> Managing International Business Operations Wal-Mart Courts European Shoppers When you ate the biggest retailer in your home market—with $165 billion in sales internation - expansion is zhe key to continued growth, 2s Wal-ttare’s executives were quick to note. The com pany’ inital internationalization efforts in the early 1990s focused on Mexico and Canada. Attheent | of the decade Wal-Mart trained its sights on2 | ‘uch more lucrative and complex target, Europe. PWaNart adapted its products to |" tai csced ne tesa by buying the Asda retaiting chain, which operat yore than 230 stores. The purchase meshed wel better appeal to German customers. sis vstanars tosses wanes ten "with, WalMart’ business strategy because ME firms were alike in stressing aggressive growth aed | | loir prices. Soon after the acquisition Wal-Mart announced it would build six new Asda out supersize six more, and establish a dozen new facilites to cut distribution costs. Wal-Mart's goal ™ to expand the breadth of ts British operations allowing it to replicate the effcien, low-cost logit system that forms the basis ofits competve advantage inthe United Sree ‘The new management team also began tightening the screws on Asda’s competition by eu prices further highlighting selection, and promoting findly servic. Wal-Mart has touched off vats in food products and ater catepovies, ending competitors scrambling vo met or best is itugs Because other British retalers are accustomed to higher profi margins, the Wal Mart formula of low-markup pricing has put pressure on rival chains | such as Tesco, Safeway, and Sainsbury and given smaller stores even bigger headaches So far the strategy seems co be paying off: In 1999 Asda earned ou $715 million on sales of $13 billion ‘almarc adopted an acquisition strates vel.n 1997 itacquired the 21-store Wertkauf chai SparHandels AG and its 74 stores. Wal-Mart hun tach ore to herald the change in management and symbolize is superior “ence and selection, Because German rivals have much narrower merchan- 4 slection than Wal-Mart, shoppers initially awked at che huge quantities cttodzems, from fees fruits and vegetables to specialty meatsand cheeses, in Wat Mare qutlecs in Dortmund and other cities. As inthe United States, I \ | ‘be Wabatare stores in Germany also Cary (075, | xy to attack the German market as ira year ater it gobbled up gan American flag ourside clothing, appliandes, and ‘ured prodvens for household and personal use Customer servic is a ‘Much a draw as selection because service in German stores is mu ich less fendly and personalized. Wal-Mare Pinned to their vests, are 2 vivid sym! 1s friendly greeters, with “smiley feces” bol that the US. company believes the Ustomer comes first ‘After studying this chapter, you should be able to: Characterize the nature of marketing ‘management in international business. Discuss the basic kinds of product policies and decisions made in international business. Identify pricingissues and evaluace pricing decisions in international business. Identify promotion issues and evaluate promation decisions in international business. Discuss the basic kinds of distribution issues and decisions in international business.458 > Chapter 16. International Marketing |WakMant's next step was to commence a massive renovation project to enlarge and modernize ‘each outlet, with wider aisles, brighter lights, and more accessible shelving loaded with merchan- + dise—all of which are helping to boost sales. German shoppers also are pleased at not having to bag their own purchases or pay fr the plastic bags at WalMart, as they do at many German stores, * Moreover, German consumers have benefited from the company’s low pricing policies. WaieMart also has adapted some of its products to better appeal to German consumers. The company eliminated aloe vera scents and’printed tape on its house brand diapers after German par- ents rejected such fivolities I also replaced the English setter on the packaging of Ol Roy dog food with a terrier after learning thae terriers are popular in Germany, whereas setters are not, ‘Wal-Mart has run into a few rough spots in its attempts to crack the German market. The com. pany’ “Always low prices” policy has upset German regulators who fear that price-cuting may force momvand-pop retailers out of business. The German Cartel Office has warned the company to raise ies prices om loss leaders lke flour, cooking ol. and butter, which i had been seling below cost. Also, many experts believe Wal-Mart will need to expand more rapidly—elther by building new stores or acquiting additional existing retalers—to achieve the critical mass needed to implement efficiently its trademark high-volume, low-cost distribution system. Although Wal-Mart has great hopes for is German initiatives, they have yet to pay off Analysts estimate Wal-Mart lost between $120 and $150 tillion in Germany in 1999) aggressive and innovative marketing policies, which stress low prices, {good selection, friendly service, and efficient distribution. It ts now seck- ing to transfer this same formula to Europe. A€ we will discuss throughout this chapter, marketing is a key ingredient in the success of any international business, Yet marketing also can be a significant stumbling block for the misinformed manager. Marketing is “the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods. and services to create exchanges that satisfy individual and organizational objectives."? International marketing is the extension of these activities across national boundarles. Firms expanding into new markets in foreign countries must deal with different political, cultural, and legal systems, as well as unfamiliar economic conditions, advertising media, and distrt- s bution channels. For example, an international firm accustomed to promoting its producis on television will have to alter its approach when entering a less devel- oped market in which relatively few people have televisions. Advertising regulations also vary by country. French law, for example, discourages advertisements that disparage competing products; comparative advertisements must contain at least two significant, objective, and verifiable differences between products.? New Zealand regulators may ban ads for a variety of reasons. A Nike ad featured a coach telling his players to “visualize your opponent as your worst enemy.” who then gets tackled by the team; the ad was banned by the regulators for being too violent. Similarly, a Coca-Cola ad featuring aboriginal dancers was banned for being “cul- turally insensitive."4 In addition to dealing with national differences, international marketing man- agers confront two tasks their domestic counterparts do not face: capturing syner- gies among various national markets and coordinating marketing activities in those markets. Synergies are important because they provide opportunities for additional revenues and for growth and cross-fertilization. Coordination is important because st cain help lower marketing costs and create a unified marketing effort, WV fie has achieved a dominant position among U.S. retailers with itsInternational Marketing Manag > 459, 4 INTERNATIONA / : Lom internation) firm's marketing activities often are organized anim anae aed ‘ reontained function within the firm. Yet that Tunetion both affects and Ia Sged by virtually every other organizational activity. as sh Sa geet : by elatlonships make international marketing nesagoment » cated cea Tent of international business sucres, International macketing management ioe ars anv efforts to ensure Oat its International marketing aie, cit i the firm's corporate strategy, business strategy, and other functional atege3: international Marketing and Business Strategies key challenge for a firm's marketing managers ts to adopt an international mar- [ste ‘strategy that supports the firm's overall business strategy.® As we discussed : Inchapter 10, business strategy can take one of three forms: differentiation, cost Jeadership, oF focus. : "A differentiation strategy requires marketing managers to develop products as well as pricing, promotional, and distribution tactics that differentiate the firm's oducts or services from~those of ‘ts competitors in the eyes of customers. Pifrentiation can be based on perceived quality, fashion, reliability, or other Rilent characteristics, as the marketing managers of such products as Rolex Inatehes, BMW automobiles, and Montblanc pens successfully have shown Nesuming the differentiation can be communicated adequately to customers, the |fem will be able to charge higher prices for its product or insulate itself rom price fompetition from lesser brands. For example, Rolex, which has successfully imple- jneted a dferentiation strategy. does not need to cut the price for its diamond- enrested $15,000 watches Whenever Kmart features Timex quartz watches for [s39.95 on a blue light special. titernatively,a firm may adopt an international business strategy {hay sere le overall cost leadership. Cost leadership can be pursued and achieved through lystematic reductions in production and manufacturing cost, reductions in sales Pare Ieceptance of lower profit margins. the use of less expense materials fats the acceptance Of other means. Marketing managers fr @ fcr) Sonne ‘his strategy will concentrate their promotional efforts on advertising the low price sf the product and will utilize channels of distribution that allow the firm to keep ieee pace low-—for example. by selling through ‘seen tT rather than rough fashionable boutiques. Texas Instruments calculators, Hyundai automo les, and Bic pens all are marketed using 2 ‘cost leadership strategy. And Timex's ost leadership approach has allowed t to thrive in the large market for low-price ‘watches. : PercuRey 16.1 | International Marketing TIONS ‘Accountine Ravacnuent a san integrated Functional Area Howat * * Resource Funct Manacementtet > Chapter 16. Interrtional Marketing (orld). RETTY.GARLIC! John Huang, the managing director ofa small exporting company in Shenahen, China, ses but one product: garlic. He recently faced an interesting challenge: how to convince the world’s food- processing companies to order is gatc, despite his lack of mar- keting budget. F ‘Huang’ solution was ro use the Internet to build worldwide recognition of his company and its simple product line. He designed an attractive Web site—wwn-prettygarliccom—shat provides much of the information a prospective buyer of gar reeds—prices, ordering information, payment terms, shipping arrangements, and packaging details. The Web site aso provides information of use to garlic retailers, such as the plant’s health benefits. cis probably che only sité onthe Internet chat features color photos showcasing the different sizes and types of galc. Although most Web surfers have no need £0 see a photo of a 5S-centimeter pure-white Pizhou garlic, buyers for the world’s food processors and grocery chains do. Half of Huang’s orders ate generated by the Internet, and the company now ships 18,000 tons of garlic a year. Needless to say, the Internet has pro- Video a perfect means for Huang to reach his small but focused target market ret Jouraal, August 7, 000. p. B& Source: “The Web @ Work? Vall svrnepressygaviccom Web sie. A firm also may adopt a focus strategy. In this case marketing managers will concentrate their efforts on particular segments of the consumer market or on particular areas or regions within a market. International marketing managers will need to concentrate on getting the appropriate message regarding the firm's | products or services to the various selected target markets. For example, the | Svigs watchmaker Ste! Suisse Microelectronique et d'Horlogerie SA (SMH), which manufactures the popular Swatch watches, focuses its marketing efforts on sell- ing this inexpensive line of watches to young, fashion-oriented consumers in ‘orth America, and Asia.,"Wiring the World” demonstrates how one Chinese entrepreneur used the Internet as a key element in implementing his Europe, } focus strategy. ‘A critical element for a firm's success is the congruency of its international mar- keting efforts with its overall business strateg makers—have chosen different strategies. yet all are successful internationally | because they match their international marketing efforts to their business strate- gies. Timex’s cost leadership strategy implies that the firm must seek out low-cost suppliers globally and sell its watches in discount stores such as Wal-Mart and Target. rather than in fashionable department stores such as Saks Fifth Avenue | and Harrod's. Rolex's differentiation strategy, based on the firm's carefully nur- tured worldwide image, might collapse if Rolex. distributed its watches through Timex, Rolex, and SMH—all watch- armies of street vendors stationed in front of subway stations throughout the world, rather than through a handful of chic and expensive horologists located on ( the most fashionable avenues of the world’s most glamorous cities. Similarly, SMH does not advertise Swatch watches to the upper-class, middle-aged audiences of Town and Country and Architectural Digest or to the predominantly male reader- ship of Field and Stream and Popular Electronics. It does advertise its wares in.the USS., Chinese, and French editions of Elle, which are read by demographically sim ilar young, trendy female audiences—the target of its focus strategy. 4= - De ign market are derived fren sjoeesions about whether to enter a particular for- fess strategy. For example, que iust be consistent with the firm's overall bust- Tien, Steady economic growth of such low-to-middle- income countries as Costa fescue rice Because of bud, sarily for Rolex. fully assess aint Tesource limitations, international firms must care- focne. Intkaenciag ty Tank them according to thelr potential for the firms’ petition, channels of distrib ming may be factors such as culture, levels of com- Pemthe nature of the peed ons aralabilty of infrastructure. Depending oo er ctmultaneoucty preauct and other circumstances, a firm may choose t0 cee ple, consumes gente arkets that meet certain acceptably criteria. For a oot Te Goods marketers like Nike and Coca-Cola often introduce new pr roadly throughout North America or Europe to maximize the impact S their mass media advertising campaigns. Alternatively, a firm may cae ‘0 enter markets one By one, in an order based on thelr potential to the irm. Caterpillar. for example. uses this approach because its marketing strategy is based on the painstaking development of strong local dealerships, not glitzy eee highlighting the endorsements of the latest music and sports stars. The Marketing Mix ‘After an international firm has decided to enter a particular foreign market, further marketing decisions must be made.® In particular, International marketing man- agers must address four issues: 1. How to develop the firm’s product(s) 2. How to price those products 3. How to sell those products 4. How to distribute those products to the firm's customers ‘These clements are collectively known as the marketing mix and colloquially referred to as the four Ps of marketing: product, pricing. promotion, and place (or dictebutlon), The role of the four Ps in international marketing is illustrated in Figure 16.2 cd termational marketing-mis issues and decistons parallel those of domestic mavketinagin many ways. arthough they are more complex. The array of varlables international marketing managers must consider is far broader, and the interrela~ tose variables far more intricate, than is the case for domestic nos sefore we discuss these complexities, however, we need to vant issue in international marketing—the extent to which its marketing mix in all the countries it tionships among marketing manag focus on another import an international firm should standardi enters. Standardization Versus Customization ‘Afiem’s marketers usually choose from three basi¢ approaches in deciding whether fo ctaminradize or customize thelr firm's marketing mix: : choad the firm adopt an ethnocentric approach, that ts, stmply market its Genas Internationally the same way Kt does domestically? a. chad itadopt a polycentric approach. tha is, customize the marketing mix to meet the specific needs of each Foreign fae it cee ; rntric approach. that Is. analyze the needs of customers 8. Should I adorn Sepa standard martin mis for al the mares serves?”+2.) Chapter 16. International Marketing © Cost leadership = * Focus rt Aah i, ibe ‘ z Rt iy oe pimees Sty siesta Nn CT UE RR ST vies Siren a Gea ee eakeaced veal ARN se aan Et anhance the > ,Sestrability of the “ provet or service to patent Byers 2 eustor nds = via transportation + and merchandising” ba , eh fine argon Tees RUN ca Se RRA RAC Détision-MAKiNG Facrors? Laon at PS een ‘Target customers Indus of consumer EP «Cultural itluences factorsincome levels Changing exchange rates. BEXEMUDRIGHERERY the temencs ofthe marketing Mis or International Frm The ethnocentric approach is relatively easy to adopt. The firm simply mar- : kets its goods in international markets using the same marketing mix it uses domestically, thereby avoiding the expense of developing new marketing tech- niques to serve foreign customers. When some firms first internationallze, they adopt this approach, believing that a marketing mix that worked at home should be as successful abroad. For example, when Lands’ End targeted the German mail-order market in the mid-1890s—which on a per capita basis is the largest in the world—it deliberately replicated its U.S. marketing strategy. Stressing its “down home” roots. the company trumpets to its U.S. consumers its location next to a rural Wisconsin cornfield, the friendliness of its operators and production staff, and its generous return polley—consumers can return all Lands" End prod. ucts, even if they are used or worn out, with no questions asked. When it entered the German market, Lands’ End established its local headquarters in an old schoolhouse in the tiny, picturesque village of Mettlach on the Saar River. The company spent months training its telephone operators to ensure they would meet its standards for friendly, helpful service. It also transplanted its “ho questions asked" return service, much to the consternation of ils German competitors, whose policy was to accept returns only if the goods were flawed or inaccurately described in thelr eatalogs and then only if the goods were unused and in good condition.® The ethnocentric approach may not be desirable, however, if the feet loses sales because it fails to take into account the idiosyncratic needs of ite for eign customers. Should this be the ease, successful firms will modify their mars keting mixes to meet local conditions and needs after the firms learn more about the local market.International Marketing Manggement > 463 fe polycentric appro, , Pe cusiamise the oa ore costly because international marketers Py meet the {dlosyncratie ee een mlx In each market the firm enters in ¢ raeeease the firm's reverses eu, of customers in that market. Customlzation Aa it adopt this approach believe tiene = successful in this task. Firms ers ing to pay a higher price for more willing to buy and more ne ipat does Mot, Often fete er eaust that exactly meets their needs than @ Eee ‘adopt this approach, ational firms that view themselves as multido- centric ay soning the fate ee for standardization of the marketing mix, and to use essentialh entlally the same product or service in different ee arpa, Cone Gob, ne Same marketing approach to sell that product Sei sant 1a was one of the first international businesses to adopt this approach, It sells ts popular soft drink worldwide and uses essentially the same packaging, product, and advertising themes everywhere. Indeed, the cantor ebepe of a Coca-Cola bottle is one of the world's most widely recog- 2 “te iat Hath the enacts andthe gece approaches eg sa ation of the marking mx. As we saw in Chapter 10, a rm using the ethno- centele appt Standardizes on the basis of what the frm does In its home coum: try. A firm using the geocentric approach starts with no such home country blas. Instead, the geocentric approach considers the needs of all the firm's customers around the world and then standardizes on that basis. Standardization became a popular buzeword during the 1980s, as proponents such as Kenichi Ohmae (then managing director of McKinsey & Company's ‘Tokyo office) argued that customers in the Triad were becoming increasingly alike, with similar Incomes, educational achlevements, lifestyles. and aspira~ tions, so that expensive customization of the marketing mlx by country was less necessary.® Similarly, Harvard Business School marketing guru Theodore Levitt believes that standardization of a firm’s products and other elements of Its mar- keting mix creates huge economies of scale in production. distribution, and pro- motion. By transforming these cost savings into reduced prices worldwide, Levitt argues, a firm that adopts standardization can outperform its interna: tional competitors. 9 ‘The trade-offs between standardization and customization are clear. Standardization allows a firm to achieve manufacturing, distribution. and pro- motional efficiencies and to maintain simpler and more streamlined opera~ tions.'! However, the firm may suffer lost sales if its products fail to meet the tunique needs of customers in a given market. Customization allows a firm to taller its products to meet the needs of customers in each market, although the firm may sacrifice cost efficiencies by so doing. In essence, standardization Teeny the cost side of the profit equation: by driving down costs, the firms pulls are enhanced. Customization focuses on the revehue side of the profit guations by attending to the unique customer needs in each market, the frm ts Siete cheege higher prices and sell more goods in each market. In practice, ae rirensetia the extremes of either approach.1? Many successful firms have Mio ctrategy of “think globally. act locally” to gain the economies of scale Sees eeciciey tee ete reenioing Dek Sa eat as a Caen ea rperaat national markets, Even Coca-Cola, a ploneer in the use of Hotel macreting, has begun to encourage more localized thinking within tts 0 amework. Eat act me gps ul me hs ae. US Fee Pre ange and spacious, and consumers prefer lange stoves, se. Cichens tend washers. The smaller kitchens of Europe and Japan dictais the : Manet a aioe appliances. Further, within Burope there are marked dlfer- ences in power supply characteristics and in conser preferences for various cnvatives. Thus appliance manufacturers must develop design features and alWasher 20 meet she needs of thee Branlan shoppers a wel 2¢ the Browing midele cass ozhe emergrgeconomies eind 2 2-e Mexca specific and unique product lines for cach country in which the firms do business, Whirlpool ‘has tried to reduce some of the costs of customization by designing its products to meet the needs of market niches that cross national boundaries. For example, Whirlpool designers have devel- oped a World Washer. a small. stripped- down automatic washing machine targeted to meet the needs of the emerging middle classes in such countries as Brazil. Mexico, and India. Whirlpool, however, stands ready to customize even the World Washer when needed. It modified the agitators of World Washers sold in India to ensure the machines would not shred or tangle the del- icate saris traditionally worn by Indian women.12 ‘The degree’ of standardization or cus- tomization a firm adopts depends on many factors, including product type. the cultural differences between the home country and the host countries. and the host countries’ legal systems. The firm may,adopt one approach for one clement of the marketing mix and another for a second element. Often firms standardize product designs to capture manufacturing economies of scale but customize advertisements and the channels of distribution 10 meet spe- cific local market needs. The degree of standardization-also may be influenced by the firm's perception of the global marketplace. which is similar to the conundrum Is the glass half full or half empty?” A firm tilting toward standardization assumes consumers around the world are basically similar but then adjusts for differences among them, A firm thing toward customization assumes consumers are'different but then adjusts for similarities among them, An international firm also must consider its own organtzational structure. Standardization implies that power and control should be centralized, often at the firm’s headquarters. whereas customization suggests that headquarters must dele- gate considerable decision-making power to local managers. ‘Thus a strongly cen- alized firm (see Chapter 13) can more easily standardize its international marke ing mix than can a decentralized firm. Ofien international firms address these organizational issues by adopting a two-step process: 1. The decision to standardize some elements of the marketing mix, such as product design. brand name, packaging. and product positioning. is made centrally. ° 2. Then local managers are called on (0 critique the global marketing program and {o develop plans to implement custoinized elements of the marketing mix, such as promiotion and distribution.) Table 16.1 summarizes some factors that may lead a firm to adopt standardization or customization for all or part ofits international marketing efforts The first P of the international marketing mix is the product itself. Here, prod- uct comprises-both the set of tangible factors that the consumer can sce of touch (the physical product and its packaging) and numerous intangible factors‘STANDARDIZED INTERNATIONAL MARKETING Advantages Disadvantages 7. Reduce marketing costs 1 Ignores diferenc conditions of produce use 2. Facilicaescentralized control of 2, Ignores local legal differences marketing, Promotestffciency in R&D 3. Ignores differences in buyer behavior * patcerns 4, Resulesinéconomies of scale in 4. Inhibits local marketing initiatives, production 5, Reflectsthe trend toward a single 5. Ignores other itferences in individual global miketplace markers CUSTOMIZED INTERNATIONAL MARKETING [Advantages Disadvantages : 1. Reflectiiferent conditions of produce use 1. Increases marketing coss| 2. Acknowledges local legal differences 2, Inhibits centralized control of markering 3. Accourtsfordifferencesin buyer behavior 3, Creates inefficiency in R&D pacerng 4, Promogslocal marketing initiatives 4, Reduces economies of scale in production, 5. Accountsfor ocher differences in individual. Ignores the trend coward single global markets markerplace such as image, installation, warranties, and credit terms. Critical to a firm's ability to compete internationally {s its success in developing products with tan- gibic end intangible features that meet the wants and needs of customers in diverse national markets.15 For example, Toyota’s success in selling its automo- biles in Europe, Asia, and the Americas reflects its product-related achieve- ments in designing and producing mechanically réliable vehicles, offering com- petitive waranties, building a solid brand narie for its products, providing spare parts and repair manuals, and furnishing financing to its dealers and retail customers. Standardized Products or Custom ed Products? A key product policy decision facing international marketers is the extent to which vhei firms’ products should be standardized across markets or cus- tomized within individual markets. For example, Toyota, like many international ims. has adopted a blend of customization and standardization. It has stan- Gardized its corporate commitment to bulking high-quality, mechanteally reli rece eibites and to maintaining the prestige of the Toyota brand name. Yet For exampa (2 produets and product mix to meet the needs of local markets United Roreut Sells Fight-hand-drive motor vehicles in Japan, Australia, and the Europe, Tea and lefthand-drive vehicles tn the Americas and continental Panties offenng (uusts ts warranties from country to country based on the war- ay vate Dy cong ua, samnpetttors. The name wiider which it sells a product also See as ecg Me Automobile sold as a Lexus Sports Coupe in the United fells In weet to eee 1 ree Japan. Toyota will even adjust the produets it the U.S. maa aa imuekel conditions. For example, its initial entry Into elu ieiiien * suffered from poor handling and a lack of power and fore failed tu make a dent in Chrysler's dominance of this market. The firm Product Policy > 465 “Advantages and “Disadvantages of Standardized and Customized International Marketing466 > Chapter 16 International Marketing corrected these problems in its Previa van, which it rushed to the U.S. market. However, because Chrysler's sales in Asian markets were limited and of little threat, Toyota continued to sell its original van model for several years in those markets. i. ‘Sometimes firms learn they have customized their products riot by design but by accident, For example, in the late 1980s Unilever discovered to its horror that for no apparent reason it was using 85 different recipes for its chicken soups and 15 different cone shapes for its Cornetto icé creams in Europe. Once the problem was detected, Unilever quickly standardized its ice cream cone design and slashed the number of chicken soup flavors it offered European customers, thereby reducing its production and inventory costs and simplifying Its distribu- tion requirements.!¢ The extent to which products should be customized to meet local needs varies according to several factors, One {s the nature of the product's target cus- toiners—are they industrial users or are they individual consumers? Although 0 some industrial products are customized and some consumer products are stan- dardized, generally speaking, industrial products are more likely to be standard- ized than consumer products. For example, Caterpillar’s bulldozers and front- end loaders are sold throughout the world with only minor modifications to meet local operating and regulatory requirements, Products sold as commodities also are typically standardized across different markets; examples include agricul- tural products, petroleum, 16MB computer memory chips, and chemicals. A gen- eral rule of thumb {s that the closer to tive body a product {s consumed, the more Likely it will need to be customized. For example, to boost its sales in Japan, —_| Eddie Bauer altered the styles of clothing it sells there, adding to its store shelves stretchy shirts and straight-legged pants that the Japanese prefer. 7 The Big Boy burger chain added pork omelettes and fried rice to its menus in Thailand to attract local consumers.!® Legal Forces The laws and regulations of host countries also: may affect the. product policies adopted by international firms. For example, counties often impose detailed label- {ing requirements and health standards on consumer products that firms, both for- eign and domestic, must follow strictly, International firms must adjust the pack- aging and even the products themselves to meet these consumer protection regulations. For example, Grupo Modelo SA, the brewer of Corona beer, had to reduce the nitrosamine levels of the beer it sells in Germany, Austria, and | ‘Switzerland to meet those countries’ health standards.!9 Countries also may regu- late the design of consumer products to simplify purchase and replacement deci | | | | sions. For example, Saudi Arabia requires electricalyeonnecting cords on consumer appliances to be 2 meters long, GE suffered the embarrassment (and a loss of prof- its) of having its goods turned back at a Saudi port when an inspector determined GE's connecting cords were only 2 yards long.2° Widely varying technical standards adopted by countries for such products as electrical appliances and broadcasting, and telecommunications equipment also force firms to customize their products. For example, the electrical plugs of home appliances sold in Europe must be modi- fied on a country-by-country basis to fit the array of electrical outlets found there. Laws designed for an earlier age also create numerous problems for online mar- keters, as “Wiring the World” indicates. Cultural Influences F | International firms often must adapt their products to meet the cultural needs of : _ local markets. One typical adaptation is to change the labeling on the product's package into the primary language of the host country. However, in some cases a‘ Pi Product Policy > “7 E-MARKETING: BEWARE THE REGULATORS The interner offers markecers the vaysof doing business, Unio wot deg but Urea ee revapereachs iy Online, « Cerman erealer eine vies honed " ib sumer electronics, dis anionovave wu ft tert abit buh pee trd issemninate information to consumers nearl ; y instantaneously Uke many dicurer, mus res pain bul a - piers. The more goods it purchases, the lower the prices i gets from its suppliers. Primus's markezing insight was to pass along these savings co its customer in ral ine: As Primus gets more orders for a given good, it lowers the price of the good to its cus- tomers, thereby generating more demand for the good. German, lav, however, discourages rice discounting kegel resets discounts to no mote than 3 percent from the advertised price. Opportunity to develop new Philips andony used this la to prevent Primus Orie fom die counting the tlevlons, VCR, and stereo systems i buys from them, French courts banned the use of che Internet by Nart. an cnline auetion company, to auction expensive art Such aue> tlons are reserved for a state-coritrolied group of auctioneers. Nart led co utilize the Incernet to ‘crack this monopoly by hav ing its New York subsidiary advertise and operate the online auctions, Through this approach Nart also believed it could avoid paying commissions and | France's value-added tax. French courys ruled, however, that because the auctions were adver- ised in France, the arc works were displayed in France, and Nart’s headquarters was located in France, Nart was subject co french tw foreign language may be used to connete quality or fashion. For example, after the Collapse of communfom, Procter & Gamble added German words to the labels of detergents sold in the Czech Republic. Market researchers had determined that gecalecte in packages labeled in English or German were viewed by Czechs as being righer quality than products In packages labeled in Czech 2? Often the Ingredi- aoe ocl products are modified to better please local palates, Gerber. for exam: sre Ghetomnizes Its baby food to meet the requirements of the local culture. The ‘company found that Pol Y ch mothers refused to purchase its mashed bananas for an rate te frult was viewed as an expensive luxury. Instead, Polish anne eae ee arate err mothers favor sutrese mothers choose Gerber's Freez: Dried Sardines and Rice for thetr infants: JoPPtpats Frito-Lay division also has modified its snack foods to bet thelr eh Pe vega consumers, offering, for example, paprika favored chips to Poles and Hungar! entsts also are busily working om & be very successful amor ther Gerber nor Frito-Lay hi America ‘ ‘Culture may af bile makers have learn scious, For many Japanese than a mode of transporte niles per year, about one! often more important thao 4 ar if the paint undernes tens and shrimp-flavored chips to Koreans. Its food sci- squid-peanut snack food Frito-Lay believes will vogoutheast Asians, Presumably for cultural reasons, net as yet made plane to market these items in North ect product polley nother ways, For example, foreign automo- oat Japanese consumers are extremely quality con- a atmers an automobile is more a status symbol c contne average car in Japan is driven only 5,000 tore U.S. average. Thus the way the car looks is rd Why ie drives. A Japanese customer may reject @ tne te hood Is uneven or the gas tank cover fits Ee6S. > Chapter 16. International Matheting : .24 Many German consumers are very environment conscious. As a result, pats redesign products they sell In Germany to allow for easter dis- posal and recycling, And Mattel’s Japanese subsidiaty makes Its Barble dolls more Japanese in appearance. ‘This move boosted the annual sales of Barbie an by 2 million units. 5 Jot hates culture may force changes in a foreign product. For example: although U.S. films are very popular in Asia. HBO often has to edit its movies, “before they can be broadcast In Asia's culturally conservative countries. HBO could not show Schindler's List or Amistad in Malaysia because both films contained brief nudity, and thelr director, Steven Spielberg, refuses fo allow others to cut scenes from his raovies. And given the prevailing policies of regulators in Singapore, it is. unlikely that HBO's Sex in the City will ever be televised there.29 Economic Factors A country’s level of economic development may affect the desired attributes of a product. Consumers, in richer countries often favor products loaded with extra performance features: more price-sensitive consumers in poorer countries typi- cally opt for stripped-down versions of the same products. Sometimes a firm may have to adjust package size or design to meet local conditions. For example, firms selling toothpaste or shampoo in poorer countries often package their goods in single-use sizes to make the products more affordable to local citizens. The quality of a country's infrastructure also may affect the customization deci- sion; thus manufacturers may reinforce the suspension systems of motor vehi- cles sold in countries where road maintenance is poor. The availability and cost of repair services also can affect product design. For example, most automobiles sold in North America use electronic fucl injectors rather than carburetors. In poorer countries the reverse js true, primarily because of maintenance consider- ations. Maintaining fuel injectors requires sophisticated electronic testing equipment backed up by highly trained technicians; any mechanic can tune up a carburetor. Brand Names One element international firms often like to standardize is the brand name of a product. A firm that does this can reduce its packaging. design, and advertising production costs. It also can capture spillovers ofits advertising messages from one market to the next. For example, Avon's entry into the China market was made eas- fer by the fact that millions of consumers had seen its products advertised on Hers Kong television 27 Mars, Inc.. sought $o capture the benefits of standardizaticn by dropping its successful local brand names for the Marathon ber in the British Ket and the Raider chocolate biscuit on the Continent in favor of the more unive"- sally known Snickers and Twix brands.?8 However, sometimes legal or cultu,al f"- tors force a firm to alter the brand names under which it sells its procuis. For example, Grupo Modelo SA markets Corona beer in Spain as Coronita lee ais & Spanish vineyard owns the Corona brand name. Coca-Cola calls 3 niece soft drink Diet Coke in weight-conscious North America but Coca-Ce.s ight in other markets. . PRICING ISSUES AND DECISIONS ' ‘The second P of the international marketing mix is pricing, Developing cifective Prices and pricing policies is a critical determinant of any firm’s success. ® Pricing Policies directly affect the size of the revenues earned by a firm. The gelicics also Serve as an important strategic weapon by allowing the firm to shap: (ue vompetl- tive environment in which it does business. For example, Toys ‘R’ Us has achievedI Pricing lssues and Decisions > 469 suécess in Germany, Japan, the United States, and other priced toys tn low-cost warchouselike settings. pressure on its competitors to slash thelr cos and shrink thelr profit margins. The firm's aggressive pricing strategy has effec: trey forced iS competitors to fight the battle for Asian, European, and North American consumers on terms dictated by Toys ‘R' Us. As the opening case suig- gests, Wal-Mart 1s doing much the same ma Europe, ees Both domestic and international firms must strive to develop pricing strategies that will produce profitable operations, but the'task facing an international firm is more complex than that facing a purely domestic firm. To begin with, a firm's costs" ofdoing business vary widely by country. Differences in transportation charges and tariffs cause the landed price of goods to vary by country, Differences in distribu- tion practices also affect the final price the end customer pays. For example, intense competition among distributors in the United States jninimizes the margin between retail prices and manufacturers’ prices, In contrast, Japan's inefficient multilayered distribution system, which relies on a chain of distributors to get geods into the hands of consumers, often inflates the prices Japanese consumers pay for goods. Exchange rate fluctuations also can create pricing problems. If an exporter’s home currency rises tn value, the exporter must choose between maintaining its prices in the home currency (which makes its goods more expensive in the import- ing country) and maintaining its priees in the host currency (which cuts its profit ' margins by lowering the amount of home country cturrency it receives for each countries by selling low- | {ts low prices have placed enormous ts, alter their distribution systems, > unit sold), International firms must consider these factors In developing their pricing polt- ies for each national market the firms serve. They must decide whether they want to apply consistent prices across all those markets or customize prices to meet the needs of each. In reaching this decision, the firms must remember that competi- tion, culture, distribution channels, income levels, legal requirements, and exchange rate stability may vary widely by country, Pricing Policies International firms generally adopt one of three pricing policies: 1, Standard price policy 2. Two-tiered pricing 3. Market pricing An international firm following a geocentric approach to international marketing will adopt a standard price policy. whereby the firm charges the same price for ite products and services regardless of where they are sold or the nationality of the customer. Firms that sell goods which are easily tradable and transportable often adopt this pricing approach out of necessity. For example, if firm manufacturing DRAM memory chips charged different customers vastly different prices, some of Its favored customers might begin to resell the chips to less favored customers—an easy task, given the small size and high value of the chips. Similarly, firms that sell commodity goods in competitive markets often use Unis pricing polley. For example, producers of crude oil, stich as Aramco, Kuwait Oil, and Pemex, seli their products to any and alll customers at prices determined! by supply and demand in theavorld crude oll market. Other comniodities produced ar j traded worldwide, such as coal and agricultural goods, also are sold at competitive prices with suitable ‘adjust- ments for quality differentials and transportation costs and little regard to the pur- chaser's nationality. ‘An international firm that follows an ethnocentric marketing approach will use a two-tiered pricing policy. whereby the firm sets one price for all Its domestic sales and a second price for all its international sales. A firm that adopts a two-tieredfo > Chapter 16 International Marketing . pricing policy commonly allocates to domestic sales all accounting charges associ- ated with research and development, administrative overhead, capital depreciation, ‘and so on, The firm then can establish a uniform foreign sales price without having to worry about covering these costs, Indeed, the only costs that need to be covered by the foreign sales price are the marginal costs associated with foreign sales, such as the product's unit manufacturing costs, shipping costs, tariffs, and foreign dis- tribution costs. 5 ‘Two-tlered pricing often fs used by domestic firms Just beginning to interna- tlonalize. In the short run charging foreign customers a price that covers only marginal costs may be an appropriate approach for such firms. However, the strong ethnocentric bias of two-tiered pricing suggests it is not a suitable long- run pricing strategy. A firm that views,foreign customers as marginal—rather than integral—to its business 1s unlikely to develop the international skills, expertise, and outlook necessary to compete successfully in the international marketplace. Firms that adopt a two-tiered pricing policy also are vulnerable to charges of dumping. Recall from Chapter 8 that dumping fs the selling of a firm's products in a foreign market for a price lower than that charged In the firm's domestic market— fan outcome that easily can result from a two-tiered pricing system. Most major trading countries have issued regulations intended (o protect domestic firms from dumping by foreign competitors. For example, in the mid-1990s Toyota and Mazda were charged with dumping minivans in the U.S. market. Although the Japanese automakers were not penalized in this case, both subsequently raised their mini- van prices to avoid future dumping complaints. Market Pricing An international firm that follows a polycentric approach to International market- ing will use a market pricing policy. Market pricing is the most complex of the three pricing policies and the one most commonly adopted. A firm utilizing market pricing customizes its prices on a market-by-market basis 6 maximize its profits in| each market. ‘As you may remember from your microeconomics class, the profit-maximizing output (the quantity the firm must produce to maximize its profit) occurs at the intersection of the firm's marginal revenue curve and its marginal cost curve. The profit-maximizing price is found by reading across from the point on the firm's demand curve where the profit-maximizing output occurs. In Figure 16.3fa) the intersection of the marginal revenue curve (MR) and the marginal cost curve (MC) occurs at Q. which is the profit-maximizing output. If you read straight up from Q until you reach the demand curve (D). then move left to the y-axis, you find the profit-maximizing price, P, the maximum price at which quantity Q of the good can be sold. With market pricing the firm calculates and charges the profit-maximizing price in cach market it serves. Figure 16.3(b) shows two markets in which a firm has identical demand and marginal revenue curves but faces different marginal cost curves. The firm faces higher marginal costs in country 1 (MC,) than in coun- | try 2 (MC,). Accordingly, its profit-maximizing price in country 1 (P,) is higher than that in country 2 (P,). 7 { Two condiiions must be met if a firm is to successfully practice market pricing: 1, The firm must face different demand and/or cost conditions in the countries in which it sells its products. This condition usually is met because taxes, tariffs, standards of living, levels of competition, infrastructure costs and availability, and numerous other factors vary by country. . \ 2. The firm must be able to prevent arbitrage, a concept discussed in.Chapter 7. | The firm's market pricing policy will unravel if customers are able to buy the firm's products in a low-price country and resell them profitably in a high-price= Pricing Issues and Decisions > 471 1 Finding the proft-maximizing price bi. Finding the profit-maximizing price for two markets Fi uc Mey Price of good so Profitmaximizing ‘output | wR Ld MR @ % a Quantity produces ‘Quantity prcduced - Tos Determining the Profit-Maximizing Price “ = country. Because of tariffs, transportation costs. and other transaction costs, arbitrage is usually nbt a problem if country-to-country price variations are ‘small. If prices vary widely by country, however, arbitrage can upset the firm's market pricing strategy. Assuming these conditions are met, the advantages of this polycentric approach are obvious. The firm can set higher prices where markets will tolerate : them and lower prices where necessary to remain competitive. It also can directly allocate relevant local costs against local sales within each foreign mar- ket, thereby allowing corporate strategists and planners to better allocate’ the firm's resources across markets. Such flexibility comes with a cost, however. To capture the benefits of market pricing. local managers must closely monitor sales and competitive conditions within their markets so that appropriate and i timely adjustments can be made. Also, corporate headquarters must be willing + to delegate authority to local managers to allow them to adjust prices within “S, their markets. ‘Amarket pricing policy, however, can expose a firm to complaints about dump- ng {as discussed earlier) as well as to three other risks: (1) damage to its brand name, (2) development of a gray market for its products, and (3) consumer resent- ment against discriminatory prices. zi ‘The firm needs to ensure that tiéprices it charges in one market do not damage . the brand image it has carefully ntirtured in other markets. For example, suppose ‘Seagram encouraged its North American and European brand managers to market Chivas Regal as a premium scotch whiskey sold at a premium price but allowed its ] Japanese brand managers to peddle Chivas Regal as a nonprestigious'brand sold ‘at rock-bottom prices. Because of its marketing approach in Japan, Seagram would 7 risk deterioration of Chivas Regal's premium brand image in North America and Europe. Thus any international firm that sells brand name products and adopts market pricing should review the prices charged by local managers to ensure that the integrity ofits brand names and its market images is maintained across all of {ts markets.