Marketing Basics International Business |
Lars Perner, Ph.D.
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Protectionism: Although trade generally benefits a country as a whole, powerful interests within countries frequently put obstacles—i.e., they seek to inhibit free trade. There are several ways this can be done:
Tariff barriers: A duty, or tax or fee, is put on products imported. This is usually a percentage of the cost of the good.
Quotas: A country can export only a certain number of goods to the importing country. For example, Mexico can export only a certain quantity of tomatoes to the United States, and Asian countries can send only a certain quota of textiles here.
“Voluntary” export restraints: These are not official quotas, but involve agreements made by countries to limit the amount of goods they export to an importing country. Such restraints are typically motivated by the desire to avoid more stringent restrictions if the exporters do not agree to limit themselves. For example, Japanese car manufacturers have agreed to limit the number of automobiles they export to the United States.
Subsidies to domestic products: If the government supports domestic producers of a product, these may end up with a cost advantage relative to foreign producers who do not get this subsidy. U.S. honey manufacturers receive such subsidies.
Non-tariff barriers, such as differential standards in testing foreign and domestic products for safety, disclosure of less information to foreign manufacturers needed to get products approved, slow processing of imports at ports of entry, or arbitrary laws which favor domestic manufacturers.
Justifications for protectionism: Several justifications have been made for the practice of protectionism. Some appear to hold more merit than others:
Protection of an “infant” industry: Costs are often higher, and quality lower, when an industry first gets started in a country, and it thus be very difficult for that country to compete. However, as the industry in the country matures, it may be better able to compute. Thus, for example, some countries have attempted to protect their domestic computer markets while they gained strength. The U.S. attempted to protect its market for small autos American manufacturers were caught unprepared for the switch in demand away from the larger cars caught U.S. auto makers unprepared. This is generally an accepted reason in trade agreements, but the duration of this protection must be limited (e.g., a maximum of five to ten years).
Resistance to unfair foreign competition: The U.S. sugar industry contends that most foreign manufacturers subsidize their sugar production, so the U.S. must follow to remain competitive. This argument will hold little merit with the dispute resolution mechanism available through the World Trade Organization.
Preservation of a vital domestic industry: The U.S. wants to be able to produce its own defense products, even if foreign imports would be cheaper, since the U.S. does not want to be dependent on foreign manufacturers with whose countries conflicts may arise. Similarly, Japan would prefer to be able to produce its own food supply despite its exorbitant costs. For an industry essential to national security, this may be a compelling argument, but it is often used for less compelling ones (e.g., manufactures of funeral caskets or honey).
Intervention into a temporary trade balance: A country may want to try to reverse a temporary decline in trade balances by limiting imports. In practice, this does not work since such moves are typically met by retaliation.
Maintenance of domestic living standards and preservation of jobs. Import restrictions can temporarily protect domestic jobs, and can in the long run protect specific jobs (e.g., those of auto makers, farmers, or steel workers). This is less of an accepted argument—these workers should instead by retrained to work in jobs where their country has a relative advantage.
Retaliation: The proper way to address trade disputes is now through the World Trade Organization. In the past, where enforcement was less available, this might have been a reasonable argument.
Note that while protectionism generally hurts a country overall, it may be beneficial to specific industries or other interest groups. Thus, while sugar price supports are bad for consumers in general, producers are an organized group that can exert a great deal of influence. In contrast, the individual consumer does not have much of an incentive to take action to save about $5.00 a year.
Effects of protectionism: Protectionism tends to lead to additional tariffs or other protectionist measures by other countries in retaliation, reduced competition (which results in inflation and less choice for consumers), a weakening of the trade balance (due in part to diminished export abilities resulting from foreign retaliations and in part because of the domestic currency loses power as there is less demand for it). An overall effect may be a vicious cycle of trade wars as each country responds to the other with a “tit for tat.”
Efforts to encourage trade: The General Agreement on Trade and Tariffs (GATT), which was negotiated at the Bretton Woods Conference in 1947, sought to encourage international trade following World War II, when many countries were in bad shape after the war. There were several objectives:
To encourage trade in general;
To replace non-tariff barriers with tariff barriers—i.e., it is acceptable but not encouragable to impose some burden on foreign products, but this must be in the form of a readily identifiable duty rather than a more vague restriction which is less transparent;
Reciprocity: Countries should respond in kind when other countries reduce tariffs or barriers;
Providing the most favorable trade terms offered to anyone to all members of the agreement.
Note that the above represent general principles, which in practice are implemented with numerous exceptions. For example, the Uruguay Roundtable Agreement, which set up the World Trade Organization, literally runs several thousand pages. The EU and NAFTA are accepted, but go against the provision of offering the best terms available to everyone.
The 1994 Uruguay Round Table Agreement resulted in the establishment of the World Trade Organization (WTO). The main thrust of this organization is to expand the scope of trade affected (e.g., services are now covered), the protection of intellectual property (e.g., patents, copyrights, and trademarks) and, most importantly, to provide binding decisions on disputes which member countries must meet.
Approaches to law: Different legal systems exist in different countries, many of which are based on a combination of various choices. In much of the English speaking World, the legal systems are based on the common law, a practice whereby the courts have gradually, over centuries, refined the law as new complex issues have come up. For example, standards for contracts are a very tricky issue, and numerous questions have been decided when they have been raised over time. Thus, common law is well suited to address complex legal issues, and is best suited for addressing the challenges associated with a rapidly changing environment (e.g., intellectual property issues that are raised by technological advances). It may sound somewhat undemocratic that laws are effectively made by un-elected judges, but in most jurisdictions, a parliament can essentially override the decisions made by default by the courts. Nowadays, in most developed countries, the common and statutory law made by legislatures (e.g., the U.S. Congress or the British parliament) coexist, so that courts mostly address issues not directly specified in statutory law or adapt statutes so that they can address situations so specific that they had not been considered by the legislature).
Some countries—e.g., France and Germany—have their legal systems based entirely on statutory law so that judges do not generally make precedents in deciding cases—they merely tend to “match” as closely as possible the respective legal situation to the most appropriate statute.
Alternatively, many countries’ legal systems are based to a large extent on religious law—for example, the Koran contains very specific dictates on inheritance and on many business matters (the best known example revolving against the practice of usury, which has frequently been interpreted to preclude the use of interest entirely). Since religious law is believed to have been laid down by God, it tends not to lend itself well to being changed when situations change.
Socialist law is based on the premise that “the government is always right” and typically has not developed a sophisticated framework of contracts (you do what the governments tells you to do) or intellectual property protection (royalties are unwarranted since the government ultimately owns everything). Former communist countries such as those of Eastern Europe and Russia are trying to advance their legal systems to accommodate issues in a free market.
In almost all countries, there is also some component of administrative law, or rules and regulations whose promulgation is delegated to bureaucrats. For example, the legislature usually does not have enough time to specify in detail all the regulations necessary to govern, say, banking, so it passes some broad guidelines and relies on government agencies to come up with the specifics. Again, if the legislature does not like what the bureaucrats have done, it can pass legislation to override the bureaucrats’ decisions. An extreme case of administrative law involves the case of Japan, where the Diet tends to pass notoriously vague laws, giving government officials tremendous discretion through the process of administrative guidance. Here, businesses will frequently not know what the law is until they consult government officials (government work, by the way, tends to be more prestigious than employment in all but the largest firms), and connections thus become extremely important.
Laws across borders. When laws of two countries differ, it may be possible in a contract to specify in advance which laws will apply, although this agreement may not be consistently enforceable. Alternatively, jurisdiction may be settled by treaties, and some governments, such as that of the U.S., often apply their laws to actions, such as anti-competitive behavior, perpetrated outside their borders (extra-territorial application). By the doctrine known as compulsion, a firm that violates U.S. law abroad may be able to claim as a defense that it was forced to do so by the local government; such violations must, however, be compelled—that they are merely legal or accepted in the host country is not sufficient.
The reality of legal systems. Some legal systems, such as that of the U.S., are relatively “transparent”—that is, the law tends to be what its plain meaning would suggest. In some countries, however, there are laws on the books which are not enforced (e.g., although Japan has antitrust laws similar to those of the U.S., collusion is openly tolerated). Further, the amount of discretion left to government officials tends to vary. In Japan, through the doctrine of administrative guidance, great latitude is left to government officials, who effectively make up the laws.
One serious problem in some countries is a limited access to the legal systems as a means to redress grievances against other parties. While the U.S. may rely excessively on lawsuits, the inability to effectively hold contractual partners to their agreement tends to inhibit business deals. In many jurisdictions, pre-trial discovery is limited, making it difficult to make a case against a firm whose internal documents would reveal guilt. This is one reason why personal relationships in some cultures are considered more significant than in the U.S.—since enforcing contracts may be difficult, you must be sure in advance that you can trust the other party.
Enforcement: In the United States, not all laws are consistently enforced, but this is a problem to a much lesser extent than it is in many other countries—both developing and developed. In many countries, access to the courts is difficult to get and additionally, the courts may not be as independent as they are here. Further, there are frequently problems with corruption.
Some laws of particular interest to firms doing business abroad.
Anti-trust. U.S. antitrust laws are generally enforced in U.S. courts even if the alleged transgression occurred outside U.S. jurisdiction. For example, if two Japanese firms collude to limit the World supply of VCRs, they may be sued by the U.S. government (or injured third parties) in U.S. courts, and may have their U.S. assets seized.·
The Foreign Corrupt Influences Act came about as Congress was upset with U.S. firms’ bribery of foreign officials. Although most if not all countries ban the payment of bribes, such laws are widely flaunted in many countries, and it is often useful to pay a bribe to get foreign government officials to act favorably. Firms engaging in this behavior, even if it takes place entirely outside the U.S., can be prosecuted in U.S. courts, and many executives have served long prison sentences for giving in to temptation. In contrast, in the past some European firms could actually deduct the cost of foreign bribes from their taxes! There are some gray areas here—it may be legal to pay certain “tips” –known as “facilitating payments”—to low level government workers in some countries who rely on such payments as part of their salary so long as these payments are intended only to speed up actions that would be taken anyway. For example, it may be acceptable to give a reasonable (not large) facilitating payment to get customs workers to process a shipment faster, but it would not be legal to pay these individuals to change the classification of a product into one that carries a lower tariff.
Anti-boycott laws. Many Arab countries maintain a boycott of Israel, and foreigners that want to do business with them may be asked to join in this boycott by stopping any deals they do with Israel and certifying that they do not trade with that country. It is illegal for U.S. firms to make this certification even if they have not dropped any actual deals with Israel to get a deal with boycotters.· Trading With the Enemy. It is illegal for U.S. firms to trade with certain countries that are viewed to be hostile to the U.S.—e.g., Libya and Iraq.
Note that these laws frequently put the U.S. at a competitive disadvantage relative to firms that are not bound by these restrictions.
Definitions: It is difficult to capture a relatively amorphous concept like culture in a definition, but several have been proposed—e.g.,
“The collection of values, beliefs, behaviors, customs, and attitudes that distinguish a society.”
“A learned, shared, compelling, interrelated set of orientations for members of society.”
“Shared meanings.”
While memorizing definitions is not essential, note the following parts of the definition:
Learned. Culture is not genetically based—if that were the case cultures across the World would have been much more similar to each other. We learn what is considered appropriate in our culture through trial and error. If a child engages in competitive behavior, this might be rewarded in the United States with the expression of parental approval, while in Japan it might result in subtle shows of disapproval, such as lack of attention.
Shared. The beliefs, interpretations, and behaviors are shared by all or most of the people within the culture, so that it becomes a truly society-wide phenomenon.
Compelling: Culture must have implications (such as social disapproval if contradicted) in order to be considered important.
Interrelated. Although there may be conflicts between elements of culture (e.g., respect for seniority may come into conflict with a growing value of achievement in Singapore), for the most part, elements of culture constitute a coherent and relatively consistent whole. For example, the tendency for Japanese business people to bow when meeting each other and the tendency of lower level Japanese employees to show great deference to their superiors are both manifestations of a strong emphasis on respect.
Cultural lessons. We considered several cultural lessons in class; the important thing here is the big picture. For example, within the Muslim tradition, the dog is considered a “dirty” animal, so portraying it as “man’s best friend” in an advertisement is counter-productive. Packaging, seen as a reflection of the quality of the “real” product, is considerably more important in Asia than in the U.S., where there is a tendency to focus on the contents which “really count.” Many cultures observe significantly greater levels of formality than that typical in the U.S., and Japanese negotiator tend to observe long silent pauses as a speaker’s point is considered.
Hofstede’s Dimensions. Gert Hofstede, a Dutch researcher, was able to interview a large number of IBM executives in various countries, and found that cultural differences tended to center around four key dimensions:
Social orientation (Individualism vs. collectivism): To what extent do people believe in individual responsibility and reward rather than having these measures aimed at the larger group? Contrary to the stereotype, Japan actually ranks in the middle of this dimension, while Indonesia and West Africa rank toward the collectivistic side. The U.S., Britain, and the Netherlands rate toward individualism.
Power orientation (distance): To what extent is there a strong separation of individuals based on rank? Power distance tends to be particularly high in Arab countries and some Latin American ones, while it is more modest in Northern Europe and the U.S.
Goal Orientation (Masculinity vs. femininity) involves a somewhat more nebulous concept. “Masculine” values involve competition and “conquering” nature by means such as large construction projects, while “feminine” values involve harmony and environmental protection. Japan is one of the more masculine countries, while the Netherlands rank relatively low. The U.S. is close to the middle, slightly toward the masculine side.
Uncertainty orientation (avoidance) involves the extent to which a “structured” situation with clear rules is preferred to a more ambiguous one; in general, countries with lower uncertainty avoidance tend to be more tolerant of risk. Japan ranks very high. Few countries are very low in any absolute sense, but relatively speaking, Britain and Hong Kong are lower, and the U.S. is in the lower range of the distribution.
Although Hofstede’s original work did not address this, a fifth dimension of long term vs. short term orientationhas been proposed. In the U.S., managers like to see quick results, while Japanese managers are known for take a long term view, often accepting long periods before profitability is obtained.
High vs. low context cultures: In some cultures, “what you see is what you get”—the speaker is expected to make his or her points clear and limit ambiguity. This is the case in the U.S.—if you have something on your mind, you are expected to say it directly, subject to some reasonable standards of diplomacy. In Japan, in contrast, facial expressions and what is not said may be an important clue to understanding a speaker’s meaning. Thus, it may be very difficult for Japanese speakers to understand another’s written communication. The nature of languages may exacerbate this phenomenon—while the German language is very precise, Chinese lacks many grammatical features, and the meaning of words may be somewhat less precise. English ranks somewhere in the middle of this continuum.
Ethnocentrism and the self-reference criterion. The self-reference criterion refers to the tendency of individuals, often unconsciously, to use the standards of one’s own culture to evaluate others. For example, Americans may perceive more traditional societies to be “backward” and “unmotivated” because they fail to adopt new technologies or social customs, seeking instead to preserve traditional values. In the 1960s, a supposedly well read American psychology professor referred to India’s culture of “sick” because, despite severe food shortages, the Hindu religion did not allow the eating of cows. The psychologist expressed disgust that the cows were allowed to roam free in villages, although it turns out that they provided valuable functions by offering milk and fertilizing fields. Ethnocentrism is the tendency to view one’s culture to be superior to others. The important thing here is to consider how these biases may come in the way in dealing with members of other cultures.
Strategic management deals with making the “big picture” decisions on the goals that a firm should have and how resources should be deployed to achieve these goals. This process is not fundamentally different in the international context, but the process is complicated because of the additional issues that surround a broader geographic scope. Two broad strategic questions involve:
Preferred areas for investment and allocation of resources—based on such factors as risk, opportunity, and competition in the area; and
The extent to which local management should be given autonomy to make decisions. In general, local managers tend to have a better understanding of their markets, but if given too much authority, they may veer from established company objectives, and may threaten the consistency of a brand image across markets.
Entry Strategies
Methods of entry. With rare exceptions, products just don’t emerge in foreign markets overnight—a firm has to build up a market over time. Several strategies, which differ in aggressiveness, risk, and the amount of control that the firm is able to maintain, are available:
Exporting is a relatively low risk strategy in which few investments are made in the new country. A drawback is that, because the firm makes few if any marketing investments in the new country, market share may be below potential. Further, the firm, by not operating in the country, learns less about the market (What do consumers really want? Which kinds of advertising campaigns are most successful? What are the most effective methods of distribution?) If an importer is willing to do a good job of marketing, this arrangement may represent a “win-win” situation, but it may be more difficult for the firm to enter on its own later if it decides that larger profits can be made within the country.
Licensing and franchising are also low exposure methods of entry—you allow someone else to use your trademarks and accumulated expertise. Your partner puts up the money and assumes the risk. Problems here involve the fact that you are training a potential competitor and that you have little control over how the business is operated. For example, American fast food restaurants have found that foreign franchisers often fail to maintain American standards of cleanliness. Similarly, a foreign manufacturer may use lower quality ingredients in manufacturing a brand based on premium contents in the home country.
Contract manufacturing involves having someone else manufacture products while you take on some of the marketing efforts yourself. This saves investment, but again you may be training a competitor.
Direct entry strategies, where the firm either acquires a firm or builds operations “from scratch” involve the highest exposure, but also the greatest opportunities for profits. The firm gains more knowledge about the local market and maintains greater control, but now has a huge investment. In some countries, the government may expropriate assets without compensation, so direct investment entails an additional risk. A variation involves a joint venture, where a local firm puts up some of the money and knowledge about the local market.
Advantages:
Ease of market entry. It may be useful for a firm to partner with another that already has a presence in and knowledge of a market. For example, Kentucky Fried Chicken (KFC) partnered with the Mitsubishi Keirishi in entering Japan. By doing so, KFC was assured of managerial talent to deal with local regulations and handling logistics (e.g., labor and construction) while Mitsubishi in turn got the use of an authentic American brand name.
Shared risk. Some projects are just too big for any one company to approach alone. Boeing can partner with Rolls Royce, with the latter making the engines for the aircraft, while Boeing makes the frame. Many times, deep sea oil exploration is too big a commitment for any one oil company, so two or more may together.
Shared knowledge and expertise. Intel, known for its cutting edge innovations in computer chips, can partner with a Japanese firm do to its manufacturing.
Synergy and competitive advantage. “Synergy” refers to the idea that the resources held by two firms, when combined, add up to more than the sum of their parts. For example, Amazon.com and Federal Express might be able to create, together, a credible image of fast, reliable service (from FedEx) and a large selection (from Amazon). By itself, FedEx might not have a great edge over UPS, and Amazon may not have a real edge over Barnes & Noble, but together, by coordination, they may be able, at an affordable price, to provide faster delivery of a wider range of items than Barnes & Noble.
Disadvantages:
Legal obstacles. Since both firms have their own interests, complicated legal agreements may have to be made up. Also, there may be limitations on market concentration, and there may be some concern about the legality of technology transfer. In some countries, as previously mentioned, it may be difficult to enforce agreements.
Complacency: If two firms join forces where they previously competed, they may become complacent in developing new products, improving quality, and lowering costs and prices. When competition is place, firms tend to maintain greater discipline, which is needed for competitive ability in the long run.
Costs of coordination. When two firms have different cultures (e.g., individualistic vs. collective or authoritarian vs. more participative), more effort may be needed in circulating information and reaching decisions. For example, Oracle, an aggressive computer firm in the Silicon Valley with a strong emphasis on meritocracy might have difficulty working with a collectivistic Japanese firm.
Blurred lines between areas of competition and cooperation. Suppose Sony and Compaq, which both make computers, want to collaborate on making memory chips. To do so, they may have to share information about other computer technology in areas where they may compete. There is now a question of what to share and what to hold back. Not only is time spent deciding whether to share or withhold, but essential information may end up not being available to those who need it.
Scope: Cooperation may be comprehensive in nature—where both parties collaborate completely on a project such as the development, manufacturing, and marketing of a new project—or it may be confined to one function such as manufacturing or marketing.
Organizational Design
Impact: Organizational design addresses such issues as how people are put together in an organization. Many firms are so large that dividing them into units is necessary in order to
Establish centers of accountability; and
Allocate resources to those who can best decide on how, specifically, to put them to work most effectively. For example, high level management may not have the expertise to say exactly how its R&D budget should be spent, but it can decide how much money is allocated to the development team relative to how much is allocated to marketing.
Accountability tends to influence how individuals are motivated—e.g., whether they should pursue the interests of the marketing function vs. the consumer goods division—so organizational structure is likely to have a great impact on choices made by individual managers.
Approaches: There are several options in how to structure a firm. E.g.,
Product: A large firm like Hewlett-Packard might decide to organize itself into divisions of precision instruments, printers, computers and peripherals, components, and aircraft technology. The philosophy here is that the challenges in manufacturing, marketing, and distributing the products is are so similar that they can best be performed within the same group of people. A downside, however, is that such divisions may lose track of the overall goals of HP (e.g., brand development) or differences between country markets (e.g., because margins are currently greater, the precision instruments division might focus predominantly on developed countries).
Area. A firm may face the need to introduce a number of different products into a new area. Because many of these may have common distribution channels, and because brand development may need to be coordinated, it may be decided to place divisions in different countries. The problem here is that each division may become isolated and that information gained in one area is not shared with other regions.
Functional. Another philosophy is that there is some overlap in expertise between products and between regions in manufacturing, finance, and marketing. Thus, one division produce a product line that, in the case of HP, is ultimately based on digital technology. Marketing, then, can focus on building a brand that spans many categories whose quality and support mutually reinforce the brand. Here, again, an “us” vs. “them” philosophy may develop in that different divisions may not coordinate their activities as well as they should. For example, marketing may not pass enough feedback customers back to manufacturing, and manufacturing may in turn not implement changes desired by consumers.
Customer. Many times, relatively similar products are bought by very different customers. For example, HP might have divisions of defense, consumer goods, industrial, and components. Again, different divisions may not work well together to transfer knowledge and technology.
Matrix. In rapidly changing markets, being able to allocate individuals where they are currently needed may become essential. Thus, engineers can move from R&D to manufacturing or marketing as there is a greater need there. The main problem is that each individual will report to different managers, making it difficult to evaluate his or her performance. When working simultaneously in two different “jurisdictions,” there may also be a question of how to divide the employee’s time and energy.
Culture tremendously impacts people’s work expectations and behavior. In the U.S., for example, individual recognition and responsibility is the norm. In more collectivistic cultures such as Japan, responsibility and reward usually goes to teams, which internally exert peer pressure to get members to contribute. Responses to treatments may also vary—for example, where a loss of face is a serious concern, managers must be careful to criticize indirectly and privately.
In terms of attitudes, U.S. workers are frequently happy to take overtime at 150% of their normal pay, while this would be less acceptable in countries where people “work to live” rather than “live to work.”
Perceptions may differ across cultures. For example, in the U.S., a person is typically thought to succeed because of skill, hard work, or initiative, while in some more “fatalistic” cultures, success is attributed to luck or connections.
Product
Product Need Satisfaction. We often take for granted the “obvious” need that products seem to fill in our own culture; however, functions served may be very different in others—for example, while cars have a large transportation role in the U.S., they are impractical to drive in Japan, and thus cars there serve more of a role of being a status symbol or providing for individual indulgence. In the U.S., fast food and instant drinks such as Tang are intended for convenience; elsewhere, they may represent more of a treat. Thus, it is important to examine through marketing research consumers’ true motives, desires, and expectations in buying a product.
Approaches to Product Introduction. Firms face a choice of alternatives in marketing their products across markets. An extreme strategy involves customization, whereby the firm introduces a unique product in each country, usually with the belief tastes differ so much between countries that it is necessary more or less to start from “scratch” in creating a product for each market. On the other extreme, standardization involves making one global product in the belief the same product can be sold across markets without significant modification—e.g., Intel microprocessors are the same regardless of the country in which they are sold. Finally, in most cases firms will resort to some kind of adaptation, whereby a common product is modified to some extent when moved between some markets—e.g., in the United States, where fuel is relatively less expensive, many cars have larger engines than their comparable models in Europe and Asia; however, much of the design is similar or identical, so some economies are achieved. Similarly, while Kentucky Fried Chicken serves much the same chicken with the eleven herbs and spices in Japan, a lesser amount of sugar is used in the potato salad, and fries are substituted for mashed potatoes.
There are certain benefits to standardization. Firms that produce a global product can obtain economies of scale in manufacturing, and higher quantities produced also lead to a faster advancement along the experience curve. Further, it is more feasible to establish a global brand as less confusion will occur when consumers travel across countries and see the same product. On the down side, there may be significant differences in desires between cultures and physical environments—e.g., software sold in the U.S. and Europe will often utter a “beep” to alert the user when a mistake has been made; however, in Asia, where office workers are often seated closely together, this could cause embarrassment.
Adaptations come in several forms. Mandatory adaptations involve changes that have to be made before the product can be used—e.g., appliances made for the U.S. and Europe must run on different voltages, and a major problem was experienced in the European Union when hoses for restaurant frying machines could not simultaneously meet the legal requirements of different countries. “Discretionary” changes are changes that do not have to be made before a product can be introduced (e.g., there is nothing to prevent an American firm from introducing an overly sweet soft drink into the Japanese market), although products may face poor sales if such changes are not made. Discretionary changes may also involve cultural adaptations—e.g., in Sesame Street, the Big Bird became the Big Camel in Saudi Arabia.
Another distinction involves physical product vs. communication adaptations. In order for gasoline to be effective in high altitude regions, its octane must be higher, but it can be promoted much the same way. On the other hand, while the same bicycle might be sold in China and the U.S., it might be positioned as a serious means of transportation in the former and as a recreational tool in the latter. In some cases, products may not need to be adapted in either way (e.g., industrial equipment), while in other cases, it might have to be adapted in both (e.g., greeting cards, where the both occasions, language, and motivations for sending differ). Finally, a market may exist abroad for a product which has no analogue at home—e.g., hand-powered washing machines.
Branding. While Americans seem to be comfortable with category specific brands, this is not the case for Asian consumers. American firms observed that their products would be closely examined by Japanese consumers who could not find a major brand name on the packages, which was required as a sign of quality. Note that Japanese keiretsus span and use their brand name across multiple industries—e.g., Mitsubishi, among other things, sells food, automobiles, electronics, and heavy construction equipment.
The International Product Life Cycle (PLC). Consumers in different countries differ in the speed with which they adopt new products, in part for economic reasons (fewer Malaysian than American consumers can afford to buy VCRs) and in part because of attitudes toward new products (pharmaceuticals upset the power afforded to traditional faith healers, for example). Thus, it may be possible, when one market has been saturated, to continue growth in another market—e.g., while somewhere between one third and one half of American homes now contain a computer, the corresponding figures for even Europe and Japan are much lower and thus, many computer manufacturers see greater growth potential there. Note that expensive capital equipment may also cycle between countries—e.g., airlines in economically developed countries will often buy the newest and most desired aircraft and sell off older ones to their counterparts in developing countries. While in developed countries, “three part” canning machines that solder on the bottom with lead are unacceptable for health reasons, they have found a market in developing countries.
Diffusion of innovation. Good new innovations often do not spread as quickly as one might expect—e.g., although the technology for microwave ovens has existed since the 1950s, they really did not take off in the United States until the late seventies or early eighties, and their penetration is much lower in most other countries. The typewriter, telephone answering machines, and cellular phones also existed for a long time before they were widely adopted.
Certain characteristics of products make them more or less likely to spread. One factor is relative advantage. While a computer offers a huge advantage over a typewriter, for example, the added gain from having an electric typewriter over a manual one was much smaller. Another issue is compatibility, both in the social and physical sense. A major problem with the personal computer was that it could not read the manual files that firms had maintained, and birth control programs are resisted in many countries due to conflicts with religious values. Complexity refers to how difficult a new product is to use—e.g., some people have resisted getting computers because learning to use them takes time. Trialability refers to the extent to which one can examine the merits of a new product without having to commit a huge financial or personal investment—e.g., it is relatively easy to try a restaurant with a new ethnic cuisine, but investing in a global positioning navigation system is riskier since this has to be bought and installed in one’s car before the consumer can determine whether it is worthwhile in practice. Finally, observability refers to the extent to which consumers can readily see others using the product—e.g., people who do not have ATM cards or cellular phones can easily see the convenience that other people experience using them; on the other hand, VCRs are mostly used in people’s homes, and thus only an owner’s close friends would be likely to see it.
At the societal level, several factors influence the spread of an innovation. Not surprisingly, cosmopolitanism, the extent to which a country is connected to other cultures, is useful. Innovations are more likely to spread where there is a higher percentage of women in the work force; these women both have more economic power and are able to see other people use the products and/or discuss them. Modernity refers to the extent to which a culture values “progress.” In the U.S., “new and improved” is considered highly attractive; in more traditional countries, their potential for disruption cause new products to be seen with more skepticism. Although U.S. consumers appear to adopt new products more quickly than those of other countries, we actually score lower on homiphily, the extent to which consumers are relatively similar to each other, and physical distance, where consumers who are more spread out are less likely to interact with other users of the product. Japan, which ranks second only to the U.S., on the other hand, scores very well on these latter two factors.
Reference Prices. Consumers often develop internal reference prices, or expectations about what something should cost, based mostly on their experience. Most drivers with long commutes develop a good feeling of what gasoline should cost, and can tell a bargain or a ripoff.
Reference prices are more likely to be more precise for frequently purchased and highly visible products. Therefore, retailers very often promote soft drinks, since consumers tend to have a good idea of prices and these products are quite visible. The trick, then, is to be more expensive on products where price expectations are muddier.
Marketers often try to influence people's price perceptions through the use of external reference prices—indicators given to the consumer as to how much something should cost. Examples include:
Manufacturer's Suggested Retail Price (MSRP). This is often pure fiction. The suggested retail prices in certain categories are deliberately set so high that even full service retailers can sell at a "discount." Thus, although the consumer may contrast the offering price against the MSRP, this latter figure is quite misleading.
"SALE! Now $2.99; Regular Price $5.00." For this strategy to be used legally in most countries, the claim must be true (consistency of enforcement in some countries is, of course, another matter). However, certain products are put on sale so frequently that the "regular" price is meaningless. In the early 1990s, Sears was reported to sell some 55% of its merchandise on sale.
"WAS $10.00, now $6.99.”Sold elsewhere for $150.00; our price: $99.99."
Reference prices have significant international implications. While marketers may choose to introduce a product at a low price in order to induce trial, which is useful in a new market where the penetration of a product is low, this may have serious repercussions as consumers may develop a low reference price and may thus resist paying higher prices in the future.
Selected International Pricing Issues. In some cultures, particularly where retail stores are smaller and the buyer has the opportunity to interact with the owner, bargaining may be more common, and it may thus be more difficult for the manufacturer to influence retail level pricing.
Transfer pricing involves what one subsidiary will charge another for products or components supplied for use in another country. Firms will often try to charge high prices to subsidiaries in countries with high taxes so that the income earned there will be minimized.
Antitrust laws are relevant in pricing decisions, and anti-dumping regulations are especially noteworthy. In general, it is illegal to sell a product below your cost of production, which may make a penetration pricing entry strategy infeasible. Japan has actively lobbied the World Trade Organization (WTO) to relax its regulations, which generally require firms to price no lower than their average fully absorbed cost (which incorporates both variable and fixed costs).
Alternatives to “hard” currency deals. Buyers in some countries do not have ready access to convertible currency, and governments will often try limit firms’ ability to spend money abroad. Thus, some firms have been forced into non-cash deals. In barter, the seller takes payment in some product produced in the buying country—e.g., Lockheed (back when it was an independent firm) took Spanish wine in return for aircraft, and sellers to Eastern Europe have taken their payment in ham. An offset contract is somewhat more flexible in that the buyer can get paid but instead has to buy, or cause others to buy, products for a certain value within a specified period of time.
Promotional objectives. Promotional objectives involve the question of what the firm hopes to achieve with a campaign—“increasing profits” is too vague an objective, since this has to be achieved through some intermediate outcome (such as increasing market share, which in turn is achieved by some change in consumers which cause them to buy more). Some common objectives that firms may hold:
Awareness. Many French consumers do not know that the Gap even exists, so they cannot decide to go shopping there. This objective is often achieved through advertising, but could also be achieved through favorable point-of-purchase displays. Note that since advertising and promotional stimuli are often afforded very little attention by consumers, potential buyers may have to be exposed to the promotional stimulus numerous times before it “registers.”
Trial. Even when consumers know that a product exists and could possibly satisfy some of their desires, it may take a while before they get around to trying the product—especially when there are so many other products that compete for their attention and wallets. Thus, the next step is often to try get consumer to try the product at least once, with the hope that they will make repeat purchases. Coupons are often an effective way of achieving trial, but these are illegal in some countries and in some others, the infrastructure to readily accept coupons (e.g., clearing houses) does not exist. Continued advertising and point-of-purchase displays may be effective. Although Coca Cola is widely known in China, a large part of the population has not yet tried the product.
Attitude toward the product. A high percentage of people in the U.S. and Europe has tried Coca Cola, so a more reasonable objective is to get people to believe positive things about the product—e.g., that it has a superior taste and is better than generics or store brands. This is often achieved through advertising.
Temporary sales increases. For mature products and categories, attitudes may be fairly well established and not subject to cost-effective change. Thus, it may be more useful to work on getting temporary increases in sales (which are likely to go away the incentives are removed). In the U.S. and Japan, for example, fast food restaurants may run temporary price promotions to get people to eat out more or switch from competitors, but when these promotions end, sales are likely to move back down again (in developing countries, in contrast, trial may be a more appropriate objective in this category).
Note that in new or emerging markets, the first objectives are more likely to be useful while, for established products, the latter objectives may be more useful in mature markets such as Japan, the U.S., and Western Europe.
Some issues in advertising:
Values tend to differ between cultures—in the U.S. and Australia, excelling above the group is often desirable, while in Japan, “The nail that sticks out gets hammered down.” In the U.S., “The early bird gets the worm” while in China “The first bird in the flock gets shot down.”
Advertising standardization considerations tend to parallel issues surrounding product and positioning standardization. On the plus side, economies of scale are achieved, a consistent image can be established across markets, creative talent can be utilized across markets, and good ideas can be transplanted from one market to others. On the down side, cultural differences, peculiar country regulations, and differences in product life cycle stages make this approach difficult. Further, local advertising professionals may resist campaigns imposed from the outside—sometimes with good reasons and sometimes merely to preserve their own creative autonomy.
Countries differ in their regulations of advertising, and some products are banned from advertising on certain media (large supermarket chains are not allowed to advertise on TV in France, for example). Other forms of promotion may also be banned or regulated. In some European countries, for example, it is illegal to price discriminate between consumers, and thus coupons are banned and in some, it is illegal to offer products on sale outside a very narrow seasonal and percentage range.
Channel structures—the way that products make their way from the manufacturer to the consumer—often differ somewhat between countries. In less developed countries, channels are often longer because (1) it is difficult to reach the retailer and (2) there is a need to “break” the large bulk shipments into relatively smaller quantities so that a less affluent consumer does not have to “invest” in a larger inventory (e.g., while in the U.S. consumers often buy bars of soap in five-packs, a half bar may be sold in some countries. It is difficult enough for a new product to break into the market in the U.S., where there are large retail stores and an acceptance of new products, but in other countries, getting a new product distributed is even more difficult because:
Stores are frequently smaller and have room for a smaller number of products; and
Distribution is often based on long-standing relationships, and wholesalers are more reluctant to take on new products that may compete with those supplied by their established partners.
Prospects for electronic commerce. Electronic commerce—usually in the form of sales, promotion, or support through the Internet—is a hot topic at the moment, evidenced by the high market capitalization of firms involved in this kind of business. Growth rates have been considerable over the last two years and are expected to persist, at least to some extent, for at least the next several years. Yet, it should be recognized that so far, sales over the Internet account for only a small portion of sales—especially outside the U.S.
Obstacles to diffusion. Obstacles to the diffusion of Internet trade come both from enduring sources and temporary roadblocks which may be overcome as consumer attitudes change and technology is improved. Currently, Internet connections are slower than desired so that downloading pictures and other information may take longer than consumers are willing to wait. “Glitches” in online ordering systems may also frustrate consumers, who are unable to place their orders at a given time or have difficulty navigating through a malfunctioning site. The lack of non-English language sites in some areas may also be off-putting to consumers, and registering domain names in some countries is difficult. Further, shipping small packages across countries may be inefficient due to high local postage rates and inefficiencies in customs processing. Most of these obstacles may be overcome within next few years.
Other obstacles may, however, have considerably greater staying power. First, there are legal problems, as several different countries may seek to impose their jurisdiction on advertising and laws of product assortment and business practices. Further, the maintenance of databases, which are essential to delivering on the promises of e-commerce, may conflict with the privacy rules of some countries—this is currently a hot issue of contention between the United States and the European Union. Finally, there are issues of taxation and collection. While the Clinton Administration has sought to get the WTO to go along with a three year tax “moratorium” on Internet purchases much like the one observed in the U.S., strong opposition is expected. A great attraction of e-commerce in Europe is that people may order from other countries and thus evade local sales taxes, which can be prohibitive (e.g., 25% in Denmark and 16% in Germany). Some firms will ship to customers in neighboring countries without collecting sales taxes or duties, with the responsibility of paying falling on the consumer. Although most consumers who order and do not arrange to pay for these taxes get away with it, fines for those caught through random checks can be severe.
Lars Perner, Ph.D.
Assistant Professor of Marketing
San Diego State University
Imperial Valley Campus
720 Heber Ave.
Calexico, CA 92231 lperner@mail.sdsu.edu http://www.LarsPerner.com "Birth is nature's way. Adoption is God's way!" (Source unknown)
