PART SIX MANAGING INTERNATIONAL OPERATIONS CHAPTER SIXTEEN MARKETING GLOBALLY

OBJECTIVES
To understand a range of product policies and the circumstances in which they are appropriate internationally To grasp the reasons for product alterations when deciding between standardized versus differentiated marketing programs among countries To appreciate the pricing complexities when selling in foreign markets To interpret country differences that may necessitate alterations in promotional practices To comprehend the different branding strategies companies may employ internationally To discern complications of international distribution and practices of effective distribution To perceive why and how emphasis in the marketing mix may vary among countries

CHAPTER OVERVIEW
Marketing is a social and managerial process through which individuals and organizations satisfy their needs and objectives via the exchange process. Chapter Sixteen begins by examining the ways in which marketing managers analyze country market potential in order to develop effective international marketing mix strategies. It reviews the adaptation vs. standardization debate and also considers the rationale for selecting nationally responsive vs. globally integrated marketing strategies. The chapter discusses each of the marketing mix variables from an international perspective and concludes with a note about international electronic commerce.

CHAPTER OUTLINE
OPENING CASE: Avon [See Map 16.1] Founded in 1886, Avon is one of the worlds largest manufacturers and marketers of beauty-related products. This case describes Avons push into foreign markets via a combination of nationally responsive and globally standardized marketing strategies. The company markets in more than 120 countries through direct investments, licensing, franchising and distributor arrangements. More than 70 percent of its sales come from

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outside the U.S. Avon seeks to develop a global image of being a company that supports women and their needs. It relies heavily on independent salespersons who sell directly to individual customers. Avon emphasizes standardized products that carry its global brand, but allows product lines and brand names to vary by country if needed. In addition, each country operation sets its own prices to reflect local market conditions and strategic objectives. Whenever possible, Avon transfers organizational learning and successful practices from one country to another. Teaching Tip: Review the PowerPoint slides for Chapter Sixteen and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures and tables in the text. I. FILLING GLOBAL NEEDS AND WANTS Although basic marketing principles are the same in both domestic and foreign markets, environmental differences often require those principles be applied in different ways. MARKETING STRATEGIES International marketing orientations help determine the degree to which companies follow either a globally integrated or locally responsive strategy. A. Marketing Orientations The international applications of five common product policies are highlighted below. 1. Production Orientation. A production orientation indicates a firm is more concerned about production variables such as efficiency, quality and/or capacity than it is about marketing. Firms assume customers want lower prices and/or higher quality. Such an approach is still used internationally for selling commodities, for passive exports and for serving foreign-market segments that resemble domestic markets. 2. Sales Orientation. A sales orientation indicates a firm assumes global customers are reasonably similar and it can therefore sell abroad the same product it sells at home. A firm will be aided in this approach when there is also a spillover of product information from one country to another. 3. Customer Orientation. A customer orientation indicates a firm is sensitive to customer needs, i.e., it thinks in terms of identifying and serving the needs of the customer. Given a particular country market, what products are needed? 4. Strategic Marketing Orientation. A strategic marketing orientation indicates a firm is committed to continuously serving foreign target markets and to making incremental product adaptations to satisfy local customers. It draws upon elements of the production, sales and customer orientations, as appropriate. 5. Societal Marketing Orientation. The societal marketing orientation indicates a firm recognizes it must conduct its activities in a way that preserves or enhances the well-being of all its stakeholders, i.e., as it serves the needs of its customers it must also address the environmental, health, social, and work-related problems that may arise when producing or marketing its products abroad. 185

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B. Targeting and Segmenting Markets Market size is not only a function of population in a given country, but is more specifically related to how many people are likely to consume a particular product. When targeting and segmenting markets, companies have three basic alternatives including segmenting by country, identifying some segments on a global basis, or combining the previous approaches by looking first at countries as segments then identifying segments within countries. The most common way of identifying market segments within a country is through demographic factors such as income, age, gender, ethnicity, and religion. III. PRODUCT POLICY Although adopting marketing orientations that involve product adaptations for foreign markets is often costly, many companies continue to make product alterations for foreign markets for a variety of compelling reasons. A. Reasons for Product Alterations The primary reasons behind the tendency of firms to alter their products to meet local conditions are legal, cultural, and/or economic in nature. 1. Legal Reasons. Explicit product-related legal requirements vary widely by country but are usually meant to protect customers, the environment, or both. Protective packaging laws and international product standards represent two very complicated legal issues. POINT--COUNTERPOINT: Should First World Governments Regulate Their Companies Marketing in Third World Countries? POINT: International companies sell products in Third World countries for which there are restrictions in their home countries. Often, the regulations in developing countries are lax, and the consumers may not be able to make good decisions due to poor education and low incomes. If First World governments dont regulate to protect consumers in Third World countries, no one will. In addition to selling potentially harmful products, many MNEs also neglect to develop new products that consumers in Third World countries actually need. Further regulation may help to improve the situation for consumers in less developed countries. COUNTERPOINT: Instead of regulating companies, efforts should be focused on improving education and living standards in less developed countries. Even if First World countries limited their own companies from selling certain harmful products, companies from developing countries would likely continue to sell those same products. Again, education of individuals, rather than government intervention, is the only effective long term solution to consumer protection.

2. Cultural Reasons. Cultural factors affecting product demand may or may not be easily discerned. While religious beliefs may offer clear guidelines 186

regarding product acceptability, other factors such as color, design, and artistic preferences may be much more subtle. 3. Economic Reasons. Levels of income, differences in income distribution and the extent and condition of available infrastructure can all affect demand for a particular product. Often, price-reducing alterations are required if a firm wishes to participate in a particular country market. B. Alteration Costs Usually firms will choose to standardize basic components while altering critical end-use characteristics. Certain alterations (such as packaging and color options) may be inexpensive to make, yet they can have an important effect on demand. C. Extent and Mix of the Product Line When making product line decisions, managers must consider the cost and effect on sales of offering just one or a few products internationally as opposed to an entire family of products. Whereas narrowing a product line allows for the concentration of effort and resources, the broadening of a product line may lead to distribution economies. D. Product Life-Cycle Considerations Differences will likely exist across countries in both the shape and the length of a products life cycle. A product facing declining sales in one country may have growing or sustained sales in another. Such country differences can lead to an extended life for a given product. IV. PRICING Price represents the value asked for a product. Although usually expressed as a monetary value, in the case of barter transactions it may not be. In the long run, price must be low enough to generate sufficient demand but high enough to yield a profit to the firm. The complexities of pricing are exacerbated in the international arena. A. Government Intervention Every country has laws that either directly or indirectly affect prices to the final customer. Price controls may set either maximum or minimum prices for designated products. The WTO permits a government to establish restrictions against any imports that enter the country at a price below the price charged to customers in the exporting country (dumping). However, a firm may charge different prices in different countries because of competitive and demand factors (e.g., a firm may choose to exclude fixed costs in the price calculation of products exported to developing countries in order to be price competitive in those markets.) B. Greater Market Diversity Country variations lead to many ways of segmenting the market for a particular product. Depending upon market conditions, a firm may adopt any of the following pricing strategies. A skimming strategy sets a high price for a new product, which is aimed at market innovators. Over time, the price will be progressively lowered in response to demand and supply conditions, i.e., the presence of additional competitors. A penetration strategy sets an aggressively low price to attract a maximum number of customers (some of whom may switch from other brands) and to discourage competition. A simple cost-plus strategy sets the price at a desired margin over cost. C. Price Escalation in Exporting 187

If standard markups occur within distribution channels, either lengthening the channels or adding other expenses somewhere within the network will further increase the delivered price of the product. Common reasons for price escalation in export sales are tariffs and the often greater distance to the market. To compete in export markets, a firm may have to sell its products to intermediaries at a reduced price in order to lessen the amount of price escalation (See Figure 16.3). D. Currency Value and Price Changes Pricing in the case of highly volatile currencies can be extremely difficult, especially under conditions of high inflation. Pricing decisions must assure the company of sufficient funds to replenish inventory. This may result in the need for frequent price adjustments. Further, currency fluctuations also affect pricing decisions for any product that faces foreign competition; when a currency is strong, producers may have to accept a lower profit margin if they wish to be price competitive. The longer-term viability of a distribution system can be undermined in some cases by activities in the gray market, the selling and handling of goods through unofficial distributors. E. Fixed versus Variable Pricing MNEs often negotiate export prices, while small companies frequently give price concessions too quickly. This limits small companies ability to negotiate on a range of marketing factors that affect their costs such as: Discounts for quantity or repeat orders Deadlines that increase production or transportation costs Credit and payment terms Service Supply of promotional materials Training of sales personnel or customers Table 16.2 shows ways in which an exporter may deal more effectively in price negotiations. The extent to which manufacturers can or must set prices at the retail level varies substantially by country. There is also substantial variation in whether, where and for what products customers prefer or expect to negotiate an agreed-upon price. Local laws and customs may limit firms abilities to set prices as they choose. In many cultures, prices are simply the starting point in the bargaining process. F. Company to Company Pricing Dominant retailers with substantial clout may get suppliers to offer them lower prices, which in turn will enable them to compete as the lowest-cost retailer. However, such clout may not exist in new foreign markets. In addition, many industrial buyers are claiming large price reductions through Internet purchases. V. PROMOTION Promotion consists of the messages intended to help sell a product, i.e., direct and indirect forms of communication designed to inform, persuade and/or remind a target audience about an organization and its products. The promotion mix consists of personal selling, advertising, sales promotion/support and publicity/ public relations activities. A. The Push-Pull Mix

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Promotion strategies may be categorized as push (which use direct selling techniques) or pull (which relies on mass media). Most firms use a combination of both. Factors that will determine the mix of push and pull strategies include the type of distribution system, the cost and availability of media, customer attitudes toward sources of information and the relative price of the product as compared to disposable income. A. Standardization of Advertising Programs Advertising represents any paid form of media (nonpersonal) presentation. Although savings from the standardization of advertising are not as great as those from product standardization, they can nonetheless be substantial. However, in addition to reducing costs, standardized advertising may also improve the quality of advertising at the local level, prevent the confusion associated with different national messages and images and speed the entry of products into new country markets. Standardization usually implies using the same agency globally. However, it is difficult to completely standardize an advertising campaign for a number of reasons. 1. Translation. When a media transmission spans multiple countries, there is no opportunity to translate a message into other local languages. When messages are translated, numerous difficulties can be encountered with both language (content and meaning) and images. 2. Legality. What is deemed to be legal advertising in one country may in fact be illegal elsewhere. Differences result mainly from varying national views on consumer protection, competitive protection, standards of morality and nationalism. 3. Message Needs. An advertising theme may not be appropriate everywhere because of national differences in how well consumers know a product, how they perceive it, who makes the purchasing decision, and what features are most important. VI. BRANDING A brand is a name, term, sign, symbol and/or design that is intended to identify a product or product line and differentiate it in the marketplace. A trademark is a brand, or a part of a brand, that is granted legal protection because it is capable of exclusive appropriation. It protects the sellers exclusive rights to use the brand name and/or brand mark. MNEs must make four major branding decisions: brand vs. no brand, a manufacturers brand vs. a private brand, one brand vs. multiple brands, and a global brand vs. multiple local or regional brands. A. Language Factors Both the translation and pronunciation of brand names pose potential problems in many markets. Often the problems are obvious, but other times they are quite subtle, yet critical. In addition, brand symbols (shapes and colors) are culturally sensitive in many societies. B. Brand Acquisitions When an MNE acquires a (foreign) firm, it automatically acquires its brands. In some instances those brands will be maintained; in others they will be folded into a larger brand in order to capture economies of scale and to promote regional/global brand recognition. C. Country-of-Origin Images 189

Firms must determine whether to promote a local or foreign image for their products. The products of some countries may be perceived as being particularly desirable and of higher quality than products from other countries. A firm may be able to enhance its competitive advantage by effectively exploiting this perception. D. Generic and Near-Generic Names While firms want their brand names to become household words, they do not want those names to become so common they are considered to be generic (e.g., Kleenex and Xerox). Generic names may either stimulate or frustrate the sales of the firm from whom the name was expropriated. VII. DISTRIBUTION Distribution refers to the physical and legal path that products follow from the point of production to the point of consumption. In many instances, geographic barriers and poor transportation infrastructure and facilities will divide a country into very distinct viable and non-viable markets. DOES GEOGRAPHY MATTER? Is Necessity the Mother of Invention Global marketing approaches need to take into account different climates and seasons in order to be effective. Other natural conditionssuch as mountains, waterways, and desertscan impact distribution plans. Identifying immigrant subcultures can be important in some countries as well. The role of geography has been diminishing with the rise of the global economy as people from different parts seek to buy the same kinds of goodsfor example, people in tropical climates buy winter clothes and skis because they travel to snowy areas for recreation.

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A. Difficulty of Standardization Distribution is often the marketing mix variable that firms find the most difficult to standardize. This is because each country has its own national distribution system that is historically intertwined with its cultural, economic, and legal environments. Other factors that influence the ways in which consumer products are distributed within a given country include peoples attitudes toward entrepreneurship, the ability to pay retail workers, restrictions on the size of stores and their hours of operation, the financial ability to carry large inventories, the efficacy of the national postal system. B. Choosing Distributors and Channels Just as in the case of production, a firm may choose to handle the distribution function internally or outsource it to a specialized provider. 1. Internal Handling. When sales volume is low, it is usually more cost effective for a firm to contract with an external distributor. On the other hand, distribution may be handled internally when sales volume is high, when the firm has sufficient human, capital and financial resources, when aftersales service is extensive and complex, when customers are global and when a firm can otherwise enhance its competitive advantage. 2. Distributor Qualifications. Common criteria for evaluating and selecting distributors include financial strength, good relationships with their customers, the extent of their other business commitments regarding both complementary and competitive products and the state of a distributors equipment, facilities and personnel. A final consideration is how quickly start-up can occur. 3. Spare Parts and Repair. The more complex and expensive a product, the more important that after-sales service will be. When after-sales service is critical, firms may need to invest in service centers, which can in turn become important sources of revenues and profits. 4. Gaining Distribution. Distributors choose the products and firms they wish to represent and emphasize. A new entrant must therefore convince a desired distributor of the viability of both its products and the company itself. To do so it may need to provide extra incentives or be willing to enter into exclusive arrangements provided a competitor does not already occupy that position. C. Hidden Costs in Distribution Because of the differences in national distribution systems, the cost of getting products to customers varies widely from one country to another. In many countries, ports, roads, and warehouse facilities are so poor that getting goods to customers in a timely fashion and at a reasonable cost, with minimal damage or loss en route, is truly difficult. Many countries have multi-tiered, wholesale systems through which a product must move before reaching the retail level. Because each intermediary adds a markup, final delivered prices increase. In some countries, low labor costs and a basic distrust by owners of all but family combine to result in retail practices that raise consumer prices, especially when there is an insistence upon counter (as opposed to self) service. Many countries have laws that protect small retailers, which in turn effectively limit the number of large retail firms and the efficiencies they bring to their operations. Many 191

countries also limit operating hours. When retailers have little space for storing inventory, distributors must incur the cost of making more frequent but smaller deliveries to prevent retail-level stock-outs. D. The Internet and Electronic Commerce As electronic commerce increases, customers worldwide can quickly compare prices from different distributors, thus intensifying price competition. However, global Internet sales are not without problems. A firm cannot easily differentiate its marketing program because the same Web advertisements and prices reach customers everywhere. At the same time, however, a firms Internet ads and prices must comply with the laws of each country where it markets its product. VII. MANAGING THE MARKETING MIX Once a company is operating in a country and estimates that countrys market potential, it must calculate how well it is doing there. One tool that can be used to accomplish this is gap analysisa method for estimating potential sales by identifying market segments a company is not serving adequately (see Figure 16.4). LOOKING TO THE FUTURE: Will the Haves and the Have-Nots Meet the Have Somes? Most projections indicate the disparities between the haves and the have-nots of the world will continue to grow throughout the foreseeable future, both within and across countries. To serve the haves, firms will offer luxury products to customer niches that cut across national boundaries. At the other extreme, companies will have numerous opportunities to develop low-cost, standardized products designed to fit the needs of the have-nots. For many firms, these two extremes present a serious dilemma. Moreover, firms will find it increasingly difficult to charge different prices in different countries, although they will be increasingly able to cut intermediaries out of the distribution channels for their products. CLOSING CASE: NeoPets NeoPets is a web site targeting the youth market on the internet. Users can create virtual pets and play games online with other members. The site earns the majority of its revenue from advertisers on its web site, but also earns revenue from merchandise sales based on its characters. Most advertising is immersive advertising, in which the advertising message is embedded in the games on the site. NeoPets has begun translating its sight into many languages and now can reach 89.9 percent of internet users in their native language. QUESTIONS 1. In the past, weve seen many types of childrens products, ranging from Ninja turtles to Hula Hoops, that have turned out to be fads. How do you think NeoPets can prevent its concept from becoming a fad? To avoid becoming a fad with fading popularity, NeoPets will have to continue to be innovative with content. By adding new games, puzzles, and characters, NeoPets will be able to keep the attention of its users and will develop into a lasting entertainment 192

option rather than becoming just a passing fancy. Another way to maintain interest is to constantly improve the technical quality of the site in order to avoid being dated or technologically anachronistic. 2. Although NeoPets has been successful thus far in gaining members by word of mouth, should it turn to some more proactive promotion? If so, what should it be? Word of mouth has proven to be a very effective way of gaining new members to online communities. An active advertising campaign may result in new members but will likely reduce the commitment of both new and existing members to the site. Often, childrens products go through boom and bust cycles of popularity. Slower, controlled membership growth is likely to lead to more long-term success than sudden bursts of interest. NeoPets should invest its resources into continually improving its product rather than spending large sums on mass advertising campaigns. The only type of promotion NeoPets should pursue is in viral marketingproviding existing users with incentives to recruit new members and selectively creating and sustaining an online buzz about the site. What country-to-country differences in acceptability of NeoPets might exist? How might NeoPets deal with them? There could be significant country-to-country differences in acceptability of NeoPets, but these are likely to be more a function of technological availability rather than cultural or linguistic differences. NeoPets has done a good job in facilitating participation in multiple languages and is poised to continue to expand its efforts in that regard. Also, the idea of pet ownership is nearly universal, as is the interest among children and teens in electronic gaming and the Internet. The main limitation for NeoPets in many countries is likely to be the limited access that many children and teens have to computers and Internet connections. As these become more accessible in the developing world, however, then NeoPets is likely to find an even bigger audience. There is not much that a company the size of NeoPets can do to expand access to technology to children in developing countries, although they could make some largely symbolic efforts by donating equipment to schools and other entities to increase Internet use among young people in less developed countries. Examine each of the criticisms about NeoPets practices. What should NeoPets and regulatory agencies do about each of them? The lack of transparency in advertising on NeoPets is a serious criticism that needs to be addressed. Something as simple as a message saying this game is brought to you by Kelloggs would help in that regard. NeoPets needs to continue to be very careful in protecting the privacy of its users and must make sure it complies to all data privacy laws in all countries where it operates or hopes to operate. Parents criticisms that NeoPets takes up too much of their childrens time and directs their attention away from their studies and other more important activities is a legitimate concern. NeoPets could install a parental control feature that allows parents to limit the amount of time their child can spend on NeoPets in any given day or week. More customization of content by country and region to allow/disallow things such as games of chance and religious content would address concerns that some have had. NeoPets should try to meet or exceed all applicable regulations to preempt regulatory bodies from passing special new rules directed exclusively at NeoPets. 193

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5. NeoPets depends mainly on a youth market. Can it extend its concept to an adult market? If so, how? NeoPets should strive to develop and maintain long lasting relationships with its users that can transcend childhood and adolescence. The site has not been operating long enough to have many of its original users move into adulthood, but should continue to try to cater to the interests of older teens and twenty-somethings as the user demographic changes. One possible way to do this would be to spin off a related site with a more sophisticated gaming structure. On-line role playing games, such as the Sims, are popular with many adults, due to the complexity, variety, and sophistication that these games offer. A NeoPets Plus site could cater to an older crowd by developing more complex situations and challenges for users. This would also attract a different advertising base, which would open up new revenue streams for the company. WEB CONNECTION Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter Sixteen. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter Sixteen. _________________________ CHAPTER T ERMINOLOGY: skimming strategy, p. 573 penetration strategy, p. 573 cost-plus strategy, p. 573 gray market, p. 575 push, p. 577 _________________________ pull, p. 577 distribution, p. 582 generic, p. 582 gap analysis, p. 587

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ADDITIONAL EXERCISES: International Marketing Exercise 16.1. While many firms have moved to develop globally standardized products, others have moved toward more product differentiation across countries. Ask students to discuss the types of products for which they would expect to see more global standardization, and those for which they would expect to see more local differentiation. Be sure they consider both goods and services. Exercise 16.2. A number of advertising agencies have expanded their operations to the global level so they can offer their services on a worldwide basis. Ask students to discuss the reasons an MNE might prefer to work with a single global advertising agency rather than a series of local or regional agencies. Then ask students to explore the challenges advertising agencies face when they choose to offer worldwide services. Exercise 16.3. When a firm is confronted with excess capacity but its national currency is relatively weak, it may choose to export to markets with relatively stronger currencies. Ask students to discuss the logic and wisdom of basing a longterm international marketing strategy on foreign currency swings. What would a firm have to do to effectively position itself to maximize such opportunities? Exercise 16.4. Ask students to identify a popular local product that is not widely available in other countries. Have the students pick a country and develop a marketing plan for the product in that country. What alterations might have to be made to the product or its packaging for it to succeed in the target country? How should they distribute the product? What about pricing? Is there a large potential market for the product in the target country? Why or why not?

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