Chapter 17 - Global Marketing and R&D

Global Marketing and R&D

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Learning objectives
Explain why it makes sense to vary the attributes of a product from country to country. Articulate why and how a firms distribution strategy might vary among countries. Identify how and why advertising and promotion strategies might vary among countries. Explain how and why a firms pricing strategy might vary among countries. Discuss how the globalization of the worlds economy is affecting new product development within the international business firm.

The focus of this chapter is on how marketing and R&D can be performed so they will reduce the costs of value creation and add value by better serving customer needs. A global marketing strategy that views the worlds consumers as similar in their tastes and preferences is consistent with the mass production of a standardized output. By mass-producing a standardized output, the firm can realize substantial unit cost reductions from experience curve and other scale economies. But ignoring country differences in consumer tastes and preferences can lead to failure. Thus, an international businesss marketing function needs to determine when product standardization is appropriate and when it is not, and to adjust the marketing strategy accordingly. Similarly, the firms R&D function needs to develop globally standardized products when appropriate as well as products that are customized to local requirements. Marketing and R&D are dealt with in the same chapter because of their close relationship. A critical aspect of the marketing function is identifying gaps in the market so that new products can be developed to fill those gaps. Developing new products requires R&D; thus, the linkage between marketing and R&D. Marketing dictates to R&D whether to produce globally standardized or locally customized products.

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OUTLINE OF CHAPTER 17: GLOBAL MARKETING AND R&D Opening Case: Levi Strauss Goes Local Introduction The Globalization of Markets and Brands Market Segmentation Management Focus: Marketing to Black Brazil Product Attributes Cultural Differences Economic Development Product and Technical Standards Distribution Strategy Differences between Countries Choosing a Distribution Strategy Communication Strategy Barriers to International Communication Push versus Pull Strategies Global Advertising Management Focus: Overcoming Cultural Barriers to Selling Tampons Management Focus: UnileverSelling to Indias Poor Pricing Strategy Price Discrimination Strategic Pricing Regulatory Influences on Prices Configuring the Marketing Mix Management Focus: Castrol Oil in Vietnam New-Product Development The Location of R&D Integrating R&D, Marketing, and Production Cross-Functional Teams Building Global R&D Capabilities Chapter Summary

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Critical Thinking and Discussion Questions Closing Case: Kodak in Russia CLASSROOM DISCUSSION POINT Review the passage by Theodore Levitt at the beginning of the chapter with students. Then, pick a company like McDonalds, MTV, or Starbucks and ask students to discuss whether the company standardizes its marketing mix, or adapt it to the local market. Ask students to explore the companys web site, and specifically its international sites. Next, ask students to identify differences and similarities in the marketing mix across countries. Finally, ask students to explain their findings using Levitts hypothesis. OPENING CASE: Levi Strauss Goes Local Summary The opening case explores how Levi Strauss, the manufacturer of blue jeans, changed its international marketing strategy to regain its competitiveness in the mid-2000s. Levi Strauss had watched its sales fall from $7.1 billion in 1996 to just $4 billion in 2004. The company had failed to keep up with changes in the fashion market, and was out of touch with its consumer. A three part turnaround strategy was implemented, and currently the company is beginning to see a turnaround. Discussion of the case can begin with the following questions. 1. How would Theodore Levitt view the world of blue jeans? Why did Levi Straus change its marketing mix? What effect did the change have on the companys overall strategy? 2. How did Levi Strauss engineer its turnaround? 3. What does the decision to give national managers more autonomy mean to the companys overall strategy? Another Perspective: To see how the recovery at Levi Strauss has progressed, go to {http://www.levistrauss.com/} and click on International then explore the various topics including values and vision, and company transformation. LECTURE OUTLINE FOR CHAPTER This lecture outline follows the Power Point Presentation (PPT) provided along with this instructors manual. The PPT slides include additional notes that can be viewed by clicking on view, then on notes. The following provides a brief overview of each Power Point slide along with teaching tips, and additional perspectives.

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Slide 17-3 Introduction The marketing mix (the choices the firm offers to its targeted market) is comprised of product attributes, distribution strategy, communication strategy, and pricing strategy. Slide 17-4 The Globalization of Markets and Brands Culture and consumer tastes drive the need to localize. Globalization seems to be the exception rather than the rule in many markets. Slides 17-5-17-6 Market Segmentation Market segmentation involves identifying distinct groups of consumers whose purchasing behavior differs from others in important ways. Segments can be based on: geography, demography, socio-cultural factors and psychological factors. Slide 17-8 Product Attributes A product is like a bundle of attributes. Products sell well when their attributes match consumer needs. Slide 17-9 Cultural Differences While there is some cultural convergence among nations, Levitts vision of global markets is still a long way off. Slide 17-10 Economic Development Consumers in highly developed countries tend to demand a lot of extra performance attributes, while consumers in less developed nations tend to prefer more basic products. Slide 17-11 Product and Technical Standards Differences in product and technical standards may require the firm to customize products. Slides 17-12- 17-13 Distribution Strategy A firms distribution strategy (the means it chooses for delivering the product to the consumer) is a critical element of the marketing mix. Slides 17-14-17-18 Differences between Countries There are four main differences in distribution systems: 1. retail concentration 2. channel length 3. channel exclusivity 4. channel quality Slide 17-19 Choosing a Distribution Strategy The optimal strategy depends on the relative costs and benefits of each alternative.

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Slide 17-21 Communication Strategy Communication channels available to a firm include direct selling, sales promotion, direct marketing, and advertising via different media. Slides 17-22-17-25 Barriers to International Communication The effectiveness of a firm's international communication can be jeopardized by cultural barriers, source and country of origin effects, and noise levels. Another Perspective: The class can be stimulated to think of some positive and negative source effects (German autos vs. German wine, Italian cuisine vs. British cuisine). Slides 17-26-17-29 Push Vs. Pull Strategy Firms have to choose between two types of communication strategies: a push strategy emphasizes personnel selling a pull strategy emphasizes mass media advertising The choice between push and pull strategies depends upon product type and consumer sophistication, channel length, and media availability. Slides 17-30-17-31 Global Advertising Standardized advertising makes sense when it has significant economic advantages, creative talent is scarce and one large effort to develop a campaign will be more successful than numerous smaller efforts, and brand names are global. Standardized advertising does not make sense when cultural differences among nations are significant, and country differences in advertising regulations block the implementation of standardized advertising. Slide 17-34 Pricing Strategy There are three issues to consider price discrimination, strategic pricing and regulatory influence on prices. Slides 17-35-17-37 Price Discrimination Price discrimination occurs when firms charge consumers in different countries different prices for the same product. The price elasticity of demand is a measure of the responsiveness of demand for a product to changes in price. Slides 17-38-17-41 Strategic Pricing Strategic pricing has three aspects: 1. predatory pricing - involves using the profit gained in one market to support aggressive pricing designed to drive competitors out in another market. 2. multi-point pricing - a firms pricing strategy in one market may have an impact on a rivals pricing strategy in another market. 3. experience curve pricing - price low worldwide in an attempt to build global sales volume as rapidly as possible, even if this means taking large losses initially.

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Slides 17-42-17-44 Regulatory Influences on Prices A firms ability to set its own prices may be limited by: 1. antidumping regulations 2. competition policy Slide 17-46 Configuring the Marketing Mix Differences in culture, economic conditions, competitive conditions, product and technical standards, distribution systems, government regulations, and the like may require variation in product attributes, distribution strategy, communications strategy, and pricing strategy. Another Perspective: Fun sites to visit with students include Cadbury Schweppes {http://www.cadburyschweppes.com/EN http://www.cadburyschweppes.com/EN} and Kraft {http://www.kraft.com/default.aspx}. Both companies sell their products in many countries around the world, and by clicking on the various country locations, students can get a feel for which elements of the marketing mix have been standardized, and which have not. Slide 17-47 New Product Development Firms today need to make product innovation a priority. This requires close links between R&D, marketing, and manufacturing. Slide 17-48 The Location of R&D New product ideas come from the interactions of scientific research, demand conditions, and competitive conditions. Slides 17-49 Integrating R&D, Marketing and Production A firms new product development efforts need to be closely coordinated with the marketing, production, and materials management functions. Slide 17-50 Cross Functional Teams Effective cross functional teams should be led by a heavyweight project manager with status in the organization, include members from all the critical functional areas, have members located together, establish clear goals, develop an effective conflict resolution process. Slide 17-51 Building Global R&D Capabilities To adequately commercialize new technologies, firms need to integrate R&D and marketing. CRITICAL THINKING AND DISCUSSION QUESTIONS

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QUESTION 1: Imagine you are the marketing manager for a US manufacturer of disposable diapers. Your firm is considering entering the Brazilian market. Your CEO believes the advertising message that has been effective in the United States will suffice in Brazil. Outline the possible objections to this. Your CEO also believes that the pricing decisions in Brazil can be left to local managers. Why might she be wrong?
ANSWER 1: While babies behinds serve the same function in all cultures, and the

product's technical standards may be similar, sensitivity to bodily functions does vary across cultures. Thus, the advertising message may need to be changed for different attitudes towards what is appropriate advertising. Likewise, where it might be progressive to show an ad with a male changing a diaper in some countries, in other countries this message could be lost or misinterpreted. Another consideration would be the noise level created by the advertising message of competitor's products, which may well be different in Brazil. While local demand and price elasticity decisions should play an important role in Brazil, pricing should not be left solely to the discretion of the local managers. Since this is a global business, your firm will likely be competing in Brazil with some of the same competitors as elsewhere. Thus pricing decisions in one country can have an impact on pricing and competition in other markets. Similarly, your firm may want to position and price the brand similarly across different South American countries. QUESTION 2: Within 20 years we will have seen the emergence of enormous global markets for standardized consumer products. Do you agree with this statement? Justify your answer. ANSWER 2: One could either choose to agree or disagree, while the best answer would likely hedge it somewhere in the middle. There are already enormous global markets already for products like Coke and Levis, but it is questionable whether there will ever be a global consumer market for Norwegian lutefisk. More global consumer markets will likely emerge, but there will continue to be national distinctions for many products. QUESTION 3: You are the marketing manager of a food products company that is considering entering the Indian market. The retail system in India tends to be very fragmented. Also, retailers and wholesalers tend to have long-term ties with South Korean food companies, which make access to distribution channels difficult. What distribution strategy would you advise the company to pursue? Why?
ANSWER 3: The firm should sell to either wholesalers or import agents. Because the

retail system in India is very fragmented, it would be very expensive for the firm to make contact with each individual retailer. As a result, it would be more economical for the firm to sell to wholesalers or import agents. Import agents may have long-term relationships with wholesalers, retailers, and/or other import agents. Similarly, wholesalers may have long-standing relationships with retailers and, therefore, be better able to persuade them to carry the firms product than the firm itself would.

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QUESTION 4: Price discrimination is indistinguishable from dumping. Discuss the accuracy of this statement? ANSWER 4: In some specific instances this statement is correct, but as a general rule it is not. When a firm is pricing lower in a foreign country than it is in its domestic market, it can be difficult to distinguish dumping from price discrimination unless it is clear that the firm is selling at below cost in the foreign market. Yet when costs are reasonably well known and all prices are above these, or if the firm is pricing lower in its domestic market than in foreign markets, it can be reasonably concluded that price discrimination rather than dumping is occurring. QUESTION 5: You work for a company that designs and manufactures personal computers. Your companys R&D center is in North Dakota. The computers are manufactured under contract in Taiwan. Marketing strategy is delegated to the heads of three regional groups: a North American group (based in Chicago), a European group (based in Paris), and an Asian group (based in Singapore). Each regional group develops the marketing approach within its region. In order of importance, the largest markets for your products are North America, Germany, Britain, China, and Australia. Your company is experiencing problems in its product development and commercialization process. Products are late to market, the manufacturing quality is poor, and costs are higher than projected, and market acceptance of new products is less than hoped for. What might be the source of these problems? How would you fix them?
ANSWER 5: The dispersion of activities makes sense - products are produced in the

lowest cost location and marketed by people familiar with local conditions. (The R&D in North Dakota must be a historical fluke.) Yet this makes the coordination task extremely complex, and information required for successful commercialization is likely not being effectively communicated among all the appropriate people. Greater cross-functional integration in the new product development process should help to improve product development and commercialization. CLOSING CASE: Kodak in Russia Summary The closing case describes the approach Kodak took to establish itself as a leader in the Russian consumer photography market. Kodak entered the Russian market in the early 1990s as the country was making its transition from a command economy to a market driven economy. At the time, the consumer market for photography was underdeveloped, few distribution options existed, and the Kodak name was relatively unknown. Today, Russia is one of Kodaks most promising markets. The following questions can be helpful in directing the discussion.

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QUESTION 1: How did the Russian market differ from markets in developed Western nations? How were these differences likely to impact upon demand for photographic products? ANSWER: There were several key differences between the Russian market and other developed Western markets. A primary difference involved Russias transition from a command economy to a market economy, and all of the challenges that resulted from the transition. In addition, the consumer market for photography was underdeveloped, the Kodak product line was virtually unknown, and the cost of cameras and complementary products was out of reach for many consumers. A further difference involved the few viable options for distribution. QUESTION 2: How did Kodak adjust its marketing mix in Russia to match local requirements? Do you think this was the right thing to do? ANSWER: Kodak made several changes to its marketing mix to better fit the Russian market. Capitalizing on Russias lower production costs, Kodak company opened a factory is Russia to produce a simple, inexpensive camera and accessories. The company also developed a consistent marketing message tailored to the local market , and encouraged major enterprises to give cameras as employee gifts rather than the traditional vodka. Finally, Kodak established a franchising system for its Kodak Express stores where consumers can buy products and develop film. It would appear that the changes Kodak has made to its marketing mix have been successful. Russia is now one of Kodaks top markets. QUESTION 3: Kodaks traditional film business is now under attack from digital photography (in which Kodak is also a leader). Should Kodak adjust its marketing mix for digital products to the Russian market? Why? ANSWER: This question should generate a number of interesting ideas from students. Some students might argue that Kodak has successfully built a presence in the country and that it should not bother fixing something that is not broken. These students might further point out that given that cameras are very much a luxury item, computers are also likely to be considered a luxury, and that without easy access to computers some of the appeal of digital photography is lost. Other students however, will probably point out that by not entering the digital market, Kodak is leaving itself open to attack from competitors that the company has already done the hard work of establishing a consumer photography market, now it should expand its product line to include digital cameras and equipment.

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Another Perspective: The Kodak web site {http://www.kodak.com/eknec/PageQuerier.jhtml?pq-path=2/6868&pqlocale=en_US&_requestid=5417} lets you explore the companys marketing efforts in other countries by changing the country selection at the top of the page. Go to the site, and change the country to Russia to see the companys current efforts there. INTEGRATING iGLOBES There are several iGLOBE video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following: Title: Drug Companies Conduct Research in India Conducting Drug Trials in India Abstract: This video explores the ethics of using India as a source of subjects for clinical trials by multinational pharmaceutical companies. Key Concepts: economic development, investment, ethics, new product development, location-specific advantages Notes: With its vast number of sick people, India is becoming an important destination for multinational pharmaceutical companies. Unlike traditional investment that is driven by a search for low cost labor or materials, or a bigger market however, pharmaceutical giants like Pfizer and Glaxo are attracted to India because of the countrys large number of scientists, doctors, and most importantly, patients. Yet, Pfizer and Glaxo are not trying to sell products designed to help the population get well, instead, they see the country as a laboratory of sorts. India has more than 30 million people that suffer from heart disease, a similar number of diabetics, and tens of millions of other people that have been diagnosed with cancer or psychiatric problems. Because of the poverty in the country many of these people are in advanced stages of their illnesses and have never been medically treated making them ideal candidates for clinical trials of new drugs. For companies, the clinical phase is one of the most tedious, expensive, and critical steps in the development of a new drug. Companies like Glaxo and Pfizer can shorten this stage and make it less expensive by completing it in India where according to Dr. Vijai Kumar of Neeman Medical International, companies can include one third more people in one third less time. The pharmaceutical companies believe that by conducting their clinical trials in India, drugs will eventually be more affordable everywhere.

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However, concerns have been raised that the pharmaceutical giants might be taking advantage of the situation in India. Jeffery Kahn of the University of Michigan Medical School has suggested that some people might participate in clinical trials simply because it is the only way they can get any sort of treatment. Kahn is concerned that many of the study participants will not get the benefit of the new drugs. Instead, the new products will only benefit people in richer nations. There are also concerns that the studies could be unreliable if people lie about their medical histories because they are so desperate for treatment. For now however, it appears that the trials will continue. Experts anticipate that by 2010, some 2 million Indians will be involved in some sort of trial, up from just 2,000 three years ago. Discussion Questions: 1. Why are so many pharmaceutical companies attracted to India? What are the advantages of conducting clinical trials in India as compared to countries such as the U.S.? Can a company in todays hyper-competitive market afford to continue clinical trials in its domestic market? 2. Consider the ethics of using India as a test market for new drugs. Should companies like Pfizer be prohibited from conducting clinical trials in a country where many participants may be illiterate and extremely poor? Should clinical trials be limited to only those participants who can demonstrate a certain level of literacy and/or income? 3. The clinical trial phase of new product development is one of the most expensive and arduous stages of getting a drug to market. If companies are criticized for moving this process to places like India where they believe they can conduct this step in less time for less money what will be the effect on new product development? Who are the winners and who are the losers in the new trend of conducting clinical trials in India? 4. Concerns have been raised that the clinical trials being conducted in India may be compromised because people are lying about their medical histories just to be included. What are the dangers of conducting clinical trials in a nation where people are desperate to get medical treatment of any sort, experimental or not? What are the implications of using such trials to quickly and cheaply get a product to market?

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INTEGRATING VIDEOS There are also several longer video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following: Title 4: Dominos Pizza Summary Dominos began expanding its pizza business outside the U.S. in 1983. By 2005, the company had 3,000 stores outside the U.S. located in more than 50 different countries. Dominos success lies in part to its product, pizza seems to be universally accepted, and to its commitment to consistency, the company wants every store to be the same regardless of its location. Still, Dominos has had to make some adjustments to meet the needs of each market. Pizza topping and ingredients reflect local tastes and customs for example. Delivery methods must also be adapted to individual market conditions. So, for example, in Japan pizzas are delivered via scooter by people who are very familiar with the neighborhood. Similarly, promotional materials must fit with the market. In Belgium for example, menus are printed in three different languages. Yet, through all of the adjustments to the marketing mix, the company is committed to its core principles. To ensure that the companys core principles are emphasized, Dominos is very particular when selecting franchisees. The company only considers people who are capable of operating a business within corporate guidelines. To facilitate this process, Dominos also provides strong support to its franchisees. In Mexico for example, the company makes a store visit every 45 days, provides all marketing materials, and provides training. Discussion Questions 1. Dominos has successfully grown its international presence very quickly. Compare and contrast its strategy with that of another well-known international fast food operation, McDonalds. What similarities do you see? Are they any significant differences between the two companies? What has led to the success of Dominos? 2. Dominos owes its rapid expansion into foreign markets to its franchisees. Consider the companys franchising strategy. How does Dominos ensure that its corporate values and strategies are adopted by the franchise operations? 3. While its pizza appears to be universally accepted, Dominos has had to make some adjustments to its marketing mix. Discuss the different components in the marketing mix and how the company has responded to local needs. 4. Dominos made some significant changes to its Mexican operation in the late 1990s. Discuss Dominos efforts there, the economic risk the company was facing, and the strategies it used. Is Dominos current strategy viable in the long-term? Why or why not?

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globalEDGE Exercise Questions Use the globalEDGE site {http://globalEDGE.msu.edu/} to complete the following exercises: Exercise 1 The consumer purchase of specific brands is an indication of the relationship that develops over time between a company and its customers. Locate and retrieve the most current ranking of global brands. Identify the criteria that are utilized. Which country (or countries) appears to dominate the top 100 global brands list? Why do you think this is the case? Prepare a short report identifying the countries that possess global brands and the potential reasons for success. Exercise 2 Some regions of the world are more widely known for their innovation efforts than others. Identify the fifteen organizations with the highest research and development (R&D) expenditures in the world. A colleague mentioned that the Technology Review is a particularly informative source on innovation topics. Prepare a short report regarding the country of origin of the companies with the most R&D spending, as well as the distribution of R&D expenditures by industry. Answers to the Exercises Exercise 1 The overall and industry rankings of the worlds top 100 global brands are prepared annually by BusinessWeek and Interbrand. The rankings can be accessed by searching the term global brand at {http://globaledge.msu.edu/ResourceDesk/}. This resource is named Interbrand: Global Brands Scoreboard and is found under the globalEDGE category Research: Rankings. Be sure to check the Resource Desk only checkbox of the search function on the globalEDGE website. Search Phrase: global brand Resource Name: Interbrand: Global Brands Scoreboard Website: {http://www.businessweek.com/magazine/toc/06_32/B399606globalbrands.htm} globalEDGE Category: Research: Rankings Exercise 2 The Top 15: Companies Spending the Most on R&D is an annual ranking published by the Technology Review magazine. The ranking can be reached by searching for the term Technology Review at {http://globaledge.msu.edu/ResourceDesk/}. The link is located under the globalEDGE category Research: Rankings. Be sure to check the Resource Desk only checkbox of the search function on the globalEDGE website.

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Search Phrase: Technology Review Resource Name: Technology Review: Corporate R&D Scorecard 2005 Website: {http://www.technologyreview.com/Biztech/14743/} globalEDGE Category: Research: Rankings

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