MKTG 4633
Penetration Pricing Charging a low price in order to penetrate market quickly Appropriate to saturate market prior to imitation by competitors
When Sony was developing the Walkman in 1979, initial plans called for a retail price of ¥50,000 ($249) to achieve breakeven. However, it was felt that a price of ¥35,000 ($170) was necessary to attract the all-important youth market segment. After the engineering team conceded that they could trim costs to achieve breakeven volume at a price of ¥40,000, Chairman Akio Morita pushed them further and insisted on a retail price of ¥33,000 ($165) to commemorate Sony's 33rd anniversary. At that price, even if the initial production run of 60,000 units sold out, the company would lose $35 per unit. The marketing department was convinced the product would fail: Who would want a tape recorder that couldn't record? Even Yasuo Kuroki, the project manager, hedged his bets: He ordered enough parts for 60,000 units but had only 30,000 actually produced. Although sales were slow immediately following the Walkman's launch in July 1979, they exploded in late summer.
Flexible cost-plus pricing ensures that prices are
competitive in the contest of the particular market environment
3 Bargaining Power of Buyers
iTunes passed Wal-Mart to become the #1 music retailer in 2008. Until then Wal-Mart was the largest. Wal-Mart has forced many artists to create versions of offensive lyrics.
Pricing of goods, services, and intangible property bought and sold by operating units or divisions of a company doing business with an affiliate in another jurisdiction Intra-corporate exchanges Cost-based transfer pricing Market-based transfer pricing Negotiated transfer pricing
A market-based transfer price is derived from the price required to be competitive in the global marketplace. In other words, it represents an approximation of an arm's-length transaction. Cost-based transfer pricing uses an internal cost as the starting point in determining price. Cost-based transfer pricing can take the same forms as the cost-based pricing methods discussed earlier in the chapter. The way costs are defined may have an impact on tariffs and duties of sales to affiliates and subsidiaries by global companies. A third alternative is to allow the organization's affiliates to determine negotiated transfer prices among themselves. This method may be employed when market prices are subject to frequent changes.
In any industry, competition works to drive down the rate of return on invested capital toward the rate that would be earned in the economist's "perfectly competitive" industry. Rates of return that are greater than this so-called competitive rate will stimulate an inflow of capital either from new entrants or from existing competitors making additional investment. Rates of return below this competitive rate will result in withdrawal from the industry and a decline in the levels of activity and competition.
According to Michael E. Porter of Harvard University, a leading theorist of competitive strategy, there are five forces influencing competition in an industry: the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, and the competitive rivalry among current members of the industry.
Understanding the term organization is key Umbrella corporations/holding companies have one or more 'core' advertising agencies Each 'organization' has units specializing in direct marketing, marketing services, public relations, or research Individual agencies are considered brands Full service brands create advertising, and provide services such as market research, media buying, and direct marketing
Advertising is a fast-paced business, and the ad agency world is fluid and dynamic. New agencies are formed, existing agencies are dismantled, and cross-border investment, spinoffs, joint ventures, and mergers and acquisitions are a fact of life. There is also a great deal of mobility in the industry as executives and top talent move from one agency to another.
Creating Competitive Advantage via Strategic Intent Building layers of advantage Searching for loose bricks Changing the rules of engagement Collaborating
An alternative framework for understanding competitive advantage focuses on competitiveness as a function of the pace at which a company implants new advantages deep within its organization. This framework identifies strategic intent, growing out of ambition and obsession with winning, as the means for achieving competitive advantage. This approach is founded on the principles of W.E. Deming, who stressed that a company must commit itself to continuing improvement in order to be a winner in a competitive struggle.
Defined as a persistent upward change in price levels
Can be caused by an increase in the money supply Can be caused by currency devaluation
Cost Leadership Based on a firm's position as the industry's low-cost producer Must construct the most efficient facilities Must obtain the largest market share so that its per unit cost is the lowest in the industry Only works if barriers exist that prevent competitors from achieving the same low costs
Cost leadership advantage can be the basis for offering lower prices (and more value) to customers in the late, more-competitive stages of the product life cycle. In Japan, companies in a range of industries—35mm cameras, consumer electronics and entertainment equipment, motorcycles, and automobiles—have achieved cost leadership on a worldwide basis. Cost leadership, however, is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. In an era of increasing technological improvements in manufacturing, manufacturers constantly leapfrog over one another in pursuit of lower costs. Cost leadership advantage can be the basis for offering lower prices (and more value) to customers in the late, more-competitive stages of the product life cycle. In Japan, companies in a range of industries—photography and imaging, consumer electronics and entertainment equipment, motorcycles, and automobiles—have achieved cost leadership on a worldwide basis. Cost leadership, however, is a sustainable source of competitive advantage only if barriers exist that prevent competitors from achieving the same low costs. In an era of increasing technological improvements in manufacturing, manufacturers constantly leapfrog over one another in pursuit of lower costs.
Countertrade occurs when payment is made in some form other than money Options
Countertrade usually involves a seller from the West and a buyer in a developing country. Flourishes when hard currency is scarce. Exchange controls may prohibit a company from repatriating earnings so the company spends in country to buy products that are exported. The most important reason for countertrade is that developing countries have found it difficult to obtain bank financing for exports. Counterpurchase is distinguished from other forms in that each delivery in an exchange is paid for in cash. For example, Rockwell International sold a printing press to Zimbabwe for $8 million. The deal went through, however, only after Rockwell agreed to purchase $8 million in ferrochrome and nickel from Zimbabwe, which it subsequently sold on the world market. Offset is a reciprocal arrangement whereby the government in the importing country seeks to recover large sums of hard currency spent on expensive purchases such as military aircraft or telecommunications systems. Lockheed Martin Corp. sold F-16 fighters to the United Arab Emirates for $6.4 billion and agreed to invest $160 million in the petroleum-related UAE Offsets Group. Compensation trading: This form of countertrade, also called buyback, involves two separate and parallel contracts. In one contract, the supplier agrees to build a plant or provide plant equipment, patents or licenses, or technical, managerial, or distribution expertise for a hard currency down payment at the time of delivery. In the other contract, the supplier company agrees to take payment in the form of the plant's output equal to its investment (minus interest) for a period of as many as 20 years. Used heavily in China. Switch trading is a mechanism that can be applied to barter or countertrade. In this arrangement, a third party steps into a simple barter or other countertrade arrangement when one of the parties is not willing to accept all the goods received in a transaction.
Export price escalation is the increase in the final selling price of goods traded across borders.
Does the price reflect the product's quality? Is the price competitive given local market conditions? Should the firm pursue market penetration, market skimming, or some other pricing objective? What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers? Should prices differ with market segment? What pricing options are available if the firm's costs increase or decrease? Is demand in the international market elastic or inelastic? Are the firm's prices likely to be viewed by the host-country government as reasonable or exploitative? Do the foreign country's dumping laws pose a problem? A list of eight basic considerations for those whose responsibility includes setting prices on goods that cross borders
The advantage that a nation gains by being home to internationally competitive industries in fields that are related to, or in direct support of, other industries
Downstream industries will have easier access to these inputs and the technology that produced them, and to the managerial and organizational structures that have made them competitive. Access is a function of proximity both in terms of physical distance and cultural similarity. It is not the inputs in themselves that give advantage. It is the contact and coordination with the suppliers, the opportunity to structure the value chain so that linkages with suppliers are optimized. These opportunities may not be available to foreign firms. Similar advantages are present when there are internationally competitive, related industries in a nation. Opportunities are available for coordinating and sharing value chain activities. Consider, for example, the opportunities for sharing between computer hardware manufacturers and software developers. Related industries also create "pull through" opportunities as described previously. For example, non-U.S. sales of PCs from Compaq, Dell, IBM, Acer, and others have bolstered demand for software from Microsoft and other U.S. companies.
3 Buyers=manufacturers and retailers, not consumers Buyers seek to pay the lowest possible price Buyers have leverage over suppliers when: They purchase in large quantities (enhances supplier dependence on buyer) Suppliers' products are commodities Product represents significant portion of buyer's costs Buyer is willing and able to achieve backward integration
In Porter's model, "buyers" refers to manufacturers (e.g., GM) and retailers (e.g., Wal-Mart), rather than consumers. The ultimate aim of such buyers is to pay the lowest possible price to obtain the products or services that they require. Usually, if they can, buyers drive down profitability in the supplier industry. To accomplish this, the buyers have to gain leverage over their vendors. One way they can do this is to purchase in such large quantities that supplier firms are highly dependent on the buyers' business. Second, when the suppliers' products are viewed as commodities—that is, as standard or undifferentiated—buyers are likely to bargain hard for low prices, because many firms can meet their needs. Buyers will also bargain hard when the supplier industry's products or services represent a significant portion of the buying firm's costs. A fourth source of buyer power is the willingness and ability to achieve backward integration. Because it purchases massive quantities of goods for resale, Wal-Mart is in a position to dictate terms to any vendor wishing to distribute its products at the retail giant's stores. This includes the recorded music industry. Wal-Mart refuses to stock CDs stickered with parental advisories for explicit lyrics or violent imagery. Artists who want their recordings available at Wal-Mart have the option of altering lyrics and song titles or deleting offending tracks. Likewise, artists are sometimes asked to change album cover art if Wal-Mart deems it offensive. Walmart has launched Soundcheck, which consists of performances by up-and-coming recording artists that are broadcast every Friday night on the in-house television network found in each store. Exclusive tracks featuring special versions of songs by the Soundcheck sessions' artists are also available.
Barriers of Entry Economies of Scale Refers to the decline in per-unit product costs as the absolute volume of production per period increases Product differentiation The extent of a product's perceived uniqueness Capital requirements Required investment for manufacturing, R&D, advertising, field sales and service, etc. Switching costs Costs related to making a change in suppliers or products
Economies of scale: Although the concept of scale economies is frequently associated with manufacturing, it is also applicable to R&D, general administration, marketing, and other business functions. Honda's efficiency at engine R&D, for example, results from the wide range of products it produces that feature gasoline-powered engines. When existing firms in an industry achieve significant economies of scale, it becomes difficult for potential new entrants to be competitive. Product differentiation: Differentiation can be achieved as a result of unique product attributes or effective marketing communications, or both. Product differentiation and brand loyalty "raise the bar" for would-be industry entrants who would be required to make substantial investments in R&D or advertising. For example, Intel achieved differentiation and erected a barrier in the microprocessor industry with its "Intel Inside" advertising campaign and logo that appear on many brands of personal computers. Capital requirements: Capital is required not only for manufacturing facilities (fixed capital) but also for financing R&D, advertising, field sales and service, customer credit, and inventories (working capital). The enormous capital requirements in such industries as pharmaceuticals, mainframe computers, chemicals, and mineral extraction present formidable entry barriers. Switching costs are caused by the need to change suppliers and products. These might include retraining, ancillary equipment costs, the cost of evaluating a new source, and so on. The perceived cost to customers of switching to a new competitor's product may present an insurmountable obstacle preventing industry newcomers from achieving success. For example, Microsoft's huge installed base of PC operating systems and applications presents a formidable entry barrier.
A collection of 5 partners Key suppliers do some tasks better than the flagship (ex.: manufacturing) Key customers (ex: car dealers) Key consumers (ex: car buyers) Selected competitors like global Strategic Partnerships Nonbusiness infrastructure: universities, governments, trade unions that supply intangibles like technology and intellectual property
Japanese vertical and Korean have succeeded, Rugman and D'Cruz argue, by adopting strategies that are mutually reinforcing within a business system and by fostering a collective long-term outlook among partners in the system. The authors say "long-term competitiveness in global industries is less a matter of rivalry between firms and more a question of competition between business systems." A major difference between the flagship model and Porter's is that Porter's is based on the notion of corporate individualism and individual business transactions.
Marketers of domestically manufactured finished products may move to offshore sourcing of certain components to keep costs down and prices competitive China is "the world's workshop" Rationalize the distribution system—Toys 'R' Us bypasses layers of intermediaries in Japan to operate U.S. style warehouse stores
Rationalization may include selecting new intermediaries, assigning new responsibilities to old intermediaries or establishing direct marketing.
Rigid cost-plus pricing
means that companies set prices without regard to the eight pricing considerations
Barter
The least complex and oldest form of bilateral, non-monetary countertrade A direct exchange of goods or services between two parties
Managers must determine the objectives for the pricing objectives Unit Sales Market Share Return on investment They must then develop strategies to achieve those objectives Penetration Pricing Market Skimming
A number of pricing issues are unique to global marketing. The pricing strategy for a particular product may vary from country to country; a product may be positioned as a low-priced, mass-market product in some countries and a premium-priced, niche product in others. Stella Artois beer is a case in point. Pricing objectives may also vary depending on a product's life-cycle stage and the country-specific competitive situation. In making global pricing decisions, it is also necessary to factor in external considerations such as the added cost associated with shipping goods long distances across national boundaries. The issue of global pricing can also be fully integrated in the product-design process, an approach widely used by Japanese companies. When this occurs, penetration pricing is recommended as a means of achieving market saturation before competitors copy the product. Historically many companies that used this type of pricing were located in the Pacific Rim. Scale-efficient plants and low-cost labor allowed these compan
Search for opportunities in the defensive walls of competitors whose attention is narrowly focused Focused on a market segment Focused on a geographic area to the exclusion of others
A second approach takes advantage of the "loose bricks" left in the defensive walls of competitors whose attention is narrowly focused on a market segment or a geographic area to the exclusion of others. For example, Caterpillar's attention was focused elsewhere when Komatsu made its first entry into the Eastern Europe market. Similarly, Taiwan's Acer Inc. prospered by following founder Stan Shih's strategy of approaching the world computer market from the periphery. Shih's inspiration was the Asian board game Go, in which the winning player successfully surrounds opponents. Shih gained experience and built market share in countries overlooked by competitors such as IBM and Compaq. By the time Acer was ready to target the United States in earnest, it was already the number one PC brand in key countries in Latin America, Southeast Asia, and the Middle East.
THE FLAGSHIP FIRM: BUSINESS NETWORK WITH FIVE PARTNERS
According to Professors Alan Rugman and Joseph D'Cruz, Porter's model is too simplistic given the complexity of today's global environment. Rugman and D'Cruz have developed an alternative framework based on business networks that they call the flagship model. The flagship firm is at the center of a collection of five partners; together, they form a business system that consists of two types of relationships. The flagship firm provides the leadership, vision, and resources to "lead the network in a successful global strategy." Key suppliers are those that perform some value-creating activities, such as manufacturing of critical components, better than the flagship. The double-headed arrows that penetrate the flagship and key suppliers in the figure indicate that this is a network relationship, with a sharing of strategies, resources, and responsibility for the success of the network. Other suppliers are kept at "arm's length"; these traditional commercial relationships are depicted diagrammatically by arrows that stop at the border of the flagship. Likewise, the flagship has network relationships with key customers and more traditional, arm's length commercial relationships with key consumers. Key competitors are companies with which the flagship develops alliances such as those described at the end of Chapter 9. The fifth partner is the nonbusiness infrastructure (NBI), comprised of universities, governments, trade unions, and other entities that can supply the network with intangible inputs such as intellectual property and technology. In the flagship model, flagship firms often play a role in the development of a country's industrial policy.
Sale of an imported product at a price lower than that normally charged in a domestic market or country of origin Occurs when imports sold in the U.S. market are priced at either levels that represent less than the cost of production plus an 8% profit margin or at levels below those prevailing in the producing countries U.S. law, the Byrd Amendment, provides for payment to companies harmed by dumping To prove, both price discrimination and injury must be shown
Antidumping policy is administered in the U.S. by the U.S. Commerce Dept.; by the European Commission in Europe. Companies concerned with running afoul of antidumping legislation have developed a number of approaches for avoiding the dumping laws. One approach is to differentiate the product sold from that in the home market so it does not represent "like quality." An example of this is an auto accessory that one company packaged with a wrench and an instruction book, thereby changing the "accessory" to a "tool."
Competitive Advantage Achieved when there is a match between a firm's distinctive competencies and the factors critical for success within its industry Two ways to achieve competitive advantage Generic strategies—four types Strategic intent—also four types
Any superior match between company competencies and customers needs permits for the firm to outperform competitors. There are two basic ways to achieve competitive advantage. First, a firm can pursue a low-cost strategy that enables it to offer products at lower prices than competitors. Competitive advantage may also be gained by a strategy of differentiating products so that customers perceive unique benefits, often accompanied by a premium price. Note that both strategies have the same effect: They both contribute to the firm's overall value proposition. Two different models of competitive advantage have received considerable attention. The first offers "generic strategies," four routes or paths that organizations choose to offer superior value and achieve competitive advantage. According to the second model, generic strategies alone did not account for the astonishing success of many Japanese companies in the 1980s and 1990s. The more recent model, based on the concept of "strategic intent," proposes four different sources of competitive advantage. The quality of a firm's strategy is ultimately decided by customer perception. Operating results such as sales and profits are measures that depend on the level of psychological value created for customers: The greater the perceived consumer value, the better the strategy. A firm may market a better mousetrap, but the ultimate success of the product depends on customers deciding for themselves whether or not to buy it. Value is like beauty; it's in the eye of the beholder. In sum, competitive advantage is achieved by creating more value than is done by the competition, and value is defined by customer perception.
Changing the rules of engagement
Canon introduced the first full-color copiers and the first copiers with "connectivity"— the ability to print images from such sources as video camcorders and computers. The Canon example shows how an innovative marketing strategy—with fresh approaches to the product, pricing, distribution, and selling—can lead to overall competitive advantage in the marketplace. Canon is not invulnerable, however; in 1991 Tektronix, a U.S. company, leapfrogged past Canon in the color copier market by introducing a plain-paper color copier that offered sharper copies at a much lower price.
Law of One Price All customers in the market get the best product for the best price Global markets Diamonds Crude oil Commercial aircraft Integrated circuits The Global Manager must develop systems and policies that address Price Floor: minimum price Price Ceiling: maximum price Optimum Prices: function of demand Must be consistent with global opportunities and constraints Be aware of price transparency created by Euro zone, Internet
Charging a premium price May occur at the introduction stage of product life cycle Luxury goods marketers use price to differentiate products
Standardization vs. Adaptation Primary Issue Must the specific advertising message and media strategy be changed from region to region or country to country? Think of cultural and legal issues Four difficulties that compromise an organization's communication efforts The message may not get through to the intended recipient. The message may reach the target audience but may not be understood or may even be misunderstood. The message may reach the target audience and may be understood but still may not induce the recipient to take the action desired by the sender. The effectiveness of the message can be impaired by noise.
Communication experts generally agree that the overall requirements of effective communication and persuasion are fixed and do not vary from country to country. The same thing is true of the components of the communication process: The marketer is the source of the message; the message must be encoded, conveyed via the appropriate channel(s), and decoded by a member of the target audience. Communication takes place only when the intended meaning is transferred from the source to the receiver. Proponents of the "one world, one voice" approach to global advertising believe that the era of the global village has arrived and that tastes and preferences are converging worldwide. According to the standardization argument, people everywhere want the same products for the same reasons. This means that companies can achieve significant economies of scale by unifying advertising around the globe. Advertisers who prefer the localized approach are skeptical of the global village argument. Instead, they assert that consumers still differ from country to country and must be reached by advertising tailored to their respective countries. Proponents of localization point out that most blunders occur because advertisers have failed to understand—and adapt to—foreign cultures.
Hypercompetition is a term used to describe a dynamic competitive world in which no action or advantage can be sustained for long
Competition unfolds in a series of dynamic strategic interactions in four areas: cost quality, timing and know-how, and barriers to entry The only source of a truly sustainable competitive advantage is a company's ability to manage its dynamic strategic interactions with competitors by means of frequent movements and counter movements that maintain a relative position of strength in each of the four areas.
COST FOCUS Firm's lower cost position enables it to offer a narrow target market and lower prices than the competition Sustainability is the central issue for this strategy Works if competitors define their target market more broadly Works if competitors cannot define the segment even more narrowly
Cost focus. In the shipbuilding industry, for example, Polish and Chinese shipyards offer simple, standard vessel types at low prices that reflect low production costs. Aldi, a German-based no-frills "hard discounter" with operations in numerous countries, offers a very limited selection of household goods at extremely low prices. IKEA, the Swedish furniture company described in the chapter introduction, has grown into a successful global company by combining both the focused differentiation and cost focus strategies.
Incoterms
Delivery duty paid - seller agrees to deliver the goods to the buyer at the place he or she names in the country of import with all costs, including duties, paid Ex-works - seller places goods at the disposal of the buyer at the time specified in the contract; buyer takes delivery at the premises of the seller and bears all risks and expenses from that point on. FAS (free alongside ship) named port of destination - seller places goods alongside the vessel or other mode of transport and pays all charges up to that point FOB (free on board) - seller's responsibility does not end until goods have actually been placed aboard ship CIF (cost, insurance, freight) named port of destination - risk of loss or damage of goods is transferred to buyer once goods have passed the ship's rail CFR (cost and freight) - seller is not responsible at any point outside of factory
Product Differentiation Product that has an actual or perceived uniqueness in a broad market has a differentiation advantage Extremely effective for defending market position Extremely effective for obtaining above-average financial returns; unique products command a premium price
Differentiation advantage. This can be an extremely effective strategy for defending market position and obtaining above-average financial returns; unique products often command premium prices. Examples of successful differentiation include Maytag in large home appliances, Caterpillar in construction equipment, and almost any successful branded consumer product. Nike has a unique array of product features.
Threat of New Entrants
Distribution channels: If channels are full, or unavailable, the cost of entry is substantially increased because a new entrant must invest time and money to gain access to existing channels or to establish new channels. Some Western companies have encountered this barrier in Japan. Government policy is frequently a major entry barrier. In some cases, the government will restrict competitive entry. This is true in a number of industries, especially those outside the United States, that have been designated as "national" industries by their respective governments. Japan's postwar industrialization strategy was based on a policy of reserving and protecting national industries in their development and growth phases. The result was a market that proved difficult for non-Japanese competitors. Cost advantages independent of scale economies: Access to raw materials, a large pool of low-cost labor, favorable locations, and government subsidies are several examples. Competitor response: If new entrants expect existing competitors to respond strongly to entry, their expectations about the rewards of entry will certainly be affected. A potential competitor's belief that entry into an industry or market will be an unpleasant experience may serve as a strong deterrent. Bruce Henderson, former president of the Boston Consulting Group, used the term "brinkmanship" to describe a recommended approach for deterring competitive entry. Brinkmanship occurs when industry leaders convince potential competitors that any market entry effort will be countered with vigorous and unpleasant responses. This is an approach that Microsoft has used many times to maintain its dominance in software operating systems and applications.
A list of eight basic considerations for those whose responsibility includes setting prices on goods that cross borders
Does the price reflect the product's quality? Is the price competitive given local market conditions? Should the firm pursue market penetration, market skimming, or some other pricing objective? What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers? Should prices differ with market segment? What pricing options are available if the firm's costs increase or decrease? Is demand in the international market elastic or inelastic? Are the firm's prices likely to be viewed by the host-country government as reasonable or exploitative? Do the foreign country's dumping laws pose a problem?
India is home to nearly 300 daily newspapers, including the Times of India and the Hindustan Times; the price per copy is only 5 rupees—about 10 cents. Additional critical factors in India's media environment include the lack of penetration by cable television and the fact that only about 4 million Indians currently subscribe to an Internet service. By contrast, billboards are the medium of choice in Moscow. As Thomas L. Friedman has pointed out, Moscow is a city built for about 30,000 cars; during the past decade, the number of cars has grown from 300,000 to 3 million. The result is massive traffic jams and commuting delays; thus, affluent businesspeople spend hours in traffic and have little time to read the newspaper
Even when media availability is high, its use as an advertising vehicle may be limited. For example, in Europe, television advertising is very limited in Denmark, Norway, and Sweden. Regulations concerning content of commercials vary; Sweden bans advertising to children younger than 12 years of age. In 2001, when Sweden headed the EU, its policymakers tried to extend the ban to the rest of Europe. Although the effort failed, Sweden retained its domestic ban. This helps explain why annual spending on print media in Sweden is three times the annual spending for television.
Global Pricing: Three Policy Alternatives
Extension or Ethnocentric Adaptation or Polycentric Geocentric
Cost-based pricing is based on an analysis of internal and external cost
Firms using western cost accounting principles use the Full absorption cost method Per-unit product costs are the sum of all past or current direct and indirect manufacturing and overhead costs
Geocentric Pricing Intermediate course of action Recognizes that several factors are relevant to pricing decision Local costs Income levels Competition Local marketing strategy
For consumer products, local income levels are critical in the pricing decision. If the product is normally priced well above full manufacturing costs, the global marketer should consider accepting reduced margins and price below prevailing levels in low-income markets. The important point here is that in global marketing there is no such thing as a "normal" margin. Of the three methods described, the geocentric approach is best suited to global competitive strategy. A global competitor will take into account global markets and global competitors in establishing prices. Prices will support global strategy objectives rather than the objective of maximizing performance in a single country. In the short term, however, headquarters might decide to set a market penetration objective and price at less than the cost-plus return figure by using export sourcing to establish a market. Another short-term objective might be to arrive at an estimate of the market potential at a price that would be profitable given local sourcing and a certain volume of production. Instead of immediately investing in local manufacture, a decision might be made to supply the target market initially 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 to a fixed sales volume by existing local manufacturing facilities.
Representatives of two or more companies secretly set similar prices for their products Illegal act because it is anticompetitive Horizontal price fixing occurs when competitors within an industry that make and market the same product conspire to keep prices high Vertical price fixing occurs when a manufacturer conspires with wholesalers/retailers to ensure certain retail prices are maintained
For example, in 2011 the European Commission determined that Procter & Gamble, Unilever, and Henkel had conspired to set prices for laundry detergent. The term horizontal applies in this instance because Procter & Gamble and its co-conspirators are all at the same supply chain "level" (i.e., they are manufacturers). The European Commission recently fined Nintendo nearly $150 million after it was determined that the video game company had colluded with European distributors to fix prices. During the 1990s, prices of Nintendo video game consoles varied widely across Europe. They were much more expensive in Spain than in Britain and other countries; however, distributors in countries with lower retail prices agreed not to sell to retailers in countries with high prices.
A global company that has the ability to successfully transform a domestic campaign into a worldwide one, or to create a new global campaign from the ground up, possesses a critical advantage. The first company to find a global market for any product is frequently at an advantage relative to competitors that make the same discovery later. The search for a global advertising campaign should bring together everyone involved with the product to share information and leverage their experiences. Global campaigns with unified themes can help to build long-term product and brand identities and offer significant savings by reducing costs associated with producing ads. McDonalds: I'm lovin' it IBM: Solutions for a Small Planet BP: Beyond Petroleum De Beers: A diamond is forever
Global advertising also offers companies economies of scale in advertising as well as improved access to distribution channels. Where shelf space is at a premium, as with food products, a company has to convince retailers to carry its products rather than those of competitors. A global brand supported by global advertising may be very attractive because, from the retailer's standpoint, a global brand is less likely to languish on the shelves.
Collaborating
History has shown that the Japanese have excelled at using the collaborating strategy to achieve industry leadership. As noted in Chapter 9, one of the legendary licensing agreements of modern business history is Sony's licensing of transistor technology from AT&T's Western Electric subsidiary in the 1950s for $25,000. This agreement gave Sony access to the transistor and allowed the company to become a world leader. Building on its initial successes in the manufacturing and marketing of portable radios, Sony has grown into a superb global marketer whose name is synonymous with a wide assortment of high-quality consumer electronics products. More recent examples of Japanese collaboration are found in the aircraft industry. Today, Mitsubishi Heavy Industries Ltd. and other Japanese companies manufacture airplanes under license to U.S. firms and also work as subcontractors for aircraft parts and systems. Many observers fear that the future of the American aircraft industry may be jeopardized as the Japanese gain technological expertise.
The Target- Costing Process: Determine the segment(s) to be targeted, as well as the prices that customers in the segment will be willing to pay. Compute overall target costs with the aim of ensuring the company's future profitability. Allocate the target costs to the product's various functions. Calculate the gap between the target cost and the estimated actual production cost. Obey the cardinal rule: If the design team can't meet the targets, the product should not be launched.
How are segments targeted? Using market research techniques such as conjoint analysis, the team seeks to better understand how customers will perceive product features and functionalities. How are target costs calculated? Think of debits and credits in accounting: Because the target cost is fixed, additional funds allocated to one subassembly team for improving a particular function must come from another subassembly team. Example: Western companies are beginning to adopt some of these money-saving ideas. For example, target costing was used in the development of Renault's Logan, a car that retails for less than $10,000 in Europe (see Case 11-1). According to Luc-Alexandre Ménard, chief of Renault's Dacia unit, the design approach prevented technical personnel from adding features that customers did not consider absolutely necessary. For example, the Logan's side windows have relatively flat glass; curved glass is more attractive, but it adds to the cost. The Logan was originally targeted at consumers in Eastern Europe; to the company's surprise, it has also proven to be popular in Germany and France.
Human Resources - the quantity of workers available, skills possessed by those workers, wage levels, and work ethic Physical Resources - the availability, quantity, quality, and cost of land, water, minerals, and other natural resources Knowledge Resources - the availability within a nation of a significant population having scientific, technical, and market-related knowledge Capital Resources - the availability, amount, cost, and types of capital available; also includes savings rate, interest rates, tax laws, and government deficit Infrastructure Resources - this includes a nation's banking, healthcare, transportation, and communication systems Capital Resources: The advantage enjoyed by industries in countries with low capital costs versus those located in nations with relatively high capital costs is sometimes decisive. Firms paying high capital costs are frequently unable to stay in a market where the competition comes from a nation with low capital costs. The firms with the low cost of capital can keep their prices low and force the firms paying high costs to either accept low returns on investment or leave the industry. Infrastructure Resources: Infrastructure includes a nation's banking system, healthcare system, transportation system, communications system, as well as the availability and cost of using these systems. More sophisticated industries are more dependent on advanced infrastructures for success.
Human Resources: Countries with a plentiful supply of low-wage workers have an obvious advantage in the production of labor-intensive products. On the other hand, such countries may be at a disadvantage when it comes to the production of sophisticated products requiring highly skilled workers capable of working without extensive supervision. Physical Resources: The availability, quantity, quality, and cost of land, water, minerals, and other natural resources determine a country's physical resources. A country's size and location are also included in this category, because proximity to markets and sources of supply, as well as transportation costs, are strategic considerations. These factors are obviously important advantages or disadvantages to industries dependent on natural resources. Knowledge Resources: The presence of this factor is usually a function of the number of research facilities and universities—both government and private—operating in the country. This factor is important to success in sophisticated products and services, and to doing business in sophisticated markets. This factor relates directly to Germany's leadership in chemicals; for some 150 years, Germany has been home to top university chemistry programs, advanced scientific journals, and apprenticeship programs.
Adaptation or Polycentric Pricing Sensitive to market conditions but creates potential for gray marketing Permits affiliate managers or independent distributors to establish price as they feel is most desirable in their circumstances
IKEA takes a polycentric approach to pricing: While it is company policy to have the lowest price on comparable products in every market, managers in each country set their own prices, which depend in part on local factors such as competition, wages, taxes, and advertising rates. Overall, IKEA's prices are lowest in the United States, where the company competes with large retailers. Prices are higher in Italy where local competitors tend to be smaller, more upscale furniture stores than those in the U.S. market. Generally, prices are higher in countries where the IKEA brand is strongest. When IKEA opened its first stores in China, the young professional couples, the primary target market, thought prices were too high. The company quickly increased the amount of Chinese products in order to lower prices; today the average Chinese customer spends 300 yen, or about $36.
Broad market strategies Cost Leadership—low price Product Differentiation—premium price Narrow market strategies Cost Focus—low price Focused Differentiation—premium price
In addition to the "five forces" model of industry competition, Michael Porter has developed a framework of so-called generic business strategies based on the two types or sources of competitive advantage. The relationship of these two sources with the scope of the target market served (narrow or broad) or product mix width (narrow or wide) yields four generic strategies: cost leadership, product differentiation, cost focus, and focused differentiation. Generic strategies aiming at the achievement of competitive advantage or superior marketing strategy demand that the firm make choices. The choices concern the type of competitive advantage it seeks to attain (based on cost or differentiation) and the market scope or product mix width within which competitive advantage will be attained.
If competitors do not adjust their prices in response to rising costs it is difficult to adjust your pricing to maintain operating margins If competitors are manufacturing or sourcing in a lower-cost country, it may be necessary to cut prices to stay competitive
In the United States, Levi Strauss & Company is under price pressure from several directions. First, Levi's faces stiff competition from the Wrangler and Lee brands marketed by VF Corporation. A pair of Wrangler jeans retails for about $20 at Penney's and other department stores, compared with about $30 for a pair of Levi 501s. Second, Levi's two primary retail customers, J.C. Penney and Sears, are aggressively marketing their own private label brands. Finally, designer jeans from Calvin Klein, Polo, and Diesel are enjoying renewed popularity. Exclusive fashion brands, like Lucky and Seven, retail for more than $100 per pair. Outside the United States, thanks to the heritage of the Levi brand and less competition, Levi jeans command premium prices—$80 or more for one pair of 501s. To support the prestigious image, Levi's are sold in boutiques. Not surprisingly, Levi's non-U.S. sales represent about one-third of revenues but more than 50 percent of profits. In an attempt to apply its global experience and enhance the brand in the United States, Levi's has opened a number of Original Levi's Stores in select American cities. Despite such efforts, Levi's rang up only $4.4 billion in sales in 2010 compared with $7.1 billion in 1996. A decade ago, officials announced plans to close six plants and move most of the company's North American production offshore in an effort to cut costs.
Corporate advertising Compensates for lack of control over publicity Calls attention to the company's other communication efforts Image advertising Enhances the public's perception, creates goodwill Advocacy advertising Presents the company's point of view on a particular issue
Japan's Fuji Photo Film asked its advertising agency to develop an image campaign for the United States. At the time, Fuji was embroiled in a trade dispute with Kodak. Fuji had also invested more than $1 billion in U.S. production facilities and had won a long-term photofinishing contract with Wal-Mart. The campaign was designed to appeal both to Wal-Mart and to the giant retailer's customers; as a Wal-Mart spokesman said, "We've long said we buy American when we can. The more people understand how American Fuji is, the better." In 1995, Japanese car marketers hired Hill & Knowlton to create a public relations campaign designed to convince then-President Bill Clinton that his plan to impose 100 percent tariffs on 13 luxury cars was ill-advised and could even cost him California's 54 electoral votes in the 1996 election. Nissan and other companies also sent position papers and information packets to dealers and the media. Interviews with representatives from auto dealers were carried by both print and electronic media. Within weeks, the Clinton administration announced that the U.S. and Japan had reached an agreement. No sanctions were imposed and the American International Automobile Dealers Association. was able to claim an important victory.
BUILDING LAYERS OF ADVANTAGE company faces less risk if it has a wide portfolio of advantages Successful companies build portfolios by establishing layers of advantage on top of one another Illustrates how a company can move along the value chain to strengthen competitive advantage
Japanese TV industry:1970s—largest producer of black and white sets and becoming world leader in color sets; Comp. Adv. = low labor costs Next, they built factories large enough to serve the world market; sold under many brand names; added layers of Comp. Adv. of quality and reliability Next, they invested in marketing channels and Japanese brand name recognition; new layer of Comp. Adv. of global brand franchise Led to the introduction of new products like VCRs and photocopiers and to the establishment of regional manufacturing to adapt products to local market needs.
Public relations practices can be affected by: Cultural traditions Social and political contexts Economic environments Public relations professionals must understand these differences and tailor the message appropriately
Mass media and the written word are important vehicles for information dissemination in many industrialized countries. In developing countries, however, the best way to communicate might be through the gongman, the town crier, the market square, or the chief's courts. In Ghana, dance, songs, and storytelling are important communication channels. In India, where half of the population cannot read, writing press releases will not be the most effective way to communicate. In Turkey, the practice of PR is thriving in spite of that country's reputation for harsh treatment of political prisoners. Although the Turkish government still asserts absolute control as it has for generations, corporate PR and journalism are allowed to flourish so that Turkish organizations can compete globally. Even in industrialized countries, there are some important differences between PR practices. In the United States, much of the news in a small, local newspaper is placed by means of the hometown news release. In Canada, on the other hand, large metropolitan population centers have combined with Canadian economic and climatic conditions to thwart the emergence of a local press. The dearth of small newspapers means that the practice of sending out hometown news releases is almost nonexistent. In the United States, PR is increasingly viewed as a separate management function. In Europe that perspective has not been widely accepted; PR professionals are viewed as part of the marketing function rather than as distinct and separate specialists in a company.
New entrants mean downward pressure on prices and reduced profitability Barriers to entry determines the extent of threat of new industry entrants
New entrants to an industry bring new capacity, a desire to gain market share and position, and, quite often, new approaches to serving customer needs. The decision to become a new entrant in an industry is often accompanied by a major commitment of resources. New players mean prices will be pushed downward and margins squeezed, resulting in reduced industry profitability in the long run. Porter describes eight major sources of barriers to entry, the presence or absence of which determines the extent of threat of new industry entrants. These barriers will be discussed in the next two slides.
Cost-based pricing is based on an analysis of internal and external cost Firms using western cost accounting principles use the Full absorption cost method Per-unit product costs are the sum of all past or current direct and indirect manufacturing and overhead costs
Rigid cost-plus pricing means that companies set prices without regard to the eight pricing considerations Flexible cost-plus pricing ensures that prices are competitive in the contest of the particular market environment
Low Inflation Environment
Should make it possible to raise prices but consider the global competitive environment U.S. inflation rate in the 1990s was low and strong demand had factories at capacity However, mid-1990s Europe had high unemployment, Asia was in recession By the end of the decade, globalization, the Internet, low-cost products from China, and cost-conscious consumers became other constraining factors
Extension Pricing "In the past, Mercedes vehicles would be priced for the European market, and that price was translated into U.S. dollars. Surprise, surprise: You're 20 percent more expensive than the Lexus LS 400, and you don't sell too many cars."
Similarly, Mercedes executives moved beyond an ethnocentric approach to pricing. As Dieter Zetsche, chairman of Daimler AG, noted, "We used to say that we know what the customer wants, and he will have to pay for it . . . we didn't realize the world had changed." Mercedes got its wake-up call when Lexus began offering "Mercedes quality" for $20,000 less. After assuming the top position in 1993, Mercedes CEO Helmut Werner boosted employee productivity, increased the number of low-cost outside suppliers, and invested in production facilities in the United States and Spain in an effort to move toward more customer- and competition-oriented pricing. The company also rolled out new, lower-priced versions of its E Class and S Class sedans. Advertising Age immediately hailed management's new attitude for transforming Mercedes from "a staid and smug purveyor into an aggressive, market-driven company that will go bumper-to-bumper with its luxury car rivals—even on price.
4 When suppliers have leverage, they can raise prices high enough to affect the profitability of their customers Leverage accrues when Suppliers are large and few in number Supplier's products are critical inputs, are highly differentiated, or carry switching costs Few substitutes exist Suppliers are willing and able to sell product themselves
Supplier power in an industry is the converse of buyer power. Microsoft and Intel are two excellent examples of companies with substantial supplier power. Because about 90 percent of the world's nearly 1 billion plus PCs use Microsoft's operating systems and 80% use Intel's microprocessors, the two companies enjoy a great deal of leverage relative to Dell, Compaq, and other computer manufacturers. In fact, it was precisely because Microsoft became so powerful that the U.S. government and the European Union launched separate antitrust investigations. As the trend toward tablets, smartphones, and netbooks continue, Apple , Android or Linux OS will diminish the market share of MS Windows. Chipmakers from Qualcomm and Texas Instruments are used by Apple , Android or Linux OS and will challenge Intel. Microsoft and Intel will find their supplier power diminishing.
Extension Pricing Ethnocentric Per-unit price of an item is the same no matter where in the world the buyer is located Importer must absorb freight and import duties Fails to respond to each national market
The extension approach has the advantage of extreme simplicity because no information on competitive or market conditions is required for implementation. The disadvantage of the ethnocentric approach is that it does not respond to the competitive and market conditions of each national market and, therefore, does not maximize the company's profits in each national market or globally. When toymaker Mattel adapted U.S. products for overseas markets, for example, little consideration was given to price levels that resulted when U.S. prices were converted to local currency prices. As a result, Holiday Barbie and some other toys were overpriced in global markets.
Global competition occurs when a firm takes a global view of competition and sets about maximizing profits worldwide The effect is beneficial to consumers because prices generally fall as a result of global competition While creating value for consumers, it can destroy the potential for jobs and profits
The automobile industry has also become fiercely competitive on a global basis. Part of the reason for the initial success of foreign automakers in the United States was the reluctance—or inability—of U.S. manufacturers to design and manufacture high-quality, inexpensive small cars. For U.S. manufacturers, small cars meant smaller unit profits. Therefore, U.S. manufacturers resisted the increasing preference in the U.S. market for smaller cars, a classic case of ethnocentrism and management myopia. European and Japanese manufacturers' product lines have always included cars smaller than those made in the United States. In Europe and Japan, market conditions were much different: less space, high taxes on engine displacement and on fuel, and greater market interest in functional design and engineering innovations. First Volkswagen, then Japanese automakers such as Nissan and Toyota discovered a growing demand for their cars in the U.S. market. It is noteworthy that many significant innovations and technical advances—including radial tires, anti-lock brakes, and fuel injection—also came from Europe and Japan. Airbags are a notable exception. In the United States, foreign companies have provided consumers with the automobile products, performance, and price characteristics they wanted. If smaller, lower-priced imported cars had not been available, it is unlikely that Detroit manufacturers would have provided a comparable product as quickly. What is true for automobiles in the United States is true for every product class around the world. Global competition expands the range of products and increases the likelihood that consumers will get what they want. The downside of global competition is its impact on the producers of goods and services. Global competition creates value for consumers, but it also has the potential to destroy jobs and profits. When a company offers consumers in other countries a better product at a lower price, this company takes customers away from domestic suppliers. Unless the domestic supplier can create new values and find new customers, the jobs and livelihoods of the domestic supplier's employees are threatened.
Porters Force 2: Availability of Substitue Products
The availability of substitute products places limits on the prices market leaders can charge in an industry; high prices may induce buyers to switch to the substitute. Once again, the digital revolution is dramatically altering industry structures. In addition to lowering entry barriers, the digital era means that certain types of products can be converted to bits and distributed in pure digital form. For example, the development of the MP3 file format for music was accompanied by the increased popularity of peer-to-peer (p-to-p) file swapping among music fans.
Demand Conditions Rapid Home Market Growth - another incentive to invest in and adopt new technologies faster and build large, efficient facilities Products being pushed or pulled - do a nation's people and businesses go abroad and then demand the nation's products and services in those second countries?
The best example of this is Japan's rapid home market growth that provided the incentive for Japanese firms to invest heavily in modern automated facilities. Early home demand, especially if it anticipates international demand, gives local firms the advantage of getting established in an industry sooner than foreign rivals. Equally important is early market saturation, which puts pressure on a company to expand into international markets and innovate. Market saturation is especially important if it coincides with rapid growth in foreign markets. Push/Pull: When the U.S. auto companies set up operations in foreign countries, the auto parts industry followed. The same is true for the Japanese auto industry. Similarly, when overseas demand for the services of U.S. engineering firms skyrocketed after World War II, those firms in turn established demand for U.S. heavy construction equipment. This provided an impetus for Caterpillar to establish foreign operations.
Products whose sale is dependent upon the sale of primary product Video games are dependent upon the sale of the game console "If you make money on the blades, you can give away the razors." Cellular service providers subsidize the phone and make money on calling plans
The biggest profits in the video industry come from sales of game software; thus, even though Sony and Microsoft may lose money on console sales, games are generating substantial revenues and profits. This illustrates the notion of companion products: a video game console is worthless without games, a DVD player is worthless without movies, a razor handle is worthless without blades, a cellular phone is worthless without a calling plan, and so on. Sony has sold more than 200 million game consoles since 1994 worldwide but PlayStation game sales have exceeded 800 million units. Cellular service providers like Vodaphone and AT&T buy handsets from Nokia, Motorola, etc. and subsidize the cost by locking customers into long-term contracts and charging extra for text messaging, roaming, etc. In most markets the iPhone sells for $199. However, in India, where customers do not want to be locked in to long-term contracts, the iPhone sells for $600 and is sold exclusively through Airtel, an Indian operator, and Vodaphone. Sales have been slow as consumers choose lower priced phones from competitors. And, a significant number of $199 iPhones are returning from the U.S. in tourist luggage
The book discusses the Komatsu/Caterpillar saga, and this is just one example of how global competitive battles are shaped by more than the pursuit of generic strategies. Many firms have gained competitive advantage by disadvantaging rivals through "competitive innovation." Hamel and Prahalad define competitive innovation as "the art of containing competitive risks within manageable proportions" and identify four successful approaches utilized by Japanese competitors. These are: building layers of advantage, searching for loose bricks, changing the rules of engagement, and collaborating.
The book discusses the Komatsu/Caterpillar saga, and this is just one example of how global competitive battles are shaped by more than the pursuit of generic strategies. Many firms have gained competitive advantage by disadvantaging rivals through "competitive innovation." Hamel and Prahalad define competitive innovation as "the art of containing competitive risks within manageable proportions" and identify four successful approaches utilized by Japanese competitors. These are: building layers of advantage, searching for loose bricks, changing the rules of engagement, and collaborating. This approach is founded on the principles of W.E. Deming, who stressed that a company must commit itself to continuing improvement in order to be a winner in a competitive struggle. For years, Deming's message fell on deaf ears in the United States, while the Japanese heeded his message and benefited tremendously. Japan's most prestigious business award is named after him. Finally, however, U.S. manufacturers are starting to respond.
Creative strategy—a statement or concept of what a particular message or campaign will say Big idea—"The flash of insight that synthesizes the purpose of the strategy, joins the product benefit with consumer desire in a fresh, involving way, brings the subject to life, and makes the reader or audience stop, look, and listen." John O'Toole, legendary ad man
The message is at the heart of advertising. The particular message and the way it is presented will depend on the advertiser's objective. Is the ad designed to inform, entertain, remind, or persuade? Moreover, in a world characterized by information overload, ads must break through the clutter, grab the audience's attention, and linger in their minds. In his book about Subaru of America, Randall Rothenberg describes the big idea in the following way: "The Big Idea is easier to illustrate than define, and easier to illustrate by what it is not than by what it is. It is not a "position" (although the place a product occupies in the consumer's mind may be a part of it). It is not an "execution" (although the writing or graphic style of an ad certainly contributes to it). It is not a slogan (although a tag line may encapsulate it). The Big Idea is the bridge between an advertising strategy, temporal and worldly, and an image, powerful and lasting. The theory of the Big Idea assumes that average consumers are at best bored and more likely irrational when it comes to deciding what to buy." Ex.: MSN "Life's Better with the Butterfly;" MasterCard "There are some things in life money can't buy"
Firm Strategy, Structure, and Rivalry Domestic rivalry in a single national market is a powerful influence on competitive advantage The absence of significant domestic rivalry can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets Differences in management styles, organizational skills, and strategic perspectives also create advantages and disadvantages for firms competing in different types of industries Capital markets and attitudes toward investments are important components of the national environments Chance events are occurrences that are beyond control; they create major discontinuities Government is also an influence on determinants by virtue of its roles as a consumer, policy maker, and commerce regulator
The personal computer industry in the United States is a good example of how a strong domestic rivalry keeps an industry dynamic and creates continual pressure to improve and innovate. The rivalry between Dell, Gateway, Compaq, Apple, and others forces all the players to develop new products, improve existing ones, lower costs and prices, develop new technologies, and continually improve quality and service to keep customers happy. Rivalry with foreign firms may lack this intensity. Domestic rivals have to fight each other not just for market share, but also for employee talent, R&D breakthroughs, and prestige in the home market. Eventually, strong domestic rivalry will push firms to seek international markets to support expansions in scale and R&D investments, as Japan amply demonstrates. The absence of significant domestic rivalry can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets. Capital markets and attitudes toward investments are important components of the national environments. For example, U.S. laws prohibit banks from taking an equity stake in companies to which they extend loans. This drives a short-term focus on quarterly and annual gains and losses. This focus is carried into equity markets where low profits produce low share prices and the threat of a takeover. As a result, U.S. firms tend to do well in new-growth industries and other rapidly expanding markets. They do not do well in more mature industries where return on investment is lower and patient searching for innovations is required. Many other countries have an opposite orientation. Banks are allowed to take equity stakes in the customer companies to which they loan, which therefore take a long-term view and are less concerned about short-term results. Chance includes such things as wars and their aftermaths, major technological breakthroughs, sudden dramatic shifts in factor or input cost, like an oil crisis, dramatic swings in exchange rates, and so on. Governments devise legal systems that influence competitive advantage by means of tariffs and nontariff barriers and laws requiring local content and labor. In the United States, for example, the dollar's decline over the past decade has been due in part to a deliberate policy to enhance U.S. export flows and stem imports. In other words, government can improve or lessen competitive advantage, but it cannot create it.
A middle ground between 100% standardization and 100% adaptation A basic pan-regional or global communication concept for which copy, artwork, or other elements can be adapted as required for individual countries
The question of when to use each approach depends on the product involved and a company's objectives in a particular market. The following generalizations can serve as guidelines: ● Standardized print campaigns can be used for industrial products or for high-tech consumer products. Examples: Apple's iPhone and iPad. ● Standardized print campaigns with a strong visual appeal often travel well. Example: Chivas Regal ("This is the Chivas Life"). Similarly, no text appears in the assembly instructions for IKEA furniture. Picture-based instructions can be used throughout the world without translation. ● TV commercials that use voiceovers instead of actors or celebrity endorsers speaking dialogue can use standardized visuals with translated copy for the voiceover. Examples: Gillette ("The best a man can get"); GE ("Imagination at work"); UPS ("We ♥ Logistics").
Government Controls, Subsidies, and Regulations Government control can also take other forms. As discussed in Chapter 8, companies are sometimes required to deposit funds in a noninterest-bearing escrow account for a specified period of time if they wish to import products. For example, Cintec International, an engineering firm that specializes in restoring historic structures, spent eight years seeking the necessary approval from Egyptian authorities to import special tools to repair a mosque. In addition, the country's port authorities required a deposit of nearly $25,000 before allowing Cintec to import diamond-tipped drills and other special tools. Why would Cintec's management accept such conditions? Cairo is the largest city in the Muslim world, and there are hundreds of centuries-old historic structures in need of repair. The German government historically restricted pricing, especially in the services sector. The recent move towards deregulation has made it possible for foreign providers in telecommunications, air travel, and insurance to enter the market. In retail, changes are the repeal of two laws. One limited discounts to 3% of list price; the other prohibited free gifts, like sturdy shopping bags.
The types of policies and regulations that affect pricing decisions are: Dumping legislation Resale price maintenance legislation Price ceilings General reviews of price levels
Focused Differentiation The product not only has actual uniqueness but it also has a very narrow target market Results from a better understanding of customer's wants and desires Ex.: High-end audio equipment
The world of "high-end" audio equipment offers another example of focused differentiation. A few hundred small companies design speakers, amplifiers, and related hi-fi gear that costs thousands of dollars per component. While audio components represent a $21 billion market worldwide, annual sales in the high-end segment are only about $1.1 billion. American companies such as Audio Research, Conrad-Johnson, Krell, Mark Levinson, Martin-Logan, and Thiel dominate the segment, which also includes hundreds of smaller enterprises with annual sales of less than $10 million. The state-of-the-art equipment these companies offer is distinguished by superior craftsmanship and performance and is highly sought after by audiophiles in Asia (especially Japan and Hong Kong) and Europe. Industry growth is occurring as companies learn more about overseas customers and build relationships with distributors in other countries.
5 Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other Price competition Advertising battles Product positioning Differentiation
To the extent that rivalry among firms forces companies to rationalize costs, it is a positive force. To the extent that it drives down prices, and therefore profitability, and creates instability in the industry, it is a negative factor. Several factors can create intense rivalry. Once an industry becomes mature, firms focus on market share and how it can be gained at the expense of others. Second, industries characterized by high fixed costs are always under pressure to keep production at full capacity to cover the fixed costs. Once the industry accumulates excess capacity, the drive to fill capacity will push prices—and profitability— down. A third factor affecting rivalry is lack of differentiation or an absence of switching costs, which encourages buyers to treat the products or services as commodities and shop for the best prices. Again, there is downward pressure on prices and profitability. Fourth, firms with high strategic stakes in achieving success in an industry generally are destabilizing because they may be willing to accept below-average profit margins to establish themselves, hold position, or expand.
GRAY MARKET GOODS This practice, known as parallel importing, occurs when companies employ a polycentric, multinational pricing policy that calls for setting different prices in different country markets. Gray markets can flourish when a product is in short supply, when producers employ skimming strategies in certain markets, or when the goods are subject to substantial markups. For example, in the European pharmaceuticals market, prices vary widely. In the United Kingdom and the Netherlands, for example, parallel imports account for as much as 10 percent of the sales of some pharmaceutical brands. The Internet is emerging as a powerful new tool that allows would-be gray marketers to access pricing information and reach customers.
Trademarked products are exported from one country to another where they are sold by unauthorized persons or organizations Occurs when product is in short supply, when producers use skimming strategies in some markets, and when goods are subject to substantial mark-ups
Selecting an ad agency: Company organization Companies that are decentralized may want to leave the choice to the local subsidiary National responsiveness Is the global agency familiar with local culture and buying habits of a particular country? Area coverage Does the agency cover all relevant markets? Buyer perception What kind of brand awareness does the company want to project?
When selecting an advertising agency it is important to consider the four areas listed on this slide. Also, despite an unmistakable trend toward using global agencies to support global marketing efforts, companies with geocentric orientations will adapt to the global market requirements and select the best agency or agencies accordingly. Advertising professionals face escalating pressure to achieve new heights of creativity. Some critics of advertising complain that agencies sometimes try to create advertising that will win awards and generate acclaim and prestige rather than advertising that serves clients' needs. The search for fresh answers to promotion challenges has prompted some client companies to look to new sources for creative ideas. There is a growing tendency for Western clients to designate global agencies for product accounts to support the integration of the marketing and advertising functions; Japan-based companies are less inclined to use this approach. For example, in 1995, Colgate-Palmolive consolidated its $500 million in global billings with Young & Rubicam. That same year, IBM consolidated its ad account with Ogilvy & Mather for the launch of the "Solutions for a small planet" global campaign. Similarly, Bayer AG consolidated most of its $300 million consumer products advertising with BBDO Worldwide; Bayer had previously relied on 50 agencies around the globe. Agencies are aware of this trend and are themselves pursuing international acquisitions and joint ventures to extend their geographic reach and their ability to serve clients on a global account basis. In an effort to remain competitive, many small independent agencies in Europe, Asia, and the United States belong to the Transworld Advertising Agency Network. TAAN allows member agencies to tap into worldwide resources that would not otherwise be available to them.
Export price escalation
is the increase in the final selling price of goods traded across borders.
Gray Market Issues
• Dilution of exclusivity. Authorized dealers are no longer the sole distributors. The product is often available from multiple sources and margins are threatened. • Free riding. If the manufacturer ignores complaints from authorized channel members, those members may engage in free riding. That is, they may opt to take various actions to offset downward pressure on margins. These options include cutting back on presale service, customer education, and salesperson training. • Damage to channel relationships. Competition from gray market products can lead to channel conflict as authorized distributors attempt to cut costs, complain to manufacturers, and file lawsuits against the gray marketers. • Undermining segmented pricing schemes. As noted earlier, gray markets can emerge because of price differentials that result from multinational pricing policies. However, a variety of forces—including falling trade barriers, the information explosion on the Internet, and modern distribution capabilities—hamper a company's ability to pursue local pricing strategies. • Reputation and legal liability. Even though gray market goods carry the same trademarks as goods sold through authorized channels, they may differ in quality, ingredients, or some other way. Gray market products can compromise a manufacturer's reputation and dilute brand equity, as when prescription drugs are sold past their expiration dates or electronics equipment is sold in markets where they are not approved for use or where manufacturers do not honor warranties.
