NTERNATIONAL MARKETING NOTES

International Marketing

Definition:

International marketing is the performance of business activities designed to

plan, price, promote, and direct the flow of company’s goods & services to
consumers in more than one nation for profit.

Adaptation of the controllables (marketing mix elements) to the

uncontrollable elements determines the ultimate outcome of the marketing
enterprise.

Domestic Uncontrollables

• Political / Legal

o Political decisions involving domestic foreign policy

o Any country has a right to restrict foreign trade when it adversely affects
the security or economy of the country

o Conversely there may be positive effects when there are changes in foreign
policy and countries are given favored treatment (MFN)

• Domestic Economic Climate

o Home based uncontrollable element

o Direct impact on the capacity to invest in plants and facilities

o Capital generated in the home country and then mobilized

o Internal economic conditions will result in restrictions against foreign

investment in order to strengthen the domestic economy

• Competition

o In the home country – Eg. Kodak & Fuji

Foreign Uncontrollables

• Political / Legal Forces

o E.g. China – communist legal system where all the deals were done with the
state to a commercial legal system

• Level of Technology

o Technical expertise may vary

o Technical Knowledge

o Special training

• Alien Status of Foreign businesses

o Foreigner control the business

o Alien in the culture of the host country

o E.g. Coke

• Cultural Forces

• Distribution

• Competitive forces (Soft Drink)

For Global marketing to be a success environmental adjustments are needed.

SRC – Self Reference Criterion

- Unconscious reference to ones own cultural values, experiences and

knowledge

Culture

Values Meanings History Beliefs Symbols

E.g. - Vicks / Germany

Maharaja Mac

Stages of International Marketing

• No direct foreign Marketing

o No activity in cultivating customers outside domestic market

o Distributors / Dealers / Foreign Customers coming directly to the firm

o Web Pages (Indication)

• Infrequent Foreign Marketing

o Product surplus in domestic market

o No intention of maintaining continuous market representation

o Few companies fir this model as customers always look for long term
commitment

• Regular Foreign Marketing

o Marketing goods on a continuous basis to foreign markets

o Overseas Middlemen / Own Sales force / Sales subsidiary

o Adaptation of the product to the foreign market

• International Marketing / Multinational Marketing

o Fully committed & involved in international marketing

o Markets all over the world

o Production & marketing activities outside the home market

o The company formulates a unique strategy for every country with which it
conducts business

E.g. Balsara – Mint / Cinamint

• Global Marketing

o At this stage, companies treat the world, including their home market as
one

o Maximize returns through global standardization of its business activities

o Efficiency of scale by developing a standardized product, of dependable

quality, to be sold at a reasonable price to a global market

o The company standardizes its logo, image, store, processes

o Wherever necessary due to cultural differentiation adaptations are made

(Multidomestic & Global Marketing can exist simultaneously)

International trade involves voluntary exchange of goods, services, assets, or

money between residents of two different countries or between different
countries. The fundamental question that arises for most of us at the thought
of international trade is why should a business firms of one country should to
the another country, when the industries of that country also produce goods
and market them. What is the basis of international business?

A number of theories have been developed to explain the basis for

international trade. The different trade theories include theory of absolute
advantage, theory of comparative advantage, and classical trade theory.
These theories discuss and analyze different nuances of trade for the trading
partners and deal with the financial dynamics of the trading activity between
two countries

Theory of absolute advantage

The Scottish economist Adam Smith first explained the theory of absolute
advantage in 1776. He argued that a country has an absolute advantage in
the production of a good when it can produce more of that good with a given
amount of resources than another country.

A simple economic model can be used to illustrate the principle of absolute

advantage.

The following economic model is based on the following assumptions and is

just an example:

• There are only two countries, Australia and China.

• These two countries each produce only wheat and cloth.

• Each country has the same amount of resources (land, labor and capital),
however the quality differs.
• Resources are transferable between the production of wheat and cloth.

• Production costs for each country are fixed.

• There are no trade barriers, such as tariffs between the two countries.

Table 1 Absolute Advantage - Production before Specialization

Wheat

(units) Cloth

(units)

Australia 30 20

China 5 25

Total output 35 45

Table 1 shows the production for each country before specialization.

With a given amount of resources Australia can produce 30 units of wheat

and 20 units of cloth. While China can produce 5 units of wheat and 25 units
of cloth.

In this example Australia produces more wheat while China can produce
more cloth.

Australia then has an absolute advantage in the production of wheat and

China an absolute advantage in the production of cloth.

Table 2 Production gains after specialization

Wheat (units) Cloth (units)

Australia 60(+30) 0 (-20)

China 0 (-5) 50 (+25)

Total output 60 (+25) (net gain) 50 (+5) (net gain)

When each country specializes in the production of the goods they have a
comparative advantage in, greater production of both goods could occur.

This is illustrated in Table 2, were the production of wheat has increased by

25 units and production of cloth by 5 units.

It is quite realistic to think that one country has an absolute advantage over
another country in the production of some goods. Finland has done this
recently by specializing in the production and distribution of Nokia
telephones.

Criticism: According to this theory every country should be able to produce

certain products at low cost compared to other countries and should product
certain other products at comparatively high price than other countries.
International trade takes place only under such condition. But, in reality most
of the countries do not have absolute advantage of producing at lowest cost
and commodity, yet they participate in international business.

Theory of comparative advantage

Adam Smith's theory of absolute advantage is a simple explanation of the

benefits of international trade. However, if one country has an absolute
advantage in the production all goods, can there be benefits from trade.

In 1817, David Ricardo, a classical economist developed the principal of

comparative advantage to explain this situation. The principal is based on the
relative efficiencies of production where each country has a comparative
advantage in producing the commodity in which it has the lower opportunity
cost.

Opportunity costs are what must be given up in order to consume or produce

another good. For example, going on an overseas holiday may involve giving
up the purchase of a new car. The comparative advantage principle can be
illustrated using Tables 3 and 4.

Table 3 Comparative advantages: production before specialization

Wheat (units) Cloth (units)

Australia 20 10

China 5 5
Total Output 25 15

In Table 3, Australia has an absolute advantage in the production of both

wheat and cloth. By using the theory of comparative advantage, both
countries can gain from specialization and trade.

Table 4 Opportunity costs

Opportunity cost

Country 1 unit of wheat 1 unit of cloth

Australia 0.5 (10/20) units of cloth 2 (20/10) units of wheat

China 1 (5/5) units of cloth 1 (5/5) units of wheat

From Table 4:

• Australia has a comparative advantage in the production of wheat since it

has to give up only 0.5 units of cloth to produce an extra unit of wheat, while
China must give up 1 unit of cloth to produce an extra unit of wheat. So it is
more practical for Australia to specialize in the production of wheat.

• China has a comparative advantage in the production of cloth since it has

to give up only 1 unit of wheat to produce an extra unit of cloth, while
Australia must give up 2 units of wheat to produce an extra unit of cloth.
Consequently it is more practical for China to specialize in the production of
cloth.

Australia has a comparative advantage in the production of wheat and China

cloth. Trade between the two countries should be beneficial because of the
different opportunity costs for these commodities.

Table 5 Production levels after specialization

Wheat (units) Cloth (units)

Australia 40 (+20) 0 (-10)

China 0 (-5) 10 (+5)

Total output 40 (+15) (net gain) 10 (-5) (net gain)

From Table 5 we can see that total output has increased when countries
specialize in the production of goods and services based on comparative
advantage. As both countries are using their resources more efficiently, trade
will lead to higher standard of living than would be otherwise possible.

A modern approach to comparative advantage

Michael Porter The Comparative Advantage of Nations (London, Macmillan
1990), suggests that instead of different factor endowments being the basis
for international trade much of the world's trade is taking place between
nations with similar factor endowments.

Factor endowments and comparative advantages are important in countries

that have industries based on natural resources and where production does
not rely on high levels of technology or where the labor force is relatively
unskilled. Porter suggests that it is competitive advantage (based on lower
costs, technological innovation and product differentiation) rather than
comparative advantage that is becoming an important factor in determining
the pattern and direction of international trade.

Transnational corporations are playing a very important role in this

development because they are able to coordinate their production activities
by moving resources production components, investment funds, technology
and labor across the world.

Assumptions and Limitations

a. It assumes countries are only driven by the maximization of production

and consumption.

b. It assumes only two countries are engaged in the production and

consumption of two goods.

c. It assumes no transportation costs. In reality, transportation costs are a

major expense of international trade.

d. It assumes labor is the only resource for production and is mobile within
each nation but cannot be transferred.

e. It assumes specialization does not result in gains in efficiency. In fact,

specialization results in increased knowledge of a task and future
improvements.

The Opportunity Cost Theory

Gottfried Harberler proposed the opportunity cost theory in 1969. The

limitations of the comparative cost theory produced the basis of this theory.
The opportunity cost is the value of alternatives, which have to be forgone in
order to obtain a particular thing. For example Rs. 1000 is invested in the
equity of Rama News Print Limited and earned a dividend of 6% in 1999, the
opportunity cost of this investment is 10% interest, had this amount been
deposited in a commercial bank for a term of one year.

Another example is that, India produces textile garments by utilizing its

human resources worth of Rs. 1 billion and exports to the US in 1999. The
opportunity cost of this project is, had India developed software packages by
utilizing the same human resources and exported the same to USA in 1999,
the worth of the exports would have been Rs. 10 billion.

Opportunity cost approach specifies the cost in terms of the value of the
alternatives, which have to be forgone in order to fulfill a specific act.

Thus, this theory provides the basis for international business terms of
exporting a particular product rather than other products. The previous
example suggests that it would be profitable to India to develop and export
software packages rather than textile garments to USA.

We slightly modify the previous example. For example, assume that India
earned Rs. 15 billion by exporting the same software packages to UK in 1999
rather than to USA. This theory suggests that the opportunity cost of India’s
software exports to USA in 1999 is Rs. 15 billion.

This. This theory also provides basis for international business of exporting a
product to a particular country rather to another country.

Other theories of International Trade

1. The Productivity Theory

It is criticized that most of the comparative cost theories are not applicable to
developing countries. Hence, H. Myint proposed productivity theory and the
vent for surplus theory.

The productivity theory points toward indirect and direct benefits. This theory
emphasizes that the process of specialization involves adapting and
reshaping the production structure of a trading country to meet the export
demands. Countries increase productivity in order to utilize these gains of
exports. This theory encourages the developing countries to go for cash
crops, increase by enhancing the efficiency of human resources, adapting
latest technology etc.

Limitations – However, this theory has also certain limitations. They are:

 Labour productivity did not increase after certain level.

 Increase in working hours

 Increase in the proportion of gainfully employed labour in proportion to

disguised unemployed labour.

2. The Vent for Surplus Theory

International trade absorbs the output of unemployed factors. If the countries

produce more than the domestic requirements, they have to export the
surplus to other countries. Otherwise, a part of the productive labour of the
country must cease and the value of its annual produce diminishes.

Thus, in the absence of foreign trade, they would be surplus productive

capacity in the country. This surplus capacity is taken by another country and
in turn gives the benefit under international trade.

Appropriateness of this Theory for Developing Countries: According to this

theory, the factors of production of developing countries are fully utilized. The
unemployed labour of the developing countries is profitably employed when
the vent for surplus is exported.

International trade permits for more efficient use of capital and labour.
Hence. J.S. Mill described this theory as, “serving relic of the Mercantile
Theory.”

3. Mill’s Theory of Reciprocal Demand

Comparative cost advantage theories do not explain the ratios at which

commodities are exchanged for another. J.S. Mill introduced the concept of
“Reciprocal demand” to explain the determinations of the equilibrium terms
of trade. Reciprocal demand indicates a country’s demand for one commodity
in terms of the other commodity; it is prepared to give up in exchange.
Reciprocal demand determines the terms of trade and relative share of each
country.

Quality of a product exported by country A

Equilibrium = -----------------------------------------------------
Quality of another Product exported by country B

Assumptions: Assumptions of this theory are: Existence of two countries,

trade in only two goods, both the goods are produced under the law of
constant returns, absence of the transportation costs, existence of perfect
competition and existence of full employment.

Modern Trade Theories

Modern theories focus on the concept of economies of scale as opposed to

the assumption of constant returns of scale incorporated in other theories.
This may mean that as a company produces on a larger scale, average costs
fall (internal economies of scale), but also that costs (the establishment of
good infrastructure, the presence of well-trained employees, etc.) will decline
if numerous other businesses are established in the vicinity (external
economies of scale). The company's earnings increase disproportionately to
the increase in use of all factors of production (e.g. labour, machinery,
capital). The company then gains an ever-increasing advantage over other
firms in its sector and thereby ends perfect competition, which was an
assumption of traditional theories.

It should be clear that if economies of scale, regardless of their base, largely

determine international competitiveness, it is mainly incidental factors or
even chance that will decide why one country, for example, has a strong
aircraft industry as a result of internal economies of scale and another
country has acquired and electronics industry as a result of external
economies of scale.

A second implication of economies of scale is that even if countries have

comparable supply structures (so that there are no comparative cost
advantages and, according to traditional theory, no reason for specialization
either), there are still reasons why one country specializes in one product and
another in something else. If they do so, production costs can be reduced in
both countries by economies of scale, and everyone involved in international
trade can benefit.

However, economies of scale need not include all stages of production. They
may actually be important at the sub-process stage of production because
production can be considered as a series of sub-activities ranging from
design to assembly. The company can create economies of scale by
concentrating on a few sub-activities such as design and production of
certain components or assembly. Other sub-activities then take place
elsewhere, e.g. abroad. And when it comes to explaining the location of these
sub-activities, companies often resort to the concept of comparative costs (as
used by traditional theorists): labour-intensive assembly takes place where
labour is cheap, and the design takes place where there is plenty of
technological know-how.

INTERNATIONAL MARKETING DECISIONS

International Marketing presents a more complex task than domestic

marketing because of the uncontrollable international marketing environment
and their heterogeneity. Hence, though the basic marketing decisions to be
made are similar in international and domestic marketing, making
international marketing decision is generally more challenging.

In international marketing, a company has to make, broadly five strategic

decisions.

1. International marketing decision: The first decision a company has to

make, is whether to take up international marketing or not. This decision is
based on a serious consideration of a number of important factors, such as
the present and future overseas opportunities, present and future domestic
market opportunities, the resources of the company in terms of skills,
experience, production and marketing capabilities and finance, company
objectives etc.

2. Market Selection Decision: Once it has been decided to do international

marketing, the next important step is the selection of the most appropriate
market. For this purpose, a thorough study of potentials of the various
overseas markets and their respective marketing environment is essential.
Company resources and objectives may not permit a company to do business
in all the overseas markets. Further, some markets are not potentially good,
and it may be suicidal to waste company resources in such markets. A proper
selection of the overseas markets therefore is very important.

3. Entry and Operating Decisions: Once the market selection decision has
been made, the next important task is to determine the appropriate mode of
entering the foreign market such as export, contract manufacturing, direct
manufacturing plant etc. on the basis of this decision, proper arrangements
must be made to continue the activities of marketing.

4. Marketing Mix Decision: As in the domestic marketing, the success highly

depends upon the applicability of proper Marketing Mix, in International
marketing also; Marketing Mix plays a major role. The elements of marketing
mix – product, promotion, price and physical distribution should be suitably
designed so that they may be adapted to the characteristics of the overseas
market.

INTERNAL AND EXTERNAL INTERNATIONAL MKTG CONCEPT

The key difference between domestic and international marketing is the

multi-dimensionality and complexity of foreign country markets a country
may operate in. Knowledge and awareness of these complexity and
implications for international marketing is must.

The important environmental analysis model  SLEPT (Social, Legal,

Economical, Political and Technological)

1. SOCIAL AND CULTURAL Influences

a. SOCIAL: Difference in social conditions, religion and culture determines

whether the customers are similar or dissimilar across the globe.

McDonald’s had to understand the same in India when they had to enter such
huge market with its burger. In 1995 / 6 India’s vegetarian market was 40%.
These vegetarians preferred that the burger should be made in a clean and
separate kitchen. Also their love for spicy food was required to be considered.
Among the non-veg. eaters, their disliking towards pork and beef among
mean eater was very well known. McDonald’s realize that they need to serve
Indians more than just burger, a burger that satisfies Indians taste.

b. CULTURE: Culture describes the kind of behaviour considered acceptable in

society.
The prescriptive characteristic of culture simplifies a consumer’s decision-
making process by limiting product choices to those which are socially
acceptable. The same feature creates problems for those products, which are
not in time with culture.

• Coca Cola had to withdraw its 2 liters bottle from Spain market as
Spaniards were not having refrigerator having larger compartments.

• Johnson’s floor wax was doomed to failure in Japan as it made the wooden
floors very slippery and Johnson failed to take into account the custom of not
wearing shoes inside the home.

• Coca Cola when introduced in china the name sounded like “KOOKE –
KOULA” meant thirsty mouth, full of candle wax. So they had to change the
name to “KEE KOU KEELE” which meant “joyful taste and happiness.”

• In Japan, White face is associated with death of mask.

• The size of refrigerators in USA is very big compared to Indian refrigerators,

as women there believe in storing vegetables and other eatable items, which
can be consumed till longer period of time.

Even the value and beliefs associated with color vary significantly between
different cultures. Blue considered as feminine and worm in Holland, is seen
as masculine and cold in Sweden. Green is a favorite color in Muslims, but in
Malaysia, it is associated with illness. White is associated with death and
mourning in China, Korea and in some traditions in India. Although, the same
color expresses happiness and is color of wedding dress of the bride in
English country.

Such differences suggest that same marketing mix can not be used for all
markets.

2. Legal Environment:

Legal systems vary both in content and interpretations. A successful

marketer will modify his marketing strategies in accordance with such
variations. Laws affect the marketing mix in terms of products, price,
distribution and promotional activities quite dramatically. For many firms
such laws are burdensome regulations.

For e.g. in Germany environmental laws mean a firm is responsible for the
retrieval and disposal of packaging waste it creates and must produce
packaging which is recyclable.

In Canada, if the information does not appear in both French and English, the
goods may be confiscated.

An international Marketer should learn about the advertising, packaging, and

labeling regulations in foreign markets.

India has been seen by many firms to be an attractive emerging market

having many legal difficulties, bureaucratic delays and lots of official
procedures. Many MNCs have found it difficult to break such hard structure.
Foreign companies are often viewed with suspicion. How ever, some firms
have been innovative in overcoming difficulties.

3. ECONOMIC ENVIRONMENT:

The economic situation varies from country to country. There are variations
in the levels of income and living standards, interpersonal distribution of
income, economic organization, occupational structure and so on. These
factors affect market conditions.

The level of development in a country and the nature of its economy will
indicate the type of products that may be marketed in it and the marketing
strategy that may be employed in it. In high income countries there is a good
market for a large variety of consumer goods. But in low-income countries
where a large segment does not have sufficient income even for their basic
necessities, the situation is quite different.

4. POLITICAL ENVIRONMENT:

The political environment of international marketing includes any national or

international political factor that can affect the organization’s operations or
its decision-making. The tendencies of governments to change regulations
can seriously affect an international strategy providing both opportunities
and threat. (1992’s liberalization policy by Narsimha Rao Govt.) An unstable
political climate can expose firms to many commercial, economic and legal
risks.

Political risk is defined as being: “A risk due to a sudden or gradual change in

a local political environment that is disadvantageous to foreign firms and
markets.”

5. TECHNOLOGICAL ENVIRONMENT:

The Technological Environment is perhaps the most dramatic force now

shaping our destiny. An international marketer should very well keep in his
mind the change taking place in technology and thereby affecting the
product.

New technologies create new markets and opportunities. However, every new
technology replaces an old technology. Xerography hurt carbon-paper
industry, computer hurt typewriter industry, and examples are so on. Any
international marketer, when ignored or forgot new technologies, their
business has declined. Thus, the marketer should watch the technological
environment closely. Companies that do not keep up with technological
changes, soon find their products outdated.

The United States leads the world in research and development spending.
Scientists today are researching a wide range of promising new products and
services ranging from solar energy, electric car, and cancer cures. All these
researches give a marketer an opportunity to set his products as per the
current desired standard. The challenge in each case is not only technical but
also commercial that means manufacture a product that can be afforded by
mass crowd.

MULTINATIONAL CORPORATIONS (MNCs)

A Multinational Corporation is a business unit which operates simultaneously

in different part of world either by manufacturing or marketing or both by
keeping its headquarter elsewhere as a strategic nerve centre.

Although MNC took birth in the early 1860s, it was after the Second World
War that the Multinationals have grown rapidly.

Generally, an MNC meets five criteria.

1. It operates in many countries at different levels of economic development.

2. Its local subsidiaries are managed by nationals.

3. It maintains complete industrial organizations including R & D and

manufacturing facilities, in several countries.

4. It has direct investment base in different countries.

5. It derives from 20 % to 50 % or more of its net profits from foreign

operations.
CLASSIFICATIONS OF MNCS

Pyramid Model Umbrella Model Inter/ Conglomerate

MNC MNC MNC

a. Pyramid Model MNC: These organizations have strong Headquarters and

weak subsidiaries. Head Quarter is rude, arrogant and gives no powers to its
subsidiaries. The decision making capacity is also not centralized. For E.g.
Siemens, Johnson & Johnson, IBM, McDonalds, Marks & Spencer etc. This
model of MNC is very power conscious.

b. Umbrella Model MNC: This model is very good among others. There is a
relationship of mutual help between the Head quarter and the subsidiary.
Ideas and money flow freely.

Making money and using power is not the primary motto of the organizations.
Head quarters give full freedom to the subsidiaries. Both HQ and subsidiaries
are very strong. E.g. P & G, Price water house, KPMG etc.

Problems: These organizations are very image conscious. If anything

damages their image, strong actions are taken for that.

c. Inter conglomerate Model MNC:

 For such organizations, money is main aim.

 Investment and Rate of Investments are very high.

 No loyalty towards any subsidiary countries. E.g. HLL, Unilever etc.

 Companies enter any segment and adapt the approach of Multi segments,
Multi markets, Multi products and Multi countries.

 Such companies try to acquire monopoly and take over its competitors
there by reducing competition. E.g. Brooke Bond and Lipton are taken over
by HLL.
How MNCs expand their business:

1. International Licensing: MNC permits the domestic company to use its

trademark, brand name or technical know-how for manufacturing and
marketing purpose. The license is given against payment of fee which acts as
source of income to the MNCs. E.g. Brand 555 is the licensed user of British
American Tobacco company. In India it is manufactured by ITC (the licensee).
It has the market of 600 cr. And company pays 5% of the total sales to BAT
(licensor) as license fees. The BAT does not provide any raw material but just
the brand name is given. This company took 45 years to establish. The
licensor generally keeps supervisor in the plant of licensee.

2. International Franchising: the licensor not only provides the brand name
but also the raw material. E.g. McDonalds. (Syrup – pharmaceutical
companies, printed circuit boards to electronic items, essence – cold drink
companies (Pepsi gives its essence to Punjab Agro).

3. Turnkey projects: MNCs undertake to complete the whole project and

handover the same when ready to the host country. Such project may be
supplied on tender basis. Such projects provide new opportunity to expand
the business activities.

4. Joint Ventures: “Like marriage, binding between home country

representative and host country representative, to set up a project either in
home country or host or 3rd country with a commitment of joint risk taking
and joint profit sharing.”

E.g. Modi Luft – Modi and Lufthansa

Successful JVs: Indo Gulf fertilizer – Birla group, Taj group of hotels with
Russian government.

5. Collaborations: It deals with any one part of management function, either

finance or technology collaboration. (it is not possible to have collaboration in
consumer products and FMCG. It happens generally with medicines,
technological products.)

E.g. Bajaj – Kawasaki, Hero Honda ,Kinetic Honda

Collaborations are time bound and not permanent.

Merits of Multinational Corporations:

1. Change and progress: MNCs are said to be the agents of change and
progress, on world wide.

2. Enables maximum use of resources.

3. To the host countries, the plants, equipments, and technical know how
necessary for its operations which is not available otherwise is made
available thru MNCs.

4. MNCs create employment opportunities in the host countries. Local

recruitment of Junior Managers creates a pool of managerial talent in the host
country.

5. Goods are made available at cheaper price due to economies of scale.

6. MNCs contribute enormously to technology transfer between rich and poor

countries.

7. MNCs stimulate domestic employment.

8. Helps removal of monopoly and improve the quality of domestic made

products.

9. Promotes exports and reduce imports by raising domestic productions.

10. Provides benefits of R & D.

DEMERITS OF MNCs

(Students please elaborate the following points)

1. Provides out-dated technology.

2. MNCs exploit local labour by paying relatively lesser rates.

3. MNCs involvement often results in the lack of development of local

research and development.

4. Use of capital-intensive technology reduces jobs in local country.

5. MNCs ruin domestic companies.

6. Adverse effect on life style / culture in host countries.

7. Charge very high fees.

Some of the Indian MNCs: IOC, Ranbaxy, Dr. Reddy, Wipro, Infosys, ONGC,
Hindustan Petroleum, and Bharat Petroleum.
TRADE BLOC

Along with trade barriers, there are trade blocs among the countries of the
world. These blocs offer special concessions to members of the group but
impose restrictions on the imports from the non-member countries. As a
result, these trade blocs are harmful to the growth of free international trade.
Efforts should be made to remove such trade blocs so as to have free trade
among the nations of the world. Unfortunately, efforts in this direction by
WTO are not effective.

Trade blocs are groups of countries that have established special preferential
arrangements governing trade between members. Although in some cases
the preferences-such as lower tariff duties or exemptions from quantitative
restrictions the general purpose of such arrangements is to encourage
exports by bloc members to one another-sometimes called intra-trade.

OBJECTIVES OF TRADE BLOCS (REASONS OF FORMING T.B.)

 To remove or at least to reduce trade barriers among the member-

countries of the group.

 To impose common external tariff and non-tariff barriers on non-member

countries.

 To bring integration of economies of member countries through free

transfer of labour, capital and other factor of production.

 To maintain cordial economic, political, cultural and social relations among

the members of the group.

 To provide assistance to member countries of the group in all possible

ways in solving their current economic problems.

TYPES OF ECONOMIC INTEGRATION / TRADE BLOCS

 FREE TRADE AREA: In Free Trade Area all barriers to the trade of goods and
services among member countries are removed. In an ideal free trade area,
no discriminatory tariffs, quotas, subsidies o administrative impediments
would be allowed to distort trade between member countries. Each country
however, is allowed to determine its own trade policies with regard to non-
members. For e.g. there is a free trade agreement known as NAFTA (The
North American Free Trade Agreement) between three counties; USA, Canada
and Mexico.

 Custom Union: A Custom Union represents the next stage in economic

cooperation. Member countries here not only remove trade restrictions for
members but also adopt a uniform commercial policy (Common external
tariff) against non-members. A customs union brings more economic
integration as compared to free trade area. Custom Union exists between
France and Monaco, Italy and San Marino, to name some examples.

 Common Market: A Common Market is a step ahead of custom union. It

eliminates all tariffs and other restrictions on internal trade, adopts a set of
common external tariffs and removes all restrictions on free flow of capital
and labor among member nations. Thus, a common market is a common
marketplace for goods as well as for services. Unlike a custom Union, a
common Market allows free movement of factors necessary to production.
Latin America possesses three common markets: The Central American
Common Market (CACM), the Andean Common Market, and the Southern
Cone Common Market.

 Economic Union: It is a step ahead to common market. It has all features of

common market and also uniformity in respect of monetary and fiscal policy
of member countries. Member countries are expected to pursue common
fiscal and monetary policies.

DETAILS OF IMPORTANT TRADE BLOCS

1. Association of South East Asian Nations

The Association of Southeast Asian Nations or ASEAN was established on 8

August 1967 in Bangkok by the five original Member Countries, namely,
Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam
joined on 8 January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23
July 1997, and Cambodia on 30 April 1999.

OBJECTIVES

The ASEAN Declaration states that the aims and purposes of the Association
are:

(i) To accelerate the economic growth, social progress and cultural

development in the region through joint endeavors.

(ii) To promote regional peace and stability through abiding respect for
justice and the rule of law in the relationship among countries in the region
and adherence to the principles of the United Nations Charter.

(iii) To maintain close cooperation with the existing international and regional
organizations with similar aims.

WORKING OF ASEAN

The member countries of ASEAN have Preferential Trading Arrangements

(PTA), which reduces tariffs on products traded among member countries. In
1992, ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan
to reduce tariffs systematically for manufactured and processed products.

The members have also established a series of co-operative efforts to

encourage joint participation in industrial, agricultural and technical
development projects and to increase foreign investments in their
economies. These efforts include an ASEAN finance corporation, the ASEAN
Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations have
introduced some programmes for greater diversification in their economies.

India and ASEAN

India is interested in maintaining close economic relations with the members

of ASEAN, as these countries are closer to India. The ASEAN countries are
offering co-operation to India in the field of trade, investment, science and
technology and training of personnel. Also, India’s trade with ASEAN countries
is satisfactory in recent years.

2. LAFTA (LATIN AMERICAN FREE TRADE ASSOCIATION)

LAFTA was established in February 1960 under the Treaty of Montevideo. The
member countries of the association are Argentina, Brazil, Columbia, Chile,
Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela and Bolivia.
The main objective of the association is to build up a common market for
South American countries and thereby to bring about a gradual reduction in
trade barriers among member countries. LAFTA as a trade bloc wants to
stimulate intra-Latin American trade and also to increase Latin American’s
declining share in world trade. However, LAFTA could not emerge as a
powerful economic union due to non-cooperation among the member
countries. The member countries have been competing among themselves
for promoting their exports. Political instability among the member countries
is another cause responsible for making this union weak and ineffective. Due
to lack of understanding and mutual trust, the integration among the
member countries is not effective.

In recent years, the Latin American debt crisis has eroded some of the
industrial progress that the countries had made and has forced them to rely
on primary product exports to patch up their debt. In 1989, Andean countries
made a renewed effort to revive regional co-operation with new measures.
LAFTA was replaced (renamed) by the Latin American Integration Association
(LAIA) with the signing of the Montevideo Treaty of 1980. The achievements
of LAIA are also moderate.

An 'advising bank' is a correspondent of a bank which issues a letter of credit,

and, on behalf of the issuing bank, the advising bank notifies the beneficiary
of the terms of the credit, without engagement on its part to pay or
guarantee the credit.

3. EUROPEAN UNION:

As a major center of power in the global economy, the European Union (EU) is
second only to the United States. In 2002, GDP of EU was US$ 8531 bn. This
constituted 26.6 % of the global GDP as compared to 32.5 % for the US and
12.2 % for Japan. Today after a number of Eastern European Countries joined
the EU, it is a bloc of 25 counties with a population of over 450 mn. The EU
also includes Germany, UK, France, Italy and Spain, which are respectively
3rd, 4th, 5th, 7th, and 9th largest economies in the world. Thus EU presents
an enormous export and investor market that is both mature and
sophisticated.

In 2004, EU accounted for 35.1 % of global merchandise exports as compared

to 11.1 % by the US, valued at US$ 3,300 bn.

About the EU: The EU is an organization of European Countries dedicated to

increasing economic integration and strengthening cooperation among its
members. The EU has its headquarters in Brussels, Belgium. The union
consists of 25 members namely, Belgium, Denmark, France, Germany,
Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, UK, Spain, Austria,
Finland, Sweden, Czech Republic, Hungary, Latvia, Malta, Poland, Slovakia,
Cyprus, Estonia, Lithuania and Slovenia.

Objectives of the EU: Its principal goal is to promote and expand cooperation
among members states in economics, trade, social issues, foreign policies,
security, defence, and judicial matters. Another major goal of the EU is to
implement the Economic and Monetary Union, which introduced a single
currency, the Euro for the EU members.

The Single Market and Common Commercial Policy: The single market refers
to the creation of a fully integrated market within the EU, which allows for
free movement of goods, services and factors of production. The EU, in
conjunction with Member States, has a number of policies designed to assist
the functioning of the market. Some of the policies are given below:

Competition Policy: The main competition lied in energy and transport sector.
The union designed this strategy to prevent price fixing, collusion (secret
agreement), and abuse of monopoly.

Free movement of goods: A custom union covering all trade in goods was
established and a common customs tariff was adopted with respect to
countries outside the union.

Services: Any member nation has a right to provide services in other Member
States.

Free movement of persons: Any citizen of EU member state can live work in
any other EU member state

Capital: There are no restrictions on the movement of capital and on

payments with the EU and between member states and third countries.

Trade between the European Union and India

India was one of the first Asian nations to accord recognition to the European
Community in 1962. The EU is India’s largest partner and biggest source
community in 1962. The EU is India’s largest trading partner and biggest
source of FDI. It is a major contributor of developmental aid and an important
source of technology. Over the years, EU – India trade has grown from 4.4 bn
to 28.4 bn US$.

Top items of trade between India and EU

India’s exports to EU % India’s Imports from EU %

Textile and clothing 35 Gemstones and jewellery 31

Leather and leather products 25 Power generating equipment 28

Gemstones and jewellery 12 Chemical products 15

Agriculture products 10 Office machinery 10

Chemical products 9 Transport equipment 6

 India is EU’s 17th largest supplier and 20th largest destination for exports.

 India’s strength lies in its traditional exports like textiles, agriculture and
marine products, gems and jewellery, leather and electronics products.

 Tariff and non-tariffs have been reduced, but compared to International

standards they are still high.

 Under the Bilateral trade between India and EU, it accounts for 26% of
India’s exports and 25% of its imports.

 Under the same trade there is an agreement on sugarcane. The EU has

undertaken to buy and import a specific quantity of sugarcane, raw or white,
from India at guaranteed price, the prices are fixed annually.

3. THEORY OF INTERNATIONAL PRODUCT LIFE CYCLE (IPLC)

The International Product Life Cycle (IPLC) theory explains trade in a context
of comparative advantage, describes the diffusion process of an innovation
across national boundaries.

The life cycle begins when a developed country, having a new product to
satisfy consumer needs, wants to exploit its technological breakthrough by
selling abroad. Other advanced nations soon start up their own production
facilities and before long LDCs do the same. Efficiency shifts from developed
countries to developing nations. Finally, advanced nations, no longer cost-
effective, import products from their former customers. The advanced nation
becomes a victim of its own creation.

Stages and characteristics

There are 5 distinct stages in the IPLC stage 0 through 4. The given below
table shows the major characteristics of the IPLC stages, with the US as the
developer of the innovation in question. The next exhibit shows three life-
cycle curves for the same innovation: One for the initiating country, one for
the other advanced countries and one for LDCs. For each curve, net export
results when the curve is above the horizontal line; if under the horizontal
line, net import results for that particular country. As the innovation moves
through time, directions of all three curves change. Time is relative, as the
time needed for a cycle to be completed varies from one kind of product to
another.

IPLC stages and characteristics for the initiating country

STAGE IMP / EXP TARGET MARKET COMPETITORS PRDTN COST

(1) Local Innovation None USA Few: Local Firms Initially High

(2) Overseas innovation Increasing export USA & Advanced Nations Few:
Local Firms Decline owing to economies of scale

(3) Maturity Stable export Advanced Nations & LDCs Advanced Nations Stable

(4) Worldwide imitation Decline export LDCs Advanced nations Increase

owing to lower eco. Of scale.

(5) Reversal Increasing import USA Advanced nations & LDCs Increase owing
to comparative disadvantage

Stage 1 – Local Innovation: Stage 1, on the left of the vertical importing /

exporting axis, represents a regular and highly familiar product life cycle in
operation within its original market. Innovations are most likely to occur in
highly developed countries because consumers in such countries are affluent
and have relatively unlimited want. From the supply side, firms in advanced
nations have both the technological know-how and abundant capital to
develop new products.

Stage 2 – Overseas Innovation: As soon as the new product is well developed,

its original market well cultivated, and local demands adequately supplied,
the innovating firm will look to overseas markets in order to expand its sales
and profit. Thus, this stage is known as a “Pioneering” or “International
Introduction” stage. The technological gap is first noticed in other advanced
nations because of their similar needs and high-income levels.

Competition in this stage comes from usually US Firms, since firms in other
countries may not have much knowledge about innovation. Production cost
tends to be decreasing at this stage because by this time the innovating firm
will normally have improved the production process. Supported by overseas
sales, aggregate production costs tend to decline further because of
increased economies of scales. A low introductory price is not necessary
because of the technological breakthrough; a low price is not desirable
because of heavy and costly marketing effort needed to educate consumers
in other countries about the new products.

Stage 3 – Maturity: Growing demand in advanced nations provide a

movement for firms there to commit themselves to starting local production,
often with the help of their government’s protective measures to preserve
infant industries. Thus, these firms can survive and succeed in spite of
relative inefficiency.

Development in competition does not mean that the initiating country’s

export level will immediately suffer. The innovating firm’s sales and export
volumes are kept stable because LDCs are now beginning to generate a need
for the product. Introduction of the product in LDCs help offset any reduction
in export sales to advanced countries.

Stage 4 – Worldwide imitation: This stage means tough times for the
innovating nation because of its continuous decline in exports. There is no
more new demand anywhere to cultivate. The decline will certainly affect the
US innovating firm’s economies of scale, and its production cost thus begin to
rise again. Consequently, firms in other advanced nations use their lower
prices to gain more consumer acceptance abroad at the expenses of the US
firm. As the product becomes more and more widely aware, imitation picks
up at a faster pace. Towards the end of this stage, US export declines to
nothing and any US production still remaining is basically for local
consumption.

Stage 5 – Reversal: The major characteristics of this stage are product

standardization and comparative disadvantage. The innovating country’s
comparative advantage has disappeared and what is left is comparative
disadvantage. This disadvantage is brought about because the product is no
more capital-intensive or technology-intensive but instead has become labor-
intensive for LDCs. LDCs now can establish sufficient productive facilities to
satisfy their own domestic needs as well as to produce for biggest market in
the world. For e.g. the black and white televisions are now no more
manufactured in USA as many Asian firms can produce them much less
expensively than any US firms.

VALIDITY OF THE IPLC

Several products have conformed to the characteristics described by the
IPLC. For e.g. at one time the US used to be an exporter of typewriters, cash
registers, B/W Televisions etc. but with passage of time, these simple
machines are now being imported, while US firms exports only the
sophisticated, electronic version of such machines.

Marketing Strategies:

For industries suffering the imitation stage or maturity stage things are likely
to get worse rather than better. Companies can understand the implications
of the IPLC and adjust marketing strategies accordingly.

I. Product Policy:

I. a. Automation: The IPLC emphasizes the importance of cost advantage. If

for innovating firms it is difficult to match labor costs in low-wage nations (it
happens generally with countries like US where labor cost is too high) the
firms can cut labor costs through automation and robotics. For e.g. IBM has
converted its Kentucky plant into one of the most automated plants thereby
cutting labor costs.

I. b. Outsourcing: Another way to cut the cost of product is to outsource the

product. Outsourcing is the practice of buying the parts or whole product
from other manufacturers while allowing a buyer to maintain its own brand
name.

Another modified version of outsourcing is having various components

produced under contract in different countries. That way, a firm takes
advantage of the most abundant factor of production in each country before
assembling components into final products for worldwide distribution.

IBM’s PC system consists of components made in low-cost countries-

monochrome monitor in South Korea; Floppy disk drives in Singapore, and
printer, keyboard, power supply in Japan. The final assembly takes place in
USA.

I. c. manufacturing in other country: the innovator may use local

manufacturing in other countries as an entry strategy. The company not only
can minimize transportation costs but can also slow down potential local
competition.

I. d. New Technology: Once in the maturity stage, the innovator’s

comparative advantage is gone; the firm should switch from producing
simple versions to producing new technologies in order to remove itself from
cutthroat competition.
II. Pricing Policy:

Stage – 1: At this stage, firm can afford to behave as a monopolist, charging a

premium price for its innovation. But this price must be adjusted downward in
the second and third stage of IPLC to discourage potential new comers and to
maintain market share. For e.g. IBM was slow in reducing prices for its PC
models. They believed that the IBM PC was too complex for Asian imitators.
This proved to be a costly error as the basic PC hardly changed for several
years. As a result other Asian companies came out with their own brands.

Stage – 4: In the last stage, it is not practical for the innovating firm to
maintain low price due to competitor’s cost advantage. But the firm’s above-
the-market price is feasible only if it is accompanied by top-quality product.

III Promotion Policy: Promotion and pricing are highly related in IPLC. In the
starting, the marketer must plan for a non-priced promotional strategy such
as providing technical support, or offering after-sales-service or giving
warranty for a particular period after the product is offered. The
concentration should be towards meeting consumer’s demand. Positioning is
another important point at the beginning. The marketer should try to position
the product as a high-quality product having good reputation. One thing the
company must never do is to allow its product to become a commodity item
with prices as the only buying motive as such products can easily be
duplicated by other firms. Through out four stages product differentiation, not
price is most important for protecting a company from the crowded, low-
profit market segment.

IV Place: A strong dealer network can provide the innovating firm with a good
defensive strategy. Because of its monopoly situation at the beginning, the
firm is in a good position to be able to select only the most qualified agents
and the network should be expanded further as the product becomes more
diffused. GM’s old policy of limiting its dealer from carrying several GM
brands inadvertently encouraged those dealers to start carrying imports,
there by creating alternative channel for GM which threatened the existing
channel.

Once a product is in the final stage of its life cycle, the innovating firm should
strive to become a specialist not a generalist, by concentrating its efforts in
carefully selected market segments, where it can distinguish itself from
foreign competitors. To achieve distinction in product, the innovating firm can
add product features or offer more service.

PORTERS NATIONAL DIAMOND FOR COMPETATIVE ADVANTAGE

According to Porter, as a rule competitive advantage of nations is the

outcome of 4 interlinked advanced factors and activities in and between
companies in these clusters. These can be influenced in a pro-active way by
government.

Factor Conditions

The situation in a country regarding production factors, like skilled labor,

infrastructure, etc., which are relevant for competition in particular industries.
These factors can be grouped into human resources (qualification level, cost
of labor, commitment etc.), material resources (natural resources,
vegetation, space etc.), knowledge resources, capital resources, and
infrastructure. They also include factors like quality of research on
universities, deregulation of labor markets, or liquidity of national stock
markets. These national factors often provide initial advantages, which are
subsequently built upon. Each country has its own particular set of factor
conditions; hence, in each country will develop those industries for which the
particular set of factor conditions is optimal.

This explains the existence of so-called lowcost- countries (low costs of

labor), agricultural countries (large countries with fertile soil), or the start-up
culture in the United States (well developed venture capital market). Porter
points out that these factors are not necessarily nature-made or inherited.
They may develop and change. Political initiatives, technological progress or
socio-cultural changes, for instance, may shape national factor conditions. A
good example is the discussion on the ethics of genetic engineering and
cloning that will influence knowledge capital in this field in North America and
Europe.

Home Demand Conditions

Describes the state of home demand for products and services produced in
a country. Home demand conditions influence the shaping of particular factor
conditions. They have impact on the pace and direction of innovation and
product development. According to Porter, home demand is determined by
three major characteristics: their mixture (the mix of customers needs and
wants), their scope and growth rate, and the mechanisms that transmit
domestic preferences to foreign markets. Porter states that a country can
achieve national advantages in an industry or market segment, if home
demand provides clearer and earlier signals of demand trends to domestic
suppliers than to foreign competitors. Normally,

home markets have a much higher influence on an organization's ability to

recognize customers’ needs than foreign markets do.

Related and Supporting Industries

The existence or non-existence of internationally competitive supplying

industries and supporting industries. One internationally successful industry
may lead to advantages in other related or supporting industries. Competitive
supplying industries will reinforce innovation and internationalization in
industries at later stages in the value system. Besides suppliers, related
industries are of importance. These are industries that can use and
coordinate particular activities in the value chain together, or that are
concerned with complementary products (e.g. hardware and software). A
typical example is the shoe and leather industry in Italy. Italy is not only
successful with shoes and leather, but with related products and services
such as leather working machinery, design, etc.

Firm Strategy, Structure, and Rivalry

The conditions in a country that determine how companies are established,

are organized and are managed, and that determine the characteristics of
domestic competition Here, cultural aspects play an important role. In
different nations, factors like management structures, working morale, or
interactions between companies are shaped differently. This will provide
advantages and disadvantages for particular industries. Typical corporate
objectives in relation to patterns of commitment among workforce are

of special importance. They are heavily influenced by structures of ownership

and control. Family-business based industries that are dominated by owner-
managers will behave differently than publicly quoted companies. Porter
argues that domestic rivalry and the search for competitive advantage within
a nation can help provide organizations with bases for achieving such
advantage on a more global scale.

The role of government in the Diamond Model of Porter

The role of government in the Diamond Model of Porter is to act as a catalyst
and challenger; it is to encourage - or even push - companies to raise their
aspirations and move to higher levels of competitive performance. They must
encourage companies to raise their performance, to stimulate early demand
for advanced products, to focus on specialized factor creation and to
stimulate local rivalry by limiting direct cooperation and enforcing anti-trust
regulations.

Diffusion of innovation

This extension of the product life cycle was developed by Everett M. Rogers
in 1962 and simply looks who adopts products at the different stages of the
life cycle.

Rogers identified five types of purchasers as the product moves through its
life cycle stage. He suggested:

1. Innovator who make up 2.5% of all purchases of the product, purchase the
product at the beginning of the life cycle. They are not afraid of trying new
products that suit their lifestyle and will also pay a premium for that benefit.

2. Early Adopters make up 13.5% of purchases, they are usually opinion

leaders and naturally adopt products after the innovators. This group of
purchasers are crucial because adoption by them means the product
becomes acceptable, spurring on later purchasers.

3. Early Majority make up 34% of purchases and have been spurred on by the
early adopters. They wait to see if the product will be adopted by society and
will purchase only when this has happened. They early majority usually have
some status in society.

4. Late Majority make up another 34% of sales and usually purchase the
product at the late stages of majority within the life cycle.

5. Laggards make up 16% of total sales and usually purchase the product
near the end of its life. They are the ‘wait and see’ group. They wait to see if
the product will get cheaper. Usually when they purchase the product a new
version is already on the market. Some may call Laggards, bargain hunters!

CULTURAL FACTORS
1. HOFSTEDES THEORY

According to Geert Hofstede, there is no such thing as a universal

management method or management theory, valid across the whole world.
Even the word 'management' has different origins and meanings in countries
throughout the world. Management is not a phenomenon that can be isolated
from other processes taking place in society. It interacts with what happens
in the family, at school, in politics, and government. It is obviously also
related to religion and to beliefs about science.

The five Cultural Dimensions of Hofstede

The cultural dimensions model of Geert Hofstede is a framework that

describes five sorts (dimensions) of differences / value perspectives between
national cultures:

Power distance. The degree of inequality among people which the population
of a country considers as normal.

Individualism versus collectivism. The extent to which people feel they are
supposed to take care for, or to be cared for by themselves, their families or
organizations they belong to.

Masculinity versus femininity. The extent to which a culture is conducive to

dominance, assertiveness and acquisition of things. Versus a culture which is
more conducive to people, feelings and the quality of life.

Uncertainty avoidance. The degree to which people in a country prefer

structured over unstructured situations.

Long-term versus short-term orientation. Long-term: values oriented towards

the future, like saving and persistence. Short-term: values oriented towards
the past and present, like respect for tradition and fulfilling social obligations.

To understand management in a country, one should have both knowledge

and empathy with the entire local scene. However, the scores of the unique
statistical survey that Hofstede carried out should make everybody aware
that people in other countries may think, feel, and act very differently from
yourself, even when confronted with basic problems of society.

HIGH AND LOW CONTEXT CULTURE

The general terms "high context" and "low context" (popularized by Edward
Hall) are used to describe broad-brush cultural differences between societies.

High context refers to societies or groups where people have close

connections over a long period of time. Many aspects of cultural behavior are
not made explicit because most members know what to do and what to think
from years of interaction with each other. Your family is probably an example
of a high context environment.

Low context refers to societies where people tend to have many connections
but of shorter duration or for some specific reason. In these societies, cultural
behavior and beliefs may need to be spelled out explicitly so that those
coming into the cultural environment know how to behave.

High Context

• Less verbally explicit communication, less written/formal information

• More internalized understandings of what is communicated

• Multiple cross-cutting ties and intersections with others

• Long term relationships

• Strong boundaries- who is accepted as belonging vs who is considered an

"outsider"

• Knowledge is situational, relational.

• Decisions and activities focus around personal face-to-face relationships,

often around a central person who has authority.

Examples: Small religious congregations, a party with friends, family

gatherings, expensive gourmet restaurants and neighborhood restaurants
with a regular clientele, undergraduate on-campus friendships, regular pick-
up games, hosting a friend in your home overnight.

Low Context

• Rule oriented, people play by external rules

• More knowledge is codified, public, external, and accessible.

• Sequencing, separation--of time, of space, of activities, of relationships

• More interpersonal connections of shorter duration

• Knowledge is more often transferable

• Task-centered. Decisions and activities focus around what needs to be

done, division of responsibilities.

Examples: large US airports, a chain supermarket, a cafeteria, a convenience

store, sports where rules are clearly laid out, a motel.

CULTURAL DIMENSIONS:

The major elements of culture are material culture, language, aesthetics,

education, religion, attitudes and values and social organisation.

Material culture

Material culture refers to tools, artifacts and technology. Before marketing in

a foreign culture it is important to assess the material culture like
transportation, power, communications and so on. Input-output tables may
be useful in assessing this. All aspects of marketing are affected by material
culture like sources of power for products, media availability and distribution.
For example, refrigerated transport does not exist in many African countries.
Material culture introductions into a country may bring about cultural
changes which may or may not be desirable.

Language

Language reflects the nature and values of society. There may be many sub-
cultural languages like dialects which may have to be accounted for. Some
countries have two or three languages. In Zimbabwe there are three
languages - English, Shona and Ndebele with numerous dialects. In Nigeria,
some linguistic groups have engaged in hostile activities. Language can
cause communication problems - especially in the use of media or written
material. It is best to learn the language or engage someone who
understands it well.

Aesthetics

Aesthetics refer to the ideas in a culture concerning beauty and good taste as
expressed in the arts -music, art, drama and dancing and the particular
appreciation of colour and form. African music is different in form to Western
music. Aesthetic differences affect design, colours, packaging, brand names
and media messages. For example, unless explained, the brand name FAVCO
would mean nothing to Western importers, in Zimbabwe most people would
instantly recognise FAVCO as the brand of horticultural produce.

Education

Education refers to the transmission of skills, ideas and attitudes as well as

training in particular disciplines. Education can transmit cultural ideas or be
used for change, for example the local university can build up an economy's
performance.

The UN agency UNESCO gathers data on education information. For example

it shows in Ethiopia only 12% of the viable age group enrol at secondary
school, but the figure is 97% in the USA.

Education levels, or lack of it, affect marketers in a number of ways:

• • advertising programmes and labelling

• • girls and women excluded from formal education (literacy rates)

• • conducting market research

• • complex products with instructions

• • relations with distributors and,

• • support sources - finance, advancing agencies etc.

Religion

Religion provides the best insight into a society's behaviour and helps answer
the question why people behave rather than how they behave.
Religion can affect marketing in a number of ways:

• • religious holidays - Ramadan cannot get access to consumers as shops

are closed.

• • consumption patterns - fish for Catholics on Friday

• • economic role of women - Islam

• • caste systems - difficulty in getting to different costs for

segmentation/niche marketing

• • joint and extended families - Hinduism and organizational structures;

• • institution of the church - Iran and its effect on advertising, "Western"

images

• • market segments - Maylasia - Malay, Chinese and Indian cultures making

market segmentation

• • ensitivity is needed to be alert to religious differences.

Attitudes and values

Values often have a religious foundation, and attitudes relate to economic

activities. It is essential to ascertain attitudes towards marketing activities
which lead to wealth or material gain, for example, in Buddhist society these
may not be relevant.

Also "change" may not be needed, or even wanted, and it may be better to
relate products to traditional values rather than just new ones. Many African
societies are risk averse, therefore, entrepreneurialism may not always be
relevant. Attitudes are always precursors of human behaviour and so it is
essential that research is done carefully on these.

Social organisation

Refers to the way people relate to each other, for example, extended
families, units, kinship. In some countries kinship may be a tribe and so
segmentation may have to be based on this. Other forms of groups may be
religious or political, age, caste and so on. All these groups may affect the
marketer in his planning.

There are other aspects of culture, but the above covers the main
ingredients. In one form or another these have to be taken account of when
marketing internationally.

STRATEGIES TO ENTER GLOBAL MARKETS

There are a variety of ways in which organisations can enter foreign markets.

Exporting

Exporting is the most traditional and well established form of operating in

foreign markets. Exporting can be defined as the marketing of goods
produced in one country into another.

The advantages of exporting are:

• manufacturing is home based thus, it is less risky than overseas based

• gives an opportunity to "learn" overseas markets before investing in bricks

and mortar

• reduces the potential risks of operating overseas.

The disadvantage is mainly that one can be at the "mercy" of overseas

agents and so the lack of control has to be weighed against the advantages.
For example, in the exporting of African horticultural products, the agents
and Dutch flower auctions are in a position to dictate to producers.

Besides exporting, other market entry strategies include licensing, joint

ventures, contract manufacture, ownership and participation in export
processing zones or free trade zones.

Licensing: Licensing is defined as "the method of foreign operation whereby a

firm in one country agrees to permit a company in another country to use the
manufacturing, processing, trademark, know-how or some other skill
provided by the licensor".

It is quite similar to the "franchise" operation. Coca Cola is an excellent

example of licensing. In Zimbabwe, United Bottlers have the licence to make
Coke.

Licensing involves little expense and involvement. The only cost is signing
the agreement and policing its implementation.

Licensing gives the following advantages:

• Good way to start in foreign operations and open the door to low risk
manufacturing relationships

• Linkage of parent and receiving partner interests means both get most out
of marketing effort

• not tied up in foreign operation and

• Options to buy into partner exist or provision to take royalties in stock.

The disadvantages are:

• • Limited form of participation - to length of agreement, specific product,

process or trademark

• • Potential returns from marketing and manufacturing may be lost

• • Partner develops know-how and so licence is short

• • Licensees become competitors - overcome by having cross technology

transfer deals and

• • Requires considerable fact finding, planning, investigation and

interpretation.

Those who decide to license ought to keep the options open for extending
market participation. This can be done through joint ventures with the
licensee.

Joint ventures

Joint ventures can be defined as "an enterprise in which two or more

investors share ownership and control over property rights and operation".

Joint ventures are a more extensive form of participation than either

exporting or licensing. In Zimbabwe, Olivine industries has a joint venture
agreement with HJ Heinz in food processing.

Joint ventures give the following advantages:

• • Sharing of risk and ability to combine the local in-depth knowledge with a
foreign partner with know-how in technology or process

• • Joint financial strength

• • May be only means of entry and

• • May be the source of supply for a third country.

They also have disadvantages:

• • Partners do not have full control of management

• • May be impossible to recover capital if need be

• • Disagreement on third party markets to serve and

• • Partners may have different views on expected benefits.

If the partners carefully map out in advance what they expect to achieve and
how, then many problems can be overcome.

Ownership: The most extensive form of participation is 100% ownership and

this involves the greatest commitment in capital and managerial effort. The
ability to communicate and control 100% may outweigh any of the
disadvantages of joint ventures and licensing. However, as mentioned earlier,
repatriation of earnings and capital has to be carefully monitored. The more
unstable the environment the less likely is the ownership pathway an option.

Pricing products

Three basic factors determine the boundaries of the pricing decision - the
price floor, or minimum price, bounded by product cost, the price ceiling or
maximum price, bounded by competition and the market and the optimum
price, a function of demand and the cost of supplying the product. In
addition, in price setting cognisance must be, taken of government tax
policies, resale prices, dumping problems, transportation costs, middlemen
and so on. Whilst many agricultural products are at the mercy of the market
(price takers) others are not. These include high value added products like
ostrich, crocodile products and hardwoods, where demand outstrips supply at
present.

Transfer pricing

Transfer pricing is more appropriate to those organisations with decentralised

profit centres. Transfer pricing is used to motivate profit centre managers,
provide divisional flexibility and also further corporate profit goals. Across
national boundaries the system gets complicated by taxes, joint ventures,
attitudes of governments and so on. There are four basic approaches to
transfer pricing.

• • Transfer at cost: few practise this, which recognises foreign affiliates

contribute to profitability by operating domestic scale economies. Prices may
be unrealistic so this method is seldom used. Otherwise it is basically used for
increasing corporate profitability.

• • Transfer at direct cost plus overheads and margin. Similar to that in

transfer at cost. Profits are show at every stage.

• • Transfer at a price derived from end market prices: very useful strategy in
which market based transfer prices and foreign sourcing are used as devices
to enter markets too small for supporting local manufacturers. This gives a
valuable foothold. Prices are required to be competitive in the international
market.

• • Transfer at an "arm's length": this is the price that would have been
reached by unrelated parties in a similar transaction. The problem is
identifying a point "arm's length" price for all products other than
commodities. Pricing at "arm's length" for differentiated products results not
in a specific price but prices, which fall in a predeterminable range.

Global pricing

There are three possible global pricing policies - extension (ethnocentric),

adaptation (polycentric) and invention (geocentric).

Extension: The same global price. A very simple method but does not
respond to market sensitivity.
Adaptation : Different prices in different markets. The only control is setting
transfer prices within the corporate system. It prevents problems of arbitrage
when the disparities in local market prices exceed the transportation and
duty costs separating markets.

Innovation : A mix of a) and b). This takes cognisance of any unique market
factor (s) like costs, competition, income levels and local marketing strategy.
In addition it recognises the fact that headquarters price coordination is
necessary in dealing with international accounts and arbitrage and it
systematically seeks to embrace national experience.

Pricing Strategies:

Skimming Price strategy: Skimming price strategy is strategy in which the

manufacturer charges a very high price in the initial stage of the PLC from
the consumers. The exporter has also to incur very high promotional
expenses since the product the newly introduced in the market. In this
strategy, the exporter keeps his profit margin very high. This type of strategy
is used in case of fashionable and novelty items, perishable items and
consumer durables which are introduced for the first time in the market. This
type of strategy is particularly useful if the exporter enters in the
international market for a short term and his main motive is profit
maximization. It is not possible for any exporter to follow this export pricing
strategy for a long time. It is used to match the demand and supply of early
adopters and reinforce customers perception of high value products.

Penetration Price strategy: In this type of pricing strategy, the exporter

charges a lower price in the initial stages since the main objective of the
exporter is to capture a large market share and create brand loyalty among
the consumers. In the later stages, the exporter raises the prices of the
product and recovers the losses suffered in the initial period. This pricing
strategy can be followed in case of products where the exporter is assured of
large market and continuous sale. It is used by organizations who have non
differentiated products or have large marketing systems in place.

Market Holding strategy: in this type of strategy, the goal is to maintain the
market share. It is used for price adjustment against competitors. Here, the
organization usually keeps a similar price with that of the competitors in the
initial stage. Such type is also required due to the price and currency
flutuations in different countries.
Cost plus pricing: There are basically two types under this heading, the
historical accounting cost method and the estimated future cost method. The
former includes direct and indirect costs and has the disadvantage of
ignoring demand and competitive position in the target market. Estimated
cost approaches are based on assumptions of production volume (depending
on process) which will be a principal factor determining costs. Again
difficulties may lie in trying to estimate production levels. In reality, costs
may be a useful starting point but should never be used as a final arbiter.

Price escalation

One major feature of international pricing is the increase on the price due to
the application of duties, increase in costs of transportation and distribution
margin increase, increase with the length of distribution channel, etc.

Dumping: It is the sale of an imported good or product at a price lower than

normally charged in domestic market or country of origin than the country of
sale. It is usually done by organizations to capture the market share. There
are anti dumping legislations used by the government to protect local
industries since it affects development of local economy, as it cannot be
predicted. To be convicted, both price discrimination and injury must be
proved.

GENERIC STRATEGIES

If the primary determinant of a firm's profitability is the attractiveness of the

industry in which it operates, an important secondary determinant is its
position within that industry. Even though an industry may have below-
average profitability, a firm that is optimally positioned can generate superior
returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued
that a firm's strengths ultimately fall into one of two headings: cost
advantage and differentiation. By applying these strengths in either a broad
or narrow scope, three generic strategies result: cost leadership,
differentiation, and focus. These strategies are applied at the business unit
level. They are called generic strategies because they are not firm or industry
dependent. The following table illustrates Porter's generic strategies:
Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a
given level of quality. The firm sells its products either at average industry
prices to earn a profit higher than that of rivals, or below the average
industry prices to gain market share. In the event of a price war, the firm can
maintain some profitability while the competition suffers losses. Even without
a price war, as the industry matures and prices decline, the firms that can
produce more cheaply will remain profitable for a longer period of time. The
cost leadership strategy usually targets a broad market.

Some of the ways that firms acquire cost advantages are by improving
process efficiencies, gaining unique access to a large source of lower cost
materials, making optimal outsourcing and vertical integration decisions, or
avoiding some costs altogether. If competing firms are unable to lower their
costs by a similar amount, the firm may be able to sustain a competitive
advantage based on cost leadership.

Firms that succeed in cost leadership often have the following internal
strengths:

• Access to the capital required to make a significant investment in

production assets; this investment represents a barrier to entry that many
firms may not overcome.

• Skill in designing products for efficient manufacturing, for example, having

a small component count to shorten the assembly process.

• High level of expertise in manufacturing process engineering.

• Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For
example, other firms may be able to lower their costs as well. As technology
improves, the competition may be able to leapfrog the production
capabilities, thus eliminating the competitive advantage. Additionally, several
firms following a focus strategy and targeting various narrow markets may be
able to achieve an even lower cost within their segments and as a group gain
significant market share.
Differentiation Strategy

A differentiation strategy calls for the development of a product or service

that offers unique attributes that are valued by customers and that
customers perceive to be better than or different from the products of the
competition. The value added by the uniqueness of the product may allow
the firm to charge a premium price for it. The firm hopes that the higher price
will more than cover the extra costs incurred in offering the unique product.
Because of the product's unique attributes, if suppliers increase their prices
the firm may be able to pass along the costs to its customers who cannot find
substitute products easily.

Firms that succeed in a differentiation strategy often have the following

internal strengths:

• Access to leading scientific research.

• Highly skilled and creative product development team.

• Strong sales team with the ability to successfully communicate the

perceived strengths of the product.

• Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by

competitors and changes in customer tastes. Additionally, various firms
pursuing focus strategies may be able to achieve even greater differentiation
in their market segments.

Focus Strategy

The focus strategy concentrates on a narrow segment and within that

segment attempts to achieve either a cost advantage or differentiation. The
premise is that the needs of the group can be better serviced by focusing
entirely on it. A firm using a focus strategy often enjoys a high degree of
customer loyalty, and this entrenched loyalty discourages other firms from
competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have
lower volumes and therefore less bargaining power with their suppliers.
However, firms pursuing a differentiation-focused strategy may be able to
pass higher costs on to customers since close substitute products do not
exist.
Firms that succeed in a focus strategy are able to tailor a broad range of
product development strengths to a relatively narrow market segment that
they know very well.

Some risks of focus strategies include imitation and changes in the target
segments. Furthermore, it may be fairly easy for a broad-market cost leader
to adapt its product in order to compete directly. Finally, other focusers may
be able to carve out sub-segments that they can serve even better.

A Combination of Generic Strategies

- Stuck in the Middle?

These generic strategies are not necessarily compatible with one another. If a
firm attempts to achieve an advantage on all fronts, in this attempt it may
achieve no advantage at all. For example, if a firm differentiates itself by
supplying very high quality products, it risks undermining that quality if it
seeks to become a cost leader. Even if the quality did not suffer, the firm
would risk projecting a confusing image. For this reason, Michael Porter
argued that to be successful over the long-term, a firm must select only one
of these three generic strategies. Otherwise, with more than one single
generic strategy the firm will be "stuck in the middle" and will not achieve a
competitive advantage.

Porter argued that firms that are able to succeed at multiple strategies often
do so by creating separate business units for each strategy. By separating
the strategies into different units having different policies and even different
cultures, a corporation is less likely to become "stuck in the middle."

However, there exists a viewpoint that a single generic strategy is not always
best because within the same product customers often seek multi-
dimensional satisfactions such as a combination of quality, style,
convenience, and price. There have been cases in which high quality
producers faithfully followed a single strategy and then suffered greatly when
another firm entered the market with a lower-quality product that better met
the overall needs of the customers.

Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend
against competitive forces. The following table compares some
characteristics of the generic strategies in the context of the Porter's five
forces.