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Marketing in Emerging Markets

Maria Humayun E13MBA056

Today's Agenda

Introduction to emerging markets


Ideas and realities

How the business environment is


different from advanced economies
What firms need to know to perform
successfully in emerging markets

Case Study Analysis - Skoff Winery


Targets China

Initial discussion
Students form the groups and discuss the following
issues:
What are emerging markets?
Salient features of emerging markets
How emerging markets are different from developed
economies?
Which emerging markets have you visited?
Could you find any difference in terms of infrastructure,
transportation, communication (telephone & internet),
utilities, food and health services?

Classifying Countries based on


Economic Development
Advanced economies are post-industrial countries characterized by high per
capita income, highly competitive industries, and well-developed
commercial infrastructure.
Examples- 35 worlds richest countries including Australia, Canada, Japan,
New Zealand, the United States, and Western European countries.
Developing economies are low-income countries characterized by limited
industrialization and stagnant economies.
Examples- about 130 low-income countries, with limited industrialization and
stagnant economies- e.g. Bangladesh, Nicaragua and Zaire.
Emerging market economies are a subset of former developing economies
that have achieved substantial industrialization, modernization, improved
living standards and remarkable economic growth.
Examples- some 23 countries in East and South Asia, Latin America, Middle
East and Eastern Europe- including Brazil, Russia, India, China (so called
BRIC countries).
International Business
Strategy, Management & the New Realities
Based on: Cavusgil, Knight and Riesenberger

KEY DIFFERENCES
Dimension

Advanced

Developing

Emerging

Economies

Economies

Markets

Canada, France,

Representative Countries

Japan, United
Kingdom, United
States

Approximate Number of
Countries
Population

(% of World)

Approximate per capita


income

(U.S. Dollars; PPP Basis)

Approximate % Share of
World GDP

(PPP* basis)

Population

(Millions)

Angola, Bolivia,
Nigeria,
Bangladesh

Brazil, China,
India,
Indonesia,
Pakistan

35

130

23

14.9

26.4

56.8

37827

9010

12874

50.1

16.06

33.84

1062.80

1881.06

4045.41

Advanced Economies
Mature state of industrial development; transitioned from
manufacturing economies into service-based economies.
Home to about 15% of the worlds population, and account for
half (50.1%) of world GDP, over half of world trade in products,
and three-quarters of world trade in services.
Political systems- democratic, multiparty systems of
government.
Economic systems- typically based on capitalism, with relatively
little government intervention in business.
Serious purchasing power; few restrictions on international trade
and investment.
They host the world's largest MNEs.
Based on: Cavusgil, Knight and Riesenberger

Developing Economies
Account for only about 16 percent of world GDP, low
discretionary incomes, limited proportion of personal
income spent on purchases other than food, clothing, and
housing.
In developing economies, 17% live on less than $1 per
day; 40% live on less than $2 per day.
The combination of low income and high birth rates tends
to perpetuate poverty.
Misnomer-sometimes called underdeveloped countries or
third-world countries- these terms are imprecise because,
despite poor economic conditions, the countries tend to be
highly developed in historical and cultural terms.
Based on: Cavusgil, Knight and Riesenberger

Emerging Market Economies

Most distinguishing characteristic- countries are


enjoying rapidly improving living standards and a
growing middle class with rising economic
aspirations.
Importance in the world economy is increasing as
attractive destinations for exports, FDI, and
sourcing.
Emerging market countries are evolving towards
wealthy nation status.
Based on: Cavusgil, Knight and Riesenberger

Emerging Market Economies


Examples: Hong Kong, Israel, Saudi Arabia, Singapore, South
Korea, and Taiwan have developed beyond the emerging market
stage.
2004- emerging markets- the Czech Republic, Hungary, and Poland,
received a boost when they became members of the European
Union. By joining the EU, these countries had to adopt stable
monetary and trade policies. They leverage their low-cost labor to
attract investment from Western Europe, thereby boosting their
economies.
The two second-wave accession countries that joined EU on 1
January 2007 are Romania and Bulgaria; and the third-wave
accession country that joined EU on 1 July 2013 is Croatia.
9

Contribution to Global Growth


Developed vs. Emerging Markets

Spending on Consumer Goods

Comparison of Two Neighboring


Emerging Economies of South-Asia
(2012)
Pakistan

India

1290

1489

4.2

3.2

Average Years Male


Schooling

5.6

6.7

Rule of Law Index

0.5

0.7

Government Consumption

0.09

0.10

GDP per Capita

GDP Growth

(Current USD)

(Annual %)

(Ratio to GDP)
4

Democracy Index

0.2

0.8

Inflation, Consumer Prices

9.7

9.3

(Annual %)

Source: 1 World Bank; 2 UN population projections; 3 Political Risk Services International Country Risk Guide; 4 Freedom
House Political Rights Index.

Comparison of Two Neighboring


Emerging Economies of South-Asia
En Route to 2050

Rate of Growth

Size of Economy

(Bn

Constant 2000, USD)

Rate of Growth of
Total GDP (2040-2050)
1

Income per Capita

(Constant 2000, USD)

Rate of Growth of
Income per Capita

Pakistan

India

Normal

Fast

675

8165

5.0%

5.2%

2455

5060

4.4%

5.1%

275

1614

+80%

+45%

(2040-2050)
2

Population

(Mn)

% Change in Working
Population (Approx)
3

Source: 1 [HSBC estimates]; 2 [World Bank, UN population projections and HSBC estimates]; 3 [UN population projections]

FDI Inflow Pakistan and India

Source: World Bank (Indias 2012 Data not Available)

World Bank's Ease of Doing


Business' Index for Pakistan and
India 2013 (Ranks)
Pakistan

India

106

131

99

177

122

91

Getting Credit

71

24

Protecting Investors

32

34

Trading Across Borders

90

129

159

186

75

119

Ease of Doing Business


Starting a Business
Registering Property

Enforcing Contracts
Resolving Insolvency
Source: www.doingbusiness.org/

COMPARITIVES

GDP GROWTH RATES

Emerging Market Dynamics


Emerging markets account for over 40 percent of world
GDP. They represent over 30 percent of exports and receive
over 20 percent of FDI.
Mid-2000s, the emerging markets collectively enjoyed an
average annual GDP growth rate of nearly 7%, a
remarkable feat much faster than advanced economies.
Benefit from: low-cost labor, knowledge workers,
government support, low-cost capital, and powerful, highly
networked conglomerates
Based on: Cavusgil, Knight and Riesenberger

The New Global Challengers


(Boston Consulting Group Study)
Some 100 companies from Emerging Markets (called
Rapidly Developing Economies in the BCG study) are
poised to become important 21st-century multinationals.
Examples:
Brazil: Embraer, Sadia & Perdiago, Natura Mexico:
America Movil, Groupo Modelo
India: Ranbaxy, Infosys, Tata Tea, WIPRO
China: Galanz, Haier, Chunlan Group Corp., Lenovo,
Pearl River Piano
Turkey: Koc Holding, Vestel & Sisecam
Based on: Cavusgil, Knight and Riesenberger

What Makes Emerging Markets


Attractive?

Emerging markets are attractive as:

Target markets

Manufacturing bases
Sourcing destinations

Based on: Cavusgil, Knight and Riesenberger

Emerging Markets as Target Markets

Growing middle class:


Electronics
Automobiles
Health care services.

Developing Industrial sector:


Manufactured products
Technology
Sophisticated technology
Based on: Cavusgil, Knight and Riesenberger

Emerging Markets as
Manufacturing Bases
Home to low-wage, high-quality labor for manufacturing and
assembly operations.
Large reserves of raw materials and natural resources.
South Africa is a key source for industrial diamonds.
Brazil long has been a center for mining bauxite, the main
ingredient in aluminum.
Thailand has become an important manufacturing location for
Japanese MNEs such as Sony, Sharp, and Mitsubishi.
Malaysia and Taiwan- Motorola, Intel, and Philips manufacture
semiconductors there.
Mexico and China- platforms for consumer electronics and auto
assembly.
Based on: Cavusgil, Knight and Riesenberger

Emerging Markets As Sourcing


Destinations
Out sourcing
Procurement of selected value-adding activities, including
production of intermediate goods or finished products, from
independent, external suppliers. Helps foreign firms become more
efficient, concentrate on their core competences, and obtain
competitive advantage.

Off shoring
When sourcing involves foreign suppliers or production bases.

Global sourcing
Refers to the procurement of products and services from foreign
locations. Procurement can be from either independent suppliers or
company-owned subsidiaries.
Based on: Cavusgil, Knight and Riesenberger

Common Features of Global


Brands
Some are highly visible, conspicuous consumer products such
as consumer electronics and jeans
Some serve as status symbols worldwide, such as cars and
jewelry.
Many have widespread appeal because of innovative features
that seem to fit everyones life style, such as mobile phones,
credit cards. and cosmetics.
Some are identified with the country of origin and command a
certain degree of country appeal such as Levis (American
style) and IKEA furniture (Scandinavian style).
In other cases, global brands are reaping the benefits of firstmover advantages in offering new and novel products or
services (Starbucks, Nokia, Samsung).
24

Product Strategy for


Emerging Markets
Maria Humayun E13MBA056

Today's Agenda
1. Product Strategy for emerging markets
2. Standardization and adaptation of the international
marketing program for emerging markets
3. Global branding and product development for
emerging markets
4. Strategies that fit emerging markets
5. Brand Bollywood going global

26

Frame Work for Emerging


Markets

27

Marketing strategy for


Emerging Markets
Global marketing strategy
a plan of action that guides the firm in:
(1) how to position itself and its offerings in
emerging markets and which customer segments to
target; and
(2) the degree to which its marketing program
elements should be standardized and adapted
28

Global Market Segments


A global market segment represents a group of
customers that share common characteristics across
many national markets. Firms target these buyers with
relatively uniform marketing programs.
MTV and Levi Strauss both target a largely
homogenous youth market that exists across most of
the world.
This segment generally follows global media, is quick
to embrace new fashions and trends, and has significant
disposable income.
29

Positioning
The firms objective in pursuing global market segments is to
create a unique positioning of its offerings in the minds of target
customers.
Positioning -- the firm develops both the product and its
marketing to evoke a distinct impression in the customer's mind,
emphasizing differences from competitive offerings.
In the international food retailing McDonald has established itself
as clean, economical, organized fast food retailer available for
longer working hours worldwide.
30

Global Positioning Strategy


Internationalizing firms aim for a global positioning
strategy, i.e., one in which the offering is positioned
similarly in the minds of buyers worldwide.
KFC, Honda, and Sony are good examples of companies that
successfully use this approach. Consumers around the world
view these strong brands in the same way.
Global positioning strategy is beneficial because it reduces
international marketing costs by minimizing the extent to
which management must adapt elements of the marketing
program for individual markets
31

Standardization and
Adaptation
Adaptation refers to firm efforts to modify elements of the
international marketing program to accommodate specific
customer requirements in a particular market.
Standardization refers to firm efforts to make the marketing
program elements uniform, with a view to targeting entire
regions of countries, or even the global marketplace, with a
similar product or service.
Achieving a balance between adaptation and standardization is
part of a broader corporate strategy that has the firm debating
its position between global integration and local
responsiveness.
32

Tradeoffs

33

Three Levels of Product

34

35

36

Standardization
Representing a tendency towards global integration,
standardization is more likely to be pursued in global industries
such as aircraft manufacturing, pharmaceuticals, and credit cards.
Boeing, Pfizer, and MasterCard are examples of firms that use
standardized marketing strategy with great success.
A standardized marketing approach is appropriate when:
Similar market segments exist across countries.
Customers seek similar features in the product.
Products have universal specifications.
Business customers have converging expectations.
37

Advantages of Standardization
Cost Reduction. Standardization reduces costs by enabling
economies of scale in design, sourcing, manufacturing, and
marketing. Offering a similar marketing program to the global
marketplace or across entire regions is more efficient than having
to adapt products and their marketing for each of numerous
individual markets.
Improved Planning and Control. Standardization provides for
improved planning and control of value-adding activities. In the
case of Electrolux, for example, fewer offerings mean that
management could simplify quality control and reduce the number
of parts that it stocks for repairing defective products.
38

Advantages of Standardization
(cont.)

Ability to portray a consistent image and build global brands.


A brand is a name, sign, symbol, or design intended to identify
the firms product and differentiate it from those of competitors.
Global brand -- one whose positioning, advertising strategy,
look, and personality are standardized worldwide.
Standardization allows the firm to establish and project a
globally recognized brand.
Having a globally recognized brand helps increase customer
interest and reduces the confusion that arises from proliferation
of numerous adapted products and marketing programs.
Marketing is more effective and efficient because the firm can
serve larger global market segments that transcend multiple
countries.
39

Adaptation
Adaptation of an international marketing program
exemplifies local responsiveness. It is a strategy multidomestic industries commonly use.
E.g., publishing and software industries, where books,
magazines, and software must be translated into the
language of the target country.
Adaptation may be as simple as translating labels and
instructions into a foreign language, or as complex as
completely modifying a product to fit the needs of very
unique market conditions.
40

Reasons for Adaptation


Differences in National Preferences. Adaptation makes the offering
more acceptable to customers.
Differences in Laws and Regulations. Promotion of certain
products is restricted in some countries; laws in Europe, including
Germany, Norway, and Switzerland, restrict advertising directed at
children.
Differences in Living Standards and Economic Conditions.
Income levels vary substantially around the world; firms typically
adjust both the pricing and the complexity of their product offerings.
Differences in National Infrastructure. The quality of
transportation networks, marketing institutions, and overall business
infrastructure particularly influence the alternatives and quality of
marketing communications and distribution systems firms employ
abroad.
41

Advantages of Local
Adaptation
Meeting needs of customers more precisely.
Creating unique appeal for the product.
Complying with such government regulations as health and
technical standards.
Achieving greater success in combating customer
resistance.
In addition, adaptation provides managers an opportunity
to explore alternative ways of marketing the product or
service. Such market knowledge can guide the firm in its
R&D efforts, often leading to superior products for sale
abroad and at home.
42

Standardization and
Adaptation: A Balancing Act
A decision about the degree of standardization and
adaptation is not an either/or decision, but rather a
balancing act.
There are good arguments in favor of both; it is up to the
manager to sort out the trade-offs in light of the unique
circumstances of the international environment and the
firm's chosen strategy.
The most important distinction is that standardization
helps the firm reduce its costs, while adaptation helps the
firm more precisely cater to local needs and
requirements, thereby increasing its revenues.
43

Adaptation is Costly
Adaptation may require substantial redesign of products,
modifications to manufacturing operations, lower pricing, and
overhauled distribution and communications strategies.
The costs add up when these changes multiply in numerous
national markets simultaneously.
Whenever possible, managers usually err on the side of
standardization because it is easier and less costly than
adaptation.
Others adapt marketing program elements only when necessary,
to respond to local customer preferences and mandated
regulations.
44

Regional Solutions may be


more Practical
As a compromise, some firms will pursue standardization as part
of a regional strategy, where international marketing program
elements are formulated to exploit commonalities across a
geographic region, instead of across the world.
General Motors markets distinctive car models for each of China
(for example, Buick), Europe (Opel, Vauxhall), and North America
(Cadillac, Saturn).
Convergence of regional preferences, regional economic
integration, harmonization of product standards, and growth of
regional media and distribution channels, all make regional
marketing more feasible than pursuing global standardization.
45

Common Features of Global


Brands
Some are highly visible, conspicuous consumer products such as
consumer electronics and jeans.
Some serve as status symbols worldwide, such as cars and
jewelry.
Many have widespread appeal because of innovative features that
seem to fit everyones life style, such as mobile phones, credit
cards. and cosmetics.
Some are identified with the country of origin and command a
certain degree of country appeal such as Levis (American style)
and IKEA furniture (Scandinavian style).
In other cases, global brands are reaping the benefits of firstmover advantages in offering new and novel products or services
(Starbucks, Nokia, Samsung).
46

Pricing Strategies for


Emerging Markets
Mubbsher Munawar Khan
Institute of International Marketing Management

Pricing
Only area of global marketing mix where policy
can be changed rapidly without large direct
cost implications
Decisions in global markets are affected by
complexity of influential factors

15-48

International
pricing framework
Firm-level factors

Environmental
factors

Product factors

Market factors

Pricing strategies

Terms

15-49

Other
elements

Firm performance

Internal factors affecting


international pricing decisions
Firm-level factors
Corporate and marketing
objectives
Competitive strategy
Firm positioning
Product development
Production location
Market entry modes

PRODUCT FACTORS
STAGE IN PLC
PLACE IN PRODUCT
LINE
MOST IMPORTANT
PRODUCT FEATURES
PRODUCT POSITIONING
PRODUCT COST
STRUCTURE

15-50

External factors affecting


international pricing decisions
Environmental factors
Government influences
and constraints
Inflation
Currency fluctuations
Business cycle stage

MARKET FACTORS
CUSTOMERS
PERCEPTIONS
CUSTOMERS ABILITY
TO PAY
NATURE OF
COMPETITION
COMPETITORS
OBJECTIVES,
STRATEGIES,
STRENGTHS AND
WEAKNESSES
GRAY MARKET APPEAL
15-51

What is this?
What price-related phenomenon is
caused by the summation of all cost
factors in the distribution channel
including ex-works price, shipping
costs, tariffs, and distributor markup?

Price escalation
15-52

15-53

Tactics for Countering


Price Escalation

Rationalizing the distribution process


Lowering the export price from the factory
Establishing local production of the product
Pressurizing channel members to accept lower
profit margins

15-54

Factors influencing
customer sensitivity to price
(1)
More distinctive product
Greater perceived quality of products
Consumers less aware of substitutes in the
market
Difficulty in making comparisons
Proportion price represents of total expenditure
of the customer

15-55

Factors influencing
customer sensitivity to price
(2)
Perceived benefit for customer increases
Product is used in association with a product
bought previously, such that components and
replacements are highly priced
Costs are shared with other parties
Product or service cannot be stored

15-56

What is this?
What price strategy involves
charging a high price at the top end
of the market with the objective of
achieving the highest possible
contribution in a short time?

Skimming
15-57

Problems with
skimming
Having a small market share makes the firm
vulnerable to aggressive local competition
Maintenance of a high-quality product requires
a lot of resources
If product is sold more cheaply at home or in
another country gray marketing is likely

15-58

What is this?
What price strategy involves
charging a final price based on
competitive prices?

Market pricing
15-59

What is this?
What price strategy involves
charging a low price with the
objective of achieving the highest
possible sales?

Penetration pricing
15-60

Motives for
penetration pricing
Intensive local competition
Lower income levels of locals
View of exporting as marginal activity

15-61

What is this?
What term is used to describe the
prices charged for intracompany
movement of goods and services?

Transfer pricing
15-62

What is this?
What price strategy is based on
grouping products and services in a
system-solution product in order to
overcome possible customer price
concerns?

Bundle pricing
15-63

Basic Approaches To
Pricing Across Countries

Price
standardization

15-64

Price
differentiation

Figure 15.5 Structural Factors


Of Standardized
Versus Differentiated Pricing

Source: Reprinted from European Management Journal, Vol. 12, No. 2, Diller. H. and Bukhari, I. (1994) Pricing conditions in the European Common Market, p. 168, Copyright 1994, with permission from Elsevier.

15-65

Figure 15.6
A taxonomy of international
pricing practices
Preparedness for
internationalization

High

Low

3 Multilocal
price setter

4 Global
price leader

1 Local
price follower

2 Global
price follower

Multilocal markets

Global markets

Industry globalism
Source: Adapted from Solberg et al., 2006, p. 31. In the original article Solberg has used the concept Globality instead of Globalism.

15-66

International
pricing practices (1)
Prototype 1: Local price
follower
Limited resources and
leverage
Dependent on local
export intermediary
Cost-oriented, standard
prices
Unexposed to global
forces

PROTOTYPE 2: GLOBAL
PRICE FOLLOWER
NEWCOMERS TO
GLOBAL MARKETS
MARKET-ORIENTED,
STANDARD PRICES
GLOBAL
COMPETITION BUT
LOCAL DIFFERENCES
15-67

International
pricing practices (2)
Prototype 3: Multilocal price
setter
Local market leaders in
selected markets
Market-oriented, adapted
prices
Local competition

PROTOTYPE 4: GLOBAL
PRICE LEADER
GLOBAL MARKET
LEADERS
MARKET AND COSTORIENTED GLOBAL
PRICES
GLOBAL COMPETITION
BUT LOCAL
DIFFERENCES
15-68

What is this?
When a customer requires one
global price per product from the
supplier for all its foreign SBUs and
subsidiaries, a _____ has been
requested.

Global pricing contract


15-69

Customer advantages and


disadvantages of GPCs
Advantages
Lower prices worldwide
Higher levels of service
Standardization of
products
Efficiency of processes
Faster diffusion of
innovations

Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 6170.

DISADVANTAGES
LESS ADAPTABILITY
TO MARKET CHANGES
POTENTIAL FOR
QUALITY
INCONSISTENCIES
DEPENDENCE UPON
SUPPLIER COULD
RESULT IN HIGHER
PRICES
RESISTANCE TO GPCS
AMONG LOCAL
MANAGERS
MONITORING COSTS
15-70

Supplier advantages and


disadvantages of GPCs
Advantages
Access to new markets
Economies of scale
Influence over market
development through
association with
industry leaders
Strong relationships
developed
Solve price and service
anomalies across
countries
Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 6170.

DISADVANTAGES
RESISTANCE TO
CHANGE
LOSS OF CUSTOMERS
RISK OF FAILING TO
DELIVER ON
PROMISES
INAPPROPRIATE USE
OF COST
INFORMATION
OVER DEPENDENCE
ON ONE CUSTOMER
CONFLICT IN
DISTRIBUTION
CHANNELS
15-71

Approaches to
transfer pricing
Transfer at cost
Transfer at arms length
Transfer at cost plus

15-72

Currency decisions
in export pricing
Quote price in foreign currency of buyers country
Quote price in currency of exporters country
Quote price in currency of a third country
Quote price in currency unit (euro)

15-73

Benefits To Quoting Price


In Buyers Country Currency
Quoting in foreign currency could be a
condition of the contract
Access to finance abroad at lower interest rates
Good currency management may be a means
of gaining additional profits
Customer preference for quotes in their
currency

15-74

Delivery terms
EXW Ex-works
FCA Free carrier
FAS Free alongside
ship
FOB Free on board
CFR Cost and freight
CIF Cost, insurance,
and freight
CPT Carriage paid to

CIP CARRIAGE AND


INSURANCE PAID TO
DAF DELIVERED AT
FRONTIER
DES DELIVERED EXSHIP
DEQ DELIVERED EXQUAY
DDU DELIVERED
DUTY UNPAID
DDP DELIVERED DUTY
PAID
15-75

Figure 15.8 Different


terms of payment

Source: Chase Manhattan Bank, 1984, p. 5.

15-76

Characteristics of
letters of credit
An arrangement by banks for settling
international commercial transactions
Provide a form of security for parties involved
Ensure payment, provided that terms and
conditions of credit have been fulfilled
Payment based on documents only and not on
merchandise or services involved

15-77

Figure 15.9 The Process For


Handling Letters Of Credit

Source: Phillips et al., 1994, p. 454, with permission from ITBP Ltd.

15-78

Letter of credit forms


Revocable L/C
Irrevocable but unconfirmed L/C
Confirmed irrevocable L/C

15-79

Export financing

Commercial banks
Export credit insurance
Factoring
Forfeiting
Bonding

LEASING
COUNTER-TRADE

Barter
Compensation deal
Buy-back agreement

15-80

Communication Strategy in
Emerging Markets
Mubbsher Munawar Khan
Institute of International Marketing Management

Agenda

Promotion Strategies for emerging markets


Elements in the communication process
Communication tools
Major advertising decisions
Standardization and adaptation
Printed, outdoor and electronic advertisement
Case study RIN
82

Variations within Countries


The literacy rate indicates the number of people who can
read -- a critical ability for understanding most ads.
Media are widely available in advanced economies. In
emerging markets and developing economies, however, TV,
radio, the Internet, and newspaper may be limited.
The firm must use creative approaches to advertise in
countries with low literacy rates and limited media
infrastructure.
Certain media selections make sense for some countries but
not for others. Mexico and Peru emphasize television
advertising, Kuwait and Norway concentrate on print media,
and Bolivia uses a lot of outdoor advertising on billboards
and buildings
87

Comparative Statistics

88

Standardization vs. Adaptation


Culture, Language
Literacy level, verbal/nonverbal language, etc.
Symbols, colors, numbers,
etc.
National Humour
etc.
Advertising Arrangement
Local Advertising Style
Restrictions (Object,
Arrangement)
89

MEDIA CONDITIONS
Media Infrastructure
Media Habits
Media Costs
Overflow

Distribution Structures in
Emerging Markets (5)
Mubbsher Munawar Khan
Institute of International Marketing Management

Agenda for Today


Presentation and Discussion on Research Article The
Changing Structure of Distribution in Pakistan
Distribution Structure in Emerging Markets
Decision Making Regarding Channels
Channel Sequences
Strategy for Market Coverage
Factors Influencing Channel Size
Gray Marketing Causes, concerns and cure

Gray Marketing (Parallel Imports)

Gray market activity: Legal importation of


genuine products into a country by intermediaries
other than authorized distributors.
Consider a manufacturer that produces in the source
country and exports its products to another,
countries A and B in Exhibit 17.8.
If the going price of the product happens to be
sufficiently lower in Country B, then gray market
brokers can exploit arbitrage opportunities buy the
product at a low price in Country B, import it into
the original source country, and then sell it at a high
price there.

Causes of Gray Markets


Root cause of gray market activity is a sufficiently
large difference in prices of the same product between
two countries.
Such a price difference may be due to:
(1) the manufacturers inability to coordinate prices
across its markets; or
(2) a conscious effort on the part of the firm to charge
higher prices in some countries when competitive
conditions permit.
Exchange rate fluctuations may also exacerbate gray
market activity by widening the price gap between
products priced in two different currencies.

Manufacturer Concerns
over Gray Markets
1. The risk of a tarnished brand image when customers
realize that the product is available at a lower price
through alternative channels particularly less
prestigious outlets.
2. Manufacturer-distributor relations can be strained
because parallel imports result in lost sales to
authorized distributors.
3. Gray market activity can disrupt regional sales
forecasting, pricing strategies, merchandising plans,
and other marketing efforts.

Strategies to Cope with


Gray Markets
Counter through aggressive price-cutting in countries and regions
targeted by gray market brokers.
Exclusive import rights as incase of Gillette and Procter and gamble.
Interfere with the flow of products into markets where gray market
brokers procure the product.
Publicize the limitations of gray market channels. By publicizing
special sign or writing on the package.
Design products with exclusive features that appeal to customers.
Adding safety, luxury, or functional features that are unique to each
market reduces the likelihood that products will be channeled
elsewhere.

Challenges of Doing Business


in Emerging Markets

Estimating the Potential of


Emerging Markets
Estimating the true potential of emerging market demand
is challenging. The economic and social environments in
these countries are highly peculiar.
Limited availability of data sources or reliability of
information.
Market research may be more costly and less precise
than in advanced economies.
Market potential indicators include: GDP growth rate,
income distribution, commercial infrastructure, the rate
of urbanization, consumer expenditures for discretionary
items and unemployment rate.
Based on: Cavusgil, Knight and Riesenberger

Market Potential Indicators

Three practical approaches firms employ in


assessing market potential of individual
countries are:
per-capita income
size of middle-class, and
A mix of market potential indicators

Market potential may be assessed with aggregate


country data, such as gross national income
(GNI) or per-capita GDP, expressed in terms of a
reference currency, such as the U.S. dollar.
Based on: Cavusgil, Knight and Riesenberger

Challenges of Doing Business in


EMS:

Weak Intellectual Property Protection


Even if they exist, laws that safeguard intellectual
property rights may not be enforced, or the judicial
process may be painfully slow.
Argentina- enforcement of copyrights on recorded music,
videos, books, and computer software is inconsistentlaws against Internet piracy are weak and ineffective.
China Indonesia, and Russia - counterfeiting is common,
especially with software, DVDs, and CDs.
India- weak patent laws discourage investment by
foreign firms.
Based on: Cavusgil, Knight and Riesenberger

Challenges of Doing Business in EMs:

Bureaucracy and Lack of Transparency


Burdensome administrative rules, as well as excessive requirements for
licenses, approvals, and paperwork, delay business activities.
Example- American International Group (AIG) formed a joint venture with the
giant Indian conglomerate Tata, to enter India's underserved $8 billion
insurance market, and it still took six years before the Indian government
granted AIG permission to sell property and life insurance.
Excessive bureaucracy means lack of transparency, i.e. legal and political
systems are not open and accountable. Where anti-corruption laws are weak,
bribery, kickbacks and extortion are common.
In Transparency Internationals rankings, emerging markets such as Argentina,
Indonesia, and Venezuela experience substantial corruption.
Based on: Cavusgil, Knight and Riesenberger

Challenges of Doing Business in EMs:

Partner Availability and Qualifications


Foreign firms need to seek alliances with local partners in
countries characterized by inadequate legal and political
frameworks- gaining access to local market knowledge,
supplier and distributor networks, and key government
contacts.
Qualified business partners in emerging markets are not
readily available. Often in emerging markets, one has to
contend with second-best or third-best partner candidate,
and provide much technical and managerial assistance to
upgrade the partners capacity.
Based on: Cavusgil, Knight and Riesenberger

Challenges of Doing Business in EMs:


Dominance of Family Conglomerates

Family conglomerate (FC) is a large, privately-owned company


that is highly diversified, and control economic activity and
employment in emerging markets.
South Korea, where they are called chaebols - the top 30 FCs
account for nearly half the assets and industry revenues in the
Korean economy. Samsung, the most famous Korean FC, has
annual profit of US$27.18 billion on revenues of $188.14 billion.
India where they are called business houses
Latin America where they are called grupos
Turkey where they are called holding companies - the
Koc Group is the 222nd biggest company in the world and the
only Turkish company in Fortune 500, and Sabanci provides over
five percent of Turkeys national tax revenue.
Based on: Cavusgil, Knight and Riesenberger

Entry Strategies for Emerging


Markets

Export Entry Modes


Contractual Entry Mode
Investment Entry Modes
112

Export Entry Modes

Direct Exporting
Export Management Companies (EMC)
Export Trading Companies (ETC)

Indirect Exporting
Control over the plan, Marketing the product line, Quick feed back,
Trademark and patent protection, and earning goodwill.
Knowledge about export shipping and international payments.
Developing Distribution strategy and finding appropriate distributors.
Higher startup costs and risks (travel, communication and
personnel)
113

Contractual Entry Mode


Licensing
Advantages
Quick entry with little capital
Guaranteed periodic royalties
Feed back based product development
Low commitment
Avoiding high transport costs
May be the only way to enter

114

Contractual Entry Mode

Licensing
Disadvantages
Suitable only when licensor posses distinctive
technology and trademark
May be you are preparing a competitor
Absolute size of income is comparatively smaller than
other modes
Cannot change the entry mode

115

Contractual Entry Mode


Franchising
Advantages
Rapid expansion with low capital
Standardized Marketing
Motivated franchisee
Low political risk

Disadvantages
Lack of operational control
Limited profit
Governmental restrictions

116

Contractual Entry Mode


Technology Transfer

117

Business plan
Financial considerations
Company goals
Nature of Technology/service

Contractual Entry Mode

Countertrade
Counter purchase
Buyback
Offset
Clearing
Management Contracts
Contract Manufacturing
Turnkey projects

118

Investment Entry Modes


Marketing Subsidiary
Technology oriented products
Marketing and distribution network
Spin-off sales
After-sales services

Joint Venture
Different ways of joint ownership
Shared capital and risk
Compared to marriages

119

Investment Entry Modes


Foreign Direct Investment
Modes
Greenfield investment
Moderate entry and later expansion, no inherent problems,
choice of location, welcomed by the local governments
But slow entry and slow returns and more risky

Take over of an existing company


Faster start, shorter payback period, new products
But difficult to find, no experience for new products, personnel
issue and bad will

120

Investment Entry Modes


Foreign Direct Investment
Benefits
Local production: savings in transportation, tariffs, labor, raw
material and energy. Uniform quality of supply.
Marketing advantages: easier adaption

Perils

More capital and management resources


More risky

Suggestions
Analyses of political, legal, economic, social, and cultural
environments
Experience through exports
121