International Marketing Exam 3

Strategies to deal with advertising regulations

-Keep track of regulations and pending legislation -Screen the campaign early on -Lobbying activities -Challenge regulations in court -Adapt marketing mix strategy

Approaches to creating advertising copy

-Each country is independent -Export Advertising -Regional Approach

Retailing Differences Across the World

-Industrialized countries tend to have a lower distribution outlet density than the emerging markets. -The advanced facilities available in the developed world allow a much higher square footage of retail space per resident,due to the large size of the retail outlets. -Department stores, In US do not carry fresh produce, In US, Department stores are declining due to off-price retailers, but in central and eastern Europe, & Japan they are very popular, Department Stores are not present in developing countries -Specialty Stores - Gaining market share in Western Europe at the expense of Department Stores, In developing countries, specialty stores are the main retail format, Specialized markets, Off-price retailers are very popular in US, Canada but not in Europe

Barriers to Standardization in Advertising

-Language -Symbols -National Sentiments -Religion -Gesticulation (gestures) -Purchase Motivations -Market Maturity -Culture Specific -Communication Infrastructure -International Agencies may not serve a market -Consumer Literacy Levels -Advertising Regulations -"Not-Invented-Here" (NIH) Syndrome

Challenges to International Logistics

-Problems with rail in RU -Developing countries 1. Containerization 2. Ports 3. Transportation Infrastructure 4. Home Delivery

Proactive Strategies to Combat Gray Markets

-Product/service differentiation and availability -Strategic pricing -Marketing information systems -Long-term image reinforcement -Establish legal precedence -Lobbying

Reactive Strategies to Combat Gray Markets

-Strategic Confrontation -Price cutting -Supply interference -Promotion of gray market product limitations -Collaboration -Acquisitions

Other types of promotions

-Trade shows, direct marketing, event sponsorships

Price Controls

1. Adapt the product line. To reduce exposure to a government-imposed price freeze, companies diversify into product lines that are relatively free of price controls. Of course, before embarking on such a changeover, the firm has to examine the long-term ramifications. Modifying the product line could imply loss of economies of scale, an increase in overheads, and adverse reactions from the company's customer base. 2. Shift target segments or markets. A more drastic move is to shift the firm's target segment. For instance, price controls often apply to consumer food products but not to animal-related products. So, a maker of corn-based consumer products might consider a shift from breakfast cereals to chicken-feed products. Again, such action should be preceded by a thorough analysis of its strategic implications. Alternatively, a firm might consider using its operations in the high-inflation country as an export base for countries that are not subject to price controls. 3. Launch new products or variants of existing products. If price controls are selective, a company can navigate around them by systematically launching new products or modifying existing ones. Faced with price controls in Zimbabwe, bakers added raisins to their dough and called it "raisin bread," thereby, at least momentarily, escaping the price control for bread. Also here, the firm should consider the overall picture by answering questions such as: Will there be a demand for these products? What are the implications in terms of manufacturing economies? Inventory management? How will the trade react? Furthermore, if these products are not yet available elsewhere, this option is merely a long-term solution. 4. Negotiate with the government. In some cases, firms are able to negotiate for permission to adjust their prices. Lobbying can be done individually, but is more likely to be successful on an industry-wide basis. 5. Predict incidence of price controls. Some countries have a history of price freeze programs. Given historical information on the occurrence of price controls and other economic variables, econometric models can be constructed to forecast the likelihood of price controls. Managers can use that information to see whether price adjustments are warranted, given the likelihood of an imminent price freeze. 6. Market exit

Factors that contribute to the increased complexity and cost of global logistics compared to domestic logistics:

1. Distance. The first fundamental difference is distance. Global logistics frequently require the transportation of parts, supplies, and finished goods over much longer distances than is the norm domestically. A longer distance generally suggests higher direct costs of transportation and insurance for damages, deterioration, and pilferage in transit and higher indirect costs of warehousing and inventory. 2. Exchange Rate Fluctuation. The second difference pertains to currency variations in international logistics. The corporation must adjust its planning to incorporate the existence of currencies and changes in exchange rates. For example, in the mid-1990s when the Japanese yen appreciated faster than the U.S. dollar against key European currencies, Honda found it much more economical to ship its Accord models to Europe from its U.S. plant in Marysville, Ohio, rather than from its plants in Japan. 3. Foreign Intermediaries. Additional intermediaries participate in the global logistics process because of the need to negotiate border regulations of countries and deal with local government officials and distributors. Although home country export agents, brokers, and export merchants work as intermediaries providing an exporting service for manufacturing firms, those home-based intermediaries do not necessarily have sufficient knowledge about the foreign countries' market conditions or sufficient connections with local government officials and distributors. In Asian countries such as Japan, South Korea, and China, personal "connections" of who knows whom frequently seem to outweigh the Western economic principle of profit maximization or cost minimization in conducting business.11 Therefore, working with local distributors has proved very important in building initial connections with the local business community as well as local government regulators. 4. Regulation. The bulk of international trade is handled by ocean shipping. Because the United States is the world's largest single trading country in both exports and imports, and most of its trading partners are located across the Pacific and the Atlantic Oceans, U.S. regulations on ocean transport services directly affect foreign exporters to the United States (as well as U.S. importers of foreign goods) in terms of shipping costs and delivery time. In the United States, the Merchant Marine Act of 1920 (also known as the Jones Act) forbids foreign-owned freighters from transporting passengers and merchandise from one domestic port to another by restricting foreign access to the domestic shipping market. The act requires passengers and merchandise being transported by ship within the United States to travel on U.S.-built, U.S.-owned and U.S.-staffed vessels, while allowing unilateral retaliatory action against restrictions imposed by other countries. In March 2003, more than 50 nations, including Australia, Canada, China, the EU, and Japan, filed a joint statement with the World Trade Organization (WTO) calling for the liberalization of international marine transport services during the WTO's new round of multilateral trade negotiations.12 Until resolved by the WTO, the barriers imposed by this act continue to add to the costs of logistics in and around the United States. 5. Security. Security was not an acutely serious concern until September 11, 2001, when the blatant terrorist attacks in the United States awakened the world to the importance of domestic and international security measures. Transportation costs for exporters have increased because of the extra security measures that shipping lines and terminal operators face. However, if the government-imposed user fees or carrier surcharges are too high or come without sufficient advance notice, some exporters could even lose their overseas markets due to increased shipping costs and insurance premiums.

Minimizing Risk of Tax Audits: 5 Questions to Ask

1. Do comparable/uncontrollable transactions exist? 2. Where is the most value added? Parent? Subsidiary? 3. Are combined profits of parent and subsidiary shared in proportion to contributions? 4. Does the transfer price meet the benchmark set by tax authorities? 5. Does the MNC have the information to justify the transfer prices used?

Pricing in Inflationary Environments

1. Modify components, ingredients, parts, and/or packaging materials. Some ingredients are subject to lower inflation rates than others. This might justify a change in the ingredient mix. Of course, before implementing such a move, the firm should consider all its consequences (e.g., consumer response and impact on shelf life of the product). 2. Source materials from low-cost suppliers. Supply management plays a central role in high-inflation environments. A first step is to screen suppliers and determine which ones would be most cost efficient without cutting corners. If feasible, materials could be imported from low-inflation countries. Note, however, that high-inflation rates are coupled with a weakening currency. This will push up the price of imports. 3. Shorten credit terms. In some cases, profits can be realized by juggling the terms of payment. For instance, a firm that is able to collect cash from its customers within 15 days, but has 1 month to pay its suppliers, can invest its money during the 15-day grace period. Thus, firms strive to push up the lead time in paying their suppliers. At the same time, they also try to shorten the time to collect from their clients. 4. Include escalator clauses in long-term contracts. Many business-to-business marketing situations involve long-term contracts (e.g., leasing arrangements). To hedge their position against inflation, the parties will include escalator clauses that will provide the necessary protection. 5. Quote prices in a stable currency. To handle high inflation, companies often quote prices in a stable currency such as the U.S. dollar or the euro. 6. Draw lessons from other countries. Operations in countries with a long history of inflation offer valuable lessons for ventures in other high-inflation countries. Cross-fertilization by drawing from experience in other high-inflation markets often helps. Some companies—McDonald's34 and Otis Elevator International,35 for example—relied on expatriate managers from Latin America to cope with inflation in the former Soviet Union. Inspired by experience in Brazil, McDonald's decided to negotiate separate inflation rates with each supplier. These rates were then used for monthly realignments, instead of the government's published inflation figures.

Price Coordination: Considerations

1. Nature of customers. When information on prices travels fast across borders, it is fairly hard to sustain wide price gaps. Under such conditions, firms will need to make a convincing case to their customers to justify price disparities. With global customers (e.g., multinational clients in business-to-business transactions), price coordination definitely becomes a must. General Motors applies "global enterprise pricing" for many of the components it purchases. Under this system, suppliers are asked to charge the same universal price worldwide. In Europe, Microsoft sets prices that differ by not more than 5 percent between countries due to pressure from bargain-hunting multinational customers. However, pharmaceutical firms often adopt tiered or differential pricing in developing countries. To make drugs or vaccines affordable in these countries, companies such as GlaxoSmithKline or Gilead sell their products far below the prices they charge in more developed markets (see also Global Perspective 12-2). 2. Amount of product differentiation. The amount of coordination also depends on how well differentiated the product is across borders. Obviously, the less (cross-border) product differentiation, the larger the need for some level of price coordination and vice versa. . Stains in Southern Europe differ from stains in Scandinavia because of different food habits. In addition, the spin speed of washing machines varies across Europe. In cold, wet countries (e.g., Great Britain), the average spin speed is 1200 rpm—twice as fast as the 600-rpm speed of washers in Spain. Henkel, the German conglomerate, adjusts the formula for its Persil laundry detergent brand to suit local market conditions. As a result, a detergent sold in one European country may not be suitable for washers elsewhere in Europe. Thus, product differentiation can pose a barrier for cross-border price comparison shopping. 3. Nature of channels. In a sense, distribution channels can be viewed as intermediate customers. So, the same logic as for end consumers applies here: price coordination becomes critical when price information is transparent and/or the firm deals with cross-border distribution channels. Pricing discipline becomes mandatory when manufacturers have little control over their distributors. 4. Nature of competition. In many industries, firms compete with the same rivals in a given region, if not worldwide. Global competition demands a cohesive strategic approach for the entire marketing mix strategy, including pricing. From that angle, competition pushes companies toward centralized pricing policies. On the other hand, price changes made by competitors in the local market often require a rapid response. Should the subsidiary match a given price cut? If so, to what extent? Local subsidiaries often have much better information about the local market conditions to answer such questions than corporate or regional headquarters. Thus, the need for alertness and speedy response to competitive pricing moves encourages a decentralized approach toward pricing decisions. 5. Market integration. When markets integrate, barriers to cross-border movement of goods come down. Given the freedom to move goods from one member state to another, the pan-European market offers little latitude for perfect price discrimination. Many of the transaction costs plaguing parallel imports that once existed have now disappeared. In fact, the European Commission imposes heavy penalties against companies that try to limit gray market transactions. The Commission fined Volkswagen (VW) almost $110 million when it accused VW of competition abuses. VW had ordered its Italian dealers not to sell cars to citizens from outside Italy. Austrian and German shoppers tried to buy VW cars in Italy where they were 30 percent cheaper. Several multinationals doing business in the EU harmonize their prices to narrow down price gaps between different member states. Mars and Levi Strauss reduced their pan-European price gaps to no more than 10 percent.68 6. Internal organization. The organization setup is another important influence. Highly decentralized companies pose a hurdle to price coordination efforts. In many companies, the pricing decision is left to the local subsidiaries. Moves to take away some of the pricing authority from country affiliates will undoubtedly spark opposition and lead to bruised egos. Just as with other centralization decisions, it is important to fine-tune performance evaluation systems, as necessary. 7. Government regulation. Government regulation of prices puts pressure on firms to harmonize their prices. A good example is the pharmaceutical industry. In many countries, multinationals need to negotiate the price for new drugs with the local authorities. Governments in the EU increasingly use prices set in other EU member states as a cue for their negotiating position. This trend has prompted several pharmaceutical companies, such as GlaxoSmithKline (GSK), to negotiate a common EU-price for new drugs.

Lowering Export Price

1. Rearrange the distribution channel 2. Assemble or manufacture product in foreign markets 3. Adapt the product to escape tariffs or tax levies 4. Sell older versions of the product 5. Lower the quality 6. Eliminate costly features (or make them optional) 7. Downsize the product 8. Pre-owned products

Transfer Pricing Considerations

1. Tax regimes. Ideally, firms would like to boost their profits in low-tax countries and dampen them in high-tax countries. To shift profits from high-tax to low-tax markets, companies would set transfer prices as high as possible for goods entering high-tax countries and vice versa for low-tax countries. However, manipulating transfer prices to exploit corporate tax rate differentials will undoubtedly alert the tax authorities in the high-tax rate country and, in the worst case, lead to a tax audit. Most governments impose rules on transfer pricing to ensure a fair division of profits between businesses under common control. 2. Local market conditions. Examples of market-related factors include the market share of the affiliate, the growth rate of the market, and the nature of local competition (e.g., nonprice- versus price-based). To expand market share in a new market, multinationals may initially underprice intracompany shipments to a start-up subsidiary. 3. Market imperfections. Market imperfections in the host country, such as price freezes and profit repatriation restrictions, hinder the multinational's ability to move earnings out of the country. Under such circumstances, transfer prices can be used as a mechanism to get around these obstacles. In addition, high import duties might prompt a firm to lower transfer prices charged to subsidiaries located in that particular country. 4. Joint venture partner. When the entity concerned is part of a joint venture, parent companies should also factor in the interests of the local joint venture partner. Numerous joint venture partnerships have hit the rocks partly because of disputes over transfer pricing decisions. 5. Morale of local country managers. Finally, firms should also be concerned about the morale of their local country managers. Especially when performance evaluation is primarily based on local profits, transfer price manipulations might distress country managers whose subsidiaries' profits are artificially deflated.

Pricing Policies & the Euro

As of January 1, 2002 the euro is the common currency within the 12 EU member states. Companies operating in the euro-zone will need to make strategic decisions in two areas: -Harmonization of prices - the biggest impact is likely to be price harmonization -Transfer pricing - prices within EU will become more transparent

Global Retailing: Push vs. Pull

At the heart of this retailing revolution is the fundamental change in the way goods and services reach the consumer. Previously, the manufacturer or the wholesaler controlled the distribution chain across the world. The retailer's main competitive advantage lay in the merchandising skills of choosing the assortment of goods to sell in the store. The retailer's second advantage—closeness to the customer—was used to beat the rival retailer across the street. The manufacturer decided what goods were available and, in most countries, at what price they could be sold to the public. That distribution system of earlier times has been turned upside down. The traditional supply chain powered by the manufacturing push is becoming a demand chain driven by consumer pull—especially in the developed countries where the supply and variety of goods is far above base-level requirements of goods and services. In most industrialized countries, resale price maintenance—which allows the supplier to fix the price at which goods can be sold to the final customer—has either been abolished or bypassed. The shift in power in the distribution channel is fundamentally a product of the application of information technology to store management. Many multinational companies from industrialized countries are now entering markets and developing their distribution channels in developing countries. One study showed that companies from Western countries seem to have difficulty competing with Japanese companies in fast-growing Southeast Asian markets and attributed this to different styles in managing distribution channels.89 In just three decades, for example, the consumer electronics distribution systems in Malaysia and Thailand have come to be characterized by a striking presence of exclusive dealerships with Japanese multinational manufacturers such as Panasonic and Hitachi. For example, Panasonic practices a push strategy with 220 exclusive dealerships in Malaysia and 120 in Thailand. In Malaysia, these exclusive dealerships represent 65 percent of total Panasonic sales, although these numbers represent only 30 percent of the retailers selling Panasonic products. On the other hand, General Electric and Philips use a pull strategy, relying on the multivendor distribution system without firm control of the distribution channel as practiced in Western countries. Competitors from the United States and Europe are feeling locked out of Japanese companies' tightly controlled distribution channels in Southeast Asia. This information suggests that a push strategy is more effective than a pull strategy in emerging markets.

Global Retailing: On-Time Retail Information Management

Cutting down on stocks in inventory is a tempting thing to do to achieve cost savings. The chief reason for holding stocks is to smooth out bumps in the supply chain. However, one of the biggest sources of inefficiency in logistics occurs exactly because distribution channel members just do so independently of each other. It is known as the "bullwhip effect"—after the way the amplitude of a whiplash increases down the length of the whip when it is cracked. Procter & Gamble discovered this effect more than a decade ago. The company noticed an odd thing about the shipment of Pampers, its well-known brand of disposable diapers. Although the number of babies and the demand for diapers remained relatively stable, orders for Pampers fluctuated dramatically. This was because information about consumer demand can become increasingly distorted as it moves along the supply chain. For instance, when a retailer sees a slight increase in demand for diapers, it orders more from a wholesaler. The wholesaler then boosts its own sales forecast, causing the manufacturer to scale up production. But when the increase in demand turns out to be short-lived, the distribution channel is left with too much stock and orders are cut back.90 Computer systems can now tell a retailer instantly what it is selling in hundreds of stores across the world, how much money it is making on each sale, and, increasingly, who its customers are. This information technology has had two consequences. Reduced Inventory. First, a well-managed retailer no longer has to keep large amounts of inventory—the stock burden has been passed upstream to the manufacturer. In addition, the retailer has a lower chance of running out of items. For a company such as Wal-Mart, with more than 60,000 suppliers in the United States alone, keeping everyone informed is critical. The company does this through its Retail Link system, which suppliers can tap into over a secure internet connection. They can check stock levels and sales down to the level of individual stores. Wal-Mart may have a brutal reputation for driving down costs, but its investment in information systems has played a large part in building one of the world's most efficient supply chains, capable of handling more than $300 billion of annual sales.91 Another good example involves 7-Eleven stores in Japan. The moment a 7-Eleven store customer in Japan buys a soft drink or a can of beer, the information goes directly to the bottler or the brewery and immediately goes into the production schedule and the delivery schedule, actually specifying the hour at which the new supply must be delivered and to which of the 4,300 stores. In effect, therefore, 7-Eleven controls the product mix, the manufacturing schedule, and the delivery schedule of major suppliers such as Coca-Cola or Kirin Breweries. The British retailer Sainsbury's supply chain is geared to provide inputs on demand from the stores with a scheduled truck service to its 350 stores. The stores' ordering cycle is also set to match the loading and arrival of the trucks, which run almost according to a bus schedule. Further attempts to reduce inventory can also be made jointly by retail chains for their mutual benefit. For example, in February 2000, Sears and Carrefour, joining the rush to the business-to-business electronic-commerce arena, announced a joint venture to form an online purchasing site where the retailers buy about $80 billion in combined purchases. The venture, called GlobalNetXchange (GNX), creates the industry's largest supply exchange on the internet. GNX is an e-business solution and service provider for the global retail industry. Now suppliers can monitor retailers' sales, reduce inventory levels to a minimum, and better plan manufacturing of products on a hosted platform. It makes money by charging fees to suppliers or retailers using the exchange and is set up as a separate entity with its own management, employees, and financing.92 Market Information at the Retail Level. Second, the retailer is the one that has real-time knowledge of what items are selling and how fast. This knowledge is used to extract better terms from the manufacturers. This trend in the transfer of power to the retailer in the developed countries has coincided with the lowering of trade barriers around the world and the spread of free-market economies in Asia and Latin America. As a result, retailers such as the U.S.'s Toys "R" Us, L.L. Bean, and Wal-Mart; Britain's Mark & Spencer and J. Sainsbury; Holland's Mark; Sweden's IKEA; France's Carrefour; and Japan's 7-Eleven stores, Uniqlo, and Muji are being transformed into global businesses. A firm can use strong logistics capabilities as an offensive weapon to help gain competitive advantage in the marketplace by improving customer service and consumer choice and by lowering the cost of global sourcing and finished goods distribution. These capabilities become increasingly important as the level of global integration increases and as competitors move to supplement low-cost manufacturing strategies in distant markets with effective logistic management strategies. This point is well illustrated by Ito-Yokado's takeover in 1991 of the Southland Corporation, which had introduced 7-Eleven's convenience store concept in the United States and subsequently around the world. Seven & I (formerly, Ito-Yokado) of Japan licensed the 7-Eleven store concept from Southland in the 1970s and invented just-in-time inventory management and revolutionized its physical distribution system in Japan. The key to Ito-Yokado's success with 7-Eleven Japan has been the use of its inventory and physical distribution management systems to accomplish lower on-hand inventory, faster inventory turnover, and most importantly, accurate information on customer buying habits. Seven-Eleven Japan93 now implements its just-in-time physical distribution system in 7-Eleven stores in the United States.94 Thus, distribution is increasingly becoming concentrated; manufacturing, by contrast, is splintering. Forty years ago, the Big Three automakers shared the U.S. auto market. Today, the market is split among 10—Detroit's Big 3, 5 Japanese carmakers, and 5 German car makers. Forty years ago, 85 percent of all retail car sales occurred in single-site dealerships; even three dealership chains were uncommon. Today, a fairly small number of large-chain dealers account for 40 percent of the retail sales of cars. Given the increased bargaining power of distributors, monitoring their performance has become an important management issue for many multinational companies. Although information technology has improved immensely, monitoring channel members' performance still remains humanistic. In general, if companies are less experienced in international operations, they tend to invest more resources in monitoring their channel members' activities. As they gain in experience, they may increasingly build trust relationships with their channel members and depend more on formal performance-based control.

Global logistics

Defined as the design and management of a system that directs and controls the flows of materials into, through and out of the firm across national boundaries to achieve its corporate objectives at a minimum total cost

Antidumping

Dumping occurs when imports are being sold at an unfair price. An unfair price refers to a price lower than the one a company normally charges in its home market (adjusted for shipping and handling costs).59 To protect local producers against dumping, governments could levy countervailing duties or fines. Clearly, it is important for exporters to recognize that pricing policies, such as penetration pricing, may trigger antidumping actions. Antidumping actions will persist in the future, especially during tough economic times. Multinationals need to take antidumping laws into account when determining their global pricing policy. Aggressive pricing may trigger antidumping measures and, thus, jeopardize the company's competitive position. Global companies should also monitor changes in antidumping legislation and closely track antidumping cases in their particular industry. To minimize risk exposure to antidumping actions, exporters might pursue any of the following marketing strategies: 1. Trading up. Move away from low-value to high-value products via product differentiation. Most Japanese carmakers have stretched their product line upward to tap into the upper-tier segments of their export markets. 2. Service enhancement. Exporters can also differentiate their product by adding support services to the core product. Both moves—trading up and service enhancement—are basically attempts to move away from price competition, thereby making the exporter less vulnerable to dumping accusations. 3. Distribution and communication. Other initiatives on the distribution and communication front of the marketing mix include (1) the establishment of communication channels with local competitors, (2) entering into cooperative agreements with them (e.g., strategic alliances), or (3) reallocation of the firm's marketing efforts from vulnerable products (that is, those most likely to be subjected to dumping scrutiny) to less sensitive products. 4. Reconfigure the export product 5. Produce in the export country

Price Escalation

Exporting involves more steps and substantially higher risks than simply selling goods in the home market. To cover the incremental costs (e.g., shipping, insurance, tariffs, and margins of various intermediaries), the final foreign retail price will often be much higher than the domestic retail price. This phenomenon is known as price escalation. Exhibit 12-5 provides an example of price escalation for one of Harley-Davidson's popular motorcycle models. Note that the huge price tag for Harleys sold in China is mainly due to the hefty 50 percent import duty. As a result, Harleys can be much more expensive than German luxury sedans manufactured in China. Price escalation raises two questions that management needs to confront: (1) will our foreign customers be willing to pay the inflated price for our product (sticker shock)? and (2) will this price make our product less competitive? If the answer is negative, the exporter needs to decide how to cope with price escalation.

Aligning Pan-Regional Prices: Pricing Corridors

Find middle ground by upping prices in low-price countries and cutting them in high-price countries. The procedure works as follows: Step 1: Determine optimal price for each country. Find out what price schedules will maximize overall profits. Given information on the demand schedule and the costs incurred in each market, managers are able to figure out the desirable prices in the respective markets. Step 2: Find out whether parallel imports ("gray markets") are likely to occur at these prices. Parallel imports arise when unauthorized distributors purchase the product (sometimes repackaged) in the low-price market and then ship it to high-price markets. The goal of step 2 is not to pre-empt parallel imports altogether but to boost profits to the best possible degree. Given the "optimal" prices derived in the first step, the manager needs to determine to what extent the proposed price schedule will foster parallel imports. Parallel imports become harmful insofar as they inflict damage on authorized distributors. They could also hurt the morale of the local sales force or country managers. Information is needed on the arbitrage costs of parallel importers. For instance, in the European drug industry, parallel importers target drugs with more than 20 percent price differentials. Conceivably, firms might decide to abandon (or not enter) small, low-price markets thereby avoiding pricing pressure on high-price markets. MNCs should also consider the pros and cons of nonpricing solutions to cope with parallel imports. Possible strategies include product differentiation, intelligence systems to measure exposure to gray markets, creating negative perceptions in the mind of the end-user about parallel imports.71 In 1996, P&G changed the name in Northern Europe for one of its cleaner products from Viakal to Antikal to fight parallel imports sourced from Italy where the product was 30 percent cheaper. Step 3: Set a pricing corridor. If the "optimal" prices that were derived in Step 1 are not sustainable, firms need to narrow the gap between prices for high-price and low-price markets. Charging the same price across the board is not desirable. Such a solution would sacrifice company profits. Instead, the firm should set a pricing corridor. The corridor is formed by systematically exploring the profit impact from lowering prices in high-price countries and upping prices in low-price countries, as shown in panel (B) of Exhibit 12-9. The narrower the price gap, the more profits the firm has to sacrifice. At some point, there will be a desirable trade-off between the size of the gray market and the amount of profits sacrificed.

Currency Movements

Fluctuating Exchange Rates -Currency Gain/Loss Passthrough and Currency Quotation: Two major managerial pricing issues result from currency movements: (1) How much of an exchange rate gain (loss) should be passed through to our customers? (2) In what currency should we quote our prices? Let us first address the pass-through issue. Consider the predicament of American companies exporting to Japan. In principle, a weakening of the U.S. dollar versus the Japanese yen will strengthen the competitive position of U.S.-based exporters in Japan. A weak dollar allows U.S.-based firms to lower the yen-price of American goods exported to Japan. This enables American exporters to steal market share away from the local Japanese competitors without sacrificing profits. By the same token, a stronger U.S. dollar will undermine the competitive position of American exporters. When the dollar appreciates versus the yen, we have the mirror picture of the previous situation: the retail price in yen of American exports goes up. As a result, American exporters might lose market share if they leave their ex-factory prices unchanged. To maintain their competitive edge, they may be forced to lower their ex-factory dollar prices. Of course, the ultimate impact on the exporter's competitive position will also depend on the impact of currency movements on the exporter's costs and the nature of the competition in the Japanese market. The benefits of a weaker dollar could be washed out when many parts are imported from Japan, since the weaker dollar will make these parts more expensive. When most of the competitors are U.S.-based manufacturers, changes in the dollar's exchange rate might not matter.

Countertrade: Forms, Motives, Shortcomings

Forms: 1. Simple barter 2. Clearing agreement 3. Switch trading 4. Buyback (compensation) 5. Offset Motives: 1. Gain access to new or difficult markets 2. Overcome exchange rate controls or lack of hard currency 3. Overcome low country credit worthiness 4. Increase sales volume 5. Generate long-term goodwill Shortcomings: 1. No "in-house" use for goods offered by customers 2. Uncertainty and lack of information on future prices 3. Timely and costly negotiations 4. Transaction costs

Implementing Price Coordination

Global marketers can choose form four alternatives to promote price coordination within their organizations: 1. Economic measures. Corporate headquarters are able to influence pricing decisions at the local level via the transfer prices that are set for the goods that are sold to or purchased from the local affiliates. Another option is rationing, that is, headquarters sets upper limits on the number of units that can be shipped to each country. To sustain price differences, luxury marketers like Louis Vuitton set purchase limits for customers shopping at their European boutiques. Louis Vuitton products bought in Europe or Hawaii are often resold in Japan by discount stores as "loss leaders." 2. Centralization. In the extreme case, pricing decisions are made at corporate or regional headquarters level. Centralized price decision-making is fairly uncommon, given its numerous shortcomings. It sacrifices the flexibility that firms often need to respond rapidly to local competitive conditions. 3. Formalization. Far more common than the previous approach is formalization where headquarters spells out a set of pricing rules that the country managers should comply with (e.g., price at par with the price of the leading brand). Within these norms, country managers have a certain level of flexibility in determining their ultimate prices. One possibility is to set prices within specified boundaries; prices outside these bounds would need the approval from the global or regional headquarters. 4. Informal Coordination. Finally, firms can use various forms of informal price coordination. The emphasis here is on informing and persuasion rather than prescription and dictates. Examples of informal price coordination tactics include discussion groups, "best-practice" gatherings.

Gray Markets

Gray market channel refers to the legal export/import transaction involving genuine products into a country by intermediaries other than the authorized distributors. From the importer side, it is also known as "parallel imports." Three conditions are necessary for gray markets to develop: 1. Products must be available in other markets. 2. Trade barriers must be low enough for parallel importers. 3. Price differentials among various markets must be great enough to provide the basic motivation for gray marketers. Such price differences arise for various reasons: -Currency fluctuations -Differences in market demand -Segmentation strategy -Competitive Pressure -Legal differences

Export Mechanism

Home-Country Middleman -Trading Companies -Brokers and Agents -Cooperative Export Arrangements Foreign-Country Middleman -Merchant -Agents and Brokers Network Marketing Use Established Channels Build Own Channels

Global Retailing: Legislation and Regulation

Large-Scale Retail Store Law (LSRSL) in Japan - This law helped to protect the small retail stores China's Ban on Direct Retailing Restrictions on Expansion of hypermarkets Hours of Operation

Intermodal

More than one mode of transportation is usually employed. Naturally, when shipments travel across the ocean, surface, or air, shipping is the initial transportation mode crossing national borders. Once on land, they can be further shipped by truck, barge, railroad, or air. Even if countries are contiguous, such as Canada, the United States, and Mexico, for example, various domestic regulations prohibit the unrestricted use of the same trucks between and across the national boundaries. When different modes of transportation are involved, or even when shipments are transferred from one truck to another at the national border, it is important to make sure that cargo space is utilized at full load so that the per-unit transportation cost is minimized. Trade barriers, customs problems, and paperwork slow cycle times in logistics across national boundaries. Although this is true, the recent formation of regional trading blocs, such as the EU, the North American Free Trade Agreement, and the MERCOSUR (The Southern Cone Free Trade Area), is also encouraging the integration and consolidation of logistics in various regions for improved economic efficiency and competition. Managing shipments so that they arrive in time at the desired destination is critical in modern-day logistics management. Due to low transit times, greater ease of unloading and distribution, and higher predictability, many firms use airfreight, either on a regular basis or as a backup to fill in when the regular shipment by an ocean vessel is delayed. For footwear firms Reebok and Nike and fashion firms such as Pierre Cardin, the use of airfreight is becoming almost a required way of doing business, as firms jostle to get their products first into the U.S. market from their production centers in Asia and Europe. The customer in a retail store often buys a product that may have been airfreighted in from the opposite end of the world the previous day or even the same day. Thus, the face of retailing is also changing as a result of advances in global logistics. Distance between the transacting parties increases transportation costs and requires longer term commitment to forecasts and longer lead times. Differing legal and traffic environments, liability regimes, and pricing regulations affect transportation costs and distribution costs in a way not seen in the domestic market.

Ocean Shipping

Ocean shipping offers three options. Liner service offers regularly scheduled passage on established routes; bulk shipping normally provides contractual service for prespecified periods of time; and the third category is for irregular runs. Container ships carry standardized containers that greatly facilitate the loading and unloading of cargo and intermodal transfer of cargo. Ocean shipping is used extensively for the transport of heavy, bulky, or nonperishable products, including crude oil, steel, and automobiles. Over the years, shipping rates have been falling as a result of a price war among shipping lines. Although most manufacturers rely on existing international ocean carriers, some large exporting companies, such as Honda and Hyundai, have their own fleets of cargo ships. For example, Honda, a Japanese automobile manufacturer, owns its own fleet of cargo ships not only to export its Japan-made cars to North America on its eastbound journey but also to ship U.S.-grown soybeans back to Japan on its westbound journey. This strategy is designed to increase the vessels' capacity utilization.

Sales Promotions

Refers to a collection of short-term incentive tools that lead to quicker and/or larger sales of a particular product by consumers or the trade. Promotions tend to be local: -Economic development -Market maturity -Cultural perceptions -Trade structure (pull vs. push promotions) -Government regulations

Physical distribution

Refers to the movement of the firm's finished products to its customers, consisting of transportation, warehousing, inventory, customer service/order entry, and administration

Materials Management

Refers to to the inflow of raw material, parts, and supplies through the firm

Air Freight

Shipping goods by air have rapidly grown over the last 30 years. Although the total volume of international trade using air shipping remains quite small—it still constitutes less than 2 percent of international trade in goods—it represents more than 20 percent of the value of goods shipped in international commerce. High-value goods are more likely to be shipped by air, especially if they have a high value-to-volume ratio. Typical examples are semiconductor chips, LCD screens, and diamonds. Perishable products such as produce and flowers also tend to be airfreighted. Changes in aircraft design have now enabled air transshipment of relatively bulky products. Three decades ago, a large propeller aircraft could hold only 10 tons of cargo. Today's jumbo cargo jets carry more than 30 tons, and medium- to long-haul transport planes (e.g., the C-130 and the AN-32) can carry more than 80 tons of cargo. These super-size transport planes have facilitated the growth of global courier services, such as FedEx, UPS, and DHL. Of all world regions, the entire Asia-Pacific is the most popular airfreight market today, with double-digit, year-on-year growth. Asia has become the world's factory floor to outsource the manufacture of goods and services. The top five commodities moving from the Asia-Pacific area to the United States include office machines and computers, apparel, telecom equipment, electrical machinery, and miscellaneous manufactured products. The westbound (from the United States to Asia/Pacific) commodities mainly include documents and small packages, electrical machinery, and fruits and vegetables.

Tata Nano

The Tata Nano is a city car manufactured by Tata Motors made and sold primarily in India. The Nano was initially launched with a price of one lakh rupees or ₹100,000 (US$1,500), which has increased with time. Designed to lure India's burgeoning middle classes away from motorcycles, it received much publicity, but the sales expectations were not met. Multiple issues like factory relocation from Singur, instances of Nano catching fire, and the perception of Nano being unsafe and lacking quality due to cost cutting led to the decline of sales volume. As compared to Tata Motor's aspiration of 250000 unit sales annually at the time of launch, sales in FY 2016-17 was 7591 units only. The car is a loss making product for Tata Motors as disclosed by former Tata Sons chairman Cyrus Mistry and confirmed by current Tata Motors management.Tata Motors has confirmed that despite no demand the production of the car will continue for some more time due to the emotional connect of the product with the Tata Group.

Adaptation/Polycentric Pricing

The second pricing policy can be termed adaptation/polycentric. This policy permits subsidiary or affiliate managers to establish whatever price they feel is most desirable in their circumstances. Under such an approach, there is no control or fixed requirement that prices be coordinated from one country to the next. The only constraint on this approach is in setting transfer prices within the corporate system. Such an approach is sensitive to local conditions, but it does present problems of product arbitrage opportunities in cases where disparities in local market prices exceed the transportation and duty cost separating markets. When such a condition exists, there is an opportunity for the enterprising business manager to take advantage of these price disparities by buying in the lower-price market and selling in the more expensive market. There is also the problem that under such a policy, valuable knowledge and experience within the corporate system concerning effective pricing strategies is not applied to each local pricing problem. The strategies are not applied because the local managers are free to price in the way they feel is most desirable, and they may not be fully informed about company experience when they make their decision.

Setting Transfer Prices

There are two broad transfer pricing strategies: market-based transfer pricing and nonmarket-based pricing. The first perspective uses the market mechanism as a cue for setting transfer prices. Such prices are usually referred to as arm's length prices. Basically, the company charges the price that any buyer outside the MNC would pay, as if the transaction had occurred between two unrelated companies (at "arm's length"). Tax authorities typically prefer this method to other transfer pricing approaches. Since an objective yardstick is used—the market price—transfer prices based on this approach are easy to justify to third parties (e.g., tax authorities). The major problem with arm's length transfer pricing is that an appropriate benchmark is often lacking, due to the absence of competition. This is especially the case for intangible services. Many services are only available within the multinational. A high-stakes dispute between the U.S. Internal Revenue Service (IRS) and GlaxoSmithKline PLC, the British pharmaceuticals company, vividly illustrates the issue of valuing intangibles. According to the IRS, Glaxo's U.S. subsidiary overpaid its European parent for the royalties associated with scores of drugs, including its blockbuster Zantac drug. Glaxo allegedly had overvalued the drugs' R&D costs in Britain and undervalued the value of marketing activities in the United States, thereby artificially cutting the U.S. subsidiary's profits and tax liabilities. Glaxo vehemently denied this charge. As you can see, the case centered on the issue of where value is created and where credit is due—on the marketing or on the R&D front? Nonmarket-based pricing covers various policies that deviate from market-based pricing, the most prominent ones being: cost-based pricing and negotiated pricing. Cost-based pricing simply adds a markup to the cost of the goods. Issues here revolve around getting a consensus on a "fair" profit split and allocation of corporate overhead. Further, tax authorities often do not accept cost-based pricing procedures. Another form of nonmarket-based pricing is negotiated transfer prices. Here conflicts between country affiliates are resolved through negotiation of transfer prices. This process may lead to better cooperation among corporate divisions. One study showed that compliance with financial reporting norms, fiscal and custom rules, and antidumping regulations prompt companies to use market-based transfer pricing. Government-imposed market constraints (e.g., import restrictions, price controls, and exchange controls) favor nonmarket-based transfer pricing methods. To the question, which procedure works best, the answer is pretty murky: there is no "universally optimal" system. In fact, most firms use a mixture of market-based and nonmarket pricing procedures.

Transfer Pricing Definition

Transactions between related entities of the same companies are called transfer prices

Geocentric Pricing

Using this approach, a company neither fixes a single price worldwide nor remains aloof from subsidiary pricing decisions, but instead strikes an intermediate position. A company pursuing this approach works on the assumption that there are unique local market factors that should be recognized in arriving at a pricing decision. These factors include local costs, income levels, competition, and the local marketing strategy. Local costs plus a return on invested capital and personnel fix the price floor for the long term. However, for the short term, a company might decide to pursue a market penetration objective and price at less than the cost-plus return figure using export sourcing to establish a market. Another short-term objective might be to estimate the size of a market at a price that would be profitable given local sourcing and a certain scale of output. Instead of building facilities, the target market might first be supplied from existing higher-cost external supply sources. If the market accepts the price and product, the company can then build a local manufacturing facility to further develop the identified market opportunity in a profitable way. If the market opportunity does not materialize, the company can experiment with the product at other prices because it is not committed by existing local manufacturing facilities to a fixed sales volume.

Extension/Ethnocentric Pricing

Where a company has standard prices for its products across all locations and geographies irrespective of any other factors. In such a case, shipping, taxes and other expenses are covered in the standard price. It covers virtually all costs associated with production that may arise. It is also called ethnocentric pricing. Advantages: •Extreme simplicity because no market or competitive conditions need to be taken into consideration •Additional expenses like shipping, packaging, taxes, etc. are covered, no matter where the location is •Consumers are familiar with the product and its price wherever they buy it Disadvantages: •This pricing policy does not respond to the market and competitive conditions of different markets •There is a possibility of incurring more cost than the price of the product in remote locations •The products priced under this policy are not eligible for sales and discounts •Not being able to be sold in clearance sales at lower prices may lead to the products stocks not being cleared at all