customized from country to country. One view is that adapted advertising should be used, as the only way to achieve relevant advertising is to develop separate campaigns for each country.


At the other extreme is the view that advertising should be standardized for all markets. In the past, companies (coming mainly from developed countries) that internationalised in foreign markets had country specific marketing programs, being guided by an adapting strategy. After 1985, many companies started to be aware of the advantages of standardization and started to adopt global marketing strategies. As we already discussed a global strategy allows for standardization where possible and for adaptation whenever necessary. It is a marketing philosophy that makes possible to standardize some parts of the marketing mix and not others. For instance, Ford Escort (the same product) is sold as an affordable product in USA and as a premium car in India. Due to the differences in the economic development level and the purchasing power, the product was repositioned (from a popular car to a premium car) for the Indian market and the advertising was adapted accordingly. Standardized or global advertising is usually used:

when the company addresses global market segments and it addresses similar needs with similar messages,

when it has worlds brands. Brands such as Coca-Cola, Pepsi-Cola, Mc Donald’s are global brands that use the same name in the creative strategy everywhere in the world,

when the product is sold at regional level. For instance, in Europe many companies practice pan-european advertising as media coverage across Europe expands and in order to avoid confusion resulted from exposure to multiple messages and brands of the same product , companies try to advertise brand names and promotions across Europe. Plus, besides the uniform image developed through pan-european advertising, the company will obtain cost savings with the production of ads.

One way to standardize advertising is to use pattern advertising. Pattern advertising is a compromise between standardization and adaptation. Pattern advertising reflects the philosophy of planning globally acting locally OR thinking globally and acting locally. Through pattern advertising, the company has a global advertising strategy (such as a standardized basic message) that is slightly modified in order to meet local needs (small modifications of the ad design or different media). For instance, Levi’s uses pattern advertising when has a common advertising strategy that focus on the two same things world-wide: the quality of the product and the American origin. But these two points are expressed differently in different countries. In UK ad, there is


a cowboy in a Wild West setting wearing jeans in order to suggest America, while in Japan, there is James Dean in Levi’s jeans in the ad to suggest the American origin1. Channel emphasises on prestige in its ads (this is the common strategy) but prestige is perceived differently in different countries and therefore requires different creative execution (this is the adaptation part). As we already have seen global advertising offers the advantages of creating a global image for the product and of obtaining cost savings, but there are some barriers to global advertising, some challenges the advertising faces in international markets:

Language limitations. Cultural diversity. Media limitations. Legal and tax considerations.

1. The language limitations represent an element that comes as a disadvantage for global advertising. Language translations can determine errors such as2:

• Simple carelessness. For instance, “Body by Fisher” (original) became “Corpse by Fisher” (translation).

• Multiple meaning words (where more dialects are spoken in one country or where one language is spoken in more countries and the same word has different meanings). For instance, Parker Pen Company when entering the Latin American market translated literally the slogan used in USA – “Avoid embarrassment –use Parker Pens”. In Spanish the word embarrassment has also the meaning of un-wanted pregnancy, resulting that Parker was advertising its pens as contraceptives.

• Idioms or local slogan can determine blunders in international marketing. For instance, one USA advertiser used the same slogan in the UK market: “You cannot use a more fine napkin at your dinner table”, but in UK the word napkin is the slang for diaper.

1 Cateora Ph and Graham J., 1999, Op. Cit, p. 486. 2 Kotabe M and Heksen K., Op. Cit, p. 402-404.


Therefore, solutions to avoid language mistakes are: • to involve a local advertising agency, • for English speaking audiences, use the English slogan world wide.

Examples are United Colors of Benetton; Coke is it or Always Coca-Cola; Pepsi – the choice of a New Generation; Philips makes things better etc.,

• to use of voice-overs that say an adapted local slogan. 2. Cultural diversity of markets can also represent a barrier towards global advertising. Communication is more difficult in an international environment because things are perceived differently due to cultural factors. If perceptions over the same thing are different it means that messages received differ in different countries and cultural factors should be taken into consideration. P&G when entered the Japanese market with Pampers used an ad illustrating a stork delivering Pampers to homes. The campaign failed because Japanese did not understand why storks were bringing Pampers. In Japan’s folklore babies are brought by giant peaches floating on the river, not by storks3. Religion as part of culture plays also an important role. For instance, in Saudi Arabia P&G had to adapt its ad for shampoo by showing the face of a woman with a veil on her head and the hair of another woman from the back. The attitude towards advertising is important. At the beginning of 1990’s, consumers in Central and Eastern Europe preferred ads that offered information about the product, while lifestyle ads were less effective. Such attitudes change over time. People’s attitudes towards advertising affect the effectiveness of ads. In Egypt for instance, people have negative attitudes towards advertising, while in China, consumers declared that advertising is the prime factor that consumer use when choosing a brand4. 3. Media limitations. In developed countries the number of media possibilities is high while in emerging markets there is a lack of media choice as media infrastructure is underdeveloped, there are few TV stations and radio stations, the quality of print media such as magazines, newspapers is poor, advertising cannot be properly planned as there are no reliable statistics available about media readership (there are no surveys on who reads what and where). This can impede standardized media strategies. But, the poor quality of existing media 3 Cateora Ph. and Graham J., 1999, Op. Cit, p. 494. 4 Kotabe M and Heksen K., Op. Cit, p. 407.


made companies to find new solutions to advertise their products. For example, in Egypt, ads are print on the sails of boats, in Romania and also in Hungary ads are placed on the material covering a construction site or a building being renovated. Media production costs are to be taken into consideration as advertising rates might not be stable over time, making global advertising even more difficult. 4. Legal considerations of every country can be an obstacle for global advertising, as companies have to comply with national laws. The main domains that are regulated in advertising and the major types of advertising regulations are the following:

Comparative advertising Content of advertising message Advertising of “vicious products” Advertising towards children Advertising taxation

Comparative advertising refers to comparisons made between products in ads. Comparative advertising can be explicit (when the name of the competitive product is mentioned in the ad) or implicit (when products of competitors are not named and the competitive products are only implied). An example of implicit comparative advertising are the detergents ads, when “the usual detergent” (the competitor’s) is not so good as Ariel. In USA direct comparative advertising is commonplace, while in other countries comparative advertising is more or less restricted. In Belgium and Luxembourg the law explicitly bans comparative advertising. In India, Unilever had to give up one of its ads for the Pepsodent toothpaste because claimed it is 102% better than the leading brand, even though the name of the leading brand was not mentioned, but the well known cling of Colgate was present and a model was miming the name Colgate5. In EU, the harmonization of laws governing advertising takes place and as comparative advertising is concerned, implicit comparisons will be allowed but explicit comparisons will be banned. The content of the advertising message is also regulated in some industries in different countries. There are institutions that have to approve the ads that will be used. In Australia, there is an Advertising Standard Council that banned the ad of a plumbing company that showed a girl getting even with her boyfriend by turning

5 Cateora Ph. and Graham J., 1999, Op. Cit, p. 490.


on all taps and provoking a flood. The Advertising Standard Council qualified the ad as “encouraging to irresponsible waste of water” during an Australian draught. In Vietnam the Ministry of Trade, the Ministry of Culture, the Customs department, any TV station or newspaper can censor an ad. TV advertising of the so called “vicious products” such as alcohol, tobacco is also regulated in many countries. Table no. 12. 2. presents some of these regulations in selected countries from Europe. Also there are other types of products, besides the “vicious products” that are also regulated in many countries. Pharmaceuticals are such products: in Austria advertising for drugs is forbidden by law, in Denmark is forbidden advertising for non-prescription drugs and in France prior approval of a government authority is needed to advertise drugs. Other types of products that are regulated in different countries are: slimming products in Finland certain such products can not be advertise; pregnancy tests and contraceptives (forbidden in Ireland), sweets (ads for sweets have to display a toothbrush symbol in Netherlands), cars (ads for cars have to contain costs of taxes and insurance and figures of net fuel consumption in Portugal), pornographic ads or any ads offensive to the public taste are forbidden in UK. Table no. 12.2 European advertising regulations of vicious products

Country Tobacco Alcohol Austria Banned on TV Large number of restrictions Denmark Banned Restrictions and voluntary

restraints Finland Banned Banned France Banned Banned, especially for drinks

with high alcohol content Germany Forbidden No restrictions so far Italy Banned Restricted Netherlands Voluntary restrictions Voluntary restrictions Switzerland Banned Banned UK Pipe tobacco and cigar ads

are permitted but strictly regulated

Voluntary restrictions

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman

Publishing, p. 525.


Advertising towards children is another domain subject to regulations in some countries. Examples are the following:

In Quebec, Canada TV stations are not allowed to air towards children and the same in Sweden.

In Finland children cannot speak or sing the name of a product in a commercial.

In Italy commercials in cartoon programs are banned. Advertising for war toys and games of chance are forbidden in

Germany. In some countries special taxes apply to advertising. The amounts designated to advertising are supplementary taxed by governments. This is the case of Austria. France also intends to introduce such taxes on TV and radio advertising. Such taxes increase the cost of promotion and the per capita cost of advertising. 12.2.3.2 Sales promotions

Sales promotions refer to a collection of short term incentive tools directed to consumers and/or retailers that have the objectives to increase sales quickly. Table no. 12.3 presents the main sales promotions tools with the objective envisaged by each. The same aspect related to the degree of standardization a company can apply to sales promotions at international level is important. For most international companies sales promotions have a local character due to:

different stages of the market maturity: in early stages of the product life cycle (PLC), samples and coupons to induce the trial of the product are appropriate, while in more established markets (the maturity stage of the PLC) bonuses, in-pack coupons, price reductions in order to encourage repeat purchase are recommended,

different cultural perceptions about different forms of sales promotions. For instance, European consumers use far fewer coupons than the American consumers,

trade structure. One major issue of companies is how to allocate their promotional budget between consumer promotion- directed to the final consumer (pull strategy) and trade promotion- directed to middlemen (push strategy). This depends on the differences in local trade structure and the balance of power between manufacturers


and distributors. P&G tried to cut down on trade promotions and to introduce everyday low prices for final consumers in Germany. The result was that several major German retailers gave up P&G products. In this case trade promotions seemed to be more effective than consumer promotion6.

government regulations represent the most critical factor in designing a promotional package, as countries differ to a large extent in this respect for different forms of sales promotion7: − premiums: in France the value of a premium must not exceed 7%

of the products price; in Germany free premiums are illegal; in Netherlands premiums must not exceed 4% of the value of the product and has to be related with the main product; in Japan the value of the premium should not exceed 10% of the value of the product purchased.

− price reductions in Germany, authorities must be notified in advance if the company is going to have a sale and sales are limited to certain occasions: winter or summer sale, company anniversary; while in USA, UK, France price reductions are allowed any time of the year.

− competitions: in UK, if a purchase is not required, the chance must determine the winner, but if a purchase is mandatory, skills should decide the winner; in Netherlands winning by chance is illegal and competitions that require the exercise of skills are permitted but prizes should not exceed a certain value; in Germany competitions are allowed with the purpose to draw attention to the product, but no order form should accompany the competition details, otherwise is illegal.

Given the above mentioned aspects there are certain situations when sales promotions techniques are recommended to be used and other situations when they are not8:

6 Kotabe M and Heksen K., Op. Cit, p. 433. 7 Ibid, pp. 432-433; Chee H. and Harris R., Op. Cit, p. 548. 8 Dahringer L.D. and Muhlbacher H., 1991, International Marketing, Addison-Wesley, p. 500.


Table no. 12.3 Sales promotion techniques

Technique Objective Reduce price Coupons Trade allowances Price-offs

Encourage trial or repeat purchase Build distribution and increase orders Encourage repeat purchase

Add value or perceived value

Self-liquidating premiums Continuity premiums Bonus pack Contests and sweepstakes

Encourage trial or repeat purchase Reward users; encourage repeat purchase Increase perception of value; convert trier into user Encourage trial purchase; draw attention to other promotional messages

Provide information Displays Special events Trade shows and exhibitions Product demonstrations

Draw attention to the product; provide information Draw attention to the product; provide information Create presence in the target’s mind Allow consumers to evaluate product without risk; build distribution

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 545.

A. Coupons :

require well-developed backward channels to handle redemption, require literacy on part of retailers and consumers, social status perceptions affect effectiveness.


B. Contests and sweepstakes: take the legal considerations into account, prize choice should vary to match target market tastes, likely to be less effective where mass media coverage is poor.

C. Price-offs: likely to be ineffective in environments where prices are subject to

bargaining, subject to trade misuse, require sophistication from retailers.

D. Stamps: unfeasible in unstable economic conditions (for both manufacturer

and target market), handling and redemption require stable channels.

12.2.3.3 Public relations Public relations is concerned with images and it has the objective to build good relations and improve understanding between the company and all with whom it comes into contact, both within and outside the organization, namely its public. Table no. 12. 4 presents the main types of public a company wants to communicate with. Table no. 12.4 The categories of publics for an organization

Categories of public for an organization Customers

Media Employees

Activists groups Financial community

Suppliers Stockholders

General public Host government

Home government


Public Relations have both an internal side, regarding the communication within the company and an external side, regarding the communication with the external public (also known as marketing public relations). Internal public relations. Especially in multinational companies, internal communication is important to create an appropriate corporate culture. Japanese have been good in achieving good internal public relations. External public relations. Through public relations the company intends to build a good reputation of the: organisation, products and its people. The purpose of the Public Relations is to establish a credible environment in which other promotional tools to be used more effectively, therefore, Public Relations activities have the role to complement the other promotional tools. The Public Relations have the objective to ensure that the market is receptive to the company and its products. In a foreign environment the company has to influence the external environment and the public opinion in relationship with the company and its products, to create a positive public opinion. A number of tools can be used in this respect and table no. 12.5 presents them. Public relations today are considered to be a broader concept that includes publicity activities as well. When compared to advertising, the general public is likely to believe publicity because it is free and is not directly influenced by the firm. Among the main objectives that are envisaged through Public Relations activities, the following are the main9:

/ promote awareness of the existence of the company, / anticipate and counter criticism of the company and to minimise

damage to the company image, in relationship with product issues and corporate conduct,

/ to overcome prejudice against the use of the company’s product, / to promote and establish a brand image in a foreign market, / to increase a company’s sphere of influence and achieve a high profile.

9 Chee H. and Harris R., Op. Cit, p. 540-541.


Table no. 12.5 Public relation tools

Public Relation tools Examples News release

Special events

Lobbying

Audio-visual presentations

Printed presentations

Corporate identity materials

Sponsorship

Visits, competitions, openings

Government, politicians, opinion leaders, pressure groups

Video, audio cassettes, films, slides

Company newsletters, brochures, other publications

Business cards, logos, stationary, uniforms

Arts and sports Crisis management is also part of public relations. When crisis situations are not managed well the company’s image suffers on the long term. Perrier- the mineral water company from France had a negative corporate image when in 1990 were found in a bottle traces of benzene and the company did not manage properly the crisis. In recent years crisis management is becoming more formalized in companies with specialists who are ready to step in when problems and criticism arise. In order to handle Public Relations there are companies that have their own PR department, such as Toyota, and there are companies that hire specialists from the PR departments of large advertising agencies.

12.2.3.4 Personal selling

Personal selling takes place when a customer or a prospective purchaser is met in person by a representative of the firm for the purpose of making a sale. Personal selling is considered both a distribution tool and a promotional tool and when used adequately a market research tool. As a promotional tool personal selling is the most expensive but it is also very effective and flexible in the sense that instant feedback can be given. Personal selling is recommended when the market is concentrated and when the products are expensive (high unit value) or not frequently purchased.


If we compare advertising with personal selling, it can be noticed that there are differences in more respects as presented in table no. 12.6. Table no. 12.6 Personal selling versus advertising

Personal selling Advertising • Two way communication process -

the salesperson can give instant feedback

• Less “noise”- there is a direct conversation

• Face-to-face contact- personal activity

• Larger share of the promotional budget than advertising

• In emerging markets advertising media may not be available and labour might be cheap and it might be easy to hire a large sales force

• Less control over the message sent - because the salesperson responds on the spot, as he considers appropriate for the situation; this may differ from the firms pre-prepared message

• More persuasive - the salesperson can adapt to fit the customer personality and product needs

• One way communication process- the message is sent through media

• More “noise” – more disturbing factors

• Non-personal medium communication

• Control the message- as it is sent in one form for all customers

• Limited customer contact and pre-set message

At the level of personal selling there is little true international selling, because salespeople carry out most of their sales within one country. Each sale is a sale in one country and salespeople typically work in one region. Personal selling is a personal activity that requires that the salesperson understands the needs and the wants of the customer. In international selling the salesperson has to know the local customs and to be able to form relationships with the customers. Personal selling has the purpose to sell a product to a customer. In order to do this, the company’s salespeople have to leave the customer with the appropriate perception of the products and of the company.


Personal selling is influenced by the company culture and by the country culture. The differences between the cultures of two companies determine differences in the practices of those people working in the two companies. The differences between the cultures of two countries determine different values of employees of the same company in two different countries. If we try to change the company’s culture and to introduce new practices, we might manage without strong negative reactions from employees. For instance, we can ask salespeople to report to a group instead of a boss (in collectivist culture) in order to increase group responsibility. If we try to change procedures that are strongly rooted in the country’s culture, we might encounter strong negative response and we might fail. For instance, trying to form a sales force by integrating both men and women in Saudi Arabia. The least effect will be that the sale force will not do its best. In conclusion, the company culture determines the working environment and the practices to be used. The country cultures (values build at an easily stage in life) influence which management practices will succeed. International sales force issues are really local issues in a foreign country. A company may standardize the sales management approach for all countries or customize the sales management approach for each country. However, in all situations the management of the sales force in a multinational company, consists of the following steps:

1. Setting sales force objectives 2. Designing sales force strategy (size, structure, compensation) 3. Recruiting and selecting salespeople 4. Training salespeople 5. Motivating and compensating salespeople 6. Evaluating salespeople

1. Setting sales force objectives. They are derived from the objectives of the company. The roles the sales force has to play in reaching the company’s objectives represent the objectives of the sales force. They (the roles) state what the sales force is asked to do. For instance, if the company has the objective:

to provide customer with more understanding of the product, than the sales force objectives will be to push for the publicity of the product,

to enter the markets as low cost provider, than the sales force objectives will concentrate on the sales volume, to expand market share.


to create a high quality- high service image of product, the sales force objective will be to offer customer satisfaction and to solve customer complaints.

The sales force objectives will determine the size of sales force, the structure of the time spent by salespeople either for promoting new products and/or existing products or for delivering customer satisfaction and increasing sales volume. 2. Designing sales force strategy. When setting its sales force strategy a company addresses the following issues: structure, size and compensation. Structure: What is going to be the structure of the sales force? Territorial, product or customer centred? The structure of the sales force sets the responsibilities of each salesperson. In a territorial sales force, each salesperson is responsible for a particular geographic area. In a product sales force, each salesperson sells only one product or product line. In a customer sales force, each salesperson is responsible for particular clients. The size of the sales force is usually calculated according to the number of visits necessary per customer and the number of persons required to do the necessary number of visits. In an international environment the customer’s expectations may modify the calculations. In USA a client might be satisfied to buy large quantities of goods and see the salesperson every six months, in other countries, clients might buy smaller quantities more frequently, expecting therefore to see the salesperson more often. Compensation: How to compensate the salespersons in order to motivate them to do a good job? Companies do not pay equally their sales force in different countries, as pay expectations (the pay rate) differ from one country to another. In some countries a commission-based compensation is the main motivating tool (individualistic societies), while in other countries a commission-based compensation may not constitute a motivation (in collectivist societies where people want to be part of the group, they do not want to stand out with anything from their peers. Once a young Japanese in an American company in Japan, was proposed the position of top manager because he was the best employee and had the best ideas. Although he refused, he was appointed anyhow. The sales went down because nobody listened to him. The company should adapt its compensation plan accordingly.


3. Recruiting and selecting people. In order to recruit and select salespeople, a company should decide:

what it wants in its salespeople in every country, what type of skills and character traits they are looking for,

what will work best in an unfamiliar culture, because the skills required for success as a salesperson, depend on the culture in which the sales take place,

how to find and attract the people with the necessary skills. For instance, in Western countries a salesperson has to be outgoing, while in other cultures (such as Middle East) a more quieter and more patient salesperson can maximize the sale. The first decision the company has to take is whether to use local salespeople or foreign salespeople. When choosing foreign people for a local sales force, the company may use either expatriates (people coming from the country of origin of the company) or third national countries (people working for the company and coming from a tertiary country, neither from the home or the host country). The use of expatriates, third nationals or of local salespeople depends on the circumstances and has each a number of advantages and disadvantages. Expatriates are preferred when:

products are highly technical, the selling requires extensive background of information and

applications, (sometimes) to add to the prestige of the product in the eyes of foreign

customers. The disadvantages of having expatriate selling personnel are:

high cost, cultural and legal barriers, a limited number of very good (and difficult to find) personnel willing

to live abroad (in certain countries) for extended periods. Local nationals have the advantage that:

are more knowledgeable of the cultural and legal environment, are better to get in unfamiliar distribution systems and referral

networks.


Having local nationals as sales personnel has disadvantages as well: there is the tendency of headquarters personnel to ignore their advice, the lack of understanding of how home office politics influence

decision making, the lack of qualified personnel (especially in emerging markets).

Third country nationals are expatriates from their own country, working for a foreign company in third country. Third country nationals are sought by multinational companies because:

they speak several languages, they know the industry or the foreign country well, sometimes in order to avoid double taxation.

When deciding what kind of sales force to use, the company has to take into consideration the host country restrictions. In most countries there are restrictions concerning the number of non-national allowed to work within the country. Some countries (USA, Canada) limit work permits for foreigners to positions that cannot be filled by a national. In some countries (Latin America) there are laws protecting the workers’ rights. Employees are penalized for dismissing employees. For instance, in Venezuela, if a person worked for more than three months for a company, he is entitled to receive one month pay at the time of dismissal, 15 days pay for every month worked at the company exceeding 8 months and 15 days pay for each year worked for the company. Other Latin American countries have similar laws. When selecting selling personnel the selection criteria must be localized because what it makes a good salesman in one country might not do it in another one. 4. Training the sales force. The nature of the training depends on who is being trained, the expatriates or the local nationals. Expatriates are usually trained on cultural sensitivity, cultural orientation, customs, culture, history, foreign sales practices. Local nationals are being trained about the company history and culture, its products, technical information and selling methods. Normally, international sales training has to be adapted to the needs of the local market. For high technology and highly standardized products, sales training may be held at regional or international level, as technical aspects are more similar across countries.


Such centralized training is done by companies as10: IBM that has an European training centre that is attended by about

5000 persons a day, as IBM usually offers its salespersons an initial training of 13 months and expects all its salespeople to spend 15% of their time each year in additional training.

Mc Donald’s has also a Mc Donald’s Hamburger University at Chicago where partners from around the world come to receive centralized training.

Home-office personnel has also to be trained in order to be receptive to the needs of foreign operations. They also have to receive cross-cultural training and to be send periodically abroad in order to increase their awareness of the problems of the foreign operations. 5. Motivating salespeople. Motivation is especially complicated in the international environment when the firm deals with different cultures. The marketing and sales activities require highly motivated employees regardless the location. In order to motivate the sales force in one country the firm has to find out what motivates people in that country as there are national and cultural differences in motivation. The company has to design appropriate compensation systems. Financial compensation is one of the main motivators in all countries. But the way financial compensation is awarded has to be adapted to each country. There are countries in which the use of commissions is not publicly accepted, case in which the company should use salary increase instead of commissions to motivate salespersons who perform high. In collectivist cultures (in Asia) it is unacceptable that one person should accept substantially more than another in the same position. In Japan the bonus system is based on group effort. When financial rewards are not acceptable the company must rely more on non-financial rewards such as recognition, titles. Communication is also important in maintaining high levels of motivation because everyone performs better when well informed. Foreign managers need to know what is happening in the present company. Other ways to motivate are foreign trips, training. The compensation of sales force in different countries have to be adapted to local conditions however, when setting it there are aspects to be considered, as presented in table no. 12.7.

10 Kotabe M and Helsen K., Op. Cit, p. 452-453.


Table no. 12.7 Do’s and don’ts in international compensation

Do’s Don’ts • Do involve representatives from

foreign countries • Do allow local managers to

decide the mix between base and incentive pay

• Do use consistent performance measures (results paid for) and emphasis on each measure

• Do allow local countries flexibility in implementation

• Do use consistent communication and training themes worldwide

• Don’t design the plan centrally and dictate to local offices

• Don’t create a similar framework for jobs with different responsibilities

• Don’t require consistency across countries on every performance measure within the incentive plan

• Don’t assume cultural differences can be managed through the incentive plan

• Don’t proceed without the support of senior sales executives worldwide

Source: Cateora Ph. and Graham J., 2002, Op. Cit, p. 532.

6. Evaluating the sales force. The last step in the sales force management is the evaluation. A company can evaluate its sales force through quantitative evaluation and through qualitative evaluation. Quantitative evaluation consists in measuring aspects such as sales, structure of sales and increases in sales at company level and/or individual level. Qualitative evaluation takes into account the knowledge the salesperson accumulated, the manner of the salesperson and the opinions of customers (customer satisfaction), peers and supervisors. Evaluation in international sales management provides useful information for making international comparisons.

There are a number of skills considered necessary for an international sales manager11: Maturity: to be able to work more independently and to have the ability to make decisions on their own without guidance from the home office. Emotional stability: to be sensible to different behaviours from different countries, to have considerable knowledge about the job, off the job and to know the local language and to be able to handle interpersonal relationships. 11 Cateora Ph. and Graham J., 2002, Op. Cit, p. 521-523.


Enjoy travel: two thirds of their nights are in hotel rooms, therefore they have to enjoy travelling otherwise they get tired or/and bored quickly. Positive look: to like what they do, their job, travelling, going internationally. Flexibility: to be sensitive to habits of the market. Similarly is valid for the persons who work at home for a foreign company. Cultural empathy: to be open to the new, foreign customs (if some one is confused about the environment is not going to be effective).

A new approach to promotion in recent years is the integrated marketing communication (IMC). IMC has the purpose to coordinate all promotional activities, from mass advertising to sponsorships and sales promotions in order to convey one and the same idea in a unified voice. In other words, all promotional mix elements to centre around a single key idea. If a company wishes to develop about its product the image that is a reliable product than, all promotional activities, all types of advertising, all sales promotions, all public relations activities and all personal selling should transmit this idea. 12.2.4 Determine the promotional budget One of the delicate decisions that marketers face when planning their communication internationally is about money. How much to spend on communication? How to allocate resources across different markets? There are a number of methods to set the promotional budget among which the most important are:

Percentage of sale. Competitive parity. Objective-and-task.

As a percentage of sale, the company sets its promotional budget as a percentage of either past or expected sales revenue. The advantage is that is a simple method. The disadvantage is that sales drive advertising not advertising drives sales, as it is supposed to happen. It is not suitable for a market entered recently as there are no historical sales and the future sales cannot be very well predicted. Competitive parity. Through this method companies set their budgets by looking at competitors’ spending and matching their amount. The rationale behind this method is that “competitors’ collective wisdom” shows the “optimal” spending


amount in the industry. In this way the company can maintain a minimum of share of voice (brand advertising as proportion of industry advertising). When entering a new market usually is necessary to spend more for new brands in order to step out from the crowd in the consumers’ eyes. The objective-and-task method is the most popular method. The budget is planned based on the overall cost of fulfilling the company’s stated objectives, either market share, brand awareness. The way resources are allocated across countries is another important aspect of budgeting promotion internationally. A few approaches can be followed by multinational companies12: There is bottom-up planning: each country subsidiary determines independently how much money to be spend within its market and requests the desired resources from the headquarters. At the other extreme is the top-down budgeting through which the headquarters sets the overall budget and shares it among subsidiaries. The regional angle method becomes the most commonly used and consists of each region deciding over the resources needed to achieve its planned objectives and than proposing it to the headquarters.

12.2. 5 Develop message strategy The next step in the promotional planning process is to develop the message strategy. At international level the main decision to be taken is over the standardization/adaptation of the message. Talking about advertising there are some advantages and disadvantages in trying to standardize the advertising message and also some barriers to standardization. Table no. 12. 8 presents them. Table no. 12.8 Merits of standardization and barriers to standardization

Merits of standardization Barriers of standardization • Economies of scale • Consistent image • Global consumer markets • Cross fertilization

• Cultural differences • Advertising regulations • Market maturity • ‘Non-invented syndrom” (NIH)

12 Kotabe M. and Heksen K., Op. Cit, p. 415.


Among the advantages are the following : The company obtains economies of scale when standardizing the message. A single campaign is cheaper than multiple country campaigns. For instance, Levi’s saved around 2,2 million $ by shooting a single TV ad that covered six European countries. Savings are obtained because there are fewer executives (people) who develop the campaign at global or regional level. Another advantage is to have a consistent (the same) brand image, to have a single brand identity across a region. Message consistency is important in regions where there is extensive media overlap (such as Europe) and for goods that are sold to customers who travel the globe. A standard message strategy is an advantage when there are global customer segments, segments that are culturally similar across the globe. Another advantage of globalisation is cross-fertilization. Cross fertilization means that marketers encourage their subsidiaries to consider and adapt (if suitable) advertising ideas proven successful in other markets. This process of exploiting good ideas is not restricted to global brands. P&G used for Latin America and other parts of the world an ad that was developed in Taiwan. To come up with a good idea takes a long time, so when a company comes up with a good idea it is worth to consider it in other country subsidiaries, as well. There are a number of barriers to a message standardization strategy. Cultural differences and advertising regulations have to be known as they always require adaptations. Market maturity in relationship to the product also requires different strategies for different countries. In Eastern Europe at the beginning of 1990’s most ads were presenting mainly product information as the consumer was willing to know only about the product, while in the last years lifestyles ads have been developed as the consumer became more sophisticated. The NIH syndrome refers to the reluctance of certain local subsidiaries or local advertising agencies to accept creative materials from other countries. Companies can use different strategies to develop advertising messages and there are a number of appeals that are universals. Examples are given in table no. 12.9. For products that are identical physically but which are used differently from one market to another, such as different food products (cereals, instant coffee, margarine, etc) the advertising message has to be adapted.


Table no. 12.9 Examples of universal appeals

Type of appeal Description/Examples Case histories/story telling The use of cases /examples/stories to show the

benefits of the product. Superior Quality Promises superior quality. Country of origin Benefits of a strong positive country of origin effect,

emphasizing on the origin of the product. Ex: Becks beer from Germany.

Heroes and Celebrities Uses local or international heroes or celebrities, such as sports heroes, or movie and music celebrities. Ex: James Bond for Swiss watches Omega.

Lifestyles Reflects a lifestyle that is shared by the target customers. Ex: (Taft hair spray for a dynamic lifestyle).

Market leadership For the leading brand in a country. Corporate Image Transmits positive.

Source: Kotabe M and Heksen K., 1998, Global Marketing Management, John Wiley and Sons, p. 422.

12.2.6 Decide on media strategy After the company knows what is the promotional budget and what is the message it wants to transmit, it has to establish what is the media strategy. Media objectives are usually set and media performance is evaluated based on a number of aspects such as the following13: Reach. Refers to the number of individuals or households reached. Frequency. Refers to the number of times a message is delivered to target audiences. Continuity. Refers to the pattern of message delivery. Size. Refers to the space or time unit employed.

When deciding over what media to use in international markets, the company has to consider the following aspects:

Availability. In some countries there is too few advertising media (few TV stations, radio stations and newspapers) and competition to get in these media is very high, therefore the cost is high. In other countries, there is too many advertising media

13 Albaum G., Strandkov J. and Duerr E., Op. Cit. p. 451.


(too many TV stations, newspapers) so that a company cannot get effective national coverage at a reasonable cost. The cost of advertising media differ from country to country; it is usually negotiable and advertisers can bring the cost of reaching a prospect down by using advertising agencies with bargaining power that can buy more media space (for more client companies) at lower pieces. Coverage is very important when choosing an advertising medium. In international marketing in many countries there is a lack of information regarding the coverage of media (there is no one measuring how many persons read a certain newspaper or listen a certain radio station). Another issue in international markets is that sometimes is difficult to reach certain sectors of the population with the existing media advertising. Therefore, companies invented other means to obtain the desired population coverage, such as using video vans with infomercials for the rural areas in developing countries (Colgate in India). In many international markets there is a lack of media research and market data, such as TV and radio audiences and newspaper readership. Even in such cases without the knowledge of the market coverage, companies are still using on a large scale advertising through different media. The media infrastructure that can be used varies from standard media vehicles such as radio, TV that are well established in most countries to new media such as cable and satellite TV. Newspapers. In some countries there might be so many newspapers that only partial market coverage can be obtained cost effectively. Magazines. Foreign national magazines are not used very often by international marketers because few have a large circulation and running the ads (even though paid) is not always guaranteed. Lately, there are international and local editions of magazines such as Cosmopolitan, Elle, Playboy. Radio and TV. Advertising on radio and TV is usually regulated by governments. For instance, in UK the non-commercial TV station BBC does not receive any advertising; in Germany total ad time must not exceed 12 minutes/hour; in South Korea commercials are limited to 8% of the air time and are shown grouped at the beginning and the end of the programs. New media such, as satellite, cable TV and internet are increasing. Satellite TV permits greater coverage and is ideal for global or regional standardized messages.


12.2.7 Assess effectiveness The last stage of any process is to evaluate, to assess the results obtained. For this purpose the promotional activity has to be controlled and monitored permanently. The results will be compared with the plan to check if the marketing (market share, sales volume) and promotional (brand awareness) objectives have been reached. Corrections are introduced if the evaluation brings out that there have been made mistakes.

12.3 Coordinating international advertising Global or pan-regional advertising approaches require a lot of coordination across countries. In order to co-ordinate advertising across countries a number of tools can be used by the international companies:

• Cooperative advertising (monetary incentives), • Advertising manuals (materials), • Lead-country concept, • Global or pan-regional meetings.

Cooperative advertising is used by firms that assign the advertising responsibility to their local distributors. Because the effort put into advertising by distributors may vary across countries and little consistence in the message may exist across countries, the company can offer monetary incentives to distributors in order to get some level of coordination. Usually the monetary incentives take the form of cooperative advertising through which the firm contributes to the local distributor advertising spending activities. Advertising manuals, videotapes, instructions, handbooks are used to guide the international advertising efforts. In order to obtain pattern advertising, advertising instructions are given for the commonalities part. Wrigley introduced a video tape with instructions for international advertising. In the handbook, things such as how the gum should be put into the mouth, what the background of the video should be and how to handle the gum before shooting the commercial were included as guidelines. Companies such as Mercedes and Seiko have also handbooks to communicate advertising guidelines to subsidiaries.


The lead-country concept (test the advert) can be used in advertising also, besides in the process of product introduction. For instance, Colgate Palmolive has implemented a lead-country system for international advertising campaigns. Another way to coordinate international advertising is to organize global or pan-regional meetings between marketing executives from each country, regional senior executives and key creative staff from the advertising agencies. Goodyear, the American tyre maker uses such a system to coordinate its international activity. When talking about coordinating advertising internationally, the advertising transference is an aspect worth taking into consideration. Closely related to the issue of standardization is that of transferability of a successful campaign from one market (domestic or export) to another market. Transference refers to how a marketing strategy “arrived” in a foreign market and can be defines as the extent to which a marketing activity or strategy is performed the same in a foreign market compared to the market from which it came, usually the home market. There are a number of strategies through which advertising campaigns can be extended-adjusted at international level14:

1. Complete extension. A successful advertising effort it is transferred to other countries without any modification either in the content or the media choice.

2. Symbolic extension. Successful advertising is extended to other countries with modifications only in the background situations. Minimal modifications take place, as both the appeal and the medium remain the same.

3. Literal extension. The strategy is used when buyer expectations are the same, but the encoding/decoding processes are different. In this strategy different media can be used from one country to another or the same media can be used differently according to the local legislation.

4. Symbolic and literal extension. When the company is marketing an universal product (such as Coca-Cola, Unilever, IBM) both symbolic and literal extension take place, rather than only one of them.

5. Simple adjustment. The medium and the background remain the same, while the product is promoted on a different appeal.

14 Ibid, p. 465.


6. Symbolic adjustment. In this strategy content elements, appeals and background are slightly modified.

7. Literal adjustment. The appeals are greatly changed and different media is used to convey the messages.

8. Complete adjustment. The strategy suggests a complete fresh approach in a foreign country.

12.4 Choosing an advertising agency When developing an advertising campaign internationally a company may do it in-house (like Benetton, Channel, Hugo Boss), may hire a local advertising agency or may hire a multinational advertising agency. Local domestic advertising companies have the advantage of providing the company with the best cultural interpretation, being in the position to create advertising targeted to the local market, but might have the disadvantage of a weak level of sophistication. On the other hand the use of international companies with not enough experience in a certain country can lead to mistakes with economic consequences. For instance, in 1980’s Jaguar when entered the Saudi Arabia market used a British advertising agency to develop its campaign. The Saudi audience reacted negatively to the Lebanese Arabic used in ads and to the fact that the visuals have been shot in United Arab Emirates (where people wore a certain headdress that was not typical for Saudi Arabia)15. The best compromise is considered to be the multinational agency with local branches. When choosing an advertising agency for global advertising the following criteria should be taken into consideration:

Market coverage, Quality coverage, Expertise in central international campaigns, Quality of support services, The image the company wants to projects (local versus global), Size, Conflicting accounts.

15 Jeannet J.P. and Hennessey H.D., Op. Cit., p. 511.


Market coverage: Does the company cover all relevant country markets? Quality of coverage: What are the skills of the agency? Does the level of skills meet the company standards? Is there a match between the agency existing skills and the market required difficulties? For instance, in Japan, where media space is scarce, media buying skills are more critical than creative skills. Does the company have expertise in organizing central advertising campaign? Does the company know how to coordinate a global or pan-regional campaign? What is the scope and the quality of support services? Companies hire advertising agencies not only for creative skills and media buying skills, but also for other support services such as marketing research and other forms of communication, such as sales, promotion, public relations event- sponsorship. According to the image the company wants to project, either of being local or being global, it will choose a local or a global advertising agency. The size of the agency is usually critical for media buying as large companies have more negotiating power than small companies. Is there the issue of conflicting accounts? Does the agency already work with an account of one of our competitors? There are two major risks in case of conflicting accounts: first the confidentiality issue, as companies share with their advertising agencies a lot of confidential data and in the agency people work together and information can get through and second, superior creative talent might be assigned by the ad agency to the competing brand’s account. Many of the international companies that have global operations found it difficult to deal at the same time with a large number of agencies (according to the number of countries entered). Therefore, many multinational firms concentrated their accounts with large advertising agencies that operate at global level all their promotional activities. Among the leaders are McCann Erickson, Young and Rubicam, J. Walter Thompson, Ogilvy and Mather and BBDO. Tables 12.10 and 12.11 present some of the largest advertising agencies at international level according to the revenues and to the number of international creative awards.


Table no. 12.10 Top agency networks worldwide by revenues, 2003

$ Agency Revenues

Dentsu 1.9 bill. BBDO Worldwide 1.24 bill. McCann Erickson Worldwide 1.22 bill. J.Walter Thompson 1.18 bill. Publicis Worldwide 1.02 bill. DDB Worldwide 943 mill. Leo Burnett 886 mill. TBWA Worldwide 771 mill. Euro RSCG 756 mill. Ogilvy and Mather Worldwide 706 mill. Grey Advertising 650 mill. Saatchi & Saatchi 543 mill. Young and Rubicam Advertising 517 mill. Foote, Cone & Belding 453 mill. Lowe Worldwide 406 mill.

Source: http://www.mind-advertsing.com/agencies Table no. 12.11 Top 10 agencies in 2003 by international creative awards

Agency Awards BBDO World wide 136 TBWA Worldwide 130 Saatchi & Saatchi 110 DDB Worldwide 107 Leo Burnett 90 Lowe Worldwide 77 J. Walter Thompson 51 Ogilvy & Mather 51 McCann Erickson 42 Euro RSCG 33

Source: http://www.mind-advertsing.com/agencies

Case studies*

Case study 1 The larger you are the harder you fall!

Authors: Alexandru Bucoi,

Lecturer Romanian-Canadian MBA Luminiţa Nicolescu Associate Professor,

Academy of Economic Studies 1.1 Introduction

December 14th, 1998. The activity is at its peak at S.C. ASTESE Production S.R.L. Due to the nature of its products, well known on the Romanian market under the name of Angelli, both the production and the commercial activity are carried out at maximum parameters.

The end of the year means for Angelli products not only a raise in sales, but a genuine explosion, generating practical difficulties in satisfying the high demand. The results of this year appear to be unexpected, the sales raised with over 40% as compared to last year’s sales, surpassing all management expectations. Appendix no. 1 presents the evolution of the sales for Angelli products between 1995-1998.

* These case studies have been ellaborated with the support of Leonardo da Vinci Program BG//00/B/F/PP-132022.


The work carried out for more than one year, day and night, by AB and EP for the organisation of a new modern sales system and of a performing distribution network (meant to replace the old out-dated sales system), started to show its results now.

Sitting in his Office at 4 Splaiul Unirii, AB, Commercial Manager, was about to analyse the orders arrived that morning from the territory in order to see if he needs to modify the orders of quantities and types of products for the production section. The phone rings and the pleasure to hear an old friend, SN, Promotion Manager at a well-known cigarette company, is great, but the news he brings are not as good… “Have you heard about the new ordinance issued by the Ministry of Finance?”, the question came directly. “No!…What ordinance?” “The one with the excises and…” “Do they increase the excises again?”, “Yes… I don’t know….maybe….but this is not important, they intervene heavily in the selling activity.”, “…..”.

“I have unofficially received a copy, I’ll send it to you by e-mail”, “OK, thank you! Talk to you later. Bye!”

What draws AB’s attention in the following minutes in the received message is: Emergency Ordinance no. 50 (Extracts from the ordinance are presented in Appendix no. 5) …………………………………………………………………………

“One economic agent, internal producer or importer of alcoholic beverages and tobacco products may have contractual relations with a maximum of 15 economic agents that carry wholesale trading activity.” ……………………………………………………………..…………

“The provisions of this emergency ordinance come into force on January 1st 1999”

“It is not possible”, exclaimed AB. ”Does the Ministry of Finance impose these things? This is not possible! It is a joke…”

1.2 Company description and history

Astese Production S.R.L. is one of the largest producers of alcoholic beverages in the Romanian market, being the holder of the Angelli brand and leader in the field of sparkling wines. It is a Romanian company with 100% private capital, the majority of the capital being Italian. The firm has 74 employees, its organisational structure being presented in Appendix no. 2.

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The first Angelli products emerged in the Romanian market in the second half of the year 1994. These products were the two products that later became representative for the Angelli brand: Gran Moscato – sweet sparkling wine and Cuveé Imperial – demi-dry sparkling wine. Immediately after the launching of the Angelli products, there were obtained very good results and a high volume of sales. This determined the company to diversify its product portofolio in order to satisfy the tastes of all consumers. Thus in 1995 they started the production of vermouths and appetisers, the first products of this kind being the classical vermouths Bianco – white vermouth, Rosso – red vermouth and Cherry – cherry-flavoured appetiser. In 1996 the first products in the liqueur range were introduced: Café Café with coffee flavour, Elexir di Pesca with peach flavour and Elixir di Nocciola with hazelnut flavour. The product range diversified continuously, for each production line: sparkling wines, vermouths, appetisers and liqueurs, so that in 1998 the firm was producing and commercialising 16 products. Appendix no. 3 presents the entire Angelli products range in 1998.

In 1998, as it can be seen in figure no. 1.1, 68% of the company’s activity (as the volume of sales) was given by sparkling wines, 27% by vermouths and appetisers (out of which 23% is given by the Cherry appetiser and 4% by other appetisers and vermouths) and 5% by liqueurs.

Figure no. 1.1 The structure of the sales volume according to the product types

68%

23%

4% 5%

vschlive

vs = sparkling wine; ch = cherry; li = liqueurs; ve = vermouths

In 1996, sales started to slow down after the initial increase. This led to the decision to organise a new distribution system based on the modern concepts of the market economy. At the very beginning of the company’s operations, the selling activity was performed by approaching various present or potential customers, in order to convince them to acquire the Angelli products. The customers were contacted randomly, there was no customer selection. After the products were sold,


they were not tracked down to the final consumers: it was not known to whom the products were further sold, in what quantities and under what conditions. The objective of the company was to replace the existing chaotic distribution system, with a well-organised and co-ordinated system. For this purpose, at the beginning of 1997 an Italian adviser with a vast experience (acquired in the Italian market) in sales, was hired by the company. He had the mission to conceive and to put into practice a sales system and a modern distribution network for the Angelli products, based on a thorough observation of the real conditions in Romania. Practically, in the field of the alcoholic beverages, Astese was the first company to put into practice a new modern distribution system adapted to the Romanian market conditions. The first changes took place in the second half of the year 1997, more precisely in August when AB was hired as Commercial Manager at Astese. He and the Italian adviser formed a team and together designed a specific sales structure at national level. These new structures were conceived so that to achieve a direct relation with the market, and to allow monitoring the evolution of the products in the market. Through the new system a set of support services was offered to the direct clients (distributors, wholesalers, retailers). The results were seen immediately, as the year 1997 concluded with an unpredicted sales rise of 35% as compared to the previous year. In 1998, the production was carried out in a space rented from the vine and winemaking station Banu Mărăcine next to Craiova, where, besides the production line, there was also a final products warehouse. Moreover, the company had two large warehouses in Bucharest that were supplied with goods as the production was carried out. Practically, the delivery of products was performed from all three warehouses. An important investment was done, and a modern factory was under construction in Bucharest. The factory envisaged the increase in the production capacity three times and the warehousing capacity twice. Through the coming into use of the new factory, the new warehouse and the new headquarters, the factory in Craiova and the three warehouses were to be gradually dissolved.

1.3 The position on the market of the Angelli products

The market for the Angelli products has some specific features:

Case study

/ with respect to the sparkling wines, the competition was hardly present in 1998/1999. There were no other brands that could represent a powerful competition at the time. Other products (such as the Faber sparkling wines) appeared lately, and this could affect the sales of the Angelli products.

/ it is a very highly seasonable market, over 60% of the sales being performed between October 15th – January 15th of each year. For all the other types of products (vermouths, liqueurs, appetisers) the demand is relatively stable all year long, with small fluctuations and slight increases at the end of the year period. Appendix no. 4 presents the evolution of the sales for different types of Angelli products during a year.

The Angelli products are mass products, designated to all the consumers and they may be bought both from the kiosks at the corners of the streets and in the shops, restaurants and luxurious bars. The prevalent market segment for the Angelli products, namely women aged between 18-45, from towns with a population over 50 000 inhabitants, is targeted for promotion reasons.

The market shares for the three types of Angelli products are presented in table no. 1.

Table no. 1 The market shares of Angelli products in 1998

Type of products

Sparkling wines

Cherry Vermouths and

appetisers

Liqueurs

Market share 60% 85% 20% - Angelli wished to go on consolidating its market leader position for the sparkling wines by initiating an aggressive sales strategy (intense distribution and sustained promotion of the sales towards all the links of the distribution channel and towards the final consumer), and investing in advertising activities.

The Angelli products were present in over 50% of the selling points, existent at national level (kioks, shops, supermarkets, restaurants, bars). Over 70% of the total sales of the Angelli products is achieved in the key-selling points (the most prosperous commercial points, with a great flow of visitors and consumers), all of them being


commercial points in which the base assortment of Angelli products (Cuvee Imperial, Cocktail Pesca and Cherry) are present in proportion of over 85%.

The medium price for sparkling wines is 1,47$, for vermouths, and 1,53$ for appetisers and 1.57$ for liqueurs. The prices in lei (local currency) of the Angelli products, as well as of the competing products are up-dated at the same time with the evolution of the price for the raw materials and of the inflation in the Romanian market.

The main competing products for the Angelli products were in 1998/1999:

Garrone, the leader in the field of the vermouth products, with a market share of 75%. The firm diversified its production, offering also a range of frizzante wines, competing with the Angelli sparkling wines. Due to the advantage obtained through its vermouths, Garrone managed to promote to the level of intermediaries and of retail sellers its other types of products. It is a potential powerful rival for the Angelli sparkling wines.

Garrone invests in publicity as well as in promotion activities (advertisements, sales promotion, participation in exhibitions). It tries to follow closely the Astese politics both from the point of view of the promotion – publicity, and from the point of view of the distribution and sales organisation. This firm started as well to organise its own sales structure and a distribution network at national level.

Faber is a competitor for the sparkling wines, but it just entered the market. Venezia is a local brand in the field of the sparkling wines, produced in Timişoara by SC Veliero S.R.L. that through the low prices (30-35% cheaper than the Angelli products) managed to extend gradually in other areas.

The Angelli products enjoy a high notoriety (the performed studies show that over 87% of Romania’s mature population knows the Angelli brand) and a very good image in the market. The products are seen as having an excellent price/quality ratio that made Angelli products to be preferred by consumers.

The good product image is due to their look, completely different from other similar products from the Romanian market. Everything that represents its look: labels, caps, necklaces are designed and manufactured in Italy by experienced companies in the field.

The image campaign is done through TV advertising and annually are invested in this activity around 800.000 $. The logo: “Angelli, the prelude to an adventure” is a very famous logo in Romania, at the level of the whole country.

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The entire video spots’ creation and production is done in Italy ensuring an image of quality and distinction. The main promotional campaign of each year is carried out during September – December 31st, the emphasis being on the Angelli sparkling wines that actually become the central point for the entire activity of the company in this period.

1.4 The organisation of the distribution

The distribution system through which the Angelli products are sold is based on its own selling force and on intermediaries.

The own sales force is composed of nine Area Sales Managers, some of them having subordinated a sales agent. Each Area Sales Manager operating area includes a number of a few counties.. For the areas where there are a large number of distributors and where there are large cities, the Area Sales Managers have subordinated a sales agent.

The sales agents receive the orders for products from the intermediaries and transmit them to the Sales Department in Bucharest. The Sales Department, based on the orders received from the country, sells the products to the intermediaries, the price including also the transportation of the products from the Astese warehouses to the intermediaries’ locations in the country. The company uses independent transportation companies and the sales managers and agents ensure the relationships with the intermediaries, merchandise at the retailers and have the task of solving any issues arising at the retailers or end consumers level (such as orders, transportation or quality issues).

The main types of intermediaries with whom the sales agents are in contact and by whom the Angelli products are distributed are:

Distributors. These represent companies that carry out a dynamic sales activity, having their own sales agents who visit each retailer of the allocated sales area. In general they sell a product package that also contains the Angelli products.

Wholesalers. These represent companies that carry out a static sales activity, displaying the goods in huge commercial centres that are visited by retailers. The retailers are buying from wholesalers and the quantity of products is decided by themselves based on the sales experience they had with the respective product.


The company does not have a direct sale to retailers or end consumers. The only direct commercial relationship is with Metro cash and carry the first store of this kind in Romania.

Figure no. 12 presents the members of the distribution channel for the Angelli products.

Figure no. 1.2 The distribution system of the Angelli products

ProducerAstese SRL

Area Sales Managers (9)

Distributors

Wholesalers Wholesalers Metro Cash &Carry

Retailers

End consumers

Bucharest Sales Department

The company has trading relations with 186 intermediaries (distributors or wholesalers) covering the whole country. The distribution of Angelli products at national level depends on the potential of every intermediary. Exclusive relations with intermediaries from a certain geographic area are not agreed to, in the sense that for the same area there may operate two, three or more distributors for Angelli products, depending on market demand.

A standard procedure for selecting the intermediaries was used, which together with the company’s motivating system, resulted in Angelli products being

Case study

distributed by the most serious, and performing distributors at the time. The main criteria for the selection of Angelli products’ intermediaries include: the sales volume, the average inventory levels, the delivery time, the treatment of damaged and lost goods, the co-operation in promotional and training programs, the middlemen services owed to the customer.

The distributors may operate: & only for one county area (distributors like: Mach, Boema, San Land,

Sorla etc.), & for the area of several counties: Net Group Distribution (Sibiu, Alba,

Arad, Teleorman, Bucharest, Suceava, Vrancea, Mureş, Brăila), ERNA (Iaşi, Suceava, Vaslui, Bacău), BDM (Baia Mare, Satu Mare, Bistriţa, Cluj), Valentiana (Vâlcea, Olt, Gorj) etc.

There is no direct client (including Metro) that has more than 4% of the turnover of Astese Production S.R.L. Consequently the company’s activity at the level of intermediaries is atomised, there are no clients with a determining share in the company’s activity.

In spite of this, due to the intermediaries’ motivating system, 90% of them have accepted to work in exclusive purchasing conditions with Astese. They do not distribute brands considered competitors for Angelli products. The intermediaries are motivated through the system of relations Angelli-client and through the awarding system. In the relationships with the distributors the stimulation and price system used is:

& 7% discount off the invoice direct price list, as an operational discount1.

& a 6% award, based on the achievement of the sales targets established for a period of three months. This 6% discount is divided between the most four important product groups: sparkling wines, liqueurs and Cherry, vermouths and appetisers (others than Cherry). The share for each product group vary from one period to another (the objectives are set for a three-month period), according to the interest the company has in promoting a certain product group through distribution systems.

1 The 7% off functional discount from the price list is granted to the distributors to offer them a margin that allows

them to operate by supporting their distribution expenditures. In rare cases in which the retailers asked for products directly from Angelli, these are sold at the price list.


The company suggests to the distributors a minimum selling price to retailers at the level of the price list +2% and to wholesalers at a minimum of the price list of +1%.

For wholesalers, that either have direct contact with Astese either with Astese’s distributors, the stimulation represents:

3% operational discount, granted directly on the invoice.

2% award for the achievement of the sales targets established for a three-month period, similarly as for the distributors.

As a selling price of the wholesalers to retailers, the company suggests a minimum selling price at the level of the price list.

The orders received from the distributors through the Area Sales Managers are honoured in maximum 48 hours. The transport is done through specialised transportation companies. For this activity there are used lorries with a capacity between 5 and 20 tons, according to the structure and importance of the order. The transportation activity is co-ordinated, organised and paid for by Astese Company.

The commercial relations with the clients, regardless the role they have within the distribution chain (wholesalers, distributors, retailers) are done without any formal commercial sale-purchase contracts. They have mostly an informal character. The only formal contractual agreement is the one with Metro Romania, because of the specific conditions that this intermediary requires.

The number of direct clients is not in any way limited or fixed, there is the possibility for co-operation with any trader that is in compliance with the company’s criteria. The actual traders (intermediaries and retailers) carry out their activity based on a trading authorisation that is valid for different types of products (foodstuffs, consumer goods etc.), there is no requirement for a special authorisation for alcoholic products.

Case study

1.5 What has to be done?

Reading the mail took AB just a few minutes because the problem seems very clear.

Beginning with January 1st 1999, the whole distribution system had to be changed being necessary the shift from a distribution network made up of 186 intermediaries to a system according to which there were not allowed more than 15 intermediaries. The effects of this situation were terrible and hardly to evaluate on the spot. Thus, for the afternoon of the same day at 18.30 has been convoked a meeting with all those responsible for the sales activity in order to make a first analysis and appreciation of the situation.

Because of the quick way the meeting has been convoked at 18.30 everybody was present (as it rarely happened before) and was waiting with interest to find out the reason for which the meeting has been convoked. The news have been a real surprise for everyone. After a noisy period when everyone was trying to expound his opinion, one has tried to understand the situation and its future implications. It has not been easy and although at 23.00 o’clock the discussion has not been over yet, the effective formulation of a coherent and logical solution could not be done. It was certain that the emotional factor was influencing all discussions. Consequently, there was decided that it is necessary a time of reflection for everybody and next day, at 17.00 o’clock tomorrow a new meeting was scheduled at which the General Manager of the company was going to be invited in order to make decisions.

It is vital for the company’s Commercial Department to analyse the situation the company faces and to make proposals for coping with the problems envisaged to occur beginning January 1999. The way the first meeting has been taking place has not helped in finding some alternatives with a viable finality. You are employed as an adviser who has been hired from outside the company and who is not part of the company employees’ actual subjective way of thinking to analyse the situation and to search possible solutions that could reduce the impact of this emergency ordinance.


For the next meeting that will take place 17.00 o’clock you have to prepare a material through which you express your point of view concerning the following aspects:

Assignment questions: 1. Study carefully Appendix no. 5, referring the Emergency Ordinance

no. 50 of 14.12.1998. What are the main problems that appear once the provisions of this ordinance come into force?

2. Propose immediate actions that can be put into practice by SC Astese Production in order to face the new situation created, starting January 1st, 1999.

3. Describe a plan of measures that could be elaborated in 1999 by SC Astese so that to ensure a high sales volume for its products.

Case study

Appendix no. 1 Angelli sales evolution for 1995-1998 The graph represents the volume of sales.

Sales - quantity


Appendix no. 2

Organisational Chart of S.C. Astese Production SRL

Production Director

Commercial Director

Chief Accountant

Laboratory Responsible

2 persons

Products Preparation Coordinator

4 persons

Bottling Section Manager

24 persons

Marketing Coordinator

3 Delivery Responsibles(one for each wearhouse) 9 persons

Logistic Coordinator

9 Area Sales Manager

7 Sales Agent

Treasurer 1 person

Accounting Responsible

3 persons

Financial Responsible

1 person

Company's driver

Purchassing Coordinator

Telephon Operator

General Director Assistant

General Director

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Appendix no. 3 The assortment of the Angelli products in 1998 Sparkling wines:

• Gran Moscato – sweet since 1994 • Cuvee Imperial – semidry since 1994 • Cocktail Pesca – sweet with peach flavor since 1995 • Cocktail Fragola – sweet with strawberry flavor since 1995 • Kir Royal – sweet with gooseberry flavor since 1998 • Cuvee Imperial Magnum (1,5 l) – semidry since 1998

Vermouths and Aperitifs:

• Bianco – white since 1995 • Cherry – with cherry flavor since 1995 • Rosso – red since 1995 • Amerikano – cocktail with orange flavor since 1996 • Manhattan – cocktail with whisky flavor since 1996 • Bellini – cocktail with peach flavor since 1996 • Fragola – with strawberry flavor since 1998

Liqueurs:

• Café – Café - with coffee flavor since 1996 • Elixir di Pesca - with peach flavor since 1996 • Elixir di Nocciola – with peanuts flavor since 1996


Appendix no. 4 The evolution of sales for Angelli products for a year A. Sales evolution for Angelli vermouths (value)

0

20000

40000

60000

80000

100000

1 2 3 4 5 6 7 8 9 10 11 12

Series1Series2

B. Sales evolution for Angelli sparkling wines (value)

0

500000

1000000

1500000

2000000

1 2 3 4 5 6 7 8 9 10 11 12

Series1Series2

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Appendix no. 5

Emergency Ordinance no. 50 of December 14th 1998 (excerpt) Art. 23 (5) Annex no. 16 of the present emergency ordinance presents the types of relationships that can be developed between the supplying and buying economic agents as far as the goods subject to authorization are concerned. Annex no. 16 to the emergency ordinance no. 50 /December 14th 1998 The Commercial relations between suppliers and buyers of the products subject to authorisation. ………………………… II. for the commercialisation of the alcoholic beverages Provider Buyer 1. Alcoholic beverages producer Wholesale trader 2. Alcoholic beverages producer Retail trader 3. Alcoholic beverages producer Alcoholic beverages producer 4. Alcoholic beverages importer Wholesale trader 5. Alcoholic beverages importer Retail system trader 6. Alcoholic beverages importer Alcoholic beverages producer 7. Whole sale system trader Retail trader ………………………………. (6)… “One economic agent, internal producer or importer of alcoholic beverages … may have contractual relations with a maximum of 15 economic agents that carry out a commercial activity in wholesale system2.” Art. IV. The provisions of this emergency ordinance come into force starting with January 1st 1999… Annex no. 17 to the emergency ordinance no. 50/December 14th 1998 Taxes of authorisation for the commercialisation ……, of the alcoholic beverages…… ………………………. 2 The law defines by economic agents that carry out a wholesale activity, all the economic agents that,

buy and sell products in large quantities. The intermediaries of the Angelli products, both distributors and whole sale traders, are included in “commercial agents that carry out their commercial activity in the wholesale system”.


3. Alcoholic beverages a) for the commercialisation of each type of alcoholic beverage

from its own production or from import 10,000,000 lei b) for the commercialisation of the following product groups in wholesale and

retail system: - spirits 10,000,000 lei - wines and wine-based products 10,000,000 lei - beer 10,000,000 lei - imported alcoholic beverages 10,000,000 lei

c) for the commercialisation of the alcoholic beverages in public alimentation system; - catering units with 40 seated places or bar places 5,000,000 lei - catering units with 41-100 seated places or bar places 10,000,000 lei - catering units with over 100 seated places or bar places 10,000,000 lei - catering units with seasonal activity: 1/3 of the authorisation tax collected by

the units with permanent activity, according to the number of seated places or bar places - for canteens and canteen - restaurants that organise festive dinners; 5% of the minimal tax collected for the catering units. d) for the alcoholic beverages commercialisation in the shops selling at retail

prices, the tax is collected for each sale unit, according to the following product groups, as follows:

- spirits 1,000,000 lei - wines and wine-based products 1,000,000 lei - beer 1,000,000 lei - imported alcoholic beverages 1,000,000 lei

………….. All organizations involved in the commercialisation of these products have to have written contracts. …………. …….. there will be used special invoices and shipping documents enscripted with “alcohol beverage” …….. The average exchange rate leu /$ was in 1999 of 8904 lei / $ (source http: www//bnro.ro).

Case study 2 Global Spirits Company - how to enter the Alcohol market∗

Author: Luminiţa Nicolescu Associate Professor

Academy of Economic Studies 2.1 Introduction The new alcohol factory, located at the outskirts of Ploieşti, a town situated 60 km North from Bucharest, the Romanian capital, is almost finished. When the new equipment will be installed, the production capacity will increase four times. The owner, Gheorghe Iaciu (called Gigi) looks proudly at the large building and reflects over the activity of his companies over the last seven years (1994-2001) while planning for the future: “My companies were local companies run in a centralized way based solely on my feelings. I have transformed them in profit centers where specific work is done by specialists in the field. I am going to be successful internationally, now that my companies became “proper” market driven companies that function based on market economy principles such as the performance and efficiency, as I have learned and seen while living in U.S.!”

∗ The author thanks Gheorghe Iaciu, the owner of the Global Spirits Company for his contribution to the

ellaboration of this case study.


2.2.1 History and presentation of the Gheorghe Iaciu companies Gheorghe Iaciu graduated the faculty of Agricultural Equipment at the Polytechnic Institute from Bucharest, the most prestigious technical educational establishment in Romania, in the year 1987. He worked for four years at the Station for Agricultural Mechanization, Ştefăneşti, Ilfov district, as head of section. In 1990 after the changes that took place in Romania Gheorghe Iaciu became involved in trading activities by buying and selling different goods such as clothes, cigarettes, cosmetics and others. He remembers the beginning of his entrepreneurial activities as follows: “I knew that I have entrepreneurial spirit and I wanted to do business. The problem was the lack of capital. I started with trade as it was the fastest way to change my financial state. I was involved in trading activities for one year and in one year, by starting from zero I reached the 11th place at the country level in terms of turnover. In 1992 I had a turnover of 25 mill. $, but I realized that I am not done for trade. I wanted to invest. So what have I done? I’ve done something related to my previous activity: I built spaces for commerciants.” After he accumulated significant capital he sett up in 1994 the company Expo Market Doraly, that is 100% in his ownership. Other companies were sett up with a similar activity profile in order to benefit of financial facilities granted by the law at the time1. Table no. 1 presents the companies owned by Gheorghe Iaciu. The “Doraly” companies built commercial spaces at the outskirts of Bucharest on the road towards Constanţa and rented them to wholesale companies. The “commercial space” renting business was chosen as a start-up business for a number of reasons:

& in 1994 trade was a booming activity in Romania. Final consumers were still buying the products they were missing for many years during the communist shortage period. At the same time state companies started to be restructured and employees were given “bonus packages” in order to voluntarily leave companies, actions that brought large amounts of disposable cash in the market,

& in 1994 the distribution system for consumer goods in Romania was completely fragmented: there was a large number of small retail shops

1 Such as tax exemptions for the first 5 years of activity.

Case study

that were buying from wholesale companies, companies that were under-developed at the time,

& the entrepreneur Gheorghe Iaciu worked in the trade sector previously and he knew the market of wholesale companies. He also had good relations with trading and importing companies, as he said:

“I had a good name among commerciants and wholesalers. They trusted me and they paid me in advance the rent for commercial spaces. In this way I was able to make the first investments.”

Table no. 1 Legal status of Gheorghe Iaciu companies in the period 1994-2001

Companies Year of setting up Year of

dismantling Observations

Expo Market Doraly 1994 - Expo Market G&D 1994 1996 Merger with Expo

Market Doraly Expo Market Doraly III

1994 2001 Merger with Expo Market Doraly

Expo Market Doraly Group

1995 1999 Merger with Expo Market Doraly

Five Group 1995 1999 Merger with Expo Market Doraly

Doraly Mall Constanţa 2001 - Separation from Expo Market Doraly

Global Spirits Company

2001 - Separation from Expo Market Doraly

The two main services the company offers are: renting display spaces and renting warehousing spaces to en-gross trading companies with all the logistics to support the activity of the companies that rent the commercial space. The physical facilities of the company developed over time by increasing the commercial space from 5500 square meters at the beginning of 1997 to around 25.000 square meters in 2001, as Expo Market Doraly became market leader in renting commercial spaces in Bucharest. Bucharest is the largest market for trade, as 65% of the merchandise sold en-gross in Romania is commercialized in Bucharest. There are 37 en-gross centers in Bucharest with surfaces comprised between 1000-30.000 square meters and Doraly is the market leader measured as the percentage of visitors. See appendix no. 1.


The competitive advantage of the Doraly companies in the space renting business, was the large range of connected services2 related to the renting service and the high degree of seriousness and promptness in doing business. When setting up the Doraly companies, Gheorghe Iaciu had as objective to serve the clients and to offer them the services they need at high quality standards. He looked for adapting to the client’s need permanently and for the best way to do this by reinvesting continously for the improvement of the supplied services. He finally succeeded to create a business sustainble on its own as he mentioned:

“I organized the system and now it works on its own. It brings us money without being necessary to be there all the time.”

The turnover of the Doraly companies increased continously between 1994 and 2000, as it is presented in table no. 2. 2.2.2 Towards the diversification of activities

Given the positive evolution of the “en-gross” business in Romania, the owner accumulated more capital and he decided to invest further. He had two strategic options:

1. to expand the renting commercial spaces business further at national level or,

2. to invest in a completely different business. 1. Initially he wanted to extend the “en-gross spaces” business at national level as he had successful experience in the field, but he could not obtain the best situated places in the large towns of Romania. He managed only in 2001 to set up a commercial center in Constanţa. The center was sett up as another company in Gheorghe Iaciu’s ownership, the company Doraly Mall Constanţa. This company rents commercial spaces to retailing companies, not to en-gross companies as the company in Bucharest. Constanţa is the largest harbour at Black Sea in Romania and a large commercial center. The Doraly commercial center was sett up based on the good relationships the owner had with local business people in Constanţa. For the other towns, the competition to get the best places (the ones with high commercial flow) was too strong and he could not afford to compete for them.

2 Such as flexibility in the renting period, access to parking and cars security, security of goods and clients,

maintenance of rented space and settlement of any complaints in maximum 8 hours, availability of local and international telephone services, availability of cooling spaces, heating during winter etc.

Table no. 2 The evolution of the turnover of the Gheorghe Iaciu companies in the period 1994-2000

Million lei/$1

Turnover/Year 1994 1995 1996 1997 1998 1999 2000 Expo Market Doraly (lei) 1.525 1.904 5.267 14.930 43.799 87.224 169.578 $ 921450 753164 1682210 2077072 4919025 5669786 7821863 Expo Market G&D (lei) 1.337 2.095 1.338 - - - - $ 807854 828718 427339 - - - - Expo Market Doraly III (lei) 300 1.426 1.731 2.766 5.248 6394 5.225 $ 181268 564082 552858 384808 589398 415626 241005 Expo Market Doraly Group (lei) - 1.527 2.786 4.035 6.557 - - $ 604034 889811 561352 736410 - - Five Group (lei) - 1.401 3.584 8.337 6.773 - - $ 554193 1144682 1159849 760669 - - Doraly Mall Constanta (lei) - - - - - - - $ - - - - - - 120.000 Global Spirits Company (lei/$) - - - - - - -

1 The exchange rates leu/$ in the period 1994-200 were: www.bnro.ro

Years 1994 1995 1996 1997 1998 1999 2000 July 2001 Exchange rate 1655 2528 3131 7188 8904 15384 21680 27855


The consumer goods distribution system started to change in Romania. Independent supermarkets, chains of Romanian supermarkets (Mega Image, La Fourmi) and large international chains of supermarkets (Billa, Carrefour) developed in Romania in the last years. The Romanian consumer buying habits started to change, as large supermarkets became available. Consequently, small retailers, convenience stores, independent shops, boutiques and kiosks were loosing their clients and started to disappear or diminish their activities. As these retailers were the main clients of the en-gross trading companies, the demand for commercial space for en-gross trade started to decline too. The en-gross market in Bucharest became a mature market that began to decline with 5-7% yearly. The competition became harder and in the last years, the tool to compete remained the price and size of the business. Consequently prices for commercial space renting decreased dramatically (from 60$/square meter in 1994 to 25$/square meter in 2001). Therefore, the tendency is that the large companies will swallow the small companies. 2. Given the declining market of the en-gross industry and the difficulty to get the appropriate places (a critical success factor in this business), Gheorghe Iaciu decided to diversify its activity by entering the production sector as he said:

“I knew that trade is going to decline, the en-gross industry is not very developed anywhere in the developed countries. The trend is of diminishing this en-gross sector everywhere. Therefore, I decided to invest in production. The question was: in what production sector? I have chosen the alcohol industry for a couple of reasons: I had some experience in the cereal market, the main raw material for alcohol and I heard that the margins are high in this industry. I realized that I can exploit the long-term advantages offered by the Romanian strong agricultural potential. I wanted to obtain a mass non-perishable product. In this way I got to the alcohol. I did not know anything about alcohol production and selling, but I knew where from to take the raw material. I did not understand the black market and its implications over this industry”.

In the period July 1997 - August 1998 the first alcohol factory was built from scratch in Ploieşti with an initial investment of 2.4 mill. $. The factory was equipped with modern equipment: a German distillery with continuous production flow that has a capacity of 10.000 litres/day. The alcohol factory was part of the Expo Market Doraly company, but it functioned as a separate profit centre. At the very beginning the company even though very well equipped was

Case study not successful in the alcohol business, as the owner explains:

“In 1998 I had an alcohol factory that was producing alcohol that I couldn’t sell. The entry barriers in the industry were very high. The market was closed, producers of alcohol beverages were buying only from already known suppliers and I was a new-comer. Besides this, the black market of alcohol was very strong. The alcohol accise was 2$/litre”. I was obtaining alcohol at 50 cents a litre, but nobody cared about my 50 cents, when they could obtain goods with 2$ cheaper from the black market producers. I have always functioned legally and paid my taxes, so I could not compete with the black market.” When Gheorghe Iaciu realized that he has a product (the alcohol) that he can not sell, he decided to integrate and to use the alcohol to further produce alcoholic beverages as he details: “I ended up producing alcohol beverages because I had the alcohol and I had nothing to do with it. I bought the necessary equipment to produce beverages, I created a product and I entered the alcoholic beverages market. Now I know that I was not ready to manufacture products. The people I hired have not make alcohol ever in their life”. He acquired an Italian bottling installation that has a 3.000 bottles/hour capacity and he started to produce both raw alcohol and alcoholic beverages. He looked in the Romanian market, by searching the products existing on the shelves of shops, identified a gap in the gin offer and decided to produce gin. The process of producing alcoholic beverages started based on the owner’s intuition. He has chosen the name of the product, designed the bottle and the label himself and the company launched the product in the Romanian market in November 1998. In 1999, Gheorghe Iaciu started to restructure his companies, by merging all space renting activities in one company and separating from the existing companies businesses in other fields of activity (alcohol) or situated outside Bucharest (renting space in Constanţa) as it can be seen in table no. 1. In 2001 Gheorghe Iaciu had three legal companies that were all in his ownership and over which he had the entire control and decision power. He gave up part of his ownership to family members, mainly to his wife Dorina Iaciu, who is Gigi’s adviser in business as he confessed:


“I am in charge with the business and its strategic and financial side, but when it comes to design and aesthetics, I always ask Dorina before making a decision. She has a good flair: what she likes is successful in the market, what she doesn’t like has no success in the market”. The three companies employ a total of 278 employees in 2001 as it is presented in table no. 3. The alcohol factory was initially part of Expo Market Doraly company and it was legally transformed in a completely new company (by separation) in 2001, when it became the Global Spirits Company (GSC). However the factory functioned as an independent entity since its beginning in 1998. Table no. 3 Evolution of employee number of Gheorghe Iaciu companies

in the period 1998-2001

Company/Year 1998 1999 2000 2001

ExpoMarket Doraly 160 150 148 141 Global Spirits Company 102 100 95 106 Doraly Mall Constanta - - 23 23 TOTAL 262 250 266 270

2.2.3 The alcohol business becomes the main business for Gheroghe Iaciu

The alcohol company enlarged the product lines by introducing in production besides gin, products such as vodka, cherry, rum and liqueur as different brands and sub-brands, so that in 2001, it had 11 brands and sub-brands. Appendix no. 2 presents the whole range of alcoholic products of the company. Among the products, the vodka brands account for the highest percentage of the production volume (62% in 2001) and for 50% of the sales volume of 120.000 l/month of the company, while the gin brands account for 28% production volume and for 40% of the sales volume of 60.000 l./ month. Appendix no. 3 presents the whole range of the company’s products and their percentages in the production volume and in the sales volume.

Case study

The GSC’s products address two major general market segments in the Romanian market: the medium consumer segment and the low consumer segment. The medium consumer segment comprises: persons with a medium towards high degree of culture, persons preoccupied of an increase in their social status, persons with ages between 20-60 years old as a large segment and between 25-40 years old as a central segment, with net monthly incomes between 1.5 mill. lei - 3 mill. lei (54$- 108$3). The company addresses both women (Bartender’s gin, Bartender’s Peach /Lemon Vodka) and men (Black Label Vodka, Baternder’s Fine Vodka) in this segment. Prices for these products range between 2$ and 4 $. The low consumer segment comprises persons with a low towards medium degree of culture, with no major preoccupation for an increase in their social status, persons who buy the products mainly for a very good price/quality relation, persons with the age comprised between 20-60 years as a large segment and between 30-50 years old as a central segment, with net monthly incomes of maximum 1.5 mill. lei (54$). The company addresses both women (Bartender’s Sour Cherry, Vulturul Regal Vodka, Club 26 Vodka) and men (Bartender’s Rum, Vulturul Regal Vodka, Club 26 Vodka). For the main two product types of GSC gin and vodka, the market position differs. The Bartender’s gin is the market leader with 51% market share at the beginning of 2001 (see appendix no. 4) while for the vodka’s the market shares are still low (see appendix no. 5). In May 2001 the gin market share increased to 53% and vodka’s market share increased to 4%. After the initial failure with the alcohol business in 1998 Gheorghe Iaciu realized that he has to make some changes in the way he runs his business, as he confessed:

“The fact that I started to chose what product to manufacture at inspiration was a bad start. Later I understood that I had to find my way and initially I tried to do this through my employees. But I realized that I can not get anywhere with them. At that moment I understood that something has to be changed. I had my entrepreneurial spirit, I had my orientation towards quality, but this was not enough, I was doing everything after my feelings. I realized that first of all I should start to transform myself …. I knew that I have to get more knowledge. So, I decided to do an MBA. I searched the Romanian market for such an educational service, I decided that what was available in the Romanian market is not what I

3 The average exchange rate leu/$ in the period January-July 2001 was 27.855 lei/$.


want, so I applied at universities in United States. I have been accepted and I attended the MBA program of Florida University in USA, for two years, in the period June 1998 – June 2000. In the meantime I was managing my business from distance via email. This was a turning point for me. I learned a lot. I learned that a person cannot do everything right on his own, a person cannot know everything,………..” Consequently, when he returned from USA he started to make changes in the company. Everything started with a change in strategy.

2.3 The transformation of the companies’ activities

after June 2000

Gheorghe Iaciu followed an MBA in USA, period in which he managed his business from distance. At the same time he accumulated knowledge, friends and relations at international level. The effects of the study period on his managerial activity started to be seen after a while as he explains:

“I entered this program, I accumulated knowledge, but I really felt the accumulations only after one year and a half. These accumulations helped me to find my direction in business. At the end of last year (2000) I personally knew what I want in business and I took some strategic decisions:

1. I concluded that I have to separate my businesses and to stop moving funds from one business to another. I decided to let each business to function on its own. I finally managed to legally separate the businesses in 2001.

2. My time is limited. Where do I use it preponderantly? In the business I think it is the future, where the potential is higher. And this is the Global Spirits Company.

3. My resources are also limited. So where do I use them? I concluded that in the alcohol business. I decided to focus on the alcohol business. What does this mean? That I have to make a strategy in this field.”

The strategy chosen by Gigi Iaciu for the alcohol business, was to restrain the number of brands, to create new brands, to recreate some brands and to re-launch them in the Romanian market and to launch them internationally, too.

Case study

2 3.1 Changes in quality

Global Spirits Company decided to focus on the quality of the product as a competitive advantage. Consequently he decided to improve the quality of its products: the alcohol (50% of the total turnover in 2000) and the alcoholic beverages (50% of the total turnover in 2000). As the alcohol is a basic component for the alcoholic beverages, its quality was decisive. Therefore, the quality of the alcohol became the key element in ensuring the quality for alcohol buyers and for the alcoholic beverages buyers. In order to ensure a high quality of the alcohol Global Spirits Company needed to answer the following questions:

/ how to control and monitor quality? And they changed the technological process and made investments in new equipment,

/ how to obtain quality? And they set up a research laboratory and hired the best specialists in the field,

/ how to measure quality? And they created a continuous quality control system part of the technological process with established parameters for the final products.

The company acquired highly modern testing equipment in order to verify the quality of the alcohol and of the alcoholic beverages. Than the company changed the technological process and the equipment twice until they managed to obtain the quality of alcohol desired. Part of the technological process is sample testing: every two hours the quality and the concentration of the alcohol is measured and when it does not correspond to the quality standards established the alcohol is reintroduced in the distillation process. After the changes made, in September 2000 Global Spirits Company managed to obtain the standards of quality desired for the alcohol. Consequently the number of clients for alcohol increased from zero to 33 in one year time, in the conditions in which (according to Gigi Iaciu) 80% of the alcohol in Romania is sold in the black market. In the first half of 2001, the company ranked the second in the country as sales volume (measured as contributor to the state budget4), while as production capacity it ranked the 22nd. The high number of clients attracted in one year time, was based on an organized direct selling process and a thorough market research

4 The ranking refers to the alcohol sales declared and for which taxes are paid to the state budget. The black

market sales are excluded.


and gathering of information prior to the negotiation process. Gigi Iaciu describes the process:

“We personally went to every potential client, as many times as it was necessary. It is not so easy to convince someone to buy from you. You have the first contact, it takes some time to find out who is the right person to talk to, than you have to know what is he interested in. To do this you have to know his products, to know what problems have his products. We decomposed their products, we know their recipees, we analysed their products in detail, we had their products checked by our tasters, so we know what problems they have and how to approach them at negotiations. This is how we managed to attract 33 clients in one year, by identifying their problems and proposing solutions for them. We still have clients for alcohol on our waiting list, whom we cannot honour due to the lack of production capacity.” In order to obtain high quality alcoholic beverages, besides a good quality alcohol, there is necessary a good quality water, as in a litre of vodka, 40% is alcohol and the rest is water. This was the second element for which the company ensured a high quality: the composition of water before entering the technological process. After one year since the new high quality standards have been introduced, in the October 2001 the Global Spirits Company received the ISO certificate.

2.3.2 Changes in the product range

In October 2000 the company started to implement the new strategy as far as the alcoholic beverages are concerned. Contracts were signed with American and English companies for the development of new products, a team of researchers was hired, the best tasters in Romania were brought in the company in order to develop high quality products. The company worked simultaneously to develop few products. The company decided to focus on a few product lines for which to develop a number of new brands and to reposition the existing brands. Table no. 4 presents the product lines and the new and repositioned brands.

Case study Table no. 4 The new product lines and brands at GSC

Product line Brand Position* Image Luma NB Ultra

premium Goldessa NB Premium

Vodka

Dakk NB Medium Bartender’s Premier

R Premium Gin

branding in progress

NB Ultra premium

Liqueur Epriz NB Premium Brandy branding in

progress NB Ultra

premium

*NB = New brand; R = Repositioned

The company has chosen to focus on these products based on: the sales estimations, by focusing on products with high volume sales

potential, the existence of markets at global level, where the GSC products can

be competitive. The new/repositioned brands are completely different from the previous GSC products: their composition is based on newly improved recipees, their image and market position is changed. The owner appreciates that the creation of the new brands is ”revolution as compared to what we have done the first time”.

Appendices no. 6 and no. 7 present by comparison the old Bartender’s gin bottle and the new Bartender’s gin bottle, respectively the old vodka brand and the new vodka brand. The new products will be launched gradually, while they are ready to enter the market, while the old products will be withdrawn also gradually. The first two new/repositioned brands that are already ready (Bartender’s gin and Dakk vodka) will be launched in March 2002. By the end of 2001 another two brands will be ready (Luma Vodka and Goldessa Vodka), in summer 2002 the liqueur brand (Epriz) will be ready and in October-November 2002, the other two brands will be finished: the brandy and the ultra premium gin. By the end of 2002 it is envisaged


that five brands Bartender's Premier, Dakk, Goldessa, Luma, Epriz will be launched in the Romanian market and probably in some foreign markets, too. In the creation of the new products, GSC’s contribution focused on the composition and the quality of the products themselves, while the image creation and all marketing activities were subcontracted to professional organizations, as the owner mentioned:

“My opinion is that if a company tries to do everything on its own, ends up as a poor company. Our company focused on what it knows to do better: products. We have a research-testing laboratory and we focus on the development of the physical product. For the image creation and for the marketing activities we hired specialized companies. We don’t want to do the work of Saatchi & Saatchi, or Ogilvy or A.C. Nielsen. They give me the information and I use it to make the decisions.”

The marketing research activity became a priority activity at GSC, as “no decision can be made without a thorough search of the market”. Gheorghe Iaciu intensified the marketing research activities at his companies by subscribing to specialty publications, by participating at exhibitions and fairs (both as an exposant but, researching the competition, too) by getting acquinted with the personalities in the field at world level, by continuously searching the internet for information about the alcoholic producers and their products at world level, by buying market studies at global level and by continuously analysing competition and consumers. GSC is aware that the most important thing for the success of the business is to get high sales volumes, by obtaining a high market share. In 1998 when it first started to launch the alcoholic beverages in the Romanian market, Bartender’s gin was the only product that was sustained with marketing activities and this was the only product that got a 53% market share in spring 2001. For all new/repositioned brands, the company designs at the moment marketing programs, meant to obtain a certain market share from the targeted segment, based on the following steps:

create awareness through advertising, stimulate trial through sales promotion, get market coverage through distribution, sustain the brand in the market (reminding advertising and sales

promotions).

Case study The company has as objectives to reach in Romania a 60% market share in the gin market and 60% market share in the vodka market in 2002 with the new/repositioned brands. 2.3.3 Approaching external markets

In the summer of 2000, when Gigi Iaciu decided to revise the strategy of its companies, he re-analysed the Romanian market with different eyes (in the light of the knowledge accumulated in USA) and he noticed that the Romanian market has not a very high potential from the point of view of the potential sales volumes and of the type of products that can be sold here, as he explains:

“At national level we have a weak market. The market potential is low from quantitative point of view, as well as from qualitative point of view. In the Romanian market there are few consumers with pretentious tastes and we cannot design premium brands for the Romanian market as the volume is low and there cannot be obtain profits for specially designed high quality products. At that moment I realized that if I want to create premium products I have to relate myself to foreign markets. However, the company has to be the first in its domestic market in order to accumulate enough capital to be able to internationalise.”

Consequently when the new brands have been conceived, they were designed as global brands. The company registered its property rights over the new brands in a number of over 100 countries (15 countries from European Union, USA, Canada and another 70 countries partners at the Madrid Protocol), investing in this over 500.000$ with the plan to go international with these brands. The company already started to negotiate with a number of partners from different countries for the distribution of its newly designed brands. However, the strategies for different countries will be different as the owner mentioned:

“We cannot go in the same way in all countries. We have one approach for the neighbouring countries and a different approach for countries such as UK, USA, France, Germany and Japan. There are products that can be sold in all countries and there are products that can be sold only in a few countries.”

The company has negotiated and found partners for distributing its products in USA, in the Scandinavian countries and in some of the neighboring countries: Bulgaria and Yugoslavia. It also made offers in U.K, Italy and Canada.


GSC considers that it has no potential to address the medium USA market that is stable and very competitive, but considers that it has chances to penetrate the premium and the ultra premium markets that have a 17% yearly growth rate and are not so competitive (from the point of view of the number of competitors). In Canada and in the Scandinavian countries GSC intends to enter both in the premium market (where to compete on quality) and in the medium market (where to compete on price). In the neighbouring Eastern European countries the company will enter especially with the medium products. 2.3.4 The need for overall change

In April 2001 the company started an investment in a new factory for alcoholic beverages, factory that will increase the production capacity four times from 10.000 litres/month to 40.000 litres/month and that will be finished in February 2002. The increase in the production capacity took place based on three reasons: to satisfy the demand for alcohol that was higher than the production capacity, to ensure a competitive price for alcohol (and further for Global Spirits Company beverages) by producing high volumes and obtaining economies of scale and to obtain highest quality possible. The total investment of the company after June 2000, was of over 6 mill. $, of which 4.8 mill. $ in equipment, 1 mill. in the creation of brands and 500.000 for the protection of brand names in foreign markets. In order to be able to reach these objectives of 60% market share in Romania for two product lines in 2002 and to internationalise in the medium and in the long term, the GSC also made some changes in the human resource activity and in the financial-accounting activity. The initial failure with the alcohol in 1998, determined subsequently the reorientation of GSC towards quality. The owner realized that he has to change the way he was selecting employees: from hiring whoever was available, he shifted towards hiring professionals and specialists in the alcohol production and the best tasters in the country for the conception of the new products. The training activity became part of the human resource policy at GSC, even though still not very focused, as the owner explains:

“I invested money in training employees because human resource is the most important in a business and it is the most difficult to develop. One rather is able to retechnologize sooner than forming a good working team. It is a very long process. The most I invested in myself, as with the others I did not know in whom to invest and in what direction. I did not know who will be suitable and who will stay. It is a long process, it takes one at least a few months to know an employees, his

Case study capabilities and suitability for the needs of the company. Now all employees are trained in computing, foreign languages, marketing etc. Some of them improved, some others did not. The process is very slow. These are people who lived with a certain mentality for many years. We want them to transform themselves in capitalists over night. This not simply possible. It takes time and I am supporting them in this process.”

Also for certain activities (such as market research and advertising) that the company’s employees cannot do it at a high level, GSC subcontracts the tasks to professional organizations. The company also changed the financial and accounting system by replacing the overall evidence kept for alcohol separate and for alcoholic beverages (in total) separate with an evidence for each brand. The new financial-accounting system based on the introduction of the new software allows to know the costs and the profits for each product separately.

The company has well established objectives as far as the Romanian market is concerned (to increase its market shares for gin and for vodka up to 60% with the new/repositioned brands) and the end of 2002 will be decisive to see if the company is successful or not. The structure of GSC will change by reducing the percentage of the alcohol selling activity to 25% in the favour of producing alcoholic beverages. Results on a large scale that will include international markets are expected to be obtained in five years time. The final thoughts of Gigi Iaciu reflect the aspects he wants to focus on in developing the strategy for his business:

“The basic of our business is: emphasizing on brands and consumers, executing highly qualitative products in an efficient way, developing an exceptional marketing activity.”

2.4 Assignment questions:

1. How did the strategy change at the Gheorghe Iaciu companies and at Global Spirits Company in the period 1994-2001?

2. What were the concrete actions that reflected the change in the general strategy and in the strategy of Global Spirits Company?

3. What were the factors that contributed to the change in strategy?


Appendix no. 1

The first 16 en-gross companies in Bucharest in 2000 as number of visitors

No. Name of the

company No. of stands

No of stands as a % of the total number of stands in all en-gross companies

Degree of visiting as a % of total

1 Doraly 625 6.62 13.47 2 Niro2 952 10.09 13.30 3 Flora 686 7.27 13.15 4 Prisma1 576 6.11 5.74 5 Europa 2000 21.20 4.59 6 Metro Otopeni 0 0.00 3.95 7 Chirigii 147 1.56 3.79 8 Metro Militari 0 0.00 3.67 9 Sam Expo 175 1.85 3.49 10 Apromat-co 243 2.58 3.30 11 Percy 193 2.05 3.07 12 Massa 327 3.47 2.75 13 Mate Vila 164 1.74 2.64 14 Herastrau 230 2.44 2.23 15 Manor 74 0.78 2.18 16 Doraly lll 99 1.05 2.11

Case study

Appendix no. 2

The assortment of alcoholic beverages at Global Spirits Company

No. Products Alcohol

concentration Bottle sizes Market∗

segment 1. BARTENDER’S

DRY GIN 40% 750ml.

500ml. 1000 ml.

M

2. BARTENDER’S BLACK LABEL VODKA

40% 700ml. 500ml. 375ml.

8000 ml.

M

3. BARTENDER’S FINE VODKA (RED)

40% 700ml. 500ml. 8000 ml.

M

4. BARTENDER’S PRINCESS VODKA

30% 700ml. 500ml.

8000 ml.

M

5. BARTENDER’S PEACH/LEMON VODKA

37.5% 500 ml. M

6. BARTENDER’S VISINATA (SOUR CHERRY)

25% 500 ml. L

7. BARTENDER’S RUM

40% 500 ml. L

8. VULTURUL REGAL (VODKA)

33% 500 ml. L

9. CLUB 26 VODKA 26% 700 ml. L 10. NOBLESS (SOUR

CHERRY LIQUEUR) 25% 700 ml. M

11. NOBLESS RASBERRY LIQUEUR)

25% 700 ml. M

∗ M represents the medium consumer segment. L represents the low consumer segment.


Appendix no. 3

The percentage of every product in the total volume of production and in the total volume of sales (2000)

PERCENTAGE OF PRODUCT IN

THE PRODUCT QUANTITY

PRODUCED SALES

DRY GIN 375 ML 40% 2.97% 2.81% DRY GIN 500 ML 40% 11.33% 13.60% DRY GIN 750 ML 40% 13.88% 23.68% Liqueur Sour Cherry 0.20% 0.45% Liqueur Rasberry 0.14% 0.33% RUM 500 ML 40% 4.77% 4.43% VISINATA 500 ML 18% 4.66% 4.58% VODKA BARTENDER’S 750 ML 40% 7.36% 8.73% VODKA Club 26 5.97% 2.92% VODKA LEMON 500 ML 30% 3.00% 2.86% VODKA N 375 0.99% 0.66% VODKA N 500 4.64% 4.35% VODKA N 700 3.56% 4.22% VODKA PEACH 500 ML 30 % 1.62% 1.55% VODKA PRINCES 500 ML 30% 18.49% 12.34% VODKA PRINCESS 700 ML 30% 6.55% 5.64% VODKA R 500 3.81% 3.59% VODKA VULTURUL-REGAL 6.08% 3.24% TOTAL BOTTLES 100.00% 100.00%

RUM 40% 8 L 0.68% 0.79% VODKA BLACK 8 LP 40% 36.05% 37.52% VODKA BLACK 8 LS 40% 15.82% 17.91% VODKA PRINCESS 8 LP 40% 24.98% 20.20% VODKA RED 8 LP 40% 22.47% 23.58% TOTAL BOTTLES 100.00% 100.00%

Case study

Appendix no. 4

The market share of the Bartender’s dry gin against the competition in the period August 1999-January 2001

Brand Market ShareAug. - Sept.

1999

Market ShareApr. – May

2000

Market ShareAug. - Sept.

2000

Market Share Dec. 2000 – Jan.

2001

Bartender's 34.5% 49.0% 45.1% 51.1% Gilmans 16.8% 17.7% 24.4% 13.4% Sankt Petersburg

8.2% 9.7% 10.1% 3.6%

Russeika 4.7% 4.2% Big Ben 7.8% Skanderberg 6.5% Sanburgen 4.8% Beefeater 6.0% 4.2%


Appendix no. 5

The market share of the GSC vodka’s brands against the competition in the period August 1999-January 2001

Brand

Market share

Aug. - Sept. 1999

Market share

Apr. – May 2000

Market share

Aug. - Sept.2000

Market share

Dec. 2000 – Jan. 2001

Bartender's Vodka 0.6% 1.8% 2.3% 2.5% Vulturul Regal 0.8% 1.0% Club 26 Vodka 0.7% 0.8% Scandic Pop 10.7% 17.2% 20.4% 20.3% Polar 5.2% 6.6% 8.6% 7.9% Voltamar 4.7% 4.3% 2.4% Imperial Gold 4.5% Stalinskaya 4.4% 4.9% 5.7% 5.4% Regal 3.9% 2.8% Vorona 3.6% 7.5% 7.9% 9.4% Uncle Sam 3.6% Alexander 3.3% 3.8% 3.5% 3.0% Perfect 3.4% 3.3% 2.8% Vinalco 2.5% 2.7% 2.6% Sankt Petersburg 2.3% 2.7% Monopol 2.6%

Case study

Appendix no. 6

The old Bartender’s gin and the new repositioned Bartender’s gin

A. The old Bartender’s bottle B. The new Bartender’s bottle


Appendix no. 7

The old and the new vodka brands and bottles

A. The old vodka brand B. The new vodka brand and bottle and bottle

Case study 3 Danmixer

Author: Madsen, Aalborg Business College,

Denmark About the case

Danmixer is a real company and the employees are all real characters. The name of the company has been changed. When you have finished your work with the case you will know why!

Only some of the events and statements given in interviews are constructed for this case. Some of the problems that the case makes topical are real, and some are fiction, but the are all realistic. The information about the company, its products and competitors are authentic.

Some of the employees have been interviewed and some informational material of the company has been used for presenting the company and some of the facts about it.

No contact should be made to any of the companies mentioned in the case!

3.1 Introduction

”We have to rethink the situation of the company in order to make the right decisions. I want you to take into consideration that we obviously are facing some major threats. But the future will bring some very interesting opportunities. Our markets are becoming more and more competitive and our customers are becoming more and more competent when it comes to product specification, supplier search and performance review. And we must never forget the strategic role of marketing. I am not a hundred percent sure that it is wise of us to aim too much at using the Internet-solution for all sales and marketing tasks. We have to be carefully about “nursing” our customers realising the importance of relationship marketing”


The Managing Director Holger Colding found himself doubtful about the use of E-Business in Danmixer. He had the feeling, that he had to get a better background to make the right decisions. He felt that the use of Informational Technology and E-Business should be treated as a more integrated part of the Marketing Strategy.

However, Informational Technology was not his only concern. Recently speaking with his best friend, who is a marketing manager in an company producing equipment for hospitals and laboratories he said:

“Until now we have been satisfied with our core-competence within Product Development and our marketing activities have been secondary as long as our products have been excellent. Still our engineers have been doing a good work when it comes to the sales processes and building relationships, but I believe we may not yet have the ability and time for market monitoring” (Colding)

3.2 November 2001

It was a cold day in November 2001. Project Manager Jens Nygaard Andersen looked out of the window. A truck was loading a big mixer for Tetra Pak in Sweden. Tomorrow Mr. Andersen was leaving for Ireland for a sales meeting, last week he was in Germany, and the week before he was in England. Actually he was now wondering if there might be any other solution than all these sales meeting all around the world. He turned around and looked at the computer screen. Another product-inquiry had arrived via the homepage. He had been quite sceptical, but now he realised that the homepage generates some new customers. At the time they made the homepage it had only cost about 10.000 Danish kr. which is approximately 1000 USD. What if we invest 10 times that amount of money? And what if the number of travels abroad could be reduced? He did not really know, but one thing was for sure. The new homepage would have to offer more facilities than the old one. Something like customer-support, and maybe use some famous companies as references.

Case study For the time being Danmixer was registered in some search engine1 databases:

WWW.Jubii.dkWWW.1klik.dkWWW.Albot.dkWWW.Altavista.dkWWW.Arriba.dkWWW.Berta.dkWWW.Excite.comWWW.Directhit.comWWW.Google.comWWW.Hotbot.comWWW.Lycos.com

Mr. Andersen went recently to a seminar at the University in Aalborg, Denmark. The professor spoke about Internet Marketing-strategies. One of the theoretical approaches, that made an impression on Mr. Andersen was the Net-activities organised as Public Internet, intranet and extranet. Mr. Andersen remembered something about the Internet being characterised as the public area for current and potential customers, competitors, research community and media. The Intranet deals with proprietary information with a focus on employee communication. The intranet is more process oriented and useful for development tasks as well as the Internet is more sales and marketing oriented. He did not remember a lot about the extranet – he only had a vague memory about it being a kind of blend. Luckily Mr. Andersen still has the handouts from the Power Point presentation. Until now Danmixer has not been using either intranet nor extranet.

Once Mr. Andersen was discussing the company’s actual and future use of the Internet, Mr. Andersen found Mr. Colding very doubtful about the effect and measuring the effect of the Internet Marketing activities. According to Mr. Andersen Mr. Colding was not really aware of the opportunities of the Internet.

“Isn’t unrealistic to believe that we can become a virtual company doing electronic commerce as long as we are producing turbo mixers for food manufactures? I don’t think you find any company that is more into conventional, physical business than Danmixer. And what is Internet marketing after all?” (Colding) 1 Search engines use special automatic tools known as spiders or robots to index web pages of registered sites.

Users can search this index by typing in keywords to specify their interest. Pages containing these keywords will be listed, and clicking on a hyperlink will take the user to the site.

http://www.jubii.dk/

http://www.1klik.dk/

http://www.albot.dk/

http://www.altavista.dk/

http://www.arriba.dk/

http://www.berta.dk/

http://www.excite.com/

http://www.directhit.com/

http://www.google.com/

http://www.hotbot.com/

http://www.lycos.com/


Mr. Andersen showed Mr. Colding a theoretical model in order to understand the concept of Electronic Commerce (Appendix no. 1).

“Of course we are not a 100% into electronic commerce as long as our product are physical, but think about a lot of our services. These services may be delivered in a digital way. In this sense you may define Internet Marketing as the application of the Internet and related technologies to achieve marketing objectives2 ” 3.3 Who is Danmixer? Danmixer is a limited company with its registered head office in Aalborg, Denmark.

Holger Colding, who is now the managing director of Danmixer, founded the company in 1989. Colding had at that time all ready gained much experience within this industry due to the fact, that he had founded another company in 1972, which developed and produced Plants for slaughterhouses. All productions are based on stainless steel, and the production is done In-house.

Danmixer employs approximately 80 people in Denmark and specialises in the manufacture and development of Turbo Process Mixing Systems, High Shear Mixing Plants, Blending Vessels, Cooling Vessels and In-Line Mixing – supplying the world market. Agents in e.g. Ireland, Japan and United Kingdom represent Danmixer.

Danmixer’s different departments are: • Senior Management (Mr. Colding and Mr. Krog), • Sales Department (9 employees), • Design and R&D Department (4 employees), • Project Management Department (10 employees) • After Sales Department (2 employees), • Purchasing Department (1 employee), • Quality Department (1 employee), • Finance Department (2 employees).

2 Definition according to Dave Chaffey, E-Business and E-Commerce Management, Prentice Hall, 2002.

Case study As to career opportunities Danmixer says:

“At Danmixer we work in an open environment, which encourages teamwork, we respect each other’s personalities, creativity and expertise, we are continuously developing our knowledge and competencies, we offer dedicated training and challenging project opportunities”

Today Danmixer is a leading partner for both small and large enterprises in the world of high quality mixing systems. The mission statement says:

“It is our mission to produce high quality products and systems that improve and compliment the customers’ current manufacturing systems. Our technology adds value to productions plants all over the world.”

Danmixer can meet all national standards and regulations when supplying equipment. The Danmixer Systems are used for producing Dairy Products, Prepared Food, Baby Food, Convenience Food, Health Care, Cosmetic, Dental and Pharmaceutical Products.

Some of the customers are famous companies: • Arla Food • Astra • Campells • Heinz • Nestlé • Northern Food Group • Tetra Hayer • Tetra Pak • Unilever

During the years Danmixer has been able to make money, and the financial situation is at the time very good. And still growth goals are essential to the management.

In spring 2001 Danmixer was certified to conform to the quality management system standard DS/EN ISO 9001:2000. Danmixer’s systems are manufactured to the European standards and legislation.


3.4 Product - The Turbo Mixing System

The Turbo Mixing System gives optimal powder / liquid or liquid / liquid mixing with / without high shear mixing. Products / ingredients homogenise, emulsify and disperse in a few seconds. Particles can be blended gently into the products. Powders and additives will be sucked into the system by vacuum. Danmixer calls this the ”All in one Process”.

The All in one process reduces producing time, handling time, down time for cleaning and down time for maintenance.

This process results from years of on-going research and development. All systems will reduce processing time, handling time, down time for cleaning and down time for maintenance in comparison to conventional mixing technology.

3.5 Internationalisation

In order to understand the process of internationalisation we have to go back to 1972, more than 17 years before Danmixer was founded. From the very beginning Danmixer served the German market, while colleagues and competitors in Denmark had a clear focus on the slaughterhouses and food producing companies in Denmark. Meanwhile Danmixer made analysis that concluded that the German market was more attractive. The domestic market was also considered important because of Colding’s philosophy saying “If you are not competitive in your domestic market, it will be difficult to become competitive in foreign markets”.

Today, most of the companies producing ham in Poland, Hungary, The Czech Republic, Germany and France are using Scanio equipment. Colding brought this international orientation with him when he sold Scanio and founded Danmixer. In other words, Danmixer has had an international orientation and competence from the first day.

In 2000 the export share of Danmixer was about 90%. Danmixer uses both indirect and direct export modes, depending on country and product. In many cases Danmixer benefits from using Agents abroad.

Case study 3.7 The market and the customers

In 1999 a survey was made to explore, which marketing efforts were the most important for exporting companies in the Northern Part of Denmark when interacting with foreign customers. The most important dimensions turned out to be long term personal relations and personal contacts in the export market for Danmixer. Marked with an X. The percent numbers covers the whole survey. More than 50 companies were asked. See table.

3.8 Tetra Pak – A key customer -

Tetra Pak in Sweden is the one of the biggest clients and best relations for Danmixer for the mixer-product. Tetra Pak is an internationally oriented company and the company has about 50% of the world market for machines for packaging milk-products, juice, chocolate-milk, ice cream and other products made by mixing powder and liquid. The attitude in Danmixer was that it is not always an advantage to have one such big customer.

Danmixer is in this way a production company for Tetra Pak, and Tetra Pak will provide Danmixer with information about different markets. The bargaining power of the two companies is in a way quite balanced since they are mutually dependent on one another and Danmixer does not feel being the weak part: “We invented the mixer. We invented a good machine, which is able to combine both thick-and thin fluid ingredients. Tetra Pak is machines for packaging and cardboard-materials. To Tetra Pak it is not so important to make money on the mixers, but the next step in the production and packaging-process. If they sell a mixer to a customer, they all ready know that the customer will face a need for packaging the product.” (Holger Colding, Managing Director)


Danmixer’s interaction with the market:

To which extend do you agree in…:

Completely Agree

Agree

Disagree

Completely Disagree

No Ans.

64%

25%X

7%

2%

2% Most of all we try to build long term relation to important players in the market When we need knowledge about a market, we use our contact person

41% 48%X 5% 2% 4%

When new opportunities occur we try to benefit from them immediately

34% 41% 20%X 2% 2%

We attach importance on visiting foreign markets to be updated

50% 20% 20% 7%X 2%

When we need more information about a market or think of increasing our activities, we make a market research

9%

57%

16%

11%X

7%

Collecting and analysing data is a core activity in our company

11% 55% 18% 11%X 5%

Case study This mutual dependence was due to the fact that the operation speed of the Danmixer Mixers was higher than any competitors, which made Tetra Pak’s customers more efficiency and that would call for a demand for more packaging-machines supplied by Tetra Pak. So it was attractive for Tetra Pak to incorporate Danmixer´s products in Tetra Pak’s customers’ production process.

At Danmixer the management were very much aware of the consequences and requirements for Danmixer.

“It’s an advantage that we can concentrate on product and process-development and production. For small and medium sized companies I believe this is a general tendency. They have to define themselves as subcontractors. We have to be trustworthy and our financial situation must be alright, and finally our image must be a professional company being capable of product development, and sales support” (Colding)

3.9 Ingredients producing companies

It was important for Danmixer to sell their mixers to the ingredient producing companies. The faster the ingredient company was able to produce ingredients, the more it could lower its cost and the more competitive the ingredient company would appear in an industry extremely focused on low costs and with difficulties differentiating their products since they were only an anonymous part of a product in the next step of the value-chain.

3.10 Competitors

This great focus on the benefits of Danmixers Turbo-mixer has caused that the company has not paid any specific attention on monitoring the competitors.

“We have to admit that we don’t know for sure a lot about our competitors. We always believed that staying competitive ourselves by our innovative product and additional services would be of greater importance than anything else. Besides we have to realise that we don’t have enormous resources for market analysis. Still we do know some competitors from the WWW”. (Jens Nygard Andersen)


Danmixer’s competitors according to Danmixer are:

• APV Crepace, • Fryma, • EMI Incorporated, • APV Limited, • Silverson, • LIGTHNIN,

Some of these companies have Web sites.

3.11 Selling directly – supported by the agents

Danmixer also put strong emphasis to selling directly to some companies in order to get out in these companies and be inspired. Danmixer became almost an international brand within food producing companies and Danmixer positioned itself as the supplier of effective mixing.

“Well, taking at quick look at our list of references, it is impressing. Enormous companies like Heinz, Nestlé, Coca-Cola and McDonald’s are just some of the names on it. Today Danmixer is a synonym for a mixer. They say we can make it on The Danmixer.” (Colding)

Because all these companies have become international having departments in many different countries this helped Danmixer becoming international.

The role of the agents is to provide the customers with information and advice when it comes to assembling. The agents are also supporting Danmixer with legal assistance according to local law and they help Danmixer with the contracts. There have been some rumours about a few agent feeling left too much on their own when the needed some product documentation. Mr. Colding neglected these rumours when Mr. Andersen told him about his experiences.

There is no marketing department in Danmixer as such. At Danmixer they did not make formal sales forecast for the company split on countries, they just make the budget in a way that satisfied the accountant, nor did they estimate future total demand.

Case study The sales effort was based on the benefits and quality of the products in itself. The sales process could last several years from the time of the initial contact till the placement of the order. A lot of different employees are involved at Danmixer and at the customer’s company as well in connection with every order. The personality of the sales man is important and a professional promotion material is required. It is of great importance that the technical back up people in Denmark are well skilled and willing to participate in cross functional teams thinking of themselves as part time marketers. Sometimes the sales people had to convince the technical back up people that some tailored specific adjustments were needed to get the order.

Danmixer offers all the customers a service agreement incorporating 6-monthly or 12-monthly service visits by its own service engineers. The service engineers, who are well skilled, are also available outside normal business hours.

Danmixer consider its stock as a vital part of its core business. Spare parts for customers service and parts for production are produced in-house and always in stock. Component standardisation and keeping a large spare parts stock ensures efficient servicing. E.G. it ensures that approx. 95% of all spare parts are available ex stock, which can be delivered anywhere in Europe within 24 hours.

Furthermore Danmixer often use test mixers at the customers’ companies concerning offering the potential customer a possibility to study the efficiency of the mixer. It was a well-defined part of the sales policy at Danmixer. Usually Danmixer has at least 4 or 5 test machines around the World and a test-person, whose only job is to support the tests of the mixers. Very often he stays at one place for a week. In Danmixer’s promotional material it says:

“Pilot Plants – Test before you Invest

We have pilot plants with all functionality of our production size systems. Pilot plant testing can be carried out at your site or in our Test Facility in Denmark”

The sales people have to know a lot about the customer’s products and production-process. Otherwise it would be impossible to bring the message about the Mixer. The ideally educational background of a sales representative is food technologist. Producing ice cream for instance calls for insight in the amount of air required.


“It is very important that you make the right mix, and in the mix stabililsators are used. The expensive part is to make the ice cream stabile. If we tell the customer that they can reduce the amount of stabilizer by 10% by using our mixer, they get very interested. Take as an example Glasbolaget in Sweden, that we sold three mixers. They used to buy stabilizers for about 17 millions d.kr, and today they only use stabilizer for about 10 million d-kr.” (Colding)

3.12 Gaining knowledge of the markets

Danmixer has no marketing department as mentioned. Gaining knowledge of a certain market therefore focused on finding companies that might find the mixer useful. In that way the marketing research and promotional effort became fused:

“Like we’re doing in Ireland. Here we visit supermarkets and food exhibitions. Facing for instance a yoghurt producing company, we’ll call them, and ask how the make yoghurt. And they will answer. So we will ask if they would like to try our test mixer for a period, and they very often become surprised that it is possible to lend a machine” (Colding)

The information about the market, that Danmixer get from Tetra Pak is of great importance, too. The close relationship to Tetra Pak was the reason that potential customers’ relationship to Tetra Pak was carefully examined. In other word one could say that the marketing strategy was very relational oriented – and less based on long term planning on the one hand or intuitive solutions on the other hand. It was very often from personal relations contacts to the customers were initiated.

3.13 Pricing

“Pricing the products is not easy. First of all you have to decide the boundaries of the offer for which you will charge money. Of course we will like to see ourselves as using Value-Based Pricing but then again we have to make sure which element of the offering are creating value for the customer. We tend to make our pricing only on the core product and some foreseen needed service. Very often the need for after-sales services exceeds our imagination before selling. Actually, I mean that we don’t charge enough for the products in these cases. In a way we sometimes gives a lot of services for free, while customers needing less after-sales service

Case study in reality are being charged too much. I also this that we should carefully study how subtle variations in the core product’s characteristics provide incremental value for certain customers” (Jens Nygaard Andersen)

In Colding’s point of view Danmixer is doing the right thing about pricing. He claims that the company is to small for a more differentiated way of pricing, and he also says, that he wants Danmixer to be profiled as a service-minded company and a trustworthy business partner.


Appendix no. 1 Model for Electronic Commerce

Digital Product

Physical

ProductPhysical process

Digital process

Virtual delivery agent

Virtual product

Virtual process

Electronic commerce areas

The core of electronic commerce

Traditional commerce

Physical Digital agent agent

Source: Turban, King, Lee, Warkentin and Chung, Electronic Commerce, Prentice

Hall, 2002

Case study 4

“Selecta washes best”* or The Craft Of Making Yogurt

Author: Diana Antonova

University of Russe, Bulgaria 4.1 Introduction Making her way to the newly opened dairy factory called Pristis, Daniella thought to herself “There is no reason for not thinking of “Selecta” like of Marilyn Monroe or of “Ariel” like of Hollywood”. Daniella was going to her first meeting with the owner of the factory to discuss the new image of the company products.

“Hollywood is dead! – Somebody would say. Only the senile old men could be delighted with the movie stars. Alas, this is the reality, and our dreams and expectations disappear together with Hollywood. Realistic movies having no mysticism flood the cinema screens. And overwhelm them. The glitter of jewels is gone – they are replaced by the stress. There is no need to look for the decline of the cinema far back in the past. The Roman Empire collapsed because they preferred the stadium games to the church ceremonies. The Catholicism lost its magic influence at that moment the priests gave up the gold and the purple mantles. The person of today needs bread and dreams.”

Dannie stopped her Fiat Uno in from of the widely open gate of the new Mecca of yogurt in Rousse. “It is quite a façade! I wander what is it in the inside?” Led by curiousity, she paced hurriedly along the flower alley leading to the administrative building. * With thanks to Jacque Segela and his book “Hollywood washes best” which explains the strategy of giving birth to the “star” market products.


“It is about time the tired sellers of dreams from Beverly Hills passed the baton to the advertising. Our trademarks will be the new stars so that the consumption becomes a cultural act. The advertising should gain its right of citizenship refused by its enemies. The advertising will replace the dreams machine and it will become an everyday Hollywood. Let’s leave the ditch Styx** of the announcements with no regret or shame in order to step on the lively beaches of the advertising. Let’s stop being King Trade’s buffoons! Let’s create the eighth art and congratulate among the Olympians of the nowadays civilization its parent – the cinema. In a nutshell, the advertising as well as the cinema wants just one thing – to be the industry of the spirit. So, let’s get our right of immortality…”

Daniella knocked at door with the “Manager” sign on and flatly crossed the threshold of the office. There was no secretary. Daniella was met by the manager himself.

“Let’s go back to the beginning”, Daniella started without an introduction, “I want to know everything if we are to work together”. 4.2 About the producer of the star

(in the place of introduction) “ Even the good business education has its imperfection. It does not equip you with techniques and technologies for creating new products and services. This turns into a public problem when a person decides to start up own business. People like me can either have a live and die life in the public services sector (if they have any such job) or constantly experience difficulties in their attempts to link realities with somebody’s bookish understandings.” This was the concept of Vassil Stefanov, a young man who dived into the depths of the dairy industry of yogurt production. Vassil was well educated with a degree in engineering, important certificates with honours as well as a master degree in Business Administration from the Sofia University. Vassil’s entrepreneur odyssey dates back from his higher degree in Computer Technologies and Systems obtained at the University of Ruse. The first period was connected with the department of Computer Systems at the University of Rousse which had a history of over 45 years.

** The underground river in the ancient Greek mythology, where the souls of the dead float carried by the ferryman

called Sharon and where the gods take their most solemn oaths.

Case study “During my study for a bachelor’s degree the University delivered different international projects under TEMPUS and PHARE, and I was included in some of them. This gave me the opportunity to do some research on the possibilities of industrial cooperation between the EU member countries. Doing the research as a side activity, not directly connected with my permanent job, contributed to a great degree to my self-confidence.

My second period, when I studied for my master’s degree in Business Administration at the Sofia University, contributed to my closer view to the programs in the scientific-and-research sector and the research areas set by a Bulgarian export company. Till then I did not know anything about the business. It happened that my research job was related to the European food markets and I came to the conclusion that there was a chance for the development of a narrow specialist in the production of foodstuffs. All this helped me a lot later. But the more important was that it lit the flare of the entrepreneur inside me and inspired me to start an independent production business.”

Looking for a topic for his master’s thesis Vassil was already determined not be anybody’s employee. He accepted his master’s programme as a chance to develop his business idea and to do the necessary research and planning. The topic of his thesis was “Entrepreneur success or failure – the significance of the foresight”. His aim was to accomplish a research in its completeness in order for him to be able to implement his business ambitions.

“When finally I was able to arrange the pile of my conscious experience, I realized I wanted to take my own strategic decisions. I was conscious of the fact I could fail but I knew that before giving it a try I would not be satisfied being somebody’s clerk”. 4.3 Heavenly because naturally (the development of the idea) “I would like to be able to say that the idea came as a result of the deep analysis of the market needs. But actually, it came from my parents. The most important fact for me was that I was able to recognize the opportunity the moment I saw it”.

The idea that influenced Vassil Stefanov was connected with the production of a new type of yogurt combining the advantages of the homemade yogurt with the quality provided by the industrial technologies. His idea was to distribute the


product among the mass consumers at reasonable prices. The idea was not marked with originality. At that time, there were more than 60 brands of dairy products and the Danon Company held 30% of the market in that sector. There were a number of small dairy farms that made yogurt and produced 7 tons of yogurt daily using non-pasteurized milk produced in own farms especially for the purpose.

On the other hand, apart from the products developed on the basis of Bulgarian recipes, Danon was the ruler of the market with its continental style yogurts in many different variatins. All the yogurts had trade names like Fibella, Geranium, Elena, LB Bulgaricum, Danon Classic, Danon Magic. Only the latter was successfully trying to contribute to its trademark among the consumers. Danon Activia had attractive packaging and got on the right side of the media.

The next, but not the last, the traditions of the Bulgarians had turned the homemade yogurt into a fetish. Preparing homemade yogurt was something done in every second household.

Stefanov felt that if the ordinary dairy farms did not undertake some risky and determined steps towards their survival, they would hardly reach to a real and stable market for their production. 4.4 Much ado about…Yogurt! (the dairy market in Bulgaria) Milk has been having a major place in the food of the Bulgarians for ages now. According to the Bulgarian standards for adequate nourishment the milk and the dairy products should take minimum 35% of the needed proteins in the food. To put it in figures, this means that only the consumption of milk and yogurt should be between 300-500 grams daily which is equal to about 90-129 kg of milk and dairy products yearly. On a national scale, 1 200 000 tons of milk would be necessary in order to guarantee this production. Considering the production of milk and dairy products for export, then the figure will be 1 600 000 tons.

Attention to the Bulgarian yogurt and its nourishing and dietetic characteristics has been paid since the beginning of the XX century. The prominent Russian biologist Ilya Metchnikov discovered that the micro flora of the Bulgarian yogurt through the products of its life cycle could neutralize the putrefactive intestinal microorganisms and especially their harmful products. The numerous tests on the yogurt only proved its dietetic and healing properties. These qualities are believed to be a result of the metabolism of Lactobacillus Bulgaricus and Streptococcus

Case study Thermopilus – microorganisms that the yogurt contains and that cause favourable changes in the gastro-intestinal microenvironment. The Bulgarian yogurt is an excellent food for people suffering of lactic insufficiency. The scientific tests show that the consumption of yogurt decreases the cholesterol content in the body. Dairy products have anti-tumor qualities, too. Scientists have proved that a diet with yogurt including live lacto-acidic bacteria can increase the power of the cells responsible for the immunity.

It is told that once a Japanese tried the Bulgarian yogurt and went into such ecstasies over it that he got soiled. He asked for a handkerchief to clean the dirty spot and then took it to Japan. That was how the famous Lactobacillus Bulgaricus was taken to the Country of the Rising Sun. Today, Japan produces over 200 000 tons of yogurt yearly through Bulgarian license.

Till 1989 the Bulgarian patent for the yogurt leaven and the technology of yogurt production was bought by 21 countries.

Over 20 kinds of yogurts are produced all over the world according to the bacteria used, and not connected with the use of flavours or fruit. The Bulgarian yogurt is made with the famous Lactobacillus Bulgaricus and Streptococcus Thermophillus. The natural yogurt in Bulgaria comprises 97% of the total production. The second position is taken by the so-called flavoured yogurts and the fruit yogurts (with pieces of fruit). The third niche is for the dairy drinks like whipped diluted yogurt (containing no water). The fourth segment of the yogurt market is taken by the so-called green cheese – not very popular in Bulgaria but traditional for the West European countries. The green cheese is a mixture of cream and fine curd. The desserts come to complete the range of yogurts. LB Bulgaricum, the only association in the dairy branch, developed a group of healthy foodstuffs with several variations on the basis of Lactobacillus Bulgaricus. The products are clinically tested and sold at the chemist’s as additives.

The yogurt is a primordial product for the Bulgarians. Regardless of this fact, the biggest problem for the dairy branch is the low purchasing power of the population. A special inquiry made in 2000 shows that 35% of the population restricted the consumption of milk and dairy products for financial reasons. In this respect, the producers of dairy products face a number of problems:

Permanently low purchasing price of the cow milk and not satisfactory for the dairy-farmers but only for the dairy manufacturers. The producers delay the payments to the farmers. The price is fixed


after a research in the whole region and the neigbouring dairy-farmers are paid nearly the same for the milk. Sometimes, the farmers give a little lower price than the one of the neighbour in order to attract producers’ attention.

Most of the dairy-farmers prefer to sell their milk directly in the cities. They make their own stations and permanent customers who prefer dairy-farmers’ milk to the expensive and skimmed one from the supermarkets.

Most of the dairy business is “in a shadow”. 1 656 million litres of milk were produced in 2000, and the statistic figures show that only ¼ of this quantity was processed. This means than only 25% of the dairy production was officially registered.

The export issue – restrictions and requirements is another problem faced by the dairy producers due to the restricted home market. Special General Instructions issued by the European Union identify who and under what conditions can supply the Common Market with dairy products. In 2000 three Bulgarian companies (BG Enterprise 12 – Belovo, Philipopolis – Plovdiv, Kondov Ecoproduct – Staro Selo) obtained a license to export to the EU. “The quota for Bulgaria will not be accomplishes for certain”, the experts predict, “because these companies do not have the capacity…..Our dairy products from cow milk are not very suitable for export. They are out of fashion both as products and as packaging and also difficult to be measured. The inconsistent quality of the milk can not guarantee constant characteristics of the product.”

The dairy producers have an unexpected competitor in the face of the households. In 1998 the yearly consumption of yogurt in Bulgaria was 180 000 tons 55% of which – homemade. In 2000 the consumption was 190 000 tons, and 35% of it was homemade yogurt.

The traditional make and consumption of yogurt in Bulgaria is connected with the production of national dairy products. Among these are: yogurt, Bulgarian white brined cheese and yellow cheese. This tradition is strongly violated today, which in turn, gives reasons to question the adequate nourishment of the population.

Case study All the above said leads to the conclusion that “Everybody loses from the chaos on the dairy market”:

The end users They are made to buy milk from unlicensed producers only because it is cheaper. But this milk does not undergo though veterinary control and may appear dangerous for the health.

The unlicensed producers

The purchasing prices of the milk are too low and the dairy-farmers cannot cover their expenses for medical treatment and breeding of the animals. The farmers look for direct buyers of their production.

The licensed producers They face difficulties in finding market for their production due to obvious reasons (higher prices connected with the increased expenses).

4.5 Yogurt for the advanced

(the idea in its course of development) Following the above analysis, Vassil Stefanov developed his business idea taking into consideration the good sides of each sector and eliminating the bad ones. He organized his own seasonal buying of “fresh milk” directly from the dairy-farmers and made preservatives that allowed keeping of same quality throughout the year. Vassil assigned a task to a Dairying Institute to develop his own strain of Lactus Bulgaricum bearing the specific taste of the natural yogurt – granular composition and slightly tart taste. Regular supply of raw material throughout the year allowed production of quality and natural yogurt with three levels of butter content (1,2%; 2% and 3,6%) according to the European standards. The yogurt production was made fully by hand with the implementation of production and management techniques for obtaining high productivity. Stefanov equipped a laboratory for permanent control over the quality of the incoming raw material and over the end product.

According to the consumers’ classification of the main trademarks of dairy products organized by Bacchus Magazine, the basic place was given to Danon-Serdica.

The leading principle for the production of the Danon yogurts is the exclusion of preservatives. As a result, the yogurts are fresh and natural. The yogurts made


by Danon-Serdica are characteristic with their thickness and butter content. Also, only tested leaven is used for their make. One of the insufficiencies of these yogurts is the powdered milk added to them which hardens the yogurts and makes then homogenous. But the consumers think that this makes the yogurts lose their natural base.

The initial marketing research made by Stefanov showed that the target consumers of his future product are A, B, and C1 socio-economic groups – well-educated, travelled a lot, responsible to their health, nice food lovers and liking go eat at home. This picture underwent through a certain differentiation as a result of a further research.

The yogurt that complied with the demands of the above consumer groups was a series of three variations of a traditional Bulgarian recipe – an environment friendly product made from selected cow milks from the Danube Valley. 4.6 Yogurt – The backbone of the fast summer

(the way to self-perfection) The first step Vassil Stefanov made towards the development of his initiative was to gain the approval of the Business Incubator in Rousse as since 1995 they were providing funding under a programme called “Start-up Your Own Business”. The programme manager was Katya Ganeva. She started an individual investigation as part of the research for obtaining a precise idea of the expected consumer target group. This was based mainly on their habit of consuming yogurt. The research was needed to add to Vassil’s information in order to provide steady basis for future strategic market decisions.

“The feeling to be in a direct contact with the customers was unfamiliar to me. Doing the research myself gave me the chance to gather information in depth and in such details which I would not have obtained through reading book researches no matter how good and expensive they might have been.”

The final picture was of consumers purchasing at the small shops in the neighbourhoods or at the big supermarket chances like Metro, Fantastico and Billa, their attitude being standard for the average European customer:

positive to the innovations, ready to try new kinds of the constantly expanding range of dairy products,

Case study

the level of yogurt consumption exceeded the consumption of the other dairy products – white cheese, yellow cheese, curd, creams,

the consumption of natural yogurt compared to the other yogurts was 20:80 unlike the average European figures.

At that stage, Vassil started to work out the profile of the yogurt he would produce. He made a network analysis of 9 of the mostly sold yogurts at the market and his conclusions were made in the form a bipolar scale: “sweet-salty”, “homogenous-granular”, “white-yellow”, “thick-thin”, tart-natural” (presented with numbers from 0÷5). The highest average figures were for yogurt similar to the one called Elena – produce of the Dairy Company in the town of Elena. The Dairy company of Elena supplied the Bulgarian market with several thousand tons of yogurt yearly and with a constant growth. 4.7 Neither snails nor fish can move backwards

(initial business planning)

The “Start-up Your Own Business” Programme, where Vassil Stefanov participated, included also a preparation of a financial plan which together with the market research and the marketing plan formed the complete business plan for a period of three years.

The initial investment for the implementation of his business idea amounted to USD 70 000 and circulating assets of USD 10 000. This appeared to be a profitable initiative with generated growth at sales of USD 0,2 mil. in its third year.

“I brought to the fore a project based on a product that I had not yet developed and even not yet created. The only favourable fact to be mentioned about my business plan at that time was that I needed only 0,1% of the Bulgarian market in order to finish without a loss. The kind of yogurt, which I was supposed to make on the basis of my research, would reach to sales equal to 1÷30 of the sales foreseen by me.”

Following the recommendations of Dimitar Kotzev from the Management and Business Development Centre (MBDC), Vassil Stefanov started to seek for a partner with the necessary technical background. Vassil considered the role of his future partner as an impartial director of the company who would observe the production process, control the quality and develop the new product.


“First, you need a whole united team of balanced and skilful people in order for you to be able to impress everybody. Having such a team, you will get on the right side of the Business Incubator and they will agree to provide you with funding, being certain that the money will not be lost. Finally, you should use the agreement for funding and the energy of our team to convince the banks to give you money for the equipment you need”.

Through the RMBDC Vassil was introduced to a well-known experienced manager at one of the biggest local cooperatives who suited best for the position of the Technical director. That person was not willing to leave his current job but offered to provide private consultations.

4.8 The leopard cannot change its spots

(problems with the partnership and a new beginning) The first problems between Vassil Stefanov and his new “partner” appeared nearly right after the approval of the possible funding for research. This was proved by the increasing uneasiness of the technical director which was later transformed into indifference.

“This person was a top manager in the dairy industry sector. He had a very strong personality. His idea was to use me as a “façade” because he would never take the risk directly and leave his job without somebody’s help. I was happy to use his services because of his prestige and I was certain he would leave me to manage the business without him to interfere. This was a partnership of mutual interest. But I needed technical advice and he was not prepared to give me any. I quickly broke the relationship as the mutual interest did not exist.”

The project, regardless of the recommendation to receive funding, was at a standstill due to the impossibility of starting the real production. In his attempts to find a new person for the position of the technical director Vassil went to the Dairy Company of Elena where the competitive yogurt of his potential future product was produced. There, Vassil managed to convince Mehmed Etemov, the production manager, to become his consultant at the start of his production. In his turn, Mehmed introduced somebody to Vassil. This was Asen, a young person who was a graduate of the Dairy Industry Department at the Institute of Food, Beverages and Tobacco Industries in Plovdiv. At that time, Asen was having his practical training at the Dairy Company of Elena. Vassil and the young specialist

Case study set their partnership very quickly and rushed into the new initiative together. With his skills the new partner suited perfectly to the necessity of a manager for the tests and for the product development.

The technological development being started, Vassil concentrated on the main problem that had remained – the funding and his own contribution to it.

“My wife and I lived on her salary since the beginning the business initiative. Our savings were spent for the building and maintenance of our home so, it was not easy to find cash and at the same time to keep the management interest to the production. I could point my father a guarantor of a loan but independence was a significant element of my understandings for starting a business”.

The decision consisted of two parts. The first part – to start a job as an associate lecturer at MBDC to go parallel with some small jobs in market research and consultancy, and to invest all he got from these jobs. The second part of the decision was to arrange a contract for rent of secondhand equipment from the Dairy Company of Elena. This agreement gave Vassil the chance to make the first quantities of the products planned for the starting year of production. During the second year Vassil considered to move the yogurt production modern premises that were the property of the local state company for dairy production called Sirma-Prista.

“This strategy appeared to be successful. The most important was that the expenses for obtaining basic capital were postponed for the second year and this made the risk of failure smaller. Initially, only the circulating assets had to be funded. Meanwhile the production increased and needed bigger own production chambers. The production proved itself and at that stage I did not want to have difficulties or side problems connected with equipment. Nearly all of the loans I had planned were related to the main capital, so in the first year there were no loans. The situation then showed that I would be able to support the start of the production with my own sources alone.”

When the development of the problem showed good results and led promisingly to a successful end during the following two months, Vassil planned for the first time the details of his strategy for the launch of the product.


4.9 The milkman should be the boss (planning the promotion of the product)

In order to increase their market share Danon-Serdica PLC undertook an active advertising campaign. The Company’s concept all over the world was HEALTH. Vassis Stefanov decided to follow their example. The subject of the promotion was to put forward a new trademark of yogurt with regional importance for the home market.

Stefanov’s company was of regional significance which was the reason for him to choose a regional advertising company for the promotion of his yogurt. Than company was aware of the market situation in the Ruse Region. The advertisers formulated the main characteristics of the new product as follows: health, quality, tradition and promotion of the most characteristic strengths of the region to a wider range of customers.

The specific message of the yogurt became The millennial tradition of health. The budget for the campaign was the money for the initial marketing research; the identification of the leading consumer motives; the place of Vassil’s company on the Ruse market; the graphic design of the package and the formulation of the original name of the new yogurt. The amount was USD 1000.

The suggestion for regionalism was achieved through the emphasis on the fact that the yogurt was made of Selected Fresh Milks from the Danube Valley. The attempts of the team to find a name of the product led them far into the depths of history. In ancient times (during the Thracian and Roman periods) Bulgaria spread on a territory of 4 autonomous regions – Serdica, Astica, Getica, Seletica, the latter being the land of the Danube Valley. As the name of the product should include traditional elements, the team started from the name of the region – Seletica, and after certain modifications they reached to the name of Selecta. On one hand, this was the old name of the region and on the other, it meant something selected, i.e. the product had a local mark and meant quality. The team thought of a way to describe the gustatory characteristics of the 3 yogurt variations – 1,6%, 2% and 3,6% butter content. In order to avoid the names with technical connotation like skimmed, normal and rich yogurt, they decided to use the suffixes light, prim, luxury as to reach to a bigger emotional influence.

Case study The suggestion of succession was obtained through the design of the package. The earthenware pot covered with a piece of cloth was related to the “Grandma’s earthenware pot” (in the past, and even nowadays, people in the villages make yogurt in earthenware pots). The garden geranium drawn on the package was a flower one could find in every Bulgarian house. The garden geranium gave the feeling of home coziness. The idea of quality, which according to the consumers could be achieved only by the homemade yogurt, was suggested through the line drawing of an earthenware pot. The use of certain colours – blue, yellow and green added to the impression of something natural and fresh. The white whirl around the pot increased the suggestion for the magic power of the product.

The test production of the new product started in January 2000. The first batch was a fact at the end of April. Selecta was yogurt with high quality and low cost price, which made it attractive to the customers. The yogurt satisfied consumers’ demands for a healthy product.

Vassil Stefanov began to distribute his product himself, certain that the other distributors would not be fully devoted on the grounds of their 20% discount for promoting Selecta in the supermarkets. For a couple of weeks he managed to sell the yogurt in more than 30 supermarkets in Ruse region and in Sofia receiving cash payments for the product. The supermarkets sold Selecta-light with 1,6% butter content in blue package; Selecta-prim with 2% butter content in green package and in yellow package Selecta-luxury with 3,6% butter content. The product was accepted very well with regards to its quantity and at a price within the range of USD 0,25÷0,40 for a 0,400 gr. jar. The blue packaged Selecta-light appeared to become the most popular. Vassil Stefanov felt that if he offered the yogurt at lower price he would sell bigger quantities but he would have losses and it would take time to cover them.

“I already knew that the low profit was the basic mistake of the dairy companies. I felt that if my product did not have good price it would not have a market and respectively I would lose the business”.

After the initial period Vassil realized he had kept to the retail sales for too long. The access to the mass market would not have been possible without distributors. Vassil signed contracts with three distributors – the distribution chain of the Dairy Company of Elena, the supermarket chains Billa and Metro.

He did not undertake any promotion but he managed to get on the right side of the media. Small quantities of the test production were kept in store.


4.10 Market has the last word (marketing research) Towards the end of 2000 it became obvious that the direction of growth planned by Vassil would not be accomplished. The growth for a 7 months period remained 7 tons daily apposed to the expected 10 tons.

The sales at the mass market were disappointing except for Selecta-light which exceeded the sales of Danon-Classic and Elena-2% but only because the price was 5% lower than the one of the competitors.

“I was absolutely certain at that stage – being on the market for 7 months I considered this a good exercise towards the big business. I learned a lot and I lost during the first year. The money I lost was not that much as the overheads kept relatively low. I think, my biggest loss was my naivety, but this is not harmful to the business. I realized I had an excellent product and I worked not in the food industry but in the free industry. At the beginning, the product sells its interest to the customer, not its quality. But quality is the basis of the rate of return in business. Finally, I realized that my product competed not with the best products of the competitors but with the low purchasing power of the mass consumers. The future were the small niches of the delicacy dairies”. 4.11 Pleasure does not fade (epilogue) Vassil Stefanov’s efforts to create a distinguished remarkable product were rewarded in May 2001 when his new product was awarded gold medal at the Plovdiv Fair and a month later he got another - the Golden Lion Prize at the “Made in Bulgaria” Exhibition. The prize was awarded for innovations in the dairy production. A new star was born – Selecta – buffalo cow yogurt with 6,5% butter content.

This prize gave him new support to continue with his ideas for business development and to get new contacts directed to the foreign producers through the media. The Japanese Concern “Medji” paid an interest in Selecta and the Japanese Ambassador in Bulgaria was a mediator in the deal for selling the license for the production of the yogurts in Japan. Now at the beginning of 2002 it is quite possible to find more jars of yogurt labelled SELECTA from Bulgaria in the supermarkets of that distant country than in the Bulgarian ones.

Case study Stefanov finished his story. Daniella had a sip the coffee that got cold long time ago. She thought:

“Is this the beginning of the success or its end? Everything seems both simple and unfinished. How many “starlets” are necessary to bring up a celebrity, how many celebrities are necessary for a star to be born and how many stars – to create a myth! This is the incredible challenge of our job. We have been chasing the Holy Graal all though our lives to finally make an advertising campaign that will remain in the eternity. Then a first magnitude star will be born from the cosmic dust – and only Heaven and us will know who its parents are…”

“We will work together!”, Danialla pressed Vassil’s hand.

“We have to conquer this hard Bulgarian market. This is the truth!”, he took her hand. “The road ahead has to be travelled and everybody faces it alone! There isn’t a method that could release you from the responsibility of thinking with your own brains, as your favourite Segela says.” The advertiser and the engineer turned sights at the same time to the glass screen separating the manager’s office from the production chamber with the flow line. The jars of Selecta-buffalo cow yogurt moved steadfastly along the line.

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