International Marketing: Text And Cases [2 ed.] 1259001806, 9781259001802

Table of contents :
Title
Contents
1. Concept and Process of International Marketing
Introduction
Definition of International Marketing
A Comparison of Domestic Marketing with International Marketing
Challenges Firms Face in International Marketing
Stages of International Marketing
International Marketing Orientation
Motivating Factors of International Marketing
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
Suggested Readings
2. WTO and Its Impact on International Marketing
Introduction
WTO and Globalisation: Issues
The Marketing Scenario
Other Factors
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
Suggested Readings
3. Emerging Trends and Internationalisation of Firms
Internationalisation—Reasons and Strategies
Ranbaxy Laboratories—Internationalisation Strategies
Dr. Reddy’s Laboratories: Going Global and Growing Multinational
Aurobindo Pharma’s International Expansion Strategies
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
Suggested Readings
4. Country Analysis, Selection, Market Size and Marketing Mix
Introduction
Country Evaluation and Selection
Country Risk Analysis
Market Research and Consumer Behaviour
International Marketing Mix
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
Suggested Readings
5. International Marketing: Opportunity Analysis
Introduction
Why do firms conduct international marketing research?
International Marketing Research
Conducting Formal Marketing Research
Assessing International Market Size and Sales Potential
Managing International Marketing Research Globally
Points to Remember
Objective Type Questions
Review Questions
Project Assignment
Suggested Readings
6. Cultural Factors and Environment
Introduction
Defining Culture
Correlates of Culture
Elements of Culture
The Nation as a Culture
Language as an Element of Culture
Religion as an Element of Culture
Cultural Dynamics
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
Suggested Readings
7. Political Factors and Environment
Introduction
Political Environment
Types of Government and Political Economic Systems
Political Risks in International Marketing
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
Suggested Readings
8. Legal Aspects and International Marketing
International Legal Environment: An Introduction
Legal Frameworks
Different Legal Systems
International Dispute Settlement Processes
Other Legal Issues
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
Suggested Readings
9. Market Entry Modes, Framework, Structure and Strategies
Introduction
Market Entry Modes: Framework and Structure
Global Market Entry Modes: Problems and Challenges
Control Strategies
Points to Remember
Objective Type Questions
Review Questions
Project Assignments
10. Market Entry Modes—JV, M&A, Strategic Alliance and Subsidiaries
Modes of Global Market Entry and Strategies
Joint Ventures
International Joint Ventures in China
Global Mergers and Acquisitions
International Strategic Alliances
Subsidiaries
Points to Remember
Objective Type Questions
Review Questions
Suggested Readings
11. International Product Policy, Planning and Strategy
Introduction
Defining a Product
Basic Classification of Products
Product Planning in International Markets
Product Extension
New Product Invention/Development
Packaging and Labelling
Concept of International Product Life Cycle
Points to Remember
Objective Type Questions
Review Questions
Project Assignment
Suggested Readings
12. Pricing Strategy and Decision for International Marketing
Introduction
Pricing Strategy for International Markets
Basic Pricing Approaches in International Markets
Factors Influencing Pricing Decisions
Counter Trade
Points to Remember
Objective Type Questions
Review Questions
Project Assignment
Suggested Readings
13. International Distribution, Marketing Channels, Logistics and Supply Chain Management
Introduction
Defining Distribution
Distributors and Channels
Direct and Indirect Marketing Channels in a Foreign Country
Distributor and Middlemen Selection Qualification Criterion
International Logistics and Global Supply Chain Management
Global Manufacturing Strategies
Global Sourcing
Inventory Management
Quality Management
Points to Remember
Objective Type Questions
Review Questions
Suggested Readings
14. Product Promotion Advertising and Building Brands in Foreign Markets
Product Promotion and Building Brands
International Market Intelligence Studies
Point to Remember
Objective Type Questions
Review Questions
Suggested Readings
Project Assignment
15. Personal Selling and Multinational Sales Management
Introduction
Objectives of Personal Selling
Process of Personal Selling
Multinational Sales Management
Managing International Sales Personnel
Points to Remember
Objective Type Questions
Review Questions
Suggested Readings
16. Decision-Making for International Markets
Introduction
Market Potential Index (MPI)
Global Competitive Index (GCI)
Foreign Direct Investment Confidence Index (FDICI)
Global Political Risk Index (GPRI)
Points to Remember
Objective Type Questions
Review Questions
Suggested Readings
17. Communication and Negotiation for International Markets
Introduction
Types and Forms of Negotiation
BATNA—A Powerful Technique
Cultural and International Negotiations
Negotiating in China
Negotiating in the US
How to Negotiate Successfully in Doing Business in Japan
Implications for Managers and Negotiators
Points to Remember
Review Question
Project Assignment
18. Export Documentation and Procedures
Export Documentation
Letter of Credit
Export Procedures
Important Steps in Processing of an Export Order
Points to Remember
Objective Type Questions
Review Questions
Suggested Readings
19. Incoterms for Export Marketing
Introduction
Meaning and Scope of Incoterms
Incorporation of Incoterms into the Contract of Sale (Incoterms 2000 and 2010)
Terminology
List of Incoterms
Incoterms Groups
Incoterms 2010
Points to Remember
Review Questions
20. International e-Tailing
Introduction
Concept of e-tailing
Types of e-tailing
Retailing vs e-tailing
Benefits and Potential Pitfalls of e-tailing
Understanding Online Consumer Behaviour in e-tailing
Segmentation in e-tailing
Barriers to the Growth of e-tailing
Pricing Strategies in e-tailing
Promotional Strategies in e-tailing
Contents xv Electronic Customer Relationship Management (eCRM) in e-tailing
Legal Aspects of e-tailing
Points to Remember
Objective Type Questions
Review Questions
Project Assignment
Problems and Challenges Faced by e-tailers in India
21. Global Issues: The Internet and E-Commerce
Introduction
Elimination of Distance and Time Zones
E-Commerce
Components of E-Commerce Value Chain
Point to Remember
Objective Type Questions
Review Questions
Project Assignment
Suggested Readings
22. Organising and Doing Business with Other Countries
Doing Business with Middle East Countries
India–Canada Bilateral Business
Points to Remember
Objective Type Questions
Review Questions
Suggested Readings
Appendix: Promotion of International Trade in India
Index

Citation preview

International Marketing Text and Cases Second Edition

About the Authors Dr Justin Paul is a faculty member at University of Washington Foster School of Business, USA. Before this, he served as an associate professor with Nagoya University of Commerce and Business, Japan. Having started his career as an

Shanghai, University of San Francisco and University of New South Wales, Sydney, among others. Business Environment International Business Management of Banking and Financial Services Export-Import Management. He has also Services Marketing

is also on the editorial review board of three refereed journals.

Prof. Ramneek Kapoor

been actively involved with many other management institutes as visiting and adjunct

Fundamentals of Sales Management, Consumer Behaviour, Services Marketing, Communication for Retail Professionals, and Managerial skills. He has presented several papers in these areas in various national and international seminars. He has organised

International Marketing Text and Cases Second Edition

Justin Paul University of Washington Foster School of Business USA

Ramneek Kapoor Director Kothari Group of Institutions Indore

Tata McGraw Hill Education Private Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto

Tata McGraw-Hill

International Marketing: Text and Cases, 2e

or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or

ISBN (13 digit): 978-1-25-900180-2 ISBN (10 digit): 1-25-900180-6 Vice President and Managing Director: Ajay Shukla Head—Higher Education Publishing and Marketing: Vibha Mahajan Publishing Manager—B&E/HSSL: Tapas K Maji Associate Sponsoring Editor: Hemant K Jha Associate Development Editor: Amrita Marik Editorial Researcher: Silvi Dua Executive (Editorial Services): Yogesh Kumar Senior Production Manager: Manohar Lal Senior Production Executive: Atul Gupta Marketing Manager—Higher Education: Vijay Sarathi Assistant Product Manager: Daisy Sachdeva Graphic Designer (Cover Design): Meenu Raghav General Manager—Production: Rajender P Ghansela Manager—Production: Reji Kumar

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Krishna Offset, 10/122, Vishnu Gali, Vishwas Nagar, DELHI-110032

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PREFACE TO THE SECOND EDITION

The subject of international marketing is a continuously evolving one. This is the result of increasing globalization of economy. As a result, the literature on the subject also needs to be updated from time to time, so that it remains relevant for those interested in studying it. The second edition of International Marketing: Text and Cases is an effort in the direction of discussing the developments in this field since the publication of the first edition of the book. It has also been developed keeping in mind the feedback received from the users of the first edition. The book has been enriched with several new chapters and cases and even the pedagogy of the book has been improvised to increase its utility for the students and teachers of the subject alike. We express our deep gratitude to the Tata McGraw-Hill team – particularly Mr. Tapas K Maji and Mr. Hemant K Jha – for their continuous support in completing the work on this project. The first edition of the book was well received by the readers and we are hopeful of even better acceptance for this new edition. We thank all the readers and reviewers for their valuable comments and suggestions for improvement in the book and also hope to continue receiving them.

ACKNOWLEDGEMENTS I would like to thank Prof Douglas (Mac) (University of Washington Foster school of Business) and Hiroshi Kurimoto (President, Nagoya University of Commerce & Business, Japan) for their constant support. My humble gratitude to Prof. Praful Agnihotri (Indian Institute of Management, Calcutta), Prof. Jatin Pancholi (Middlesex University), Mr. Yatinder Agrohoi, Mr. Sudarshana Reddy and Mr. Pradeep T K (Indian Institute of Management, Indore) for their help. Justin Paul I am grateful to my parents for all their blessings from the heavens above. I would like to thank my wife, Alka, daughter Neha and son Ankit who have always been very supportive in all my endeavors. I am also grateful to all those faculty members who have used the book and sent their recommendations for a revised and enlarged edition. Lastly, I must express my gratitude to the entire editorial and support staff at Tata McGraw-Hill for their whole hearted cooperation, guidance and support in all my publications. Ramneek Kapoor

PREFACE TO THE FIRST EDITION

International Marketing became an important area of specialisation in the 1990s. With the kind of interest this subject was attracting, a well written textbook, comprehensively covering all the aspects of international marketing was required. We have tried to fulfill this requirement through International Marketing: Text and Cases. This book is unique in terms of pedagogical features, templates that integrate topics such as business environmental factors into marketing functions in the global context. Although this text undoubtedly has more case studies and examples from India, Sri Lanka, Middle East, Japan, efforts have been made to give equal treatment to all regions and countries, so that it proves to be useful to everyone across all borders. This book is distinguished by the unique approach that it takes while dealing with the subject. While the usual approach is to treat international marketing as a series of loosely related topics, in this book the topics revolve around international marketing functions, channels and practices. We have included boxed exhibits and figures across the chapters. The case studies are written from real life perspectives. These have been included at the end of important chapters as well as at the end of the book. There is also a companion website of this book which has instructor resources containing powerpoint slides. With the process of globalisation gathering momentum, understanding the world and international marketing has become an imperative for survival and success for all the companies in all nations. The case studies included in this book are written not to indicate effective or ineffective handling of situation by the management, but for academic use in classrooms. The responsibility for any errors is ultimately ours. We express our deep gratitude to the McGraw-Hill team—Mr Biju Kumar, Mr Tapas Maji, Ms Anubha Srivastava, Ms Medha Arora and Ms N K Deepa for their help in completing this book. Please send your comments and suggestions at [email protected], mail@drjustinpaul. com and [email protected].

Preface to the First Edition

vii

Acknowledgements I would like to thank my parents Mr P V Poulose and Mrs Annie Poulose, wife Dr. Festi and brother Santosh for their constant support. My humble gratitude to Dr S P Parashar (Director, Indian Institute of Management, Indore), Prof. Praful Agnihotri (Indian Institute of Management, Calcutta), Prof. Omprakash Gupta (Prieri View A&M University, USA), Prof. Jatin Pancholi (Middlesex University), Mr Yatinder Agrohoi, Mr Sudarshana Reddy and Mr Pradeep T K (Indian Institute of Management, Indore) for their help. JUSTIN PAUL I am grateful to my parents for all their blessings from the heavens above. I would like to thank my wife, Alka, daughter Neha and son Ankit who have always been very supportive in all my endeavours. I am also grateful to Mr Rummy Chhabra, Mr Surinder Khullar, and Mr Jal B Khodaiji for their support and encouragement from time to time.

RAMNEEK KAPOOR

viii

Contents

BRIEF CONTENTS

Preface to the Second Edition Preface to the First Edition 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Concept and Process of International Marketing WTO and Its Impact on International Marketing Emerging Trends and Internationalisation of Firms Country Analysis, Selection, Market Size and Marketing Mix International Marketing: Opportunity Analysis Cultural Factors and Environment Political Factors and Environment Legal Aspects and International Marketing Market Entry Modes, Framework, Structure and Strategies Market Entry Modes—JV, M&A, Strategic Alliance and Subsidiaries International Product Policy, Planning and Strategy Pricing Strategy and Decision for International Marketing International Distribution, Marketing Channels, Logistics and Supply Chain Management Product Promotion Advertising and Building Brands in Foreign Markets Personal Selling and Multinational Sales Management Decision-Making for International Markets Communication and Negotiation for International Markets Export Documentation and Procedures Incoterms for Export Marketing International e-Tailing Global Issues: The Internet and E-Commerce Organising and Doing Business with Other Countries Appendix: Promotion of International Trade in India Index

v vi 1 21 35 69 93 127 157 181 195 213 229 277 305 329 346 360 375 388 421 436 459 473 491 501

Contents

ix

CONTENTS

Preface to the Second Edition Preface to the First Edition Brief Contents 1. Concept and Process of International Marketing Introduction 1 Definition of International Marketing 4 A Comparison of Domestic Marketing with International Marketing Challenges Firms Face in International Marketing 5 Stages of International Marketing 6 International Marketing Orientation 8 Motivating Factors of International Marketing 9 Points to Remember 15 Objective Type Questions 15 Review Questions 17 Project Assignments 17 Suggested Readings 17

v vi viii 1

4

2. WTO and Its Impact on International Marketing Introduction 21 WTO and Globalisation: Issues 22 The Marketing Scenario 23 Other Factors 29 Points to Remember 30 Objective Type Questions 31 Review Questions 31 Project Assignments 32 Suggested Readings 32

21

3. Emerging Trends and Internationalisation of Firms Internationalisation—Reasons and Strategies 35 Ranbaxy Laboratories—Internationalisation Strategies 36 Dr. Reddy’s Laboratories: Going Global and Growing Multinational

35

39

x

Contents

Aurobindo Pharma’s International Expansion Strategies Points to Remember 44 Objective Type Questions 45 Review Questions 45 Project Assignments 45 Suggested Readings 46

42

4. Country Analysis, Selection, Market Size and Marketing Mix Introduction 69 Country Evaluation and Selection 69 Country Risk Analysis 70 Market Research and Consumer Behaviour 71 International Marketing Mix 74 Points to Remember 82 Objective Type Questions 82 Review Questions 83 Project Assignments 83 Suggested Readings 84

69

5. International Marketing: Opportunity Analysis Introduction 93 Why do firms conduct international marketing research? 94 International Marketing Research 96 Conducting Formal Marketing Research 101 Assessing International Market Size and Sales Potential 114 Managing International Marketing Research Globally 118 Points to Remember 120 Objective Type Questions 121 Review Questions 122 Project Assignment 123 Suggested Readings 123

93

6. Cultural Factors and Environment Introduction 128 Defining Culture 129 Correlates of Culture 130 Elements of Culture 131 The Nation as a Culture 133 Language as an Element of Culture 139 Religion as an Element of Culture 141 Cultural Dynamics 144 Points to Remember 148

127

Contents

xi

Objective Type Questions 149 Review Questions 150 Project Assignments 150 Suggested Readings 151 7. Political Factors and Environment Introduction 157 Political Environment 158 Types of Government and Political Economic Systems Political Risks in International Marketing 165 Points to Remember 174 Objective Type Questions 175 Review Questions 176 Project Assignments 177 Suggested Readings 177

157

162

8. Legal Aspects and International Marketing International Legal Environment: An Introduction 181 Legal Frameworks 182 Different Legal Systems 183 International Dispute Settlement Processes 185 Other Legal Issues 186 Points to Remember 192 Objective Type Questions 192 Review Questions 193 Project Assignments 194 Suggested Readings 194

181

9. Market Entry Modes, Framework, Structure and Strategies Introduction 195 Market Entry Modes: Framework and Structure 196 Global Market Entry Modes: Problems and Challenges 197 Control Strategies 200 Points to Remember 204 Objective Type Questions 204 Review Questions 205 Project Assignments 205

195

10. Market Entry Modes—JV, M&A, Strategic Alliance and Subsidiaries Modes of Global Market Entry and Strategies 213 Joint Ventures 214 International Joint Ventures in China 216 Global Mergers and Acquisitions 221

213

xii

Contents

International Strategic Alliances 222 Subsidiaries 225 Points to Remember 226 Objective Type Questions 226 Review Questions 227 Suggested Readings 227 11. International Product Policy, Planning and Strategy Introduction 229 Defining a Product 230 Basic Classification of Products 230 Product Planning in International Markets 231 Product Extension 233 New Product Invention/Development 238 Packaging and Labelling 247 Concept of International Product Life Cycle 250 Points to Remember 252 Objective Type Questions 253 Review Questions 254 Project Assignment 255 Suggested Readings 255

229

12. Pricing Strategy and Decision for International Marketing Introduction 277 Pricing Strategy for International Markets 278 Basic Pricing Approaches in International Markets 281 Factors Influencing Pricing Decisions 288 Counter Trade 298 Points to Remember 301 Objective Type Questions 301 Review Questions 303 Project Assignment 304 Suggested Readings 304

277

13. International Distribution, Marketing Channels, Logistics and Supply Chain Management Introduction 305 Defining Distribution 306 Distributors and Channels 306 Direct and Indirect Marketing Channels in a Foreign Country 308 Distributor and Middlemen Selection Qualification Criterion 312 International Logistics and Global Supply Chain Management 313

305

Contents

xiii

Global Manufacturing Strategies 314 Global Sourcing 315 Inventory Management 318 Quality Management 319 Points to Remember 322 Objective Type Questions 322 Review Questions 324 Suggested Readings 324 14. Product Promotion Advertising and Building Brands in Foreign Markets Product Promotion and Building Brands 329 International Market Intelligence Studies 335 Point to Remember 340 Objective Type Questions 340 Review Questions 340 Suggested Readings 340 Project Assignment 341

329

15. Personal Selling and Multinational Sales Management Introduction 346 Objectives of Personal Selling 347 Process of Personal Selling 348 Multinational Sales Management 350 Managing International Sales Personnel 352 Points to Remember 356 Objective Type Questions 357 Review Questions 358 Suggested Readings 359

346

16. Decision-Making for International Markets Introduction 360 Market Potential Index (MPI) 360 Global Competitive Index (GCI) 365 Foreign Direct Investment Confidence Index (FDICI) Global Political Risk Index (GPRI) 367 Points to Remember 369 Objective Type Questions 369 Review Questions 370 Suggested Readings 370

360

365

17. Communication and Negotiation for International Markets Introduction 375 Types and Forms of Negotiation 376

375

xiv

Contents

BATNA—A Powerful Technique 377 Cultural and International Negotiations 377 Negotiating in China 382 Negotiating in the US 382 How to Negotiate Successfully in Doing Business in Japan Implications for Managers and Negotiators 383 Points to Remember 385 Review Question 386 Project Assignment 386

383

18. Export Documentation and Procedures Export Documentation 388 Letter of Credit 394 Export Procedures 397 Important Steps in Processing of an Export Order 399 Points to Remember 406 Objective Type Questions 406 Review Questions 408 Suggested Readings 408

388

19. Incoterms for Export Marketing Introduction 421 Meaning and Scope of Incoterms 422 Incorporation of Incoterms into the Contract of Sale (Incoterms 2000 and 2010) 422 Terminology 422 List of Incoterms 423 Incoterms Groups 429 Incoterms 2010 431 Points to Remember 433 Review Questions 434

421

20. International e-Tailing Introduction 436 Concept of e-tailing 437 Types of e-tailing 437 Retailing vs e-tailing 438 Benefits and Potential Pitfalls of e-tailing 438 Understanding Online Consumer Behaviour in e-tailing Segmentation in e-tailing 448 Barriers to the Growth of e-tailing 448 Pricing Strategies in e-tailing 448 Promotional Strategies in e-tailing 450

436

440

Contents

xv

Electronic Customer Relationship Management (eCRM) in e-tailing 451 Legal Aspects of e-tailing 451 Points to Remember 453 Objective Type Questions 454 Review Questions 454 Project Assignment 454 Problems and Challenges Faced by e-tailers in India 454 21. Global Issues: The Internet and E-Commerce Introduction 459 Elimination of Distance and Time Zones 460 E-Commerce 466 Components of E-Commerce Value Chain 468 Point to Remember 470 Objective Type Questions 470 Review Questions 471 Project Assignment 472 Suggested Readings 472

459

22. Organising and Doing Business with Other Countries Doing Business with Middle East Countries 473 India–Canada Bilateral Business 482 Points to Remember 489 Objective Type Questions 489 Review Questions 490 Suggested Readings 490

473

Appendix: Promotion of International Trade in India

491

Index

501

Visual... Learning Objectives

1

Every chapter begins with chapter objectives which tell the reader what

CONCEPT AND PROCESS OF INTERNATIONAL MARKETING

Learning Objectives After reading this chapter, you will understand:

will gain from it.

The concept of international marketing vis-à-vis domestic marketing T T T

Case 1 Tata Group’s Internationalisation Strategy One of the first ventures of Jamshedji Tata, founder of the Tata Group, was to set up a Hong Kong branch of his father’s trading firm. Almost 150 years later, Ratan Tata, the fifth generation Tata Group chairman, seems to be following the practices of his illustrious ancestor by setting up operations in every market that makes business sense. The only difference has been in the approach, which, given the passage of time, is inevitable. In about three years, the Tata Group has invested over $3 billion for 19 acquisitions, spread across five continents, and brought into its fold tens of thousands of new employees of various races and nationalities. The oldest business house in the country has shown Generation X aggressiveness in its corporate strategy. The strategy is best explained by Mr. Tata himself. “What we are attempting is simply a greater internationalisation of our business,” he said in an address. “Where this thrust is different from the past is that it goes beyond exports: we will want to be part of the community in which we operate. One of the major drivers of going international is to reduce our vulnerability to a single economy,” he added. The increasing trans-global nature of the group is perhaps best reflected in one of its smaller but fast growing companies, Tata Technologies. The Tata Motors’ subsidiary is headed by an American, who sits in Singapore, has its main market in the US and has a development centre in Bangkok. And, one of its operating companies is INCAT, the UK-based design and engineering firm acquired by the Tata Group for $91 million. Five of the group’s seven businesses – information systems and communications, engineering, services, consumer products and chemicals – have been involved in at least one acquisition in the recent years. “The world has become different, it is now interconnected. We are trying to build an international network for each business, according to its complex nature,” said a top official of Tata Sons, the group’s holding company that has been the enabler in each of the 19 acquisitions. Still, the group’s last initiative, the $8 billion offer for British steel-maker Corus through Tata Steel, stands apart.

Cases In order to help the reader in understanding the real world of international marketing, the issues to be understood and the problems to be resolved therein, cases have been provided liberally in the text. These cases are live examples from the authors.

172

International Marketing

classified by the host countries as luxuries, but they may take a more lenient approach to products that are considered necessities.

Boxed Examples

MYANMAR AND EXCHANGE RATE Exchange controls are extended to products by applying a system of multiple exchange rates to regulate

Important practices and procedures in international marketing have been highlighted as boxed items. These would help the students understand the conceptual and procedural issues of this area.

the investor has earned only US$1000. The exchange rate difference means that the investor has to pay tax on US $ 21,500 of non-existent and earned income. Sources: “Myanmar Crumbling Kit”, Asia Week, March 2001, p.8, and “Catastrophe”, Economist.Com, March 20, 2003. http://www.asiaweek.com/asiaweek/ http://www.economist.com/index.html

Diplomatic Severances and Political Sanctions Pakistan and India have on many occasions suspended diplomatic relations with each other, called back their high commissioners and, at times, even closed embassies and high commissions and consulates in each ’

Contents

xvii

Walkthrough Suggested Readings Amine, Lyn S., “The Need for Moral Champions in Global Marketing,” European Journal of Marketing, 30 (May 1996), p. 81. Epstein, M.J., and M.J. Roy, Strategic Learning through Corporate Environment Management: Implementing the ISO 14001 Standard, INSEAD’s Center for the Management of Environmental Resources (1997). Howell, Llewellyn D. and Brad Chaddick, “An Assessment of Three Approaches to Political Risk,” Columbia Journal of World Business (fall 1994), 71–91. Ohmae, K, “Putting Global Logic First,” Harvard Business Review (January/February 1995), pp. 119– 125. Ohmae, Kenichi, The Borderless World, New York, Harper Perennial, 1991. Robock, Stephan H., and Kenneth Simmonds, International Business and Multinational Enterprises, Homewood, IL: Irwin, 1989. Root, Franklin R., Entry Strategies for International Markets, Lexington Books, New York, 1994. Samuels, Barbara C., Managing Risk in Developing Countries: National Demands and Multinational Response, Prinston University Press, Princeton, NJ: 1990. Vagts, Detlev, Transnational Business Problems, The Foundation Press, Mineola, NY: 1986.

Useful Weblinks http://www.washingtonpost.com http://www.airpower.maxwell.af.mil http://www.newstodaynet.com http://iicas.ucsd.edu http://www.blonnet.com http://www.asiaweek.com http://www.economist.com http//www.newsweekInternational.com http://www.i-sis.org.uk http://www.blonnet.com

Suggested Readings These tell to the interested reader, where he should look for more indepth knowledge into the subject.

Review Questions Answering these questions will help the readers in reinforcing their con cepts and polishing up the knowledge gained from the chapter. They are very useful for the readers for preparing for examinations.

(c) Altering the basic nature of the product (d) Changing product as well its positioning (e) Changing only the product positioning

Review Questions 1. Briefly examine the process of product extension and product standardisation in international markets. 2. What are the challenges to product adaptation in international marketing? Explain the process with the help of examples of product adaptation undertaken by a product. 3. Discuss the process of new product development in international marketing. What are the challenges you expect as an automobile manufacturer of your country to face when developing a new product? Build a launch plan for a new car in a foreign market.

Objective Type Questions 1. Which of the following products have been classified by the traditionalists based on the buyer behaviour and the purchase action of its consumers? (a) Convenience products (b) Shopping products (c) Specialty products (d) None of these (e) All of these 2. A product’s life cycle in its entirety will mean product passing through (a) Local product (b) National product (c) International product (d) Global product (e) All of these 3. Factors that favour standardisation of global products are (a) High technology intensive industry (b) Prohibitive adaptation costs (c) Emergence of global customers (d) Country of origin trend (e) All of these. 4. Large scale test marketing as a complete marketing activity is undertaken by the international marketing firms to understand (a) Product acceptance as against the competition (b) The effectiveness of the promotional strategies adopted (c) The competitors’ reaction to the new innovation (d) To predict expected market share (e) All of these

Objective Type Questions A set of questions given at the end of the each chapter will be very useful to the reader, especially when examinations are approaching.

Concept and Process of International Marketing

1

1

CONCEPT AND PROCESS OF INTERNATIONAL MARKETING

Learning Objectives After reading this chapter, you will understand: The concept of international marketing vis-à-vis domestic marketing T T T

INTRODUCTION Until a few years ago, the international market was an avenue to absorb the spillover from extra production. The entrepreneur used to look at exports only if he could spare part of his production after meeting the national domestic demand. The economic environment had witnessed an overpriced, overprotected and cartel-pampered industry, which did not find it attractive to pursue lower opportunities abroad. However, with the economy opening up its doors to international manufacturers and marketers, the scenario changed radically. The liberalised economy also provided consumers internationally acclaimed brands at competitive prices. Such competition from abroad, on his home turf, virtually awoke the entrepreneur from his ensconced slumber to fight back global competition on an equal footing by raising his own standards to internationally accepted levels. Today, international markets offer unlimited opportunities to companies like Infosys, Wipro, Microsoft, Toyota, Videocon, Ranbaxy, Dr. Reddy’s Labs, Asian Paints and many others. As a result, these firms now look at international markets to gain global competitiveness through technological advancement, superior marketing strategies and continuous product and service innovations. This chapter introduces the reader to the concept, scope and process of international marketing. It analyses why a firm takes to international marketing and the various challenges and evolutionary stages it has to pass through before it can be called a truly global organisation. The chapter also provides an understanding of the firm’s orientation towards international marketing. Each country offers an independent yet interdependent market to manufacturers, service providers and knowledge- and skill-based marketing operators. The firms (handling different functions of trade and business)

2

International Marketing

have never had it so good. The world economy is opening up. Liberalisation of economies, even by nations governed within closed four walls, has brought the world closer. The domestic markets now face competition not only from within but even from all remote corners of the world. The multinational and transnational firms offer tough competition to the domestic industry by setting very steep and high standards. The import substitutions offer superior products and services to consumers. Hence, today, a country’s domestic firms not only have to protect their home turf, but they also have to go out and meet the challenges within the home boundaries of other manufacturers. Drucker describes this situation in the following words: “No institution, whether a business, a university, or hospital, can hope to survive let alone to succeed unless it measures up to the standards set up by leaders in its field any place in the world.”1 The Indian economy witnessed this when leading multinationals and mega-billion dollar corporations like Samsung, LG, Panasonic, Whirlpool, Bridgestone and automobile manufacturers like Hyundai, General Motors, Toyota, Suzuki and Honda walked into the Indian market and not only created their own space, but also virtually took over more than 60% share of the market from Indian manufacturers. In the white goods market, such as colour television and refrigerators, multinationals control more than 90% of the market share today. Goods imported from China have been responsible for the closure of many small-scale manufacturers in the dry cell battery, kitchenware, cosmetics and toy industries. It is obvious that the growth in world trade has been benefiting local consumers by providing them with higher standards of living. Foreign trade has become the mainstay of many emerging economies and bolstered their GDP growth. Indian manufacturers too, although a little late, have geared up to the internationalisation of their businesses. The pharmaceutical industry witnessed a manifold increase in its production levels ever since companies like Ranbaxy led the industry in setting up their plants abroad. Tyre majors like Apollo and CEAT used to operate primarily as domestic companies till they set up plants in Sri Lanka and South Africa. Today, many manufacturers are adopting the strategy of offering counter competition to multinationals in either their own countries or in countries on which they heavily depend for marketing their products. Table 1.1 demonstrates the growth of world exports for the past 60 years. Table 1.1

Growth of World Exports Year

Value of Merchandise Exports in Billion US$

1950

55

1960

113

1970

280

1980

1846

1990

3311

2000

6350

2002

6455

2005

7875

Sources: IMF, International Financial Statistics (Various Issues) and WTO, International Trade Statistics. http://www. imf.org/

1. Peter F. Drucker, Management: Challenges for the 21st Century, Harper Business, New York, 1999.

Concept and Process of International Marketing

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World exports have grown over one hundred times in the last half-century. This bears witness to the fact that more countries are trading their products and services across the globe. Firms are looking for markets beyond domestic consumers. The development in the means of communication and travel has enabled even small and medium-sized businesses to access international markets. What used to be the venue for dumping excess production has today become the major focused segment to reach sky-high production and profit levels. World trade report issued by the WTO exhibits the status of the top importing and exporting countries of the world (see Table 1.2). Table 1.2 Rank

Exporters

Leading Merchandise Traders Value (in Billn)

Imoporters

Value (in Billn)

1

USA

693.9

USA

2

Germany

613.1

Germany

1202.4 493.7

3

Japan

416.7

United Kingdom

345.3

4

France

331.8

Japan

337.2

5

China

325.6

France

329.3

6

U.K.

279.6

China

295.2

7

Canada

252.4

Italy

243.0

8

Italy

251.0

Canada

227.5

9

Netherlands

244.3

Netherlands

219.8

10

Belgium

214.0

Hong Kong

207.2

11

Hong Kong

201.2

Belgium

197.4

12

Korea, Rep. of

162.5

Mexico

173.1

13

Mexico

160.7

Spain

154.7

14

Taipei, Chinese

135.1

Korea, Rep. of

152.1

15

Singapore

125.2

Singapore

116.4

16

Spain

119.1

Taipei, Chinese

112.6

17

Russia

106.9

Switzerland

83.7

18

Malaysia

93.3

Malaysia

79.9

19

Ireland

88.2

Austria

78.0

20

Switzerland

87.9

Australia

72.7

30

India

49.3

India

49.6

World

6455.0

World

Source: WTO, World Trade report, 2003. http://www.wto.org/

6693.0

4

International Marketing

DEFINITION OF INTERNATIONAL MARKETING International marketing is a miniscule part of world trade, as it may not contain all the flow of different nations. Similarly, international marketing activities like outsourcing to own subsidiaries in different countries for job work may not form part of the international trade statistics. International marketing, in fact, may be defined as “the process of focusing the firm’s resources on international marketing opportunities whether while competing within the domestic market against other international companies or even when the firm goes beyond national frontiers to market goods and services.” It is on this account that Hess and Cateora have defined international marketing as “the performance of business activities that direct the flow of goods and services to consumers and users in more than one nation.” Thus, it offers an opportunity to a firm to prepare itself to meet the challenges of catering to different needs, wants, behavioural patterns and perceptions of consumers and users in various countries, only when it markets the products under its own brand umbrella. In case bulk exports are reprocessed and repackaged by another firm situated abroad, it may not be called International Marketing. Some of the bulk exports from India, such as tobacco, tea, spices, processed leather and cut and polished diamonds, etc. may not be covered under international marketing as these are reprocessed and repackaged abroad. However, these converted products will form part of international marketing for the firms situated abroad that undertake reprocessing and export. The American Marketing Association defines international marketing as “the multinational process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organisational objectives”, thereby bringing within its ambit markets situated across the world. As a result, an international firm not only has to satisfy its corporate objectives, but it has also to bring about customer satisfaction through coordinated efforts spanning different countries. Another definition of international marketing states that it is “the process that allocates company resources without regard to national frontiers.” According to yet another definition, “international marketing is simply an attitude of mind, the approach of a company with a truly global outlook, seeking its profits impartially around the world, home market included, on a planned and systematic basis (ibid p.4).” Thus, when a firm decides to go international, it has to take into account the attitudinal changes that may be required to move out of the comfort zone offered by the known and tried domestic markets. International giants like General Motors, Mitsubishi, Microsoft, Exxon, Unilever, Mitsui, Sony and Panasonic must have also faced such obstacles when they decided to go international and achieve global dominance in their respective industries. Today, these companies are registering not only growth in their sizes and output but they are also earning profits several times the size of the Gross Domestic Product (GDP) of many small developing nations.

A COMPARISON OF DOMESTIC MARKETING WITH INTERNATIONAL MARKETING Some of the comparative advantages and disadvantages of both marketing systems remain similar. The firms undertaking international or domestic marketing follow the same basic principles of marketing, i.e. they adhere to the rules for selecting products that are designed on the basis of customers’ needs, fix the price band according to the segment they want to cater to, look for logistics and distribution channels necessary to reach the end consumer in cost-effective ways and, finally, in order to generate necessary demand, these companies

Concept and Process of International Marketing

5

also undertake country-specific promotional efforts for international marketing. Yet, at times, international marketing poses problems to the firms at their different levels of operational efficiency. Such hurdles make international marketing more challenging than domestic marketing.

CHALLENGES FIRMS FACE IN INTERNATIONAL MARKETING Many people though call these difficulties, reluctance and hurdles for the international firms, we would like to name them as challenges to the acumen and talents of international marketers.

Political and Legal Environment This chapter had begun with the premise that the world is divided into many countries and each is sovereign and independent in its own right. The firms doing business with different countries have to follow rules, regulations, trade laws, taxation laws and local contractual obligations, e.g. a number of countries may follow English law, countries in some other parts of the world may have their own systems and laws devised. Besides, local administration in each country would prefer controlling the international imports to their country in order to protect local industry through tariff and non-tariff barriers. Similarly, political ideologies of the nations may differ. But an international firm’s public relations activities will ensure that it overcomes all such challenges, when entering into business with such nations. Some of the U.S. expatriate managers are experts in handling such situations, as almost all U.S.-based firms face some hostile nation or the other. Yet, they manage their relationships in such a manner that the U.S. multinationals keep growing. In a situation where political ideologies differ, some leading multinational companies prefer employing expatriate managers from neutral countries. These companies keenly follow the changes in local governance and change their own loyalties according to the changes in the administration.

Cultural Environment The cultural environment poses yet another challenge to marketers at the international level. Differences in the customs and traditions followed by different communities around the world can lead to situations where communication with the consumers, users and customers can be misinterpreted. The variation in semiotics, values, ideas, attitudes, beliefs, assumptions and traditions pose a challenge to the international marketing manager. The manager must identify similarities and disparities in cultures and take steps for adaptations in different countries. That will avoid waste of time and cost. Hence, firms select the right kind of personnel for international postings and arrange for proper training for them to understand: (a) How to address the target audience, (b) Which approach should be adopted for which country, i.e. hard sell or soft sell (e.g., in United Kingdom, the soft sell is appreciated, whereas in Germany, the hard approach may be appropriate.), (c) What should the marketer emphasise abroad, the price, the quality or will both be necessary at the same time, in addition to any other factor? Many cultures are price sensitive, whereas some others may be status and quality conscious, (d) How to react to unexpected circumstances, and (e) How to transfer one experience to another in order to add values to the brands abroad?

Competitive Environment Taken in the right spirit, competition can spur an organisation to excellence. At the same time, however, it can be dispiriting if the opponents indulge in tactics, for instance they may employ strategies to block

6

International Marketing

channels of distribution, devise prohibitive trading contracts, resort to negative advertising policies and either suddenly raise prices or lower them. Such tactics can either force them to retreat or to become aggressive in their approach. Pepsi and Coke have often indulged in similar fierce competitive fights, not only between themselves but also against the local soft drink manufacturers of some countries.

STAGES OF INTERNATIONAL MARKETING Depending on their internal circumstances, external influences, current focus strategies and future expansion plans, companies may have different degrees of involvement and commitment to international trading and marketing. It will be pertinent to note the stages that various companies pass through before they evolve into international marketing organisations. A limited number of companies take off directly as international marketing companies as a deliberate strategy. Even when they start as export-oriented units, they primarily remain exporters only and seldom get into direct marketing activities abroad. They may outsource their marketing activities to other firms abroad, to handle the marketing of their products and Fig. 1.1 Evolutionary Stages of a Global services. Such firms take much longer time to become truly Marketing Company international marketing organisations. In the evolutionary process of international marketing (Fig. 1.1), a firm may have to pass through the following stages.

Domestic Marketing Company A company that focuses exclusively on the home country market is a domestic company. In India, many such organisations start as domestic companies, focusing solely on domestic consumers and domestic economy unless they are forced to reach a stage by local competition and competition by global competitors within domestic market to look for other pastures outside the home country.

Export Marketing Company Many export marketing companies look for avenues to export indirectly, by extending local products to international clients through export marketing divisions. Their focus, however, remains on domestic markets. In India, to a large extent, the cycle industry, the machine tools industry and the pharmaceutical industry remain ethnocentric, earning a greater share of their revenues from domestic markets. Exports add to the total turnover of these organisations. EXPORT BY BIRLA TYRES Birla Tyres has carved out a niche for itself in the international arena. About 30% of its total production is currently being exported to 43 countries across the globe. The company registered an export growth of 15 to 20% during 2002–08, and its products are well accepted in the domestic and export markets. The company exports 30% of its production, against the

Concept and Process of International Marketing

7

industry average of 20%, to more than 43 countries, including Bangladesh, Vietnam, Middle-East, Africa, Philippines, Afghanistan, South Africa and North America, etc., by offering quality products. These are backed–up with aggressive marketing policies, which are based on customers’ needs and requirements, and converting them into a performance standard for the company. Source:

Multinational or International Marketing Company When a firm starts focusing on consumer needs and requirements in more than one country and accordingly devises product, price and promotion strategies, with special emphasis on the needs of each specific market, it can be called a multinational marketing company. Such a company will have sales offices or even manufacturing bases, through subsidiaries and franchisees or by way of strategic alliances with partners, abroad. LG Electronics, Samsung, Hyundai, GE, National Panasonic, Suzuki and Honda are some such companies that operate as multinationals or international companies. Their efforts, however, are not coordinated across different countries or regions. For instance, Pepsi China has no coordination with Pepsi India, even though both are a part of a multinational firm. Such business organisations are polycentric. At best, regional coordination may be achieved by appointing one regional control office. For example, South Asia may have one controlling office to manage the affairs of the units falling within its jurisdiction.

Global or Worldwide Marketing Company In the global marketing company, focus is on allocating company resources globally without segmentation of the corporate into domestic country specific or region specific. Talent, resources, philosophy, management outlook, thinking and objectives are worked out on a global basis, although, in view of the local requirements, local managers and subsidiaries are used to manage these. Such an organisation allows autonomy to local units to function even though they still depend on their worldwide network for technical expertise to maintain a competitive edge over their rivals. Talking about such a company, Keegan says that “it recognizes similarities and differences and adopts a world view. This is the company that thinks globally and acts locally. It adopts a global strategy allowing it to minimise adaptation in countries to that which will actually add value to the country customer. This company does not adapt for the sake of adaptations. It only adapts value to add to the offer.”2 Thus, when Bridgestone or Continental Tyres adapts their products to the local needs of the Indian market, they do not forsake their global quality levels, but local quality adaptation will be allowed if it adds value to the customer. Ranbaxy is one such example of a global corporate organisation in India. Ranbaxy has worldclass manufacturing facilities in seven countries, namely China, Ireland, India, Malaysia, Nigeria, USA and Vietnam. Its overseas facilities are designed to cater to the requirements of the local regulatory bodies of that country, while the Indian facilities meet the requirements of all International Regulatory Agencies. Some of the agencies such as MCA-UK, MCC-South Africa, FDA-USA and TGAAustralia, have audited and approved Ranbaxy’s manufacturing facilities for compliance with international Source:

2. Warren J. Keegan, Global Marketing Management, Seventh Edition, Pearson Education Singapore Pvt. Ltd., New Delhi, 2002.

8

International Marketing

The true distinction between a global or local outlook can be derived from the philosophy or approach adopted by each company, for which it will be appropriate to analyse the orientation and attitude adopted.

INTERNATIONAL MARKETING ORIENTATION The management’s thinking, philosophy and guiding principles towards the internationalisation of the company’s operations will decide the level of involvement of the firm’s resources, including its marketing activities and talents. On the basis of the EPRG framework, i.e. Ethnocentric, Polycentric, Regiocentric and Geocentric, Douglas and Perlmutter have analysed a company’s approach towards such global opportunities.3

Ethnocentric Approach Metro Tyres, Hero Cycles and Atlas Cycles develop their products on the basis of the requirements of local customers. Their research and development lays emphasis on developing high quality products to cater to the discerning domestic customer but, at the same time, these firms look towards the export markets only as an add-on and an extension of the local market. In their management philosophy, domestic technology, strategies and even personnel are far more superior to foreign operations and are a perfect fit for foreign operations as well. Such firms are highly domestic centralised and look at the exports marketing division as an add-on to their domestic turnover. Such companies use many practices to push their products to other countries either directly or indirectly.

Polycentric Approach The marketer here believes that each market is unique and needs to be addressed individually and differently. The plans are devised to operate through individually established businesses, i.e. either by wholly-owned subsidiaries or through marketing subsidiaries, separately in each country, allowing complete autonomy to units to operate as separate profit centres independent of head office. Such firms conduct their own business research, plan their own product adaptation, price positioning and promotional strategy to suit local needs. Ford Motors, Toyota, Suzuki and General Motors, all develop locally adapted models of their automobiles to suit each country’s consumer-specific needs. Under the polycentric approach, however, a firm may not be able to take advantage of the economies of scale. Research also may not lead to any kind of international customers, resulting in higher end cost to consumers.

Regiocentric Approach The marketing firms here segment the markets on the basis of regional similarities, for example economic, political, cultural and even geographic similarities, in order to cater to a large size of potential consumers. Just as India, Bangladesh and Pakistan, along with other smaller nations like Bhutan and Nepal, could form one group, China and Japan could be the other group. Europe forms a different rigeocentre for many companies. Both Pepsi and Coke cater to such segments as single markets and accordingly, while devising their product and promotion policies, national boundaries hold no meaning. The approach is to ensure that the regional office coordinates all local marketing activities to achieve its objectives through independent local units. Goodyear International, the tyre major, too operates on regiocentric basis, where its regional offices handle 3. Howard Perlmutter, “The Tortuous Evolution of the Multinational Corporation”, Columbia Journal of World Business, January–February, 1969.

Concept and Process of International Marketing

9

and coordinate some of the activities of Asian-Pacific countries. Europe forms another region, while the other parts of the world are divided into Latin America, Middle-East and Africa. North America also serves as a separate region.

Geocentric Approach The entire world is perceived as a single market and, in their quest to become world leaders, manufacturers offer homogenous, identifiable and often interchangeable services and products in order to integrate them for worldwide operational efficiency. Such manufacturers often extend the benefits of similar but low cost products and services worldwide. Companies in the insurance sector, banking sector and food chains, such as McDonald’s, Pizza Hut and Cookie Man, offer similar ambience worldwide in their offices and establishments. Cookie Man, McDonald’s and Pizza Hut even go to the extent of offering similar taste to customers even as they use local produce and manpower to prepare their burgers, pizzas and coffees. GEOCENTRIC INCLINATION: ARE YOU INTERNATIONALLY INCLINED? These indicators, such as foreign sales and foreign employees, are relatively easy to measure. Attitudes, consumers and markets. A geocentric scale was designed to measure egocentricity. The scale consists

1. A manager who began his or her career in any country has an equal chance of becoming a CEO of my company. 3. In the next decade, I can expect to see one or more non-US nationals serving as a senior corporate 4. In my company, nationality is unimportant in selecting individuals for managerial positions. A person’s index of a geocentric mindset is a simple sum of these index items, with the order of the last reversed. Higher values represent a more geocentric mindset. Firms with higher scores frequently use pre-departure training for expatriates and make good use of managers returning from overseas assignments. Source: Stephen J Kobrin, “Is There a Relationship Between a Geocentric Mindset and Multinational Strategy?” Journal of International Business Studies, 25 (3),1994, 439–511.

MOTIVATING FACTORS OF INTERNATIONAL MARKETING With the shortening of distances in the global economy due to the development of means of communication and travel, interdependence among nations on each other has increased manifold. In the international marketing scenario, today, no country can afford to remain aloof or exclusive. Cable television has enlightened consumers about the difference in the standards of living among the haves and the have-nots, among the developed, the developing and the yet-to-develop economies. Such awareness offers tremendous scope for companies to go international to find shelf space in all kinds of economies and to improve their realisations. If Bajaj Auto wants to go out and sell its motorcycles to the French, it may not mean merely dumping its surplus production. When competition starts to have an impact of its profits in the domestic market, it

10

International Marketing

may mean getting better product prices from the export market. Similarly, if Hero Cycles wants to set up a manufacturing hub in China, it will mean facing competition from the Chinese manufacturers on their own home turf, under conditions that will be familiar for Chinese manufacturers and not to Hero Cycles. The motives for taking fast strides in the international market may vary from economic to attaining competitive edge. Some of these are mentioned below. Environment motivating factors: (i) (ii) (iii) (iv) (v)

Competitive edge Worldwide integration of economies Technological edge and infrastructural development (e.g. telecom, transportation) Growth in purchasing power Emergence of demanding consumers

Firm-specific factors: (i) Capacity utilisation and economic advantages (ii) Product life cycle extension (iii) Experience transfers and benchmarking

Environment Motivating Factors 1. Competitive Edge Competition brings out the best. In a closed economy of the kind India had till the early 90s, Indian manufacturers did not feel the need to go international. It was a seller’s heaven, in almost all industries. The automobile industry had Ambassador and Fiat, whereas scooter manufacturers like Bajaj were firmly ensconced in their protective territories. Similarly, the manufacturers of white goods offered only a few products with competitive edge, each knowing fully well that consumers will perforce lap up the entire production. Post-1990s, the scenario has changed. Suzuki’s entry through Maruti brought in Hyundai, Toyota, General Motors and Ford. When automobiles came in, component manufacturers too followed. Bridgestone Tyres moved into India along with these manufacturers, to keep the competitive edge in the original equipment supplies*. Such situations force the local industry to either give up or to buckle up and to look for new technology and new markets around the world. When Honda tied up with Hero, TVS decided to go with Suzuki. Bajaj had virtually motivated Chinese manufacturers to bring out a replica of its own Pulsar under the brand of Guslar, when their Pulsar brand gained international recognition.

2. Worldwide Integration of Economies It is developing into a boundaryless business world. The General Agreement In Trade And Tariff (GATT) and subsequent developments in the WTO are helping the manufacturers access markets without tariff or quantity barriers and, moreover, the transition of the old economic order of closely held economies of China and other communist countries to the market economy has given access to multinationals like Unilever, P&G and others. Unified Germany has become one market, which, eventually, led to a common European market. North American Free Trade Agreement (NAFTA) and South Cone Common Market (MERCOSUR) are other examples of such alliances. ASEAN and SAARC may not yet have become close-knit like Europe but the day is not far when these associations will also offer common customs and other formalities to international * Bridgestone is a Japanese multinational. They established production unit in places like Indore in India.

Concept and Process of International Marketing

11

trade. Given the fact that each sovereign country today is receptive to transborder trade by privately-held companies, subsidiaries established abroad will not only soon have access to common markets but to other parts of the world as well.

3. Technological Edge Technology advancement and breakthrough brings about upgradation of standards of living. Technology has standardised manufacturing processes, resulting in large-scale productions offering economies of scale. The manufacturers can today afford to be competitive in any part of the world. The motorcycles produced by Honda Unicorn in India can compete with other motorcycles across the world. China has gone further and, in fact, its production levels offer it the highest scale of economies. Similarly, transportation and telecom have brought the countries of the world even closer. The multimodal transportation giants have taken away all the problems of exporting and offer their services virtually at the doorsteps of international marketing firms. The establishment of dry ports in many parts of different countries, where the containers move from the exporter’s town itself, adds to the convenience. It has brought down the cost of transportation considerably. The establishment of telecommunication networks, mobile telephones, the Internet and web cams have all contributed to faster and safer international business. Electronic signatures on the Internet have eliminated many unnecessary paper-processing delays, encouraging the international marketing firms to establish their connections worldwide. The denizens of seven seas of the world today have become one globalised village’s residents, each within the reach of a flick of a finger. A WORLD MARKET LEADER—GE General Electric Company is the perfect example of how technological edge has helped a company gain market leadership across the globe, irrespective of the cultural, political and economic differences it has been witnessing in all countries. General Electric Co. is the second largest company in the world, as per the Forbes Global 2000 list. The company operates through 14 divisions, some of which are entertainment channels, plastics, power systems, electric distribution and control. The conglomerate is present in 59 countries directly and all over the globe indirectly. The company had made $ 6.57 billion a whopping 300 percent growth. A journey through the earlier years reveals an interesting story. At one time, plastics and jet engines were its only international business, with a majority of other businesses being localised to the US only. Due to the poor economy in the 1980s, falling demand, antinuclear sentiments and and Power Systems, had suffered huge losses. As a result, the company had to look beyond the US markets. The foreign markets still commanded GE’s attention. GE’S power division already had some overseas customers, including Korea Electric Power, Taiwan Electric Power and Tokyo Electric. GE estimated that the demand in US was expected to grow at 2 percent a year, whereas it was expected to grow at 4 percent

12

International Marketing GE also realised that the four major markets, China, India, Mexico and South-East Asia, with a population of almost close to three billion people, is 10 times as large as the American market. China proved a gold mine with its need of 1,000 jet engines a year and it was also expected to add more than $100 billion in power-generating equipment by the end of year 2000. GE Hangwei Medical Systems, a joint venture company, was then formed to cater to 62,000 hospitals and 2,00,000 clinics., which would need low cost imaging equipment. In order to exhibit its commitment, GE started service centers in seventeen Chinese cities while shifting its base in China from Cincinnati to Beijing. In India, GE has invested more than $100 million in the manufacturing sector, making medical equipment, plastics, kitchen appliances and lamps. In Indonesia, where GE Technology Indonesia was set up to enter a joint venture technology transfer unit, GE holds stakes in a $2.5 billion power plant project. In Mexico, GE opened a research centre and formed a joint venture with Mabe, a Mexican appliances company, producing gas ranges for North America and accounting for 30 percent gas stoves in the US. Its entertainment arm, NBC has launched two new television networks, Super Channel NBC Asia and all-time record revenues for the company. John F. Welsh Jr, who was GE’s CEO, started to push his company aggressively to become a global leader. Thereafter, Jeffery Immelt, who succeeded John F. Welsh Jr., has been ably and successfully realising the vision of his predecessor. The company’s six divisions have shown a double-digit growth for the year 2005. In the words of John Welsh Jr., “Foreign markets present huge risks while offering great rewards. With right mix of capital and technology, which GE can provide these non-US, markets can explode. If the strategy is wrong, it is a billion dollar loss. If the strategy is right, it will herald a bright future for the company.” Sources: GE company’s website, “GE’s Brave New World”, Business Week, 8 nov.1993, 64–68 “A Big Offshore Surge for GE’s Juice Factory”, Business Week, 21st June 1993, 72, NBC to Expand Programming in Asia”, Global Direct Marketing, 20 Feb 1995.

4. Purchasing Power The purchasing power of large Asian nations like China, India and Japan has grown manifold. The middle class of India offers the largest market of haves to the marketers of the world. China’s foray into privatisation and allowing private FDIs has led to open foreign trade with China. At the same time, aggressive export and international trading bring home the much-needed dollars, which are then ploughed back into product and infrastructure development. The indian economy saw the emergence of local multinationals, which attained multibillion dollar turnovers through outsourcing of business processing and which then offered huge wealth to local manufacturers. The emergence of auto component manufacturers, call centres, software development organisations and health and medical development centres all are examples of an economic upsurge. Infosys, Wipro, Convergys and Persistent are only a few names of the firms that have helped the Indian economic upsurge through their dollar earnings.

5. Emergence of Demanding Consumers The global media has brought worldclass products into people’s living rooms and bedrooms. Today, young people in all corners of the world listen to the same music. They watch IFFA awards at the same time as they watch MTV awards. The consumer is exposed to all international brands, such as Nike, Levi’s, LG mobile phones, Motorola phones and many other such products, which are now available simultaneously in many countries of the world. This consumer education has brought in a natural demand for common and most

Concept and Process of International Marketing

13

sought-after brands, virtually motivating marketing firms to start their own distribution worldwide. Shopping malls, retail chains and franchises are all falling over each other to cater to this discerning, knowledgeable and willing-to-spend consumer. Pizza Hut, McDonalds, Cookie Mans, Barista, L.L. Beans and many other international chain food stores all find a consumer whose taste buds are demanding international delicacies.

Firm-specific Motivating Factors Firm-specific motivating factors arise when international firms see the opportunities externally. They are then motivated to analyse their own strengths to leverage against the external factors.

1. Capacity Utilisation and Economic Advantages In international marketing operations, the break-evens are moving up due to higher cost of setting up globally viable units. In order to reach the levels of production that could bring in positive returns, many times, manufacturers look beyond national boundaries to prepare themselves to compete against the global giants through worldwide operations. As a result, firms usually go for international operations. The steel industry saw such emergence of global operations in the merger of top world manufacturers like Mittal Steels and Arcelor. Similarly, Tata Steel has also gone international to counter competition. Videocon prefers calling itself an Indian multinational to achieve regiocentric operational efficiency that could bring down costs (see Fig. 1.2).

BUSINESS PROFILE

International

Domestic

Consumer Electronics

Consumer Electronics

Oil & Gas

Components

Oil & Gas

Australia

OEM

RAVVA

Glass for CPT

Existing Fields

Italy

Compressors

Infill Wells

Oman

Others

Satellite Fields

Components & intermediates

China

Others

End Products

Full spectrum Multi-brand, OEM

Gas Distribution

Mexico

Exploration in NELP (new)

Poland

Fig. 1.2 The International and Domestic Profile of Videocon Source: http://www. videoconworld.com/about/corporate-profile/index.php

Oman

14

International Marketing

2. Product Life Cycle (PLC) Extension This can only be a short-term strategy. Many times, products on the verge of declining trends on the PLC may get a new lease of life by opening up of new markets internationally. Sometimes even at the introductory and growth stages of PLC, a company may like to recover the high cost of product development by offering the same to international markets, till others catch up with it. The cold drinks and beverages industry of United States got a new lease of life in the early 80s, when both Pepsi and Coke moved into many Asian countries. Similarly, cigarette manufacturers were able to revive their fortunes when they ventured into China and Eastern Europe, after their economies opened up.

3. Experiences Transfer/Benchmarking Firms attain the standards of international marketing corporate organisations after they have established themselves firmly in their own domestic markets. Again, they may not open up all international fronts in one go, but they may learn their lessons in one economy before they move on to the next. The experiences earned are utilised in establishing new businesses at a low cost and in lesser time. Some of the retail majors like Wal-Mart (US) and Metro A.G. (Germany), which are entering India now, will stand to gain a lot with their experiences worldwide. International companies have information systems that scan case studies of different companies across the world, which can then be used as benchmarks while setting up new businesses. COCA-COLA—EXPERIENCE TRANSFER The year 1993 saw Coca Cola losing its market share in the US beverage market, shrinking from 63.3 percent of soft drink sales in 1984 to 58.8 percent, entailing a net loss of US$ 2.4 billion in potential retail sales. That is the time when the company decided to take advantage of balancing good potential markets (as against the shrinking market of US) by spreading out to different markets across the globe. Even though the US soft drink market is the biggest in the world, it is a highly matured and saturated market, US leads the world in soft drink consumption, averaging 296 eight-ounce servings per person per year, the cola manufacturer realised that if it could persuade 896 million Indians (who consumed only three servings per year) to drink just one additional serving, and if they could also follow a similar pattern in China, the US soft drink industry could get an additional sales potential of 2 billion cans per year. Coca Cola also became particularly aggressive in East Europe, Asia and South America. It opened plants in Romania, Norway, Fiji and India, while simultaneously Russia and Thailand. When the Soviet Union collapsed, Coca Cola invested more than $ 1.5 billion to build a new business, from almost zero

Concept and Process of International Marketing sales. As a result, it gained a huge market share in East Europe, in addition to making its return to India a great successful business venture. Sources: The Wall Street Journal, 3 June 1994; In Business This Week, Business WEEK, 27 July 1992, Coke makes China Foray with accelerated Fizz Sales, Bangkok Post, 16th Nov, 1993, The Wall Street Journal, 22 August 1995.

Points to Remember Product life cycle: A new product progresses through a sequence of stages from introduction to growth, maturity and decline. This sequence is known as the product life cycle and is associated with changes in the marketing situation, thus impacting the marketing strategy and the marketing mix. Tariff barriers: These barriers represent tax levied by the foreign government on goods imported into that country (or import duty). The tariff increases the price at which the goods are sold in the importing country and therefore makes them less competitive with locally produced goods. Non-tariff barriers: In some cases, these barriers effectively prevent the exporter from selling his goods in that foreign country but are not in the form of tariff. Examples can be import bans, general or product-specific quotas, rules of origin, quality conditions imposed by the importing country on the exporting countries, sanitary and phyto-sanitary conditions, packaging conditions, labelling conditions, product standards, etc. Capacity utilisation: Extent or level to which the productive capacity of a plant, firm, or country is being used in the generation of goods and services. Expressed usually as a percentage, it is computed by dividing the total capacity with the portion being utilised. Thus, it refers to the relationship between actual output that ‘is’ produced with the installed equipment and the potential output which ‘could’ be produced with it, if capacity was fully used.

Objective Type Questions 1. A company that focuses exclusively on the home country market is known as: (a) Domestic company (b) Export marketing company (c) International marketing company (d) Global marketing company (e) Multinational company 2. In a global marketing company, the focus will be on allocating company resources: (a) Globally (b) Regionally (c) Domestically (d) Nationally (e) Zonally 3. Which stage is not a part of the EPRG framework as given by Wind, Douglas, and Perlmutter ? (a) Ethnocentric (b) Polycentric (c) Regiocentric (d) Geocentric (e) Multicentric 4. Polycentric approach believes that: (a) Each market is unique (b) All markets are same (c) Markets do not matter (d) Markets can be similar (e) Markets can be controlled

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International Marketing

5. Geocentric approach believes that: (a) The entire world is a perceived single market (b) The world market can be divided into regions (c) The world market can be divided into different countries (d) The world is not a single market (e) Each market is unique 6. Regiocentric approach believes that: (a) Markets can be segmented on the basis of regional similarities (b) Markets can be segmented on the basis of country borders (c) Markets cannot be segmented (d) Markets are homogeneous (e) All markets are heterogeneous 7. In international marketing, firm specific motivating force refers to: (a) Analysing own strengths to leverage against the external factors (b) Analysing opportunities within the country (c) Analysing external factors (d) Analysing competitive opportunities 8. Experiences transfer/benchmarking in international marketing refers to: (a) Adapting experiences earned and utilised in establishing a new business at a low cost and lesser time (b) Transferring experienced employees (c) Transferring technology (d) Transferring finances (e) Transferring resources 9. International marketing orientation, as spelt out in EPRG framework, refers to: (a) Management’s thinking, philosophy, and guiding principles towards internationalisation of a company’s operations (b) Companies’ resources as allocated internationally (c) Companies’ marketing operations (d) Companies’ manufacturing plants as located (e) Companies’ personnel 10. State true or false: (a) In the international marketing operations, the break-evens are moving up due to higher cost of setting up globally viable units. (b) Many times, products on the verge of declining trends on the PLC may get a new lease of life by opening up of new markets internationally. (c) International companies have information systems that can scan the world over marketing cases of success or failure.

Concept and Process of International Marketing

17

Review Questions 1. Define the concept of international marketing. Discuss the challenges that firms face in international marketing. 2. List out the evolutionary stages of a firm’s growth from domestic to global entities, with special reference to any of the Indian firms. 3. What is the EPRG model? Point out the differences between the polycentric and geocentric approaches of a firm. 4. What are international business environment motivators? How does economic upsurge help in globalisation? Explain with examples. 5. What are the firm-specific motivators for going international? Explain. 6. How does a product life cycle help in internationalisation? Point out various stages of internationalisation while drawing the product life cycle. 7. Visit the web page of Wipro to understand business volume spread over the globe. Explain the company’s orientation towards internationalisation with the help of the EPRG model.

Project Assignments 1. Identify one each of ethnocentric, regiocentric, polycentric and geocentric firms and compare their different marketing strategies in different regions. 2. Identify an OEM (original equipment manufacturing) company in India. Identify the stage of its international marketing and observe the opportunities and challenges of further international expansion. Discuss your findings in class.

Suggested Readings Cateora, Philip R. and John L.Graham, International Marketing, 12th Ed, Tata McGraw-Hill New Delhi. Dana – Nicoleta Lascu, International Marketing – Managing Worldwide Operations In A Changing International Environment, Atomic Dog Publishing, U.S.A. Biztantra, New Delhi. Halal, William E., Global Strategic Management in A New World Order, Business Horizons, 36 November – December 1993. Johnson, Johnny K., and Ikujiro Nonaka, Relentless the Japanese Way of Marketing, Harper Business, New York, 1997. Joshi, Rakesh Mohan, International Marketing, Oxford University Press, New Delhi. Keegan, Warren J, Global Marketing Management, 7th Ed, Pearson Education, New Delhi. Keegan, Warren J. and Bodo B. Schlegelmilch, Global Marketing Management: A European Perspective, Prentice-Hall International, New York, 2000. Malnight, T.W., Globalization of Ethnocentric Firm: An Evolutionary Perspective, Strategic Management Journal, 16 Feb. 1995. Ohmae, Kenichi, The End of Nation State: The Rise of Regional Economies, The Free Press, New York 1995.

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Useful Weblinks http://www.imf.org/ http://www.wto.org/ http://www.birlatyre.com/ http://www.ranbaxy.com/ http://www.ge.com/en/ http://www.videoconworld.com/

Case STAR Network’s Adaptation to Indian Culture— A Media Success Story The entry of global media conglomerates in India began with the creation of Satellite Television Asian Region (STAR) in 1991. The STAR network’s website proudly claims that “STAR pioneered satellite television in Asia and, in the process, catalysed explosive growth in the media industry across the entire region.” The opening up of the Indian economy and the subsequent access to satellite television redefined not only the viewing experience for millions but also brought in a vast opportunity for media moguls to generate unheard sums of profits from the Indian market. The entertainment industry could now provide more people with greater choice than ever before. STAR set new standards in content, production and variety. It is hard to dispute STAR’s claim of ‘setting the pace of media in Asia’, as it broadcasts 40 services in seven languages and reaches more than 300 million viewers in 53 countries. Over 173 million people watch STAR every week. The success of the STAR TV network has been achieved by making programmes in Indian languages, such as Hindi, and by localising content as well as adapting local family culture and values in its programme content. In order to analyse the runaway success of the STAR network in India, it is important to understand the national Indian television network, which, with the coming of new communication technologies and opening up of global markets, had been subjected to massive changes since the early 1990s. “As with many other sectors of the Indian economy, the gradual deregulation and privatisation of television transformed the media landscape in a country which had one of the most regulated broadcasting environments among the world’s democracies” (Price and Verhulst, 1998; Page and Crawley, 2001). In the early 1990s, there was no television industry worth the name in India, which, until 1991, had just one state-controlled channel, Doordarshan, which was little more than a mouthpiece of the government of the day and offered monotonous and unpalatable programmes. The opening of the broadcasting skies brought in more than 300 digital channels. Some joint ventures with international broadcasters also joined the league. This opening of the satellite network and exposure of the Indian viewer called for new programme content that could satisfy local cultural feelings in addition to his remaining in touch with ever growing global entertainment forays. Thus, from news to game and chat shows, from soap operas to ‘reality TV’—which have been provided by a burgeoning television industry that was mainly global, a kind of discontent had prevailed amongst mass viewers.

Concept and Process of International Marketing

Indian television was spreading its wings in five continents during this time. In the United Arab Emirates, the vast majority of the population consists of foreign workers from the Indian sub-continent, making the oil-rich Gulf region a key target for television networks based in India. In Britain, for example, Indian channels—Zee, Sony, STAR Plus, B4U (Bollywood for You), which are available on Sky’s digital network—have dedicated viewerships. Indian television companies are increasingly finding a niche within the lucrative US market, where the Indian diaspora comprises one of the richest strata of society. Of the nearly two million people of Indian origin living in the US, the investment firm Merrill Lynch estimates that there are 200,000 millionaires. They have an average income of over $60,000, compared to the national average of about $39,000, making them America’s wealthiest immigrants (Rajghatta, 2003). India’s rapidly expanding economy and a pro-market government, coupled with an established satellite network, made the Indian market an extremely attractive proposition for transnational broadcasters (Pendakur and Kapur, 1997). According to the trade press, in 2004 there were nearly 390 million television viewers in India, with cable and satellite penetration reaching more than 48 million homes and growing annually at the rate of 10 per cent (Satellite and Cable TV, April 2004). As a global player, STAR TV suffered an initial setback when it failed to read the Indian viewer as hungry for copies of programmes based on American and western culture. Hence, it saw its objectives of TRP remaining much below expectations. However, STAR’s market value and viewership rating in India grew rapidly and changed its fortunes for the better ever since its flagship channel, STAR Plus launched Kaun Banega Crorepati, an Indian version of the successful British game show Who Wants to be a Millionaire, hosted by India’s best-known film star, Amitabh Bachchan. Along with it, STAR also launched a number of Indian programmes that depicted the Indian family drama, soap operas like Saas Bhi Kabhi Bahu Thi, Kahani Ghar Ghar Ki, Kumkum, etc. Once the Hindi channels started doing well, channels catering to strictly English viewership also picked up in total tariff rating. In 2004, almost 10 years after its launch in India, STAR claimed to be broadcasting its programmes to more than 31 million homes in India, with 90 percent Indian content, through a product mix of all its channels. Thus, while the STAR network started out with mainly American and western programmes, it took the strategic decision to adapt, rationalise and finally localise its programming to suit the variety of cultural and linguistic tastes of the diverse Indian market. As Table 1 shows, the STAR network-led channels, whether entertainment, sports or information, dominate the cable and satellite market, by placing itself within the top three slots. STAR’s adaptation to Indian culture and language, however, did not prevent it from maintaining international digital quality of its technically superior broadcasting and relaying of programmes as compared to some of the national and regional channel networks. (Source: Adapted from: Taming the Dragon and the Elephant: Murdoch’s Media in Asia, Daya Thussu; http://www.wacc.org.uk/wacc/publications/media_development/2004. This is a substantially modified version).

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Table 1 Market reach of Cable and Satellite TV–the top ten channels in India Channel Name

Type

Market reach

Market share (million homes)

SET MAX

Entertainment/sport

8.3

12.2%

STAR Plus

General

7.2

10.5%

Sony TV

General

7.1

10.4%

Zee TV

General

6.3

9.2%

Ten Sports

Sports

5.9

8.6%

Zee Cinema

Indian films

5.7

8.3%

STAR Sports

Sports

5.6

8.2%

DD2

General

5.4

7.9%

Aaj Tak

News and current affairs

5.1

7.5%

STAR Gold

Hindi movies

4.8

7.0%

Source:

Data from TAM Media Research, Satellite & Cable TV Magazine, May 2003.

Discussion Questions 1. What were the conditions prevailing in Indian television industry before the opening of the economy? Compare the pre- and post-liberalised market situation of the Indian media. 2. Find out the reasons for STAR TV network’s success in Indian television industry. 3. “Adaptation to local culture by an MNC can only ensure regional success.” Do you agree with this view. Explain in the light of the case study presented. 4. Carry out a critical analyses of STAR TV network’s orientation towards international marketing based on EPRG model.

References 1. Price, Monroe and Stefaan Verhulst (Eds.), (1998), Broadcasting Reform in India: A Case Study in the Uses of Comparative Media Law, Oxford University Press, Page, David and William Crawley (2001) Satellites Over South Asia: Broadcasting, Culture and the Public Interest, Sage. 2. Rajghatta, Chidanand (2003), ‘Merrill estimates 200,000 NRI millionaires in US’, Times of India, 14 May. 3. Pendakur, Manjunath and Jyotsna Kapur (1997), ‘Think Globally, program locally: Privatization of Indian national television’, pp. 195. 217, in Mashoed Bailie and Dwayne Winseck (Eds.), Democratizing Communication? Comparative Perspectives on Information and Power, Hampton Press. 4. Satellite and Cable TV, April 2004.

WTO and Its Impact on International Marketing

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WTO AND ITS IMPACT ON INTERNATIONAL MARKETING

Learning Objectives After reading this chapter, you will understand: How WTO was established The role of WTO in the world economy The implications of WTO Agreements How WTO facilitates the international marketing function

INTRODUCTION The World Trade Organisation was established on the basis of the General Agreement on Tariffs and Trade (GATT). Seven rounds of negotiations took place under GATT before the eighth round, known as the Uruguay Round, began in 1986. It concluded in 1995 with the establishment of the WTO. The GATT principles and agreements were adopted by the WTO, which was responsible for administering and extending them. Unlike GATT, the WTO has a substantial institutional structure. The Marrakesh Agreement, signed in Marrakech, Morocco, on April 15, 1994, established the World Trade Organisation, which came into being upon its entry into force on January 1, 1995. The Marrakesh Agreement developed out of GATT, which it includes, but it supplemented GATT with several other agreements on such issues as trade in services, sanitary and plant health measures, trade-related aspects of intellectual property and technical barriers to trade. It also established a new, more efficient and legally binding means of dispute resolution. The WTO aims to increase international trade by eliminating trade barriers, both tariff and non-tariff, and by providing a platform for the negotiation of trade and to their business. Currently, it boasts of a membership of more than 150 countries. WTO decisions, such as adopting agreements and their revisions, are officially determined by consensus. The advantage of consensus decision-making is that it encourages efforts to find the most widely acceptable decision. Apart from hosting negotiations on trade rules, one of the principal functions of the WTO is to act as an arbiter of disputes between member countries through its Dispute Settlement Body. Unlike most other This chapter has been prepared with contributions from B. Arun Kumar, Deepak Balan, Sagar Sunil, Sandeep Kumar Mishra, Sandeep S. and Syed Ashref.

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International Marketing

international organisations, the WTO has significant powers to enforce its decisions through the authorisation of trade sanctions against members who fail to comply with its decisions.

WTO AND GLOBALISATION: ISSUES It is worth noting that the WTO stands for removing the non-tariff barriers in the short-run, and import duty rates in the long run. Firms are becoming increasingly aware of the impact the WTO system on their activities in foreign markets. To a large extent, access to these markets depends on the trade liberalisation process that takes place at the WTO. The WTO rules affect their international marketing decisions such as the choice of an entry mode or the pricing of products. Over the years, trade rules have gained both in coverage and in complexity. This not only means increased opportunity but also WTO’s increased importance on a firm’s business. There are economic, business, social and political dimensions of WTO policies. The key to understanding the essence of globalisation is found in the reasons why commodity flows and divisions of production occur. This is important because economic exchanges very rarely take place between nations or groups of nations. They take place between organisations. It is worth noting that globalisation has gathered pace in the past 20 years. Marketing and selling are not always the most significant aspects of globalisation. However, globalisation is a phenomenon with profound implications for marketers. Not very long ago, there were barriers of all kinds to the movement of goods, labour and capital. But now goods can flow almost freely. International mobility of services is much higher, as is that of labour. While some restrictions remain on capital flow, things are slowly moving towards a regime of free capital flow. As markets have become more deregulated, there has been a major change in the way in which and the speed with which knowledge is disseminated. This has had profound impact on organisations, often in a way that national governments find uncomfortable and some social and political groups threatening. Although there are criticisms about the WTO, optimistic view about globalisation is about creating a new set of competencies that enable a company to utilise resources on an optimal basis to meet differentiated customer demand cost-competitively without regard for geography. It is about getting an organisation into a position of doing business in any market it chooses.

WTO and Developments in the World Economy The main objective of GATT and WTO is to reduce physical and administrative barriers to international trade.1 The impact of WTO cannot be evaluated in isolation, but with the forces of globalisation. Some of these factors are outlined below. Where organisations integrate across borders, they contribute to several economies simultaneously. Potentially, this has positive and negative dimensions from the point of view of national governments. For example, in an increasingly connected world, decisions on interest rates taken in Washington can have a significant economic effect in other parts of the world. A decision to cut interest rates will stimulate consumption for goods produced in China and elsewhere in the Asian region. To some extent, this accounts for the continued high level of growth in GDP in China, which is buoyed by demand in the developed world, 1. Arun Goyal, WTO in the New Millennium, Academy of Business Studies, New Delhi, 2001.

WTO and Its Impact on International Marketing

23

particularly the USA. According to the Nobel prize-winning economist Joseph Stiglitz, the increase in this “connectedness has given rise to the need for a new type of social, political and legal regime that takes into account the dangers of a widening of the gap between the haves and have-nots.” Customers have got easy access to most of the goods produced in other countries in their own country at competitive rates, with the slash in import duty rates and removal of import restrictions, with the implementation of WTO agreements. They have (those with purchasing power) emerged as kings and queens in the market.

Integration of Financial Markets Financial markets are now e-based and operate 24 hours a day at speeds several times higher than a generation ago. Organisations, irrespective of size, can now cost-effectively manage banking relationships outside their home base. The financial sector has been the most affected among all sectors. Mergers and acquisitions in the banking sector have been both a driver of globalisation and a response to its anticipated potential. Though firms may be incorporated in one country, they can get listed on several stock markets in other countries.

Computer-based Technologies and Information Systems The advent of affordable computing power, previously available only to organisations with lots of money, has helped to level the playing field. Many of the major breakthroughs are made by small, entrepreneurial companies based in mutually supportive clusters and supply webs. Customers now have an increasing range of choice. Classically, this was seen as a choice between innovation or differentiation and operational efficiency or cost leadership. The dimensions of quality and price are no longer a trade-off. As a direct result of the development of affordable computing capacity, a whole new range of organisational forms has emerged. A globally competitive firm is one that competes not on the basis of its products alone but on the basis of its network and the value chain of which it is a part. For example, a very high percentage of the final value of the modern ‘Boeing’ aircraft is outsourced. The comparative advantage of Boeing, its value-add and, hence, its return on assets derive from its knowledge and skills ranging from basic R&D through engineering design and logistic system management to complex final assembly. The Seattle-based company, Boeing controls but does not undertake fabrication of components and sub-assemblies. These products come from elsewhere. The ‘elsewhere’ is becoming global, and the new core competency in managing sophisticated I.T. systems enables Boeing to control the whole of its supply chain.

THE MARKETING SCENARIO The World Trade Organisation offers marketers the opportunity of reaching a much wider range of consumers than ever before. This makes some aspects of marketing easier and others more difficult. In an increasingly integrated business environment, the emphasis moves from an individual to a collaborative marketing platform. It has been observed that different corporate activities globalise at different rates, and the product requirements and standards of nations change very slowly in comparison. The concept of ‘global localisation’ now drives a company’s marketing worldwide. While the basics— core technology, design, branding—are global, the final product specification, promotion, mix and customer support are undertaken just as if the company is regional. Behaviours are converging, albeit at a slow rate.

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International Marketing Technologies/systems Logistics

Finance

Sustained Customer Satisfaction

Customer Delight

Base Materials

R&D

Structure/culture Learning

Fig. 2.1 Marketing via the Concept, Tools and Techniques. Source: This diagram has been drawn based on the idea derived after reading the white paper on — What is Globalisation by Daniel Park, Associate Consultant, B2B International Ltd.

The influence of history and cultural differences remains significant. However, the impact of the information revolution is such that there is convergence and it is beginning to accelerate. The percentage of localisation is expected to slowly decline over time. Working out the physical channels to market is not enough. Marketers now need to understand the informational channels to market. This is because the theoretical ‘consumer sovereignty’ has become a reality with flooding of the imported items in the market. Figure 2.1 depicts marketing via the concept, tools and techniques. Customer value can be derived from any element or a combination of elements, not just on the final product package. Marketing is about identifying where value-adding conversions can take place and how and why customers develop and change their views about what constitutes value. This takes place against a background of increasingly collaborative relationships rather than the traditional dealings. WTO and globalisation cannot remove the aspects of the marketing mix that are set to remain internationally heterogeneous. Therefore, as business becomes increasingly global, the question of managing the information is becoming more critical in marketing. Asymmetry of information is often the critical factor that gives rise to competitive advantage, at least over the short-term period. The new market environment is characterised by significantly greater global mindset. All this gives rise to an additional set of challenges that business leaders generally face, but especially in the marketing function. Managers need to abandon national allegiances and this can happen only when top company management modifies its own views and installs a set of processes and structures that relate to the emerging reality of the business and not to past practice. Globalisation extends choice on both the supply and demand sides of business relationships. It not only opens up more markets to a company but it also opens its markets to more competitors. This provides a more fluid marketing environment in which an organisation can ‘hedge’ its markets and customers in order to maximise returns and minimise risk and uncertainty. WTO agreements enable the minimisation of this risk and uncertainty through minimising interference by non-economic factors. They aim to bring to the companies the required fluidity to be able to compete fairly.

WTO: Impact on International Marketing The impact of WTO on international marketing can be analysed by looking at the effects on the 4Ps of marketing: Product, Price, Promotion and Place. The other factors that emerge in the new scenario must also be looked at. Figure 2.2 depicts the various decisions that a firm has to take when marketing products or

WTO and Its Impact on International Marketing WTO System

Decision to Internationalise

25

WTO System

Foreign Market Selection & Analysis

GATT GATS l TRIPS l TRIMs l l

- Market Access Conditions

Entry Mode Decisions

- Sectorial & Regional Agreements Formulation of International Marketing Strategies

Segmentation Targeting Positioning

International Marketing Mix Strategies - Distribution Strategies - Product Strategies - Pricing Strategies

l

GATT : General Agreement on Tariffs and Trade

GATS : General Agreement on Trade in Services TRIPS : Agreement on Trade-related aspects of Intellectual Property rights l TRIMs : Agreement on Trade-related Investment Measures

l l

Fig. 2.2 The International Marketing Process of the Firm and the WTO System2

services to foreign markets. The WTO system refers to the extensive body of agreements that constitute the rules, regulations and practices that member states adhere to in their international trade relations.3

Product WTO rules have a bearing on both tangible and intangible product attributes. Regarding tangible attributes, WTO rules deal with product specifications (norms and standards), labelling and products content (foreign 2. This diagram is a modified version of the figure sourced from Jean Emile Denis’s (Professor, University of Geneva, HEC) Paper—Making International Marketing Decision under WTO Rules, Thunderbird International Business Review, March–April 2003, Vol. 45(2), pp. 185–210. Reprinted with permission from the author. 3. Jean Emile Denis (2003) Making International Marketing Decisions under WTO Rules, Thunderbird International Business Review, Vol. 45(2), March–April, pp. 185–210.

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International Marketing

content and rules of origin). Decisions about intangible attributes may also be affected by WTO rules on patents, copyrights, trademarks, designs and geographical indications. Decisions about tangible attributes for industrial products are affected by rules spelled out in the International Marketing Agreement on Technical Barriers to Trade (TBT). Rules relating to labelling are to be found in TBT. The TBT Agreement introduces dispositions that were not included in the previous GATT code. While GATT covered only standards and norms affecting only the product itself, the TBT Agreement covers process and production methods that have an impact on product characteristics as well. It is often required that imported products meet certain norms in order to protect the health and safety of the population and for the protection of the environment. The TBT Agreement states that these compulsory norms must not be applied in a way that results in unnecessary obstacles to trade, and that they must be based on scientific evidence. Diversions from guidelines established by international standardisation organisations may be acceptable for climatic or geographical reasons. However, they must be publicised and governments must take into account observations addressed by other countries. Attention should be given to the fact that the rules are not the same for industrial and agricultural products. In addition, provisional measures may be applied to agricultural products in the case of serious and imminent health hazards. WTO requires that governments take appropriate action to guarantee full transparency with regard to product requirements and testing procedures. A national inquiry point must be established and changes in procedures must be notified to the business community. Product specifications have traditionally been a major headache for traders and have often been used by governments as a powerful tool to control import. The new WTO rules bring considerable clarity in this area. They will facilitate trade and, as a result, promote international competition. Because of its reliance on internationally accepted standards, it may lead to increased product standardisation in product design and production processes. There is no specific rule dealing with packaging or labelling, although the agreement on TBT makes it clear that packaging, marking and labelling requirements should not constitute unnecessary barriers to trade. Exporters are often requested to adjust to local practices. As a result, they may incur additional costs that may deter them from exporting. Such practices are acceptable as long as they are not applied in a discriminatory manner. The agreement on Rules of Origin may have a significant marketing impact on the possible countryof-origin effects. They will provide a competitive advantage to products identified as originating from countries with a well-established and positive national image. This may be a valuable asset to exporters not only of branded consumer goods but also of nationally reputed manufactured goods. The value of a product does not depend exclusively on its performance or physical characteristics. Much of its value to the consumer resides in his or her perception of price, brand name and geographical origin. This has been well demonstrated empirically in a large number of countries, particularly with regard to the impact of branding on product value and to the effect that country of origin has on consumer preferences. Marketers are well aware of these advantages and try to build up the value of their products through carefully crafted branding strategies that involve costly communication campaigns. Opportunistic competitors appropriate or plagiarise well established brand names or unduly claim geographical origins that do not belong to their products, thereby granting themselves illegitimate marketing advantages. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides traders with some degree of protection in these respect.4 4. See Krishna Rao (2005), WTO: Text and Cases, Excel Books for more information on TRIPS.

WTO and Its Impact on International Marketing

27

The Agreement requires WTO members to grant each other both national and the Most Favoured Nation (MFN) treatment in intellectual property protection for trademarks, patents and copyrights as well as for ‘geographical indications’.

Price Pricing depends on numerous factors, which fall into four categories: costs, demand, competition and regulations, including the WTO rules. WTO rules are targeted at practices that restrict pricing decisions in the conduct of international transactions. Compared to other international marketing decision areas, there are a rather large number of WTO rules that impinge upon pricing. They include the determination of the price of goods when it is assessed by customs authorities, the determination of price in relation to dumping and subsidies, and transfer pricing in multinational firms. Before the WTO regime, GATT registered many complaints to the effect that customs applied arbitrarily and unduly high customs values. Also, it was not possible to estimate in advance the duty that would be applied to products. The Agreement on Customs Valuation (ACV), which was adopted during the Uruguay Round, intends to address these problems and indicates how goods are to be valued by customs authorities. The methods of valuation are based on the price of similar products, in reference to other sales prices or to production costs or on the basis of a combination of both prices and production costs. Perhaps as importantly, the agreement spells out which valuation practices are unacceptable. These include valuations based on comparisons with prices of competing products, export market prices or choice of the higher price when two methods are used. Customs may reject prices, but they must give an opportunity to importers to justify their claims. The agreement on Pre-shipment Inspection (PSI) provides guidelines designed for protection against practices by the inspection companies acting on behalf of governments. According to PSI, physical inspection should be carried out in the exporting country and, if not possible, in the country of manufacture. The PSI Agreement provides stricter discipline in their determination of the value of goods exported. It also provides a new institutional mechanism for handling complaints regarding alleged arbitrary decisions by inspection companies. It may also reduce the level of customs-related corruption. Firms may want to set the export price at a lower level than the normal price with a view to gaining market share or access to a new market. It is a rather common practice in exporting. The WTO does not condemn dumping, but it is not allowed only if it causes or threatens to cause material injury to an industry or if it delays the establishment of a domestic industry in a member country. The agreement on Anti-Dumping Practices (ADP) states that if dumping is demonstrated, and if it results in an injury or threat of injury, the importing country may impose an anti-dumping duty. Exporters may avoid anti-dumping duties by undertaking to increase their export prices. Called ‘price undertakings’, these are allowed only after the investigating authorities have issued a preliminary determination of injury as a result of dumping. Anti-dumping duties may not be imposed for more than five years and should be terminated earlier if they are no longer warranted. Complaints are to be handled by the Dispute Settlement Body (DSB) of the WTO.5 A firm deciding to fight an anti-dumping action should be prepared to cope with the usual legal hazards: heavy legal fees, alien scrutiny over its accounting, pricing and managerial practices, considerable time and human resources devoted to the defence of the case, and the additional discomfort of losing the case. Exporters should be very cautious and watch closely the situation in the importing countries. They should pay attention to local competition with regard to their marketing performance and profitability. If domestic 5. See Justin Paul, International Business, Prentice Hall of India for more information on Dispute Settlement Body.

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competitors face difficulties, the temptation to lodge anti-dumping actions increases. In these circumstances, exporters might judiciously consider increasing their prices before being investigated. Most governments subsidise a few sectors of their economy. Since subsidies may have serious trade distorting effects, GATT has attempted, in the past and during the Uruguay Round, to limit their use and ill-effects. The WTO treatment of subsidies depends on whether the goods exported are industrial or agricultural products. Under GATT, government are allowed to return to exporters the duty that they paid on imported inputs that are being re-exported in exported products. The same principle applies to indirect taxes charged to exported products like sales taxes, value-added tax and excise tax. Exporters should take advantage of these measures with a view to lowering their export prices and of making their products more competitive. Usually, only experienced exporters take advantage of these measures. One reason for this may be that separate records have to be maintained and because of the administrative burden it represents, it is often perceived as too heavy to make duty remission an attractive proposition to exporting firms.

Promotion Promotion, also referred to as the communication mix of a firm, includes advertising, personal selling, sales promotion, direct marketing as well as export promotion services provided to the exporting firms by governments. The issue of staff working abroad is dealt with in the General Agreement on Trade in Services (GATS) in the WTO framework. The freedom to transfer staff abroad in the service industries remains quite limited because commitments made under GATS by members have been selective. Only a few countries have granted free access to foreign professionals without commercial presence.6 Yet, GATS should be seen as a first step towards further liberalisation in the transfer to foreign markets of staff in general and sales personnel in particular. In future, there will be a greater opportunity for firms to transfer and rotate their sales people in order to enable effective personal selling. Direct selling is selling to customers without using distribution intermediaries. It includes mail ordering and the sale of goods and services by electronic means. At the Geneva Ministerial Conference held in May 1998, a Declaration on Electronic Commerce (DEC) was adopted to examine all trade-related issues relating to electronic commerce. The members agreed to continue the current practice of not imposing customs duties on electronic transmissions. The declaration is not yet binding and, hence, electronic commerce is not yet ruled by WTO. Marketing communication tools like advertising, public relations and sales promotion are not specifically dealt with in any of the WTO agreements. This is because WTO agreements address problems relating primarily to trade barriers affecting exporting and importing operations. They do not predominantly concern activities that take place in the marketing of products or services like advertising or public relations once products or services have passed borders. However, under the National Treatment (NT) Clause, services that have entered other member markets should receive a treatment equitable to the treatment granted to like domestic products or services. As a result, any marketing communication activity undertaken by an exporting firm in member countries, such as advertising, public relations or sales promotion for the marketing of imported goods or services, should not be constrained any more than the communication activities of like domestic products or services. 6. See Arun Goyal (2001), WTO in the New Millennium, Academy of Business Studies for more information on GATS.

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Place In marketing terms, place refers to the convenience that a firm can offer to its customers by locating its products and services closer to the place of its consumption. The main aim of WTO, which is to remove trade barriers, is to ensure that a firm is able to operate in as many markets as it would want. GATT has, to some extent, ensured that barriers to location of merchandise are unrestricted by discouraging quantitative restrictions. Anti-dumping provisions ensure that weak markets are protected to some extent from unfair practices. GATS aims to address the service-related issues like staff working abroad. With the advent of the Internet, it has become very easy for companies to trade across boundaries. The Internet has also enabled companies, especially those in the service industry, to locate offices across the globe to take advantage of cheaper labour and to make use of a 24-hour workday. Hence, it becomes all the more important for firms to protect their trade-related intellectual properties. The agreement on TRIPS addresses this issue.7 The National Treatment Clause implies that a foreign firm should be treated on par with its domestic competitor. This enables the firm to offer its products and services in an equitable environment. The WTO has, thus, aimed at removing all the impediments in the progress of globalisation.

OTHER FACTORS There are various options a firm may consider when entering a foreign market. The WTO rules deal directly only with the establishment of sales offices or subsidiaries, licensing foreign direct investment and indirectly with distribution in general. There is no specific WTO rule dealing with the setting up of a sales organisation in a foreign country for the marketing of either consumer or industrial products. There are, however, rules on the trading of services. These rules are contained in GATS. The terminology used therein is “commercial presence”, which means any type of business or professional establishment within the territory of another member for the purpose of supplying a service, and includes the creation or maintenance of a branch or representative office. The basic rule is that such an establishment should be granted national treatment by members unless specified in their Schedule of Commitments, i.e. the listing of the concessions they granted to other members.8 This does not guarantee that an exporter of a service will be automatically granted the right to establish a commercial presence by another GATS signatory. The type of service involved may not be covered by the agreement. Besides, the Schedule of Commitment of the target country may include limitations to market access or to national treatment for any given service category. The exporter of a service must check if the service to be exported has been included in the Schedule of the target country, and what specific commitments that country has made. In principle, such inquiries should not prove too difficult to conduct because signatories are obliged to make their policies transparent by making relevant information on their import regime accessible to members. In addition, GATS signatories must have established a national enquiry point that service exporters may address for information on their policies on trade in services. Licensing is often chosen as a means of entry when firms cannot export or proceed through foreign direct investment either because of entry barriers or because the firm’s resources are limited. Firms that consider 7. Visit www.wto.org for more information on the TRIPS Agreement. 8. B. L. Das, WTO-Guide to the Framework for International Trade, Bookwell, New Delhi.

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entering a market through licensing are often afraid that they might not be able to protect their technological know-how from unfair practices in foreign markets. As a result, they may refrain from transferring licensing rights to foreign firms. However, under TRIPS, whether they like it or not, they may well be obliged to transfer these rights to private local parties selected by the government of that country. The main objective of the TRIPS Agreement is to protect the ownership rights of firms. The principle of national treatment is reaffirmed, and countries are required to extend the MFN treatment to foreign nationals. This requires that trade regulations should be applied to foreign goods or services without any discrimination against any exporting member countries. The TRIPS Agreement also lays down rules under which a country may be allowed to authorise a local firm to use a patent when its foreign owner demands unreasonable terms. In other words, a government is allowed under the TRIPS Agreement to proceed with compulsory licensing subject to several conditions. In particular, the compulsory license shall be used predominantly for the domestic market and the patent owner shall be paid adequate compensation. A firm that does not want to market the goods produced under a given patent, either by exporting or through local direct investment, should be aware that if it does not want to transfer know-how through a licensing agreement, it might nevertheless be forced to do so. It may then be better to negotiate licensing conditions with a local firm rather than to be forced to accept compensation terms that may not be as advantageous, even if they are adequate. One more important aspect is the one related to direct investments. Considerable liberalisation has taken place over the last decade regarding direct investment. Many constraints used to be imposed on foreign investors in contradiction to such GATT principles as national treatment and quantitative restrictions. The Uruguay Round Agreement on Trade-Related Investment Measures (TRIMs) identifies measures that are not acceptable and reiterates that TRIMs that distort trade flows are not allowed. Prohibited measures include trade-balancing import requirements, restricted access to foreign exchange and domestic sales requirements. The TRIMS Agreement is limited in scope, and a limited number of trade-related investment requirements may still be imposed by members, such as the proportion of equity to be held by local investors or demands for the transfer of up-to-date technology. Firms considering investment in a foreign market should, therefore, investigate the exact commitments that have been made by these countries. The agreement has made investment abroad easier and the power of host countries to subject foreign investors to demanding performance requirements has been greatly reduced. However, the commitments are contingent upon the development policies and objectives of host governments as well as on their right to regulate in the public interest.

Points to Remember Customs: Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods in and out of a country. Depending on local legislation and regulations, the import or export of some goods may be restricted or forbidden, and the customs agency enforces these rules. Import restrictions: Methods employed in controlling the volume or value of goods coming into a country, usually to maintain the exchange rate of the country’s currency. These include tariff and non-tariff barriers to trade.

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Operational efficiency: A market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. Subsidies: A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. A type of benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public. Innovation: Process by which an idea or invention is translated into goods or service for which people will pay. To be called an innovation, an idea must be replicable at an economical cost and must satisfy a specific need. Often called the commercialization of the invention itself.

Objective Type Questions 1. The World Trade Organization (WTO) was framed in: (a) 1993 (b) 1995 (c) 1997 (d) 1998 (e) 1999 2. GATS cover the following different ways of providing an international service: (a) Services supplied from one country to another (b) Consumers as firms making use of a service in another country (c) A foreign company setting up subsidiaries or branches to provide services in another country (d) Individual travelling from their own country to supply services in another (e) All of the above 3. ATC stands for: (a) Agreement of tools of clothing (b) Arrangement for textile and clothing (c) Agreement on textile and clothing (d) None of these 4. One of the most important goals of the WTO system is to resolve their conflict on border issues. (True/False) 5. Consumers or firms making use of a service in another country is known as consumption abroad. (True/False) 6. India became the member of GATT in: (a) 1952 (b) 1950 (c) 1947 (d) 1949 7. The five-year plan of India which envisaged exchange rate reforms was: (a) Sixth (b) Seventh (c) Eighth (d) Ninth 8. Under the Uruguay Round India has bound –––––––––– % of all its tariff lines. (a) 57% (b) 67% (c) 69% (d) 72% 9. Anti-Dumping and countervailing duties are imposed under Custom Tariff Act. (True/False) 10. WTO facilitates international marketing activities. (True/False)

Review Questions 1. Discuss how the WTO facilitates the process of international marketing.

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2. Discuss the link between the new world trade system and the 4 Ps of marketing: Product, Price, Place and Promotion. 3. Discuss the options a firm may consider when entering a foreign market.

Project Assignments 1. Select a company that has expanded overseas. Find out the major reasons for its expansion and how globalisation has affected its business in the last 20 years. 2. Study the impact of various WTO regulations on the international marketing of the textile and garment industry.

Suggested Readings Cherunilam, International Business, Prentice Hall of India, New Delhi. Coulson, Thomas, Colin, Creating the Global Company, McGraw-Hill, 1992. Daniel Park, What is Globalisation? Jean-Emile Denis, Taking International Marketing Decisions under WTO Rules, http://cat.inist.fr/?aModele =afficheN&cpsidt=14392202. Justin Paul, International Business, Third Edition, Prentice Hall of India, New Delhi. Justin Paul, Business Environment, McGraw-Hill Education. Nejdet Delener, An Ethical and Legal Synthesis of Dumping: Growing Concerns in International Marketing, http://www.springerlink.com/content/h14472014267302q/ Sharan, International Business, Pearson Education. World Trade Organisation http://en.wikipedia.org/wiki/WTO.

Case Dispute Settlement: The US–Venezuela Gasoline Case A decade ago, with the aim to create pollution-free roads, the US government adopted a regulation mandating specific standards for the quality of gasoline sold in the markets of United States. Oil producing countries protested, Venezuela in particular. According to Venezuela, this regulation was unfair as 2/3rds of Venezuela oil exports was dependent on US markets. The dispute created tension and controversy between the US and Venezuela. The solution was not an easy one. In this case, US imposed certain conditions on the quality of gasoline. The aim settled by the Environment Protection Agency (EPA) under the Clean Air Act (CAA) was to improve the quality of air, which has deteriorated due to pollution caused by gasoline emissions. The regulations imposed different standards on domestic and imported gasoline. It was challenged in the WTO by Venezuela, citing that US decision was a violation of the principle of national treatment. Venezuela argued that imported goods, once in the domestic market of the member country, cannot receive treatment less favourable than the internally produced goods. Venezuelan

WTO and Its Impact on International Marketing

gasoline, in general, imported gasoline in the US was subject to test the standards much more rigorous than those imposed on gasoline produced in the United States. The US argued that this discrimination was just devoid under article 20 of the GATT. This provision says that under certain conditions, countries can take measures that would be normally outlawed in order to conserve exhaustible natural resources or to protect human, animal or plant life. One of the major conditions is that these measures should not be protectionism in disguise. Venezuela refuted that argument. Venezuela was in no way questioning the right of the US to impose very high environmental standards. It said that if US wanted very clean gasoline, they should have submitted both the domestic and the imported gasoline to the same high standards. The new regulation put in place by the US had an important economic impact for Venezuela and for their state owned gasoline producer, Petroleas de Venezuela. Producing the Gasoline requested by US, was much more expensive for Venezuela than if it could have followed the same specifications as domestic gasoline. In total, for the first three years, that represented the expense of some 40 million dollars. The US market was extremely important for Venezuela and its export earnings. When Petroleas de Venezuela understood that the discriminatory aspects of the American Gasoline Regime would not be modified by the US, they decided to consult the government to assess the possibility of bringing the case to WTO. The permanent mission of Venezuela in Geneva asked for four more consultations with the delegation of the US. These consultations took place in Washington which did not achieve any positive result. Venezuela, therefore, had no recourse but to ask the WTO to establish a panel. The complaints were heard by the panel in 1995. The panel consisted of three independent experts chosen by both sides on a dispute. The US denied that it was discriminating against imported gasoline. The claim was that clean air is an exhaustible natural resource and that it was therefore justified under article 20 to take measures to preserve it. It also claimed that its regulation was necessary to protect human health which is permitted under another article 20 exception. However in January 1996, the WTO panel ruled that imported gasoline was indeed discriminated against and this could not be justified even under article 20. A month later, US appealed the panel’s conclusions. Its appeals were based on the argument that clean air is an exhaustible natural resource. Appeals in the WTO were heard by the appellate body. Appellate body is the permanent group of seven persons of recognised authority with demonstrated expertise in law and international trade. It does not look at new evidences but only at points of law and the interpretations of the WTO rules by the panel. Within two months, the Appellate body issued its rulings. It confirmed to the panel’s rulings that the discrimination against the imported gasoline was not justified under Article 20, but it ordered a broad interpretation of this provision. The US was not satisfied with the outcome of the Appellate body proceeding because WTO’s decision was in favour of Venezuela. No further recourse was available. The Appellate body report and the modified report of the panel were adopted by the Dispute Settlement Body in 1996, i.e. just after one year when the panel was appointed. The complaining countries were satisfied with the outcome and the way the dispute was handled. The resolution of this case confirmed that the new dispute settlement system was working in a neutral way in which developing countries could trust. The European Union had a substantial interest in this case and participated as a third

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party. The US had to implement the ruling, it had to change its regulation, it discussed with Venezuela “How long should it take?” It required regulatory action, in US, it meant notice to the public of the proposed new rule, seeking comments, a public hearing if requested and then publication of the final ruling. All that required time but political context was rather harsh and yet US negotiated with the various interests involved which included the conservation and environmental groups, the EPA itself, the government bodies involved in the regulation of the new environment and the trading parties. At last, both the countries agreed on the timings. The US implemented the necessary changes in the legislations within 15 months from the day the dispute was resolved. Source: This case was prepared on the basis of video available on this on the WTO website, resources, videos. This case can be discussed in the class with the help of this video.

Discussion Questions 1. Why did US agree to the dispute settlement decision taken by WTO? 2. Discuss the implications of WTO decision on the international marketing prospects of gasoline from Venezuela.

Emerging Trends and Internationalisation of Firms

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EMERGING TRENDS AND INTERNATIONALISATION OF FIRMS

Learning Objectives After reading this chapter, you will understand:

INTERNATIONALISATION—REASONS AND STRATEGIES Many companies have established a strong global presence by way of exporting, joint ventures, strategic alliances and establishing subsidiaries. Some companies have become true multinationals and generate a major share of their revenue from global functions. Three macro factors seem to underlie the trend towards greater internationalisation. They are: (i) The decline in trade barriers (ii) Removal of restrictions on foreign investment (iii) The technological change, particularly the dramatic developments that have occurred in recent years in communications, information processing and transportation technologies. This chapter looks at the global market entry strategies of some Indian companies like Ranbaxy, Dr. Reddy’s Laboratories, Aurobindo Pharma and the Tata Group.

Global Market Entry of Firms: Some Reasons Ideally, all companies think about going global because of several reasons. These are as follows.

(i) Domestic Competition Globalisation has brought about new challenges. It has created a business environment wherein companies are caught in the ‘Eat or to be Eaten’ situation. Companies that have a strong local presence are also writing business plans for global expansion because domestic patronage, significant though it may be, is ultimately limiting, particularly with increasing competition. That is why the exploration of foreign markets is imperative

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for ambitious companies such as Mittal, Videocon, and Tata Motors. Many companies believe that, by going global, they can kill two birds with one stone, by capturing the foreign market as well as the domestic market.

(ii) To avoid Dependence on Domestic Market Companies that aspire to more than simply survive cannot afford to leave their business solely on the fortunes of one country. When an economy booms, companies increase their capacity to produce to meet the growing domestic demand. But if the economy slows down tomorrow, what will happen then? Therefore, it is important for a company to look beyond its boundaries.

(iii) Economies of Scale Another argument for overseas expansion is the fact that the firm achieves international competitiveness and economies of scale, which translate into price benefits. Tagging along is the competitiveness factor, where quality and efficiency are directly improved (or should be) as a result of the high level of competition in foreign markets. INTERNATIONALISATION: STRATEGIES 1

In pursuing

(a) International Cost Leadership Strategy:

2

(b) International Differentiation Strategy:

RANBAXY LABORATORIES—INTERNATIONALISATION STRATEGIES3 Ranbaxy Laboratories Limited was registered in India in 1961. Dr. Parvinder Singh joined Ranbaxy in 1967. He was appointed its Joint Managing Director in 1977 and elevated as the Managing Director in 1982. He rose to the position of Vice Chairman & Managing Director in 1987 and took over as Chairman and Managing Director in 1993. With his bold and new ideas, Dr. Singh made immense contribution to the growth of the company. 1. See Justin Paul (2007), International Business, Prentice Hall of India, 3rd Ed., www.phindia.com/justinpaul. 2. See Chaturvedi and Kumar, Managing Global Business, Excel Books. 3. The case studies in this chapter have been written with the intention of classroom discussion only, not to indicate either effective or ineffective management.

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Ranbaxy began manufacturing formulations in 1962. It went public in 1973. A multipurpose chemical plant was set up to manufacture pharmaceutical products at Mohali (Punjab), in India. Ranbaxy formulated its export strategy on the basis of the opportunities that came its way in 1975. In 1977, Ranbaxy had its first international joint venture in Lagos (Nigeria). In 1983, a modern dosage forms facility at Dewas (MP), in India, was developed. In 1985, the Ranbaxy Research Foundation was established. Stancare, Ranbaxy’s second pharmaceutical marketing division, also started functioning. In 1987, production started at the modern plant at Toansa (Punjab). In 1988, Ranbaxy’s Toansa plant got US Food and Drug Authority (FDA) approval. In 1990, Ranbaxy was granted a patent for Doxycyline in the US.

Internationalisation Ranbaxy had always been very outward looking as a company. It recognised that if 99 percent of the pharmaceuticals market lay outside India, tapping the international potential was always something bigger than just meeting export commitments. Ranbaxy had foreseen that the future business scenario would be based on worldwide product-based intellectual property rights. Ranbaxy repositioned itself in 1992 and, to make internationalisation a success, the following changes were carried out in the organisation: i. Bringing a change in the exports mindset. ii. In 1992, six to eight months were spent studying what Ranbaxy Laboratories really wanted to be. Three clear elements emerged. that it will stick to its core area of pharmaceuticals. expansion into foreign countries. its own proprietary innovative drugs to leverage in the era of worldwide intellectual property rights.

Growth Challenges, Phases and Strategies In the 1970s and 1980s, a lot of criticism was encountered within and outside the company. For example, it’s a tough industry, it’s pharmaceuticals, it’s only the West which can discover and make high-quality pharmaceuticals, the Indian image is poor, Indian quality is average, the “made in India” label is unattractive, you cannot sell an Indian product in the United States and not even in some of the underdeveloped countries etc., were the often quoted criticisms. The Indian pharmaceutical industry has long struggled with an international image that has collectively labelled its members as trespassers of Intellectual Property Rights. Ranbaxy Laboratories was serious about its image as an ‘international’ player and fought hard and long against the stigma attached to Indian firms. In 1992, Ranbaxy Laboratories entered into an agreement with Eli Lilly & Co of USA for strategic alliance in India, to market the latter’s select products. In 1993, a joint venture was set up in China and was called Ranbaxy (Guangzhou China) Limited. In 1994, Ranbaxy Laboratories established its Regional Headquarters in London (UK) and Raleigh (USA). Ranbaxy’s Global Depositary Receipts (GDR) got listed on the Luxembourg Stock Exchange. Thus, the year 1994 was a very important one in the growth phase of the company.

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In 1995, Ranbaxy Laboratories acquired Ohm Laboratories, a manufacturing facility in the US. And, the FDA approved, state-of-the-art new manufacturing wing at Ranbaxy’s US subsidiary, Ohm Laboratories Inc., started functioning. In 1997, Ranbaxy Laboratories crossed a sales turnover of Rs.10,000 million, with its exports reaching an all-time high of Rs. 5,000 million. In 1999, Bayer AG, Germany and Ranbaxy signed an agreement for an International Strategic Alliance, where Bayer obtained exclusive development and worldwide marketing rights to an oral once daily formulation of Ciprofloxacin, originally developed by Ranbaxy. It was Ranbaxy’s strategy to market its products globally through this alliance. In 2000, Ranbaxy acquired Bayer’s Generics business in Germany, which was trading under the name of Basics. It also forayed into Brazil, the largest pharmaceutical market in South America and achieved global sales of US $ 2.5 million in that market. In 2001, Ranbaxy took a significant step forward in Vietnam by initiating the setting up of a new manufacturing facility with an investment of US $ 10 million (Green Field Venture). It achieved a turnover of US $ 600 million for the year 2001. At the same time, its subsidiary, Ranbaxy USA crossed sales of US $ 100 million, becoming the fastest growing company in the US. In 2003, Ranbaxy received The Economic Times Award for Corporate Excellence for ‘The Company of the Year, 2002–2003’. Ranbaxy and Glaxo SmithKline Plc (GSK) accelerated their discovery programmes through a global alliance for drug discovery and development. In 2004, Ranbaxy began operations in France as a generic company after acquiring a wholly owned subsidiary RPG (Aventis) SA. The company joined the elite club of Billion-Dollar Companies, achieving global sales of US$ 1 billion in February 2004. In 2005, Ranbaxy’s anti-malarial molecule successfully completed POC Phase II studies. It was launched in Canada. It opened a third state-of-the-art R&D facility on its Gurgaon campus to focus on NCE discovery research . Ranbaxy’s joint venture with Nippon Chemiphar in Japan (Nihon Pharmaceutical Industry Limited) launched Vogseal for diabetes, the first product of the joint venture. In the same year, it acquired the generic product portfolio from EFARMES of Spain (18 drugs for sale in Spain).

Moving into Gear Mr. Malvinder Singh assumed charge as Managing Director and Chief Executive Officer in January 2006. His global sense of enterprise made him to go for an ‘aggressive overseas acquisition’ strategy for expansion, instead of growth through the organic route. Accordingly, the year 2006 was an eventful and relentless expansion year in the history of Ranbaxy, during which it acquired the following:4

March 21, 2006 Ranbaxy’s US arm bought patents, trademarks and automated manufacturing equipment from Senetek for its disposable auto injector for self-administration of parenteral drugs for anaphylactic shock.

March 27, 2006 Ranbaxy’s Italian subsidiary acquired the unbranded generic business of Allen, a division of GlaxoSmithKline, to complement its own pipeline for the Italian market. 4. Compiled from Business Today, September 10, 2006.

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March 29, 2006 Ranbaxy acquired 96.7 percent of the Romanian drug maker Terapia from Advent International for $324 million (Rs.1,522 crore). Combined with Ranbaxy’s own operations in Romania, the Terapia acquisition created Romania’s largest generics firm.

March 30, 2006 Ranbaxy acquired the generics company, Ethimed, a top ten player in Belgium. It provides Ranbaxy a base from where to manage and expand its operations in the Benelux countries (Belgium, The Netherlands and Luxemburg).

July 18, 2006 Ranbaxy’s Spanish subsidiary purchased the Mundogen generics business of GlaxoSmithKline in Spain. The acquisition beefed up Ranbaxy’s product portfolio in the country. Exercise: RANBAXY’S WORLD Total Revenues Global Revenue Market Cap No. of countries where it is present: 49 No. of countries where it has manufacturing units: 8

2006

2011

Rs. 5,188 crore Rs. 3,891 crore Rs. 15,077 crore

________ ________ ________

Source: Business Today, September 10, 2006, Page 67

Ranbaxy, at present, has manufacturing operations in more than a dozen countries and its products are available in over 125 countries. The company has an expanding international portfolio of alliances, joint ventures and representative offices across the globe, with a presence in top markets of the world like USA, Japan, China, Mexico, Canada, Brazil and South Africa. Similarly, it has a presence in 22 of the 25 European Union countries, including Germany, France, Italy, UK and Spain.

DR. REDDY’S LABORATORIES: GOING GLOBAL AND GROWING MULTINATIONAL Dr. Reddy’s Laboratories is one of India’s leading drug manufacturers. The company, established by Dr. K. Anji Reddy in 1984, in the beginning developed and manufactured generic and branded pharmaceuticals and bulk pharmaceutical ingredients. Later on, it started manufacturing formulations and enhanced its trust on entering the international market with exporting methyldopa in 1986. Continuing its path towards success, the company obtained its first USFDA5 approval in 1987. With the acquisition of Benzex Laboratory Private expanding its bulk actives business, the company grew further in 1988.

5. USFDA stands for United States Food & Drug Authority.

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Dr. Reddy’s Laboratories (DRL) Grow Globally During the 1990s, the company consolidated its position in the domestic formulation market through product as well as acquisitions. By the late 1990s, Dr. Reddy’s Laboratories transformed itself into a global pharmaceutical powerhouse with its research and export strategy. Dr. Reddy’s Laboratories has world-class expertise in the development and manufacture of pharmaceutical intermediates, bulk actives and finished dosage. It is in a position to provide high quality and cost-effective products to the international market, including Europe, Japan and the US. It was in 1990 that Dr. Reddy’s Laboratories exported Norfloxacin and Ciprofloxacin to Europe and to the Far East. By spreading its arm to export field, the company entered into the export business to Russia first time in 1991. In 1993, Dr. Reddy’s Research Foundation was established at Miyapur in Andhra Pradesh. It filed 18 product patents around the world for novel lead compound, largely focused on anti-cancer, anti-diabetes and guidelines segments and popular for under-parent drugs, broad-basing its therapeutic presence. This integrated unit is involved in analytical research, process chemistry, clinical research, pre-clinical biology, area such as intellectual management and conference facilities, drug delivery in organic synthesis and natural products chemistry.

Milestones In 1984, the company was set up by Dr. Anji Reddy in India. In 1986, Dr. Reddy’s entered international markets with exports of Methyldopa. In 1987, it obtained its first USFDA approval. In 1990, Dr. Reddy’s exported Norfloxacin and Ciprofloxacin to Europe and the Far East. In 1991, the company commenced formulation exports to Russia. In 1994, Dr. Reddy’s Laboratories made a GDR issue of US$ 48 million. In 1995, DRL established a joint venture in Russia.

Licensing Strategy in 1997 Dr. Reddy’s Laboratories licensed anti-diabetic molecule, DRF 2593 (Balaglitazone) (in 1997 and DRF 2725 Regaglitazar in 1998) to Novo Nordisk. It became the first Indian pharmaceutical company to out-license an original molecule. In 1999, Dr. Reddy’s Laboratories acquired 45 percent stake in American Remedies Limited.

Foreign Subsidiary in 2000 Reddy US Therapeutics, a wholly owned subsidiary, was established in Atlanta, USA, to conduct drug discovery. With its merger with Cheminor Drugs Limited (CDL) and with its acquisition of American Remedies Limited (ARL), the company became India’s third largest pharmaceutical company after Ranbaxy and Glaxo.

Listing, Licensing and Joint Venture in 2001 It became the first Asia-Pacific pharmaceutical company, outside Japan, to list on the New York Stock Exchange. It was listed with the symbol ‘RDY’ on April 11, 2001. On April 26, 2001, Dr. Reddy’s Laboratories

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(DRL) unveiled its new corporate identity and philosophy, reinforcing its commitment to bring hope to life through meaningful research. DRL out-licensed DRF 4158 to Novartis, for up to US$ 55 million upfront payment.6

Joint Venture in China Commenced operation in China by establishing joint venture.

Acquisition (Overseas) Strategy in 2002 DRL conducted its first overseas acquisition – BMS Laboratories Limited and Meridian Healthcare in UK Nordisk. In 2003, Dr. Reddy’s Laboratories announced a 15-year exclusive product development and marketing agreement for drugs with Leiner Health Products in the US. INTERNATIONAL MARKETING STRATEGIES AND RECENT DEVELOPMENTS7

i. Agreement with Merck (Strategic Alliance):

ii. Tie-up with an Australian Firm (Strategic Alliance):

iii. Acquisition: iv. Marketing Pact with a New Zealand Firm (Strategic Alliance):

6. Annual Report, Dr. Reddy’s Laboratories, 2001–02. 7. This write-up is based on the information collected from the Annual Reports of Dr. Reddy’s Laboratories, and the website of the company.

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International Marketing DR. REDDY’S LABORATORIES’ INTERNATIONALISATION OVER THE YEARS 2003

Entry into South Africa And Middle East

2001 1999 1995

1994

1992 1986

Entry into China

Entry into LATAM countries8

Entry into ASEAN countries9

Entry into Central Eastern Europe (CEE), Middle East (ME) & Rest of Africa (ROA) countries

Entry into Russia and CIS countries10

Entry into SAARC countries

AUROBINDO PHARMA’S INTERNATIONAL EXPANSION STRATEGIES P. V. Ramaprasad Reddy and K. Nityananda Reddy promoted Aurobindo Pharma Limited as a private limited company in 1986, with a small capital of Rs.10 lac. The company commenced production in 1988. It became a public limited company in April 1992. Now, Aurobindo Pharma Limited is the largest manufacturer of semi-synthetic penicillin in the continent and the fourth largest in the world. The company is among the top five pharmaceutical companies in India, with integrated facilities to manufacture bulk drugs, antibiotics, antivirals, antidepressants, antifungals cardiovascular, macrolides, CUS, CNS, antiallergic and gastroenterologicals. Today, the company’s products are serving consumers in India and over 100 other countries. The company’s R&D strength lies in developing intellectual property in the area of non-infringing processes and in resolving complex chemistry challenge by developing new drug formulations, new drug delivery system and by applying new technologies for better processes. 8. LATAM stands for Latin American Countries. 9. ASEAN stands for Association of South East Asian Nations. 10. CIS stands for Commonwealth of Independent States.

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Aurobindo Pharma Grows Global Aurobindo Pharma Limited has a significant presence in a large part of the world.

1998: Subsidiary Strategy Aurobindo Pharma Limited set up two wholly owned subsidiaries in the US and Hong Kong. The company invested $2,00,000 in the US and $1,50,000 in the share capital of Aurobindo Pharma (Hong Kong) Pte Ltd.

2000: Joint Venture Strategy Aurobindo Pharma set up two joint ventures for formulations in the US with an investment of $12 million.

2003: Joint Venture Strategy Aurobindo Tongling (Datong) Pharmaceuticals Ltd., China, a joint venture between Aurobindo Pharmaceuticals Limited and Shanxi Tongling Pharmaceuticals Co. has been set up for manufacture. Aurobindo Pharma has established a number of wholly owned subsidiaries, joint ventures and representative offices at strategic locations to take advantage of available opportunities and to improve the business value chain. These units are presently established business interests, creating the necessary infrastructure and alliances and are being readied to handle volume business. They also ensure stability in source of supplies and consistent quality. The marketing linkages will give the necessary capability to reach customers much faster. Summarised details of Shri Aurobindo Pharmaceutical’s Subsidiaries and Joint Ventures Name of the Entities

Country

Category

% of Stake

Aurobindo (H. K.) Limited APL Pharma Thai Ltd. APL Holdings, Inc.

Hong Kong Thailand USA

Subsidiary Subsidiary Subsidiary

100 48 100

AB Farmo Quimica Limitada Aurobindo (Datong) Bio-Pharma Co., Ltd. Aurobindo TongLing (Datong) Pharmaceutical Co., Ltd. APL Chemi Natura Ltd. Hellix Healthcare B. V.

Brazil China

Subsidiary Subsidiary

99.8 100

Marketing Marketing Established as a Green Field investment venture (Merged with Aurobindo Pharma USA, Inc.) Marketing and Manufacturing Manufacturing

China

Subsidiary

100

Manufacturing

India The Netherlands India

Subsidiary Subsidiary

100 100

Marketing Marketing

Joint Venture

50

Marketing

USA USA USA Canada

Joint Venture Joint Venture Subsidiary Subsidiary

50 50 100 100

Citadel Aurobindo Biotech Limited Cephazone Pharma, LLC Aurosal Pharmaceuticals, LLC Aurobindo Pharma USA, Inc. Auro Pharma Inc.

Main Activity

Manufacturing JV Manufacturing JV Marketing and Manufacturing Marketing

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Long-term Growth Strategy A brief summary of the activities/features of some of the subsidiaries is as follows: a. Aurobindo Tongling Pharmaceutical Company Limited This subsidiary caters to the local market in China. Till 2005, Aurobindo Pharmaceuticals had invested US$3.3 million as equity. b. Aurobindo Bio Pharma Co. Ltd (APL) APL has set up this company to manufacture penicillin from the basic stage, to be used by the parent company. c. Hellix Healthcare B. V. (HHB) This company was incorporated to seize the business opportunities available in Europe and to concentrate on the R&D investment in business entitles and provision of services. d. APL Tharma Ltd (APTL) This is a marketing company and sells goods manufactured by the parent company. e. AB Farmo Quimica Limited (APQL) APQL is a subsidiary company in Brazil, which is involved in manufacturing and marketing activities. f. Citadel Aurobindo Biotech Ltd (CABL) This is a joint venture with Citadel for marketing bio-tech products in India.

Recapitulation It is worth noting that Indian pharmaceutical companies have emerged as true multinationals. They have acquired the flagship products of some of the leading firms in the world and have entered into strategic alliances with multinationals like Bayer AG, GSK, Merck, etc. A major share of the revenues of leading Indian companies comes from their foreign operations. On the basis of recent developments, one can expect more aggressive expansion activities in the pharmaceutical sector in the future.

Points to Remember Internationalisation: Internationalisation is the process of planning and implementing products and services so that they can easily be adapted to specific local languages and cultures so as to increase the involvement of enterprises in international markets. Economies of scale: Reduction in cost per unit resulting from increased production, realised through operational efficiencies. Economies of scale can be accomplished because as production increases, the cost of producing each additional unit falls. Licensing: The verb license or grant license means to give permission. Licensing is a process by which license may be issued by authorities, to allow an activity that would otherwise be forbidden. It may require paying a fee and/or proving a capability. The requirement may also serve to keep the authorities informed on a type of activity, and to give them the opportunity to set conditions and limitations. Subsidiary: A subsidiary, in business matters, is an entity that is controlled by a separate higher entity, usually referred to as the parent company and whose voting stock (more than 50%) is controlled by the parent company. Acquisition: An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. A corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm. Acquisitions are often made

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as part of a company’s growth strategy whereby it is more beneficial to take over an existing firm’s operations and niche compared to expanding on its own. Acquisitions are often paid in cash, or the acquiring company’s stock or a combination of both. Joint Venture: The cooperation of two or more individuals or businesses—each agreeing to share profit, loss and control—for the purpose of executing a particular business undertaking.

Objective Type Questions 1. The following information is set forth before the commencement of franchising operations: (a) Bankruptcy history (b) Litigation history (c) Financing arrangements (d) All of these (e) None of these. 2. The following is the main reason why companies have foreign subsidiaries, compared to alliances: (a) To earn more profit (b) Less risky (c) Risk management (d) None of these 3. Contractual forms of market entry include: (a) Licensing (b) Franchising (c) Both (a) and (b) (d) None of these 4. Technology is driving globalization because of economies of scale. 5. International corporate planning is essentially short-term incorporating generalised goals. 6. International franchising is a form of licensing. 7. Export houses have to obtain export house certificate from DGFT. 8. Contract manufacturing’ is a form of: (a) Acquisition (b) Joint venture (c) Licensing (d) Franchising

Review Questions 1. Discuss the reasons for the internationalisation of a firm. 2. Why did Ranbaxy and Dr. Reddy’s Lab formulate export strategy first, before establishing foreign joint venture and subsidiary? 3. Discuss the international marketing success story of Aurobindo Pharma. 4. Critically examine the global expansion strategies of Ranbaxy, Dr. Reddy’s Lab and Aurobindo Pharma.

Project Assignments 1. Indian software industry has grown manifolds in the last two decades. Study the impact of internationalisation on the Indian software industry and the reasons for growth by taking an example of a firm from the industry. Discuss the findings in class.

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2. Has the process of internationalisation adversely affected the Indian domestic industry? Find out a company which has been negatively affected by internationalisation.

Suggested Readings Annual Reports, (1995–2005), Ranbaxy. Annual Reports, (1995–2005), Dr. Reddy’s Laboratories. Annual Reports, (1995–2005), Aurobindo Pharma. Business Today, September 10, 2006, pp.66–7. Paul, Justin, (2007), International Business, 3rd ed. Prentice Hall, New Delhi. Paul, Justin, (2006), Business Environment, 2nd ed. McGraw-Hill, New Delhi. Primary information from the companies.

Case 1 Tata Group’s Internationalisation Strategy One of the first ventures of Jamshedji Tata, founder of the Tata Group, was to set up a Hong Kong branch of his father’s trading firm. Almost 150 years later, Ratan Tata, the fifth generation Tata Group chairman, seems to be following the practices of his illustrious ancestor by setting up operations in every market that makes business sense. The only difference has been in the approach, which, given the passage of time, is inevitable. In about three years, the Tata Group has invested over $3 billion for 19 acquisitions, spread across five continents, and brought into its fold tens of thousands of new employees of various races and nationalities. The oldest business house in the country has shown Generation X aggressiveness in its corporate strategy. The strategy is best explained by Mr. Tata himself. “What we are attempting is simply a greater internationalisation of our business,” he said in an address. “Where this thrust is different from the past is that it goes beyond exports: we will want to be part of the community in which we operate. One of the major drivers of going international is to reduce our vulnerability to a single economy,” he added. The increasing trans-global nature of the group is perhaps best reflected in one of its smaller but fast growing companies, Tata Technologies. The Tata Motors’ subsidiary is headed by an American, who sits in Singapore, has its main market in the US and has a development centre in Bangkok. And, one of its operating companies is INCAT, the UK-based design and engineering firm acquired by the Tata Group for $91 million. Five of the group’s seven businesses – information systems and communications, engineering, services, consumer products and chemicals – have been involved in at least one acquisition in the recent years. “The world has become different, it is now interconnected. We are trying to build an international network for each business, according to its complex nature,” said a top official of Tata Sons, the group’s holding company that has been the enabler in each of the 19 acquisitions. Still, the group’s last initiative, the $8 billion offer for British steel-maker Corus through Tata Steel, stands apart.

Emerging Trends and Internationalisation of Firms

“Tata’s acquisitions till now can be called safe, at least in terms of investment,” a senior analyst tracking the Group said. Corus is almost six times bigger than Tata Steel in revenues and three times in production. It also goes a step beyond Tata Steel’s earlier acquisition of NatSteel of Singapore in ’04 and Millennium Steel of Thailand. “The previous two acquisitions gave Tata Steel presence across at least seven countries in South-East Asia, a huge market for value-added steel products. It (the acquisition) was more to increase geographical presence than to increase capacity,” said the analyst.

The takeover of Corus by Tata Steel has led to its prominence in the global steel industry in terms of reach and production. If successful, the post-deal entity will be the fifth largest steel company in the world and the second biggest company in India in terms of turnover. “Tata Steel had missed out on the opportunity, grabbed by LN Mittal, in the 1990s. Now, backed by increased cash flows, considerable reserves of raw materials and leveraging the group’s cash box, Tata Steel knows it’s now or never,” said an industry observer. Interestingly, other group companies like Tata Motors, Tata Chemicals and Tata Tea have also come through tough times and now are making cross-border moves. About a decade back, just 5 percent of the group’s turnover came from overseas operations. It increased to 20 percent in ’03 and is now 30 percent. If its multi-billion dollar acquisitions plans are any an indicator, 50 percent doesn’t seem to be too far. Source: The Economic Times

Discussion Question 1. Why does Tata Group invest billions for acquisitions?

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Case 2 Does “Japanese Acquisition in Ranbaxy” mean International Marketing Strategy?1 Executive Summary During the last four decades, Ranbaxy, leading pharmaceutical firm based in India, had grown from a home based enterprise to one of the biggest multinational corporation. Ranbaxy had acquired many domestic and foreign companies and established various joint ventures to host its flag in foreign markets. The firm, under the leadership of 36-year-old, Duke University alumnus Malvinder Singh had undertaken a series of acquisitions in foreign countries during 2006 and 2007, particularly in 2006. Critics had pointed out that Malvinder Singh’s daredevil sense of enterprise was the motivating force for the relentless overseas expansion the firm had undertaken in the year 2006, soon after he was elevated as Chief Executive Officer. In recent years, the management was under pressure because of fall in share prices and the strict quality control rules imposed by the regulatory authority in the United States, the world’s largest pharmaceutical market. In such a situation, rethinking the strategy of acquiring other firms was more pertinent for Ranbaxy to keep moving ahead. Ranbaxy thus announced a strategic sale of controlling stake surprisingly in June 2008 to a Japanese pharmaceutical firm, Daiichi Sankyo Company Limited. At the same time, the firm got premium price for agreeing to be acquired for their share (much higher price than the market price). This case is an attempt to find out the solution for the following pertinent questions, even though it goes on to discuss international business strategies of Ranbaxy. (i) Could Ranbaxy have been able to survive and succeed, had the firm not gone for this strategic sale to a foreign firm? (ii) What is the rationale for this strategic sale immediately after undertaking many major acquisitions during the previous two-year period? (iii) Strategic reasons for paying premium price by the Japanese firm for this international acquisition.

Key words—Strategy, Acquisition, International Business, Expansion On Wednesday morning of 11 June 2008, it was a remarkable day in the forty-seven years’ history of Ranbaxy Limited, the largest pharmaceutical company in India. With excitement and emotions, Ranbaxy Chief Executive Officer and Managing Director Malvinder Singh announced the $4.6 Billion planned sale of 53.92% stake in the company, for $4.6 billion to Daiichi Sankyo of Japan, the second largest pharmaceutical firm based in Japan. This acquisition marked the biggest takeover of an Indian company by a foreign firm in the last decade. The recent trend had been for Indian companies to take over foreign businesses, but it was surprising to see a major successful Indian multinational firm suddenly agreeing for a takeover by an unassociated foreign company, after pursuing aggressive inorganic growth strategy – series of foreign acquisitions over the previous decade. 1. This case has been prepared by Justin Paul, Associate Professor, Nagoya University of Commerce and Business, Japan, and Pragya Bhawsar, Lecturer, Rai Business School, Bhopal, M.P., India. It is not intended to serve as endorsement, sources of data, or illustrations of effective or ineffective management. The case is developed and published solely as the basis for class discussion.

Emerging Trends and Internationalisation of Firms

Malvinder Mohan Singh, Ranbaxy’s Chief Executive and Managing Director – and the head of the Singh family that founded the company – had therefore made Indian corporate history. For the year 2008, the company had recorded global sales of US $1,6282 million with its 12,000 strong multicultural workforce.2 Therefore, his decision to sell was debated as people asked whether he had done the right thing or was there any unexplained motive. Singh explained thus: “This is I think the best deal after exploring and evaluating all permutation and combination. This is what we have chosen as the most optimal deal, I feel ever.” 3 After the announcement of the deal, answering to a journalist, Singh contended that this is just what the doctor ordered. “This will put us on a new and much stronger platform to harness our capabilities in drug development, manufacturing and global reach,” he said. “Together with our pool of scientific, technical and managerial resources and talent, we will enter a new orbit to chart a higher trajectory of sustainable growth ... in the developed and emerging markets, organically and inorganically. This is a significant milestone in our mission of becoming a research-based international pharmaceutical company.”4 At the same time, the President and Chief Executive Officer, Daiichi Sankyo Company Limited, commented about the deal in the following words: “The proposed transaction is in line with our goal to be a global pharmaceutical innovator and provides the opportunity to complement our strong presence in innovation with a new, strong presence in the fast-growing business of non-proprietary pharmaceuticals.” He added: “While both companies will closely cooperate to explore how to fully optimize our growth opportunities, we will respect Ranbaxy’s autonomy as a standalone company as well.”5

History and Background Ranbaxy was established by Ranbir Singh and Gurbax Singh in 1937 in India. Ranbaxy Laboratories Limited was registered in India in the year 1961. Dr. Parvinder Singh made immense contribution to Ranbaxy, with bold new ideas. He joined Ranbaxy in 1967, was appointed its Joint Managing Director in 1977 and was elevated as Managing Director in 1982. He rose to the position of Vice Chairman and Managing Director in 1987 and took over as Chairman and Managing Director in 1993. Ranbaxy began manufacturing formulations in 1962. It went public in 1973. Multipurpose chemical plant was set up for the manufacture of pharma products at Mohali in India. Ranbaxy formulated export strategy depending on the opportunities in 1975. In 1977, Ranbaxy’s had its first international joint venture in Lagos (Nigeria). In 1983, a modern dosage forms facility at Dewas (MP) in India was developed. In 1985, Ranbaxy Research Foundation was established. Stancare, Ranbaxy’s second pharmaceutical marketing division, also started functioning. In 1987, production started at the modern plant at Toansa (Punjab). In 1988, Ranbaxy’s Toansa plant got US Food and Drug Authority (FDA) approval. In 1990, Ranbaxy was granted US patent for Doxycyline. 2. Ranbaxy Laboratories Limited, www.ranbaxy.com/aboutus/aboutus.aspx,accessed June 2009. 3. Japan’s Dai-Ichi Acquired Controlling Stake in Ranbaxy, Video File from youtube.com, http://www.youtube. com/watch?v=D3voQTw2C18 (On the occasion of announcement of the deal). 4. http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4296

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Internationalisation Strategy Ranbaxy had always been very outward looking as a company. It recognised that if 99 percent of the pharmaceuticals market lay outside India, tapping the international potential was always something bigger than just meeting export commitments. Ranbaxy had foreseen that the future regime would be based on worldwide product based patent rights, which was brought into practice by World Trade Organisation. Ranbaxy had repositioned itself in 1992 and the following changes were carried out in the organisation to meet with the internationalisation requirements: (a) The first step taken was to bring a change in the exports mindset. (b) In 1992, six to eight months were spent studying what Ranbaxy Laboratories really wanted to be. The management prepared a business plan and declared their vision statement, which had the following three elements: First, Ranbaxy decided that the company will not look at diversification into unrelated or even related areas and it will stick to its core area of pharmaceuticals. Second, the management stated its intent to be an international company. This implied a focused and rapid expansion into foreign countries. Third, they clarified that they would be a research-based company, which meant that it would discover its own proprietary innovative drugs, to leverage in the era of worldwide intellectual property rights.

DREAM OF A YOUNG CEO Malvinder Singh joined Ranbaxy in 1998 and became the CEO and MD in 2006. Within two years after becoming CEO, Malvinder Singh had systematically purged risk out of Ranbaxy’s model. An alumnus of the prestigious Doon School, Dehradun; St Stephens College, New Delhi; and an MBA from Fuqua School of Business at Duke University, North California, Singh is well built and dapper with a penchant for photography. Affectionately known inside the company as “Malav”. Malvinder Singh, 36, did not mind wearing a T-shirt in office. There were other, more mundane reasons why Singh was at ease facing the world. Cookery competitions and birthday parties were held regularly in the company, as were fancy dress shows (Singh dressed as colourful singer Daler Mehendi at one of these). In his office, there was a cutout of “Ranbaxy /fun @work”, which he had registered as a trademark. Work had never been so much fun when Singh took charge as the Chief Executive Officer in January 2006. The previous year (Ranbaxy follows the calendar year), the net profit had fallen 62 per cent, sales were flat, the return on capital employed was a 5.3 percent and return on net worth 10.6 percent. The company was too dependent on the US, which accounted for 45 percent of its business.6 5, 6. www.rediff.com/money/2008/jun/11ranbaxy1.htm.

Emerging Trends and Internationalisation of Firms

Singh lost no time to embark on a mission that had systematically reduced risk in the company’s business model. His diagnosis and prescription had been accurate—apart from the buoyancy in the share price, the return on capital employed had jumped more than three times and the return on net worth more than two-and-a-half times. In Singh’s words, “When I took over as the CEO, I was clear that we needed to change our strategy. We were heavily focused on doing everything on our own. We were litigating with everyone. We were not making the best use of resources and needed to improve our speed.”7 In four days at the end of March 2006, Ranbaxy announced three overseas acquisitions: the unbranded generic business of Allen SpA (a division of GlaxoSmithKline) in Italy, Terapia in Romania and Ethimed NV, a generics company in Belgium. This was followed by the acquisition of Mundogen generic business of GSK in Spain in July and Be-Tabs Pharmaceuticals in South Africa in December. Singh cooled off by the end of the year. The only significant overseas acquisition in the following year (2007) was of the US rights of a group of 13 dermatology products from Bristol-Myers Squibb Company in May. “The alliances with Big Pharma (the world’s biggest companies) firms brought in more certainty of launching products in the US. In litigation, there is always uncertainty. You may have a strong case, but not win. We have the second largest first-to-file pipeline for the US after Teva (the world’s largest generic drugs maker). We are the only company which will, every year, have one first-to-file for a billion dollar plus product,” said Singh.8 At the same time, Ranbaxy, the giant at home in India, moved to get footholds in domestic companies that complimented it. Less than two months after Singh took charge, Ranbaxy acquired 7 percent equity in Zenotech Laboratories and forged an alliance with it to market its oncology products under the Ranbaxy label. That equity stake has since gone up to 48 percent, though the original promoter continues to be in charge of operations.9 A few months later, the company expanded its in-house active pharmaceutical ingredient manufacturing capacity by acquiring Cardinal Drugs based in Gwalior. In January 2007, Ranbaxy acquired 14.9 per cent in Krebs Biochemical’s, which would help it leverage Krebs’ API and Fermentation capabilities and derive cost benefits. Three months later, it entered into an agreement to acquire 14.9 percent in Jupiter Biosciences and struck a global supply arrangement for Peptides. In April 2007, Singh made his move yet in acquiring 14.7 percent in India-based antibiotics exporter Orchid Pharmaceuticals. The acquisition was done through Solrex, a partnership firm between Ranbaxy subsidiaries—Solus Pharma and Rexcel Pharma (known as Solrex). In the weeks to this announcement, though most people saw a connection between Solrex and Ranbaxy, the company kept quiet and left everyone to their conjectures. A visible involvement of Ranbaxy would have fuelled a rally in Orchid’s shares, increasing the cost of acquisition. “From the compliance perspective, we did what we were required to do and disclosed when we were ready to talk. We picked up the shares when the market was down,” said Singh.10 There was also an agreement with Orchid to synergize manufacturing and marketing capabilities across geographies and therapeutic categories. Singh went to all the four with the same proposition. 7, 8. www.rediff.com/money/2008/jun/11ranbaxy1.htm. 9, 10. www.rediff.com/money/2008/jun/11ranbaxy1.htm.

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“You have the technical skills and R&D, but are limited to the emerging markets. We have capability to take it to the developed markets. One plus one is not two; it’s four. When you are the leader, you have to set the pace for the industry,” said Singh confidently.

INTERNATIONALISATION—PHASES AND ENTRY MODES A lot of criticism was encountered within and outside the company. For example, it is a tough industry, it is pharmaceuticals, it is only the West which can discover and make high-quality pharmaceuticals, the Indian image is poor, one cannot sell an Indian product in the United States and not even in some of the developing countries, etc. were the often quoted criticisms. The Indian pharmaceutical industry has long struggled with an international image that had collectively labeled its members as trespassers of Intellectual Property Rights. Ranbaxy was serious about its image as an “international” player and fought hard and long against the stigma attached to Indian firms. (See Exhibit 1 for chronology of Ranbaxy’s achievements.)

Phase 1: 1992–2005 In 1992, Ranbaxy entered into an agreement with Eli Lilly & Co. of USA for setting up a joint venture in India to market select Lilly products. In 1993, the company set up a joint venture in China called Ranbaxy (Guangzhou China) Limited. In 1994, the new Research Center at Gurgaon (near Delhi) became fully operational. Ranbaxy established Regional Headquarters in London (UK) and Raleigh (USA). The Fermentation pilot plant at Paonta Sahib was commissioned. Ranbaxy’s Global Depository Receipts (GDRs) got listed in Luxembourg Stock Exchange. Thus, 1994 was a very important year in the growth phase of the company. In 1995, Ranbaxy acquired Ohm Laboratories Inc., an FDA approved, state-of-the-art manufacturing facility in the US. In 1997, Ranbaxy crossed a sales turnover of Rs.10,000 million, with its exports reaching an all time high of Rs. 5, 000 million. In 1998, Ranbaxy entered USA, world’s largest pharmaceutical market, with products under its own name. In 1999, Bayer AG, Germany and Ranbaxy signed an agreement for international strategic alliance where Bayer obtained exclusive development and worldwide marketing rights to an oral once daily formulation of ciprofloxacin, originally developed by Ranbaxy. Ranbaxy’s strategy was to market its products globally through this alliance. In 2000, Ranbaxy acquired Bayer’s Generics business (trading under the name of Basics) in Germany. It also forayed into Brazil, the largest pharmaceutical market in South America and achieved global sales of US $2.5 million in that market. In 2001, Ranbaxy took a significant step forward in Vietnam by initiating the setting up of a new manufacturing facility with an investment of US $10 million (Greenfield venture). It achieved a turnover of US $600 million for the year 2001. At the same time, their US subsidiary, Ranbaxy USA crossed sales of US $100 million, becoming the fastest growing company in the US. In 2002, Ranbaxy launched cefuroxime axetil post approval from USFDA, the first approval granted to any generic company for this product. In 2003, Ranbaxy received The Economic

Emerging Trends and Internationalisation of Firms

Times Award for Corporate Excellence for ‘The Company of the Year, 2002–2003’. Ranbaxy and Glaxo SmithKline plc (GSK) accelerated their discovery programmes through a global alliance for drug discovery and development. Ranbaxy launched the first branded product Sotret (isotretinoin) in the USA. In 2004, Ranbaxy began operations in France as a generic company, after acquiring a whollyowned subsidiary RPG (Aventis) SA. The company joined the elite club of Billion Dollar Companies, achieving global sales of US $1 billion in February 2004. Ranbaxy made its first anti-retroviral filing with the USFDA under the President Emergency Fund for AIDS Relief (PEPFAR). RBx 11106, and Anti-malarial molecule being developed in collaboration with Medicines for Malaria Venture (MMV) successfully completed phase I studies. In 2005, Ranbaxy’s antimalarial molecule successfully completed proof-of-concept (POC) Phase II studies. Ranbaxy launched operations in Canada. It opened its third state-of-the-art R&D facility on Gurgaon campus to focus on New Chemical Entity (NCE) discovery research. Ranbaxy’s joint venture with Nippon Chemiphar in Japan (Nihon Pharmaceutical Industry Limited) launched Vogseal for diabetes, the first product of the joint venture. The same year it acquired generic product portfolio from EFARMES of Spain (18 drugs for sale in Spain). Ranbaxy received India’s first approval from USFDA for an ARV drug under PEPFAR.

Phase 2: 2006—Ranbaxy under CEO Malvinder Singh The year 2006 has been an eventful, relentless expansion year in the history of Ranbaxy under the leadership of young CEO Malvinder Singh. The four global acquisitions in ten days in March 2006 proved that Singh was a true young assertive leader with daredevil sense of enterprise. The series of overseas acquisitions by Ranbaxy in the year 2006 were: March 21, 2006 Ranbaxy’s US arm buys patents, trademarks and automated manufacturing equipment from Senetek for its disposable auto injector for self-administration of parenteral drugs for anaphylactic shock. March 27, 2006 Ranbaxy’s Italian subsidiary acquired the unbranded generic business of Allen, a division of GSK, to complement its pipeline for the Italian and Spanish market. March 29, 2006 Ranbaxy acquired 96.7 percent of largest independent Romanian generic pharma company Terapia from Advent International for $324 million (Rs.1,522 crores). Combined with Ranbaxy’s own operations in Romania, the Terapia acquisition created Romania’s largest generic firm. March 30, 2006 Ranbaxy acquired generics company, Ethimed, a top 10 player in Belgium. This provided Ranbaxy from where to manage and expand its operations in the Benelux countries (Belgium, Netherlands and Luxembourg). July 18, 2006 Ranbaxy’s Spanish subsidiary purchased the Mundogen generics business of GSK in Spain. The acquisition beefed up Ranbaxy’s product portfolio in the country.

Phase 3: 2007–2008 Malvinder Singh and his team continued to buy stake in foreign firms in 2007–08. They could achieve many things during this period. The important among them were:

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th

largest generic company in South Africa for

$70 million.

healthcare segment in India) be marketed as a co-branded product in various global markets.

GLOBAL FOOTPRINTS Ranbaxy’s global footprint extends to 49 countries embracing different local people and cultures to form a family of 51 nationalities, with an intellectual pool of some of the best minds in the world.

USA Ranbaxy Pharmaceuticals Inc. (RPI), a wholly owned subsidiary of Ranbaxy Laboratories Limited, established operations in the USA in 1994, and began marketing Abbreviated New Drug Application (ANDA) approved generic products in 1998 after receiving FDA approval for Cefaclor, a broad spectrum anti-infective agent. In the US (the world’s largest pharma market), Ranbaxy had captured a significant share of the generics market. During the year 2006, the company achieved sales of US $379 million, representing an increase of 15 percent. As of May 2007, Ranbaxy had 122 ANDAs approvals in the US, with 75 pending approvals from the US FDA. Ranbaxy had the second largest product pipeline pending with the US FDA.12 Ranbaxy’s product development and manufacturing capability, teamed with its ability to market products in many global markets, made RPI an attractive business partner. A key part of Ranbaxy’s business strategy was to collaborate with partners with complementary skills, creating a “win-win” position for both partners. RPI had already experienced commercial success in penetrating the US healthcare market, and looked forward to enhancing growth and future business opportunities through collaboration and strategic alliances. Ranbaxy Laboratories Inc. (RLI), also a wholly owned subsidiary of Ranbaxy Laboratories Limited, was the branded prescription division in the US market. RLI had continuously grown and expanded through its R&D efforts, with novel drug delivery systems, as well as through Ranbaxy’s licensing activities, mergers and acquisitions. Ohm Laboratories was also a subsidiary company of Ranbaxy Laboratories Limited and was the US manufacturing site for approximately 40 percent of RPI’s product portfolio. In addition to manufacturing prescription products, Ohm had a commercial presence in the private label market (Over-The-Counter) and supported the needs of many major retail outlets throughout the US. Ranbaxy’s global expertise and commitment to develop new and innovative products, through 12. http://www.ranbaxy.com/operations/operationregion.aspx?id=62&flag=

Emerging Trends and Internationalisation of Firms

rapidly expanding generic, private label and brand product lines, had positioned Ranbaxy as a robust and capable player in the US market.

Brazil Ranbaxy initiated operations in Brazil in November 2000 through its majority-owned entity— Ranbaxy SP Medicamentos Ltd. The Brazil government introduced the National Policy for generics medicine in 1999 and the first generics was registered in Brazil in February 2000. Ranbaxy was the first Indian company to get its plants approved by the regulatory authorities of Brazil and the first international company to support the Brazilian government initiative to guarantee and improve access to generic medicines. Ranbaxy is the 6th largest generics company in Brazil as per IMS Health. During 2007, the company achieved sales of US $ ~40 Mn. The company’s product portfolio in this market comprises a wide range covering Chronic and Acute therapy segments.

Canada Ranbaxy Pharmaceuticals Canada Inc. was established as a wholly owned subsidiary of Ranbaxy Laboratories Limited that started operations in September 2005. Backed by a strong management team, the company has a strong product pipeline. The distribution function has been outsourced to McKesson Logistics, and the laboratory testing function to SGS Laboratories.

Mexico A wholly owned subsidiary set up in 2004, Ranbaxy Mexico, has been selling over 50 products in the Mexican market encompassing Anti-infectives, Cardiovasculars, Analgesics, Anti-retrovirals, Anti-Acne, Gastro-intestinals, Anti-diabetes, and CNS preparations.

Peru Ranbaxy has been doing business in Peru since 2000, initially as a joint venture and then as a wholly owned subsidiary named as Ranbaxy PRP (Peru) SAC. With a strong presence in institutional market as well as in private hospitals, pharmacy chains and independent pharmacies, Ranbaxy in Peru is importing around 45 molecules and more than 70 different products. Ranbaxy was committed to the global objective of providing good quality medicines at an affordable price.

Venezuela, Ecuador, Colombia Ranbaxy has been operating in Venezuela, Ecuador & Columbia (VEC) since 2004.The company is engaged in marketing of good quality generics across several therapeutic segments in order to provide access to medicines to a larger population.

Central Europe A part of Ranbaxy Pharmaceuticals’ expansion into global markets; the Central Europe operations

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were managed from the offices in Vienna, Austria and London, UK.The countries covered include Austria, Switzerland, Czech Republic, Slovakia and Hungary The portfolio comprises a broad variety of branded and non-branded generics products. Cooperation with several local marketing and distribution partners has been put in place to ensure smooth and profitable operations. Through various endeavours, Ranbaxy supports the government’s initiative in bringing down overall healthcare costs.

Lithuania and Latvia Baltics operations are managed out of offices in Lithuania and Latvia. The portfolio comprises a broad variety of branded generics.

Belgium A wholly owned subsidiary of Ranbaxy, Ranbaxy Belgium N.V. (RBNV) started operations in Belgium on 14th February, 2006 after the acquisition of Ethimed N.V. It is among the top ten generic companies in Belgium. Rechristened Ranbaxy Belgium in November 2006 and serving as headquarters for Ranbaxy’s Benelux (Belgium Netherlands Luxembourg) operations.

Bulgaria The direct operations of Ranbaxy Bulgaria started in September 2005. The nature of operations is primarily of representing Ranbaxy. The supply agreement was signed with Actavis in October 2005 and subsequently with Ecopharm in early 2007. Ranbaxy was the first Indian generics manufacturer to set up direct operations in Bulgaria and has got clear pricing advantage over other European generics.

France Ranbaxy Pharmacie Génériques started operations in January 2004. An operation of about 80 persons, RPG has a 4 percent market share in the French generics market.

Germany A wholly owned subsidiary of Ranbaxy, Basics GmbH is located at Leverkusen, Germany. The German generics market is the largest in Europe. The market share of generics has reached a level of approximately 46 percent of prescriptions in 2006, according to Insight Health. In Germany, Ranbaxy has a generic product portfolio of 50 generic drugs in a variety of dosage forms and strengths, covering a wide therapeutic range, including Cardiovasculars, Antidiabetes/metabolic disorders, anti-infectives, analgesics/anti-rheumatics, central nervous system and gastrointestinal drugs.

Ireland Ireland commercial operations (sales of Ranbaxy products in Ireland market) are managed out of office in London, UK. The portfolio comprises a number of branded generics. Cooperation with

Emerging Trends and Internationalisation of Firms

a couple of local marketing and distribution partners has been put in place to ensure smooth and profitable operations.

Italy Ranbaxy Italia S.P.A was established to promote and distribute Ranbaxy products in the Italian market.

Poland Ranbaxy is one of the fastest growing generic companies in Poland, selling a wide range of products and employing over 90 people. In business since 1997, the company promotes competitive, highquality pharmaceuticals across many therapeutic drug categories: Anti-infective, Anti-arthritics, Cardiovascular and CNS.

Portugal Ranbaxy Portugal was set up in December 2004 and it is based in Porto. The generic product portfolio covers a wide therapeutic range such as Central Nervous System, Cardiovascular, Antidiabetes, Anti-infective, Analgesics & Antirheumatics and Gastrointestinal at an affordable price.

Romania Terapia Ranbaxy is the largest independent generic company in Romania. Terapia (Romanian firm) was the largest acquisition of Ranbaxy (in 2006) till date and with this new entity, Ranbaxy had positioned itself as a strong player for the EU and CIS markets. Terapia had a strong brand name and a consistent track record of growth and profitability. Terapia Ranbaxy recorded combined sales of US $73 million during 2006.13 The company has the largest sales force on the market, strong product development and regulatory departments.

Spain Ranbaxy in Spain is located in Barcelona. The company has its own sales force to market Ranbaxy products. A strong sales team covering the entire territory and a strong customer service department provide customers with best services.

United Kingdom Europe continues to be a major growth engine for Ranbaxy, and the UK operation, a wholly owned subsidiary, plays a significant role in Ranbaxy’s European presence. In 2006, the UK operations clocked sales of US $35 million,14 despite severe price erosion and an intense competitive market. The branded business witnessed sales exceeding US $7.5 million, a growth of 34 percent over 13. http://www.ranbaxy.com/operations/operationregion.aspx?id=60&flag=

14. http://www.ranbaxy.com/operations/operationregion.aspx?id=60&flag=

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the previous year.15 The branded product portfolio was enhanced in the respiratory segment with the introduction of Easyhaler (Inhaler), complementing the respiratory class. Ranbaxy UK now has the Easyhaler for Salbutamol, Budesonide, Beclamethazone and Formoterol, Visclair (Mecysteine) indicated for Chronic Obstructive Pulmonary Disease (COPD) and Distaclor-MR (Cefaclor MR) for Respiratory Tract Infections (RTI). RUKL has made remarkable progress in enhancing its product portfolio and for securing the product basket by in-licensing products. Ranbaxy signed deals with various companies, for a number of different molecules in different therapeutic areas.

Kazakhstan Ranked as No. 24 company in the country, Ranbaxy CAR began its direct operations in October 1998. Ranbaxy has its presence throughout Kazakhstan, Kyrgyzstan and Georgia. The company has a wide presence in segments such as Cough & Cold Preparations, Anti-Infectives, NSAIDS, Iron combination products and Cardiovasculars.

Russia Ranbaxy has been operational in Moscow since 1993. The marketing and sales team is spread in all the major cities of Russian Federation like St. Petersburg, Yekaterinburg, Novosibirsk, Rostovon-Don, Chelyabinsk, Krasnodar, Perm, Kazan, Vladivostok, Krasnoyarsk, N. Novgorod, etc.

Ukraine Positioning itself as a company that offers “best products at affordable prices”, Ranbaxy Ukraine started its operations in 1993. The operations of the company were structured upon the branded generic marketing model.

Egypt Since its introduction in 1996, Ranbaxy Egypt is continuously reinforcing its position as a new name in the Pharmaceutical Industry in Egypt, backed by Ranbaxy’s global image. Ranbaxy Egypt offers international standard quality medicines at affordable prices to the Egyptian patients.

Ivory Coast In Ivory Coast, Ranbaxy was ranked amongst the top 10 pharmaceutical companies, and was hauled as one of the fastest growing companies. The company began its operations in 1995. The pharmaceutical market in this country is close to 80 million USD and Ranbaxy has a turnover of approximately 1.5 million USD in this market.16

Morocco Ranbaxy registered its office in Morocco in July 2005 to oversee the operations in Maghreb, viz. Morocco, Algeria and Tunisia region. 15. http://www.ranbaxy.com/operations/operationregion.aspx?id=60&flag= 16. http://www.ranbaxy.com/operations/operationcountry.aspx?Cid=213&Rname=Asia%20Pacific&flag=&Rid=61

Emerging Trends and Internationalisation of Firms

59

South Africa Ranbaxy (S.A.) (Pty) Ltd – South Africa, a wholly owned subsidiary of Ranbaxy, was set up in the year 1998. During 2006, Ranbaxy acquired Be-Tabs with the turnover US $ ~30 million, and thus became the 5th largest generic company in South Africa.17 The product portfolio is divided into three strategic areas: Acute, Chronic and OTC. The acute products contribute majority of the company’s turnover and include Anti-Infectives and Anti-fungals. Ranbaxy’s joint-venture with Community Investment Holdings (South Africa), “Sonke Pharmaceuticals (Pty) Ltd”, (Sonke) has sold Ranbaxy’s range of Anti-retroviral products in South Africa and other African markets.

Australia Ranbaxy Australia Pty Ltd (RAPL) was incorporated in 2004. The company has strengthened its operations with the launch of direct operations.

Cambodia Ranbaxy entered the Cambodia market in 1997 with a few products Brustan (Ibuprofen & Paracetamol), Norbactin (Norfloxacin), Histac (Ranitidine). Since then, Ranbaxy has obtained more than 90 approvals from MoH of Cambodia. Ranbaxy is one of the leading suppliers of products to Ministry of Health (MoH).

China Ranbaxy Guangzhou China Limited (RGCL) was incorporated in 1993, the partners being Ranbaxy Laboratories Limited, Guangzhou Qiaoguang Pharmaceutical Co. Ltd. (an affiliate of Bain Yun Shan Pharmaceutical Company) and HK New Chemic Ltd. This Ranbaxy joint venture had achieved a milestone of being the first Sino-India Joint Venture and received full support from both governments.

Japan The Japanese pharma market, with a low generic penetration valued at US $3 billion, represents 5 percent of the overall pharma market. Ranbaxy was the first Indian company to enter the world’s second largest pharmaceutical market. During 2006, the company’s 50:50 Joint Venture, Nihon Pharmaceutical Industry company Ltd. (with Nippon Chemiphar), clocked in sales of US $24 million.18 After being acquired by Daiichi Sankyo of Japan in 2008, Ranbaxy might be in a position to sell more in Japan through Daichi Sankyo’s distribution network.

Malaysia Recognised as a leading manufacturer, Ranbaxy Malaysia was set up as a wholly owned subsidiary in June 1984. With its excellent sales and marketing team, the firm has had strong 17. http://www.ranbaxy.com/operations/operationcountry.aspx?Cid=213&Rname=Asia%20Pacific&flag=&Rid=61 18. http://www.ranbaxy.com/operations/operationcountry.aspx?Cid=213&Rname=Asia%20Pacific&flag=&Rid=61

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brand recognition amongst the General Practitioners, Government Hospitals and Retail Pharmacy sector.

Myanmar Ranbaxy had entered the Myanmar market in 1993 with its first product approvals from the local Food & Drug Authority (FDA). Ranbaxy set up direct representation through its own branch office in June 1997 and since then, Ranbaxy has been able to obtain over 175 approvals and was considered to be amongst the top three companies in Myanmar. The company has its H.O. in Yangon, in one of the prime business centers of the country, and a branch office in Mandalay.

Philippines Ranbaxy started business in Philippines in 1998, through a strategic alliance with a local marketing and distribution company. Philippines still remains an export destination for Ranbaxy.

Singapore Ranbaxy launched its operations in Singapore in 2001. The business is managed from Ranbaxy Malaysia, which has a manufacturing plant in Sungai Petani, Kedah, for supplying to the Singapore market.

Thailand The Thailand operations were set up in 1983 through a joint venture between RLL & Thai shareholders. In 1995, the operations were enhanced with the acquisition of a reputed Thai pharmaceutical company: Unichem. Marketing is Ranbaxy Thailand’s forte. Ranbaxy Unichem Co. Ltd. (as the company is known in Thailand) markets and sells ethical pharmaceutical products to medical channels (hospitals and clinics) and Drug Store channels throughout Thailand. Some locally acquired products are also exported to neighbouring countries. About 50 percent products are imported from India and the rest are toll manufactured locally by OLIC (a subsidiary of DIETHELM Switzerland). The logistics of distribution and collection is outsourced to Diethelm, considered one of the best in the Asia Pacific Region. During the year 2006, the operations registered a turnover of over US$9 million, showing a growth exceeding 17 percent.19

Middle East and UAE UAE is the single largest market for Ranbaxy in the Middle East region. It is recognized as the largest generic company in this market. During 2006, the company consolidated its position in the Middle East on the back of new product introductions in UAE, Oman, Bahrain, Lebanon. Ranbaxy was ranked as No. 1 generic company in UAE in the private market and is placed at No.13th amongst the pharma companies. It is growing at 27 percent20. The company markets 19. http://www.ranbaxy.com/operations/operationcountry.aspx?Cid=68&Rname=Asia%20Pacific&flag=&Rid=61

20. http://www.ranbaxy.com/operations/operationregion.aspx?id=63&flag=

Emerging Trends and Internationalisation of Firms

its products through a distributor with a dedicated sales team of ~15 front line staff. In UAE, Ranbaxy’s Histac became the leading brand in its category. Ranbaxy is No. 1 generic company in UAE. It has 2 brands in the top 50 list, each valued more than US $1 million.

Sri Lanka Ranbaxy’s operations in Sri Lanka date back to over two decades. Ranbaxy was ranked as the 4th largest pharmaceutical corporation in Sri Lanka.21

ACQUISITION by DAIICHI SANKYO On 11th June, 2008, in one of the biggest strategic sales in the pharmaceutical sector, Japan’s second-largest pharmaceutical company Daiichi Sankyo agreed to buy up to 51 per cent stake in Ranbaxy Laboratories at Indian rupees 737 (US$17) a share. Singh sold promoter’s 34.8 percent stake for around Rs. 10,000 crore ($2.4 billion) at Indian rupees 737 per share.22 In November 2008, Daiichi Sankyo the completed takeover of the company from the founding Singh family in a deal worth $4.6 billion by acquiring a 63.92 percent stake in Ranbaxy.23 Daiichi Sankyo acquired the majority equity stake in Ranbaxy by a combination of (i) purchase of shares held by the sellers, (ii) preferential allotment of equity shares, (iii) an open offer to the public shareholders for 20 percent of Ranbaxy’s shares, as per Indian regulations, and (iv) Daiichi Sankyo’s exercise of a portion or all of the share warrants to be issued on a preferential basis (see exhibit 2). All the shares/warrants were acquired/issued at a price of Rs. 737 per share. The purchase price represented a premium of 53.5 percent to Ranbaxy’s average daily closing price on the National Stock Exchange for the three months ending on June 10, 2008 and 31.4 percent to such closing price on June 10, 2008.24 (See exhibits 3 and 4 for Ranbaxy’s share price on National Stock exchange.) This is an indicator that the Daiichi had seen potential in Ranbaxy`s business in India as well as in other countries. The share price of Ranbaxy rose 3.86 percent to Rs. 526.40(BSE) and Rs.525.85 (NSE) on June 9, two days before the company announced its buyout by Daiichi Sankyo (see exhibit 4). The benchmark index in India, Sensex plunged 506 points the same day. Daiichi Sankyo agreed to pay as much as $4.6 billion for a 50.1 percent stake in Ranbaxy. As reported earlier by Financial Express, on June 10, a day before the deal was announced, the Ranbaxy scrip surged 6.52 percent to Rs. 560.75 and the Sensex fell 177 points. The stock ended almost flat at Rs. 560.80 on June 11. On Monday, it settled at 567.75 points, up a mere 0.15 percent. A senior government official said the regulator had called for trading details of Ranbaxy shares from stock exchanges to inquire into the contrarian movement of the company’s stock over the last two weeks. “There was some unusual movement in the stock price before the deal was announced, which needs to be looked into,” the official said. 21. 22. 23. 24.

http://www.ranbaxy.com/operations/operationregion.aspx?id=63&flag= http://en.wikipedia.org/wiki/Ranbaxy_Laboratories. http://en.wikipedia.org/wiki/Ranbaxy_Laboratories. http://www.thehindubusinessline.com/2008/06/12/stories/2008061252370100.htm>.

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Ranbaxy stock price movement during the six months period prior to the deal was not remarkable. The Ranbaxy deal was a major takeover in the offing, but the deal still took everyone by surprise. Thus, the amount of movement in the stock as well as the period over which speculative positions were built was not large. Ranbaxy’s acquisition by Daiichi Sankyo is the biggest acquisition of a listed Indian entity till date. The combined company is worth about $30 billion bigger than Teva, the world’s largest generic company at $ 9.4 billion. It ranks No.15 among the list of innovator companies dotted by big names, such as $48 billion Pfizer and $ 44 billion Glaxo SmithKline.25 Daiichi Sankyo is the product of a 2005 merger between Sankyo and Daiichi. In the financial year ended March 2008, it had net sales of $8.2 billion and a profit after tax of $915 million.26 It has presence in 21 countries and employs 18,000 people. It is the second largest pharmaceutical company in Japan. The company can trace its roots back to 1899, though the formal entity today is relatively new. Daiichi Sankyo makes prescription drugs, diagnostics, radiopharmaceuticals and over-the-counter drugs. Daiichi Sankyo found it easier to enter the Indian market with Ranbaxy, but its bigger goal would be in securing a strong presence in the global market for generics which Ranbaxy had. In an interview, Malvinder Mohan Singh said about their decision to exit Ranbaxy: This is not an exit. This is a strategic transaction that will completely transform the way business is done. It brings together a generic and innovator company. This is phenomenal. We are headed for a strategic redefinition, and are creating a new business model. It makes perfect sense for the shareholders, and takes the company to a different level. On the financial side, the debt goes to zero, Rs 3,000 crore of cash comes in, the market capitalization goes to $ 8 billion, the net worth goes up. Our objective is to be No.1 in generics. Together, we are bigger than Teva. And it is a matter of great pride for any Indian to say this. I want this deal to be seen as a transformational deal, a deal which took Ranbaxy to next orbit.27 Daiichi Sankyo and Ranbaxy believed that this transaction would create significant long-term value for all stakeholders through: (a) A complementary business combination that provides sustainable growth by diversification that spans the full spectrum of the pharmaceutical business; (b) An expanded global reach that enables leading market positions in both mature and emerging markets with proprietary and non-proprietary products; (c) Strong growth potential by effectively managing opportunities across the full pharmaceutical life-cycle; and (d) Cost competitiveness by optimizing usage of R&D and manufacturing facilities of both companies, especially in India. The acquisition was expected to boost Ranbaxy’s branded drug development initiatives for developed markets. Ranbaxy will gain cost competitiveness by optimising usage of R&D and manufacturing facilities of Daiichi Sankyo. The company will also gain smoother access to, and a 25. Ranbaxy Daiichi, Cover Story, Business world, June 23, 2008, page no.26. 26. http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4296. 27. Business world, 23 June 2008, page no.28.

Emerging Trends and Internationalisation of Firms

strong foothold in, the Japanese drug market. The immediate benefit for Ranbaxy is that the deal frees up its debt and imparts more flexibility into its growth plans. After the acquisition, Ranbaxy will operate as Daiichi Sankyo’s subsidiary. The deal aimed to combine Ranbaxy, a generic powerhouse making copycat drugs, with Daiichi that only deals in premium priced patented medicine. In Japan, where an ageing population and rising healthcare costs have led the government to allow generics substitution for branded innovator drugs, Daiichi lacks the low cost development and manufacturing back end to supply them, like Ranbaxy did. Until 2008, Ranbaxy was the predator. Under Singh, the company embarked on a string of acquisitions to enter new markets or strengthens its presence in the old ones. Among his foreign acquisitions are the unbranded generic drug business of Allen SpA (a division of GlaxoSmithKline) in Italy; Terapia in Romania; Ethimed, a generics company in Belgium; the Mundogen generic business of GSK in Spain; and Be-Tabs Pharma in South Africa. Singh has taken over or acquired strategic stakes in a host of domestic companies such as Zenotech Laboratories, Cardinal Drugs, Krebs Biochemicals and Jupiter Bioscience. After such an acquisitive strategy, why would Singh suddenly agreed to be acquired? The answer was not easy. Indian generic companies, especially Ranbaxy, were feeling the heat of falling prices and regulatory requirements in US, the world’s largest pharmaceutical market. In such a situation being resilient was more important for Ranbaxy and to search for new markets to keep moving ahead. The sale is justified with higher share price the shareholder got it. Ranbaxy could also bypass a lot of European and US companies that are finding it difficult to enter the Japanese market, where safety and testing requirements are a lot higher. What is the rationale for this strategic sale? Did Singh want to get rid of the challenges that he encountered? Did he get a better deal by selling the stake at Indian rupees 737, when the market price was approximately rupees 500? What would be the synergies of this acquisition in the much-coveted Japanese market and within the Daiichi Sankyo? As much smaller companies than Ranbaxy have gone to Japan, shopping bag in hand, why didn’t Singh try to stake in a Japanese firm or in Daiichi Sankyo instead of selling? Domestic laws make Japanese companies difficult to take over. But there surely could have been an equivalent in Europe or the US. Unlike many Indian MNCs which targeted foreign companies several times their size, why did Ranbaxy follow a different prescription? As if Ranbaxy had it chosen to continue alone. First, the company has thrived on selling offpatent drugs in the US. But this had become a much more expensive proposition because of litigation. Second, there was growing competition in generics at home and abroad. Finally, even as the Indian government was insisting on stringent quality norms, and extending its regime of price controls, the industry contends that it simply cannot make adequate returns on various products. For Daiichi Sankyo, there are huge benefits in getting access to Indian research capabilities and market. India and Indian companies are a very good way forward for them. Daiichi Sankyo is banking not just on the cost advantage Ranbaxy would bring, but also on capabilities for innovation and new product development. They would shift a section of their R&D to Ranbaxy`s facilities in India because of abundant supply of scientists in the field in India.

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Daiichi Sankyo’s has formulated plan to make the much cheaper generic drugs the default option over branded drugs. The ministry stamp of approval will eliminate the problems patients have been facing with health insurance claims; some insurers have not been accepting generic drugs as valid medicines. Indian pharmaceutical companies have been aware of this opportunity.

POST-ACQUISITION PHASE Cultural Challenge Post the deal, doubts were raised, since there has been no recent example of a generic company being integrated into an innovator company. Some also highlighted the possibilities of cultural clashes–innovator companies have always seen themselves as superior to generic companies. Besides, the Japanese culture of consensus-building and team playing could be new for promoterrun company.

Financial Results For the year 2008–09, the company recorded sales of Rs. 72,507 Mn (USD 1,667 Mn), registering a growth of 8 percent. EBITDA was Rs. 6,168 Mn (USD 142 Mn). Net income for the year was Rs. 9,146 Mn (USD 198 Mn). Loss on account of exceptional items (including provisions on inventories, Mark-to-Market losses on fair value of derivatives) was Rs. (9,389) Mn (USD (196) Mn).28 During the first quarter of post-acquisition, Ranbaxy shares were down and ranged between 240 rupees to 300 rupees 247.40 sharply below the 737 rupees per share that Daiichi Sankyo paid for its stake in January 2009.29 On May 24, 2009 Daiichi Sankyo announced that Mr. Malvinder Mohan Singh would step down from the positions of Chairman, CEO and Managing Director of Ranbaxy with immediate effect. Mr.Atul Sobti, who was serving as Ranbaxy’s Chief Operating Officer, had been appointed CEO. Commenting on these changes, Mr. Takashi Shoda, a director of Ranbaxy and the CEO of Daiichi Sankyo said: We very much appreciate the efforts of the Singh family, which grew Ranbaxy from a small, local Indian company to the large multinational company it has become today. We especially acknowledge the contributions of Mr. Singh. His strategic vision and passion for the pharmaceutical industry will be missed in Ranbaxy’s operations. We wish him continued success as he pursues his many other business interests.30 “It was a difficult decision to separate from Ranbaxy,” said Mr. Singh, “but it was the right time for me to do so. I leave with complete confidence that the initial transition phase that followed Daiichi Sankyo’s acquisition of majority shareholding interest in Ranbaxy has been completed successfully and that the company’s excellent team of management colleagues are well-positioned to take full advantage of the company’s growth opportunities.”31 28. http://www.ranbaxy.com/news/newsdisp.aspx?cp=912&flag=ARC. 29. http://in.reuters.com/article/innovationNews/idINTRE5040U520090105 Information was also collected from Executives in Ranbaxy. 30. http://www.daiichisankyo.com/4less/cgi-bin/cs4view_obj.php/b_newsrelease_n1_eng/875/DS_20090524_ Reconstitution of Ranbaxy Executive Lead. 31. http://www.daiichisankyo.com/4less/cgi-bin/cs4view_obj.php/b_newsrelease_n1_eng/875/DS_20090524_ Reconstitution of Ranbaxy Executive Lead.

Emerging Trends and Internationalisation of Firms

An important question to be answered here is – Why did Daiichi Sankyo offer premium price and acquired controlling stake in Ranbaxy? Despite facing ups and down in its journey, Ranbaxy always had been a resilient company and always had looked forward. But will Ranbaxy be able to be a phoenix in the world of pharmaceuticals market after its acquisition by Daiichi Sankyo not bearing fruitful results as it was predicted? Exhibit 1 Year

Achievement

1961

Company incorporated

1973

A multipurpose chemical plant was set up for manufacturing of APIs at Mohali India Ranbaxy went public

1977

First joint venture with Lagos (Nigeria)

1985

Ranbaxy Research Foundation was established

1987

Production start-up at the modern API plant at Toansa (Punjab, India), Ranbaxy became the largest antibiotic/ antibacterial manufacturer of India

1990

Ranbaxy was granted US patent for Doxycyline

1992

Entered into an agreement with Eli Lilly & Co. of USA for setting up a joint venture in India to market select lilly products

1994

Ranbaxy’s DGR listed in Luxembourg Stock Exchange Establishes Regional Headquarters in UK & USA. The new research centre at Gurgaon (Haryana, India) becomes fully operational

1995

Acquired Ohm Laboratories in US

1997

Ranbaxy Laboratories Ltd. crosses a sales turnover of Rs. 10 billion

1998

Ranbaxy enters USA, world’s largest pharma market with products under its own name

2001

Crosses US$100 million sales, fastest growing company in US

2003

Ranbaxy & Glaxo SmithKline enter into global alliance for drug discovery & development

2004

Ranbaxy began operations in France as top 10 generic company after acquiring RPG (Aventis) SA

2005

Ranbaxy acquires generic products portfolio from EFARMES 005 Ranbaxy launches operation in Canada

2006

Ranbaxy acquires Be Tabs pharmaceuticals, the 5th largest generic company in South Africa for $70 million, also acquires unbranded generics business of GSK in Italy & Spain, acquires Terapia for $324 million 2006 Ranbaxy places US$ 440 million in FCCB

2008

Ranbaxy redefined its business model, brought Daiichi Sankyo company limited as majority partner (sold the majority stake to this Japanese firm)

Source: Substantially modified version based on the information collected from http://www.ranbaxy.com/ aboutus/history.aspx on 16th July, 2008.

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Exhibit 2 Date of Acquisition

Particulars

Number of Shares

October 15,2008

Acquisition of shares under open offer

92,519,126

October 20,2008

Allotment of shares on preferential basis

46,258,063

October 20,2008

Acquisition of shares from the Singh family

81,913,234

November 7,2008

Acquisition of shares from the Singh family

48,020,900

Total

268,711,323

Source: Retrieved on 16 July, 2009 from the Ranbaxy–Daiichi Sankyo Deal: Where do they go now?, SSRN-ID1415972. Exhibit 3 Month

Open price (Rs.)

High (Rs.)

Low (Rs.)

Close (Rs.)

Volume (000’s)

Value lakhs

March 2008

439.00

473.80

418.45

438.45

26013.39

116700.69

April 2008

444.00

502.00

435.90

479.75

35283.97

168794.59

May 2008

480.00

535.00

459.50

528.30

20852.75

103689.82

June 2008

533.00

660.00

456.25

523.05

123899.01

700173.83

Source: Retrieved on 16th July 2009 from www.moneycontrol.com. Exhibit 4

Date

Closing price on BSE (in Rs.)

Closing price on NSE (in Rs.)

30 May 2008

528.65

528.30

2 June 2008

514.05

514.00

3 June 2008

529.95

529.95

4 June 2008

518.90

518.05

5 June 2008

525.00

525.35

6 June 2008

506.80

506.90

9 June 2008

526.40

525.85

10 June 2008

560.75

560.75

11 June 2008

560.00

561.00

12 June 2008

543.50

544.05

13 June 2008

566.90

566.85

Source: Compiled from: www.moneycontrol.com on 20th July, 2009.

Emerging Trends and Internationalisation of Firms

Exhibit 5 Elements

Daiichi Sankyo

Ranbaxy Laboratories

FY 2007

FY 2007

Net sales

8,220.13

1,012.85

Overseas sales

3,349.32

613.87

R&D

1,527.09

96.47

Operating Income

1,464.51

229.91

912.52

143.96

13,896.99

527.03

Net Income Assets Return on equity (ROE)

7.80%

28.80%

EPS

$1.26

$0.35

No. of Consolidated Subsidiaries

43

18

15,349

8,141

No. of Employees

Exchange rates used All figures mentioned are in million dollars 1 Dollar = Rs 42.91 1 Dollar = 107.07 yen Source: Business World, 23 June 2008, p. 28. Exhibit 6

Region/Country

FY 2008 FY 2007 Change Q4 2008 Q4 2007 Change

North America

19,282

17,306

11%

5,080

4,463

14%

India

14,857

13,932

7%

3,740

3,427

9%

Europe

14,275

15,070

–5%

3,628

4,183

–13%

Asia Pacific & CIS (Excl. India)

9,310

7,588

23%

2,688

2,278

18%

Rest of the World

9,713

8,618

13%

2,580

2,457

5%

Active Pharmaceutical Ingredients (API) and Other

5,069

4,413

15%

1,379

1,143

21%

72,507 66,927 8% Global Sales 19,096 17,951 6% Source: Retrieved on 16 July 2009 from http://ranbaxy.com/news/newsdisp.aspx?cp=912&flag =ARC.

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Exhibit 7 Particulars

FY 2008

FY 2007

Change

Q4 2008

Q4 2007

Change

Sales

72,507

66,927

8.3%

19,096

17,951

6.4%

EBITDA*

6,168

9,467

–34.9%

(1,085)

2,977

–

8.5%

14.1%

–5.7%

16.6%

(9,146)

7,866

–

(6,798)

1,878

EBITDA Margin Profit after Tax

–

*EBITDA: Earnings before Interest, Tax, Depreciation and Amortization Source: Annual Report of Ranbaxy, 2007–2008.

Discussion Questions 1. Why did Ranbaxy agree for the strategic sale of its controlling stake to Japan’s Daiichi Sankyo? 2. Do you consider that the strategy of Daiichi Sankyo (acquisition) as a classic case of international marketing strategy with long-term interest? 3. Why did Daiichi Sankyo pay premium price to acquire Ranbaxy?

Country Analysis, Selection, Market Size and Marketing Mix

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COUNTRY ANALYSIS, SELECTION, MARKET SIZE AND MARKETING MIX

Learning Objectives After reading this chapter, you will understand: The criteria and strategies to be formulated for country analysis and selection How to measure the market size The meaning and scope of the international market mix The reasons for product alterations

INTRODUCTION The process of penetrating and then selling in an international market is a difficult one. In fundamental terms, entering a new country-market is like a start-up situation, with no sales, no marketing infrastructure in place and little knowledge of the market. Despite this, companies usually treat this situation as if it were an extension of their business, a source of incremental revenues for existing products and services. Companies often pursue this new business opportunity with a focus on minimising risk and investment— the complete opposite of the approach usually advocated for genuine start-up situations. From a marketing perspective, although the principles are same, environmental differences often cause them to be applied differently. International marketing is different from home-country marketing. International marketing, as opposed to marketing in a single country, takes place in an environment of increased complexity and uncertainty, in areas as varied as consumer behaviour and government regulation. This suggests that the differences between domestic and international marketing are differences of degree rather than underlying differences of kind.

COUNTRY EVALUATION AND SELECTION Since companies seldom have enough resources to take advantage of all international opportunities, they must carefully choose how to use their human, technical and financial resources. Managers often ask, “Where can we best leverage our already developed competencies?” and “Where can we go to best sustain, improve or extend our competencies?”1 1. Daniels, Radebaugh and Sullivan, International Business, 10th ed., Pearson Education.

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Choosing a country to set up sales offices, franchisees, production units, etc. should be based on the following conditions: (i) A geographic strategic location plan must allow a company to respond to new opportunities in different locations. (ii) Scanning techniques that are based on broad variables that indicate opportunities and risks, enable managers to compare prospective country locations and to choose. (iii) Managers should take into consideration the business environment, the conditions in a host country that could significantly affect the success or failure of a foreign business enterprise. (iv) Managers should make investment decisions only after weighing opportunities and risks; the factors that influence most are market size, ease and costs, resource availability and red tape. (v) Market size and sales potential is probably the most important variable for the manager’s use while determining whether to make an investment or not and where. A technique for making rough estimates of market size is to base projections on a similar or a complementary product for which sales data are available. (vi) Within a regional trading group, companies may choose the country with the lowest corporate tax. (vii) Companies should compare the degrees [and costs] of red tape needed to operate in prospective countries. (viii) A few techniques that can be used by companies to compare potential projects include discounted cash flow, net present value, and internal rate of return.

COUNTRY RISK ANALYSIS It is often possible for companies to reduce risk by insuring. When operating abroad, a company usually faces greater uncertainty than at home because the foreign operations have to be conducted in a relatively less familiar environment.

Competitive Risk Companies may develop strategies to find countries in which there is least chance of significant competition; efforts will have to be made to get the best partners, best locations and best suppliers. Companies may gain advantages in locating where competitors are because the competitors have performed the costly task of evaluating locations so that a follower may get a ‘free ride’.

Political Risk Managers use three approaches to predict political risk: analysing past patterns, using expert opinion and examining the social and economic conditions that might lead to such risk. There is no general consensus as to how political instability can be predicted; different nationalities of companies may perceive risks to be different for the same locales, generally because of differences in their familiarity with the locales. If there is a great deal of frustration in a country, political parties may disrupt business by calling on general strikes and destroying property and supply lines; frustration is dissatisfaction as a result of unfulfilled needs, i.e., aspirations.

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MARKET RESEARCH AND CONSUMER BEHAVIOUR Companies undertake research to reduce uncertainties in their decision processes, to expand or narrow down the alternatives they consider and to assess the merits of their existing programmes. A company can seldom, if ever, gain all the information because of time constraints and the costs of collecting and processing information. Managers should estimate the costs of data collection and compare them with the probable pay-off from the data in terms of revenue gains or cost savings. Using samples based on available information, a company can draw fairly accurate inferences concerning market-segment sizes and locations. From the available information from competitors’ public financial reports and behavioural studies, a company can devise questionnaires or do some test marketing by using a selected sample so that responses reflect the behaviour of the larger target group to whom the company plans to sell. In many countries, business is conducted under a veil of secrecy, consumers’ buying behaviour is a matter of speculation and market intermediaries are reluctant to answer questions.2

Market Size Analysis Once companies decide to enter international markets, they must analyse data to determine their market potential in each country and their marketing mix to meet the potential.

Market Potential To determine the market potential, a company has to first estimate the possible sales of the category products for all companies and then estimate its own market share potential. The techniques used to determine the market size are the same as used domestically. The major indicators are:3

It has been found that:

There are certain factors, other than those mentioned above, that affect demand for some products in some countries. They are discussed below.

Obsolescence of Product Consumers in developing countries do not necessarily follow the same pattern as consumers in higher income countries.

International Marketing Research—Myth or Reality? European Research 15, No. 2 (May 1987): pp. 94–98. International Marketing

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Costs If costs of essential products are high, depending on their per capita income, consumers may spend more than what is expected. If costs of non-essential products are high, consumers will spend less than expected.

Income Elasticity Income elasticity of demand measures the relationship between a change in quantity demanded and a change in income in the hands of the consumer. It depends on the nature of products. Normal Goods have a positive income elasticity of demand. So, as the income of the consumer rises, the demand at each price level is greater. Necessities have an income elasticity of demand of between 0 and +1. Demand rises with income, but less than proportionately. Often, this is because we have a limited need to consume additional quantities of necessary goods as our real living standards rise. The examples of this would be the demand for fresh vegetables, toothpaste and newspapers. Demand is not very sensitive at all to fluctuations. Luxuries, on the other hand, are said to have an income elasticity of demand > +1. (Demand rises more than proportion, to a change in income.) Inferior Goods have a negative income elasticity of demand. Demand falls as income rises. In recession, the demand for inferior products might actually grow. Within a given market, the income elasticity of demand for various products can vary and, of course, the perception of a product must differ from consumer to consumer. The market for overseas holidays is a great example (tourism). What is a necessity for some people might be a luxury for others. For many products, the final income elasticity of demand might be close to zero. In other words, at best, there is a very weak link between fluctuations in income and spending decisions.

Substitution Consumers in a given country may more conveniently substitute products or services than consumers in some other countries. While cars have a large transportation role in the U.S., they are impractical to drive in Japan. As a result, cars there serve more as a status symbol or as a means of personal indulgence. The Japanese support the mass transportation systems like railways and buses.

Income Inequality Where income inequality is high, the per capita income figures are usually low. But there are people in the middle and upper income groups who have substantial income to spend. One such country is India.

Cultural Factors and Taste Countries with similar incomes may have different preferences for products and services because of values or tastes. estimate of sales can be made.

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Gap Analysis serving adequately. If a company’s sales are lower than the estimated market potential, it means that the company has the potential for increased sales4. Figure 4.1 illustrates the gap analysis diagrammatically. See the self-explanatory diagram for the gap analysis drawn below.

Fig. 4.1

Gap Analysis

Different companies may have to modify their marketing programmes because of different gaps. Competing in world markets requires careful preparation and analysis. This requires evaluation of global, regional and national demands and gaps.5

4. Kumar, International Marketing Research World Business, Thomson South Western, 2005, p. 129.

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India is a relatively poorly penetrated market for motorcycles compared to other developing countries. Countries like Indonesia and Vietnam, which have similar or lower per capita incomes, have much higher motorcycle penetration. This is the reason why the Delhi-based Hero group is moving internationally.

INTERNATIONAL MARKETING MIX Establishing linkages across marketing mix elements is critical in a competitive environment, where product differentiation may not offer a long-term advantage. In a competitive situation, a firm has to prioritise the marketing mix elements. This does not mean concentrating only on a few elements and ignoring the others. Prioritising emphasises the need to recognise the fact that some elements may be important than others at a given point in time. When Samsung entered the Indian market, it had sophisticated offerings but the priorities were to develop a brand with such associations and to develop a distribution channel. Whirlpool, the fastest growing refrigerator brand in India, emphasised product offerings adapted to local consumers through marketing research. This enabled the brand to come out with offerings that were in tune with the needs of consumers. The international marketing mix comprising product, price, promotion, branding and distribution is discussed in the following paragraphs.6

Product Policy There are five common product policies: product orientation, sales orientation, customer orientation, strategic market orientation and societal orientation.

Product Orientation With product orientation, companies focus primarily on production, with little analysis of consumer need. This approach is used internationally for need for differentiation. domestic surplus. resemble the market aimed at initially. market potential. Passive sales occur when

6. This is an original write-up based on the ideas given in the books, Global Marketing Strategies, Jeannet and International Marketing

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Sales Orientation Internationally, sales orientation means that, on the basis of the assumption that consumers are sufficiently similar globally, a company tries to sell abroad what it can sell domestically. This orientation differs from the production orientation because of its active rather than passive approach to promoting sales. A company with a sales orientation is better able to sell the same product in multiple countries when consumer characteristics are similar and

Customer Orientation When the company operates according to its sales orientation, the product is held constant and the sales location is varied. In contrast, in the case of customer orientation, the country is held constant and the product is varied as the company wants to penetrate the markets in a given country because of the country size, growth potential, proximity etc. In such cases, suppliers depend upon the buyers to determine what the end-users want.

Strategic Marketing Orientation A strategic orientation combines production, sales and customer orientation. Companies tend to make product variations abroad without deviating very far from their experience.

bicycles and mopeds, he understood the intricacies of the Indian marketplace very well. INTERNATIONAL EXPANSION OF HARLEY DAVIDSON (HD) A key part of Harley-Davidson’s (US Sportster) growth strategy is expanding its sales outside the US. for international marketing is the extent to which the products and the Harley image need to be adjusted to meet the needs of overseas markets. Harley’s image is rooted in American culture, and thus seems Hugo Wilson of Britain’s magazine. “The guy who’s into Harleys here is also the guy who owns cowboy

Europe is the focal point of H-D’s overseas ambitions, simply because it is the second largest heavyweight motorcycle market in the world. Europe is also a huge challenge for H-D. Unlike in the US, leaders in the heavy bike segment: BMW, Honda, Kawasaki and Yamaha. of the heavy motorcycle market is for performance bikes (such as the popular Japanese high-power, percent. European buyers tend to be knowledgeable and highly style conscious. Also, European roads and riding style are different from the US.

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Another example could be bicycles in China and USA. While the same bicycle might be sold in China and the US, it might be positioned as a serious means of transportation in the former and as a recreational tool in the latter.

Societal Marketing Orientation Companies with societal marketing orientation give serious consideration to potential environmental, health, social and work-related problems for being successful in those markets.

Reasons for Product Alterations Because of certain legal, cultural and economic reasons, companies alter their products to fit the needs of customers in different countries, as seen in some of the examples above. (i) Legal Reasons are usually related to safety, health protection and environmental issues. These may cause changes in the packaging of a product. Automobile companies have to limit emissions according to pollution control norms in different countries. There may be many more regulatory issues. Also, there may be differences in some product standards, according to which the company might have to do some product alterations. For example, appliances made for the US and Europe must run on different voltages. 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. (ii) Cultural Reasons Cultural and religious differences limit the standardisation of a product offering on a global basis. For example, food and clothing, etc. (iii) Economic Reasons company will need to design low price models or small quantity packs for such countries. country.

Alteration Costs Every product alteration has a cost. Some alterations are very low cost and yet have an important influence on demand. For example, packaging. compare the cost of an alteration with the cost of lost sales from no alterations. One strategy could be to compromise between uniformity and diversity.

Extent and Mix of the Product Line In reaching product line decisions, a company should consider the possible effects on sales and the cost of having one product as opposed to a family of products.

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Product Life Cycle Considerations Product life cycles may differ by country. When one market has been saturated, it may be possible to continue growth in another market. For example, while somewhere between one-third and half of American homes now own a computer, the corresponding figures for even Europe and Japan are much lower. Therefore, many computer manufacturers see greater growth potential there.

ii. Pricing Proper pricing is very important for gaining sales as well as profits. Kellogg’s, a global brand in its category of foods, conducted trials for its cornflakes when it first entered the Indian market. However, it was unable to sustain repeat purchase because of its high prices, which were almost 100 percent over the existing competitive brands. Pricing is more complex internationally than domestically because of the following factors:

Government Intervention

The WTO permits countries to establish import restrictions at a price lower than what is charged to consumers in the exporting country. This makes it difficult for companies to differentiate through pricing. Japan has actively lobbied the WTO to relax its regulations, which generally require firms to price not lower than their average fully absorbed cost (which incorporates both variable and fixed costs).

Greater Market Diversity Country to country variation creates natural segments and a company sets different prices for different countries on the basis of competitive situation and the stage of the product in the PLC. A company may exercise considerable pricing discretion by using the following strategies:

On the basis of its brand equity and target markets, a company has to choose one of the above strategies very carefully. The example below explains the failure due to wrong pricing strategy. Heinz, the globally known ketchup brand, entered the Indian market, where Kissan and Maggi were well established and with which consumers were familiar. Though the brand may have had a superior offering in

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terms of product attributes, there was a need to create brand awareness and then link the brand’s attributes to the name of the brand. Advertising through a well-planned positioning strategy was required to bring the brand within the ‘consideration set’ of consumers. The penetration of the category (ketchup) is low, in the category of ketchup in a market where consumers were unfamiliar with the brand. Besides, the brand followed an up-market skimming pricing strategy, of pricing the offering higher than the competitive offerings. While advertising may have been prioritised by the brand as a prerequisite for its ‘start-up’ strategy, the brand had probably assumed that consumers in India are familiar with the brand and would associate it with the category (which could be true of other markets in the world). Further, pricing the product high in a country where there is a need to sell and create a market need not have been a priority. A lower priced variant introduced with an innovative recipe drawn from traditional foods could have made a better impact on consumers. The brand later introduced a sales promotion, which was followed by the strongly entrenched brands in the category. The priority of the brand should have been a low-priced variant, positioned to create a trial for the brand and expand the market.

Price Escalation in Exporting If standard mark-ups occur within distribution channels, lengthening the channels or adding expenses somewhere within the system will further increase the price for the consumer. In such a case, the price generally goes up by more than transport and duty costs. Thus, to become competitive in exporting, a company may have to sell its product to intermediaries at a lower price to lessen the amount of escalation. It should determine what price would help to maximise profits.

Currency Value and Price Changes In the case of highly volatile currencies, pricing can be difficult. Pricing decision must consider the replacement costs. If not, the company will be making only paper profits and will not be able to adjust to inflation. Two other pricing problems occur because of inflationary conditions: currency than expected. When companies sell similar goods in multiple countries, price differences among the goods must not exceed by much the cost of bringing them in from a lower priced country. Or, a spill over in buying will occur. In barter, the seller takes payment in some product produced in the buying country. For example, when Lockheed was an independent firm, it accepted Spanish wine in return for aircraft, and sellers to Eastern Europe have taken their payment in ham.

Fixed versus Variable Pricing The extent to which manufacturers can or must set prices at the retail level varies substantially by country. There is also substantial variation in whether, where and for what products consumers bargain in order to settle on an agreed price.

Company to Company Pricing Dominant retailers with clout can get suppliers to offer them lower prices. This, in turn, enables them to compete on being the lowest cost retailers.

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iii. Promotion The types and direction of messages and the method of presentation may be extremely diverse, depending on the company, product and country of operation.

The Push-Pull Mix Factors that help determine the mix of push and pull among countries are:

Thus, push is more likely when:

Pull is more likely in a self-service situation.

Standardisation of the Advertising Programme The savings that result from having standardised advertising are great. Standardisation also yields better quality at local levels. Companies can rapidly enter different markets with the same advertising agency, taking good ideas from one market and quickly introducing them in other markets. Complete standardisation of advertising is sometimes not possible due to translation, legality and message needs. Translation When a company is going to sell in a country where a different language is spoken and understood, translation is usually necessary. Some messages play on words and simply do not translate well. Sometimes, direct translation is not possible as what is an acceptable word in one place may seem offending at another place. Legal standards of morality and nationalism put legal constraints. What is legal in one country may be illegal in another country. countries, for example, it is illegal to price discriminate between consumers and, thus, coupons are banned. In some places, it is illegal to offer products on sale outside a very narrow seasonal and percentage range. Message Needs Message needs may differ from country to country, depending upon the PLC and gap analysis. Media Media requirement may also vary in different countries. An average American is exposed to several

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advertising clutter, the increasing number of channels, the availability of zapping mechanisms and reduced watching of television by certain groups. Thus, marketers must consider other methods of getting consumers’ attention.

iv. Branding and Distribution The international environment substantially affects whether to go for a worldwide brand or local brands for different countries. Some companies use the same brand and logo globally, whereas some may use the same family of brands. There are a number of problems in using the uniform brand internationally. They are:

Language Factors A brand name may carry a different association in another language. Brand symbols do not necessarily work everywhere. Pronunciation and different letters may also present additional problem.

Brand Acquisitions Much international expansion takes place through acquisition of companies in foreign countries that already have branded products. The acquiring company may either continue with the existing brand name of the acquired brand or may try to consolidate the acquired brands to reduce its promotional budget.

Country of Origin Images Products of some countries tend to have a higher quality image than those from other countries. Companies depending upon the image choose to put labels. The main challenge is to find new ways to capture attention and position a brand in the consumer’s mind. Public relations and word-of-mouth marketing are playing a growing role within the marketing mix to build and maintain brands.

Difficulty of Standardisation Within the marketing mix, for several reasons, companies find distribution one of the most difficult functions to standardise internationally. Distribution reflects different country environments. countries. workers, labour legislations and efficacy of the postal system, etc. that influence the type of distribution of goods in a country.

Choosing Distributors and Channels A company may tie up with other companies for its distribution function or it may handle the function on its own. Distribution may be handled internally when:

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Distributor Qualification The common criteria for the selection of distributors include:

Gaining Distribution

Distributors choose what they will handle. Companies

Hidden Costs in Foreign Distribution Because of different distribution systems, the cost of getting goods to consumers varies widely from one country to another. Five factors that often contribute to cost differences in distribution are: 1. 2. 3. 4. 5.

Infrastructure conditions Number of levels in the distribution system Retail inefficiencies Size and operating hours restrictions Inventory stock-outs.

The Internet and E-Commerce The growth in online households creates new distribution opportunities and challenges when selling globally over the Internet. DELL, a computer company, is known for its online ordering proposition; HP is not known for it, although it is an equally well-known brand. DELL laptops are sold in many foreign countries through the website that facilitate e-commerce. A few examples of companies that have used the marketing mix very well are: Sony in television, Reebok in the category of footwear, Ray-Ban in the category of sunglasses and Mercedes in cars. Some other brands that entered the Indian market with a tremendous degree of equity and a well-planned marketing mix have also been able to adapt effectively to the Indian context.

Geography are readily accessible through the Interstate freeway system (or, at least, from navigable roads that connect the freeways), many foreign areas are more difficult to reach. A large proportion of the population of Latin America, for example, is concentrated in coastal areas due to the inhospitable terrain that pre-dominates the

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continent. In Europe, connections across mountains were achieved through aggressive tunnelling, but this has not yet been affordable in most developing countries. In some areas, the only way to bring most materials which will then ‘re-wholesale’ to one who can only be reached by jeep, who, in turn, will resell to a store that may only be reachable through pack animals. Note that, in addition to physical transportation, reliable communication, such as mail, phone, fax and the Internet, is also essential to allow for the flow of goods.

Points to Remember Elasticity of demand: It is a measure, devised by Alfred Marshall, used in economics to show the responsiveness, or elasticity, of the quantity demanded of goods or service to a change in its price or consumer income. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in the price or consumer income. Product line: A group of products manufactured by a firm that are closely related in use and in production and marketing requirements. The depth of the product line refers to the number of different products offered in a product line. Price escalation: It is a situation of increase in prices, especially due to inflation.It is a contract provision that permits the seller to raise prices in response to increased costs. Push strategy: Approach used as part of a marketing strategy to encourage customers to purchase a product or service. A push strategy targets members of the distribution channel, such as wholesalers and retailers, to push the promotion up through the channel to the consumers. This approach is more common in industrial markets. Pull strategy: Approach used as part of a marketing strategy to encourage customers to purchase a product or service. A pull strategy targets the end consumer, using advertising, sales promotions, and direct response marketing to pull the customer in. This approach is common in consumer markets.

Objective Type Questions 1. Common criteria for the selection of distributors include (c) Extent of its other business (d) All of these commitments (e) None of these 2. Common product policy includes (a) Product orientation and sales orientation only (b) Product orientation, sales orientation, customer orientation, strategic market orientation, societal orientation (c) None of these (d) Customer orientation and societal orientation only 3. Normal goods have (a) Positive income elasticity of demand (b) Negative income elasticity of demand

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4. 5. 6.

7.

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(c) All of these (d) None of these Necessities have an income elasticity of demand between (a) 1 and +1 (b) 2 and 3 (c) 3 and 4 (d) 0 and +1 Luxuries are said to have an income elasticity of demand (a) > + 1 (b) < + 1 (c) 0 + 1 (d) 0 + 2 Inferior goods have a (a) Positive income elasticity of demand (b) Negative income elasticity of demand (c) All of these (d) None of these Where income inequality is high, the per capita income figures are usually

8. A company may exercise considerable pricing discretion by using which of the following strategies? (a) Skimming strategy (b) Penetration strategy (c) Cost plus strategy (d) All of these 9. State true or false: (a) Interior goods have a negative income elasticity of demand. (b) DELL, computer company, is known for its online ordering proposition, internationally. (c) Products of some countries tend to have a higher quality image than those from other countries. (d) Consumers in developing countries do no necessarily follow the same pattern as consumers in higher income countries.

Review Questions 1. From the point of view of International Marketing, discuss the criteria for country analysis. 2. Discuss the facts of the international marketing mix. 3. What is gap analysis?

Project Assignments 1. Download the Seterra Software from the internet (accessible on google.com or www.educationalfreeware.com). The instructor can call up the students randomly to play this ‘Country & place’ location game. Select a continent first and click on a country. You will get a white picture of the country if you select the country in your first attempt. You may repeat the game selecting another continent, which can be done by another student in the classroom. 2. Contact an Indian firm operating in international markets and find out its marketing mix in markets of a particular country. Compare and discuss the results with your colleagues.

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Suggested Readings Joshi, R. M., International Marketing Keegan, W, International Marketing, Pearson, USA, 2008. Paul Justin, International Business

Case International Marketing Mix— Differences in North America, Europe and Asia: Case of Toyota Toyota uses product-oriented marketing mix in foreign markets and it enables the company to meet the need of their customers in each region (Europe, Asia, North America, other) and offer the price for the customers which can truly satisfy them.

TOYOTA NORTH AMERICA Overview Toyota used was that it created a powerful market through new product launches which matched the needs of the people and the production was adapted to the changing taste and lifestyle. Other reasons could be Toyota’s significant costs advantage over American car competitors. Toyota entered the market in the 1950s, and it helped to gain a big market share. Why did Toyota have cost advantage against their competitors? It is due to the Toyota Production System (TPC) which resulted in lower costs. TPC accepts the suggestions and ideas of simple workers regarding how to improve the efficiency and productivity of cars. TPC is a system of continuous improvements since it helps to create synergy among different stages of car manufacturing. At the same time, North American car manufacturers were not willing to invest money in new manufacturing techniques and technologies. As a result, their unwillingness led to a tremendous market share loss in the region.

Marketing Mix Product Toyota’s market-oriented management allows them to meet the needs of their customers in North America through a careful analysis. Toyota company recognises and understands that the North America’s market is at different stage of economic development and that the relationship with the competitors differ as well in each region. Toyota company focuses on specific types of vehicles in this region and tries to develop cars specifically for North America, because the needs, lifestyle and tastes are different from other main regions, such as Europe or Asia. North America’s market for the company is the central one overseas and it has been a key driver market which led to a faster growth of the company. It is believed that the population of North America will have a tendency to grow, so in the future this market will remain one of the biggest.

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(basically using Lexus brand which has about 2% of North America’s market share compared to just 0.8% in Europe) in North America. In the future, a different lineup will be required as the residents of North America might reconsider their taste and choose smaller and less powerful cars due to environmental issues and the price of oil. For North Americans, the development of the product and the product itself are very important things. As Toyota have already found out these specific needs of this region, they should continue to offer their customers the cars they really want and the company should continue concentrating on their business strategy which is based on self-sufficiency in development and production.

Strategy As mentioned before, Toyotas’ strategy in the region from the beginning was the adaptation to the changes of customers need and that is why they launched a lot of new products which helped to gain a big market share in this region. First of all, Toyota in North America started introducing

Toyopet, launched in North America

small cars, the first one was Toyopet. At the same time, they started investing money on research and development, which was the beginning of further investigations of customers need in North America. The first model of Toyopet could not withstand American conditions. Through research and development, by 1960, Toyota introduced Toyopet in North America which matched all the conditions.

Toyota Corolla launched in North America in 1968

In 1968, Toyota introduced a small Corolla model. They wanted to differentiate themselves from their rivals, which at the time manufactured heavy cars. By entering the market with small cars

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and by investing money in research and development, Toyota prevented high competition from local companies. Toyota was a first mover in small cars in North America, so they had and still has a first mover advantage in small cars, which year by year became more and more popular and it enabled them to achieve economies of scale in such category of cars.

Pricing Policy As one of the specific needs of North Americas’ people in cars’ market is the product itself, Toyota’s pricing policy is pointed towards middle class customers, but not to the customers who are buying cars loaded with expensive option. It stresses the point that, for American people, the product itself is one of the most important components, expensive options are so not significant.

Barriers to Entry, Economy of Scale Toyota had to gain reputation in North Americas’ market. At the beginning, Japanese cars were considered as low quality cars. The second barrier to enter the market was that North Americas’ these barriers by hiring manufacturing and quality control consultants from that region, by implementing quality control technologies and by Toyota Production System. Nowadays, the Japanese in North America are thought to be high quality and Toyota’s efforts resulted in cheaper producing costs than American manufactures have.

Competition in North America The war in Japan between Toyota and Nissan (both companies strived for cutting costs and for making better cars at the same time) before Toyota entered North America market resulted in lower costs, which was an advantage over American cars manufactures. Japanese cars are

America, but Toyota overcame them with great cost advantages and Toyota Production System.

Dealer Network (Distribution) Toyota company has a unique and wide dealer network in North America (236 dealers in Canada, 1235 in USA for Toyota and 226 for Lexus). They treat dealers as true customers of their company. The strategy is to seek for people who have been around cars all their time. To have strong dealers means to be a successful company. The dealers are given 18%–20% percent gross profit (which is higher than American car companies give to their dealers). By doing so, Toyota induces them to sell their cars. Such unique dealer network enables Toyota to stay competitive and one of the leading car manufacturers in North America.

Promotion Toyota’s slogan “Toyota. Moving forward” in North America suggests the company is oriented to continuous product development. It also underlines that the company holds on its business strategy to be self-sufficient in development and production. “Moving forward” indicates the adaptation to the changing need of the customers.

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It is still important for United States residents to feel that they are taking the leading role in the world. For example, quite a significant number of Americans still believe that high, innovative Lexus brand is American. While promoting Lexus products, Toyota understands this issue and does not try to change Americans’ perception.

TOYOTA EUROPE Overview 1990s when the investments made accounted for as much as 7 billion US dollars. Today, Toyota Europe sells in 48 different European countries and has 9 manufacturing plants. In other words, it covers the whole region of Europe. Despite the fact that the markets in Europe vary a lot from country to country, the strategy of Toyota is more or less the same with just slight adaptations. Toyota’s market share is just below 8% (7.6% to be exact) and it is not much if compared to increase the share using own product strategy.

Marketing Mix Product Europeans’ taste is somewhat different from that of the Americans and it can easily be seen in the adaptation of strategy used by Toyota in this part of the world. To be precise, most of the people in Europe drive compact cars or family cars mainly because the price of gasoline is a few times more expensive than in the USA. This trend could be easily seen if we look at the best selling

there are no luxurious or upper class cars in this list due to several reasons: directly in Europe. for other car manufacturers.

For example, Toyota even abandoned the selling of Toyota Camry (a big, upper class sedan) in Europe in 2004 because the sales of this model were very low (just above 2000 cars sold during 2003 in Europe), but in the USA it is one of the best selling cars. Design We believe that the design of the car is one of the key reasons of selling or not selling the car because for most people, it is what makes cars different. Toyota understands this and even established a European Design and Development centre in France, which is supposed to be one of the leading countries in design solutions. Toyota Avensis has the design created by this centre and it is even exported to Japan. What is more, Europeans want built-in quality and Toyota

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implemented almost the same cars’ creation, manufacturing and evaluation steps like in Japan. It might not be strange for other countries, but Japanese companies tend to preserve technologies within the country and rarely export the best products. In design section, consumer tastes are also different from, for example, the Japanese style. Europeans love round cars, with no sharp corners, when in Japan, some Toyota cars have sharp edges.

Branding and distribution Toyota cars are sold in 48 different countries across Europe through about 3000 sales outlets in these countries. So it could be said that the distribution channel is well organised and quite broad since there are not only official dealers but also private outlets which sell Toyota’s cars. Toyota also uses “just-in-time” delivery while manufacturing cars in Europe, and logistics infrastructure is wide to become as efficient as possible. There are 13 part centres in different parts of Europe to ensure quick and stable distribution of needed parts in different countries. More is to be said about branding as it is the part of strategy which needs several adjustments if, a company wants to be successful. Firstly, Toyota uses different brand names for “normal” cars all over the world and no adjustments are made if these names are taken into account. The story is different if we take model names. For example, exactly the same car has three of this model is Echo. Moreover, in Europe even the third name exists – Toyota Yaris. The change of model names is certainly an example of adaption. As far as we know, the origin of name Yaris wants to show it has the knowledge of European history and tastes and, therefore, this name is taken not by mistake since she represented beauty and elegance – essential parts for women. That is why Yaris is most popular among women. In Europe, the branding of Toyota is of high quality but still relatively cheap. Toyota just strengthens this public view because it just underlines what the company expects from this market. As mentioned before, the strength of Toyota in Europe is small cars, and not luxurious ones (the market share of Lexus is just 0.3% compared to about 2% in the USA).

Pricing Despite the fact that Europe is regarded as a single market for Toyota, pricing strategies in different countries vary quite a lot. The reasons behind this are governmental policies such as taxes or tax returns, market share and competition and tastes. The table below shows prices for the exactly the same models in different countries. France

Germany

Denmark

Italy

Poland

UK

Toyota Yaris

12000

Toyota Avensis

23500

13300

–

12500

10500

12000

23000

22000

21500

18500

19000

24400

23300

22500

24000

26000

24000

Country Analysis, Selection, Market Size and Marketing Mix

French automobile manufacturers produce a lot of the same class car and competition is very

Mercedes C class are considered to be the competitors of Avensis. If we look at Denmark example (the price of Yaris was not presented in www.toyota.dk), the prices are lower than in neighbours but the tax for new cars in Denmark is 180%. So Toyota tries to take the part of it by lowering the prices. In Italy and United Kingdom, prices are average since there are not many obstacles for Toyota. Poland is very interesting country—Yaris and Avensis

These prices are also influenced by consumer tastes, but the measurement of it is difficult. Moreover, the countries presented are big enough and to underline certain taste is almost impossible.

Promotion The advertisement cost is about 1000 euro for the one car sold and this number is relatively low if compared to other countries. It means Toyota is not promoting itself that much like in USA – the main overseas market for them. The European slogan “Today, tomorrow, Toyota” might be a reason for that. It basically means that Toyota’s technologies are ones of the future (not today’s and not even tomorrow’s). Moreover, the Toyota company is known for its technologies and reliability, so there is no need for huge investments in advertisements. But if they advertise, they concentrate on showing how environmental-friendly and sustainable they are since these issues are now very popular in Europe. What is more, they tend to advertise small and compact cars as they are best selling and also Toyota Prius, which is supposed to be environmental-friendly.

TOYOTA ASIA Overview Since the first quarter of 2007, Toyota Motor Corporation is together with its half owned subsidiary Daihatsu, the world’s largest automaker. Toyota’s data for the first eleven months of 2009 show that sales in Asia (excluding Japan) is set to overtake the domestic sales. Toyota sold 1,354,000 units in Asia from January to November 2009, an year-on-year increase of 4.5%, compared to 1,256,000 vehicles in Japan. This makes Asia the second-largest market for Toyota in 2009 after North America (1,770,000 units). Now the main product policies and strategies of the Toyota Motor Corporation in Asia are discussed.

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Marketing Mix Product Toyota follows a pyramid strategy, selling large numbers of low-cost models (Corolla, Camry) and smaller numbers of higher-cost models (Tacoma pickup truck, Lexus luxury vehicles). This product breakdown reflects Toyota’s strategy of segmenting the market into wealth levels and selling accordingly. Nevertheless, Toyota has to adapt different models to different regions.The taste and preferences of Asian customers, for example, are different from those in the United States, Europe and

in Thailand and Indonesia enabled the consolidated sales in Asia to rise dramatically, reaching 956 thousand vehicles and underscoring the Asian market’s increasingly important role in driving Toyota’s growth. Other top performers in Toyota’s product portfolio in the Asian market are: Carmy, Corolla, Corporation established Central Research & Development Laboratories and technical centres. This enables Toyota to build cars which suit the preferences and desires of their customers. Besides the central technical offices and laboratories in Japan, Toyota established a central engineering and research centre for the Asia Pacific Region in Samutprakan Province, Thailand. The R&D expenditures totalled ¥958.8 billion, which are representing 3.6% of the consolidated net revenues. The reason for the high level of investments in R&D in recent years is that Toyota’s product strategy is based on a forward-looking and leading-edge technology development and to maintain Toyota’s competitive advantage in technology and their products.

Branding and Distribution Brand recognition allowed Toyota to charge higher prices than its competitors and thus earn higher profits. Over the past decade, Toyota has increasingly sought to bolster its brand recognition through motor sport. Since 2000, with a moderate success, Toyota has entered the Formula One, area they once dominated. According to Stefaniak, a marketing communication professional, Toyota recognises the difference between just marketing products and actually investing in creating a brand for the company. The strong reputation of the Toyota Motor Company contributes to the product and makes it a safe choice for the customers. Moreover, Toyota uses different brand names for different segments. As already mentioned, Toyota uses this pyramid strategy to segment the market according to the wealth level. The brand Lexus, for example, stands for superior quality and is aimed at customers who expect a luxury car, competing with BMW and Mercedes-Benz, whereas the brand Daihatsu, which

Country Analysis, Selection, Market Size and Marketing Mix

issue, Toyota uses the same brands all over the world, just the models differ in different regions. As the central base for the Asian/Pacific market, Toyota established a manufacturing and export

steadily increasing production. The strategy behind this is to increase local production to meet the steadily growing demand for Toyota cars in Asian markets. In October 2009, Toyota announced that it would begin producing car engines in India to take advantage of the country’s low-cost manufacturing costs. Toyota will produce these engines through Toyota Kirloskar, a division under Toyota, which is 89% owned by Toyota and 11% owned by India’s Kirloskar group. The reason for this is that Toyota needs to increase its market presence in India’s auto industry, Motor Co. Toyota plans to introduce its maiden small car in India by December 2010, which will be produced by Toyota’s upcoming 100,000 unit-a-year plants in its factory on the outskirts of Bangalore. Toyota tapped demand in emerging markets earlier than most other automakers and has thus developed numerous manufacturing facilities, distribution networks, and brand reputation. One of the most important markets in Asia with numerous distribution and manufacturing facilities is China. Sales in the rapidly expanding Chinese market totalled 499 thousand vehicles Motor Co. Ltd., production of the new Corolla by Tianjin FAW Toyota Motor Co. Ltd., began 2008.

Pricing Toyota believes the role of purchasing is through long term and stable production of quality products at the lowest price in a fast and timely manner. The main objective of administering prices within any company in the automobile industry is profitability and to consistently increase efficiency in their product line. The traditional pricing strategy is formulated into the cost + profit = selling price. When auto companies make changes and improvements, the cost of production increases, causing the selling prices to go higher. Companies normally do not want to cut their targeted return and therefore the costs are passed on to the consumer to maintain their profit margin. Toyota takes on a slightly different approach with a sales-oriented objective. Although the variables are the same, the formula is adjusted strategically into the selling price – cost = profit. Toyota firmly believes that its markets and consumers are what determine the selling price. Waste elimination is given top priority, which reduces cost and by continuously reducing these types of costs, it will result in persevering the company’s profit growth.

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Promotion Although the financial crises led to a reduction of advertisement cost of more than 48 percent compared to the previous year, Toyota still remains, according to a study recently published by Nielesen, among the top ten companies with the highest budget for advertisment. Toyota has a very high brand recognition and this is due to the postive and successful advertisment campaigns. Besides further product development for the Asian market, advertisement, which is adapted to specific regional preferences of certain regions, will remain as one of the most important tasks for further growth in the Asian market.

Discussion Questions 1. Discuss how Toyota launched their cars and promoted in Europe and North America. 2. Discuss the international marketing mix strategy of Toyota with reference to product and price.

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Learning Objectives After reading this chapter, you will understand the:

INTRODUCTION International marketing research is basically a collection and analysis of information about a product or service in the international market, from a sample of individuals and organisations. This information relates to their behaviours, characteristics, attitudes, opinions, possessions, needs, and aspirations. Generally, such international marketing research will include research on consumers. In fact, from product design to packaging to retailing to advertising and selling in the multi-country and multi-cultural markets, an international marketing firm must continuously seek information that can help it find answers to guide it in an alien atmosphere. International marketing research, thus, becomes a basic tool for decision-making. Before launching a product in the domestic market, just as a manufacturer has to gather, analyse and evaluate the information pertaining to the need for the product, consumers’ attitude and preferences towards already exiting substitutes, total industry potential, expected sales volumes and values, the comparative price its market can bear and lots of other demand determinants variables, such as the economic scenario, the cultural differences amongst different communities residing within the country, its legal, moral and ethical aspects and the direct and indirect elasticity through the domestic marketing information system the company has set up, in the same way, the manufacturer needs to evaluate and adopt information while planning to sell in multi-domestic and multi-country markets. Because of the unknown characteristics of foreign markets, international marketing firms need to get into the market research seriously. In this chapter, an attempt is made to understand the need for marketing research for internationally operating firms at all levels and for the components of marketing mix, such as product, price, place and

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promotion. The chapter also discusses how even some of the mega corporations, with all the resources at their command, fail to make a mark in different countries due to faulty research methodologies adopted or inadequate and inaccurate analyses of research. The history of international markets is replete with examples of wrong inferences drawn from research, leading to gross marketing failures. When an American manufacturer of cereal breakfast failed to make much of an impact in Japan, it became obvious that the manufacturer had not taken into account the traditional eating habits of the Japanese while conducting primary research into the country.1 Even in India, eating habits at the breakfast table have not yielded much result for Kellogg’s, even after having tried multiple variations of taste mixes for its corn flakes. Similarly, a giant like Hindustan Lever woke up to the potential for washing powder in rural India only after a small manufacturer like Nirma had eaten away their major share by catering to the low price segment. Proctor and Gamble, in spite of advertising heavily for its ladies diapers in Japanese market, lost out to a local manufacturer who had encashed on Japanese women’s need for frequent change of diapers and limited storage space by introducing thinner diapers.2 This chapter also addresses the process of marketing research both at the firm’s own level through in-house analyses of data collected and through studying data collected from secondary sources for earlier research projects conducted. A step-by-step, logical discussion on identifying the marketing problem, deciding on research methods to be adopted, pinpointing information and data requirement, implementation of research design, collection of data from primary and secondary resources and, finally, analyses, interpretation and acceptance of research results will eventually make the reader familiar with the entire marketing research subject at the global level. The discussion also takes into account varied cross-cultural, cross-country and cross-ethnic issues that sway and influence research decisions.

WHY DO FIRMS CONDUCT INTERNATIONAL MARKETING RESEARCH? The objectives of international marketing research may vary from firm to firm and from country to country because the factors that influence the market scenario are dynamic in nature and may keep on changing as the economy of different countries gets affected by national and international incidents. Similarly, while manufacturers may be familiar with the cultural, political and ethnic nature of their home country through the information system adopted at home, it is not necessary that this system will be equally familiar with the other world marketing systems, cultures, politics, economies, customers and their consumption patterns, preferences and other idiosyncrasies. Manufacturers may have to constantly monitor and evaluate the different forces and trends that could affect the smooth operation of international demand and supply, resulting either in massive consolidation of success in the global market or it may mean failure and having to start the operations all over again. Thus, setting up of the market information system at the international level becomes the first need and basis of international marketing research.

1. David Ricks, Big Business Blunders, Dow Jones, 1983. 2. Alecia Sway, Soap Opera. The Inside Story of Proctor and Gamble, Times Books, 1993.

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From the above two cases, it becomes clear that international marketing research is a very complex activity because organisations may not come across the kind of issues they face in their home territories elsewhere in the world. Through secondary research and primary surveys, an international company may seek answers to some of the following questions and problem areas:3 1. Identifying and understanding the strengths, weaknesses, opportunities and threats in existing and emerging markets vis-à-vis the in-house references pertaining to (a) PRODUCTS, whether to extend the same line of products or to have an extension. Or, should the products be altered according to country-specific requirements. The demand estimates for its products vis-à-vis the competition, the market responsiveness to its products as against the locally made products and also against the products and services imported. (b) PRICING in terms of self-criterion, existing, emerging and expected competitions in countries across the world. How the cost, laws, rulings, regulations, interest rates, banking systems, exchange rates, taxes and balance of payments of its host/target country will affect the pricing strategies. (c) DISTRIBUTION and logistics, which could be profitable to the firm at the same time. This must mean providing satisfaction to customers. The corporate business strategies, the plans and the functional systems adopted in various countries. (d) PROMOTION that could not only make a noise but could be a real perception building exercise for the organisation in the minds and preferences of the customers spread in different countries. The system must give out the communication media, its reach, availability and cost of channels to spread into the targeted segments, availability of financial, human and psychical resources and their required qualitative levels. 2. Understand the complexities of consumer behaviour all across the designated countries, under conditions specific to that country alone. 3. Understand the cultural and religious factors affecting its business in various countries. 4. Understand the political and legal set-ups and their impact on its business. 5. In addition, many other kinds of environmental factors may be encountered by the international marketing managers, which they will have to not only understand but also master in order to run their business profitably, both for themselves and for their customers too. 3. Kumar, V. (2003), International Market Research, Prentice-Hall of India, may be referred for more information.

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In other words, a company will have to set up an information system that comprises all relevant data, details, investigational studies and researches with solutions to all the problems of a firm operational in international markets.

INTERNATIONAL MARKETING RESEARCH As discussed in the introduction to this chapter, international marketing research is deep and analytical. This study becomes a basic tool for decision-making, as it involves scanning of data, collected either personally by the human resources employed by the firm or by the outside agencies, either contracted by this firm or an earlier firm that had faced similar problems in its approach to this particular project or problem. Thus, international marketing research has rightly been defined as “systematic designing, gathering, recording, and analyses of data about problems related to marketing of a product or services in more than one country by a firm operating globally.” The definition clearly states that this is a kind of research that crosses international boundaries and whose universe and protagonists may come from across different nations, cultures and economic and political set-ups. The firm could have had similar research going on in different countries at the same time or it can be conducted sequentially at later times in other parts of the world. Such a huge exercise obviously presents its own challenges and limitations in the form of different decisions thrown up by the research findings. A firm has to adapt to one that suits it the most and which can only come after reconciling the differences involved in multi-location, multi-cultural, multi-political, multi-lingual, multilegal and multi-personnel aspects, as each factor assigns its own outlook to the research involved.

Scope of International Marketing Research and Country Analysis Differences in national values, cultures, economic structures and history all contribute to competitive success. First, country competitiveness affects a Multinational Enterprise’s (MNE) selection of its global operation’s location. Like, for example, utilize China as one of its major offshore production centres in order to benefit from cheap labour, materials and large market demand. Second, country competitiveness affects an MNE’s industry selection.4 An international marketing firm, as discussed above, has inadequate knowledge of the markets in which it will be operating and of the risks involved in terms of resources deployed. Hence, the firm has to be extra careful while devising its strategies and plans. International marketing research enables international marketers to get a complete profile of each segment of marketing activity and the marketing mix at the global level in the following fashion:

Country Profile To prepare a comprehensive picture of a country or countries in which the firm proposes to operate or expand its already existing operations. International marketing research will help in country screening and selection once the firm is able to match the available data with that of self-reference criterion and check the viability of the proposal financially, physically, ethically, politically and economically. The research team may initially do this after analysing secondary data available through the published figures of the country concerned. The sources of secondary data will be discussed separately in this chapter. 4. Oded Shenkar and Yadong Luo (2004), International Business, John Wiley & Sons, Singapore, p. 127.

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Profile of Industry Marketing research will be needed to prepare a comprehensive report on the industry to which the firm belongs, or in which the firm proposes to diversify. The manufacturing capacities, the sales potentials, the future growth expectations, the earlier bottlenecks, the industry trends, the market characteristics particular to that country, the competitive strengths and weaknesses of the related industry, will all have to be studied. The research methods will vary from studying and analysing secondary data to concept testing and conducting research on focus groups. The international markets have often been subjected to volatile changes due to rapid technological changes in developed countries, shortening product life cycles, international takeovers and mergers, diversifications and gains or losses in the product market shares. International marketing research will have to study all this through the concepts of focus groups, direct surveys and secondary data analyses. While it will be easy for it to get the necessary data in developed countries, where storage of data and information is better organised, it will be a tough task for any marketer to acquire such information in underdeveloped or developing countries, where no formal systems to store data exist, or even if the information is available, it will have been put together for a different purpose.

International Customer Profile This can also be called a research in a buyer’s mind and the external factors affecting preferences, behaviours, attitudes, likes and dislikes. Brand awareness of the firm’s products and services and also that of the competition is studied through this research.

Source:

Similarly, firms may study niche markets by identifying different segments available across the globe. Such segmentations enable the marketer to focus its resources to that particular group rather than stretching its abilities all across the world.

International Product Profile The firms planning to go international generally will have some product or service being successfully marketed in the home country and, it is possible, the company may be exporting the same to select countries. However, this does not mean that the firm is successful in the international market. In order to establish its credentials, the firm’s research will have to evaluate its offers and products mix in the light and environment of targeted markets situated in different countries and the objectives set up by the firm. The firm will have to conduct primary surveys either all across or by select and identified groups in controlled markets. This will help the firm in giving acceptable names, identities and brands to its products in different countries.

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The meanings attached to different brands and their usage may vary across different cultures and their correct presentations can only be achieved if the international marketer is aware of the hidden as well as the apparent need of the international customer. Similarly, consumers’ tastes and habits will have to be established by product testing through international marketing research and the firm has to ensure its products conform to local tastes.

Source:

Asian Business

The colours, symbols, material and the size of packing and packaging, in addition to the information given on the outer cover, may vary from nation to nation and each culture will assign its own meaning to different kinds of packing. To ensure that it conveys the correct meaning to the users, a firm will have to undertake its own design studies for its literature and publicity materials. Product packaging design studies will highlight to the firm the extent of acceptability of its material by the customers across different countries or whether it has to introduce changes and alterations in its packaging and packing. Let us explain it with an example. A hand tools manufacturer from India booked a big order of supplies to Japan. The importers there assured him that they would be placing similar orders in future as well. But, for some reason, the Japanese orders did not come through and, in fact, many of the importers wanted to get out of the import contract. On his next visit to Japan, the manufacturer found out why. The packaging he had used was too simple in design and it had been done in single colour. He could not understand why a hand tool, which ultimately had to be sold to an automobile mechanic or, at best, to a small machinery store should be packaged in an attractive, multi-coloured customised box. Then, his local distributor presented a pen to him, which was elegantly wrapped in a multi-coloured gift-wrap. The distributor casually asked him to hazard a guess as to how much the pen would have cost. On having been told the actual value of the pen inside and the perceptive value Japanese attached to the outer packaging, the hand tool manufacturer understood that he too had to revamp his packaging to suit the same taste. A firm may have a subsidiary operating in a specific country and, in order to avoid similarities, the firm’s international packaging may have to bear a different look altogether. For example, Nestle chocolates or Cadbury’s products, which are generally available in all countries, through local manufacturing and marketing subsidiaries, will definitely have a localised flavour, packing and taste, whereas the one exported by the company’s international marketing headquarters will have completely different packaging and colours in order to distinguish it from the others. The colours particularly convey different meanings to consumers of different countries. For instance, green colour is associated with abundance and prosperity in the Muslim countries, but it is also associated with disease in some parts of the world. Similarly, the size and material used in packaging plays a significant role in some countries. Some of the international brands selling beer in India, to date, have not been able to popularise beer cans because the Indian consumers like to hold the refrigerated glass bottle in their hands, just to check if it is chilled enough to consume. The tinned can does not feel chilled in the consumers’ hands.

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In order to understand the actual needs, requirements and delight levels of the foreign consumers, testmarketing of products and services may be undertaken by the international marketer under product research. This kind of testing can ultimately iron out all deficiencies prevailing in any component of the marketing mix. Such test-marketing may involve testing new product performance and consumer response in a controlled area of a region or a country.

International Distribution and Logistics Profile International marketing is very different from marketing of products within the home boundaries of a firm. For international marketing, a firm will have to undertake a complete analysis of the local customs, traditions, legal rules, regulations, contractual bindings, understandings and agreements within different nations on the import and export of goods and services. Similarly, even though the firm resorts to incoterms for import/ export to market within different countries, to have an effective and cost-efficient logistical policy, it will have to familiarise itself with different terms and conditions, language, excise and other conditions. Timely deliveries, safety of material and reach through the appropriate channels to the best satisfaction of ultimate customers become the hallmark of getting a winning edge over all sorts of competition. An international marketing firm’s research plan must look into the cultural variables that can influence the purchase patterns and subsequent distribution systems. The geographical distribution of potential within multi-country limits may vary from region to region and it is possible that the firm may not find it feasible to get into all regions at once. Hence, the research will have to identify and find an answer to the problem of reaching all the nooks and corners, or a selective area, and find the right and efficient channels to move the goods and services, i.e., as industries and firms globalise, so managements must increasingly analyse industries and competitors on a worldwide basis.5 SPECIMEN MARKETING RESEARCH EXERCISE A multi-country marketing research project at Plethico Pharmaceuticals, an Indian Company Objective: Estimating the market potential for ladies’ facial acne removing cream. Research problem: Research hypothesis: Research coordinators: Secondary Data Research:

Primary Data Research:

5. John S. Hill (2005), World Business: Globalization, Analysis and Strategy, Thomson South Western.

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Sampling Procedure: Data to be Collected:

Channel coverage and their effectiveness can become the major cost add-on factor in distribution of fast moving consumer products. Avon, Olivetti and Amway have adopted the route of selling directly to the actual consumers by way of individual distributors, who move into select societies. Similarly, Hindustan Uni Lever Ltd. is establishing a direct distributing strategy in some states in rural India. Their rural vans are covering remote villages to cater to the rural needs. Distribution research will have to focus on where to put up the manufacturing plants, warehouses and stockyards, etc. particularly in industrial products and consumables, where the industrial inventory levels have been following the ‘Just-In-Time’ ( JIT) policy to bring down the cost of components. Market researchers will have to consider and evaluate their feasibility and suggest a way out. Distribution research will also analyse the financial as well as physical capacity and capability in addition to government rules, regulations, commission norms and other legal, fiscal contractual obligations that may differ from country to country.

International Advertising and Promotion Profile Once a marketing firm decides to go international, it has to adopt the correct communication strategy because that is going to affect both the customers and the non-customers in some way or the other. Those who are buying today, their trust and confidence in the product needs to be reinforced, while the fence-sitters will be tempted to change their opinion about the product or service sooner or later. Market researchers will have to ensure that the message conveyed through advertising enhances and adheres to the norms set up by the countryspecific culture, which will definitely have a deep influence on the advertising communication. Many times, an advertising message that is effective in one culture becomes offensive and counterproductive in another culture. Some countries like Spain, Italy and Japan being high context cultures will prefer an advertising style that is indirect and subtle and communicates through less copy but, at the same time, which uses symbols. Copy, facts and logic have a greater appeal in low context cultures like Germany and Scandinavia. Each culture has its own norms, beliefs, taboos, superstitions and faiths. Market researchers will have to go deep into each aspect before forming an advertising policy. Advertising effectiveness, selection of right media and the language will also come under the focus of international marketing research. Many times, international firms use the same advertisement and message in many countries by merely dubbing the audio and translating the copy. Although such a strategy saves lots of money, it may not help the advertiser attain the desired results. The visuals used in these messages could have conflicting effects on different communities because each culture attaches different meanings and connotations to different images and people interpret them from their own cultural perspectives. And, instead of getting a positive response, the message can actually become a source of embarrassment for the firm.

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Such an intrusion on a wife’s privacy may not be considered offensive in the Western culture but not so in Japan. Similarly, in order to adopt a particular promotional strategy, a firm will need a thorough research into the different aspects of personal selling, for instance whether to entrust the entire work to the distributor staff, hire its own staff abroad or to deploy a team from the head office and home country. The answers to all these questions, and many others, will have to be obtained through international marketing research.

International Pricing Profile It will be a major blunder for any international firm to transfer home country price to another country, by simply converting the local currency value into foreign currency. It is not necessary that a packet of 20 Classic cigarettes, costing Rs. 70 in India, should be converted to equivalent currency value in the U.S. The international price fixation is not merely an exercise in demand or supply or cost plus profit, as it may be done in domestic market. It has to comprehensively understand multi-country market potentials, sales potentials, multi-country sales forecasts and cost analyses thereof. A firm also has to understand the impact of international price elasticity, competitive pulls and pressures, from international competition and also the issues concerning trade agreements, tariff duties, customs, currency ups and downs, economy inflationary pressures and the perceptual impact of pricing, etc. The cultural context on international pricing will have to be researched. Products considered value for money in one culture may either be too expensive or useless for the price fixed in another culture, as their uses could differ. Similarly, in Western culture, profit earning is not seen to be bad. In fact, high pricing may result in a positive perception for the product, whereas in emerging markets and many Islamic countries, excess profitability may not be appreciated and may mean cheating the customer. Maximum retail pricing may vary from culture to culture, and country to country. Bata shoes has, to date, been pricing its shoes in odd numbers, with prices ending with a figure of 9 or 99 and not making it to the next digit, as that tends to increase the unit sales. In the Chinese-dominated cultures and countries, the number 8 has a significant meaning, as its local pronunciation tallies with wealth (8). Researchers will have to analyse and evaluate the impact of conveying of product through multiple channels on the international pricing, as commissions will have to be paid at each level even though they may take into account only the fair amount being paid, which will add to the price for the end consumer.

CONDUCTING FORMAL MARKETING RESEARCH The Process of International Research The international marketing research process is not different from the local domestic research that the firm may have conducted to understand its customers, their biases and favourites, their needs, aspirations and desires. Information about customers remains the most critical factor in both the research processes. However, it is not so easy to conduct this research at the international level in spite of continuous flow of an

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in-house marketing information system set up by the firm. This information system may act as an additional tool but the firm will have to employ an altogether different process of marketing research to address the problems pertaining to a particular project, objective or assignment at the international level. It will require systematic gathering, collection and analyses of data, either through the in-house marketing information system or an outside agency specialising in international marketing research will have to be assigned the task of conducting the necessary process on behalf of the organisation in various countries earmarked for the research project. In both the situations, the steps followed are generally the same as discussed below. (a) (b) (c) (d) (e)

Identifying and defining the research problem Developing and formulating a research plan Determining information extent and need Collecting data Analysing data and interpreting results

(a) Identifying and Defining the Research Problem International marketing research, like any other research, starts off by identifying the actual problems to be addressed in the entire process. Once the problem has been identified and clearly defined, it becomes easy to reach a consensus on the objective of the research. Since it may involve resources and personnel on a very large scale, the researcher will have to evolve a system that could differentiate the symptoms from the actual problem. Just as in the human body a doctor has to diagnose the root cause of fever, because fever may not be the actual disease, the market researcher should isolate and identify the root cause from the actual problem. 1. Exploratory Research For this, the market researcher may have to get into exploratory research that can provide the relevant dimensions of the actual problem. It may also suggest the information and tools that may be required to solve this problem. For example, while conducting an exploratory research into the sales drop of large sedan cars in a particular market, the research concluded that it is not the car that created the problem but the non-availability of enough parking space in people’s houses that actually necessitated their buying smaller vehicles. Thus, many times, exploratory research may present another problem to be identified and investigated. 2. Descriptive Research This may be needed to describe a situation and get the hypothesis proposed by exploratory research. The descriptive research will have to include observational and statistical techniques to not only generate quantifiable data but also to establish in detail the problem situation. 3. Causative Research As the name suggests, such a research is undertaken to establish the cause and effect relationship between independent and dependent variables. Here, research examines how a change introduced in one variable can or will impact the other variable(s) or the overall plan. For example, how Maruti’s offer of attaching free incentives to their car price, in terms of a free insurance policy or free air ticket for a trip abroad, etc. will affect Maruti’s sales to England and other European countries. Such an analysis and research for demand projection is causative research. Once the firm’s research managers have been able to identify the problem, it is essential that an accurate and to-the-point definition of the problem is established.

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(b) Developing and Formulating a Research Plan Before starting, the international marketing firm’s research team will have to work out a blueprint for the research that will identify the budgetary provisions, requirements, information sources and their cost to the organisation in terms of preparing data collection instruments, reaching those instruments to the protagonists, survey methods and personnel involvement and analysis systems to be adopted. The time period for each activity will have to be spelt out to obtain best benefits for the costs involved. Thus, while formulating a research plan, the firm must have answers to the following problems: 1. How can the firm benefit in value (dollar/rupee terms) by collecting this information and interpretation? 2. How much will this information cost in terms of dollars/ rupees? 3. How much will it cost the organisation in dollar /rupee terms in the long run if this data is not collected? The international marketing research plan will also specify whether the firm will have to go into the direct data collection exercise. Or, if there will be enough data available through the in-house information system, or through an earlier research carried out by other agencies for similar problems. Figure 5.1 presents a graphic description of the steps involved in international marketing research process.

(c) Determining Information Extent and Need After defining the research problem, the next step is to determine how much information would suffice to reach some conclusive evidence to solve the problem. The cost of research being quite high, the extent of information gathered must remain within the predetermined limits of time, universe and geographical boundaries. For example, while conducting research, a major midsize car manufacturing company will have to determine whether it needs to survey the entire population of the country in which the research project is on or will it suffice to conduct a survey in one particular region. It will have to specify again whether all population members of the region will be covered or only people falling within certain age groups, income categories and professions will be the target universe. The researcher will have to devise a conscious strategy that can ensure that the self-reference criterion is not allowed to colour the research process or the findings. It has been often observed that self-culture, values, customs norms and behaviour always get into the researcher’s observation and they eventually creep into the final analysis also. As far as possible, home country norms, values, beliefs and cultural variants should be analysed and, if it is felt that their influence will alter the meaning and definition of the entire research process, they should be kept in mind.

(d) Collecting Data Once the extent and need of the research problem has been determined, after identification and definition, the research team will be in a position to pinpoint the source of information from the necessary data can be collected. Usually, the first step is to look for the data within the firm’s own network of information, which could be the firm’s own offices, sales team and associates. This is known as internal secondary data. In order to widen its field of knowledge for better analyses of problem, the firm will still have to look at the data collected by other agencies. This data will be called external secondary data. The firm’s objective and problem get better defined and identified after the market research team has analysed the secondary data. This data will clearly indicate whether further research is required and if primary data should be collected through personal interviews and surveys, which amount to primary research.

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International Marketing International Marketing Objective

Identify and Define Research Problem

Deciding Methodology to be Involved

Developing and Formulating Research Plan

Determine Information Extent and Need Secondary Collecting Data Primary Analysis of Data

Evaluation/interpretation

Presentation

Fig. 5.1

International Marketing Research Process

(e) Analysing and Interpreting Results Collecting, analysing and interpreting data is the final stage of international marketing research, as the teams, having understood the requirements and necessary inter-culture adjustments of a multi-country research project, are now ready to gather the primary data. It will, though, cost a lot of time, money and effort to the firm to undertake such a massive activity. At this stage too, research teams will face and may have to overcome various hurdles, as getting answers from first-time respondents and non-responsive respondents will take plenty of cajoling and inspirational tricks on the surveyors’ part to get the necessary attention from people. The recruitment and training of field surveyors is also a daunting task. The research team will have to ensure that the field staff itself has understood the spirit of each question and keeps the answers free from personal bias. It becomes all the more difficult if the field surveyors are not familiar with the local culture and language. The necessary courtesy, as required and dictated by the local culture, will definitely get the surveyor access to the inner circles and will help in completing the assignment. The qualitative aspect of fieldwork should not be sacrificed for the sake of quantitative completion of targets assigned to the field staff. A lowly paid field staff may not actually undertake the entire survey and will get into short cuts to fill in the questionnaires. Such allowances will have to be looked into by the international marketing manager before analysing the data collected. A proper pre-recruitment background of having conducted such surveys, further training about the special needs of the current project and adequate supervision of the field staff will keep the survey free from interview-related bias and cultural misunderstandings.

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Secondary Data Secondary data is the data that has been collected by someone else for a similar or dissimilar situation or problem at an earlier time, not for the problem at hand. In fact, today, knowledge banks all over the world, whether on the Net or within the confines of government libraries, databanks, online professional, and userprovided keyword access agencies, commerce and trade-related development agencies, etc., are replete with the secondary data. However, whether the data available is relevant to the current research problem will have to be decided by the research firm. In the developing and emerging economies of the world, knowledge management has become the keyword and most commercial organisations, embassies, trade representatives, chambers of commerce, ministries of industry and trade provide vast sources of data. In the emerging economies, however, this data may not be classified properly and the verification of accuracy may call for another litmus test for the international marketing research. In the developed countries, however, comprehensive statistics are available. For example, in United States, the National Trade Data Bank, maintained by the U.S. Department of Commerce, offers a wealth of data on their website, http://www.stat-usa-gov concerning export opportunities and marketing guidelines. Similarly, organisations like the United States Department of Commerce can help researchers by providing countryspecific reports. Japan and many other countries like the United Kingdom, France and Germany too have a vast source of data collected through research conducted by agencies deployed by their governments. The top 10 firms engaged in global marketing, advertising and opinion research are from these European countries. By charging a subscription fee, these agencies offer huge resources of secondary data. Many publications, magazines and journals related to international industry, trade and commerce also carry out their own surveys in countries across the world, and a wealth of knowledge can be accessed through these publications. Again, international agencies like the World Bank, The Organization For Economic Cooperation And Development (OECD), The International Monetary Fund (IMF) and many arms of the United Nations actively gather information on economic, social and demographical development in their member countries. Published reports for the last many years are available from these agencies. Trends can be ascertained on international economic, social and political situations anywhere in the world over by studying these reports.

Internal Secondary Data/External Secondary Data Secondary data can be further classified into two categories. The data available from (within) the firm’s own sources is known as internal secondary data and when the researcher has to tap the sources outside the firm, whether on the Internet, in public libraries, in magazines, journals, or even get this from marketing research agencies, it is known as external secondary data. Internal secondary data will not relate to the same problem but, many times, the data that has been collected by another unit of the firm can be used to solve a similar problem. For example, a washing machine manufacturer had originally conducted a survey for washing machine users or prospects on the demographical set up and income and living patterns to understand the purchasing capacity and spending habits. When the same firm introduced refrigerators a few years later in Saudi Arabia, it did not have to go through a fresh survey because not much was likely to have changed in the respondents’ living standards a couple of years later. However, validation of secondary data is absolutely essential, even if it is used by the same firm.

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External Secondary Data Sources The sources for secondary data vary from the independent research agencies to government information arms, to the information sources provided by international development agencies and associations. A few examples of external data sources are listed below. International Marketing Research Firms AC Nielson Corporation, Cognizant Corp., The Cantar Group Limited U.K., Information Resource Incorp U.S., GFK AG. Germany, The Arbitration Company U.S., MRB-India etc. International Agencies Data Management United Nations, OECD Trade Stastics, United Nations Statistics Year Book, United Nations Monthly Bulletin of Statistics, International Monetary Fund, World Bank Project Reports, Internatiobnal Banks and their Country Specific Project Reports. Country Related Specific Data Management Embassies, high commissions and their trade representatives, trade journals of high commissions, associations of trade and industries, directorates and ministries of trade, commerce and exports. Publications Publications on various industries by government sources and industry associations, publications on taxations, fiscal levies, publications on economic developments, trade journals, national and international newspapers’ archives, almanacs, statistical year books, encyclopaedias, industry chambers of commerce, trade association press bulletins, the Cambridge information group’s findex containing 90 industries and 13,000 reports. The economic intelligence units, EIU country data in print and online, global market information database can also be purchased online. It contains 330 product consumer studies in 49 countries.

Challenges to Management of Secondary Data A firm may not be able to get comprehensive secondary data to meet all the necessary information. In fact, many published reports will have been written by people who are simply compiling demographic and other details for commercial and economic profits. Their presentation and cataloguing will require more work by the research team, which has to isolate and pinpoint the required information from mountains of unnecessary data. This may lead to uncalled for expense and time for sifting the exact information. The data collected presents the following shortcomings to the international marketing researchers: Availability It has already been discussed that all countries may not have the exact data readily available. The systems adopted for data collection may not be scientific or logical across the board. In the absence of government rules and regulations for registration of births and deaths in the developing and underdeveloped countries, the population census itself may not be correct. It is often seen that in countries like India, Pakistan, Bangladesh and many other African countries, the actual date of birth, etc., are not known and that births are simply registered by approximate details given by elders. The census is conducted every ten years, which, again, is too long a gap to get the true picture. The tendency to avoid sales tax, excise and other local levies, also leads to the suppression of useful data. Unaccounted wealth does not give the accurate picture of a country’s gross national product and gross domestic product. In India, the Right to Information Act has been legislated in 2005 but in many other economies in underdeveloped countries, no information is provided by the government agencies on the methods adopted, sample selection and systems followed for processing of data.

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Accuracy and Reliability The international market research team may not be in a position to reach confident decisions unless it is sure of the accuracy of the data it has collected. The accuracy and the reliability will depend upon the seriousness of the agency that had collected this secondary data in the first place. Political exigencies, international aid considerations and to justify the availability of funds from the government revenue sources, many agencies tend to present either an exaggerated picture or a dismal situation, depending on the circumstances. Poor economies will often exaggerate poverty and deprivation, whereas developing economies may exaggerate their growth and the gross domestic product. Dictators and one-party nations will inflate their success stories and growth rates. Even in democratic countries, the governments in power will present a picture of better economy, better harvest, better industrial products and lower price increase index, etc., if the elections are close at hand. The success of Indian Five Years Plans started showing results in the fag end of last decade. The literacy rates projected by many countries are quite unreliable. In fact, the data collected directly by the government agencies and by the agencies funded by the governments should be carefully examined, allowing for margins and space for wilful, deliberate manipulations and unintentional errors. Comparability of Secondary Data Each country may adopt different methodologies to collect and tabulate data in the absence of any standardised global yardstick. The definition of standards of living may vary from country to country. What could be an upper income group in India could become middle or lower middle-income group in a developed country like United States. Again, a below-the-poverty line yardstick of United States could actually become lower middle class in India. Hence, it is quite difficult to compare the data collected by different countries. The nomenclature and the terminology may differ from country to country. The cultural influences, the different uses to which products can be put and the expectations, desires and dreams of each nation make it difficult to make comparisons amongst various countries and utilise the secondary data collected. Validation of Secondary Data Looking into the vast difference in three research studies undertaken by different identities, it is essential to scrutinise secondary data before interpretation because otherwise the entire time, cost and effort spent will have been wasted.

Source:

International marketing researchers will have to validate the data through the following checklist: 1. What was the original problem/objective for which this data was collected? 2. What were the methods used/yardsticks fixed for collecting and collating this data? Consistency of methods. 3. Did this data form part of the actual research conducted or is it merely based on survey reports to support a decision already taken? 4. The timing of the data. 5. The environmental, economic, political and fiscal conditions prevailing when this data was collected. 6. Is it internal data or did an external agency conduct it?

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7. Was any other agency or entity affected by the information contained in the data? 8. How do the data and findings compare with the earlier studies conducted on the basis of natural yardsticks of change? What results can be expected now? What and how much is the variation?

Primary Data International firms do not get into research so easily, unless they find enough secondary data to reach conclusive evidence to the problem. Primary data collection exercise is costly, time-consuming and may not always prove cost beneficial. But whenever and wherever international firms get into direct marketing research, they have to collect primary data for a specific project, to be analysed directly by the researcher team, which can then use the findings to address the problem on hand. Thus, primary data pertains to “collecting information for first time for a specific project”. Since such information is being collected for the first time, a cost-benefit analysis must be undertaken simultaneously and after the researcher is convinced of long-term benefits accruing to the firm, the approach to be adopted for primary data collection can be finalised.

Primary Research Approaches An international marketing research firm may either use qualitative research at the primary level or even a quantitative approach can be undertaken to gather data about the research project. Survey research through a questionnaire sent by e-mail, personal interview, telephonic interview or electronic surveillance is conducted by the firm to understand field data, for example analysing market shares, estimating sales potentials, finding impact of marketing and advertising strategies, etc. Similarly, personal interviews with individuals and focus groups are some of the tools that firms use to collect primary qualitative information. Some of the approaches adopted by international marketing researchers to collect primary data to undertake research are discussed here. Focus Groups Large-scale quantitative data involves getting into the research at the field level, spending huge sums of money, time and effort. Many firms prefer to conduct exploratory research with select groups by way of joint interviews, depth interviews and observational enquiry. In the focus group interview method, the interviewer or the moderator conducts loosely structured free flowing open discussion about the problem with a small group of 10 to 12 people. Focus group interviews can bring forth opinions of the target audience on both qualitative and quantitative objectives. Such groups can be forerunners for the later, quantitative and in-depth research to be conducted on a larger scale. Such groups can also be exhorted to voice their thoughts, perceptions and suggestions on product performances and future changes and expectations from the products under research, etc. The members of the group are recruited from predetermined sub-segments of the universe under research, on the basis of the common characteristics decided by the researcher. These could be either from certain geographic region, ethnic background, age factor, income congruity, social similarities, educational and cultural bonding, or ownership of certain products and consumers of services. Electronic surveillance units can be placed in the adjoining room to observe the visible and not visible behaviour patterns to draw conclusions. Although the focus group research is undertaken in domestic market research too, the ability of the moderator in the international and multi-country marketing research becomes crucial in organising and

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handling group activity. Hence, well-trained moderators, who are familiar with the local language, cultural sensitivity and social norms for addressing mixed groups of people are required. They must understand the very fabric of social, cultural, affinity towards individualism, groupism or collectivism. Even the status conscious behaviour of social groups can affect the response of a subject in a group activity and the moderator must be in a position to elicit the true response from the audience and extract the correct meaning and results. For example, being more outgoing and extrovert, people in the West can frankly express their pleasure or displeasure on any issue without any reservations, whereas societies in the East are more conservative, which prevents people from being so open and free. They will be quite hesitant to share their true thoughts. Similarly, it is difficult in purdah-dominated societies of the Middle East, Pakistan, Malaysia and parts of China to obtain any kind of response from the female population, unless the moderator happens to be a woman familiar with their culture. In-depth Interview Researchers organise personal, one on one, and private interviews with the sole object of exploring and discovering consumer attitudes, motives, likes and dislikes more closely. Such an interview is generally handled through unstructured questionnaires. To help the interviewee not feel any kind of pressure or duress, the interview is generally held in a familiar atmosphere. In-depth interviews present challenges similar to the one discussed in group interviews. Cultural habits of shying away from strangers, unknown men not being allowed inside the house to meet women and holding back true feelings pose greater challenges in this kind of research. In such a situation, the interviewer should be from similar culture, preferably someone known to the family or, if a translator is involved, the translator should also be from a similar culture, familiar with the norms observed in the social set up and milieu of the interviewee. Field Survey Research As discussed, field survey research is conducted by contacting the respondent through personal, telephonic, postal or e-mail questionnaires. Such a survey is based on the assumption that the respondents are literate enough to understand the questions posed and will respond. Sometimes such questionnaires or telephonic interviews are accompanied by incentives in order to tempt the respondents to answer each question. Such methods can be used extensively for larger surveys and can be taken across different frontiers, cultures and countries for effective comparisons. Designing a Questionnaire A questionnaire is the prerequisite to gather primary data whether in person, by mail or over the telephone. However, it poses a big challenge to the international marketer to design a questionnaire that could spell out the correct meaning of the question asked across different cultures, countries and personalities and elicit the required response from the people of multi-country origin. This survey has to be compared with the response received from many parts of the globe. Hence, measurement issues need to be addressed in the beginning itself. The market research team will have to predetermine the measurement equivalence, otherwise the results will not be rendered in the true meaning in which the answers to questions were provided by the respondents. Translating Questionnaire The questionnaire prepared by the market research team will be in the language of the home country and will need to be translated to the language of the country in which survey is being conducted. If it is a cross-country survey, further translation may be required into many other languages. Even within the same country, the language and dialect may change like it does in India, where the dialect and pronunciation change every 100 kilometres. Careful translation will save the researcher from many embarrassments later.

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Back Translation and Parallel Translation Back translation is a two-way method in which the translator from the country other than the master questionnaire language will translate it into his language and then, from the translated version, back into the original language. For example, an English version of the document will be translated by a person who knows Hindi for research in India and then a person who is fluent in English and Hindi will translate it back into English. This process is continued till the original version is matched word to word, ironing out any lacunae in translation. In the translation, many multi-lingual persons are used till the exact version is arrived at, which is then vetted by experts for use in the field. Ensuring Scalar Equivalence An international marketer must be aware of the approach different cultures will take to the questions posed. A questionnaire designed to get simple, one-word answers will not help to completely get to the actual response. Similarly, when using scalar questions, a clear set of instructions needs to be appended to the questionnaire to avoid any kind of confusion. The respondents may not to like to answer all the questions if they are asked for their opinion on simple scale with opposite words like good, bad, worst or best. However, if a few more details could be added to the questionnaire, explaining the real meaning of the question asked, it would become easy for the respondent to respond correctly. In a Likert scale questionnaire, a researcher will have to (draw out the comparative scales) adjust the scale to make a cross-country research meaningful. While the westerners may condemn or appreciate anything vociferously, the Asians, on the other hand, tend to take a middle of the road position. While an American may mark 5 or 1 depending on his like or dislike, an Indian or Pakistani would be happy to tick all questions between a scale of 3 or 4. Thus, an experienced researcher must know how to adjust scales and take out the real meaning from the scale. Again, in countries where literacy rates are still very low as compared to developed countries, the questions should not be open-ended. Lenghty questionnaires should also be avoided. In fact, specially designed visual scales, which can, for example, show happiness or displeasure, can be used. FACES SCALE (VISUAL RESEARCH QUESTIONNAIRE) Happy Unhappy Source:

A pretest of the questionniare, on a smaller scale, will help the researchers avoid pitfalls of blunders. A White Goods Manufacturer’s comprehensively explained questionnaire. Translated from English to Urdu, Chinese, French, Japanese, Persian and Hindi. Strongly disagree

Strongly agree

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Source:

Sampling International marketing research conducted in different countries and a multi-cultural universe covers the entire population. Hence, researchers have to draw a sample from a target audience. This drawing of sample or a sub-section from the main population is called sampling. The sample so drawn will be a true representative of the entire population in the absolute sense. Three main issues concerning sampling will have to be decided before starting sampling research. Unit of sample: Who will the researchers survey out of the target population? Size of sample: What shall be the size of the sample, i.e. how many respondents will be included in the sample to be covered? Procedure of Selecting Sample What procedure will be followed to select a sample? The two basic sampling procedures adopted by researchers are known as probability sampling and non-probability sampling. In the former, each group or sub-section is given an equal and fair chance to be included in the sample selected for the survey through random sampling procedures. In non-probability sampling, however, convenience and judgment of the researcher make it unknown to the units of universe if they will be selected. Availability of manpower and requisite budget and mechanical and electronics means to cover the sample units will become the major deciding factors for the selection of samples to be included in the research plan. Sampling will also depend on the extent of survey the research team wants to carry out. If it is a multicountry research, the team may not go all out for covering each country. Rather, a cluster of countries can be put into one group and the team can fix one or two select countries which are homogenised demographically, socially and culturally, and make comparative studies later. For example, in Asia, the team may decide to put India and Sri Lanka in one cluster, whereas Nepal and China can be put in another cluster of sample. Challenges to Sampling Sampling presents similar challenges to the international market researcher team when it takes to the field survey. The first challenge is the lack of basic data for approaching its universe. A basic demographic data, containing lists of people and citizens of a country, residents of select towns, updated telephone directory, address books and mailing lists are not available in a majority of underdeveloped and yet-to-develop countries. Social, economical, cultural and financial data is not maintained in many countries by the authorities. Excepting modern, developed towns, where streets and houses have well-defined numbers, old towns in almost all countries, in South America, Pakistan, India or England, do not carry any city maps, street or house numbers. Postal mails are sent by approximated addresses. However, such handicaps may

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not be noticed in the emerging market of China, where cities are divided into administrative districts, administrative streets and resident committees. The lack of adequate and updated records of census, age break-ups, income divisions, earnings and educational standards make sampling an extremely difficult task in these countries. The lack of basic infrastructure, such as telephones, postal efficiency and transportation, makes sampling a daunting experience for the research team. Even though the language used in two different countries may be the same, different meanings are attached to social family units. While in eastern cultures of Pakistan and India, a family even today means a large unit, consisting of a joint family, extended family and even a retinue of servants, where in western countries like the U.S. and many parts of Europe, a family usually consists of a wife, husband and children. Similarly, while unmarried couples are relatively unknown in the eastern part of the world, such a union in many western countries is a deemed legally valid family unit. Thus, preparing a sampling plan in a multi-country research is a very tough and daunting task for any international research team and requires flexibility in making adjustments as the local cultures, living habits and the localised conditions demand in order to make the best out of the data and sample support available. Contacting Respondents Once the sampling procedure has been finalised, the surveying team has to decide on the vehicle required for contacting the respondents for the research. The respondents selected can be contacted on telephone, through the postal service and in person and the survey can also be organised through the Internet. However, all these methods can change from country to country and no single method will suffice for all countries. Even within the boundaries of a single country, the survey team may have to utilise multiple methods to make sure they reach the required quantity of sample universe to get authentic results. Due to non-availability and inadequate infrastructure in rural and remote areas, telephonic contact is limited in many countries. At the same time, local cultural habits in the use of telephone act as a restrictive force in getting the survey completed. In many Muslim and conservative countries, telephone cannot be used during the day because the ladies of the house may not attend to a call from a stranger. In modern towns like Delhi, New York and Mumbai, again, the telephone may not be of much use during the day if both husband and wife go out to work. Culturally too, many people do not open up on telephones to strangers. Germans refuse to give details to a voice on the other side if they do not know the person fully. In China, too, executives and managers are reluctant to talk and discuss business matters on the telephone and prefer a face-to-face discussion. Cost efficiency of the method and means deployed for data collection play a major part in international marketing surveys. In underdeveloped and yet-to-develop countries, the lack of basic infrastructure, such as transportation, communication, postal network and Internet, make many a proposal of survey prohibitively expensive, urging the surveying to adopt shortcuts to complete the research. In countries like Bangladesh, Nepal, parts of India, Russia, Pakistan, Brazil, Nigeria and many other small countries in Africa, mail never gets delivered on time, making the survey redundant in such circumstances. Contact through Internet Internet today is growing rapidly in almost all parts of the world. It is available to almost 600 to 700 million users across 200 countries of the world, out of which two-thirds users are situated in the United States. In many emerging markets and economies like India and China, and also in developed countries like Japan, Germany, France and other European countries, researchers have used the Internet to find out about the opinion of unknown respondents by conducting opinion surveys, e-mail surveys and panel website surveys.

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E-mail surveys E-mails are sent to unknown addresses with questionnaires, which are to be filled in by the respondents and returned. The challenge here lies in exhorting the addressee to reply to the questionnaire because, usually, millions of e-mails end up as Spam and junk mails. In order to avoid this, the surveyor generally attaches another incentive like the offer of an electronics game or a free CD, to the questionnaire. Website surveys These are undertaken when a website receives hits from unknown visitors. The site navigates the hits to a questionnaire about their identification and also other relevant details required by the surveyor and then lead to the survey page on the website. Only after answering the survey questions will the visitor be allowed access to the information in the website. Many surveyors approach the respondents through a pop-up, which appears as an advertisement snapshot while the respondent is navigating through the website. However, some browsers can block these pop-ups. Panel website surveys are undertaken when the website has its own select group of people as a sample universe, who have been recruited on the basis of an eligibility criteria fixed by either the website or by the requirement given by the surveyor. Such members of the panel receive the questionnaires by e-mail. And, for each questionnaire that they respond to, the members get paid in kind or cash. Consumers’ survey panels have been established all over the world. Challenges to Internet Research Not all samples selected by the research team are connected to the Internet and are, therefore, limiting in its very nature the qualitative representation of the universe. The survey team will not have the first hand knowledge of the sample members that the questionnaires are addressed to. Again, the Internet penetration is still at its infancy in many developing and underdeveloped countries and, with lack of databases in these countries, the research team has to take the help of regular mails to access the identified respondents. Internet access and free availability of servers poses another hazard to such surveys. Thus, to realise the full value of the amount spent, the research team has to rely on a multi-model approach for reaching out to their universe and adopt the system and methods in a multi-mix for an ideal survey.

Providing Decision Support System for International Marketing Research The international marketing environment changes dynamically. A survey undertaken by the firm can get redundant if a decision is delayed and postponed on account of non-availability of a vibrant and quick and responsive decision support system. A decision support system can be defined as the availability of analytical systems and tools to interpret the findings of international marketing research and survey and present solutions thereof. It has also been defined as “a coordinated collection of data, systems, tools and techniques complemented by supporting software and hardware designed for the gathering and interpretation of business and environmental data.”3 The survey findings will have to be coordinated and compared with the home country requirement and also compared with those of other countries. Hence, a system will have to be evolved that can be applied to all fronts, a system that should have the following features and facilities.

Computerisation and Empowerment Through Personal Computers For this massive task, a computerised, online support system will enable the managers to undertake complex and more difficult tasks of comparing and contrasting different economies, situations and projections to reach idealistic solutions in their market research. The spread of telecommunication and mobile telephone networks 3. Refer William R Dillon , Thomas J. Madden, and Neil Firtle, Marketing Research In A Marketing Environment, Irwin, 1953.

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even in the emerging and developing countries help in keeping people empowered even when they are on the move in the field. Hence, a battery of personal computers, laptops and sim cards and wireless cards will enable the system to operate freely.

Proactive and Interactive A computerised system will permit international researchers to remain in touch with the headquarters and generate on-the-spot reports, without having to refer to their offices and programmers each time. They can get even the software amended or altered without getting back to the parent country, which leads to great saving in terms of time and revenue to the international marketing research organisation.

Flexibility A computer will provide access to managers from not only the headquarters, but even managers from the other countries where similar projects are being conducted can access the network, work out required averages, do data sorting, data simulation, data projections and data presentations. It will also provide the necessary flexibility to arrange and store information in paperless offices, as otherwise the task of preparing, storing, sorting and retrieving such huge information on primary and secondary data will necessitate the hiring of complete secretarial services, which will further add to the cost of operations.

Research Orientations The system has to be equipped with software that can diagnose earlier trends, pinpoint deviations from these trends, identify problems and give future analogies and projections.

ASSESSING INTERNATIONAL MARKET SIZE AND SALES POTENTIAL One of the basic tasks of international marketing research is to bring out the answer to the question: “Do we have enough potential for our product or services to enter this country? Will there be enough space to play and make the venture profitable and sustainable for a long-term plan of the firm?” Although fairly accurate details of estimated market sizes for various products are available with the standardised internationals marketing research firms and some government agencies of the developed countries, marketers have to understand the market size by adopting different research methods and surveys because the data is either not available or, if available, it has not been updated in terms of the latest logistics and statistics. In such circumstances, the international marketing managers can employ the following procedures or approaches to guesstimate market sizes and potentials.

Analogy Method This refers to the technique adopted by the research team to project estimated figures for a market on the basis of the assumption that the behaviour, purchase patterns and purchasing capacities for a particular product or service for people at similar levels of economic development and progress in two different countries will eventually work out to be the same and, hence, the sales potentials should also be similar. The market researcher here establishes a relationship between the demand for a particular product by standardising an indicator for both the economies and countries. For example:

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and identify the rate of new adopters in China, which is better developed and where the manufacturing of two wheelers had passed through similar economic activities. Both economies have passed through similar transitions from purely agriculture-based activities to urbanisation of middle-level towns and cities and creation of new employment opportunities in these towns. This will be called country performance analogy. for two different countries by assuming that, since the product development for one particular item is similar in both countries, the ratio of adoption to related product will also be similar. base country the firm will pick up Bangladesh, where it has been marketing its products for many years. The firm has a complete database available on its television as well as DVD sales in that country. The ratio of DVD sales to the sales of televisions, it is assumed, will be similar in both the countries. The demand for Videocon DVD players and the number of Videocon colour TVs in use in Sri Lanka = the demand for Videocon DVD players and the number of Videocon colour TVs in use in Bangladesh. The demand for DVDs can be estimated on the basis of the following equation relationship: Demand for Videocon DVD players in Sri Lanka = Videocon colour TVs in Sri Lanka (Videocon DVD demand in Bangladesh/Videocon colour TV in Bangladesh). By collecting figures from both the countries, the company can work out the actual demand for their products in Sri Lanka. Based on this ratio, an estimate can be arrived at for the DVD demand in Sri Lanka. Thus, estimating the market potential on the basis of the analogy method refers to the use of a single factor index with a correlation value collected from one country and applied to the other target country.

Challenges to Analogy Method However, the researcher has to ensure that: 1. The comparable country has been chosen correctly and adjustments related to cultural disparities, competitive activities in different countries, trade agreements, trade barriers and the cartel against imports have been taken care of. 2. Adjustments and allowances have been made for consumer behavioural differences, perceptions of two far-fetched products, purchase powers and seasonal changes have been taken care of. 3. Technological advancements, innovation stages and consumers’ rate of adoption for new and innovative products will also affect the ultimate sales and potential analysis in a multi-country research project.

Continuity Extrapolation and Time Series Models Future market demand and behaviour are predicted based on the basis of past projections, whereby it is assumed that future demand will be similar to that of the past, barring the impact of more recent developments. This method is also known as Continuity Extrapolation, which attempts to project the last increment of sales changes into the future. This is done either on absolute value basis or on a percentage basis. This method recognises the fact that today’s sales activities will flow into future activities and that last year’s sales have extended into this year’s sales. The method assumes that the influence of the past affects the present and, similarly, the present will have an impact on the future.

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For example, if the demand of midsize cars in Europe had grown by 10 percent last year, the application of continuity extrapolation will assume the growth in demand by 10 percent again this year. Hence, the total potential will read as 110 percent of last year’s demand, though the adjustment of negative or positive factors may alter this. For example, if a competitor has established a new factory in Europe or a new car has been introduced, which will add to the production, that addition will have to be taken into account. The demand projection will now read as 110 percent + addition of the new car. This is, however, a self-limiting approach; it does not take into account various factors that could affect the market and demand sentiments and direction of change.

Time Series Analysis This theory is based on the assumption that, at the international level, each business undergoes different cyclical patterns and trends. These trends could be long run changes (T), cyclical changes (C), seasonal variations (S) and irregular and unexpected factors (I). The time series analysis is based on the assumption that these elements are combined in the following relationship: Demand =T*C*S*I The four basic elements are then projected. This is done by extrapolating the trends with adjustments for cyclical and seasonal factors. The irregular factors are acknowledged but not forecast separately. Most forms of time series analysis use a moving average or exponential smoothing to analyse and project demand and it is best used for long run forecasts.

Econometric Models These use different deterministic factors of the economy that can directly or indirectly have a bearing on the market demand. For example, to predict demand for beer in Netherlands, an international firm had applied autoregressive moving average model.4 The firm had used temperatures, price, consumer expenditures, and company advertising expenditures as variables. However the firm’s analyses pointed out the fact that an expense on advertising may not be able to predict the exact change in demand as each company will be making investments on advertising and it is difficult to isolate the impact of one advertising budget in such a crowded market. Continuity extrapolation, time series and econometric models are possible when past data is readily available, which is rare in most of the developing and underdeveloped countries. Hence, an international marketer will have to make use of a combination of different qualitative as well as quantitative methods to reach a conclusive decision. Some more methods available to international marketers are explained below.

Jury of Expert Opinion This is the simplest and oldest approach to demand forecasting. The basic premise is to appoint a jury, panel or committee of experts on international business from the home country as well as from the country/countries targeted for international marketing. Each member drawn from different streams and countries is asked to submit an estimate of the projected demand, along with a written justification of the assessment submitted. These assessments are then pooled and analysed at a group meeting. The variation is synthesised through 4. Refer Philip Hans Franses, “Primary Demand for Beer in Netherlands: an Application of Aramex Model Specification,” Journal of Marketing Research, May 28, 1991, pp. 240–245.

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the collective judgment of these experts. Such a procedure for forecasting international demand is simple to handle and does not cost organisation too much. The members of the jury panel are aware of the handicaps and advantages of the firm in all countries under discussion; hence, they will not put too many demands on the organisation. Their forecast will definitely keep limitations of their own company in their minds.

Limitations of This Method The reliability of this kind of forecast is limited to the experience of the people involved in international marketing. Their mindset, their apprehensions and expectations will definitely colour the sales or demand forecast. For example, ambitious executives may give the firm going international a very aggressive plan, whereas a conservative executive will tend to undermine the market forces in other countries. In fact, a combination of more than two or three methods will be required for a reliable forecast.

The Delphi Technique This is a modified version of the jury opinion developed by Rand Corporation. Experts from the home country and from other countries, where research and potential assessment has been going on, give their estimates and expert forecasts on market performance. These forecasts are compiled and returned for second and third opinions, till a consensus on demand forecast is reached. Thus, this system sieves and perfects the opinion of the jury members till every one agrees to the same level. The opinion of groups as well as individual does matter in Delphi technique, but they do not exert undue influence in modifying each other’s viewpoint. Such frequent transferring of opinions and experts may involve large expenses. Even logistically, it is not possible to collect experts from all the countries where a firm is operating at one place. Such a massive exercise should be undertaken only when online facilities are available with all experts. Besides, executives who may be busy handling other international assignments may not respond to the organisation’s calls for estimates and this loss of time may negate the very purpose of such an exercise.

Sales Force Forecasts International salespersons know their territory best, more so if the sales force is local staff based in the countries abroad where the firm has its operations. In such a situation, the field staff will be familiar with the local cultural norms, festivals and main buying seasons and off seasons, etc. Besides, they will also be well versed with the trade norms, trade channels, stock levels, purchase patterns and, finally, their moods and priorities. Hence, the members of the sales team are the best judges to forecast the expected sales. If they are expatriates, the firm can make best use of their judgments only after getting them trained in the trade norms, culture and systems of the home country. This demand forecast will also take into account the discussions and plans the force must have worked on with their trade channels. The aggregate of the entire sales force’s forecast for different countries becomes the combined demand forecast for the firm; in addition, the international marketing manager may apply finishing touches to the plans submitted by the salespersons. But the method is fraught with the following deficiency: The salespersons may colour the forecast on account of their moods and highs and lows, that is, if they are elated with the performance of the recent past, their target setting is bound to be overaggressive. But in case they have not been doing well in the recent past, the international marketing manager may have to pull them out of the depressive forecast they have submitted. As such, the salespersons may not understand the intricacies of future events affecting their demand, which could prove faulty and costly for the firm.

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The Actual Buyer Demand Industrial products, service products and products for which demand is based on well-defined derived systems, the buyer’s actual demand can be forecast through their potential purchases. Industrial consumers will always have well-defined and pre-planned demand for industrial consumables, raw materials, and capital goods, as their production plans are set much in advance and they keep their vendors well informed about any change or alteration expected in their production plans. The international sales force should do well to remain in touch with their customer regularly to keep record of their past, current as well as future intentions. Such records will help the firm build up a forecast for their industrial customers.5

Retails Stores Audit and Point of Sales Scan Projections Many international research companies in Europe, the U.S. and in some of the emerging markets, where shopping malls are growing by the day, record sales and movement of goods data from the tapes and scanners attached to the billing counters. Transactions for the day are recorded and analysed for each product. Information can be obtained on the movement of goods, on consumer preferences for size, packing and for many other activities, for example instant reaction at the point-of-purchase discount sale offers, schemes, point-of-purchase display effectiveness. In addition, such scanners are also used to record details of the sales made throughout the week to find out the shares of different brands and, thus, reach a conclusion on the market shares of different companies. Such scanners are not allowed by many stores in order to maintain the privacy of their customers. In such an event, companies like AC Nielsen, Gfk, and a few others have their own customer panels that are issued identity cards, which they have to present when they make their purchases in designated stores, thus enabling the store to record the data of select customers. More and more customers are encouraged to become members of such panels by offering them discounts and points accumulation, etc., which are later redeemed against their future purchases. Home scanners are adapted to record the day’s shopping by a selected panel of customers at their own homes, on the scanners provided by the research firms. Japanese customers are more inclined to swap their purchases against the scanners provided at their homes as they tend to shop all over the town and do not remain restricted to the designated stores. In addition, Japanese stores and shopping malls are reluctant to allow outside firms to set up any information collecting tools in their super markets. Besides, many other electronic and communication devices, such as home scanners, TV viewing people meters and short message services, getting the information attached to the products posted back on the website of the firm, are examples by which the marketing research firms collect data about customers and products for forecasting future product positioning, business strategies, plans and sales forecasts. The international marketing research is undertaken by research teams to identify opportunities in the market place, point out the shortcomings or the scope for improvement in the current product, price, or promotional tools adopted by the firms and their competitors and eventually help the personnel involved in the system to achieve the objectives set up by the corporate team.

MANAGING INTERNATIONAL MARKETING RESEARCH GLOBALLY One of the key tasks of an internationally operative firm that is involved in marketing research is to determine how to control its research operations in order to obtain the desired results from the efforts, time and money 5. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd., pp. 236–237.

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spent. The firm will have to answer the following three essential questions to reach a decision: 1. Who should conduct market research? 2. Can such a massive research operation be conducted with the in-house staff and resources alone or will an international agency be necessary? 3. How should the global marketing research operations be coordinated so that the interests of all groups, i.e. the home country management, the host country requirements and the subsidiary plans are met without clashing or undermining anyone’s authority? Having already discussed the deployment of in-house resources, let us look at the possibility of employing an outside agency to conduct the research on behalf of, or in coordination with, the firm’s staff.

Selecting an International Research Agency International firms may have their own senior executive heading their research department, but they will still prefer employing local host country agencies to help them in their multi-nation operations. This also will ensure an efficient and well-informed system of marketing research as the field personnel, local management staff and the trade personnel are better informed than the managers from the headquarters. The establishment required for conducting research of such a massive size will otherwise mean recruiting permanent staff in each country, which many organisations can ill-afford. Besides the labour laws, etc., make it quite cumbersome to have a temporary staff on the firm’s roll in each country and disband them after the research is over. The selection of the research agency may be left to the discretion of local management or subsidiary, but since the research project involves more than one country, it is generally decided by the headquarters in discussion with the local management of the country. The local agency will only be in a position to take care of local coordination of the research project with other entities, such as government agencies for permissions, etc., as in many countries there has been an increasing control on consumer privacy. Laws are being passed in many countries, protecting consumers from unsolicited calls and e-mails. The Supreme Court in India has passed orders banning unsolicited short services messages and calls on mobile phones of common people. There has been some government action recently in China too against marketing research agencies, those who violated rules. Local agencies will also be helpful in obtaining and tapping multiple sources for secondary data, if required. Besides, the research by outside agents will ensure no personal bias and self-reference criterion are allowed to interpret and implement the findings. The comparison between the findings of an outside agency and that of the firm’s employees will always ultimately tell the firm’s research department whether it is moving in the right direction. Besides, these local agencies will be familiar with the language, nuances, cultural equivalences and cultural norms of maintenance etc., which will means spending less time and money on retraining personnel for conducting research. The firm, however, will have to establish a comprehensive screening and selection procedure to ensure that the research agency is in a position to deliver the required services. The local offices of the firm, the regional authority and the director of research at the headquarters will have to pay personal attention to day-to-day coordination between different agencies. The headquarters will have to establish time, procedure, reporting relationship and hierarchy within the organisation and outside. The budget for research will have taken care of the agency’s professional fee and,

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as such, the cost factor at this stage should not become a constraint unless the agency charges are way beyond the earlier appropriations. The following is a proposed route chart that an international firm can adopt for reaching the ultimate consumer, for whom the entire effort of research is being directed: MANAGING INTERNATIONAL RESEARCH – ROUTE CHART home country agency consumers abroad home country agency host country agency consumer. host country agency consumer. foreign subsidiary host country agency consumer. host country agency consumer. Adapted from:

The multiple options research route chart above offers a multiple options to the international firm whose managers will have to pick one option. The distance between the firm’s headquarters and the research project country has some role to play in this. In case the two countries are close and the firm can manage cultural barriers and the language parlance, the shortest route of option A seems to be the best possibility. In the event of completely unknown territories, the firm will find it better to follow either route C or D, to ensure that the language, translation, retranslation and the cultural nuances are not only presented in the right spirit to the consumer but the analysis is also carried out by the researchers in the correct spirit and findings presented to the decision makers correctly.

Points to Remember Mergers: The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. This decision is usually mutual between both firms. It is a financial tool that is used for enhancing long-term profitability by expanding operations. Diversifications: It is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry which the business is already in. At the corporate level, it is generally entering a promising business outside the scope of the existing business unit. Logistics: The process of procurement and physical transmission of material through the supply chain, from suppliers to customers. Incoterms: An abbreviation of “International Commercial Terms” published and copyrighted by the International Chamber of Commerce (ICC) and widely used in international commercial transactions. Thirteen terms of sale accepted worldwide are used to divide transaction costs and responsibilities between the buyer and the seller and reflect the state-of-the-art transportation practices. Inflationary pressure: A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money caused by an increase in available currency and credit beyond the

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proportion of available goods and services. The prices of things in general increase at a higher rate than wages, thus causing a financial strain. Almanacs: A usually annual reference book composed of various lists, tables, and often brief articles relating to a particular field or many general fields.

Objective Type Questions 1. Which of the following are the major objectives of international marketing research? (a) Products (b) Pricing (c) Distribution (d) Promotion (e) All of these 2. Which one of the following is not a kind of international marketing related research format? (a) Exploratory research (b) Descriptive research (c) Causative research (d) Clinical research 3. Point the odd one out in the statement “Secondary data is a data that has been collected by”: (a) Some one else for similar or dissimilar situation (b) By research agencies for problem at earlier times (c) For the firm for current problem at hand (d) Government agencies for publication (e) Databanks 4. Which of the following will not form part of primary research data? (a) Focus groups (b) In-depth interview (c) Field survey research (d) Questionnaire (e) Prepublished demographic data 5. The two basic sampling procedures adopted by the researchers generally are known as: (a) Probability sampling and non-probability sampling (b) Exploratory sampling (c) Convenience (d) Judgment sampling (e) Deliberate sampling 6. In which system of assessing International Market Size and Sales Potentials, International research companies in Europe and U.S. record sales and movement of goods data from the tapes and scanners attached to the billing counters? (a) Retail stores audit and point of sales scan projections (b) Sales force forecasts (c) The delphi technique (d) Jury of expert opinion (e) Time series analysis 7. Which method of sales forecast is also known as “Continuity Extrapolation” that attempts to project the last increment of sales changes into the future? (a) Time series models (b) Jury of expert opinion (c) Analogy method (d) Sales force forecasts (e) The actual buyer demand

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8. Which one of these is a modified version of jury opinion developed by Rand Corporation? (a) The delphi technique (b) Time series models (c) Analogy method (d) Sales force forecasts (e) The actual buyer demand 9. State true or false: (a) The firm’s research objective and problem get better defined and identified after the market researcher has analysed the secondary data. (b) Each country may adopt different methodology to collect and tabulate the data in the absence of any standardized global yardstick established. (c) Primary data pertains to “collecting information for first time for a specific project”. (d) International marketing research conducted in different countries and multi-cultural universe poses a major task to cover the entire population. Hence the researcher has to draw a sample from the target audience. 10. Fill in the blanks: is the prerequisite to gather primary data whether in person, by mail, or even (a) A by telephone. (b) is a two-way method in which the translator from the country other than the master questionnaire language will translate it into his language then from the translated version back into the original language. (c) The drawing of sample or a sub section from the main population is called . (d) is a method by which the interviewer or the moderator conducts loosely structured free flowing open discussion about the problem, with the small group of 10 to 12 people.

Review Questions 1. 2. 3. 4. 5. 6. 7. 8.

Define international marketing research. What are the major objectives of international marketing research? Define secondary data. How will you validate secondary research data? Outline the basic steps of international marketing research process for an international project. What do you understand by the term ‘questionnaire’? What constraints will you come across while preparing a questionnaire for multi-country research? Define back translation and parallel translation with the help of examples. Explain sampling in international marketing research. What do you understand by the term ‘scalar equivalence’? Explain it with the help of examples from international marketing research process. What is international sales forecast? Explain any two methods that an international firm can employ to forecast sales.

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Project Assignment 1. A US-based software firm is looking at options for expanding its operations in Asia. Prepare a list of factors on which you would evaluate various countries in Asia and try to suggest the most suitable locations.

Suggested Readings Adler Lee, “Managing Marketing Research in Diversified Multinational Corporation”, in Edward M. Maze, (Ed.), Marketing In Turbulent Times And Marketing: The Challenges And Opportunities, Combined Proceedings, Chicago: American Marketing Association, 1975, pp. 305–308. Czinkota, M.R. and I.A., “Marketing Research for Your Export Operations”, International Trade Forum, 3, 1994, pp. 22–33. Cateora, Graham, International Marketing, Cultural Barriers, Tata McGraw-Hill, p. 234. Douglas, Susan P., C. Samuel Craig, and Warren J. Keegan. “Approaches to Assessing International Marketing Opportunities For Small And Medium Sized Companies”, Columbia Journal of World Business (Fall 1982), pp. 2–30. International Marketing, Cateora Graham, Cultural Barriers, Tata McGraw-Hill, p. 234. Keegan, Warren J. “Scanning in International Business Environment: A Study of International Acquisition Process”, Doctoral Dissertation, Harvard Business School, 1967. Kapoor, Ramneek, Planning For Future, Sales Forecast, Fundamentals of Sales Management, Macmillan India, pp. 230–238. Mullen, Michael R., “Diagnosing Measurement Equivalence In Cross National Research”, Journal of International Business Studies, 26, Third Qr. 1995, pp. 573-596. Stanat, Ruth, “Tracking Your Global Competition”, Competitive Intelligence Review, Spring, 1991, pp. 3–5. Sharer, Kevin, “Top Management’s Intelligence Needs, An Executives View of Competitive Intelligence”, Competitive Intelligence Review, Spring 1991, pp. 3–5. Steenkamp, Jan Benedict E.M., “Assessing Measurement Invariance in Cross National Consumer Research”, Journal of Consumer Research, vol. 25, No. 1, 1998, pp. 78–91.

Useful Weblinks http://www.newsweekinternational.com www.stat-usa-gov www.economist.com www. wsj.com

Case International Marketing Research at Ferrero SpA, Italian Firm International marketing research is very important for any entity (physical or legal) when a firm is contemplating to enter a new country or market. The success of services or goods offered

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depends on political, economic, technological and social “literacy” of the given entity about the segment, niche or market. That is why it has become a worldwide practice to use the tools of international marketing research such as conducting researches, both primary and secondary, through questionnaires and focus groups. Market research helps an entity to make the right decision (to expand new market or to stay domestically) and then to build up an appropriate business plan with the adaptation of product or service towards local preferences and tastes and the right promotion campaign. Italian private company Ferrero SpA is a known brand for Chocolates. It is listed among the five biggest confectionary manufacturers all over the world. The primary market research of Japanese people was carried out. The investigation is if it is still bearing the status of family private business. But one can find a huge range of goods suggested by this company across Europe, North and South America and Asia. It has boosted the 4.5 billion euros revenue per year. It has succeded with brands such as Nutella, Monch Cheri, Tic Tac, Kinder Überraschung (surprise for children) and Ferrero Rocher in different markets and the main principal of its business is “secret of recipe”. It produces high quality chocolate in 30 countries all over the world. Focusing on its behaviour during entering such markets like Germany and North America. The Italian pastry manufacturer Pietro Ferrero decided to open a small shop in Alba, Italy because there was small supply of chocolate and candy production during the after war starved period. And he played on the mass production to launch in the market hazelnut butter. Later, it was known under Nutella brand. So, the first move of Ferrero SpA’s international expansion was in Germany. They established a subsidiary and plant near Frankfurt and than Nutella were even consumed by school students every day after lessons. It became a habit. While entering North American market, they decided not to use Nutella as leading expanding brand. They discovered mint little candies and gave the name – Tic Tac. It had considerable success because of right by chosen advertisement with the expression “Put a Tic Tac in your mouth and get a BANG out of life.” To generate a big revenue every year can only be obtained by 68 years of experienced skill. Ferrero SpA was established in 1942. Actually, the presence of this leading confectionery company in Japan is quite bounded with premium brands such as Monch Cheri and Ferrero Rocher. And it imports only 15 000 kg of its product per year. The product portfolio of the company and its opportunities to attract and satisfy clients in Europe, America and Asia are known. Actually, we want to pay more attention to its brand Kinder Überraschung which is supposed to be consumed by children. Because it has its unique image, quality of milk chocolate, the recipe has not been copied and has a very strong brand image all over above mentioned markets. So, does it have the same opportunities in Japan? A PEST analysis for this company is conducted: 1. Political After the closing policy of Japan until early years of 90s, the Japanese market has become very interesting niche for all leading foreign manufacturers among the Asian market. And, as a result, the duty tariff of imported chocolate was lowered from 20% to 10% in 1988. Nowadays, the entrance to this market is available but quite complicated because of government regulations and laws. All candy or chocolate imports require certification from Japanese

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Ministry of Health and Welfare. Approval takes about three months. Of course candies containing natural ingredients are the most easily certified. Products with additives and preservatives require additional testing. When submitting an ingredient list, the manufacturing process description must also be included. For chocolate, additions to the natural product, such as colour, must be tested as well. Candied fruits, such as maraschino cherries, must be tested for sodium benzoate and benzoic acid, since they are not allowed. The origin and type of all spices, flavorings and herbs must also be specified. Testing of food and agricultural products may take two months. The certificate is issued, for six months when a product passes, is good. After the six-month period, the product must be re-tested. The average cost of a test is $250. The chosen brand of Ferrero SpA Kinder Überraschungs accreditation is one of the hardest step, because one type of this very product contains little toy inside the chocolate egg. However, the chocolate is natural, and the only additional ingredient is milk. That is why we suggest starting expansion of Japanese children niche market with the Kinder Überraschung bars. The bar has an exterior coating of milk chocolate and frozen pure milk inside. It comes in two sizes – a big box of 30 bars and a small box of 8 bars. Possibility of successful listing and accreditation is guaranteed. 2. Economical issue The Japanese chocolate market is stable and meets growth every year about 3 percent. It brings about $4,066 million and presents only 13% of Japanese confectionary market. Intense competition also comes from the country’s five largest candy companies—Lotte, Meiji, Morinaga, Ezaki Glico and Fujiya--which command 80 percent of the total market. Besides that, there is high competition among companies—exporters like Belgium brand Godiva, which represents high quality chocolate and American brand Hershey, which is consumed by low and medium class. As is known, Ferrero SpA has its own niche in Japanese market with such known brands like Ferrero Rocher and Monch Cheri that are supposed to be consumed by high class. But, still, they have opportunity to increase their presence in other niches in Japan and the suggestion is to expand Kinder Überraschung into Japanese children market because of the uniqueness of the recipe and design. Also, the success of the expansion depends on the right chosen distributor. The main retailers of chocolates and candies in Japan are convenience stores, supermarkets and train or subway station stores, called kiosk shops. The selection of the distributor depends on the target group, for example, supermarkets are more preferable by medium class and kiosk subway shops by low class. Kinder Überraschungs target group is children from 4 to 18 years old, so the best distributor for it is convenience stores and supermarkets that are available to everyone. But there is a high risk of competition for a shelf space in the stores, that is why an appropriate and successful selection of the distributor is very important in our case. The exporters who seek to operate independently may meet many difficulties and add more variable costs to their product that is unlikable because any chocolate products which cost higher than 200 yen shrink. 3. Social impact on the result of expanding is very considerable in any country. Chocolate consumption level in Japan is low as compared to the European countries. First of all, as chocolate is not the traditional food, main ingredients for production are imported by local manufacturers and the cost is pretty high for snack and pure chocolate. This is the main problem for chocolate

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market growth. But the Japanese have a tradition to buy chocolate as a present in February (St. Valentine’s Day), March (White Day) and in December (Christmas). For example, Japanese chocolate companies make about 13 percent of their annual sales during the first two weeks of February. And also, there is a trend to buy and consume healthy chocolate that helps to stop smoking, to have fresh breath and lose weight. The candies they sell fall into the categories of health/nutritional (100-percent natural candies), functional (throat, stop-smoking, diet, fashion gourmet, upscale) and traditional (traditionally popular candy types). Here Kinder Überraschung can be classified as healthy and tasty children chocolate with Calcium (Ca), which helps them to grow. 4. Technological issue is important in the area of packaging and production. The Japanese perception of right package is the cardboard boxes with the foil inner wrappers. And half of the Japanese chocolate goods are packed in this style because the packing technology is informally standardised. So, there is necessity of package adaptation for any imported chocolate. However, Kinder Überraschung has already a cardboard box and an inner foil wrapper. Primary research has been conducted with the questionnaire of 10 questions. For convenience to the Japanese, it is in the Japanese language. Only 13 people have given responses to it within 2 weeks. The conclusion, therefore, is that Japanese parents want their children to be happy, but the question that arises – Does children’s happiness depend on the chocolate? The consumption of chocolate is one time per week on an average, so, as was discussed earlier, chocolate is not the main food in Japan. And almost half of the respondents can imagine their life without chocolate. Most of them like pure chocolate and Kinder Überraschung is milky. The price that fits Japanese customers should be less than 500 yen. And most of them get news about new launched chocolate products from friends and magazines/journals. Most of them are open for new investigations and testing new product and they do not show great loyalty for a single chocolate manufacturer. And even if they will like Kinder Überraschung, they would not be able to buy it again.

Discussion Questions 1. According to the secondary and primary research, do you think that the launching of new product Kinder Überraschung by Italian company Ferrero SpA may fail? 2. Discuss the characteristic features of Japanese market with reference to: (a) Demand for chocolate in Japan (b) There are barriers to entry like high competition (c) Barriers to entry due to government regulations (d) Social perception of chocolate.

References http://www.allbusiness.com/agriculture-forestry-fishing-hunting/367061-1. html http://servelle.net/japan/Foreign%20Chocolate%20Market%20Overview%20in%20Japan.pdf http://en.wikipedia.org/wiki/Kinder_Chocolate http://www.fundinguniverse.com/company-histories/Ferrero-SpA-Company-History.html http://www.surveymonkey.com/MyAccount_Login.aspx

6

CULTURAL FACTORS AND ENVIRONMENT

Learning Objectives After reading this chapter, you will understand: What culture is and how it affects the international marketing environment around the globe What cultural adaptation is and how the international marketer effects a cultural adaptation What globalisation of cultures is and how an international marketer can bring about a change in his strategies to suit the global culture The role religion plays in formation of culture and how it affects international marketing Cultural variance in terms of different value norms and dimensions and how a marketer will adapt to these variations.

CULTURAL DIFFERENCES? DO THEY REALLY EXIST? of a trade delegation. He was there to seek some technical assistance in the area of agricultural labour interpreters explained that a gentleman will pour the limonad (type of juice) for the ladies and show other courtesies. lovely wife out to dinner. At the end of a wonderful meal, the lady asked if he would like a banana. He politely declined and thanked her, and explained he was most with the meal. But the whole while his mind was racing: “What do I do? Do I offer her a banana even though they are as close to her as they are to me? What is the “Would you

he picked the banana the lady had pointed at and peeled it half way and handed it to her. Smiles in his hosts’ faces told him he had done the right thing. After this experience he spent much time letting the trip, he was politely disabused of his notion.

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a lady, it means he has a romantic telling everyone about this tidbit of cultural understanding.

INTRODUCTION The world economy is in the middle of globalisation. For the last one decade or so, each country has been opening its doors and welcoming foreign multinationals and corporate organisations from developed countries and emerging economies to set up bases. At the same time, they want manufacturing and trading corporations and business firms from their own countries to move out and spread around the world, whether it is through mega mergers, franchising, setting their own subsidiaries or just about getting a foothold through trading itself. China’s Huanei (through telecommunications equipment), American Wal-Mart (through mega malls), India’s Tata Sons (through tea and steel) and India’s Infosys (through IT and business outsourcing) are entering hitherto unknown markets of the countries around the world. Russian steel giant Evraz bought over Oregon Steel Mills in the United States. The largest nickel producer from Russia wants to buy the nickel division of OM group of Cleveland Ohio. Similarly, the Japanese are also not far behind in making their forays into India, Vietnam and many other parts of the world. This kind of internationalisation had been the mainstay of GE, PEPSI, COCA COLA, IBM, PROCTOR AND GAMBLE, KFC, MICROSOFT and a host of other multinationals from Japan, such as PANASONIC, SUZUKI, HONDA, etc. Besides skill and management techniques, these companies will require cultural sensitivity towards the countries they are entering, in order to build their brands and gain acceptance in these countries. If ignored, cultural sensitivity can result in the kind of disaster that Proctor and Gamble faced when the company first ventured out into the Japanese market in 1973. The Japanese consumers had been bombarded with American products, American way of selling, American way of managing and American strategies by P&G with scant regard to local needs, local culture, local social norms and local living habits, This resulted in Proctor and Gamble suffering huge losses till 1987, until it eventually understood the local culture and started playing the marketing game the same way as the Japanese do. Japan soon became the second largest foreign market for P&G. In the same way, P&G’s success in China can be attributed to the fact that the expatriate Chinese in U.S. are not different from their counterparts back home. P&G was able to understand the Chinese culture from the mini China towns established in United States. These firms gain knowledge about the different cultural values of each country they are getting into, understand the importance attached to smaller nuances and then work out their finer marketing strategies to succeed. This chapter discusses how culture, thus, plays a large and very important role in marketing. In trying to understand the needs of consumers from different countries, international marketers will have to study consumers not only through their geographical and historical background but also through their cultural background, to understand what is acceptable in their environment. They will have to understand what colours, symbols, letters, language, signs, photographs, scenes, backgrounds, religious norms and social customs will be acceptable to these international clients because in international markets, no two cultures from two adjoining and adjacent countries could be similar. In countries like India, where dialect and dress codes change from one state to another, a marketer may have to understand the fabric of cultures within a culture to get a better understanding.

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In this chapter, we will try to understand what culture is, what makes culture and focus on different cultural influences that are exerted on consumer behaviour and on a marketing firm’s international ambitions. We will study how strong individual characters are formed due to cultural impacts in different nations and as marketers, how strategies can be altered to address these cultural differences.

DEFINING CULTURE Culture is the way people lead their lives. Just as fish cannot live without water, a man without culture will feel suffocated. It is the environment in which human beings breathe familiar smells from their childhood, listen to old lullabies from their grandparents and sing the same songs when they put their own children to sleep. Culture pervades a man’s life when he adopts a familiar way of eating his daily bread. Indians eat their food with their hands and some of them may lick their fingers too, whereas the Chinese use chopsticks to eat noodles. An Englishman, on the other hand, may scoff at the idea of using hands for putting morsels into his mouth. He may not relish his food until a fork and knife are given to him. All this forms part of culture, which pervades all forms of living standards. It can be seen in the dress codes of each society. If a kimono is a Japanese lady’s gown, a sari an Indian lady’s preferred dress and a skirt for an English lady, it could be blasphemous to expect all such dresses worn openly in a society where burkha is prevalent and the lady has to cover herself from head to toe in the presence of strangers. Culture influences the saving and spending patterns of a society. For example, in spite of low returns, in Japan though savings abound in post offices (9 percent) and banks (2 percent in nationalised banks), investment in stocks is not considered a viable or better return alternative. In the United States, however, more than half the population owns stocks. The work culture too differs from country to country. A U.S. resident, despite a five-day week, would love to get additional rest days and holidays and the opportunity to go on a pleasure trip abroad. The Japanese, on the other hand, may have to be lured away from their work place by offers of incentives to take a break. Such is their addiction to wok or love for duty.

How Does Culture Influence Marketing Activities? The basic task of a marketer is to maximise profits through satisfaction of his customer’s need. This means that marketers must understand the basic need that is governed by culture and the influences and pressure of society to which the customer belongs. Marketers must have a complete knowledge of culture, more so international marketers because they face diverse and different cultures in each country; this knowledge will equip them to fashion and design their products and services as per the need of their customers. They will then work out their distribution plans, evolve marketing and advertising strategies to become effective in their multi-country marketing efforts. Culture thus is defined as personality of society—it is defined as continuously evolving totality of learned and shared experiences of life that give meaning to rituals, norms, traditions, nuances, languages, symbols, and common values amongst the members of an organization and society. Culture has also been defined as “software of mind which provides a guide for humans on how to think and behave; culture is a problem solving tool” by Professor Geert Hofstede.1 Culture has been further defined as collective programming of the mind, which distinguishes the members of one group or category from other.2 Culture is not static; like shifting sands of time, culture too evolves itself over different periods of 1. Geert Hofstede, Culture’s Consequences, 2nd edition, Thousand Oaks, CA Sage, 2001. 2. Greet Hofstede, Culture Consequences Comparing Values, Behavior, Institutions, and Organizations Across the Nations, 2nd edition, Sage Publications CA, 2000.

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time by imbibing values and beliefs, when it comes into contact with other cultures of the world. That is why we have Mughalisation of Indian culture more particularly in the northern and western part of the country where the Mughals ruled for a long time. The impact of Portuguese culture and French cultures can be seen in those parts of India where both these nations ruled. The legacy of the British culture can be seen again in the Commonwealth countries which were governed by the Queen and her representatives. Whenever they are exposed, or subjected, to changing environments in society, people adapt to the changing scenario through a process of socialisation. That is why culture has also been defined as “the sum total of the values, rituals, beliefs and thought processes that are learned, shared by a group, of people and transmitted from generation to generation”.3 Culture, then, is a way human beings live, think, take decisions about consumption and their purchase patterns and, eventually, the adaptation of soul-cleansing activities of religious norms that they adopt from the society they live in. They adapt, acquire and adopt through social interaction and peer pressure, through the influence of social thinkers, leaders and captains of society, who help evolve new and better ways to develop their culture in comparison with other cultures of the world.

CORRELATES OF CULTURE The main constituents of culture that make each culture identifiable and separately distinct are as under:

1. Ecology or Geography This means the way an individual accepts the process of ecological factors in a society, the flora and fauna, wildlife, climate, temperatures, topography, natural resources, rivers, mountains, plains, minerals and other such gifts of God. Such preservation of resources, their utilisation and development for human needs and their protection, and for all species on the earth, speak of the culture of that society. How these geographical or ecological factors are distributed amongst the haves and have-nots, amongst the developed and the yet-todevelop is the very thread of culture. Ecology also affects the history, economy of nations, and the consumer behaviour. Like professor Phillip Parker reports, “geography has deep influence on history, economics, and consumer behaviour”; he further adds, “strong correlation exists between the climate and the per capita gross domestic product of countries”.4

2. Heritage Historical facts have a very strong impact on technological developments, social institutes, cultural fabric, social norms, attitude towards new innovations and acceptance of the times in which these were developed. History speaks of the impact of architecture on Indian buildings and on the construction industry. The industrial revolution of the 18th century affected the social fabrics of Great Britain. The historical wars, fought with the invaders, the Mughals and British rulers of India have all been reflected in the heritage of society and the cultural values that the society has imbibed from these invaders who settled down in the country. Again heritage can be seen in the literature of ancient times, which have influenced the cultural evolution of societies across the world. In Asia, Buddhism preached the ideal of tolerance and peace, shaping peace loving individuals. The message of renunciation by the great thinkers encourages people to live a 3. Melvin Herksokvitz, Man and His Works, p. 634. 4. Phillip Parker, Physioeconomics, Cambridge, MA, MIT Press.

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contented life and not simply chase symbols of material success. In the USA, on the other hand, the American Declaration of Independence brought out a sense of individual freedom, where the welfare of individual scores over the concern for the nation as a whole. History becomes evident in China, where despite the growing consumerism, the communism in thought and policy making of the rulers prevails even after many years of Mao’s departure. Heritage and inheritance, thus, affect every culture, be it the German pride of being a superior and stronger nation or the Mongolian influence of being a nation of warriors and survivors in many other central Asian cultures.

3. Social Fabric The social fabric includes religion, family, institutes of education, the social organisations, the thinking of philosophers, the ruling elite and the ruled multitudes. The social fabric of a culture speaks of interpersonal and intra-personal relationships the society members maintain with each other. Casteism, love of family, love of neighbourhood, tolerance of strangers, accommodation of others by selfless behaviour, love for one’s own religion, and respect for other faiths and beliefs is what constitutes a society’s behaviour. These behaviour patterns run from generation to generation. In societies where close-knit social institutes like family, clan and tribe still exist, it becomes easy for international marketers to plan and direct advertising efforts on joint promotions. In the eastern cultures, family values are derived from small group norms, which are extended to the enlarged family of the locality, or immediate neighbourhood, to the entire village. In India every unmarried girl or boy from the same village is treated like the members of one single family, assuming a filial relationship amongst them. A family in the West would mean the immediate family only. It does not extend beyond the relationship through blood. Dating someone in the neighbourhood is quite common there. Casteism is quite evident in marital relationships. Honour killings exist in Pakistan, where a girl can be killed for marrying into a rival tribe. Similarly, in India, when the nation has attained a literacy rate of 64 percent, inter-caste marriages are not accepted in many parts of the country. Some kind of a caste system prevails even in professional life, where a higher caste will not take up the professions that are associated with lower castes. The West, on the other hand, has evolved into a caste-less society, without any bias, where only the culture of work prevails. An international marketer has to be fully aware of all such differences in a society. Ideals of culture are governed by religious and social associations, for instance by preachers and politicians (through governance) and by the media and business organisations.

ELEMENTS OF CULTURE The definition of culture states it as the sum total of values, rituals, symbols, beliefs and thought processes. Whether international or domestic, marketers have to be aware of, and make special use of the knowledge of these elements while designing their products, selling strategies, channel management, and advertising and sales promotion campaigns.

Cultural Values In a society, values sustain the behaviour of individuals as well as groups. Values are learned and unlearned from personal, social and cultural interactions and experiences. These value have been defined as “enduring

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beliefs about a specific mode of conduct or desirable end state; they guide the selection or evaluation of behavior, are ordered by the importance in relation to one another to form a system of value priorities”.5 Individuals imbibe values from the culture they belong to, i.e. the family unit, the immediate neighbourhood, teachers, religious practitioners and politicians. In modern times, values are also imbibed from the media. The print media, television and films play a large part in influencing the minds of individuals. For instance, the best way for a first-time visitor to learn about the American way of life would be to read about the American culture in books and magazines and through films and television. This is where the acculturation of an individual begins. It is not the unlearning of one’s own values but the assimilation of American ones, which one can gather by interaction and adaptation. For example, an Indian may grow up in a joint family and learn that one must take care of one’s parents when they grow old. An American, on the other hand, may learn that personal success, personal freedom and personal achievement are more important in life. Average Americans start working in their teens and move out of their parental home quite early in life. In Pakistan and India, however, it is acceptable for children to stay at home for their entire lives.

Strategies for Dealing with Cultural Differences Once an organisation dealing in multi-country locations has identified differences in cultural values, it must understand fully what steps its executives should adopt and what steps can prove detrimental to business. All such possibilities will be taken up for discussion here. Each culture has its own set of acceptable and unacceptable individual as well as social behavioural norms. These are the set of rules that dictate what is morally, ethically and socially correct for that particular society. The same set of rules may not be applicable to outsiders. When entering a new foreign country, or even when devising a strategy in its current country of operation, marketers must understand these dos and don’ts. In fact, host cultures always do not expect foreigners to adjust to them. International companies have sometimes succeeded in introducing new products, technologies and operating procedures to foreign countries with little adjustment. That’s because some of these introductions have not run counter to deep-seated attitudes or because the host society is willing to accept foreign custom as a trade-off for other advantages. For example, Bahrain has permitted sale of pork products (otherwise outlawed by religious law) as long as they are sold in separate rooms of grocery stores, where Muslims can neither

overnight in Jeddah, Saudi Arabia, even though the local women cannot. Similarly, Western female managers in Hong Kong say local people see them primarily as foreigners, not as women.

These set of do’s and don’ts are also referred to as cultural imperatives, cultural exclusives and cultural adiophora, which marketers must adhere to, to ensure their survival and continuance in multi-country markets.6 These expectations may not be handed over by any culture in a set of instructions, but a shrewd and capable international marketing manager will keep on updating and adapting to such behavioural norms while interacting with the locals abroad. This process is known as acculturation, where one acquires the norms, rituals and ethics of foreign culture while working abroad. 5. Milton J. Rokeach, The Nature of Human Values, The Free Press 1973 and Jan Benedict E. M. Steenkamp, Frankel Ter Hofstede and Michael Wedel, a Cross Cultural Investigation into the Individual, and National Cultural Antecedents of Consumer Innovativeness, Journal of Consumer Research, April 1999, vol. 63, pp. 55–69.

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Imperatives These are the set of norms that ensure that business is conducted in the same way that locals do. For example, giving due regard and respect to seniors and elderly is a way of life in India, and it is expected that business partners, even from abroad, will also follow similar norms. People address each other in formal relationships by affixing respectable words either before or after the name, but in America every one can be addressed by their first names. Again, while introducing oneself on a business call, one may attach one’s surname with the first name. For an American, however, the first name suffices. In many European countries, while conducting business, people will address each other by their last names. The obedience and adherence to government authority, rules and regulations are acceptable norms in any society, but more so in eastern cultures where even petty officials expect to be treated as the seal of authority of the government. And, it is in the interest of businesspersons to know such petty officials because, otherwise, they can create problems in smooth flow of business. Such a situation may not prevail in the West. Again, imperatives can be seen in the way a society treats its women, whose status in each country differs. In certain societies, such as those of China, Nepal and Bhutan, women may be at the forefront of business negotiations. In some Muslim dominated areas of the world, the segregation of women from males is a way of life. In many countries, women conduct business with their bodies, faces and heads covered behind a veil. They may not accompany their business clients for lunch or dinner and may not invite or accept invitations to social get-togethers unless a member of their family is accompanying them.

Cultural Exclusives Refer to activities that only locals may perform and which foreigners are not expected to follow. Touching the feet of elders and seeking their blessings is a common practice in India but a foreigner is hardly expected to follow the custom. Similarly, devout Muslims will offer prayers five times a day, even at their place of work, just as devout Hindus will worship their deities before beginning the day’s work. This may seem strange to a foreigner who may be more used to praying in private or in a church.

Cultural Adiophora These are the local customs that, whether they are followed by foreigners or not, do not affect the business relationship. Eating with hands and greeting each other with folded hands are a couple of examples of adiophora. In case a foreigner were to eat with his or her hands, it may not raise eyebrows and will be accepted as normal gesture.

THE NATION AS A CULTURE The nation provides a workable definition of a culture for international marketing, where similarity among people is both a cause and an effect of national boundaries. It is an acceptable fact, however, that within the borders of a nation, dissimilarities can prevail. National identity is perpetuated through the rites and symbols of a country and a common perception of history results from the preservation of national sites and documents, etc. These shared attributes do not mean that everyone in a country is alike. Nor do they suggest that each country is unique in all respects. In fact, nations usually include various subcultures, ethnic 6. David A. Ricks, Blunders in International Business, Blackwell Publishers, 1993.

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groups, races and classes, some of which transcend national boundaries. Therefore, managers find countryby-country analysis difficult because no two citizens of a country are alike. On the contrary, there are too many variations in some countries even though a nation is a legal and constitutional unit, serving different interests of various demographic and geographical entities. All these entities, when put under the marked geographical and constitutional boundaries, give a nation its identity. By identifying these similarities or dissimilarities within different nations, an international marketing firm has to conduct its business by aligning itself as per the requirements of each nation. However, a nation legitimises itself by being a mediator of the different interests. Each nation possesses certain human, demographic and behavioural characteristics that constitute its national identity and that may affect a company’s methods of conducting business effectively in that country. The concept of a nation is much broader and bigger than the concept of a state. States have artificial boundaries, but the concept of a nation extends beyond the physical demarcation of a country. This is the reason for the unification of Germany, wherein the nation concept led to the breaking up of the man-made state boundaries. This section will discuss some of the attitudes and values that affect business behaviour amongst nations, and which can tell a marketer what products to sell, how to organise finance, staff and then manage and control operations. Just as the researchers define cultural variables differently, attaching different names to slightly varying and sometimes overlapping attitudes and values, there are numerous ways of relating marketing to culture. Some of these are presented below.

Social Systems Every culture values some people more than it does others, and such distinctions dictate a person’s class or status within that culture. In business parlance, this might mean valuing members of managerial groups more highly than members of production groups. The social stratification varies from country to country, and a person’s ranking is partly determined by individual factors and partly by the affiliation to the given groups. These affiliations could be ascribed group memberships, i.e. determined by birth (like those based on gender, family, age, caste and ethnic, racial or national origin) or the acquired group memberships, which are the affiliations not determined by birth (those based on religion, political affiliation and professional and other associations). In eastern countries, a marketer may find that such stratification is quite prominently exhibited in almost all segments, be it caste, gender, political affiliations or even religious beliefs and faiths. In fact, within the same religion, affiliations may vary from being a sanatani Hindu, an Arya Samajist to a Jain Hindu in India. Even in the West, Protestants and Catholics are examples of stratification. These stratifications affect the buying and living habits of people. These social stratifications affect the business relationships within that country. Some characteristics and group memberships that influence a person’s ranking within the country of origin are listed as follows:

Caste versus Performance Orientation People in the U.S. value performance so highly that the legislative and judicial actions aim to prevent discrimination on the basis of sex, age and religion, even though such legislation is not fully effective. Whichever factor has primary importance, seniority or humaneness, will influence a person’s eligibility for certain positions and compensation. That may not be true for all nations. In many countries, ethnic groups and religious preferences exist – in India, for instance, the caste factor can influence the determination of employment or even education opportunities for different caste groups within the same culture groups.

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Malaysia had employment quotas for three ethnic groups – Malays, Chinese and Indians—so as to protect the employment opportunities for Malays. Within the ambit of performance orientation, the orientations towards the time management, the value of time and the respect towards punctuality will be discussed. A Westerner may be very punctual, reaching the appointed place at the scheduled time, whereas in the east, a delay of half an hour to one hour is considered a normal practice and accepted with a smile on the lips without a word of apology. Again, the manner in which nations approach their tasks is also important for the international marketer. In some nations, people will attend to only one task at a time. People from Germany, Austria and United States will attend to only one task at a time and would rather be prompt, scheduled and disciplined; for them monochromic approach towards work is a way of functioning. Indians, Chinese and Pakistanis, and in many other nations in the East, people will generally handle many different functions at a given time. For them, adhering to deadlines and schedules, is not very important. Their approach to time is polychromic.

Gender Orientation Difference in attitude towards males and females. In China and India, there is a strong preference for males due to two factors – government and economic restrictions on family size and desire to have a son to perpetuate the family name, respectively. The result is the practice of aborting female foetuses and killing of female babies. Even in countries in which women constitute a large proportion of the working population, differentiation still exists in the type of jobs that are regarded as male-only positions and the ones that are regarded as female-only positions. For example, in the US, women fill a higher percentage of administrative and managerial positions than in Japan. The fact is that in all the countries where the prime source of employment is agriculture, people prefer a male progeny for fear that the inheritance of land will move away from the family the moment a girl is married into another family.

Age-based Groups Many cultures assume that age and wisdom are correlated. In the US market, however, after the 1980s, it is believed that youth has a professional advantage and this has resulted into poor employment rates for TV script writers beyond the age of 30. Even in India, currently call centres and business process outsourcing companies are going for young people. The international marketing manager will have to be aware of the age factor.

Family-based Groups In some societies, the family is the most important group membership. In societies where there is low trust outside the family, such as in China and southern Italy, small family-run businesses are more successful than large business organisations. As large scale operations are often necessary for many products, the difficulty of expanding the family-run businesses retards the development of these companies.

Occupation The perception of what jobs are the ‘best’ varies somewhat among different countries. This perception usually determines the number and the qualification of people who will seek employment in a given occupation. For example, university professors are more influential as opinion leaders in Korea and Japan than in the US and UK. Another important difference is that citizens in some countries, like Belgium and France, desire to work as entrepreneurs rather than for an organisation. In the US, transient occupations such as baby sitting,

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delivering newspapers and delivering groceries are jobs that go to teenagers, whereas in poor countries the same are filled by adults.

Materialism and Leisure Max Weber observed that the predominantly Protestant countries were the most economically developed and he attributed this to an attitude that he labelled as “the Protestant ethic”. Adhering to this view, people preferred to transform productivity into material gains than into leisure time. Some societies take less leisure time than others, which means they work longer hours, take fewer days for holidays and vacations and spend less time and money on leisure. As an example, the Japanese take less leisure time than people in other wealthy countries like the US and across Europe. However, most people today consider personal economic achievement to be important, regardless of whether they live in wealthy or poor countries.

Expectation of Success and Reward Another factor that differentiates a person’s behaviour towards working is the perceived likelihood of success and reward. Compared with the penalties of failure, people usually work harder at any task when the reward for success is higher. In the Western culture, the emphasis is on immediate rewards and the commercialisation of every activity is too rampant, whereas in Eastern societies, many times, the work one takes up does not necessarily take into account commercial expectations or instant results.

Assertiveness The average interest in the career success varies substantially among different countries. According to a study that compared the attitudes of employees from 50 countries, employees with high masculinity score were those who admired successful achievers, had little sympathy for the unfortunate, and preferred to be the best rather than at par with others. They had a money-and–things orientation than a people orientation, a belief that it is better ‘to live to work’ than ‘to work to live’ and a preference for performance and growth over quality of life and environment. Similarly, countries differ in the degree that the individuals are assertive, confrontational, and aggressive in their relationship with others. These attitudinal differences do not explain why local managers typically react in different ways from country to country, sometimes in ways that an international manager may neither accept nor wish. Examples could be given of local managers who give preference to developing an amiable and smooth relationship with suppliers than with establishing objectives of reducing costs and speeding deliveries. Another example could be found in managers who lay more emphasis on the organisational goals of employee and social welfare over the company’s priorities for growth and efficiency.

Need Hierarchy This is basically a well-known motivation theory (propounded by the late A.H. Maslow), of human motivations that explores universal cultural motivators of human behaviour.7 On the basis of this, the international marketer can actually work out the kind of response his products and advertising campaigns will receive from the country’s average citizen. According to this, people will try to fulfil the lower-order needs sufficiently before moving on to higher order. The order of needs from lower to higher is physiological (food, water and shelter, etc.), security, affiliation, esteem and finally self-actualisation. The ‘Hierarchy of Need’ theory is helpful in 7. A.H. Maslow, “A Theory of Human Motivation”, in Readings in Managerial Psychology, (Eds.) Harold J. Levitt and Louis R. Pondy, Chicago, University of Chicago Press, 1964, pp. 6–24.

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differentiating reward preferences and spending patterns of people in different countries. In a poor country, people spend a large part of their earnings on food and shelter. Elsewhere, other needs, such as status symbol purchases, luxuries and much leisure activities get priority in the spending list since food and shelter have already been taken care of. Such analysis helps international marketers identify which motivation factors should be addressed in their campaigns.

Culture Variance This refers to the dimensions on the basis of which Hofstede had identified differences amongst cultures. As discussed, no two cultures can be alike and that each culture evolves over time, changing its basic outlook either through its reaction to socio-economic changes that may have presented a new alternative for cultural growth or the change can also come as a result of imperialistic tendencies of governments that impose legal sanctions against the established practices. All cultures can be classified on the basis of a number of differences and dimensions. Each dimension distinctly separates the nation’s cultural character, as given out by Hofstede in his four-point differentials theory.

Power Distance This refers to the interpersonal relations and intra-personal relationship, which are based on the power equation formations in the hierarchical set up at work. In each society, the distance between the socially powerful and those who are not so powerful, by way of either job status, social status, wealth status or religious status, varies. In America, for example, people address each other by their first names and the vertical distance between the superior and the junior is covered by the seniors by exhibiting solidarity with the juniors by way of friendly and approachable behaviour, by joining the ranks for games, eating food together and removing work-related distance by occasionally engaging in activities meant for the junior positions. In other cultures, however, the distance between the superior and the subordinate is deliberately marked. As in India seniors prefer to be addressed by the formal epithet attached to their position. It is many times considered against the disciplining if a senior tries to bridge the gap between the two positions or if a junior overshoots his position and gets too friendly with a senior. In fact, juniors are neither involved in decision-making nor are they made privy to important discussions. Hence, it is important for an international marketer to understand 120 100 80 60 40 20 0

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Values, Sage Publications, Beverly Hills CA, 1980.

Fig. 6.1

Hofstede’s Value Survey Model: Power Distance

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this power equation to follow the correct hierarchical pattern in calling on clients. It is often seen that where power distance is high, people prefer autocratic or paternalistic management style and when it is low, they prefer consultative style of management. The cultural inheritance of a nation will determine the style adopted by the current population. In the world, wherever despotic kind of rulers existed they established vertical relationships with their subjects and other court underlings. A spirit of independence triggered through the American Declaration of Independence and flattened the vertical difference, as the welfare of an individual became the hallmark of relationship.

Individualism versus Collectivism Individualism refers to the humans’ preference to fulfil their own interest and desire before they think of the larger social group or even the interests of the nation. These attributes of individualism spell out low dependence on the organisation and a desire for personal time, freedom and challenge. On the other hand, features of collectivism are loyalty and may call for dependence on organisational support and vice versa. In countries with high individualism, self-actualisation will be a prime motivator and in countries with high collectivism, the provision of safe environment (security need) will be a prime motivator. The degree of individualism and collectivism also influences how employees interact with their colleagues. For example, the concept of family in countries like China and Mexico includes not only the nuclear family (a husband, a wife and minor children) but also vertically integrated families (several generations) and, perhaps, horizontally extended ones (aunts, uncles and cousins). Where collectivism is high, companies find their best marketing successes when emphasising advertising themes that express group (rather than individual) values.

Uncertainty Avoidance Each society has its own system of facing the everyday life. In some cultures, people feel comfortable within the zone of the familiar and the tried and trusted. For them, the unknown, unfamiliar, untried and the uncertain means raising their discomfort level. As a result, they do not like to try the new and the innovative. However, in societies wherever uncertainty avoidance is low, people will go for the new and different, as it holds the charm of the hidden for them, which they will like to explore. Such characteristics of consumers can help international marketers to design products and features keeping in view the risk avoidance or the daring to try the new and untried. In countries characterised with high uncertainty avoidance, few consumers are willing to take the risk of trying a new product first. This is a very important consideration for companies to choose where to launch their new products. In fact, in the West, people generally have low uncertainty avoidance. Hence, the saving patterns are also low and the spending patterns, accordingly, are very high because people like to live for the present. In countries that have been under communist regimes for long, uncertainty avoidance will be very high as the basic necessities were assured by the communist policies of the erstwhile governments. Their exposure to the new world outside the closed regime, however, is gradually changing the cultural traits and they are opening up to new foods, clothes and fads, etc.

Masculinity vs. Femininity A nation that has strong paternalistic affiliations and is masculine in nature will have assertiveness at the base of all dealings and living styles. Such cultures will emphasise the symbols related to the material gains of life, such as wealth, material success and achievement of ambitions, competitiveness and cut-throat rivalry in professional relationships. Such cultures can be traced in Australia, America, Canada and Great Britain, where boldness in every aspect of life is clearly visible. On the other hand, Scandinavian countries like Sweden and Norway where maternal instincts of the culture are more apparent, a gentle nurturing of

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relationships, dealings and living styles are the hallmark. More number of women are there in the workforce (jobs) in countries where faminine culture is predominant. International marketers will accordingly devise their marketing communication strategies, keeping in view the masculine or feminine characteristics of the nations. In the case of countries and markets falling under the femininity zone, the brand and the corporate image will have to be steered towards the caring and mothering kind of feelings, whereas customers and clients in masculine dominant markets may be motivated by bold appeals such as achievement, competitive edge and the feeling of having arrived in their respective societies.

Trust In countries where trust is high, cost of doing business tends to be lower because the managers do not have to spend time seeing every possible contingency and then monitoring every action for compliance in every business relationship. Instead, they can spend time investing and innovating.

Future Orientation Countries also differ in the extent to which individuals live for the present rather than the future because they see the risks in delaying gratification and investigating for the future. Where future orientation is higher, companies may be able to better motivate workers through delayed compensation, such as retirement programmes.

Fatalism Countries where people believe in fatalism, that every event is inevitable, fail to accept the basic cause-andeffect relationship between hard work and achievement of goals, i.e. they fail to understand that they have to work hard to achieve goals and take responsibility for performance. For example, they may be reluctant to buy insurance. Conservative and fundamentalist societies tend to view occurrences as “the will of God”.

LANGUAGE AS AN ELEMENT OF CULTURE Language is a unifying force in the face of diversity in many countries. For example, Hindi is a unifying force in India where there are more than 20 languages and 200 dialects. Spreading of culture is greatly facilitated if there is commonality in language. The language diversity makes it difficult for companies to integrate their workforces and to market their products on a truly national level, as each dialect, nuance and complexity may differ from culture to culture. International marketers will have to understand both the written and spoken language and also the non-verbal language to communicate effectively with the targeted audience. International marketers can run their business more smoothly in countries sharing the same language because expensive and time-consuming translation is unnecessary. In this respect, English is the most important language (apart from the primary language in a country) for use in international business. However, even in the English language, meanings attached to communicative and non-communicative gestures and symbols may vary from culture to culture, for example the American English is totally different from the British English. Spoken and Written Language Translating one language directly to another can be quite a task for the marketer, making international marketing communication difficult. First, some words do not have direct translation. Second, the languages and the common meaning of words are constantly evolving. Third, words

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mean different things in different contexts. Finally, grammar and pronunciation are complex and a slight misuse of vocabulary may change meanings substantially. Wrong choice of words is usually a big source of embarrassment. Poor translation may have tragic consequences, as the meaning conveyed may not be the same as the intended meaning. For example, the trunk of a car in United Kingdom becomes its boot in United States, which can also be understood to mean a shoe in India. Therefore, every marketer will have to go through the process of back and parallel translation to ensure the meaning of the communication is as it is originally designed. Otherwise, marketers will have to use multi-languages in brouchers, literature and packaging designed for international markets. This may not be possible as far as the visual media is concerned because the space may not permit the use of so many languages. In India, where so many dialects and languages within languages prevail, the appropriate use of Hindi and English will suffice in the north and east of the country but southern India may not be able to understand the correct meaning of the portions in Hindi. This is where the marketer will have to make use of two to three languages, as also in European markets, where language changes within a short distance. Besides English, marketers may have to use French, German and any other local language pertaining to the third nation, such as Italian, Dutch or Russian, wherever the products are being marketed.

Silent and Non-verbal Language All languages are complex and reflective of their environment. Without knowing the language of the area, marketers may not be able to perceive the requirements of customers. One can perceive things through one’s senses (sight, smell, touch, sound and taste). The cues people use to perceive things differ among societies. The reasons for these differences could be physiological or cultural. Besides the spoken and written language, one exchanges messages through a host of non-verbal cues, which form a silent language. For example, handshake is widely used to greet each other in business meetings in many countries regardless of gender differences. But, a woman may not shake hand with a man in countries like Saudi Arabia, Oman, etc. Colours, for example, conjure meanings that come from cultural experience. In most western countries, black is associated with death. White has the same connotation in parts of Asia and purple in Latin America. For products to succeed, their colours must match the consumers’ frame of reference. Another aspect of silent language is the distance between people during conversation. People’s sense of appropriate distance is learned and differs among societies. In the US, the customary distance for business discussion is 5 to 8 feet and for personal business it is 18 inches to 3 feet. When the distance is farther or closer than the customary, people tend to feel uneasy. Marketers should know that perceptual cues—especially those concerning time and status—differ among societies. For example, in the US, participants arrive early for a business appointment, a few minutes late for a dinner at someone’s house and a bit later at for cocktail parties. In other countries, the concept of punctuality may differ.

Body Language or Kinesics Kinesics is the way in which people walk, touch and move their bodies. This also differs from country to country. For example, for a Greek, Turk and Bulgarian “Yes” is indicated by a sideway movement of the head that resembles the negative headshake used in US and India. In some cases, one gesture has several meanings in different countries. Another example is the court case and debate filed by some people in India against Hollywood filmstar Richard Gere for kissing and hugging an Indian lady filmstar during a public function held in New Delhi in 2007. Although hugging, dancing, kissing, etc. are common in western culture, it is not interpreted as friendly gesture in some countries like India.

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Cultural upbringing plays its part in the ways people like to convey the messages of their speech and body language. In low context cultures, there is no extra or underlying meaning attached to the spoken statement because the words will truly convey what is meant in the true spirit. In cultures of the West, such as Germany, Australia, Switzerland and Canada, the speaker’s verbal communication is loaded with full statement and meaning of the sentence. The receiver does not have to look or ask for any other meaning. In such a situation, business also must be done through explicit forms and contracts so that no extra contractual obligations and expectations are developed between the two parties. In high context cultures, however, besides the spoken word, body language, gestures, shaking of the head and hand, each convey some meaning. And, to understand the full meaning of the spoken and unspoken gestures and communication, it is better to understand the person on a personal level too as a mere official relationship may not be sufficient to help develop the required levels of understanding and trust. Countries in southern Europe are high-context cultures, that is, most people believe that the peripheral information is crucial to decision-making and infer meaning from things said indirectly. Similarly, in the Middle East, India and many other eastern countries of high-context cultures, personal words, personal relationships and mutual trust are as important as the written contract. People value the unwritten understandings as much as they value the written words. When managers from two cultures meet, the low-context individuals may think that the high-context ones are inefficient and waste time. The high-context individuals, on the other hand, may feel that the low-context ones are too aggressive to be trusted and create an atmosphere of distrust, which could be damaging to the interests of both parties to the contract. In dealing with international contracts, therefore, a marketer will have to find a solution to accommodate both kinds of requirements because even firms can have managers from high- or low-context cultures.

Information Processing Although all cultures categorise, plan and quantify information, some cultures order and classify information differently from others. For example, in the U.S., telephone directories are classified as per the last name of a person, whereas in Iceland, entries are classified as per their first, or given, names. One needs to understand the different ordering, classifying and codifying systems to perform efficiently in a foreign environment. Cultures also differ in the manner in which they handle people. For instance, the approach is called monochronic in north Europe. In such cultures, people prefer to work sequentially, i.e. they like to finish with one customer before dealing with another. Conversely, the poly chronic people in southern Europe are more comfortable when working simultaneously on many tasks. Similarly, some cultures tend to focus first on the whole and then on the parts, whereas others do just the opposite. Likewise, some cultures will determine the principles before they try to resolve small issues (idealism), while other cultures will focus more on details rather than principles (pragmatism). Therefore, an international marketer cannot have the same yardsticks to deal even with his own staff, who come from different nationalities. Some degree of adaptation will have to be called for at both the ends, i.e. the expatriates will have to make some adjustments while the employer will have to understand the cultural background and make allowances in performance standards. When it comes to dealing with the customers, however, it is necessary for the marketer to understand the cultural approach and align strategies accordingly.

RELIGION AS AN ELEMENT OF CULTURE Religion gives meaning and sustenance to a society’s existence. Through fear and belief of the supernatural, it defines a society’s value system, attitudes and hopes. It provides the reason to multitudes in this world to

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bravely face the problems of life and then come together as groups to form a distinct culture and civilisation. Many religions of the world teach mankind different ways of leading their lives; some preach simplicity in every aspect of life. Just as Hinduism and Buddhism propagate a life of renunciation, a life that teaches and shows a path to salvation, there are other religions that teach the practical ways to wisdom. Protestants are taught to work hard and live frugally so that economic emancipation of mankind can be maintained; this in a way also leads to the beginning of capitalism in the world. Similarly, Islam is a religion that teaches the ways of every day living, actually specifying the day-to-day living and social etiquettes. It also prohibits the charging and calculation of interest. Islam talks about the relationship between men and women, advocating maintenance of marriage codes and divorce systems. It also specifies when to work and when to pay obeisance to God, specifying that a devout Muslim must offer namaz five times every day. Judaism propagates the emancipation of human soul through education and removal of ignorance. This has led to the industrialisation and commercial development of the western world, even though as a religion Judaism has had to pay a massive price.

Muslims performing an evening prayer called tarawih, the night before the holy fasting month of

http://pakpics.wordpress.com/

Again religious preaching plays a large role in shaping the consumption behaviour of a society. Purchase patterns, value calculation, individualism, totalitarianism, social hierarchical systems, family affiliations, cultural values, family norms, the status of women, the status of the old and infirm, the institution of marriage, the judicial systems and even the jurisprudence and the criminal code of conduct and the penal codes, all find their origin in the religions of the world. Religion also determines the food habits of its followers. For example, Hinduism, Buddhism, Jainism and many other small sects of eastern religions teach sympathy towards other living creatures of the world

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and, therefore, encourage vegetarianism. Islam forbids the eating of pork and consumption of alcohol by its followers, just as Hinduism forbids beef. When McDonalds opened its restaurants in Bangalore (India), it had to face stiff opposition from some of the Hindu radical groups, who alleged that the French fries were fried in animal fat. The multinational fast food retailer had to convert veggie burgers as per the Indian taste. Similarly, Kentucky Fried chicken too had to face strong resistance from Hindu fundamentalists. Even in Israel, fast food restaurants offer vegetarian food to customers without compromising on the kosher requirements of these customers. VEGETARIANISM—A CASE IN POINT in December 1995. The decision came after a Bangalore court closed a Kentucky Fried Chicken outlet because its food exceeded the legal limits for the additive. Used in a wide range of fast foods, MSG is associated with behavioural disorders, such as hyperactivity, and has induced severe brain damage in rats. Unborn children are at particular risk since MSG concentrates in the placenta. The Government fears that the Bangalore court’s decision will deter further investment in India by foreign-owned food processing companies and fast food chains, such as McDonald’s. A broad-based campaign has developed against Foreign owned fast food companies comprising health activists and animal rights’ groups those opposed to the entry of MNCs in India’s food sector. The The Ecologist, November, December 1995.

The following is an example of Hindu vegetarianism, propagated by religious preachers and saints in India. WORLD VEGETARIAN AND ANIMAL PROTECTION DAY CELEBRATIONS AT DELHI— ACHARYA VIDYANAND JI STRESSES ON RELEVANCE OF AHIMSA IN MODERN CONTEXT At a heavily-attended gathering for celebrating the World Vegetarianism and Animal Protection Day at New Delhi, Acharya Shri Vidyanand Ji, belonging to the Digambar sect, expressed his views on the importance of a vegetarian diet and simple (satwik) food. He said that these were necessary to maintain a healthy mind and a strong body. The thinking of ‘kill and die’ should be replaced by ‘live when one likes. Food of high purity (satvik food), eaten at the right time, affects a person’s feelings and emotions. He added that the destruction of animals and the reduction of greenery are responsible for ecological imbalance, which, in turn, is the cause of increased atmospheric temperatures, reduced rainfall, earthquakes and seasonal imbalance. Many due to consumption of non-vegetarian food. In Delhi alone, six lakh patients are suffering from epilepsy, a dreadful disease, the major cause of which is non-vegetarian food. Latest researches have shown that such food is responsible for many serious diseases, such as, heart ailments, paralysis and

way to a healthy life and that is why more and more people are switching over to vegetarian food in the western countries. It is painful to observe that in a country like India, which has throughout been having a vegetarian culture, is now moving more towards non-vegetarianism.

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The systems of official working days, the calendar of week days, annual calculation of the festivals, holydays and the auspicious beginning of business contracts are all governed by religious beliefs. In western countries, based on Christian belief, Sunday is when people take a break from work. It is the weekly holiday and kept free for visiting the church for prayers, etc. In Islamic countries, Friday being the holy day of Islam, all businesses and offices are kept closed on that day. A global business player will have to keep track of the religious festivals and events and national, regional and local cultural occasions while planning his business meetings, regular working of the show rooms, shops and offices. The marketer will also have to understand how to present women and children in their advertisements and campaigns without offending the viewers’ sensibilities, as many religions have unwritten codes of presenting women and children. The portrayal of women and children in advertisements is also determined and influenced by the religious tenets issued in many countries and nations. In many Islamic countries, even small girls cannot be portrayed without their heads, arms and wrists covered. Women must cover themselves from head to toe while coming out of the house. An international marketer will have to be familiar with the working systems of different countries and it will be appropriate to adopt the systems prevalent in the country for religious or social reasons. For example, in Saudi Arabia and many other Muslim countries, women are not allowed to speak to strangers nor can they have any kind of dealings with strangers. Field surveys, doorto-door sales calls and product demonstrations cannot be organised with the same kind of freedom as they can be managed in the West. In such countries, there are separate branches of banks manned by female staff, where only women customers are allowed and entertained. Human values and value system, important ingredients of culture, are greatly influenced by religion. Religious systems have certain beliefs that affect business, such as prohibiting the sale of certain products or work at certain times. However, restrictions of religion and dogmatic principles do not necessarily create hassles for other communities staying within the country. Hindu vegetarianism has not been imposed on the meat eaters in the country; people are free to decide their own preferences. It is, however, a known fact that religion has ruled the thought process and living styles and standards of its followers, who must abide by the tenets issued by their religion. It will be appropriate to state that the international marketer studies the ethical, social and economical aspects of all religions of the countries he wants to have business with in order to avoid getting into any kind of traps or silly mistakes that could offend the sensibilities of people. An international marketer will have to understand the gender roles assigned in various religions, the rituals and traditions of giving gifts and extending wishes, etc., on different festivals of different religions. For example, if Christmas is the most popular festive season in western countries, of equal importance are Diwali in India for Hindus, Eid for Muslims all over the world, and Chanukah for the Jews of the world. These are also the festivals when trade and sales are at their peak.

CULTURAL DYNAMICS Individual and societal values and customs evolve over time. Culture is dynamic in nature and, in order to ensure its survival, borrows from everyone and anyone that comes in contact with it. That is why literacy, the Internet, credit cards and the plastic money culture have been able to make inroads into hitherto conservative and closed societies. Culture change may come about through choice or imposition. Change by choice may take place as a reaction to social and economic changes that present new alternatives.

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Change by imposition, sometimes called cultural imperialism, occurs, for example, when countries introduce their legal systems into their colonies by prohibiting established practices and defining them as criminal. The introduction of some, but not all, elements of an outside culture is often called creolisation, indigenisation or cultural diffusion. The business of international sales, marketing and advertising induces change in cultures, and governments have often limited such business to protect their national cultures. However, such protection is less successful as people access foreign information through better international communications.

Is Globalisation Leading to Homogenisation of Cultures? Global economic integration has created a certain degree of cultural homogeneity across nations, posing threat to individuality of original cultures by the increasing number of shopping centres around the world and by the growing popularity of universal brands. A global consumer culture, in fact, will have both the presence of trans-national firms and their brand acceptance spread all over the globe. The widespread use of capitalism of global business corporations has led to similar living styles, food habits, emphasis on material values and exhibitionism among a stream of like dressed, like behaved individuals. Rampant display of Channel [V] and MTV cultures, dancing to the same music and subscribing to the same thought process have been lamented by many. They decry such rampant uniformity. But one has to realise that globalisation is a multi-faceted process. Paradoxical as it may seem, globalisation is both a factor for standardisation and a force for increased cultural diversity. There is an emergence of universally sold ‘global products’, with some of them having now become symbols of globalisation.

International Marketing and Cultural Dynamics The global spread of products and services is more viable than selectively marketing the same in a few select countries because the product can be mass produced and the same promotional techniques can be used the world over, to make the business a profitable venture at the optimal costs. For instance, Gillette, which is a global brand, adopts similar packaging for different countries. McDonald’s is another good example of how global strategy has been devised to fit each individual country within the global plan, even though each culture has a different and diverse need. In India, the company advertises in Hindi, “McDonalds main hai kuch baat”, and its theme emphasis on advertising in India is family-oriented, which is a very important aspect of Indian culture. Such advertising in local language appeals directly to the local people. It uses local festivals and fairs like the kite festival in Gujarat, the bhangra dance of Punjab, Bihu of Assam and Pongal of Tamil Nadu, while adapting its global communication strategy through the local cultural environment and advertises in Gujarati, Punjabi, Assamese, or Tamil. “A language offers a wide range of proximity towards the local mass. The word ‘Thanda’ has rocked almost all parts of India and thereon we see the global brand, Coke penetrating the Indian Market”.8 Such campaigns and strategies of some of the global giants exhibit that there is no such cultural takeover. Rather, it is the adaptation of global to the local need. In Asia, three-quarters of the music market is locally produced. Coca-Cola accounts for less than two of the 64 fluid ounces that an average person drinks a day. For every McDonald’s outlet in the UK, there are six Indian restaurants. While greater exposure to Western culture in the non-Western world is a fact, the ability of people to adapt cannot be underestimated. 8. Mascarenhas Preeti, Glocalisation, ibid.

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An interesting counter-current is underway, with people in different parts of the world defending their local cultures and, at the same time, seeking to diffuse them more broadly. In other words, globalisation does bring out the distinction and the local flavour of each culture to energise local identities. As G. Pascal Zachary, a senior writer at the Wall Street Journal observes: “More people in many parts of the world are expressing their distinct social and cultural traditions than at any time since the dawn of European colonialism 500 years ago.” The emergence of international news channels in Arabic (and soon in French) is a notable manifestation of this trend towards the global diffusion of local and national cultures. In this sense, globalisation is a powerful force for increasing cultural exchanges and mutual understanding. The multiplication of ethnic restaurants in Western cities, and the spread of Western food courts in the East, is an example of how globalisation offers unprecedented choice. International marketing and the process of globalisation involve the intermingling of people of different nations and cultures. Such globalisation exposes all nations and their inhabitants to new ways of thinking and new ideas. The communication revolution also plays a vital role in promoting cultural enrichment and raising political awareness in general. Easy access to the Internet means that governments, even less democratic ones, have to abandon their monopoly on the flow of information. The globalisation of communication is indeed providing many people with more freedom than they previously enjoyed. “...the fundamental source of conflict in this new world will not be primarily ideological or primarily economic. The great divisions among humankind and the dominating source of conflict will be cultural. Nation states will remain the most powerful actors in world affairs, but the principal conflicts of global politics will occur between nations and groups of different civilisations. The clash of civilisations will dominate global politics.”9 Huntington defines a civilisation as “the highest cultural grouping of people and the broadest level of cultural identity people have.... It is defined by both common objective elements, such as language, history, religion, customs, institutions, and by the subjective self-identification of people.” In doing so, he divides the world into major cultural groups, including Western, Confucian and Japanese, Islamic, Hindu, SlavicOrthodox, Latin American and African civilisations. At the core of his thesis is the notion that, with the end of global competition over economic ideology, the fault lines of world conflict now almost all lie along rifts between these great cultures. Huntington sees these notions of cultural identity as so primal that he believes that, ultimately, they will take precedence over the secular, unifying forces of economic globalisation.

Local Cultures and Globalisation The globalisation of the production and distribution of goods and services is a welcome development for raising standards of living of many people. It offers them access to products and services that they would not otherwise have had the chance to be exposed to. While agreeing that it has raised their standards of living and has brought in affluence for the common man, many of them express concerns that the changes brought about by globalisation of business by global marketers, jeopardize and threaten economic viability of locally made products and vitiates the traditions and culture of the local people by tempting them to buy foreign made goods, thus, hitting the local cottage, small-scale and domestic industry. This may bring poverty for those who are involved in production in these industrial units. For example, availability of foreign foods in a market—often at prices lower than that of local produce—can displace local farmers, who have traditionally earned a living by tilling their small plots of family-owned land and selling their goods locally. 9. Samuel Huntington’s article “The Clash of Civilizations?” appeared in the Summer 1993 issue of Foreign Affair.

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Globalisation, of course, does more than simply increase the availability of foreign-made consumer products and disrupt traditional producers. It also increases international trade in cultural products and services, such as movies, music and publications. The expansion of trade in cultural products is increasing the exposure of all societies to foreign cultures. And, the exposure to foreign cultural goods frequently brings about changes in local cultures, values and traditions. Now there is a mini-India, mini-Pakistan and miniChina in Singapore, Dubai, USA and UK. As Asians migrate and form communities in these locations, they create an environment like ‘back home’.

Reaffirmation of Local Culture In contrast to these homogenising effects, some people would argue that international marketing activities of the multinational conglomerates can also reinforce local cultures. In India, for example, satellite TV permits an increase in the number of regional channels, many of which can and do telecast Indian content (refer to case study on the Indianisation of Star TV in Chapter 1). This gives an average Indian new opportunities to identify with regional ties. Similarly, global companies have to take into account the culture of all the countries where they conduct operations or sell products. This can also enhance cultural awareness. Many observers have speculated that the homogenising effect of globalisation on national cultures, in fact, tends to produce a reaction among people which leads them to want to reaffirm their own local traditions. Thus, there are temples and rituals in foreign countries, like the famous Swaminarayan Temple in UK and USA. The ISKON movement is present in almost all the countries of the world and the same Krishna consciousness amongst its followers. Thanks to the Internet, cyber poojas can now be conducted anywhere.

Arguments against and for Internationalisation Critics of internationalisation of business allege that the phenomenon of spreading their tentacles, especially through pop culture, is perpetrating a kind of cultural genocide on the world; that the largest, most dominant cultures are becoming larger and all encompassing by annihilating other small ones, further developing their own culture at the expense of many others. However, others argue that globalisation offers the potential to enrich the world culturally. To these people, the notion that the opportunities for cultural exchange brought about by globalisation can help promote tolerance and diversity is very attractive. Their vision is the multi-cultural ‘global village’, where ideas and practices can be freely exchanged and appreciated. The potential enlightenment of the global village can be contrasted with the way people tended to view other nations and cultures ages ago. In the 18th century, Adam Smith, the father of economic theory, noted the detachment of emotion caused by distance: “Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connection with that part of the world, would be affected upon receiving intelligence of this dreadful never saw [the Chinese people killed by an earthquake], he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems 10

10. Adam Smith, The Theory of Moral Sentiments, 1759.

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The advent of global information tools has changed all this disassociation. In today’s world, where information is the key word, it does not take long to get informed about any happy or sad event taking place in even the remotest part of the world, thereby refuting the implication of Adam Smith’s statement in the current global scenario. Globalisation has changed this culture dynamic, in quite powerful ways. In today’s world, foreign policy decisions are sometimes driven by television images beamed around the world by satellites showing famine or fighting in other nations. In this context, globalisation enables a newscaster to humanise an event that has taken place overseas. As Adam Smith might have observed, seeing images of starving children and other human suffering on television creates a much more powerful emotional reaction in an observer than reading about the same event in a newspaper. If this indifference about people in foreign countries, as noted by Adam Smith, is very different today, it is partly so due to the media and partly due to the attempts of marketing efforts to globalise. Foreign policy decision-makers have discovered that press coverage of wars, famines and other events overseas can have a powerful impact on popular opinion at home. Public outrage over atrocities or sympathy over suffering can generate significant public pressure on governments to respond. This is also visible in foreign consumer culture positioning, when the advertising shows a happy-go-lucky foreigner youth on MTV, enjoying with a bottle of Coca Cola in hand one day and showing concern against the spread of AIDS across African nations in a serious discussion another day. This can win many hearts across the globe. That is why Sociology Professor Peter Berger has noted that a global network of foundations, academic networks, non-governmental organisations and some governmental and multinational agencies (such as the UN system and development agencies) have become transmission agents for what they perceive to be positive cultural values.11 This group spreads its ideas through mass communication, think tanks, educational systems, development projects, legal system, and other mechanisms of international organisations.

Points to Remember Commercialisation: The final step in new product development when the product developer makes a major marketing commitment to the product. At this stage, the product developer implements a total marketing plan and works towards production capacity. It involves deciding the timeliness of the product introduction, the locations where the product should be introduced, the market to be targeted, and the budget and promotional strategies for the product introduction. Power distance: Advocated by Hofstede. Power distance Index measures the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society’s level of inequality is endorsed by the followers as much as by the leaders. Maslow’s need hierarchy: Hierarchy of five human motivational needs arranged by ascending order of importance, developed by Abraham Maslow. The five ascending needs are physiological, safety, social, esteem and self-actualisation needs. Only unsatisfied needs are motivators. Once a need is satisfied, the next level emerges as a motivator. Globalisation: Worldwide movement towards economic, financial, trade, and communications integration. Globalisation implies opening out beyond local and nationalistic perspectives to a broader 11. Peter Berger, 1997, http://www.globalization101.org.

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outlook of an interconnected and inter-dependent world with free transfer of capital, goods, and services across national frontiers. Two major recent driving forces are advances in telecommunications infrastructure and the rise of the Internet. Consumerism: The movement seeking to protect and inform consumers by requiring such practices as honest packaging and advertising, product guarantees, and improved safety standards. It also refers to a doctrine that ever-increasing consumption of goods and services forms the basis of a sound economy.

Objective Type Questions 1. Which of the following aspects form the main constituents of culture? (a) Ecology or geography (b) Heritage (c) Social fabric (d) All of these (e) None of these 2. Some of the elements of culture are: (a) Cultural values (b) Nation and social stratification systems (c) Performance orientation (d) Language and religion (e) All of these 3. We all exchange messages through a host of nonverbal cues, which form a silent language. These cues are: (a) Colours (b) Body language or kinesics (c) Distance (d) Senses (e) All of these 4. In which culture “Yes” is not indicated by a sideway movement of the head? (a) Greek (b) Turk (c) Bulgarian (d) United States (e) India 5. All cultures can be classified based on a number of differences and dimensions; each dimension distinctly separates the nation’s cultural character as given out by Hofstede in his four point differentials theory. These dimensions are: (a) Power distance (b) Individualism (c) Uncertainty avoidance (d) Masculinity (e) All of these 6. In countries where trust is high, the cost of doing business will be: (a) Lower (b) Higher (c) Immaterial (d) Remain the same (e) None of these 7. The process, known as acculturation, refers to the situation where the international marketer acquires: (a) The norms, rituals and ethics of foreign culture while working abroad (b) The norm’s rituals and ethics of domestic culture

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(c) Knowledge about all cultures (d) Knowledge about home culture (e) None of these 8. Imperatives refer to the norms for doing business in a foreign country the way business is done by: (a) Locals (b) Foreigners (c) Expatriates (d) All the people (e) Other nationals 9. Cultural exclusives refer to activities that are performed only by: (a) Only locals (b) Only foreigners (c) All the people (d) Only expatriates (e) Immigrants 10. The interpersonal relations and intrapersonal relationship based on the power equation formations in the work place hierarchical set up as discussed by Hofstede in his value survey model in Culture’s Consequences: International Differences in Work Related Values, refers toL (a) Power distance (b) Individualism (c) Uncertainty avoidance (d) Masculinity (e) None of these

Review Questions 1. What do you mean by cultural norms and values? Use examples to explain how different cultures have different norms and values. 2. “Religion is the foundation of all culture formation.” Explain with the help of examples. 3. Define culture. Explain what the main constituents of culture are. 4. Discuss nation as an element of culture. What cultural elements differentiate one nation from another? Use examples to explain. 5. How does language become an element of culture? As a marketer, how will you read the silent and non-verbal language of nations to devise your marketing strategy? Explain with the help of examples. 6. Define the term ‘cultural imperatives, exclusives and cultural adiaphora’. What dos and don’ts will you follow as a manager for an international marketing firm if you are sent to a new foreign country? Explain with the help of examples.

Project Assignments 1. Identify two companies,collect their advertisements across various countries and find out the reasons for the difference in the presentation of the advertisements. 2. Interact with some foreigners in your city and observe. Interact with Indians on the same questions and observe. Bring about the comparisons between the cultural differences and their perception on each other’s cultures.

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Suggested Readings Benedict, Ruth, Patterns of Culture, Houghton Mifflin, Boston, 1959. Dulek, Ronald E, John S. Fielden and John S. Hill, “International Communications: An Executive Primer,” Business Horizons, 34 January/February 1991. Gupta, Prabhu, Multicultural Aspects of Managing Multinationals, Management Japan, 26, Spring 1993. Graham, Cateora, International Marketing, Tata McGraw Hill, 2005. Hagen. E. on the theory of social change, Homewood, IL, Dorsey press, 1962. Hall, Edward T., Beyond Culture, Anchor Press, Garden City, New York, Doubleday, 1976. Harris, Philip R. and Robert T. Moran, Managing Cultural Differences: High Performance Strategies For A New World Of Business, 3rd ed., Houston, Gulf Publishing Company, 1991. Hofstede, Geert, “Cultural Constraints in Management Theories”, Academy of Management Executive, vol. 7, No. 1, 1993. Joshi, Rakesh Mohan, International Marketing, Oxford University Press, 2005. Lascu, Dana-Nicoleta, International Marketing – Managing Worldwide Operations in a Changing International Environment, Atomic Dog Publishing U.S.A, Biztantra 2003. Warren J. Keegan, Global Marketing Management, 7th ed., Pearson Education, 2007.

Useful Weblinks http://www.thenation.com http://www.globalization101.org http://multinationalmonitor.org. http://www.prospect-magnize.co.uk http://parpics.wordpress.com/

Case Cross-cultural Marketing and the Abu Dhabi National Oil Company’s (ADNOC) Petrol Stations’ Self-service Trials Nnamdi O. Madichie, PhD University of Sharjah, UAE The United Arab Emirates (UAE) has become to household name in the twenty-first century international marketing environment. The country boasts a host of international banks, brands and universities from Western Europe and North America. All these corporations and educational institutions have marketing outlets that encourage self-service, e.g. ATM and online banking; selfscanning facilities and online shopping at retail outlets; and online learning and/or blackboard technologies. However, the concept of self-service has not been reported in the light of petrol station forecourts—not the least in an emerging market context with very strong cultural nuances of being served.

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In the UAE oil (petrol) distribution sector, three key players exist (all domestic companies)— ADNOC (Abu Dhabi National Oil Company), EMARAT (Emirates General Petroleum Corporation), ENOC (Emirates National Oil Company and its sister company EPPCO or Emirates Petroleum Products Company). Abu Dhabi-based ADNOC is the clear market leader with about 170 petrol stations across the country from the capital Abu Dhabi, Al Ain, to the Western region and the Northern emirates. The company launched its first self-service pilot programme at 15 stations in Abu Dhabi in March 2008. The key market challenger, ENOC (and EPPOC) petrol has about 167 petrol stations in total. The company introduced the self-service concept on 12 August 2008 in ten petrol stations in Dubai and the Northern Emirates. However, both companies have long withdrawn trials of this new phenomenon in market for reasons that have been linked to culture.

Background Abu Dhabi National Oil Company (ADNOC) was established in 1971, with operations in all areas of the oil and gas industry and since then has steadily broadened its activity by establishing subsidiaries and creating an integrated oil and gas industry in the capital, Abu Dhabi. Currently, the company manages and oversees oil production of more than 2.7 million barrels per day, which ranks it among the top ten oil and gas companies in the world. Over the past three decades, ADNOC has expanded its business activities, with substantial interests in upstream and downstream activities, including transportation, shipping, marketing and distribution. ADNOC has 14 subsidiary companies working in various fields of the oil, gas and petrochemical industry as well as crude oil and gas transport and services. Notable examples include GASCO, Borouge, and ADNOC Distribution – with the latter having been established in 1973 to oversee the marketing and distribution of petroleum products in the UAE. As an operator of service stations equipped with the latest technology, ADNOC Distribution is a pioneer and market leader—being one of the biggest such operators in the Arabian Gulf as well as operating in the fields of aviation refuelling and allied services, with a clientele base of over 50 international carriers and five airport terminals in the UAE. In addition to its fast-expanding network of over 170 petrol stations, ADNOC recently introduced new image ‘Millennium’ service stations, which range from gas refuelling, car washing, lube bay to tyre changing, and include an Oasis Service Centre comprising a convenience shop, food court and rest area. Payment is accepted in cash and by credit card, and also by company smart cards – especially used by many of the taxi firms. Furthermore, ADNOC Distribution also recently introduced car inspection services, operated in coordination with Abu Dhabi General Traffic Directorate. The subsidiary also played a major role in the ‘UAE Goes Green’ campaign to phase out leaded fuel across the country. The Unleaded Gasoline Project adopted by the firm involved the conversion of 500 petrol stations nationwide to unleaded gasoline, the training of transport and service station personnel, and an awareness campaign for about 750,000 UAE motorists— the changeover took place on 1 January 2003. On the back of these initial successes, the self-service concept was initiated at ADNOC filling stations on a trial basis in March 2008 with plans to eventually replicate these at all stations. However, it was another player, ENOC which bore the ire of motorists when it launched the

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self-service concept in August 2008. Motorists’ non-adoption of the service was based on the notion that they would prefer self-service stations if the system were well organised. According to the Fujairah Observer (a local newspaper in the eastern most part of the seven-emirate nation), critics raised concerns of the complicated nature of ENOC’s trial of self-service at its petrol forecourts. Notably amongst the complaints was that motorists were required to pay a cashier for what they expected to pump before filling their tanks. This meant that if they did not pump the correct amount they had to return to the cashier for change or to pay the extra. It was not surprising, therefore, that the initiative would have to be either substantially transformed or shortlived. The latter was the case as ENOC discontinued self-service petrol (gas) stations about four months later in November 2008. Unlike ENOC’s scheme, however, ADNOC customers were provided with the option of choosing between ‘self-service’ or ‘full-service’ pumps. Furthermore, even motorists pulling up at selfservice pumps still had the option of their tanks being filled by an attendant. Overall, it can be argued that ADNOC’s move to install self-service pumps that allowed motorists refuel their cars, was still not very well received by the general public for reasons other than the complications identified in the case of ENOC. As things currently stand, the concept of self-service is still being cautiously watched by the general public and the marketers alike.

Theoretical Context The concept of self-service has been studied – albeit from other areas outside of petrol forecourts. For example, while Alawi (1986) tried to make sense of the concept from an Arab (i.e. Saudi Arabia) perspective, Globerson and Maggard (1991) attempted a conceptualisation of the phenomenon in general. Salib and Wahba (2005) considered the phenomenon from a telecoms perspective in another Arab context (Egypt). Curran and Meuter (2005) examined the concept from a banking perspective where three technologies were compared – automated teller machines (ATM), phone banking and online banking. Beatson, Lee and Coote (2007) evaluated self-service in the hospitality sector (e.g. hotels) and noted its impact on what they alluded to as the ‘service encounter’ – i.e. at the point of ‘use’ and Nilsson (2007) considered this usage from a cross cultural perspective. Salib and Wahba (2005) considered the enquiry of self-service technologies (SST) from the perspective of the Egyptian telecom industry with the aim of extending Davis’ Technology Acceptance Model (TAM) and explaining how perceived usefulness, and perceived ease of use can influence the consumer in terms of intention and actual use of SST. Testing the TAM in Egypt, promising responses towards internet self-service were observed. Two additional critical success factors are derived from these – self-service is dependent on (iii) perceived usefulness; and (iv) perceived ease of use. On their part, Globerson and Maggard (1991) presented a conceptual model of self-service where they focused on ‘the concept of self-service within the service sector, reviewing several common classification and evaluation schemes.’ A model of the self-service sector, incorporating attributes from the consumer, organisational, and environmental sectors, was consequently advanced with the intention of providing a framework for current understanding and future research into an increasingly important subject.

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In a separate but earlier study, Curran and Meuter (2005) compared three technologies on the self-service adoption process. They argued that “...advances in technologies have allowed service providers to incorporate many different technologies into the delivery of their services.” While noting the varying degrees of success in the adoption of SST in the US, they proposed an examination of factors that influenced consumer attitudes towards such adoption. Furthermore, using what they considered to be ‘a conceptual model of the adoption process for SSTs, Curran and Meuter (2005) went ahead to develop and test across three different technologies used in the banking industry –ATMs (available for many years and is widely adopted); phone banking (available for many years but not yet widely adopted); and online banking (relatively new to the marketplace). According to them, different factors influenced attitudes toward each of these technologies and thereby explained the varying degrees of acceptance found among consumers, which would require careful consideration of ‘multiple factors […] when introducing technologies into the service encounter…’ The authors nonetheless admitted that ‘the three different technologies used were all based in the banking industry, which limits the generalizability to other industries.’ This latter point is very instructive for two reasons. First, while Curran and Meuter’s study was on the banking sector, this case study focuses on the petrol retailing sector. Second, self-service in this context does not really require any technology adoption per se as it only involves consumers filling up their tanks themselves. Moreover, using randomly distributed questionnaires in Sweden and Estonia to investigate cross-cultural variations in the demographics of consumers using SSTs, Nilsson (2007) reported that while Swedish users were demographically heterogeneous, their Estonian counterparts could be segmented along demographic lines. He, therefore, called for a larger study conducted in several cultures as having the power to “add to our knowledge of a culture’s influence on an individual’s SST usage [noting that] …business models used in ‘Western’ markets may not be applicable to emerging markets because of cultural differences.”

Survey Findings The survey of taxi drivers enquired about their different experiences such as–personal views towards filling up their petrol tanks themselves, attitudes by marketers to experiment with the concept, how the trial has affected them, and how best they thought refuelling vehicles in the UAE can be undertaken in order to ensure its adoption by the public. In every situation, responses seemed to converge on one central theme “It’s not my job!” There were also parallels drawn from the use of ATM where most of the respondents could see a more acceptable need for self-service “no need to queue for your own money and the service is round the clock (i.e. 24 hours cash access – convenience).” Most of these were deemed to be a necessary evil that most consumers could cope with—as noted in phrases such as “Alhamdullah” (meaning cannot complain, really). Additional cultural cues were also inferred from the long-established norms of the country – the culture of being served. Typical among the popular responses were: I don’t have time for this nonsense not when I have paid for it…! Don’t you see families in the shopping malls with maids taking care of their children? This is the norm even when the mother is a housewife – she still needs a maid to help out. I’m sure you must have noticed that Maids rooms are part of the design of villas here in Sharjah.

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What does that tell you? As SST is a relatively new area in services marketing, there are still limits to the understanding of its potential consequences on consumers. While there are a number of studies investigating consumers’ intentions to use SST, and the factors influencing consumer adoptions of such, there is limited research of its impact in non-technological encounters or in ‘non-internet’ settings. Moreover, Forbes’ (2008, p. 324) remark in this regard is quite illustrative ‘...an important insight from this research is that management strategies for traditional retail settings… will not be perceived as successful in non-internet SST settings.’ There is also a message in the framework outlined in Beatson, Lee and Coote (2007, p. 87) which suggested that any approach ‘to investigate the impact of self-service technology on the service encounter [with implications that] service organisations should ensure that they keep abreast of consumer acceptance of selfservice technology in the service encounter.’

Conclusion From the survey of UAE petrol stations, it seems evident that cultural differences are of limited applicability even where the key players are all domestic. Moreover, the impact from the consumer perspective does not provide any evidence to suggest that acceptance or otherwise was culturally contingent. Nonetheless, the views of a sample of customers at UAE petrol pumps tend to suggest that the country may not be ready to adopt the self-service concept in this particular sector owing to a variety of cultural nuances cutting across the multicultural society. However, not much technology is required in “filling up your petrol tank” and hence the concept should be considered in non-technology terms as well. Fitzsimmons (2003) pointed out over half a decade ago that most studies have been in other areas outside of the petrol forecourts. This mini survey, therefore, marks a good start in extending the parameters of the concept to previously untested sectors. Be that as it may, there is still a need for further in-depth consumer research to improve our understanding of some of the themes highlighted here and how they may impact cross-cultural marketing in the near future.

Discussion Questions 1. Explain the cross cultural implications of introducing the self-service concept at petrol stations in the UAE. 2. Why do you think consumers in the country seem more receptive to self-service at supermarkets and banks but not petrol pumps? 3. What would you advise petrol marketers to do in the light of this resistance to adopt selfservice? 4. To what extent do you think Nilsson’s (2007) position calling for a larger study conducted in several cultures as having the power to “add to our knowledge of a culture’s influence” of self-service may be true in this case? Sources: Alawi, H. (1986) Saudi Arabia: Making sense of self-service. International Marketing Review, vol. 3, Issue. 1, pp. 21 – 38; Abdul Kader, B. (2008) Self-service pumps fuel controversy in Abu Dhabi. Gulf News, March 10. Available online at:

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http://www.gulfnews.com/Nation/Traffic_and_Transport/10196304.html; Beatson, A., Lee, N., and Coote, L. (2007). Self-service technology and the service encounter. The Service Industries Journal. vol. 27, No 1-2, pp. 75 -90; Beckeman, M. (2008) The ‘Edisons’ behind radical innovations. International Journal of Management Practice, Vol. 3, No. 2, pp. 164-178; Curran, J., and Meuter, M. (2005). Self-service technology adoption: comparing three technologies. Journal of Services Marketing. vol. 19, Issue 2, pp. 103-11; Fitzsimmons, J. (2003) Is self-service the future of services? Managing Service Quality, vol. 13, No. 6, pp. 443-444; Forbes, L. (2008) When something goes wrong and no one is around: non-internet self service technology failure and recovery. Journal of Services Marketing, vol. 22 (4): 316-327; Globerson, S., and Maggard, M. (1991) A conceptual model of self-service. International Journal of Operations & Production Management, Vol. 11, No. 4, pp. 33-43; Nilsson, D. (2007) A cross-cultural comparison of selfservice technology use. European Journal of Marketing. Vol. 41, Issue 3/ 4, pp. 367-381; Salib, S., and Wahba, K. (2005) The acceptance of ‘self-service’ technology in the Egyptian telecom industry. International Journal of Technology Management. Volume 31, No. 1-2, pp. 20-38; The Fujairah Observer, March 2008. Online at: http://www.fujairahobserver.ae/january09feature. html

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Learning Objectives After reading this chapter, you will understand: How world political environment affects international marketing Why sovereignty and interdependence of nations is essential for international marketing Various kinds of government and the way countries are being ruled and governed internationally The political risks involved in international business measures to avert it

INTRODUCTION The business of firms that are involved in international marketing is affected by the environment in which they operate. It is beyond the explicit control of international firms to control this environment. They have to subject their plans, growth strategies and day-to-day functioning to the economic systems, fiscal policies, procedures and laws enacted by the governments that rule these nations. Although the opening up of the economies worldwide has brought the nations closer to each other, it has also brought along with it vulnerability to the financial and economic freedom of smaller nations. These nations, while they would like to enjoy the fruits of internationalisation of firms, trade and finance, their rulers, business lobbies and other pressure groups would like to protect their own interests by taking recourse to the laws of the land. The opening up of world economies in such circumstances means that an economy allows free operations to international businessmen, subject to their adhering to local rules, regulations and managing the delicate balancing act with their home country governments. International companies like Coca-Cola and Pepsi faced this recently in India, where political compulsions of many state governments encouraged them to ban their products in their states. IBM and Coke had to move out of India in the early 1970s, when the ruling party at the centre decided to oppose the multinationals operating in India. Many other companies have not only lost their business in countries like Rwanda, Uganda, Burundi and Bosnia, even their assets have been looted and plundered. Similarly, multinationals worldwide expose their assets, business strategies and even expatriate employees to the mercy of the local authorities, social and consumer associations. These firms face legal, ethical and political challenges to their survival all across the globe on a daily basis, as their managers find

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out what is allowed by the foreign governments and what is forbidden by the laws of the land. Political expediency facilitates the growth of business for these firms when politicians take decisions favouring imports and exports, and the same politics acts as deterrents when they impose barriers in the shape of embargoes, tariffs and anti-dumping duties. Companies face multi-political systems all over the world. While they have to cope with the whims and fancies of dictatorial attitudes of rulers in some nations, they also get a warm welcome in development-oriented countries. In such countries, the sovereign or the politically elected governments welcome international trade and foreign direct investment to upgrade the living standards of their multitudes. The instability of political systems of nations due to recurrent elections, upheavals of the existing governments by civil wars, court rulings and other internal and external conflicts make the business of multinationals quite unpredictable. In such circumstances, an international firm needs to protect its interests by familiarising itself not only with the economic systems but also with the political systems, political environment and the laws of the land. This chapter focuses on different political and legal environments that have a direct and indirect bearing on the international business operations of the firm. PEPSI AND COKE TOLD TO DISCLOSE SECRET OR FACE BAN The highest judicial authority of India, the Supreme Court had ordered both the companies, i.e. Pepsi and Coke, to reveal the details of chemical composition of their soft drinks and other ingredients that Center for Science and Environment, a non-governmental organisation, had alleged that the soft drinks contained unacceptable and unpermittable levels of pesticides. The highest court of the country had also threatened suspension of sales, should the companies fail to reveal the secrets of their formulae. The report of the NGO had also caused a political debate within the country, questioning if children should be allowed to drink these soft drinks contaminated with pesticides. Some of the states like Kerala had banned entry and sale of these drinks in schools within the state. In fact, both the multinational companies had to suffer a drop in their sales after the controversy cropped up, causing people to prefer fruit juices over aerated soft drinks. Source: Adapted from the news in The Times of India, August 5, 2006.

POLITICAL ENVIRONMENT No business, whether at home or abroad, can be set up without assessing the ramification of the prevailing political environment. The politicians of the home and host countries both affect and influence business in all its forms. Whether domestic or international, the political schools of thought can lobby for or against a business, irrespective of whether they are in power or out in the opposition. Multinational firms face labour leaders, environmentalists, non-governmental organisations and social activists for one reason or the other, and the firms have to wriggle their way through and juggle to stay in the good books of the opponents as well as the favourites. Many times, international firms will have to harbour and harness political bosses and opponents to make them initiate new rules, regulations and amendments in the existing rule books so that the firms can run their business smoothly. It cannot be called political corruption or nepotism. It is simply hedging against the future uncertainties of doing business in an environment where those in power can make or mar a business by changing sides.

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POLITICAL EXPEDIENCY: WAL-MART “The goal of China’s unions is to build a harmonious society.” Wal-Mart who had not permitted its 1.3 million U.S. employees to organise a union, announced it would allow its workers in China attempts to unionise, in one case, closing a meat-cutting division after ten butchers voted to unionise. Nu Wexler, a spokesman for WalMart Watch, says the company “is applying an inconsistent double But if unions are a barrier of entry to an emerging market, Wal-Mart is Labour experts Oded Shenkar of Ohio University and Richard W. Hurd of Cornell both suggest, in Bloomberg News’s coverage of the announcement, that the retailer probably agreed to allow unions under pressure from the Chinese

investments to any part of the world. http://www.washingtonpost.com/wp-dyn/content/article/2006/08/09/AR2006080901924.html

“When Pepsi and Coca Cola faced public wrath through the disclosures by an activist of non-governmental organization in India about heavy doses of pesticides in their respective soft drinks, the international firms were cornered for a while but a strategy to cater to a few social activists, lobbyists and political influencers extracted a statement from the Central Government representatives on the floor of the Parliament in favour of the soft drink giants.” Similarly, such lobbying had been used earlier on the floor of the House when the then environmental and health authorities had given a clean chit to mineral and distilled water manufacturers on the same issue. Multinational firms face such issues all over the world. Such risks do not necessarily exist in host countries alone but are present in home countries as well. Political scenarios and political lobbying can affect business of international firms at home too. Companies can face embargos from governments for taking their business to another country, especially one that may have fallen foul of the international community, for example North Korea and Cuba. American companies like Pepsi, Coca Cola, IBM, McDonald’s and Kentucky Fried Chicken (KFC) have, in fact, faced the wrath of consumers and political repercussions from many countries, whenever the United States administration has tried to impose restrictions and embargoes on business relations with other countries, either by banning complete exports or by restricting imports quantity on select items , or changing tariff structures, etc. Many American firms, therefore, try to adopt a different approach to pacify and please the public, consumers and law makers in the host country and dissociate themselves from the repercussions of the variations in the changing attitudes of their government. The instance of Wal-Mart allowing formation of unions in the workforce of its China operations, as against the policy adopted in U.S. where the firm has been opposing any kind of group organisation of its employees, is a case in point where the firm has been influenced by the local politics of the host country. This chapter deals with a detailed and comprehensive assessment of political environment and its essential features.

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Political Systems and Global Business Global economic interdependence has dramatically affected the ways in which countries and businesses relate to one another. The challenge of global competition today has caused numerous and profound changes in the political environment in which businesses must find their way and, consequently, the ways in which nation states act and react to each other. As a result, no single country can be immune to the impact of such fundamental change. An independent state territory today also is a political map, demarcating the boundaries between countries as clearly as ever. But on a competitive map, a map showing the real flows of financial and industrial activity, those boundaries have largely disappeared. Through this flow, all human beings of the world have become global citizens, and so have the international firms and multinational companies that want to sell products and services all over the world. The risks and benefits associated with global business are both very real. This vastly increased importance of trans-national business opportunities not only permits but also invites nations’ efforts to exert influence over others as an extension of the home country political systems and their foreign policy. The United States, certainly, has not been hesitant to apply sanctions in order to further its interests. In fact, it has rather liberally used sanctions in this regard. Between 1993 and the present, the US applied sanctions 61 times against 35 countries. This has been a popular option ‘of choice’ for the US decision makers. These have often been then applied as an alternative to military action as, for example, against Iran and Libya for their perceived efforts at supporting terrorism, or against Iraq in an effort to dissuade it from invading Kuwait. As indicated above, however, there is considerable debate about the effectiveness of these sanctions. One study showed that of the 150 examples of sanctions imposed during this century, “... only one in three made even a modest contribution towards the intended goal.” Moreover, sanctions are not without economic effect on the country imposing them. They can, in fact, be an ‘expensive’ option. For example, it is estimated that the application of sanctions cost the US in 1995 alone $15 to $19 billion in lost export revenues. The U.S. trade embargo of Cuba, as an economic extension of the U.S. foreign policy, seems not to have been successful. It has not caused Cuba. The continuation of the embargo does not appear to offer high prospects for success. In fact, by doing so, it seems that the U.S. will merely continue to impoverish the Cuban people, alienate its allies and trading partners, and cause its own businesses to be in a poor competitive position when Castro 1

An Independent and Sovereign State At the base of all political systems of the world lies the very foundation of an independent nation. A state that has its own legal entity free from any external or foreign power control whether political, legal or economic, a state that enjoys full legal and constitutional control on its geographical territory and is free to enter into any kind of trade agreement with other nations is called an independent sovereign state. This is a state where citizens’ rights are subject to the laws enacted by the political and legal system of the established constitution. These citizens are governed by the country laws, even if they reside outside the boundaries of the state. Even foreign businessmen and firms citizens and visitors must abide by and respect the legal rights of this state to govern their actions when they enter its boundary. There are more than 192 independent nations in the world today, each enacting its own industrial policy labour laws, trade laws and fiscal taxation laws. These 1. Colonel Ralph J. Capio and Christopher J. Capio. United States-Caba Relationship: A Time for Change http:// www.airpower.maxwell.af.mil/airchronicles/cc/cuba2.html

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governments decide whether to encourage local investments outside the country or to welcome foreign direct investments within the country, whether its citizens will have the rights to build property or assets outside the national frontiers or the foreign nationals, firms and businessmen will be permitted to build up their assets within this country.2

Interdependence of Nations The global expansion of international marketing and business interests of nations can take place only when different countries open their doors to and for foreign goods, services, trade, industry and investments. Today, no nation can exist on its own, isolating its citizens from the developments taking place across the globe. The governments and their stability, in a way, are dependent on what is happening economically and politically not only in their immediate neighbourhoods, but also across distant nations. Thus, the fall of the East block, the fall of Taliban government in Afghanistan, or even a nuclear explosion in North Korea, the U.S. and its allies waging war against Iraq, all have their repercussions and the tremors are felt all across the world. The flow of capital today depends upon a nation’s willingness to open the door to other countries and thereby giving up a part of its sovereignty and authority to other countries in order to ensure the citizens of the world can coexist and reap the rewards of all round development taking place. The nations come together in the form and shape of ASEAN, NATO, WTO, NAFTA and E.U., after yielding space to other nations from a part of their own independence and authority for common causes of mutual development. However, nations and sovereigns keep a hawk’s eye on their rights of independence and sovereignty. That is why we can see nations often objecting to certain clauses of WTO, riders being attached to foreign direct investments and many a nation insisting on local nationals compulsorily being on board of multinationals. “There is an increased level of visible distrust of multinational firms across the world calling for creation of codes of conduct for them.”3 Countries react to any action of multinationals that seem to be an infringement upon their sovereignty and independence. A move by the United States to cut business of European exports of non-essential items like cheese, perfumes, soaps and accessories by imposing tariff barriers evoked a strong protest from Europeans against American multinationals like McDonald’s and Coca Cola.

Issue of Home Country vis-à-vis the Host Country International firms operating in different countries have to strictly adhere to the laws and regulations of the home country from which they originate and the host country in which they operate. That is why companies will have to be aware of the political problems that can arise due to conflict of interests of both the countries. Normally, international firms will avoid direct entry into countries that are hostile to their home country and may adopt a circuitous route of indirect franchisee from the host country. But the risks still remain, when sweeping public, political, cultural or economic changes take place in host countries. There are examples of sweeping political upheavals in countries like Cuba (1960), the Iraq and Iran war, the Gulf war, and the war against Iraq by the U.S. and its allies have cost billions of dollars of destruction of multinational companies’ business opportunities and assets. The day-to-day functioning, policy making, local NGOs and political parties, ideologies, both in home country and host country do affect companies’ business prospects abroad. 2. Changing Concepts of Sovereignty: Can The United Nations Keep Pace, Muscatine IA; the Stanley Foundation, 1992, p. 7. 3. S. Prakash Sethi, Setting Global Standards: Guidelines for Code of Conduct in Multinational Corporations, (Hoboken N J: WILEY 2003).

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The U.S.-China relationship and the swings of coming closer and yet going apart have been quite a clear example of how relations between two countries impact international business. The U.S.-China business relationship had been re-established under the Nixon administration in the mid-1970s, urging direct foreign investments. The joint ventures, entered into by Chrysler of United States, Volkswagen between the two countries when the United States government openly criticised China’s violation of human rights in the Tiananmen Square incident in 1989. The trade relations accordingly have felt the same strain again. The relationship started normalising again when China entered the WTO, when the United States offered permanent trade relations to China. This promises a bright business environment to U.S. multinationals again. Source: http://en.wikipedia.org/wiki/Sino-American_relations

A multinational management, thus, has to be in the complete know and grip of what is happening in its home country politics and how it will affect its host country politics and vice versa. Similarly, they must be in a position to assess the political winds of change in their host country and how these changes will affect the relationship between two countries. A change from Labour to Democrat or from right to left wing can alter complete philosophy and thinking of the government and the foreign relation policy of the countries, directly jeopardising the interests of multinational business.

TYPES OF GOVERNMENT AND POLITICAL ECONOMIC SYSTEMS The legal and economic systems of a country are determined and imposed by the political systems and political sanctioning of a country. This constitutional (or unconstitutional/arbitrary) authority can be measured for any country on two dimensions as these dimensions will eventually help a firm design and direct its marketing strategies for different countries. The first dimension is the degree to which they give importance to collectivism, that is, the emphasis on common good for all through the state, as against the welfare of the individual. The second dimension looks at their being democratic or totalitarian. A detailed discussion on all systems of governments follows.

1. Collectivism vs. Individualism The term ‘collectivism’, when used in political parlance, refers to a political system that stresses the primacy of the collective goals over individual goals, and the needs, welfare and benefits of a society as a whole are given more importance over those of an individual. Individual rights in such a system are curtailed to the extent that they should not be contrary to the common good of society. Societies also get affected as per the systems adopted by politics. In the West, there is a greater emphasis on individualism. People like their individuality and freedom in countries like Great Britain, Australia and Germany. Their fulfilment of personal advancement, progress ability are stressed more than anything else. In the East, however, individual rights have been subjugated to collective goals. Hence, societies in Asia prefer common goals to individual goals. The recent trend of opening up of economies, however, is bringing out individualism in these societies too. Perhaps this is so because “culture tends to evolve from collectivism to individualism as countries become industrialised and individuals express their own identity”.4 The collectivism today has been coined as a new mantle of socialism. 4. Harry C Triandis, “The Self and Social Behavior in Differing Cultural Contexts,” Psychological Review, July 1989, vol. 96, pp. 506–520.

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2. Socialism Traces of socialism can also be seen in Plato’s philosophy. The Greek philosopher had argued in The Republic that “individual rights should be sacrificed for the good of the majority and that property should be owned in common.” In the modern context, socialism has been advocated by Karl Marx, who propagated the view that “few benefit at the expense of many in a capitalist society, where individual freedoms are not restricted.” He opined that while capitalists gain considerable wealth, the majority of the workers who earn their wages by working for capitalist will be reduced to subsistence level. He, therefore, advocated state ownership of the basic means of production, distribution and exchange (tools used by capitalists) to ensure no exploitation of the labour class takes place and that workers are fully compensated for their labour by the state. Socialism, thus, is a system that advocates government ownership and control of industry considered critical to the welfare of the nation.5

3. Communism vs. Social Democrats The early 20th century saw the emergence of a new kind of communism, which believed that socialism could be achieved only through a violent revolution and totalitarian dictatorship. The social democrats, on the other hand, held the view that socialism could be achieved by democratic means and that dictatorship and totalitarianism was not in favour of public good. The early 1970s saw the world polarised into communist states and socialist states: the former Soviet Union, Eastern European nations like Poland, Czechoslovakia and Hungary, besides Asian countries like China, Cambodia, Lagos, Vietnam and African nations like Angola, Mozambique were all under communist rule. In addition, Latin American nations of Cuba and Nicaragua were also governed by communism. By the mid-90s, however, communism collapsed. The Soviet Union was the first to fall and the 15 constituencies of republics declared themselves nominal democracies. Eastern Europe too saw communism retreating. The Eastern bloc countries opened up. East Germany was unified with West Germany and a common democratic Germany was formed. Even though individual political freedom in China is curtailed, the nation is moving away from communism today. Social democracy reached its zenith in quite a few nations like Australia, France, Germany, Great Britain, Norway, Spain and Sweden, where social democratic parties have been in power for a long time. India’s move of nationalisation and building up of public sector enterprises from telecommunication, railway, airlines, electricity, gas, oil and steel and even higher education had been modelled on the British system, where public good rather than personal gain has prevailed. The state-owned enterprises created a monopolistic entrepreneurship for the governments, eliminating all kinds of competition from within and outside the country. This closeness meant that the public had to pay for the inefficiency of government machinery by way of higher taxes and higher prices for goods and services. As a result, the trend started a reverse journey in many of the nations. A number of western democracies voted social democratic parties out of power in the late 70s and early 80s. A new breed of political parties, committed to free market economies, emerged in the Great Britain and Germany. These parties, such as the Conservative Party of England and Christian Democratic Party of Germany, started selling government-owned and managed enterprise to private owners. Although India was late in following suit, many public enterprises have been hived off by the government to private entrepreneurs in past decade or so. This system can be explained further with the help of examples. 5. Joseph A Schumpeter, Capitalism, Socialism and Democracy, New York Harper and Collins, 1947.

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Individualism The propagators of individual freedom believe that every man should have freedom to pursue his economic and political aims and that the welfare and interest of the individual should take precedence over the interest of the state. Rather, the sole focus of the state should be to ensure individual freedom and individual economic and political welfare. Aristotle, the Greek philosopher (384-322BC), had advanced this theory that was exactly opposite and contrary to Plato’s theory of collectivism. This theory believes that private ownership for the good of the society is desirable. According to Aristotle, since private property will be nurtured by individuals, it will stimulate more growth and progress; he further opined that community property receives little care by those who administer it. Hence, free enterprise will be more productive for a nation’s development. This philosophy of individualism has been followed by protestant trading nations of England, and Netherlands in the 16th century, when individual wealth seekers spread out around the world to look for new opportunities of private enterprise and trading. East India Company, discovery of America and the Portuguese traders’ discovery of India were each the outcome of private and individual efforts to seek new pastures of trade around the globe. Many British philosophers advocated and refined the concept of individualism, for instance David Humes (1711–1776), Adam Smith (1723–1790), and John Stuart Mill (1806–1873) and, in recent years, Milton Friedman, all have championed the philosophy of individualism. The very foundation of United States of America’s independence had been laid by the thought of individual freedom and self-expression. The only curb on an individual’s self-expression by the authority of the state can be in terms of protection of others’ rights to self-expressions and freedom, which, in turn, allows and guarantees each living human complete control over thought, expression, action and individuality, so long as it does not harm the rights of others. This way, the welfare of the society is well preserved and protected because when an individual’s economic and political freedom is guaranteed, his pursuit of wealth and knowledge increases manifold for society’s own development. Individualistic societies and cultures like the United States, Great Britain and Australia, have influenced in more recent years the revolutions of Eastern Europe and the former Soviet Union. It has also found acceptance in countries in the Middle East and South Africa.

Democracy and Totalitarianism In democratic states, the government is elected by the people and is administered and run by the representatives of the people or by the people themselves directly. A true democracy will have a multi-party system. These parties and elected representatives will run the government on behalf of the people of the country, as per the law enshrined in the constitution of the country. A typical democracy will have the following protective and safety measurements guaranteed by the constitution: 1. 2. 3. 4. 5. 6. 7.

An individual’s right to freedom of expression, opinion and organisation. A free media. Regular and periodical elections in which all eligible citizens are allowed to vote. Universal adult suffrage. Limited and fixed term for elected representatives. Fair judicial system, which is independent of executive. Non-political state bureaucracy.

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8. Non-political law enforcement agencies and armed forces. 9. Free access to information related to the government (for example, Right to the Information Act in India).

Totalitarianism A totalitarian country, whether based on one philosophy, one tribe or one political party, denies its citizens all those guarantees on which democratic nations thrive, for example the right to freedom of expression and organisation, right to vote and elect their own government and free media. On the contrary, repressive measures are used to keep the citizens in check from revolting or expressing their opinion against those in power. Even bureaucracy is a rubber stamp of the totalitarian government. All the countries governed by communist regimes, who believed socialism can be achieved through dictatorship, supported totalitarianism. Soviet Union’s failure, as discussed earlier, brought the retreat of communists from all these countries, even in China. Totalitarianism can be classified into three categories.

(i) Religious Totalitarianism This is found in many states where religion sanctions the power of the state through a single party, individual or group. The dictatorial attitude flows through the laws established by the majority religion of the land and day-to-day life is also governed by religious fundamentals. Islamic states of Iran and Saudi Arabia are totally based on religious totalitarianism. Pakistan too, to some extent, mixes religion with the powers of the armed forces in running the country. It is worth noting that approximately 99% people in those countries belong to the Islamic religion.

(ii) Tribal Totalitarianism It has been based on one tribe rule in many African countries like Zimbabwe, Tanzania, Uganda and Kenya. Different tribes have been ruling these countries, drawing their power from tribal laws established by customs and traditions of centuries. One family or one particular tribe seizes power from the people and, irrespective of the fact whether the majority is with them or not, rules over the country. This is the most repressive form of government where those who oppose it are, many times, deprived of right to life also. The history of many African nations is replete with stories of mass massacres and subjugation of the opponents of the ruling tribe.

(iii) Right Wing Totalitarianism It occurs when the political freedom of the people is curtailed even though economic freedom is allowed. The rulers of fascist Germany, Italy, South Korea, Taiwan and Philippines have all been governed by rightwing extremism through military dictatorship, even though majority of these countries are committed to true democracies now. Even in Latin America, till the early 1980s, the right-wing dictatorship prevailed through the military.

POLITICAL RISKS IN INTERNATIONAL MARKETING When an international firm crosses its home country borders, it exposes itself to many perceived, well assessed risks as well as unimagined, unknown risks of political ideologies, political loyalties and political affiliations

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of different countries, governments, tribes and authorities. These risks can vary from losing complete business assets through confiscation to facing a hostile consumer attitude, to competing against a well-protected industry in the host country through price protections, patent laws and territory or business segment protections. Similarly, many other government actions, such as exchange controls and restrictions, licensing requirements, equity sharing rules and regulations, domesticating the foreign equity and product manufacturing contents, meeting with the non-governmental organisations specifications and standards, all pose political risks to the business functioning of international firms, ultimately telling on their bottom and top line performances. International firms do get advance signals and can smell and sense the beginning of such risks, but once the resources have been committed, it gets too late to pull out of their business.

Indications of Political Risks The firm’s public relations activities, business monitoring executives and liaisons agents who handle dealing with host governments can predict if a country is getting too risky simply by keeping track of business reports in financial periodicals and newspapers published locally as well as abroad, such as The Economist and Wall Street Journal, The Exchange Rate Publications and Currency Indicators, which can tell about the impending fall of economies. Economic Performance of the Country Nothing else leads to unrest in a country as much as economic backwardness. People who are underemployed, poorly fed and are deprived of the basic necessities get restless with unemployment figures going up or inflation rates jumping up exorbitantly. A firm can assess how the country has been meeting its commitments in servicing foreign debts, internal loans, maintaining hard currency and balance of payments systems. Political Stability Political ideologies bring out the vulnerability of international firms. It is not possible for a firm to take sides with any political pole yet, many times, politicians, who were in opposition till yesterday, immediately take out their wrath on the previous government’s policies. International businesses too fall a prey to such witch hunting. The companies can get affected and even thrown out by such political storms, although a few countries have changed their international policies with change in government. In India when the Narasimha Rao government had introduced changes in the government fiscal policy and opened the economy to bring in more foreign direct investments into the country, the government that followed, that of Atal Behari Vajpayee, followed virtually the same policies and continued the process of growth. Similarly, Italy has had practically a new government every year after World War II, but its business policies have not been changed. In fact, an international firm must undertake a complete study of political integrity of the country it wants to operate in, which can show how many times policies of governing the country and managing business have changed with each successive change of government. In African countries, however, where tribal and ethnics continue fighting against each other, international firms face highly unstable political policies yielding threat to their business every time a new ruler takes over. In Central and Eastern Europe, such instability has been witnessed in Serbia, Bosnia, Herzegovina, Croatia and others, whereas Germany has always witnessed a smooth change over, where two extremes, Conservatives at one time followed by a government believing in socialism, have been ruling from time to time. Besides change of governments, internal turmoil creates an equally unstable political scene for international firms. The Tamil separatists of Sri Lanka, the extremists in the north-east in India, the political riots of

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Indonesia, the Kurds and Iraqi’s turmoil, the mujahideen of Pakistan, all prevent expansion of international business as foreign direct investments to these countries get blocked. A recent World Bank study indicates that 47 nations of sub-Sahara African region attracted less than $2 billion annually in direct investments. Similarly, Sri Lanka also attracted a very low foreign direct investment due to ethnic strife continuing for so many years. THAILAND’S COUP COULD DERAIL A TIGER ECONOMY When tanks rolled into Thailand‘s sprawling capital on Sept. 19, countless Bangkok dwellers celebrated the ouster of a leader many urbanites had come to despise. But what they perhaps didn’t realise was that the coup d’etat that toppled Prime Minister Thaksin Shinawatra also delayed the arrival of rumbling vehicles of another sort: hundreds of light rail carriages. Indeed, a massive planned expansion of Bangkok’s rudimentary public transit system is just one of the projects that could be sidetracked during military rule. “We are not expecting big moves in infrastructure,” says Yiping Huang, a regional analyst at Citibank in Hong Kong. “The lack of working

political crises erupted, many economists were forecasting a similar scenario there, suggesting that its economy could grow by as much as 6 percent in 2007, as cranes and backhoes kicked into gear. Even before last month’s coup, the Asian Development Bank had lowered its projection for 2007 from 5.5 to 4 percent due to political instability and last week its chief economist Ifzal Ali called Surayud’s comments “unnerving”. Citibank’s Huang has revised his growth forecast for next year a full point downward to 3.9 percent, fearing that “no proactive economic activities” would occur before fresh elections, set for October 2007, are held. And, in a sign of queasiness, GE Capital last week postponed for three months its planned $ 600 million investment in the bank of Ayudhya, Thailand’s sixth largest lender. Source: Adapted and Extracted from The Newsweek, George Wehrfritz, Growth or Happiness?, October 16, 2006, pp. 44–45.

Spirit of Nationalism The world is opening up. Each country wants to become a part of the global expansion of business and employment opportunities, those that international firms bring along with the investments they make abroad. The country has to provide and promote an atmosphere of global citizenship to all those expatriates who come and join the workforce but, at the same time, retaining its pride in cultural heritage and history. However, strong feelings of nationalism with slogans like Be Indian, buy Indian’ or ‘Buy American’, as echoed in the early 1980s in America for textile and automobiles or rejecting American apples as happened in Japan, poses political threats to international organisations across frontiers. It is seen that wherever nationalism has been strongly voiced, along with the ‘sons of the soil’ theory, foreign business has always suffered, leading to MNCs deciding to stay out of the country. Such a move has often been adopted in order to promote local business and keep foreign goods out of the country. The countries that believe in this dictum, that foreign goods can cause local businesses to shut down, adopt many repressive and detrimental measures against foreign companies by way of tariff impositions, quantity restrictions and other such barriers. Nationalisation of industry is the extreme step any country can take against international business. The ‘Swadeshi Movement’ in Bengal heralded a new age in our national history. Swadeshi was instantly Swadeshism became the cradle of New India. It was an intensely spiritual movement and aimed at the emancipation of India in every sense, of every Indian.

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With fervent national calls for the boycott of British goods, schools, courts and administration came stirring appeals for embracing Swadeshi in all spheres of life, in terms of indigenously manufactured goods, national education, language, literature and above all Swaraj, or political freedom, became the life-breath of the nation. Adapted from the News Today Special Story by V Sundaram, http://www.newstodaynet. com/2006sud/ 06aug/2308ss1.htm Populations that are concentrated regionally, who populate not only cities but the surrounding rural areas and who constitute the predominant population in their region are far more likely to be engaged in sustained rebellion against the state than dispersed or urban groups that have no regional base in which they are the predominant groups demographically. Groups whose ancestors lived in the region in which they now live and who constitute the predominant population of the region have a regional base. When groups that have a regional base face demographic pressures through internal migration they become likely candidates for rebellion. These groups are called the ‘sons of the soil’. Source: Adapted from “Sons Of Soil, Immigrants And Civil Wars’ James D Fearson, David D. Laitin, Stanford University. http://iicas.ucsd.edu/papers/GTCconf/soil11.pdf

Political Risks in International Marketing Business can manage many inherent risks in any new enterprise. It is assumed that any calculated business risk is managed by most of the firms. But any risk that is not necessarily induced by unfair competition, laws of demand and supply substitution of elasticity of demand or natural disasters is a risk that is brought upon the firms by man-made frontiers too. There are risks related to economic and fiscal policy framed by the governments of the home country, foreign countries and political ideologies. Thoughts and theories a country follows can shift overnight with a change in rulers and even a small unrest can engulf the entire nation, resulting in civil wars. The international firms have to ensure protection and safety of their business interests and properties. An international firm has to keep its eyes open to the ground to predict any small change or action by the host country leading to bigger crisis onwards.

Risks Related to the Government’s Trade Policies There are many ways in which the government of the host country can prevent business expansion plans of a foreign company or even jeopardise its existing business activities. The government can impose exchange control, prevent repatriation of funds to another country, suddenly impose restrictions on imports by way of quotas, tariff barriers or stipulate export conditions in return on international firms. Trade barriers, such as sanctions, economic boycott and suspension of diplomatic relations, can also be imposed by the home country of the firm, forcing the firms to close business in the country. China’s trade policy has seen many ups and downs, hot and cold winds with Indian firms, so much so that during the visit of the Chinese president to India, Indian firms, Indian press and the Indian Diaspora had to make a representation to the Chinese premier to re-examine his government policy towards Indian imports and Indians firms desirous of carrying on business in China.

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INDIAN COMPANIES SEEK RELAXED RULES IN CHINA Beijing has in the past carped at India’s decision to shut Chinese companies out of its market on security grounds. On the eve of Chinese president Hu Jintao’s visit, the UPA government in India had predictably got into a defensive mode and indicated that a more lenient view towards Chinese FDI was in the works. Yet, at the end of Hu’s visit, it became evident that if the mutual suspicion that blights bilateral ties between India and China is to be dispelled, several key issues impacting Indian business interests in China need to be redressed as well. A salient point raised by Indian CEOs at the India-China Economic, Trade and Investment Summit in Mumbai, relates to the restrictive regulations in China impeding synergy between companies. For instance, the experience of the Indian pharmaceutical companies operating behind the Bamboo Curtain years ago. However, the company’s revenue from its Chinese operations are a mere 1 per cent of its global revenue of $370 million. This may partly have to do with the fact that the Chinese pharmaceutical companies are too well entrenched and the competition is intense. But, as Dr Anji Reddy points out, “China’s market size is double that of India, so these sales are disappointing.” Dr Reddy’s as well as Ranbaxy Laboratories have been mooting a collaborative approach with their Chinese counterpart, involving cross investments and technology sharing, to jointly tap the global markets. Such an approach will provide an opportunity to source active pharmaceutical ingredients and intermediates to lower the cost of formulations. However, so excessive are the rules and regulations that the proposed synergy seems wellnigh impossible. Similar obstacles are evident in the IT sector as well. Indian IT companies may be welcomed in China but the fact is they get no projects from the Chinese government. TCS gets most of its business from

the investments norms are too stringent, demanding a heavy investment in case any one is considering a facility there. Tata Motors MD, Ravi Kant feels that this is a self-defeating proposition. “Despite global low”. Kant feels that auto manufacturers and component makers of both the countries should work together in areas of product development, branding and marketing. Source: Adapted from Business India, December 2006.

Risks Pertaining to Economic Policy Local taxes are not the only options a foreign government can take to make life difficult for an international firm. The local taxes and their impact can still be offset by the operating efficiencies of the international firm to some extent, as their economies of scale obviously are much higher than the localised, country-specific competitors. However, firms express their helplessness when countries and state governments resort to extreme measures of taking over the firm’s business by way of confiscation, expropriation or nationalisation. Firms have faced such extreme measures at the hands of Milton Obote (who had nationalised 60 percent of British companies in the 1960s) and Idi Amin (who had thrown out Asian businessmen after confiscating their business assets) in Uganda, Islamic Revolutionary Party in Iran, where Ayatollah Khomeini led the revolution, and Fidel Castro in Cuba. Similarly, Coke, too, faced such a situation in India in 1978, when the international firm had been asked to transfer 60 percent of its equity holding to Indians and declare the contents and formula of Coke. The Coke management preferred leaving Indian shores for good.

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Confiscation of International Firm’s Assets An international firm dreads the situation where its property, assets and business are forcibly taken over and confiscated by the host country government. Yet this has happened in many countries. Khomeini’s taking over of power from the Shah of Iran spelt doomsday for international firms, as their properties and businesses were confiscated by the Islamic Revolutionary Council. In such extreme conditions, no compensation is paid to the firm for leaving its assets behind.

Expropriation of Firm’s Assets When governments in the interest of local people and industry seize the firm’s investments in the host country and offer a nominal compensation for the same, such expropriated assets are then managed by the public sector agencies as nationalised units. Oil companies like Shell, Esso and few others were expropriated by the Indian government in the 1950-1960s, when it was decided to nationalise the oil producing and distribution activities in the country. Similarly in Cuba, Brazil, Afghanistan and east European countries, such havoc has been played with many international firms. Private companies were expropriated in Cuba in 1959–67, after the Cuban revolution of 1959. These companies (largely U.S. owned) were offered basic compensation, which was rejected by the United States. Egyptian President Gammal Abdel Nasser nationalised the Suez Canal Company on 26th July, 1956, provoking the United Kingdom, France and Israel to launch a combined attack on Egypt, which was stopped by the U.S. and the former Soviet Union.

Nationalisation of Business Assets When the governments for the cause of social benefits decide to move the property and assets of business from private hands to government-sponsored public sector undertakings or agencies, it is called nationalisation. In the interest of national benefits, countries have nationalised electricity generation and distribution, telecommunication systems, defence-related productions, road transport, oil production and distribution, banking sector and means of other transports like the railways and airlines. Such national interest is not challenged even in the international courts, as long as a valid reason and an adequate compensation is handed over by the country. private sector manages the assets better than the public sector.

firm or business, is adequately compensated for the value of the assets nationalised. The controversy arises when there is no compensation or when the compensation is unreasonably below the market value of the nationalised assets. Such a step by a government can be called expropriation. BOLIVIA AND GAS INDUSTRY On May 1 2006, newly elected Bolivian leader Evo Morales announced plans to nationalise the country’s natural gas industry; foreign-based companies were given six months to renegotiate their existing “When Mr. Evo Morales became President in January, he pledged to lift his country out of poverty. and then from rapacious multinationals. Mr. Morales, a former coca grower and a member of the country’s

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indigenous Aymara community, promised nationalisation of mines. Apart from gas, the country’s rich mineral reserves include tin, zinc, lead, silver, gold and wolfram. On the dusty roads of a campaign trail, the well-dressed executives of energy companies earning high salaries and declaring lavish dividends can look like blood-suckers of national assets who are denying prosperity to the poor. How simple would nuanced. So Mr. Morales announced a nationalisation of the country’s gas industry on May 1, and gave foreign companies 180 days to sign new deals giving the government majority control or leave the country. Soldiers were dispatched to take control. The markets were upset and papers predicted the end of foreign investment in Bolivia. Unlike the old style nationalisations when the government took over full control, Bolivia wanted the companies to stay and continue to operate under more stringent conditions. An earlier law had raised the state’s share to almost 50 per cent of production through higher taxes and royalties. Source: C. Gopinath, Market Realities Soften Bolivian Nationalisation, Business Line, Nov. 13, 2006.

Domestication Domestication refers to the host country insisting on the following: 1. Using locally manufactured raw material for manufacturing products of international firms. When Suzuki had joined hands with Maruti to manufacture cars in India, the 100 percent Indianisation of the car over a period was the stipulated condition in the collaboration contract. Developing Indian vendors to provide indigenous parts had been the major responsibility of Maruti officials in 1984–1986, in order to ensure compliance of the government’s requirements of indigenising the complete Maruti to Indian manufactured components. Similarly, the Indian motorcycle industry, which initiated the two-wheeler revolution in India with its 100c.c. bikes, brought the initial lot of two-wheelers to the country in semi-knocked down conditions. The industry has been completely indigenised over a period, after it developed Indian vendors to meet the component requirement of the two-wheeler industry in the country. 2. Even the European community has a local content requirement of 45 percent for all foreign-owned manufacturing firms in Europe. This is acceptable if it is done to encourage development of local industry and provide employment opportunities. However, many times, such a policy tell on the health of an international firm if it is forced to adopt substandard indigenised products at uncompetitive rates, to accommodate local interests. 3. Gradual transfer of ownership and management of international firms to local managers. In many Middle East countries, a business license can be issued only to a local citizen and, where involved, a foreign partner can only have a minority stake in the partnership. Thus, a foreign company per force is required to seek a local partner and pay a hefty license fee to run business in these countries. Besides, ownership equity is reduced to a minority stakes as a rule of law. 4. Not permitting repatriation of funds and profits above a certain limit and insisting on profits being deployed back in the local industry. Sometimes, the host country may face a severe foreign exchange crunch, or when the country notices the flight of capital by multinationals and foreign firms, the country can impose foreign exchange control rules and regulations. India had FERA operative in the country, which restricted foreign exchange transactions in the country. It is only now, under FEMA, under the new exim policy, that full convertibility has been allowed. In addition, the countries can also extend controls to the imported products by imposing tax. Heavy taxes are imposed on products

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classified by the host countries as luxuries, but they may take a more lenient approach to products that are considered necessities. MYANMAR AND EXCHANGE RATE Exchange controls are extended to products by applying a system of multiple exchange rates to regulate

the investor has earned only US$1000. The exchange rate difference means that the investor has to pay tax on US $ 21,500 of non-existent and earned income. Sources: “Myanmar Crumbling Kit”, Asia Week, March 2001, p.8, and “Catastrophe”, Economist.Com, March 20, 2003. http://www.asiaweek.com/asiaweek/ http://www.economist.com/index.html

Diplomatic Severances and Political Sanctions Pakistan and India have on many occasions suspended diplomatic relations with each other, called back their high commissioners and, at times, even closed embassies and high commissions and consulates in each other’s countries. Such conditions obviously spell doom for international firms situated in either country. The U.S. has also used sanctions against different countries, including Cuba, Libya, Iraq, and Iran, but it has done equal harm to the firms originating from the U.S. or from the allied countries. NORTH KOREA AND NUCLEAR DEAL On September 19, 2005, North Korea signed a widely heralded denuclearisation agreement with the United States, China, Russia, Japan and South Korea. Pyongyang pledged to abandon all nuclear weapons and existing nuclear programmers. “In return, Washington agreed that the United States and North Korea would respect each others’ sovereignty, exist peacefully together and take steps to normalise their relations.” Korea, designed to cut off the country’s access to the international banking system, branding it a Source: Adapted from North Korea’s Nuclear Gamble, Selig S. Harrison, The Newsweek, October 16, 2006, p. 31, http/www.newsweekInternational.com.

Risks Pertaining to Non-Governmental Organisations and Social Activists The non-governmental organizations (NGOs), which maintain themselves with aid from many national and international institutions, act as protectors of public conscience and public morality but, many times, they become the major stumbling blocks for the development of trade and industry. Issues such as child labour, environmental protection, women’s emancipation, wildlife protection and prevention of cruelty to animals, etc. have often been raised by the social activists to protest against international firms setting up business in foreign countries.

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In India, KFC and McDonald’s had to face violent protests when it was alleged that animal tallow was being used to cook their products. Pepsi, Coke and many other bottlers of mineral and pure water had to shut shops in many states, when pesticides were found in soft drinks and the issue of purified mineral water was raised by NGOs in India. Pepsi and Coke were banned in many Indian states, in state government offices and in educational institutes, causing losses amounting to billions of dollars to the two companies. Greenpeace campaigners in many countries cause embarrassing situations for international firms by disputing their claims. Internationally ‘BT Cotton’ has often been the subject of controversy, where it is alleged by Greenpeace workers that the BT Cotton Seed, developed by the international firm Monsanto, may not deliver as much to the farmers as claimed by the international firm and that the government agencies are hand in glove with the firm, which has already been convicted of corruption in Indonesia. In the early 1950s, the sugar industry too had faced such hostile atmosphere, when it was propagated by many NGOs that international companies use animal bones for cleaning refined sugar.

Risk Pertaining to Religious and Political Terrorism and Extremisms Religious fundamentalists, international extremists groups and separatists groups target international firms to extract ransom money by kidnapping their employees and expatriates. They pose threats to installations, machinery and property. Besides the lure of money, this is also done to embarrass their own governments and the governments of the countries to which these firms belong. Such terrorist attacks have been increasing in their frequency after the September 11, 2001 attack on the World Trade Center in New York City. It is not that these heinous acts did not happen earlier, but American firms, especially KFC, McDonald’s and Pepsi, are becoming major targets after America initiated action against Afghanistan and Iraq.

Terrorism on the Net Websites hackers, threats on the Internet highway, hijacking entire websites of international firms, floating duplicate and unauthorised websites are some of the many cyber crimes committed these days and the ways in which cyber criminals are sabotaging and attacking international business operations. The slammer and “I LOVE YOU” bugs virtually brought down the Internet operations in America, Australia, Europe and many other countries, by attacking the computers of government agencies and multinational corporations. INDIA’S BT COTTON Monsanto rides roughshod over Indian cotton farmers, leaving a wake of false claims and doctored

corruption in Indonesia. In advance of a deadline for a decision on license renewal in March 2005, Greenpeace and the Sarvodaya Youth Organisation released two versions of a report on BT Cotton, prepared by the Joint commissioned under a memorandum of understanding between the AP government and MonsantoMahyco, revealed a comprehensive failure of BT Cotton in AP. The second visibly tampered-with version exaggerated the yields, thereby substantially reducing Monsanto’s compensation to farmers. State agricultural committees have consistently demanded compensation to be paid to farmers for losses at a

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Greenpeace campaigner Divya Raghunandan said, “We are disappointed by the government’s decision to expand the region under BT Cotton, while the need was to stop where it was already grown…The fact that data has been so clearly manipulated in this case, raises serious doubts about the BT Cotton.” Source: Adapted from Rhea Gala, Isis Press Release, May 3, 2005, http://www.i-sis.org.uk/IBTCF.php.

Sometimes, the small issues of workforce retrenchment can blow out of proportion due to the cudgels Honda had to face the wrath in their scooter manufacturing plant in north India, when disciplinary action against a few workers led to protests and, subsequently, into police action, causing not only grievous injuries to the workers in a police lathi charge, but it also resulted in a production loss of eight to ten days for the Honda factory. Source: http://www.blonnet.com/2006/04/12/stories/2006041203780100.htm.

In fact, cyber terrorism has made life easy for international terrorists whose words of hatred, and instructions to their followers around the world, can be relayed so easily. Although governments of the world are seized of this problem, and each country is planning to implement cyber crime prevention laws, international agencies will do well to coordinate with each other to ensure they move faster than the criminals on the Net to provide a safe and secure business environment to international firms.

Points to Remember Nationalism: Devotion to the interests or culture of one’s nation.The belief that nations will benefit from acting independently rather than collectively, emphasising national rather than international goals. Expatriates: A person who has citizenship in at least one country, but who is living in another country. Most expatriates only stay in the foreign country for a certain period of time, and plan to return to their home country eventually, although there are some who never return to their country of citizenship. Trade embargos: A government order imposing a trade barrier under which it prohibits the movement of merchant ships into or out of its ports.The objective is to restrict certain or all trade with a foreign nation. Infringement: A violation, as of a law, regulation, or agreement; a breach. Diaspora: A diaspora is any dispersion of a population sharing common national and/or ethnic identity from their original homeland. While refugees may or may not ultimately settle in a new geographic location, the term diaspora refers to a permanently displaced and relocated collective. Dictatorship: A dictatorship is defined as an autocratic form of government in which the government is ruled by an individual, the dictator. Dictatorship may consist of a single individual, a royal family, an army, a political party, or a religious organisation. Trade sanctions: Trade sanctions are trade penalties imposed by one or more countries on one or more other countries. Typically the sanctions take the form of import tariffs (duties), licensing schemes

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or other administrative hurdles. They tend to arise in the context of an unresolved trade or policy dispute, such as a disagreement about the fairness of some policy affecting international trade (imports or exports).

Objective Type Questions 1. The term ‘collectivism’, when used in political parlance, refers to a political system that stresses the primacy of (a) Collective goal (b) Individual goal (c) Selective goal (d) All of these (e) None of these 2. The social democrats held the view that socialism could be achieved by (a) Democratic means (b) Dictatorship (c) Totalitarianism (d) All of these (e) None of these 3. Social democratic parties have been in power from time to time in these countries. (a) Australia and France (b) Germany and Great Britain (c) Norway and Spain (d) Sweden (e) All of these 4. International firms operating in different countries have to strictly adhere to the laws and regulations of (a) The home country from which they originate (b) The host country in which they currently operate (c) The third country (d) Home and host countries both (e) None of theses countries 5. In an independent and sovereign state, a citizen’s rights are subject to the (a) Laws enacted by the political and legal system of the constitution established (b) Laws enacted by international organizations (c) Laws enacted by individuals (d) Laws enacted by all of these bodies (e) Laws enacted by none of these 6. The propagators of individual freedom believe that (a) Welfare and interest of the individual should take precedence over interest of the state (b) Welfare and interest of state should take precedence over interest of individual (c) Welfare and interest of both is important (d) Welfare and interest of none is important (e) Welfare and interest of all is important

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7. Expropriation of firm’s assets refers to the situation when an international marketing firm’s assets are (a) Controlled by the host country government (b) Decontrolled by the host country government (c) Seized by the host country government against nominal compensation (d) Confiscated by the host country government without compensation (e) Released by the host country government 8. Domestication refers to the situation when host country insists on (a) Using locally manufactured raw material for manufacturing products of international firms (b) Gradual transfer of ownership and management of International Firms to Local Managers (c) Not permitting repatriation of funds and profits above a certain limit and insisting on profits being deployed back in local industry (d) Fixing up the local content of raw material requirement of certain percentage for all foreign owned manufacturing firms (e) All of these 9. When the governments for the cause of social benefits decide to move the property and assets of business from private hands to government sponsored public sector undertakings or agencies it is called (a) Nationalization of business assets (b) Confiscation of international firm’s property (c) Expropriation of firm’s assets (d) Domestication (e) None of these 10. Interdependence of nations means when different countries of the world open their doors to and for (a) Foreign goods (b) Services (c) International trade and industry (d) International investments (e) All of these

Review Questions 1. Define and explain the following terms: (a) Expropriation, (b) Domestication and (c) Nationalism. 2. Explain what kind of political risks an international marketing firm faces in the international political environment. How can an international firm safeguard its interests? 3. How can a firm assess vulnerability to political environments across the world and take preventive measures to avert it? 4. How does a government’s trade policy affect the business of an international firm? Explain with the help of examples from your country.

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Project Assignments 1. India primarily exports labour-intensive manufactured goods, such as gems and jewelry, handicraft, textile product, etc. and imports items such as petroleum, raw materials, and metals. Analyse the impact of the following events: (a) A war in the middle east that disrupts supply of petroleum. (b) Pakistan promotes gems and jewelry sector so that they can sell in foreign markets. 2. Study a firm in the Indian alchohol industry in accordance with the political impact on its business in and out of India.

Suggested Readings Amine, Lyn S., “The Need for Moral Champions in Global Marketing,” European Journal of Marketing, 30 (May 1996), p. 81. Epstein, M.J., and M.J. Roy, Strategic Learning through Corporate Environment Management: Implementing the ISO 14001 Standard, INSEAD’s Center for the Management of Environmental Resources (1997). Howell, Llewellyn D. and Brad Chaddick, “An Assessment of Three Approaches to Political Risk,” Columbia Journal of World Business (fall 1994), 71–91. Ohmae, K, “Putting Global Logic First,” Harvard Business Review (January/February 1995), pp. 119– 125. Ohmae, Kenichi, The Borderless World, New York, Harper Perennial, 1991. Robock, Stephan H., and Kenneth Simmonds, International Business and Multinational Enterprises, Homewood, IL: Irwin, 1989. Root, Franklin R., Entry Strategies for International Markets, Lexington Books, New York, 1994. Samuels, Barbara C., Managing Risk in Developing Countries: National Demands and Multinational Response, Prinston University Press, Princeton, NJ: 1990. Vagts, Detlev, Transnational Business Problems, The Foundation Press, Mineola, NY: 1986.

Useful Weblinks http://www.washingtonpost.com http://www.airpower.maxwell.af.mil http://www.newstodaynet.com http://iicas.ucsd.edu http://www.blonnet.com http://www.asiaweek.com http://www.economist.com http//www.newsweekInternational.com http://www.i-sis.org.uk http://www.blonnet.com

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Case Japan–India Diplomacy and Relationship Marketing* The relationship between India and Japan has at best been at diplomatic level so far. The government of India has recently opened up the country’s doors for Japanese people and now offers Tourist Visa on Arrival for people from five developed countries, of which Japan is the most important country with 128 million people (others are countries with hardly 5 million people such as Finland, New Zealand, Luxembourg, and Singapore). This is first time that the Indian government has offered such a facility to foreigners in the history over 60 years of independent India. This can be viewed as a milestone to forge deeper ties of friendship as partners in many fields including business between India and Japan in the 21st century. Some areas where there is scope for better synergies have been highlighted here. 1. English: In 1991, about 5 percent (50 million out of 1.13 billion people) of the Indian population was speaking good English. During the last ten years, that has changed. Over 150 million Indians have become proud of their own brand of English. Maybe 80 percent of the urban population in India speaks English now, whereas hardly 4 percent of urban population speaks English in Japan. But that is not the point. According to some sources, by 2020, India will have the largest number of English speakers in the world (Over 250 million people). British elementary and high schools started recruiting teachers from India since 2000. So the British kids are learning most of the subjects in English from Indian teachers!!! Many Indians are vastly more proficient in English than their own mother tongue because their entire education starting from elementary school or kinder garten is in English. They use English with their friends and at their place of work. A lot of people in South India cannot read their own mother tongue though they can speak a bit of it at home. Many Indian languages (India has over 12 languages) are becoming extinct every year, with English getting more and more importance. How is this related to Japan? Well, it could serve as a good indicator for policy makers and thinkers in Japan who want English introduced in Japan from elementary schools. In Japan, there are not many schools offering education in English medium and the cost for English medium elementary school (even nursery) education is too expensive (1.5 million to 2.25 million yen per year). At the same time, India has hundreds of elementary level schools including the Central government owned schools offering education in English medium for a nominal fee (50,000 yen in a year). Even the child of a cleaner/peon goes to English medium school these days in India. 2. Soft power: In Japan, the largest number of foreign students are from China and Korea. Indians are a minority. In the USA, the largest number of foreign students is from India, (second is China and third is South Korea), a lot of whom have settled down there in the past, * This case has been prepared by Dr. Justin Paul and Rajdeep Seth for classroom discussion. Rajdeep Seth, former research scholar of Nagoya University, is now based in India.

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making Indians one of the largest diaspora in the US. They have become politicians and administrators too in course of time. This is mainly because Indians get easy admission in the US universities because of their capability in English. This factor is going to determine future relations between countries in the long run, both economic and political. 3. IT boom and Mathematics: Here are a few straight facts. Only 0.15 percent of the Indian population is engaged in the IT industry. (This sector alone cannot sustain the entire country in any way.) This industry has been booming in India for the last fifteen years with the establishment of hundreds of engineering colleges in the private sector. Everyone is encouraged to become an engineer. Anyone who is not an engineer is frowned upon. All these techies have joined the Information Technology sector and have made it big. Not many students learn upto 20 X 20 as most Japanese would like to think. But these people who are engineers, have a solid foundation of mathematics due to their engineering background. 4. Mobile phones: In 2004, 70 percent of the people in the world had never heard a dial tone, i.e. they had never used a telephone. Just six years back, mobile phones were a luxury in India that a few people could afford. In 2008, there were 10.89 million new users for mobile phones in India. Now everyone has a mobile phone including students and domestic helpers. Mobile phones are much cheaper than landlines. There is a huge market for mobile phone companies. A few years back, Japanese mobile phones did not connect in India. Now there is international roaming facility for Japanese mobile phones, AU, Softbank, Docomo anywhere in India. Just switch it on and call! 5. Clean drinking water is scarce in India. Another big challenge in the future. Japanese firms which get into this segment have a lot of business opportunities. 6. National highways are clean and fast. With high speed Volvo buses running between cities, transportation has become faster and more comfortable in India. Many roads in India have been constructed with technical collaboration with Japanese contractors and firms. 7. Medicine: There is no national health insurance scheme in India, unlike countries such as Japan and United Kingdom. Medical expenses are so high that people avoid going to doctors or hospitals or rely on free medical help from friends and relatives who are doctors. Surgery is beyond the reach of most people. Public hospitals are insanely dirty. An MRI scan is much more expensive in India than in Japan, but there is no surety of getting good results because the machines are old and over used. However, there are some private sector hospitals offering worldclass facilities. They have package schemes for foreign patients with a combined package in the name of medical tourism. Most of them, particulary dentists, offer first class treatment at Third World price. Clinics and hospitals in India regularly import instruments and equipment from Japan. Given the points, it leaves Japan ample opportunity to develop strategic, technological, academic, trade and investment ties with India and Indians. It is also worth noting that there have been couple of success stories. For instance, Japanese firm Suzuki is the largest selling car in India (joint venture with Maruti). But their position could soon be overtaken by Tata, Hyundai, etc.

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Sony and Canon are best selling cameras in India. Sharp has achieved the status of best selling TV, so as Panasonic in some of the consumer electronics product segments. Simlarly, Japanese firms can provide technological help, collaboration and create their own market for high quality products in India in medicine, water purifiers, solar power, high speed transport, telecommunications. 3G mobile phones with Japanese technology could be a hit. These technological ties and investment in cheap high quality medical products will achieve much more than Overseas Development Allowance (ODA). In modern times, giving financial aid (ODA) to other countries is a type of diplomacy and not out of necessity on either the part of the giver or that of the recipient. Though both India and China receive huge amounts of financial aid from Japan, they give a lot of ODA to countries in African region. In present times, with a world that is increasingly converging, the financial aid diplomacy is just not enough to forge lasting ties. India- Japan relationship does have much common cultural background. Needless to say that Buddhism came to Japan from India via China. Similarly, the need of the hour is better co-ordination in many areas between these countries, given that the Indian economy has been growing at a relatively higher rate of 7 to 10 percent during the last 10 years.

Discussion Questions 1. What could be the possible reasons for Offering Visa on Arrival facility in India for people from five countries, including Japan? How does it help India and Japan? 2. Discuss the synergies of India–Japan diplomatic relationship.

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Learning Objectives After reading this chapter, you will understand: How legal systems of the world affect international marketing The distinction between home country, host country and international laws The differences between common law, code law and theocratic law The international dispute settlement procedures Other legal issues such as property rights, private action, public action, anti-corruption laws, Foreign Corrupt Practices Act, protection of intellectual property, TRIPS and anti-trust laws

INTERNATIONAL LEGAL ENVIRONMENT: AN INTRODUCTION The legal environment of a country pertains to the rules, laws and the constitutional provisions that regulate the behaviour of the citizens, residents of the country and business and other entities, along with the process by which countries enforce the laws and provide redressal systems to all for their grievances. The legal system of a country is of immense importance to not only local business organisations but also to international business firms. The laws of a country regulate business practices, define the manner in which business transactions are to be executed and set down the rights and duties and obligations that each party to business must perform. The legal environments of countries differ in significant ways, in relation to the type of political system a country has adopted. The political systems define the legal systems too, like they give shape to the economic policies of the state. Such political systems and the governments construct and define the legal framework to do business. If a country has opted for a democratic set up, it becomes evident that the laws of the country will also be pro individual, whereas in a totalitarian state the legal rights of the state will overrule the importance of the individual and rules governing common business by public sector agencies will be laid down. This chapter focuses on the basics of different legal systems of the world that affect the international flow of business and marketing. It also discusses the laws that affect an international marketing organisation in its home country, in the countries where its business and marketing network are set up and also in countries where it may not have any marketing activities but its business still gets affected by either the laws of that country or by the actions of other marketing and international business entities based there. The study on

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international legal environment also steers the discussion through the legal problems international firms face while setting up business in multi-country locations and the legal framework available to them for protecting their intellectual and property rights. This chapter also discusses the legal recourse international marketing firms can take if they get into a situation that demands settlement of disputes between two warring firms on international business and marketing issues.

LEGAL FRAMEWORKS Internationally, business gets affected by three main legal frameworks when it spreads into multi-country operations.

International Laws International bodies comprising different country memberships set up and regulate their rules and regulations with mutual consent. Such rules are common for every one and each member country must agree to abide by the same. Such international laws refer to the agreements, treaties, conventions, understandings (for example, WTO) and resolutions reached between the counties on trade, protection of physical and intellectual property, protection of life and liberty of each other’s citizens when they are away on business and visits to each other’s territory and many other issues in the political and economic sphere. Though such laws cannot be enforced by any individual constitutional authority of one specific country, they come into force because international law bodies enforcing them are created by member countries with common welfare in mind and, hence, they agree to abide by it. The international law enforcement bodies authorised by all member signatories adopt the redressal procedures established by such agreements. Common to such practice are law on international sale of goods (uniform law on sales and uniform laws on contract for international sale of goods).

Host Country Laws International marketing firms will abide by the laws of the country in which they operate. For example, French firm TOTAL must abide by the trade and business practices laws of India for all its marketing operations within the Indian territory. These laws are not the same as the company is subjected to in its country of origin. The same company, while doing business in France, is subjected to the French commercial laws.

Home Country Laws The laws and rules and regulations laid down by each government in its own country become the home country laws for all companies and businesses originating from that country. For example, even though Pepsi and Coke have operations in many countries, for them the laws of their home country, the United States, are as important, and sometimes more important, than those of the host country, even though they may be registered for their other country operations externally. Thus, the home country’s laws bind all originating companies all over the world. The United States companies must abide by all three types of laws: International Bodies Rules and Regulations, Laws of the United States covering the International Trades and Practices and Host Country Laws that will govern their day-to-day operations. These companies will also be subjected to home country laws pertaining to dealings with that host country and other common laws, like Anti-Trust Regulations, AntiCorruption Laws and the U.S. Corporate Governance Rules and Regulations, as applicable to firms abroad.

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This discussion focuses on some basic differences in the legal systems and how their differences affect international trade and commerce. The discussion will also include contract laws and the laws governing property rights, with main focus on patents, copyrights and trade marks. In international marketing operations, firms as well as nations are equally concerned about their products’ safety to end user and to the environment. They are equally serious about the liabilities that may arise on account of product failures/ commitments. Hence, the discussion will also include laws governing product safety and product liability.

DIFFERENT LEGAL SYSTEMS The world over, countries ascribe to three main legal systems, viz. Common Laws, Civil Laws and Theocratic Laws.

Common Law This is based on traditions, precedents and customs followed for centuries in a country. Tradition refers to a country’s legal history, precedent to the legal cases and the decisions given by the courts of law in the country in the past and the manners and ways in which laws have been applied to specific situations historically by the courts of law. Common law has its roots in the English common law. Even the United States law system is based on the English common law. Majority of the Commonwealth countries, including Australia and Canada, share this system of law. Common law “seeks interpretation through the past decisions of the higher courts which interpret the same statutes or apply established and customary principles of law to a similar set of facts. ”1

Civil Law Also known as code law, this is based on a very detailed set of laws that are organised into codes. These codes specify what constitutes legal behaviour. Code law or civil law has its roots in the Roman law and more than 80 countries of the world, including Germany, France, Japan, Russia, most of Europe, Latin America, China, Taiwan and South Korea operate with this civil law system. The judicial courts rely upon the detailed written legal codes rather than interpretation of tradition, precedent and customs. The courts under this system do not have much flexibility, as compared to the courts of common law system. The judicial and legal interpretation, as in common law, are not resorted to because written laws do not need definition but application by the courts.

Theocratic Law This system is based on religious teachings, as they are enshrined in the religious scriptures. Islamic law, Sha’riat, is the most widely practiced religious legal system in today’s world. It is based on morality rather than commercial requirement of human behaviour in all aspects of a person’s self and social life. Islamic law is based on the Holy book of Islam the Koran and on interpretation of the practices and sayings of Prophet Mohammad. It also follows the writings of scholars and teachers of Islamic scholarship, who derived rules by analogy from the principles established in the holy Koran. The basic foundations of Islamic law remain unaltered even after many centuries because they have been derived from the holy book and are acceptable to all devout Muslims. Even though Islamic jurists and scholars constantly debate the application of Islamic 1. Phillip R. Cateora and John L. Graham, International Marketing, Tata McGraw Hill, New Delhi, 2001, p. 167.

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law to the modern world, their debates are only scholastic deliberations. However, to keep pace with the advancement of life, many Muslim countries have a blend of common law and civil law system along with the Shari’at law. Islamic law is not necessarily confined to moral behaviour. Its practices are applied to commercial and business dealings too, which can definitely affect an international firm’s dealings in an Islamic country. For example, the purdah system ordains segregation of sexes, meaning women must not interact with strangers (men) and this applies to business relations as well. The Shari’at law also prohibits the consumption of alcoholic products and pork, etc. The law ordains praying five times each day and to fast for a month during Ramzan. All these practices can affect the operations of a firm in Islamic countries in North Africa, Middle East, Pakistan, Bangladesh, Malaysia, Indonesia, parts of India and many other regions of the world. Another important factor to be considered is the treatment of interest earnings in Islamic law. The payment or receipt of interest under any condition is considered sinful and is banned by the Koran. Many Islamic states have already declared the calculation of interest unlawful. In the 1990s, Pakistan federal Shari’at law court, the highest law making body in the country, declared interest against the tenets of Islam and therefore illegal. It directed the Pakistan government to amend all financial laws of the country and prohibit application of interest. In 1999, the Pakistan Supreme Court ruled that Islamic banking system should be enforced in the country after July 2001. Islamic banks are found in addition to Pakistan in many parts of the Gulf states, Egypt and Malaysia and collectively they manage assets beyond $ 300 billion by Islamic banking practices.

Contract Law and Its Application in Different Legal Systems Let us now discuss the contract law in detail. While marketing their products and services internationally, the usage of contract by firms is quite essential as they are frequently entering into contracts and agreements with various allies, partners, franchisees and other service providers all over the globe. The firms may have to enter into such contracts for collaborations, technical consultancies, and distribution of their products and services. Hence, these firms need to look at all contracts minutely and sensitively. The approach to contract law is widely different in common law and code (civil) law. A contract can be defined as a document that specifies the conditions under which the exchange agreement has to take place and assigns the rights and obligations of each party signatory to this contract. All business transactions mentioned above are regulated and implemented by some form of contract, which is enforced and governed by some contract law of different legal systems. International firms may have to resort to the contract law if either of the signatories, i.e. the firm itself or the other partner, feels aggrieved due to violation in letter or spirit of the contract agreement. Under the common law in many countries, a firm may have to spell out the details in the contract, with all contingencies, clauses and penalties, etc., specific for non-compliance and non-enforcement, even though the judges under the common law system have greater flexibility in interpreting the dispute to the contract in the light of circumstantial evidence and prevailing situations. Under common law, it takes much longer to settle a dispute. In countries governed by code laws, however, different codes spell out the legalities of contractual obligations and the contract is generally drawn on the basis of these codes only. Hence, it is not necessary to draw out detailed contingencies. It is important for the international marketing managers to understand which law the country of operations is following and then draw up the contract and seek redressal accordingly.

Jurisdiction When contract disputes arise in international marketing, there is always a question as to which country’s legal provisions become applicable on that dispute and which court’s law can provide quick redressal, i.e.

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international law, home country law or host country law. Again, it may so happen that the firms will agree at the time of formation of the contract itself about the jurisdiction of the court. The sales contract or any other contract drawn by both the parties may specify, subject to jurisdiction of courts, for example a French firm entering into contract with Indian partner, that all disputes arising out of this contract will be subject to Paris jurisdiction. In that case, the signatories may file suits in a court in Paris. Even if the firm files a case or legal complaint outside, in a third country, laws applicable for settling such a dispute in Paris will be resorted to in this case. However, in the absence of any such stipulation, the question is, which law will govern the dispute: (1) where the contract was entered into? or (2) where the contract has been executed? In the international commercial scenario, dispute settlement systems for settling issues between two different nationalities exist even though the (in case of two countries in dispute) governments may refer the matter to the International Court of Justice (The Hague). Some of the countries of the world have also signed the United Nations convention on Contracts of International Sale of Goods (CIGS), establishing a uniform set of rules governing everyday commercial contracts between buyers and sellers. Internationally, 61 countries, including the United States, have signed this contract. Countries that have signed this contract and ratified this convention get automatically covered by CIGS rules for dispute settlement, unless they decide to opt out of it, while signing a commercial contract. However, a majority of the world’s trading countries, including the U.K. and Japan, have not ratified this convention even after 18 years of its formation. The CIGS came into effect in 1988.

INTERNATIONAL DISPUTE SETTLEMENT PROCESSES Litigation in common or civil courts can cause bad blood between the parties in dispute because both, buyers and sellers, can ill-afford to earn a bad name for themselves for non-compliance of contracts. It can affect a firm’s business prospects with other international clients too. Hence, companies will usually try to reach an amicable settlement through informal processes, be it informal conciliation or arbitration by involving a (uninterested to the cause) third party.

Mediation This is also known as conciliation. It involves a third party that tries to settle the dispute between two aggrieved firms by resolving their differences. The third party’s patient hearing of the problem may suggest alternative ways out of the dispute and for reaching a compromise. Such compromises can be referred to or quoted in any court of law, should any of the parties not agree to the solution. This process of dispute settlement helps maintain future business ties in international trade too. Since the interests of both the aggrieved and the complainant parties are taken care of in a softer manner, these are preferred by Chinese businessmen, who seldom like to lose a good business prospect.

Arbitration In order to enter arbitration for dispute settlement, companies may agree to appoint a third party as a referee, or an arbitrator, whose decision will be acceptable to both the parties. The arbitration process involves referring to either domestic country-specific arbitration rules or to the rules of any agency involved in the international arbitration process. The International Court of Arbitration, under the aegis of International Chamber of Commerce in Paris, is quite active in such dispute settlements. It has standardised the rules and procedures to administer arbitration, which have been adopted by a majority of the independent countries

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and their arbitration courts. Besides the chambers of commerce, a few other active arbitration commissions and councils are: (a) Inter-American Commercial Arbitration Commission (b) The Canadian-American Commercial Arbitration Commission (c) London Court Of Arbitration

OTHER LEGAL ISSUES Property Rights Legally, the term ‘property’ means a resource over which an individual or firm or a business holds a legal title, which they are then said to own. Here, resources do not refer only to a building, land, machinery, equipment, capital and minerals alone. It also means inventions, trademarks, brands, ideas and a firm’s registered name, which are all covered under intellectual property. Each individual or firm’s property rights are upheld in different countries under the legal systems they operate within. The definition and the protection that laws provide may not be enforced in many countries. Hence, an international firm should be well aware of the legal definition of private as well as public property rights in each country they want to do business with and the protection provision offered by the laws of the land. Property rights may get violated in two ways, through private action and by public action, i.e. by the governments themselves or by the representative agencies of the country’s government.

Private Action This refers to theft, piracy, blackmail, encroachments, fraud, etc., by individuals or groups of offenders. Such crimes can occur in any part of the world, including the home country of the firm, but the law of the land differs from country to country. The action may be swift and quick in the U.S., Germany and England and many other European countries but it may take ages to get the case sorted out in the civil and criminal legal procedures of many other parts of the world, where the corrupt police system and lackadaisical attitude of the judiciary can frustrate a complainant. It has happened in many parts of the world where the governments and law enforcement agencies have provided scant protection to both domestic and foreign organisations. Many tea companies in the North-East in India have borne the brunt of kidnapping and extortions by extremists, as is evident by the news report reproduced below. Assam police deny bias in targeting, in the case of tea companies, “while we posses the information and we lack direct evidence against them.” Ever since the incidents of Assam-based tea companies funding militants such as the United Liberation Front of Asom and the National Democratic Front of Bodoland became public, the Tatas have claimed they are being singled out by the state administration. Little investigation has been carried out against other tea companies, they charged. Some of the other Williamson Magor (formerly MacNeill & Magor). The controversy has caused a furor in the Rs 22 billion

given under compulsion, a sizeable amount was given voluntarily to buy peace.

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Williamson Magor has 50 tea estates in the Brahmaputra valley alone, producing 50 million kilograms of tea per year. Police sources informed that payments to the militants—both as ransom and regular head of the Williamson Magor group to unearth the “clandestine” deals. but what about the Rs 1.3 million to Rs 1.4 million being paid quarterly to the militants? There were no immediate compulsions to Magor and they are paid rather voluntarily to buy peace,” the sources added. Source:

Similarly, successful businessmen in Russia have to pay protection money to the mafia or face violent action from them. 1995–96 saw hundreds of businessmen killed in Russia because they did not pay this protection money. Businessmen in United States too had been harassed by the mafia in the early 1930s, when their grip over Chicago was virtually complete. The history of Japan in this field is also similar, where the yakuza charged protection money from the food and entertainment industry. Mumbai’s protection rackets and kidnapping in northern and eastern parts of India speak volumes about the nexus between the police and the criminals, as in many other countries too. Such conditions can prevail in any country and international firms need to know the weapons and the strengths of the law enforcement agencies in providing protection.

Public Action This refers to the situation where law makers themselves, their agents and representatives, bureaucrats and members of public bodies, local members of legislative assemblies indulge in law-breaking activities, such as extortion, confiscation of legal property of others, encroachment and other resources gobbling activities. This is done by dangling the threats of action, citing government rules and action to the firms or by indulging in heavy taxation, introducing ceiling laws, bringing in licensing procedures, redistribution of wealth to the havenots, etc. This is also done by appropriating the firm’s property into state ownership without compensation or handing over the property to another owner without compensating the earlier owner. Again corruption, nepotism and demanding gratification, bribes, undue favours seep into every society, be it a democratic country, monarchy or dictatorship—the White House, the Royal Dutch family, Japanese politicians, Indian leaders, bureaucrats, Pakistani government and army officers, police departments, revenue departments, of all countries. If the Bofors gun can raise eyebrows in India, the Watergate scandal can question Nixon’s honesty and Suharto’s demands in Indonesia, all countries can have some form or the other public corruption. What matters for the international firm is to understand the stand law takes in the event a firm approaches it for redressal. In many countries, corruption is treated illegal and public vigilance departments take or initiate action, whereas in many others, it becomes a way of life and the loot continues.

Anti-Corruption Laws These laws are instituted by countries to prevent business organisations from using unethical means to wield undue influence over those who control the flow of business activities in the country. Such authorities as government officers, public servants, elected representatives and law makers, who can decide the fate of government contracts, business deals, and civil and military policies of the country are susceptible to many undue favours in the shape of gifts, share holdings, hard cash within and outside their country from the business community of the world. Their decisions can alter the competitive advantage, favouring a company over its business rivals. To prevent such a situation, anti-corruption laws modulate the code of conduct of

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public servants in international deals and also for business within the country. Any violation is strictly dealt with in many nations. Many government heads themselves encourage institution of corrupt practices. In a World Bank survey conducted in 69 countries, covering 3,600 companies, it was found that more than 40 percent of them had paid bribes to secure favours. This figure jumped to 60 percent in the former Soviet Union. Although in industrially developed counties only 15 percent had to resort to corrupt practices to get business, it is a telling situation where no country is free from corrupt ways. The European Bank for Reconstruction and Development, a bank that encourages investments in the former Soviet Bloc, has often regretted the widespread corruption in these countries and calls such bribe-seeking a deterrent to foreign investments.2 THAIS MAY REDRAW LAW ON FOREIGN OWNERSHIP Thailand is considering a dramatic revision of what constitutes a foreign company. The change to

Sutivong, chairman of a committee established by the commerce ministry to consider the issue said on Wednesday that voting rights should be the key criterion in determining whether a company is

multinational companies to use preferred shares, which have stronger voting rights to establish full control over Thai subsidiaries operating service businesses . In the service sector, Bangkok ostensibly limits foreign investment participation up to 49 percent. Pramon said the change, to be recommended to the commerce ministry in a formal report on Thursday, would align Thai law with common international practice. “This is not drastic”, he said, “we consideration share holding and voting rights. We are not doing anything that is more severe than what other countries have been doing”. But he conceded that the military-installed government faced a tricky political issue. Many prominent

new rules and allow them to operate as they are, while possibly liberalising the service industry rules to allow greater foreign participation. Or, it could force multinationals to change their holdings in Thai said it was up to the commerce ministry and new government to decide. “They have to weigh pros and cons for themselves “, he said. “ I am not going to do the political work Western diplomats have warned that Thailand could be accused in the World Trade Organisation of

tacit approval of such arrangements came to public attention during the furore over Shin Corp., the telecommunications empire of the family of ousted prime minister Thaksin Shinawatra, which was sold Source: News adapted from Business Standard, Ahmedabad, 29 December 2006, Amy Kazmin, Bangkok. 2. Jack G. Kaikati, George M. Sullivan, John M . Virgo, T.R. Carr and Katherine S. Virgo, “The Price of International Business Morality: Twenty Years under the Foreign Corrupt Practices Act,” Journal of Business Ethics, vol. 26, No.3, August 2000, pp. 213–222.

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Foreign Corrupt Practices Act The United States had passed the Foreign Corrupt Practices Act in the 1970s, following revelations that U.S. companies had given bribes to government officials in foreign countries in order to get lucrative contracts. The law makes it illegal to bribe a foreign government official for obtaining or maintaining a business that can be influenced by a foreign official. This law requires all public traded companies, whether or not they are involved in international marketing, to keep detailed records that will allow auditors to determine whether a violation of act has occurred. In 1997, almost along the same line, the trade and commerce ministers of the member states of Organisation for Economic Cooperation and Development (OECD), an association of the world’s 30 most powerful economies, adopted the convention on combating bribery of foreign public officials in international business transactions. The convention makes it obligatory for the member countries to make the bribery of foreign public officials a criminal offence. However, this act is also not a foolproof anti-corruption device, as the same act in circumferential words allows expenses known as facilitating or expediting payments. The OECD convention also follows suit and permits what is called grease payments or speed payments for performing routine duties in expediting business of the government departments. Bribes in the form of small payments to officials to speed up the issuance of permits, licenses or processing paperwork and, in addition, getting clearances from the dockyards, etc., are facilitated by the foreign firms. The law enforcers consider these payments of gratification less offensive and are considered gifts to petty foreign government officers.

Protection of Intellectual Property Intellectual property is the most vulnerable property of any firm to protect, as duplicity and counterfeiting of products, misuse of popular brands, undue advantage from the popularity of internationally well-accepted products by adopting similar sounding phoney names, etc., are some ways that violators of intellectual property adopt all over the world to make billions of dollars. The billions of dollars spent on research can all go waste should there be one small leakage of inventions in the pipeline by a multinational. Hence, international firms need to be aware of the intellectual property laws and regulations adopted by countries all over the world, in addition to the international institutional protection systems available to the firm in case of violation in either the host country or even a country in which it does not have any operations but still the business gets affected due to such pilferages and violations. Internationally, losses attributed to the violations of intellectual property rights in different industries, e.g. pharmaceuticals, software, industrial inventions, entertainment and publishing may run into many billion dollars. A rough estimate of the losses by the software industry alone amounts to more than $12 billion and in pharmaceutical $11 billion. The entertainment industry suffers an estimated loss of $ 10 to $ 12 billion annually. (ibid). The threat from the piracy on the Internet, the unauthorised downloads and also the hacking of the sites by unauthorised access may run into another billion dollars or so. Intellectual property refers to property that is the product of intellectual activity, e.g. computer software, a screenplay, a literary work, a music score, an industrial invention, or a chemical formula for a drug, a formula for any other chemical invention, etc. Ownership over these intellectual properties is established by patents, copyrights and trademarks. A patent grants the inventor of a new product or new process exclusive rights for a defined period for manufacture, use or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists and publishers to publish and distribute their works as they deem fit.

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Trademarks are the designs, names and brands often officially registered by which merchants, manufacturers and the producers designate and differentiate their works and products from others, e.g. Calvin Klein and Christian Dior in clothes or Channel Five, Eu de cologne perfume. In the high technology knowledge economy of the 21st century, intellectual property contributes huge economic values to business as knowledge can now be converted into digital form and can be copied and distributed at a very low cost all over the globe. At such a stage, institutionalising and implementations of intellectual property laws play a crucial role in ensuring equitable and justified rewards to the inventors and originators of new ideas, inventions, designs and efforts. Only such laws will ensure that human efforts to get breakthroughs in technology and science will continue. The protection of intellectual property rights differs from country to country. While many countries have very stringent laws to deal with the offences, the will to enforce such laws is missing. Such is the case with many countries out of a list of 164 signatories who have signed the Paris Convention for the Protection of Industrial Property, a landmark international agreement to protect intellectual property. It is obvious that weak implementation by the state authorities encourages piracy, counterfeiting and fake copies, leading to the theft of billions of dollars of intellectual property. China and Thailand have been the worst offenders recently in Asia. Pirated versions of computer software are freely available in China. Similarly, counterfeit copies of Rolex watches, Levi Strauss jeans, videotapes and computer software can be found on the streets of Bangkok. Piracy and forging are quite rampant in all parts of the world in music and entertainment industry. The International Federation of Pornographic Industry claims that one-third of all CDs and cassettes around the globe were illegally produced and sold in the year 2002, costing the industry over $ 4.6 billion in terms of revenue. The computer software industry also suffered a lax enforcement attitude of law implementers and the losses of this industry on account of piracy ran as high as $14 billion. As per the Business Software Alliance, a software industry association, in 2002 some 40 percent of all software applications used in the world were pirated. The worst region was Eastern Europe, where the piracy was as high as 71 percent. In China, the piracy rate in the same year was as high as 92 percent and the loss to the industry amounted to almost $2.5 billion, jumping from $450 million just five years ago. In the United States, the losses from piracy can go up to $ 2.5 to $3.00 billion. The impact of software piracy can be seen when the official pricing of the original Microsoft Office Professional is compared with that of the pirated version.3 In Lebanon, the official original version is priced at $200, as against which the pirated version is available for as low as $ 7.

Trade Related Aspects of Intellectual Property Rights (TRIPS) Protection from the infringements of copyrights can be granted only by the respective countries if they are alert and diligent in dealing with cases of violations of individual rights. International firms too will have to be vigilant about the counterfeits, poor copies and duplicates of their products and brand marks being marketed by impostors all across the world and take up the necessary steps at the highest levels of their own governments and also the host governments. Such lobbying will have to be managed at all international forums to ensure that their intellectual property rights are safeguarded. The firms should also fight all possible court cases to ensure that laws are actually utilised by the respective courts of the country. Many times, it is seen that in the absence of a complaint, the necessary legal actions are not pursued. It is due to lobbying 3. James Schofield, “Beating Piracy Proves To Be No Soft Touch”, Financial Times, 1 April 1999, p.7.

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by many international firms that, for the first time, the world trade agreement included intellectual property rights within the ambit of The General Agreement on Trade and Tariff in 1994. Under the new arrangement, a fresh agreement has been signed by the member countries of WTO, wherein a council of the World Trade Organization is overseeing enforcement of much stricter regulations concerning intellectual property rights. This new agreement is known as Trade Related Aspects of Intellectual Property Rights or TRIPs. The regulations under TRIPS make it mandatory for WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Advanced nations had to comply with the rules within the first year of having signed this agreement. Poor countries where the implementation of protection rights would have been a bit difficult had been given five years to enforce these laws and the backward nations had been given 10 years to ensure legislation of intellectual copyrights. These firms will have to fight it out for their rights themselves, by taking recourse to legal provisions already available in different countries. The firms can also boycott the countries where the record of safeguarding copyrights and patent rights is not very encouraging. The firms will also have to ensure the counterfeit versions of their products are not allowed to spread all over the world, particularly in the home country of the firm and the country where their products are preferred. Such a legal battle may take a long time but it pays to fight for patent rights, as can be seen from the grit shown by Pfizer in China. PFIZER WINS VIAGRA RULING IN CHINA of the patent for Viagra and ordering two Chinese companies to pay compensation for infringing on the registered trademark. Court ordered Beijing Health New Concept Pharmaceuticals The Beijing No. 1 I and Jiangsu-based Lianhuan Pharmaceutical to stop sales and production of blue rhomboid pills similar

which they sold and produced, infringed on the registered trade mark of Viagra. Source: News Adopted from the Economic Times, 29 December 2006.

Anti-Trust Laws Home and host countries, both, would like to prevent their industry from getting monopolistic and anticompetitive, as such anti-consumer association virtually acts as a blockade for fair competition and leads to undue exploitation of the general consumer. It also acts as an unfair barrier for a country’s industrial and trade development. Such protective measures are generally adopted by the host country’s trade and industrial association to create barriers for the foreign firms in the shape of mergers of competitors to form bigger conglomerates or even adopting price cartels, distribution cartels and manufacturing cartels. In Japan, it has been quite noticeable, as it is in India too, that the local industry of many products had adopted unfair trade practices. In order to ensure a fair competitive strategy, the countries legislate the anti-trust laws. In India, the Monopoly and Restrictive Trade Practices (MRTP) Act is one such Act that prevents the formation of monopolies and cartels. The United States was the first to legislate and implement its anti-trust laws on firms originating in the United States and also on those trading abroad. Similarly, other countries are also enacting such legislations.

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Points to Remember Jurisdiction: Power or right of a legal or political agency to exercise its authority over a person, subject matter, or territory. Jurisdiction over a person relates to the authority to try him or her as a defendant. Jurisdiction over a subject matter relates to authority derived from the country’s constitution or laws to consider a particular case. Jurisdiction over a territory relates to the geographic area over which a court has the authority to decide cases. Bureaucracy: Form of administration based on hierarchical structure governed by a set of written rules and established procedures. The term is often used to describe inefficient and obstructive administrative process and red-tapism. Extortions: The act of obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under the colour of official right. Encroachments: Unlawful entering (gradually and without permission) upon the land, property, other possessions, or the rights of another. For example, a building extending beyond the legal boundaries onto neighbouring private or public land, or beyond the building-line of a road or street. Nepotism: Practice of appointing relatives and friends in one’s organization to positions for which outsiders might be better qualified. Despite its negative connotations, nepotism (if applied sensibly) is an important and positive practice in the startup and formative years of a firm where complete trust and willingness to work hard (for little or no immediate reward) are critical for its survival.

Objective Type Questions 1. Internationally, any business gets affected by three main legal frameworks. These legal frame- works are (a) International laws (b) Host country laws (c) Home country laws (d) None of these (e) All of these 2. The world over, countries ascribe to three main legal systems. These legal systems are (a) Common laws (b) Civil laws (c) Theocratic laws (d) None of these (e) All of these 3. Common law is based on (a) Traditions (b) Precedents (c) Customs (d) All of these (e) None of these 4. Some of the international dispute settlement processes are (a) Mediation (b) Conciliation (c) Arbitration (d) None of these (e) All of these 5. The laws, rules and regulations by each government in its own country become for all companies and business originating from that country (a) Home country laws (b) Host country laws

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(c) Common laws (d) International laws (e) Civil laws Code law which is based on a very detailed set of laws organized into codes is also known as (a) Theocratic law (b) Civil law (c) Common law (d) International law (e) Standard law Laws instituted by countries to prevent the business firms from using unethical means to wield undue influence over those who control flow of business activities in the country are known as (a) Anti-corruption laws (b) Business laws (c) Theocratic laws (d) Patent laws (e) Administrative laws Ownership over intellectual properties is established by (a) Patents (b) Copyrights (c) Trademarks (d) None of these (e) All of these The laws, rules and regulations by each government in its own country become for all foreign companies and business operating in that country (a) Home country laws (b) Host country laws (c) International laws (d) Civil law (e) Common law State true or false: (a) Theocratic Law is a system based on the religious teachings as enshrined in the religious scriptures. (b) The process of conciliation involves a third party who tries to settle the dispute between two aggrieved firms by resolving differences. (c) In strict legal sense, the term ‘property’ means a resource over which an individual or firm or a business holds a legal title, this becomes the resource that they own. (d) A patent grants the inventor of a new product or new process exclusive rights for a defined period to manufacture, use or sale of that invention. (e) Trademarks are the designs, names and brands often officially registered by which merchants, manufacturers and the producers designate and differentiate their works and products.

Review Questions 1. How do legal systems of the world affect international marketing? Differentiate between home country, host country and international laws. 2. What are common law, code law and theocratic law? Differentiate, with examples, from countries following these laws. 3. Explain international dispute settlement procedures. Why would an international firm prefer conciliation rather than arbitration? Explain with the help of examples. 4. What kind of intellectual property does an international firm possess? What steps will you take to protect the intellectual property of your firm?

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5. What do you mean by jurisdiction in international marketing disputes? How does a marketer decide which system will be applicable to his business functioning?

Project Assignments 1. Analyse a recent global business dispute and study the legal aspects it has covered. 2. Visit a pharmaceutical firm which operates in China, U.S.A or Germany. Analyse the different legal requirements concerned with the operations and marketing in comparisons to those required in India. Discuss the findings in class.

Suggested Readings Chukwumerige, Okezie, Choice of Law in International Commercial Arbitration, Westport, Ct. Quorum Books, 1994. Clarke Irvine III, “The Harmonization of Product Country Marketing Statutes: Strategic Implications for International Marketers,” Journal of International Marketing, vol. 7, No. 2, 1999, pp. 81–103. Graham John L., “The Foreign Corrupt Practices Act: A New Perspective,” Journal of International Business Studies, Winter 1984, pp. 107–121. Jacoby Neil, H., Peter Nehmenkis and Richard Eels, Bribery and Extortion in World Business, Macmillan, New York, 1977. Kaikati, Jack and Wayne A. Label, “The Foreign Anti Bribery Law: Friend Or Foe?” Columbia Journal of World Business, (Spring 1980), pp. 46–51. Neimanis. G.J., “Business Ethics in Former Soviet Union: A Report,” Journal of Business Ethics, vol. 16, February 1997, pp. 357–362. Slomanson William R., Fundamental Perspectives on International Law, St. Paul, MN, West Publishing, 1990. Vernon Raymond, “The World Trade Organization: A New Stage in International Trade and Development,” Harvard International Law Journal, 6, Spring 1995, pp. 329–340.

Useful Weblinks http://www.rediff.com/news www.uspto.gov www.european-patent- office-org

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Learning Objectives After reading this chapter, you will understand: The modes of global entry The problems and prospects of international franchising and licensing The problems and challenges in global market entry Control strategies Control mechanism

INTRODUCTION This chapter discusses the structure, framework and strategies for collaborative arrangements, as well as the problems and challenges of going global by way of licensing, franchising, etc. Some of the operating modes that a company may adopt in a foreign country as market entry mode are wholly-owned subsidiaries, partially-owned subsidiaries, joint ventures, alliances, licensing, franchising, management contracts and turnkey operations. There could be various reasons for a collaborative arrangement in general, such as spread and reduce cost, specialise in competencies and avoid or counter competition. Some of the related motives are as follows.

Gain Location-Specific Assets Wal-Mart wanted to enter the Japanese market but was unsuccessful initially. When it found its efforts floundering, it tied up with Seiyu, which had more experience in the Japanese market. Distribution experience and a competent workforce are the key benefits that can accrue if the collaborative partner is a local.

Overcome Legal Constraints Many countries limit foreign ownership and, therefore, foreign investment companies can only enter into the franchising, licensing and alliances in those countries. The company in question often has a host of restrictions before it can enter into another country. Collaborative agreements help organisations protect themselves and reduce the risk of Intellectual Property Rights violations, which occur as a matter of course in foreign countries that have poor enforcement and strong piracy cultures, as in India and China.

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Diversify Geographically The companies are going international with the intention of diversifying into different countries and to overcome the problems of different business cycles.

Minimise Exposure to Risky Environments Companies may choose to minimise the risk of loss/seizure of assets abroad by sharing these with a local company.

MARKET ENTRY MODES: FRAMEWORK AND STRUCTURE There are various forms of collaborative arrangements. Licensing is one example. In licensing, the capital commitment is lower than that of a joint venture. Finding a desirable collaborative partner is another important issue. In the case of technology transfer, it may be difficult to find a partner who can match the company’s performance and expectations. In this case, it is usually easier to transfer resources within a subsidiary. Franchising is another way of expanding overseas, with less investment by the parent company. Some of the considerations in collaborative arrangements are:

Control The parent company has to see the extent of control while deciding on collaborative arrangement like franchising.

Global Expansion of the Company In the case of pre-established collaborative arrangements, it may not be worthwhile to enter into such an arrangement internationally if the new product is of the same type as the present product. In some cases, the collaborator of the host country may follow unethical practices, which adversely affect the reputation of the other company. The market entry modes are broadly classified as given below.

International Licensing Under a licensing agreement, the licensor company grants rights to intangible property (license) to another company for a limited period, which may be limited to one company. The intangible referred to here includes patents, inventions, formulas, processes, designs, patterns, copyrights for literary, musical or artistic compositions, trademarks, trade names, procedures and systems. The licensee pays royalty in exchange. Licensing may be adopted when the volume of products is not large enough to warrant the establishment of a separate facility for manufacturing or production. The licensor is obliged to furnish technical information. Such an arrangement exists in which technology changes are very frequent, such as in the semiconductor market. In some countries, the licensor has often asked for higher royalties in case the licensee starts exports of the product. In most cases, the transfer of technology or grant of license also involves consultation and other fees. In certain cases, the newest technology may be longer lasting and, hence, more useful in terms of benefits to the licensee. In some cases, however, the new technology may be worthless in case it does not succeed and is a failure.

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The transfer of technology may not always pertain to a totally different collaborator. In some cases, the transfer may be directed towards the subsidiary as this is regarded as a separate legal entity by law. Licensing is common in manufacturing industries.

International Franchising Franchising is a specialised form of licensing. Here, the franchiser sells an independent franchisee the use of intangible property (say a trademark) essential to the franchisee’s business and also operationally assists the business on a continuing basis, say through sales, promotion and training. As part of the continuing relationship, it offers economies and standardisation through central purchasing. A franchiser and a franchisee act almost like a vertically integrated company because the parties are interdependent and each produces part of the product that ultimately reaches the consumer. The advantages of franchising are:

to get operating permission (countries with the restrictions on Foreign Direct Investment) The disadvantage is that the acceptance of the franchising concept depends very much on the existence of awareness, education, quality and brand building exercises. The success for a domestic franchiser depends on three factors: product and service standardisation, high identification through promotion and effective cost controls. The dilemma here is that the more globally a product is standardised, the potentially lower is its acceptance in a foreign country.

Management Contracts Management contracts are the means by which a company may transfer a part of its management personnel to assist a foreign company for a specified period for a fee. Thus, with management contracts, the host country gets the assistance it wants without needing FDI and the management company receives income without having to make a capital outlay.

Turnkey Operations Turnkey operations are a type of entry mode in which one company contracts another to build, complete, ready-to-operate facilities. Turnkey operations are most commonly performed by construction and industrial equipment companies and they are often commissioned by a government agency. This work is based on the build, operate and transfer basis. The size of the contracts in turnkey operations is often very big, to the tune of hundreds of millions of dollars, which means a few large companies account for most of the international market.

GLOBAL MARKET ENTRY MODES: PROBLEMS AND CHALLENGES Many companies’ global market operations break down primarily because partners

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Different partners in the collaboration give different importance and management attention to the collaborative arrangement. Some of them are more active than the others. But when things go wrong, the active partner blames the less active one for its lack of attention and the less active one blames the more active partner for making poor decisions. The difference in attention is primarily due to different sizes of the partners.

Differing Objectives Companies enter into collaborative arrangements in the international market because they have complementary capabilities but their objectives may evolve differently over time. Common instances being:

competition for its wholly-owned operations.

Control Problems A number of factors may influence the control methods. These include:1 may not always be available

responsibility and the more limited the control process measure of performance has of interference from the headquarters more likely will extensive control be applied.

Partner’s Contributions A partner’s ability to contribute technology, capital or other assets may diminish over time compared to the other partner’s ability. This weak link may cause a drag on the collaborative arrangement, resulting in difference of opinion between the partners. Moreover, there is a danger that one partner will use the other partner’s contributed assets, enabling it to become a competitor. 1. Daniels, Sullivan and Radebeugh, International Business

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Differences in Culture Differences in culture are primarily on two accounts, national culture and corporate culture. Companies differ by nationality in how they evaluate the success of their operations. benefits.

Differences in corporate cultures may also create problems within the joint ventures. For instance, one company may be accustomed to promoting managers from within, while other may open may be entrepreneurial and the other risk averse. Since the external environment changes, a company needs to continually re-examine the fit between foreign collaboration and its strategy. The important issues are:

Dynamics of Collaborative Arrangements For a company, the cost of switching from one form to another (say from licensing to wholly-owned) is normally very high.

to penetrate. Legal, technical and marketing personnel may have entirely different perspectives on contracts. In these circumstances, decisions and performance may be evaluated with a team approach. As companies enter more collaborative arrangements, they get better performance from them. They have to choose partners carefully and learn how to achieve better synergies.

Finding Compatible Partners It is necessary to evaluate the potential partner not only for the resources it can supply but also for its compatibility to work with the other company. Partners can be found:

Negotiating Process Some technology transfer considerations are unique to collaborative arrangements. However, there are two issues:

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Therefore, it has become common to set up pre-agreements that protect all parties. Another controversial area of negotiation is the secrecy surrounding the financial terms of the arrangement.

Contractual Provisions It is not possible to anticipate all points of future disagreement and include coverage of them in a contract, yet provisions should outline

CONTROL STRATEGIES Companies often have some concerns when they do try to market their product abroad, like:

Behind these concerns, the more fundamental concern is that of control. Control is more than just ownership of voting rights. It is management’s planning, implementation and evaluation of performance to ensure that the organisation meets its objectives. Control keeps a company’s direction or strategy on track. Control is needed so that individuals would not make decisions that endanger the entire company. For example, Allied Irish Banks (AIB) allowed its foreign exchange traders at US dealing room lost $730 million before AIB became aware of it.

Factors that Make Control Difficult There are several factors that make control difficult in the international strategies alliance, licensing and franchising. Some of the factors that make control difficult can be specified as follows.

Distance In today’s world, because of the advancements in communication technology, it is cost-efficient to communicate with almost any corner of the world. Yet, the geographic distance and cultural disparity separating countries increase the time, expense and the possibility of error in cross-national communications.

Diversity Differences in market size, competition, nature of the product, labour cost, the currency and a host of other factors differentiate operations among countries. The task of evaluating performance or setting standards to correct or improve business functions is extremely complicated.

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Degree of Certainty Control implies setting goals and developing plans to meet those goals. The industry-based data are less complete and accurate for some countries. Also, political and economic conditions are subject to rapid change in some locales. These factors make planning error prone.

How to Ensure Control? Although the above factors make control more difficult in the international context, managers still try to ensure that foreign operations comply with the overall corporate goals and philosophies. The aspects of the international control processes that the marketing manger should bear in the mind are: strategic planning, decision-making process, mechanism and special situation.2 A company must adapt its resources and objectives to different and changing international markets, and this takes planning.

Strategic Planning Strategic planning must weave a company’s objectives and capabilities with its internal and external environments. Planning requires continuous reassessment. The first step is to develop long-range strategic intent, an objective or mission that will hold the organisation together over a long period, while it builds global competitive viability. Some companies would develop strategic intent as they progress, instead of starting with it in the first place. The second step is to analyse internal resources, along with environmental factors in the home country. These resources and factors affect and constrain each company differently and sometimes each product for the same company differently. For example, a small firm inexperienced in foreign operations may lack financial and human resources, even though it may have unique product capabilities. Unlike a larger counterpart, it may have to collaborate with another company, perhaps by licensing a foreign production rather than owning facilities abroad. The third step is to set international corporate objectives. Managers must examine activities in conjunction with the means of competing, such as by keeping prices low or differentiating through brand recognition. The fourth step is to analyse local conditions. Since the conditions are unique in each country, this step is important. In the next step, companies select alternatives that determine the extent to which a company follows a strategy. These alternatives include: comprise the entire value-added chain, from research to production to after-sales servicing. one, particularly in terms of the market share. products in different countries. elements in different countries.3 2. Charles W-Hill, International Business International Marketing

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The company will have to rank alternatives so they can easily modify as resource availability changes. This is the next step in planning, which is implementation of strategy. Strategic plans outline major commitments, such as what businesses the company will be in and where, carry them out. Although input for strategy formulation comes from all the departments, only the top-level management can see the company’s worldwide activities and, hence, is in a better position to plan changes in international policies. Companies grow in size as their product lines increase in numbers. And, as they grow more dependent on foreign operations, control becomes more complex. New structures continue to evolve to deal with this complexity.

Decision-Making Process The higher the managerial level at which managers make decisions, the more they are centralised. The location of decision-making may vary within the same company over time, as well as by product, functions and country. Some conditions favour the location of decisions in one place or the other. Basically, companies should choose the location on the basis of a combination of the following three trade-offs:

Companies going global through franchising, licensing, etc. need to be locally responsive. A few issues have been discussed here.

Control Mechanism following are the mechanisms by which a company can hold control in foreign markets. Corporate Culture All the companies have certain common values that their employees share. These constitute their corporate culture and form a control mechanism that is implicit and helps enforce the company’s mechanisms. The incompatibility of organisational cultures is detrimental to the acceptance of competitive advantage.4 To a great extent, the degree of control that corporate headquarters imposes on the selection of top managers for foreign subsidiaries may dictate how much formal control over the subsidiaries’ operations corporate personnel feel is necessary. Written Reports Reports are another form of control mechanism. The headquarters needs timely reports to allocate resources, correct plans and reward personnel. Decisions on how to use capital, personnel and technology continue without interruption. So, reports must be frequent, accurate and up-to-date to ensure that the objective of the multinational company in the other countries is met.

4. Daniels, Sullivan and Radebough, International Business

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Written reports are more important in international settings than in a domestic one because the managers of subsidiaries have much less personal contact with managers above them. Corporate managers miss out on much of the informal communication that could tell them about the performance of foreign operations. reports may be to monitor short-term performance or long-term indicators that match the organisation’s strategy Comparability Different costs between licensing /franchising may prevent a meaningful comparison of their operating performance. For example, the ratio of labour to sales for a subsidiary in one country may be much higher than that for licensing /franchising in another country, even though unit production costs may not differ substantially. So, the management must ensure that it is comparing relevant costs. Information Systems Apart from the information needed by headquarters to evaluate the performance of franchising /licensing, additional information is needed to plan, take action and share to improve performance. This might include: conditions, such as analyses of local, political and economic conditions, so that the headquarters can plan where to expand and constrict operations.

Special Situations Special situations such as acquisitions, joint venture , and changes in strategies create control problems. 1. Acquisitions Acquisition can lead to more geographic responsibilities and markets, as well as new lines of business. Another control problem occurs when the acquiring company’s culture is very different from that of the acquired one. Attempts to centralise certain decision-making, or to change operating methods, result in distrust, apprehension and resistance to change on the part of the acquired company. 2. Joint Venture Under joint venture arrangement, a foreign company invites an outside partner to share stock ownership in the new unit.5 The particular participation of the partners may vary with the foreign company making. There are administrative mechanisms that enable a company to gain control even with a minority equity interest. These mechanisms include spreading the remaining ownership among many shareholders, contract stipulations that board decisions require more than majority, dividing equity into voting and nonvoting stock.

Legal Framework (Branch and Subsidiary) Companies may choose among legal forms that affect their decision-making, taxes, maintenance of secrecy and legal liability. Most choose a subsidiary form which is considered as a separate legal entity in many foreign countries. When establishing foreign operation, a company has to often decide between establishing a branch or a subsidiary. A foreign branch is a foreign operation, not legally separate from the parent company. Branch 5. Jeannet Hennessey (2001), Global Marketing Strategies, Houghton Mifflin Company.

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operations are possible only if the parent company holds 100 percent ownership. A subsidiary, however, is an FDI that is legally a separate company. The parent company controls a subsidiary through its voting stock and through the control mechanisms. Because a subsidiary is legally separate from its parent company, legal authorities in each country generally limit liability to the subsidiary’s assets. The concept of limited liability is a major factor in the choice of the subsidiary form.

Types of Subsidiaries A company establishing a subsidiary in a foreign country can usually choose from a number of alternative legal forms. In addition to differences in liability, forms vary in terms of:

Points to Remember Royalty: Compensation, consideration, or fee paid for a license or privilege to use an intellectual property (brand, copyright, patent, process) or a natural resource (fishing, hunting, mining), computed usually as a percentage of revenue or profit realised from the use. Authoritarian: Leadership style in which the leader dictates policies and procedures, decides what goals are to be achieved, and directs and controls all activities without any meaningful participation by the subordinates. Participatory management: Type of management in which employees at all levels are encouraged to contribute ideas towards identifying and setting organisational goals, problem solving, and other decisions that may directly affect them. It is also called consultative management. Value added chain: Interlinked value-adding activities that convert inputs into outputs which, in turn, add to the bottom line and help create competitive advantage. A value chain typically consists of inbound distribution or logistics, manufacturing operations, outbound distribution or logistics, marketing and selling, and after-sales service. These activities are supported by purchasing or procurement, research and development, human resource development, and corporate infrastructure. Limited liability: Legal protection available to the shareholders (stockholders) of privately and publicly owned corporations under which the financial liability of each shareholder of the firm for the firm’s debts and obligations is limited to the par value of his or her fully paid-up shares. The firm itself, as a legal entity, is liable for the rest.

Objective Type Questions 1. ________is a specialised form of licensing. 2. In ___________, ownership sharing limits the flexibility or corporate decision-making. (a) Wholly-owned subsidiary (b) Joint venture

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3. A foreign ___________ is not legally separate from a parent company. (a) Branch (b) Subsidiary (c) Joint venture (d) None of these 4. The size of contracts in turnkey operations is often (a) Small (b) Big (c) Medium (d) All of these 5. The factors that makes control difficult is/are (a) Distance (b) Diversity (c) Degree of certainty (d) All of these 6. Fill in the blanks: (i) The mechanism by which a company can hold control in foreign markets are _____ and _____. (ii) Management contracts are the means by which a company may transfer _____ to assist a foreign company for ______. (iii) Trunkey operations are ______ in which one company contracts another to build, complete ready-to-operate facilities.

Review Questions 1. Distinguish between international franchising and licensing. 2. Discuss the benefits of international collaborative strategies in comparison to foreign direct investment.

5. Discuss the mechanisms by which a company can hold control in foreign markets.

Project Assignments 1. Select a global firm and critically examine its expansion strategy in different countries. 3. Identify a turnkey project and the partners and stakeholders involved in the project.

Case 1 Cisco Systems Cisco is an excellent example in successful application of international collaborative strategy. It is the world’s largest supplier of data networking equipment and the leading global supplier of computer networking solutions. Cisco views partnership as an essential component of strategic growth. It has a network of alliances the world over, ranging from India to Norway and from Canada to Brazil. The other benefits of alliances are de-risking, limiting of capital outlay, cost effective market expansion, additional gain in experience, process improvement and exposure to worldwide standards of best competitive practices. Cisco has 150 employees to oversee the alliance formation.

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Though the company initially tried to form alliances only with culturally similar organisations, it later tried to form alliances with the help of a system that would enable translation of different languages. There are a host of partners with which Cisco working well for marketing abroad. Such mutually beneficial alliance also enhances the brand value of the partnering company.

Case 2 TATA Group of India: Overseas Subsidiaries and Operations businesses. Brief descriptions of their activities are given below. Tata International: international trading. Focused on leather and engineering, it uses its well-integrated worldwide network to source globally, leverage some of its key international alliances to deliver world-class quality and work with global brands. The company and its subsidiaries worldwide have taken on various value-added roles and have stakes in a cross-section of businesses. It has stakes in a five-star hotel, bus-body building and trailer manufacture, distributorships and IT ventures; it has customer support facilities for Tata vehicles and design studios for leather. The company exports to more than 100 countries. Tata Limited: company today operates as an agent for the global procurement of goods and services for the every type of industry and activity. Tata Incorporated: specialises in all facets of global trading as well as the information and financial flows related to its lines of business. Besides, Tata Inc., sources capital goods, machinery, spares and operating consumables for the Tata companies in India. Tata Precision Industries: in high-precision machining, engineering plastic moulded parts and tool design. Tata International AG:

invests in various enterprises and projects overseas. Tata Africa: Tata Africa has a significant presence in almost all the major industrial sectors of Africa. From automobiles to hospitality, steel to information technology, Tata Africa and its associated companies are delivering quality products and world-class services to the African market and its people.

Market Entry Modes, Framework, Structure and Strategies

The following is a list of the sectors in which the Tata companies have a presence in Africa: Engineering and marketing commercial vehicles from the Tata Motors plant in India. Since then, Tata vehicles have come to be recognised for their utility, quality and comfort, and have had a steadily growing market share. Today, Tata Automobile Corporation SA, a subsidiary of Tata Africa, markets and distributes Tata vehicles (passenger cars and medium and heavy commercial vehicles) in South Africa through a network of 32 dealerships. It also assembles Tata Ubuntu buses and markets the

after-sales service. activities by companies like Tata De Moçambique Lda and Cometal SARL include bus-body building and assembly of vehicles, fabrication processes like the manufacture of pot shells for aluminium smelters, tanks for petroleum companies, radial and modular gates for irrigation as gates for canal systems and tanks for petroleum companies. Chemicals Through its engineering division, Tata Africa caters to South Africa’s chemicals industry. Services Tata Africa has a significant presence in the services sector, which includes hospitality. Hospitality managed by the Taj and offers guests the best of leisure and business amenities. Marketing and Sales

ropes, conveyor belts, rails, rollers and pipes among others, are sold not just in South Africa but steel products and mining consumables.

Discussion Question many foreign countries as part of their international marketing strategy.

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Case 3* Licensing of Philips Range of Products Licensing and merchandising is a step further in moving up the value chain for complete monetisation of the property. A major source of revenue can be generated via various licensing deals. An arrangement to license a brand requires a licensing agreement. A licensing agreement authorises a company which markets a product or service (a licensee) to lease or rent a brand from a brand owner who operates a licensing program (a licensor). Different companies engage different models to widen their presence and leverage their resources. Philips is one company which has proved time and again about their Research and Development capabilities and is evident from the number of patents, trademarks and design rights running into thousands. This case study tries to explore the leverage abilities that Philips strives to demonstrate through the licensing of their intellectual property rights. The extent to which the company is open to make licensing an efficient business model to capitalise its rights is also covered in the study.

Introduction Koninklijke Philips Electronics N.V. as Philips products were carbon-filament lamps and other electro-technical equipment. Philips is organised in a number of sectors: Philips Consumer Lifestyles (formerly Philips and Philips Healthcare (formerly Philips Medical Systems).

Licensing of Brand Philips Brand licensing is the process of creating and managing contracts between the owner of a brand and a company or individual who wants to use the brand in association with a product, for an agreed period of time, within an agreed territory. Licensing is used by brand owners to extend a trademark or character onto products of a completely different nature. Apart from benefits to licensors, there are benefits to licensees as well. Licensees lease the rights to a brand for incorporation into their merchandise, but do not share ownership in it. Having access to major global brands, and the logos and trademarks associated with those brands, gives the licensee significant benefits. The most important of these is the marketing power the brand brings to the licensee’s products. When brand managers enter or extend into new product categories via licensing, they create an opportunity for licensees to grow their company. Licensees expect that the license will provide them with sales growth. This sales growth may be in the form of growth within existing market or the opportunity to enter a new market. To achieve

Market Entry Modes, Framework, Structure and Strategies

this, licensees expect that the brand they are licensing has significant brand preference, that it will open doors and ultimately help them meet or exceed their business objectives. The licensing contract forces the licensee to achieve certain sales targets and royalties; therefore, the goal of the licensee is to quickly meet their business objectives, thereby achieving their contract obligations. Royalty is the money paid to a licensor by the licensee for the right to use the licensed property. It is calculated by multiplying the Royalty Rate by the Net Sales. Philips shares a large number of technologies and patents by licensing to third parties in foreign countries. By sharing its technology, other companies can develop or improve their products and enter new markets. But the company offers much more than patents and technology. It also provides know-how, training, services and support to realise or support its client’s business. Philips, one of the largest electronics companies in the world, is not only providing its consumer electronics, healthcare and lighting products, but technology and IP also which has the potential to compete on the company’s markets.

for the sourcing, distribution, marketing and sales of all Philips’ consumer television activities in the United States and Canada. of Philips-branded television products on the Chinese market. The deal stipulates Philips will

televisions and take care of after-sales activities in India. The company expects that with the presence of television sets in the country significantly.

Intellectual Property and Standards (IP & S) and other intellectual property (IP). To safeguard a proper return on these investments, Philips through intellectual property rights (IPRs). The IPR portfolio is used to support the Philips’ product divisions in achieving their business goals. which technologies can be shared with many partners and be brought to the marketplace even quicker. content management systems and other areas of interest with the aim to generate technologies, which it actively uses in setting new standards, in the areas of optical storage, content management and health.

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Facts and Figures Philips has the ownership of

Patents, Technology and Services Philips shares a large number of technologies and patents by licensing to third parties. By sharing their technology, other companies can develop or improve their products and enter new markets.

Licensing Programmes DVD-Video/ROM Player (Joint) Pricing information The royalty rate is determined by two key factors: 1. Functionality of the product. This means that more than one patent license is required for such a product. 2. Status of the licensee. If the company fulfills certain conditions, such as complete, true and accurate reporting and An arrangement to license a brand requires a licensing agreement. A licensing agreement authorises a company which markets a product or service (a licensee) to lease or rent a brand from a brand owner who operates a licensing programme (a licensor).

Forms of License Agreements Philips’ licenses for the various optical storage licensing programmes are made available for the manufacture of the relevant products using one or more of the licensed essential patents in the territory of manufacture and the subsequent sale of products so manufactured on a world-wide basis. For the convenience of licensees, Philips offers standard license agreements in two basic forms: one under Philips’ patents only and another under the patents of Philips and other patent owners. In addition to licensing its own patents under so-called “Philips Only Patent License Agreements”, Philips has been authorised by certain patent owners (e.g. Sony Corporation, technology concerned, in the patent portfolio as well. Accordingly, Philips includes these other patents in so-called “Joint Patent License Agreements”. These combined licenses are offered as a convenience to interested manufacturers.

Market Entry Modes, Framework, Structure and Strategies

Patent License Agreement, covering only Philips’ patents, or a standard Joint Patent License Agreement, covering patents of Philips as well as others, specified, patent owners. The choice sole discretion of the manufacturer concerned. Indeed, each patent owner whose patents are made available through a Joint Patent License Agreement administered by Philips also offers an individual license agreement pursuant to its own terms and conditions. Interested manufacturers thus have the freedom to choose between a standard Joint Patent License Agreement or one or more of the standard individual license agreements offered by Philips and each of the colicensors. In addition, manufacturers may negotiate non-standard licenses with Philips. Any manufacturer who chooses to enter into any of these license agreements should realise that the license granted does not imply any warranty in relation to Philips or third party patents, not included in the license. To be properly authorized for the use of Philips or third party patents not Philips reserves the right to assert against any licensee any and all of its patent rights not included in the license.

The License Agreement Some of the technologies indispensable to manufacture optical products are covered by patents owned by Philips and other patent owners. As a general matter of patent ownership, a party wishing to use patented technology can do so only if such party is licensed to do so by the patent owner. Philips offers its licenses on non-discriminatory terms and conditions. In principle, these licenses are available to all interested manufacturers. include patents that are necessarily infringed in the manufacture of products that comply with the Standard Specification concerned, taking into account probable developments as to technology and consumer demand. At the request of Philips, the essential nature of the licensed patents is America. Philips takes substantial efforts and expense to determine which patents are essential to the standard product, which is the subject of the particular license agreement.

The Royalty Rate The royalty rate, as specified in the standard license agreement generally is a per-unit amount and not a percentage of the net selling price of the product it refers to. The royalty rate in standard licenses is not related to fluctuations in the market price of a licensed product. Further, the royalty rate is not computed on a per-patent basis and does not fluctuate as patents are added or removed from the standard license for the format concerned. Therefore, the same royalty rate is payable when using one essential patent as when using several essential patents.

Trademarks Use of the Philips mark technologies to a company built around its core brand.

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valuable assets of our company. Use of Philips brand promise and shield emblem exclusively reserved to Philips.

Discussion Question 1. Discuss how licensing helps Philips to market its products.

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MARKET ENTRY MODES—JV, M&A, STRATEGIC ALLIANCE AND SUBSIDIARIES

Learning Objectives After reading this chapter, you will understand: Modes of global market entry as strategies Modes and strategies with special reference to joint ventures, global mergers and acquisitions, strategic alliances, and subsidiaries

MODES OF GLOBAL MARKET ENTRY AND STRATEGIES The following are the various ways through which firms can enter the global market: 1. 2. 3. 4. 5.

Exporting Licensing and Franchising Strategic Alliances/Joint Ventures (JV) Mergers and Acquisitions Subsidiaries

The characteristics of the above modes are given in brief below. Type of Entry

Characteristics

Exporting

Low control, ideal for short-term business

Licensing/Franchising

Low cost, low risk, little control, low returns

Joint Ventures and Strategic Alliances

Shared costs, shared resources, shared risks, problems of integration

Mergers and Acquisitions

Quick access to new market, high cost, complex negotiations, problems of integration

Wholly-owned subsidiary

Complex, often costly, time consuming, high risk, maximum control

In this chapter, the prospect and consequences of the various global market entry modes have been illustrated by way of examples from: A. Joint ventures in China B. Strategies of the Birla Group C. Strategies of the Tata Group

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D. Strategies of the Mittal Steel E. Strategies of Cisco Systems

JOINT VENTURES1 There are good business and accounting reasons to create a joint venture with a company that has complementary capabilities and resources, such as distribution channels, technology or finance. In a joint venture, two ‘parent’ companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control. STEPS FOR ESTABLISHING A JOINT VENTURE Step 1 Step 2 Step 2 Step 3 Step 4 Step 5 Step 6

Screening of prospective partners Shortlisting a bet of prospective partners Joint development of a detailed business plan and shortlisting a set of prospective partners Due diligence—checking the credentials of the other party Formulate strategy and terms of dissolution of the joint venture Decide appropriate structure (percentage of stake in the joint venture) Allocation of income, gain, loss or deduction to be made among the partners

How to Build Successful Joint Ventures Companies that build successful joint ventures follow a systematic process.

1. Goals Know from the beginning what both companies want to accomplish. Is it reduced product costs, expanded sales or market credibility? Your partner’s goals should be complementary to yours.

2. Win-Win The best partnership is based on a mutual win-win relationship. Take the time to locate a company with genuine interest in joint ventures and a similar corporate culture. If your business is focused on long-term customer relations and your strategic partner cares about gaining market share quickly, your two cultures may clash.

3. Negotiation It is important to understand negotiation tactics and understand the legal aspects of the deal. Keep win-win agreement in mind.

4. Relationship Once a winning joint venture is formed, the real work takes place. A good joint venture is like a marriage. It is built on communication, trust and understanding. 1. Prof. Justin Paul has co-authored two sections in this chapter with Mr. Rajendra Sardesai, Mr. Akshay Jain, Mr. V. Seshasai, Mr. Pradeep Joshi and Mr. Prashant Pathak.

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Benefits and Limitations of International Joint Ventures The benefits of international joint ventures are: (i) They facilitate expansion into key markets, develop new products and improve productivity. Companies gain expertise and lower costs by forming joint ventures. (ii) Most of the companies struggle to get acceptance among the customers. A key alliance with a larger known branded company can dramatically improve credibility. (iii) By formulating a joint venture with a solid partner, both companies expand their sales force and distribution channel (1 + 1 = 2 logic). The main reasons for the failure of international joint ventures are:

Legal Forms of Joint Ventures in the World A ‘joint venture’ is defined as a cooperative arrangement among individuals or corporate entities, formed for the purpose of carrying on a particular enterprise. A joint venture can be established in any one or a combination of three legal entities: corporations, partnerships and limited liability companies.

Corporations Business corporations offer complete protection to their shareholder-owners from liability. As such, they are a particularly attractive form for establishing joint ventures. However, the tax ramifications often preclude their use. Under the US federal tax laws, a corporation is treated as a separate taxpayer, subject to income tax at a maximum rate of 35 percent, a tax that can be completely avoided by using one of the other two forms (in the United States).

Partnerships Partnerships can take two forms, limited and general. With a general partnership, the partners share operating responsibility and each one is liable for the debts of the others. A limited partnership is comprised of one or more general partners who assume operational responsibilities for the partnership and one or more ‘limited partners’ who serve as passive investors. The general partners are usually subject to liability to the same extent.

Limited Liability Companies A limited liability company is a relatively new legal form that is emerging as the most common vehicle for conducting joint ventures. An LLC offers to its ‘members’ (analogous to stockholders of a regular corporation) the protection from liability afforded in the corporate structure while affording the same tax treatment as a partnership in which income and expenses are passed through the partners. Unlike limited partnerships, limited liability companies offer protection to members who participate in the management of the entity as well as investors. To be taxed as a partnership, rather than a corporation, an LLC that has more than one member has merely to elect this status.

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INTERNATIONAL JOINT VENTURES IN CHINA Despite the attractiveness of China’s business and foreign investment environment, the country is not an easy place to do business. Foreign businesses that seek to enter the Chinese market must consider a wide range of strategies and business structures—each with its own advantages and disadvantages. Since China’s World Trade Organisation (WTO) entry and the government’s relaxation of investment regulations, foreign investors have been choosing to establish more wholly foreign-owned enterprises (WFOEs). These WFOEs cannot be used in every sector because the government requires Chinese company participation or control in some sectors. In such cases, foreign companies have to consider a joint venture structure. Even when they are not required, joint ventures can benefit foreign investors when a Chinese partner has certain strengths—such as central or local government support, brand reputation, land, licenses, distribution, and access to suppliers—that reduce start up costs and improve the foreign investor’s chances of success. In China, most joint ventures are equity joint ventures (EJVs), though some investors establish cooperative (or contractual) joint ventures (CJVs). EJVs and CJVs are similar in many respects. The government approval process, approval authorities, format of agreements, tax breaks, legal standing, laws and authorities for dispute resolution are identical. The general management structure and governance procedures are also virtually the same. But these joint ventures differ in functional ways. The CJV parties’ profit, control, and risks are divided according to negotiated contract terms. In contrast, an EJV’s profit, control and risk are divided in proportion to the equity shares invested by the parties. The following cooperative joint venture (CJV) cases illustrate potentially useful strategies that may apply to companies in other industries as well.

Example 1: Toll Road CJV in China and approved for toll collection. The Chinese government sees toll roads as a way to encourage foreign investment in the development of China’s transportation infrastructure. CJVs are almost always used for infrastructure sector investments. A CJV enables such investors to recoup their investment more quickly than other structures, since the parties can negotiate how roads—will return to the government at the end of a project’s life).

Example 2: Chinese Gold Mining CJV Today China is the world’s fourth largest gold producer. Growth in China’s gold industry was driven by With the deregulation of China’s mining laws, the nation’s entry into the WTO in December 2001, and for foreign investment in this sector has fallen. The vast majority of foreign investments in this sector have been through CJVs. Dr. Justin Paul acknowledges the information shared by the paper presenters during Shanghai Forum, 2007, organised by Fudan University in May. The papers presented were useful for preparing this section.

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Foreign companies set up CJVs in mining for many reasons. CJVs help to counter government

high risk of failure in an individual mine because the partners can sign new contracts for new mines.

control of the project. The joint venture’s Chinese partner is responsible for preventing the loss of state

assets’ on paper. This is another reason why Chinese partners prefer the CJV structure.

elects not to make cash contributions. Chinese parties typically do not contribute working capital. To attract foreign investors, the Chinese side 30 years, the foreigners walk away.

Example 3:

A ‘Smart Card’ Wireless Security Technology CJV in China

application, secure ID and payment smart cards, market the system and technologies to the government One of the Chinese CJV partners is an entity of the Ministry of Information Industry (MII). The other

over time, after all required permits and licenses are issued. This $3 million represents 100 percent licenses to provide and operate the system and technologies in China, and it receives 20 percent of the CJV’s gross operating income. The Chinese parties use their relationships with the authorities to obtain the needed licenses and approvals, participate in market promotion and negotiations with customers,

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changing circumstances, regulations, and laws one must contend with when doing business in China,”

The CJV required a detailed agreement and, coupled with all the ancillary agreements and a clear company spokesperson,

think through all of the possible problems that may occur in the future and deal with them up front. The result is a smoother relationship with your partner(s) and a good blueprint for the operation of the CJV.” Question: Discuss the rationale for establishing joint venture as an international market entry mode in

Case Joint Ventures by Indian Business Groups: Case of Birla Group Joint Ventures

Company Partner Key products/services Birla Sun Life Insurance Sun Life (Canada) Insurance solutions Company Ltd (BSLI) A joint venture between the Aditya Birla Group and Sun Life Financial, Birla Sun Life forayed into the life insurance and retirement planning business by pioneering the unique unit-linked solutions in India. The company’s 95 percent of sales come through unit-linked plans. The company is one of the largest sellers of unit-linked plans in India, one of the fastest growing life insurance markets in the world. The company is a pioneer in introducing unique product features like a ‘free look period’ and best sales practices such as the use of ‘sales illustrations’. The regulator has now introduced the ‘free look period’ as an industry norm. The mandatory use of a sales illustration within Birla Sunlife has set up a standard of transparency in the industry. BSLI has consistently recorded a very efficient utilisation of capital, and Low claims ratio of 0.06 percent of total policies.

Market Entry Modes—JV, M&A, Strategic Alliance and Subsidiaries

Birla NGK Insulators Pvt. Ltd. Birla NGK Insulators (BNI) is a joint venture between Indian Rayon, an Aditya Birla Group Company, and world leader NGK Insulators Ltd. of Japan (NGK). Birla NGK is India’s largest and the world’s third largest producer of porcelain insulators. Its products include hollow, solid core, disc and pin/post insulators, which are mainly used in transmission and distribution of electricity and related equipment. The company contributes to almost 43 percent of the production share in the Indian market and has a capacity of 34,000 mtpa. This positions the company as the world’s largest plant for hollow and solid core insulators for the Original Equipment Manufacturer (OEM) segment. BNI products are exported to 34 countries in Europe, America, Middle East, Africa and China. Exporting 50 percent of its total sales, BNI has been very proactive in gauging changing customer needs and adapting its product range to meet high quality standards. Some of BNI’s customers are multinationals like Siemens, ABB, Areva and leading national power utilities. The marketing rights for the Indian market are acquired by Indian Rayon, while the rights for international markets are held by NGK, Japan. The company’s manufacturing facilities are located in the states of West Bengal, at Rishra, and Gujarat, at Halol. Tanfac Industries Ltd. TIDCO (Tamil Nadu Industrial Development Corpora-tion) Tanfac is one of India’s largest suppliers of fluorine chemicals. Incorporated in the year 1972, it is a joint sector company promoted by the Aditya Birla Group, Pilani Industries & Investment Corporation Ltd. (PI&ICL) and Tamil Nadu Industrial Development Corporation (TIDC). Its plant and facilities are spread over 60 acres in the chemical complex at Cuddalore, about 200 km from Chennai, India. Tanfac is engaged in the manufacture of inorganic based chemicals, such as aluminium fluoride, with a capacity of 15,000 TPA, and hydrofluoric acid with a capacity of 14,000 TPA. Inorganic fluorine based chemicals have vital applications in industries like aluminium smelting, petroleum refining, refrigerant gases, steel re-rolling, glass, ceramics, sugar, fertilisers and heavy water, etc. Organic fluoro chemicals are used as intermediates in the manufacture of pharmaceuticals and agrochemicals. Tanfac focuses on a variety of specialty fluorides, which are developed and manufactured depending on specific requirements of customers. Tanfac exports its products to countries across the globe, including Australia, New Zealand and South East Asia and Africa. Birla Sun Life Asset Management Company Ltd. Birla Sun Life Asset Management Company Ltd.—the investment manager of Birla Mutual Fund—is a joint venture between the Aditya Birla Group and Sun Life Financial Services of Canada. Birla Sun Life AMC provides investors a spectrum of 18 investment options, which include diversified and sector-specific equity schemes, balanced and monthly income funds, a wide range of debt and treasury products and two offshore funds. Birla Sun Life Mutual Fund today has emerged as one of India’s leading mutual funds, with over Rs.90 billion in assets under management, including two offshore schemes, and an investor base of around 400,000. Birla Sun Life AMC is India’s first asset management company to be awarded the coveted

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ISO 9001:2000 certification. The proof of its relentless commitment to high quality in design, development, sales and marketing of investment products, its investment management and its customer service. Birla Sun Life Mutual Fund was the first to come out with a liquid fund with the launch of Birla Cash Plus in 1997. It was also the first to come out with a dividend yield fund, Birla Dividend Yield Plus, and a debt index fund, Birla Bond Index Fund, which replicates the Crisil composite bond fund index. The latter has been awarded the AAAF rating by Crisil, Credit rating Agency. Birla Sun Life Mutual Fund has a track record of consistently winning awards based on performance. Some of its recent awards include the ‘Wealth Creator Award, 2003’ by Outlook Money for the best mutual fund, the CNBC-BNP Paribas ‘Mutual Fund of the Year award, 2002’ for Birla IT Fund, Birla MIP and Birla Income Plus as rated by Moody’s, and the ‘Business Barons Best Brand Award, 2002’ for the best mutual fund brand. Birla Sun Life Mutual Fund is present in 65 locations around India, with 18 branches, 24 franchisees and 23 cash co-ordinator centres. There are 1950 locations across India where local cheques are accepted for regular extra advantage plan (REAP) investments. There is direct credit of dividend / redemption facility with 11 banks. Some of the other innovative facilities offered by Birla Sun Life Mutual Fund are: (i) Gift Certificates These certificates can be bought by anyone and gifted to their near and dear ones, as well as business associates, for special occasions and festivals. (ii) Readicheques These are pre-issued, undated, repurchase cheques in various denominations that an investor can opt for. They are very convenient and offer greater control on one’s investments. (iii) Bond Exchange This facility allows retail investors to replace their existing portfolio of debt securities with a diversified debt fund, in order to optimise returns and improve liquidity. Birla Sun Life Distribution Company Ltd. Sun Life (Canada) Birla Sun Life Distribution (BSDL) is a part of the joint venture between the Aditya Birla Group and Sun Life Financial of Canada. The synergy of these two accomplished conglomerates offers global financial knowhow and local market insight. BSDL puts knowledge, expertise and experience to good use to preserve, nurture and nourish investors’ wealth. ‘For your today and your tomorrow’, as the company puts it. It is said that “To acquire wealth is difficult, to preserve it more difficult, but to nourish it wisely, the most difficult of all.” BSDL’s commitment to excellence, along with a roots-up approach to research and analysis, coupled with technology-driven processes, has enabled the company to excel at this challenging task and, in a span of four years, emerge as one of the leading distribution houses of the country. Source: Extracted from Birla Sunlife Insurance Website and from the interview report with Managing Director, written by Ananth Wagolikar DNA Money, 9th July, 2007.

Discussion Question Discuss the rationale for establishing many joint venture by Birla group.

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GLOBAL MERGERS AND ACQUISITIONS The rationale for global mergers and acquisitions can be specified as: a) Saving of time in establishing the production and marketing set-up in foreign countries. If a firm incorporates its own establishments, it would naturally consume more time. b) To purchase an established brand in that country and expand the sale of the acquirer’s brands in the foreign country. c) To control a larger market share of the product globally. For example, Mittal Steel’s acquisitions of Arcelor Company in Europe.

Examples Cisco Systems Acquisition of Arroyo Video Solutions On September 13, 2006, Cisco Systems® announced that they have completed the acquisition of privatelyheld Arroyo Video Solutions, Inc., a leading provider of next-generation solutions for on-demand television and related consumer services. By acquiring the Arroyo Solution, Cisco, a US company, is now in a position to deliver a highly extensible platform for video-on-demand today and the emerging time-shifted services in the future. The integration of the Arroyo platform into the Cisco IP-NGN (Next Generation Network) architectural framework enables carriers to accelerate the creation and distribution of network delivered entertainment, interactive media and advertising services across the growing portfolio of televisions, personal computers, mobile handsets and emerging-media capable devices. With this transaction, Arroyo products are now integrated into the Cisco Cable & Video Initiatives Group, within the service provider organisation led by Michelangelo A. Volpi, Cisco senior vice president and general manager, routing and service provider technology group.

Citigroup It has more than 1,200 corporate finance staff and 350 M&A specialists on five continents involved in the most significant deals in the marketplace. Through strengths that include effective negotiation, product-neutral financing, precise execution and industry expertise, the organisation has been involved in the largest and most complex deals in the marketplace. As a result, it is consistently ranked among the top tier of advisors in local, regional and global markets, when it comes to mergers and acquisitions.

Mittal Steel Arcelor Mittal has emerged as the world’s number one steel company, with 330,000 employees in more than 60 countries. The company, incorporated in 2007, brings together the world’s leading steel companies, Mittal Steel and Arcelor. (Merger of Arcelor with Mittal led to the formation of a new company.) Arcelor Mittal is the leader in all major global market segments, including automotive, construction, household appliances and packaging, with leading R&D and technology, as well as sizeable captive supplies of raw materials and outstanding distribution networks. With an industrial presence in 27 countries across Europe, the Americas, Asia and Africa, Arcelor Mittal has a balanced geographic diversity within all the key steel markets, both developing and developed.

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The Arcelor Mittal proforma revenue in 2005 showed combined revenues of 62.2bn euro (77.5bn$) and an approximate production capacity of 113 million tonnes, which represents about 10 percent of the world’s crude steel output.

INTERNATIONAL STRATEGIC ALLIANCES Strategic alliances are agreements between firms in which each commits resources to achieve a common set of objectives. Companies may form strategic alliances with a wide variety of players: customers, suppliers, competitors, universities or divisions of government. Through strategic alliances, companies can improve competitive positioning, gain entry to new markets, supplement critical skills and share the risk or cost of major development projects, without taking equity stakes. To form an international strategic alliance, companies should:

work together.

Strategic alliances are formed to:

One of the fastest growing trends for business today is the increasing number of strategic alliances. According to Booz-Allen & Hamilton, strategic alliances are sweeping through nearly every industry and are becoming an essential driver of growth. Alliances range in scope from a business relationship based on a simple contract to a joint venture agreement. Mode of Entry

Stake

Intention

Type of Relationship

International Strategic Alliance

Partners need not take equity stake

Short-term relationship

Boy-Girl friends

Joint Venture

Partners normally take stake in the new entity

Long-term relationship

Married couple

For small businesses, strategic alliances are a way to work together with others towards a common goal while not losing their individuality. Alliances are a way of reaping the rewards of team effort, and the gains from forming strategic alliances appear to be substantial. But it is not just profit that is motivating this increase in alliances. Other factors include an increasing intensity of competition, a growing need to operate on a global scale, a fast changing marketplace and industry convergence in many markets. For example, in the financial services industry, banks, investment firms, and

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insurance companies are overlapping more and more in the products they supply. Especially at a time when international marketing is becoming the norm, these partnerships can leverage growth through alliances with international partners. Rather than take on the risk and expense that international expansion can demand, one can enter international markets by finding an appropriate alliance with a business operating in a marketplace a company wishes to enter. A strategic alliance is essentially a partnership in which companies combine efforts in projects, ranging from getting a better price for supplies by buying in bulk together to building a product together, with each providing part of its production. The goal of alliances is to minimise risk while maximising the leverage and profit. An alliance is simply a business-to-business collaboration. Another term that is frequently used in conjunction with alliances is establishing a business network. Alliances are formed for joint marketing, joint sales or distribution, joint production, design collaboration, technology licensing and research and development. Relationships can be vertical between a vendor and a customer, horizontal between vendors, local or global. Strategic alliances are becoming a common tool for expanding the reach of a company. INTEL’S STRATEGIC ALLIANCES BEA Solutions

SAP Solutions

applications. Oracle Solutions

compatibility between their products and optimise their solutions to meet customer requirements. These server platforms. SAS Solutions By delivering innovative business intelligence solutions that are easy to deploy and provide solid return on investment, Intel and SAS help companies use their data to make smart business decisions.

Case ITALTEL AND CISCO STRATEGIC ALLIANCE Italtel and Cisco Extend Strategic Relationship to Develop New Converged Solutions in EMEA* and Latin America

America region. * EMEA stands for Europe, Middle East and Africa.

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Since signing the original strategic alliance agreement in early 2005, Italtel and Cisco have worked together on joint technology solutions for service providers focused on optimisation of network infrastructures, multimedia communication services for the consumer segment and hosted and managed

creation and reduce operational costs.

(Source: Yankee Group February 2006).

innovative services.”

markets. Speed to market is vital for our customers and the close cooperation between Cisco and Italtel means we can deploy these solutions rapidly and effectively.” The two companies will continue to cooperate on the development and marketing of joint solutions Technologies. Italtel and Cisco joint solutions include S

S

Telecom Italia successfully implemented the Cisco and Italtel solution to deploy hosted and managed decided to deploy these services.

mobile convergence. Source: Financial Times, Milan Frankfurt Editions, Sept. 13, 2006.

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SUBSIDIARIES The basic purpose of the subsidiaries, as compared to other forms as stated above, is to have more and direct control on the overseas operations. Subsidiaries can be established either by way of acquisition or Greenfield investment.

Case CISCO, US COMPANY SETTING UP SUBSIDIARY IN TURKEY Cisco Systems to Invest Up to US $275 Million in Turkey Over Next Five Years

highlights the growing importance of Turkey in the global emerging markets.

to better compete globally through the adoption of information communications technology (ICT) and improved education. a global basis, and Turkey understands the critical importance and transformative impact technology can have on businesses, governments, societies and the overall economic growth of the country,” said

and skilled workforce in order to increase productivity and foster innovation, and are vital for Turkey to sustain the same rate of growth it has enjoyed over the past four years.”

accelerate the country’s transformation and economic growth. networking technology and prototypes to support pilot programmes targeted towards rural broadband for education, as well as connectivity for small and medium businesses, municipalities and local communities.

technologies for the Turkish marketplace with local partners and entrepreneurs and increase the number of engineers in the country.

development in Turkey. to provide enhanced technical programmes in concert with leading local universities. There are

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requirements of local service provider customers.

Question: Source: Compiled from Newspaper USA Today and Financial Times.

Points to Remember Equity Shares: Shares having a claim to participate in the whole range of annual profits remaining to a company after it has satisfied all charges and met any fixed preferential dividends. These usually have voting rights. If the company is wound up, they will be entitled to any assets left over after all other investors have been paid off. Deregulation: The removal of government controls from an industry or sector, to allow for a free and efficient marketplace. Conglomerates: A corporation consisting of several companies in different businesses. Such a structure allows for diversification of business risks, but the lack of focus can make managing the diverse businesses more difficult. Positioning: Marketing strategy that aims to make a brand occupy a distinct ‘position,’ relative to the competing brands, in the mind of the customer. Firms apply this strategy either by emphasising the distinguishing features of their brand (what it is, what it does and how, etc.) or try to create a suitable image (inexpensive or premium, utilitarian or luxurious, entry-level or high-end, etc.) through advertising. Productivity: Relative measure of the efficiency of a person, machine, factory, system, etc. in converting inputs into useful outputs. Computed by dividing average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period.

Objective Type Questions 1. The two main reasons for the failure of joint ventures are ___________ . 2. Arcelor Mittal is the number one steel company in the world, with 3,30,000 employees in more than ___________countries. 3. When the mode of entry for companies is a joint venture, their intentions will be ___________ . 4. On Sept. 13, 2006, Cisco Systems completed the acquisition of privately held _________ company. 5. The basic purpose of the formation of a subsidiary is ___________ . 6. Business cooperation offer completed protection to their ___________ from liability for the debt of the company. 7. An alliance is simply a ______ collaboration. 8. In china, most joint ventures are ______ 9. BSDL is a part of the joint venture between ______ and ______. 10. Strategic alliances are ______ between firms in which each commits ______ to achieve a common set of objectives.

Market Entry Modes—JV, M&A, Strategic Alliance and Subsidiaries

Review Questions 1. 2. 3. 4.

Distinguish between a joint venture and a strategies alliance. Discuss the role of a subsidiary in international business. Discuss the rationale behind acquisition as growth strategy for the international expansion. Why did Italtel and Cisco decide to do business based on strategic alliance?

Suggested Readings Joshi, Rakesh Mohan (2005), International Marketing, Oxford University Press. Paul Justin, (2006), International Business, Prentice Hall. Paul Justin, (2006), Business Environment, McGraw-Hill Education.

Case International Airline Alliances Most of the airlines in the world are in, or have announced to join, an alliance in order to benefit from the ongoing globalisation process. This would not only benefit various airlines and help them reduce their cost of operations in the areas of ticketing, passenger facilities and ground operations, but it will also benefit customers in the long run. The alliance will facilitate combining routes, sales, airline terminal services and frequent flier programmes. These alliances have blurred the competitive distinctions among the major international carriers. The airline industry needs to form collaborative arrangements because of regulatory policies, cost, competition, poor profit performance, economic downturn and international terrorism. A brief summary of the various factors affecting the airlines industry has been illustrated in subsequent paragraphs. Effects of Government Regulations: Many countries have ensured national control through whole or partial ownership of airlines. Airlines is the key industry of a country the government wants domestic service to be owned by them. Governments also protect their airlines by regulating certain policies like: (a) (b) (c) (d) (e)

Foreign carriers’ landing rights. The airports and aircraft the carriers can use. Frequencies of flights. Over-flight privileges. Fare charges.

International Air Transport Association (IATA) sets global safety standards, uniform fares, meal services and baggage allowance. Certain factors that influence governments to protect their airlines are: (a) A country can save money by relying on domestic airlines in times of unusual air transport needs. (b) A government wants its own company to carry mail abroad.

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(c) Public opinion favours spending at home. (d) Airlines are the source of national pride. (e) Countries are worried about protecting their airspace for security reasons. Market Competition: A number of airlines have established market agreements to complement their route structure. For example, Northwest handles KLM’s operations in its Detroit facility. The main problem of these agreements is that connections from one airline to another show separate route codes in reservation systems. Passengers are worried about using those connections on long routes. Effects of Cost: In the era of globalisation, all airlines attempt to reduce their operational costs. Major players in the field of ground operations would certainly benefit by virtue of their large handling capacity. Certain airlines have dominated certain international airports by good capabilities, such as baggage handlers, etc. Sharing these capabilities with other airlines may spread cost. Certain airlines have made market arrangements to fly alternate days when traffic is low on the routes. The high cost of maintenance and the reservations system has led to joint ventures. Management of Alliances: A problem in the proliferation of alliances is that the relationship is so intertwined among airlines that it is difficult to make out whether they are competing or cooperating. Government restrictions on full merger from different countries may be a blessing in some ways because a corporate and national culture may be difficult to match.

Discussion Questions 1. Why does airlines enter into strategic alliance with each other in the international segment? 2. Do you think that the alliance is a marketing strategy?

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Learning Objectives After reading this chapter, you will understand: Different products with special reference to customer needs and differentiate between industrial and consumer goods Different dimensions that make a product an international product, with special company illustrations, and identify them The process of new product development in international markets and address the international diffusion process The international product life cycle and identify international marketing strategies adopted by companies at each stage

INTRODUCTION The world over, customers of goods and services have different needs, aspirations, and levels of satisfaction. What is quality for one in a product may not be satisfaction driven to the other buyer of the same product. The attribute of a product which can become a selling point to one buyer nation may not be so attractive to buyers from other countries. These selling points may become negative selling points if included in the sales story and may create aversion to the product if emphasised. An international marketer faces challenging situations when it comes to offering his products and services to customers across his own national borders. It is not necessary that the product line that a company offers in its home market will be accepted in another country with the same content and packaging. The competitive demands, attitudes, beliefs, interests, opinions, associations and value expectations differ from nation to nation and cultural variations too have their own impact in leading the customers to decide on the acceptance or rejection of a product package offered by the manufacturers. Such dynamism of international markets keeps the manufacturers on their toes and leads them to innovate on their existing product and marketing mix to cater to the ever changing taste and demand scenario in the international marketplace. This chapter discusses the product policy and planning strategies of the international marketing firms. An attempt is made to understand how international marketing firms coordinate their efforts during different stages of a product’s life cycle, i.e. from innovation to maturity to decline, and the steps they take in managing the product portfolio both in domestic and foreign markets.

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The product is the most crucial factor in any marketing activity. This product can be a service wrapped in different tangible or intangible attributes and benefits, directed to satisfy and serve a particular need. It can also be a physical product like a car, a chair, a refrigerator or an air conditioner or any other fast moving perishable or non-perishable goods. From a layman’s point of view, a product can be defined as a mass of an item manufactured by an industry, which can be defined in its tangible and physical shape, to be sold to those who have to fulfil their need by its consumption after paying a price determined by its producers. This product, besides meeting the perceptible requirement, will also provide intangible benefits of being in a position to satisfy the emotional needs of customers, such as ego satisfaction, feeling of status achievement, sense of belonging to a particular group or segment of society and a sense of attainment and possession. Buying a refrigerator fulfils a customer’s basic need of a cooling and storage machine, which can keep the food fresh and water cool, but along with the refrigerator, the customer also wants health, status and a feeling of owning a facility when he opts for a specific brand, for instance Samsung or LG. This additional package of add-on factors that the customer wants, along with his purchase of a material product, differ from country to country and the task of an international marketer becomes all the more tough when it comes to matching his products to different needs of widely divergent international customers.

DEFINING A PRODUCT A product in marketing parlance can be defined ‘as a bundle of physical, psychological, tangible, and intangible, present and future attributes that, put together, bring satisfaction or benefits to the buyer beyond the price paid by him.’1 Customers look for satisfaction beyond the value of the price paid for that product. In order to give them that feeling, marketers around the world develop their advertising communication on the basis of these tangible and psychological attributes of their product. However, a product could mean different things to different organisations. An international organisation with a seller’s attitude would look at a product as the ultimate manifestation of the resources deployed to produce what a customer will buy. An organisation for which the customer comes first will look at a product as a bundle of benefits meant to satisfy a customer’s wants and earn profits therefrom. This means that for different customers, a car will convey a different satisfaction level, depending on the perception that customer builds up in his mind for a particular brand of car. While a mid-sized car is known for fuel efficiency and steering convenience, a large automobile like a Mercedes could represent luxury and a certain status.

BASIC CLASSIFICATION OF PRODUCTS Products can be broadly classified, according to the need of the customers, into the following categories.

Industrial Products (Capital Goods and Raw Materials) These are the products that can be sold for use in producing other goods and services, altering the very nature of the original product. Industrial products are available in the shape of raw materials and consumables for the operations of international or domestic industrial customers.

1. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Limited, pp. 34–35.

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Consumer Products These products satisfy a customer’s need and do not require further processing. These are products that are inherent with the utilities that customers look for in a product. These come with other elements, such as guarantee, warranty, installation facilities, after-sales services and many other packages that act as motivators for inducing customers to make a purchase.2 Products have also been classified by traditionalists into three categories on the basis of buyers’ behaviour and on the purchase action of its consumers. These categories are: 1. Convenience products – These are meant for day-to-day living and basic survival and are bought on instinct, for example food items, medicines and toiletries, etc. 2. Shopping products – These are purchased after thorough planning in advance, where the customer may have a preconceived and predetermined brand and budget in mind. Since it involves relatively higher expense, it may need influence of other factors too. 3. Specialty products – These are products that are specially designed and manufactured to cater to a specific demand of customers, for example a specially designed, tailor-made dress, or a custommade sports car, a specially designed and custom-built furniture item, etc. All these will fall under the category of specialist goods, where how a customer perceives the benefit in the product is more important in designing the products and the communication attached to the product in the market place.

PRODUCT PLANNING IN INTERNATIONAL MARKETS Product planning basically refers to the process of determining the length and depth of the product line to be offered in the target international markets. The length will specify the number of products to be offered and the depth will relate to the various shades to be adopted for the same product in different international markets. However, in order to understand how a company’s product grows from just a local product to national brand and, eventually, into a global entity, we will have to have a brief look at the development and growth chart of a product’s life cycle in its entirety.

Local Products When a product is available in a town or, at best, in a region of the nation state, it will be known as local product. For example, MTR Spices was originally a regional and local brand when it was being marketed only in the markets in southern India and the consumption by the customers from a few states there took care of entire production, leaving little scope of exports to other regions of the country.

National Products Campa Cola was introduced by the Pure Drinks Group in the Indian markets when Pepsi and Coca Cola were not being marketed in India, during the 1970s and 1980s. Coca Cola had moved out of India due to a change in government policy. Since Campa Cola was confined to only Indian boundaries, it will be apt to call it a national product. 2. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Limited, pp. 34–35.

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Campa Cola was a soft drink brand manufactured until 2000. It was a market leader in some regions for a period spanning several years until the advent of the foreign players Pepsi and Coca Cola after the liberalisation policy of the Government of India in 1991. Campa Cola was a drink created by the pure drinks in the 1970’s. The Pure Drinks Group pioneered the India soft drink industry when it introduced Coca Cola into India in 1949, and were the sole manufacturers and distributors of Coca Cola till the 1970’s when Coke was asked to leave. The Pure Drinks group virtually monopolised the entire Indian soft drink industry for about 20 years, and then started Campa Cola during the absence of foreign competition. Source: Wikipedia

Similarly, multinational firms may also have a product specific to one particular market. When Dabur India offers ‘Real Fruit Juices’ and Godrej markets ‘Appy’ in the Indian market, without promoting the same brand internationally, we will refer to them as Indian national products, i.e. a product that is sold and marketed only within the confines of a national state. The manifestations of such products are that they have a very limited growth potential, both technically and commercially.

International Products The products that are sold across many countries are called international products. Suzuki, Japanese brand automobiles are truly international players because, besides their own country, they have a presence in Asia and United States too. Similarly, Honda and Hyundai technologies, though available under different local affiliations across many nations, can be truly called international brands. International firms in today’s financial markets, where acquisitions are the order of the day, do not necessarily have to put up green field projects to become international. Mergers, takeovers and international alliances help companies to emerge as leaders overnight in other countries. Mittal Steel became global after acquisitions of Arcellar and achieved the status of number one steel manufacturer in the world.

Global Products True global products are always marketed in global markets, in all continents, and in every country like Pepsi, Coke, Nestlé, Cadburys and Sony are the brands that inspire trust and loyalty of consumers all over the world. Phillips, National Panasonic, BMW, Renault, Mercedes, Kodak and Xerox are guided by the same strategic principles. They create the same perception across continents by universal positioning of their products, even though the marketing mix deployed by them may vary from country to country. Pepsi and Coke have become household names all over the world even though differentiating their tastes as per local adaptation of tastes in different countries. When Pepsi introduced Tropicana juice around the world, it had developed a taste to suit different customers across the globe. Such global similarities exert pressures on companies’ resources to develop products that can adapt themselves to different global conditions prevailing amongst nations. Thus, it calls for committing huge resources to research and development, but companies have found that the returns from the global acceptance of their products have more than met their investments. Besides fashion, food and beverages, the automobile industry is another industry fast emerging as a global entity with R&D developing technology to suit each country’s need of pollution control and safety measures even though the cars produced in different countries will have fixtures and body designs as per the laws applicable in their home countries, where their plants are situated.

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We will have to differentiate a global product from a global brand. The global product does not have to carry the same name in all the countries and the perception about it may also differ from country to country. This raises a question: should global organisations have a global product with the same global brand to make it universally acceptable or should they make adaptation of global product to various countries’ needs and culture without specifically giving it a global standardised name? Or, should they simply select the best suitable product from the available product mix and extend the same to other parts of the globe, in order to gain advantage of economies of scale and capitalise on the customer loyalty earned from ethnic customers who have moved abroad?

PRODUCT EXTENSION Companies here extend the same product marketed successfully in the home country to other parts of the world without many modifications. Such a move is often adopted when enough loyalty has been earned by the product in the home markets and companies can depend on the similarities of tastes and product use conditions by a large segment of customers abroad. Generally, the food and beverages industry has been adopting this line of extension wherever the laws of the land do not insist on significant modifications to the products. MTR spices and their other products, Mother’s Recipes pickles, particularly Pachranga Pickles, are marketed in many countries abroad to cater to the Indian ethnic population settled there. Similarly, some of the rice polishing and packing companies like Satnam Overseas, owners of Kohinoor brand of rice and LT Overseas, owners of Dawat Rice sell various varieties of Indian rice to take care of the palate of the nonresident Indians settled across different countries. These firms are basically ethnocentric in their approach and adopt their own niches in foreign countries to sustain a large chunk of business. However, the globalisation

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of economies has opened wonderful opportunities for geocentric companies, which, as a deliberate strategy, adopt standardised products for global promotions to grow into large international conglomerates just like the Pepsis and Cokes of the world have grown. Global product standardisation will be dealt with separately, in the following paragraph.

Product Standardisation and Adaptation Product standardisation is the process of marketing a product in international markets by affecting little change in the basic nature of the product. However, in order to obtain better customer attraction in different countries, the international marketing firm may undertake some cosmetic and ornamental changes in product packaging and labelling. Product positioning and strategy also remain, more or less, the same in all countries. Pepsi and Coca Cola are globally standardised products even though their taste may be altered a little to suit different cultural variations of taste, for instance Coca Cola may be a little sweeter when it is marketed in the Middle East to suit the local palate there.

Advantages of Standardisation 1. Builds up a global brand and product image. 2. Economies of large-scale productions help achieve an economic cost. 3. Global marketing mix can be developed at an optimum cost.

Factors That Favour Standardisation The factors that favour standardisation are high technology intensive industry, prohibitive adaptation costs, emergence of global customers and country of origin. These are discussed in brief below. High Technology Intensive Industry The cost of putting up plants in each country in high technology oriented industry can be prohibitively expensive. The international firm may not be able to find the right kind of qualified staff to produce another version of the same product as per international standards. Firms under such circumstances will prefer to stick to uniform production procedures and standards. This will avoid unnecessary confusion in the market place. Besides, the use of standardised procedures and systems will mean the firm can afford to offer standardised, spares, after-sales services and maintenance contracts across the world. Industrial capital equipment, manufacturing plants, processors and computer hardware are marketed as standard products all over the world. Prohibitive Adaptation Costs Product adaptation to suit individual tastes and preferences of each nation and country will mean reconverting the product once it has been standardised for one country. Such a move will involve making investments on alternate product manufacturing systems to meet the new customers’ needs or to alter the promotion and communication strategy. Unless the returns are quite attractive from such adaptations, companies will not be very keen to adapt the product or the communication strategy. Emergence of Global Customers The world economy has witnessed phenomenal growth of means of communication, travel and transportation. Coupled with this, economies have opened up and the globalisation of emerging nations has created a global customer profile. This type of identical global customers can be found in all corners of the world. Their tastes, preferences, needs, aspirations for achieving similar standards of living and dreams of better future all converge into a global niche of common identified segmentation of sizeable market universe. Such a large segment of identical customers offers a vast opportunity to

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international marketing firms to standardise their products and communication strategies. MTV, Levi’s jeans, McDonalds, Pizza Hut, Kentucky Fried Chicken, Café Coffee Day are accepted as popular products by the ‘global customers’. Country of Origin It has been a tradition to associate and ascribe excellence of quality of certain products to their original innovation sources or country of origin. Swiss watches command respect even though the Japanese watch industry is well known for its precision-based technology. Germany is always a preferred destination for heavy machinery and capital equipment. Italy and France will always be associated with fashion and wine industries. While India has made a mark in the software industry, China has emerged a strong contender for supplying hardware to the computer industry. Such perceptions of country of origin and specialisation result in better acceptance of products and services and profit returns from customers. This also works well for international marketing firms because it saves effort and expense on building up new identities to compete with rival firms based in countries of origin.

Product Adaptation A product that is being very well accepted in a home country may not get the same response in another country. As a result, firms may have to initiate some action to adapt the product to suit the conditions in that particular country. These adaptations are necessary due to the following: 1. Global variations in physical conditions, such as geography, topography, weather, climatic conditions, availability of logistical support, earning systems and means of livelihood, per capita income and standards of living of the inhabitants of the country, etc. 2. Varying cultural manifestations, consumer tastes and perceptions, usages, purchasing patterns, consumptions and satisfaction drivers. 3. Various levels of competition and the competitive strategies adopted by the other international marketing firms around the globe. There can be several examples of how products have been adapted and modified to suit the conditions prevailing in different parts of the world. When Mattel Toys launched in India, it carried only the American version of the Barbie doll. Today, however, in order to lure Indian children, the American toy maker offers dolls that are replicas of Indian brides. Similarly, when Barbie was introduced in Japan, there was not much response to the American Barbie. When it was modified to look like an oriental girl, however, the sales of Barbie soared to almost 15 percent of total international sales.3 International marketing firms undertake massive and extensive research abroad to understand the changes and modifications necessary in their products to suit those conditions. When the aviation industry saw declining trends in the United States in the early 1970s, Boeing and Airbus Industries adapted the larger aircraft to the needs of Third World countries (where the runways and other landing facilities were not as developed as in the West). The length and width of the wings were reduced for shorter landing runs and more thrust was put on the engines for quicker take-offs, extending the lifecycle of the product. Multinational firms undertake massive research projects to understand the kind of changes needed to adapt their products to the needs of foreign markets. Such needs could vary from a new design to altogether new products. Owing to a change in technology, it could also be a sudden shift from earlier usage patterns to new styles, necessitating modifications to suit new requirements. 3. Stoner and Wankel, Management, Prentice Hall, Englewood Cliffs, N.J., 1986, p. 653.

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Product Communication Strategies A product can be marketed abroad only with the help of a communication strategy, which is what conveys the promotional theme to consumers abroad, allowing them to form perceptions about the product, spelling out, in turn, the quantitative and qualitative sales for the manufacturers. Keegan has identified five major product communication strategies international marketers can chose from to convey the message to customers in different foreign markets.4 One Product/One Communication Strategy Worldwide (Dual Extension) This strategy is also known as an extension of the product, along with the extension of communication about the product in foreign markets by international marketing firms. The same product that is offered to the domestic customer is marketed in international markets without any significant changes in the product profile or even in the campaign themes. Such a move is possible only when customer perception about the product remains similar in all the countries in which the product is being offered. Even the statutory provisions, as mentioned earlier, do not insist on any design or content changes in the product. Pepsi, Coca Cola and many other fast food international giants had adopted similar strategies to offer the same product and run international communication messages to the intended customers. Pepsi and Coca Cola have been successful in running international communication strategies across different frontiers. In the process, they got the benefit of large-scale economies of scale on production and research and development. Many others, however, found that their same product and same message strategy had failed to produce expected results. Some were forced to change either their product or the message but many others had to effect changes in both. Kentucky Fried Chicken and Pizza Hut had to adapt their products to Indian tastes. Today, they have many Indian varieties on their platter of menus in the Indian market. McDonald’s, too, realised that a vegetarian product would be necessary to suit the Indian customers’ palate. Similarly, Campbell soup could not sell its American tomato soup formulations to Britishers and had to suffer big losses before it changed its formulation to suit the English taste. Knorr soups has not been able to make much dent in the Indian market because having a soup before meals is not a common feature in Indian homes. Keegan has put forward the conditions that the same product and same communication strategy can be successful when firms have developed a product that can meet similar needs across all sections and frontiers and when the customers’ habits and buying patterns, including purchasing capacities, remain same in all countries. Such a campaign can be utilised all over the world and save the company the cost of producing separate advertising messages for different countries. Again, the cost of research and development and the expense on marketing activities, such as sales trainings, printing of product literature, inventory planning and logistics, can be minimised when large markets offer similar customers and conditions. International marketing firms, though, will look forward to cost saving as an addition to profit realisation. Yet, such a strategy will not offer an opportunity to maximise profits, which can come through diversification and adaptation of product to international needs. Product Extension/Communication Adaptation Strategy The same product can be viewed differently in a foreign market even though its basic functions remain same. The customers may look for additional need fulfilment or an altogether different need satiation from the product. An international marketing firm under such conditions will not make any changes in its product and will adapt messages and communications related to the product to address different needs of the foreign buyers. For example, a motorcycle in India today has been raised to the level of personal means of travel both in urban and rural areas, but it still remains an item of sports and recreation in the United States. Three-wheeled auto rickshaws are more of commercial 4. Keegan, Global Marketing Management, 7th ed., Pearson Education- Prentice Hall, 2007, pp. 372–375.

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transport vehicles in India, but many in Sri Lanka have converted the same three-wheeler rickshaw into a proud personal possession like a car. The manufacturers like Bajaj Auto will emphasise the commercial aspects, such as the load-carrying capacity and fuel economy, in the Indian market but will completely change its advertising theme to address a different need in Sri Lanka. However, such adaptation does not change the basic construction of the product but creates an altogether different perception in the minds of the users. For example, a firm marketing refrigerators in the Third World will know that they are basically manufactured for food storage purposes all around the developed world but in the Third World countries, this simple machine is also viewed as a status symbol. Hence, the communication strategy will emphasise this aspect accordingly. In this strategy, the international marketing firm saves additional expense meant for product changes but ends up incurring additional budgets on conducting research on additional needs of foreign customers and on devising new advertisement plans and campaigns based on the still unknown qualities and usages of their products. Product Adaptation/Communication Extension Strategy Products are modified to suit alternate usage patterns, weather conditions and statutory requirements abroad to adopt the same communication strategy in different countries. The international firm here assumes that the product basically meets the same needs under different conditions and will have to be developed and modified accordingly. For example, clothing may serve the same purpose of fashion everywhere, yet the fashion designer will have to design clothes to fit different body types of different countries. Colour preferences and other style fits may also differ from country to country, but the advertising and other messages addressed to the intended audience will not change. Similarly, various cars exported and marketed abroad by Indian manufacturers will have to redesign their engine emissions and steering systems to suit the needs of left-hand drive and pollution control laws to suit those countries. Their advertisement messages about luxury drive, fuel efficiency or customer safety will be the same as in the messages being used in the home country. Such a move necessitates expense on research and development in redesigning the product to suit the needs of different countries. This pays in the long run, in the form of increase in business from additional channels of these countries.

opened in Jerusalem in 1995. In Arab countries, the restaurant chain used Halal menus. In 1996 McDonalds entered India where they offered the Maharaja Mac, made with lamb rather than beef. ”Schlosser, Eric. “Fast Food Nation”, Harper Collins Publishers, 2002.http://www.animal frontline.nl/ macdonalds-eng.php.

Product/Communication Adaptation Strategy This strategy involves modifying both the product and the communication in the international markets to meet the tangible as well as intangible needs of customers in all countries. Such a move is also known as dual adaptation strategy. This strategy is adopted when the conditions of use as well as the conditions related to environments differ from country to country. The product will have to be differentiated from one country to another country to ensure that it fulfils different purposes in each country where it is being marketed. For example, because Americans like to store enough food for the week at home, they prefer deep freezers to standing refrigerators, the kind that are being marketed in India. So, naturally, American households require larger storage space. An Indian manufacturer planning to enter the American market, therefore, will have to manufacture deep freezers and change the communication strategy accordingly to suit the perceptive needs of American customers. This strategy calls for long-term budgetary provisions, as it will definitely be a time-consuming and expensive work out to convert both

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the product and communication strategy in different countries. Today, however, international markets are offering huge potentials to marketers, making such an exercise worthwhile for international marketing firms.

NEW PRODUCT INVENTION/DEVELOPMENT Many firms have experienced that all products cannot be modified or communication strategies be adapted to cater to an ever-increasing customer profile across the globe. Besides, as Keegan has noticed, lesser developed countries will find it difficult to afford the expense involved in modifying the existing production facilities. The customers from these countries also cannot afford to either buy the existing product line or go for the modified version. Under such circumstances, an international firm will have to invent an altogether new product line. Product innovation here will involve bringing down the cost of manufacturing and enhancing the value of purchase to the customer on a reduced, affordable price to fulfil the same needs and attain higher levels of tangible and intangible satisfaction. This point of view has been exemplified by the authors of Blue Ocean Strategy, when they talk of providing value addition to the customer and the entrepreneurs by way of value innovation to the already crowded product mix kitties of competitors (Fig. 11.1). Under value innovation, many times, an international marketing firm will have to preferably look around the comparative substitutes to identify the innovations that can provide value benefit to the firm, as also its customers. The strategy advocates value cost trade off for circumventing competition, which can otherwise bleed the strengths of the marketing firm in many ways, such as cost of fighting and meeting the competition by spending on advertising budgets and price adjustments.

Fig. 11.1

Blue Ocean Strategy Source: Adapted from “Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant”, W.Chan Kim, Renee Maubourgne, Harvard Business School Press, pp. 18–19.

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Thus, a marketing firm can bring up the value (against price paid) to the customer and bring down the cost of manufacturing an innovative product to meet his similar needs that he had been satisfying from the existing competitive products. For example, in India, the introduction of Maruti cars by the Indo Japanese joint-venture Maruti-Suzuki can be cited as the best example of value innovation, i.e. the introduction of 800 cc cars revolutionised the entire passenger car industry. Again, Honda’s 100cc bikes in the Indian market, in collaboration with the Hero group, brought about a total change in the two-wheeler industry of Indian automobiles. (Honda belongs to Japan, Hero is an Indian company.) Sunlight washing powder, manufactured by Unilever as an alternative to Surf range of detergents, can definitely be called an invention of a new product at reduced price yet enhanced value to the customers of developing countries. Figure 11.2 illustrates the process of new product development for international markets. Generation of new product ideas

Screening of new product ideas

Developing and evaluating international product concept

Analysing product business proposal

Developing the international product prototype

Market testing of product

International commercial launch of product

Fig. 11.2

Process of New Product Development for International Markets

The firms with marketing focus are always on the lookout to introduce new and innovative products to keep their marketing ability a step ahead of their competitors. Otherwise, with the introduction of newer and developed versions of existing products, their products and services will become obsolete. Besides, companies have to keep track of the consumers’ dynamic demands and preferences, which keep changing with the change in their standards of living and exposures to exponential media coverage from all corners of the world. New product development, however, involves risks as the unknown and unpredictable market environments do add to the potential risks associated with the uncharted waters. The marketers, therefore, have to be very careful while introducing new products in international markets. For example, when Kellogg’s had introduced corn flakes in southern states in India, little did it realise that, owing to their eating habits, customers prefer idli dosa (local cereal-based preparations) over anything else. The result is that Kellogg’s corn flakes have still not caught the fancy of customers and are still struggling in many other parts of India too.

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Similarly, when McDonald’s (Fig. 11.3) had initially opened up an outlet in New Delhi, India, in the early 1980s, Indian customers were still not ready to accept fast food culture and the menu offered at McDonald’s, at best, was treated as snacks for an outing. The company had to shut shop and move out, along with Coca Cola, thus suffering considerable losses. It is only when the economy opened up again and the Indian customers had access to international media that their tastes changed and McDonald has today become a big success.

Fig. 11.3

A Picture of McDonald’s Outlet in United States and Burger Offered in its Menu

The examples above, however, should not deter the international marketing firms from introducing new and innovative versions of their products, provided enough research has gone into deciding the features and the value additions this product version will offer to the customers.

Challenges to New Product Launch in International Markets Inventing a novel product poses a big challenge to a company’s resources and investments. The firms will have to be very vigilant and take care of the following risks and challenges while introducing new products in international markets: 1. Firms handling multi-country product marketing are always curious about their competitors’ research and development activities and, should they chance upon information about a new product in the offing, they may appropriate the new product and bring out a cheaper version or even import better and cheaper substitutes much earlier than actually planned by the innovating firm. If this were to happen, the entire investment made to develop a new product will have been wasted. 2. The intended universe of customers abroad may not take to the new product in the same manner in which it was anticipated because the product may fail to live up to quality expectations, price fixation by the organisation vis-à-vis the perceived value for money deliverance by the new product or it may be little too early in the product lifecycle to gain an acceptance in that country. 3. Markets may not be fully developed yet to accept a highly advanced product due to lack of information on the new technology, or other logistical and after-sales service support may be missing from the marketplace. 4. Restrictions can be imposed either by the home country or by the host country in test marketing new innovative products if these pertain to food, pharmaceuticals or even other genres like chemicals and pesticides. 5. The international marketing firm has not conducted a market survey related to market potential vs. demand, purchasing power, purchasing parity and the conversion readiness of the customers to accept

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newer and finer patterns of the product. As is evident from the extract from the Times of India article, in such cases international marketing firms end up paying a heavy price in terms of product failures or delayed responses. WHAT MAKES MNCs QUIT INDIA? Many failures are the faults of foreigners, who overestimated the market demand in India. Many believed that India has a middle class of 250 million. Now, a middle class person in America or Europe means somebody who owns a car and home. In India, the word has been used to describe anyone that could afford a black and white TV set. The misunderstanding about what a middle class is, led to demand for Dabhol’s power, and for many consumer goods. Ray Ban found it could not sell enough dark glasses, Kellogg’s could not sell enough breakfast cereal, electronics companies could not sell enough Consequently, most foreigner investors lost a fortune in India and very few have made money. In many cases, India has proved to be a bad, even nightmarish, place to do business. These conditions must be Source: Anklesaria Aiyer)

Process of Generating New Product Ideas A new product idea may come to the firm either from within its own international marketing department or it may be generated during the brainstorming sessions of company executives who, on the basis of their experience from different countries’ markets, will spell out the needs, wants and desires of the customers of their respective markets . All international marketing firms will focus on the customer for the development of new products even though the research and development department constantly endeavours to bring about improved versions of technology and products to meet the demand and needs of their customers. The companies will rely on, besides internal sources, many other information conduits to develop and generate new product ideas.

Domestic and International Customers International firms also have a domestic market to cater to, i.e. their home market, and the best source of information, obviously, will be the home country customers. It becomes easy to develop a product in the home market and test the same as the firm will always have the first-hand experience and knowledge of domestic markets. A majority of the American products, including Pepsi, Coke, McDonald’s, Microsoft Windows, Levi Strauss and Nike, etc., which have gone on to become international brands, were initially developed for home markets. Similarly, products are originally developed by an international firm for one host country and later, through international marketing efforts and strategies, the same products are extended to other countries. Haagen-Dazs introduced and developed Dulce de leche, a caramel flavoured ice cream for Argentina and, after a successful stint, the same flavour was introduced to the customers in the United States and Europe. It now ranks second to the vanilla flavour.5

5. David Leonhardt, “It was a hit in Buenos Aires-so why not Boise?”, Business Week, September 7, 1998, vol. 3594, pp. 56–57.

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Direct and Indirect Competitors It can be done by analysing what the direct competitors and indirect substitutes are up to and either benchmarking from their previous leads or developing and commercially launching new products much before the competitors finish their test marketing, etc. However, large corporations who have big stakes in the game of consumer perception of their products will not imitate the competition. They will analyse the products of other companies to evaluate if customers’ needs and desires can be redefined and if a new and innovative product that can offer better value returns can be developed. When Japanese automobiles manufacturers had entered India in the early 1980s, the country had been facing an acute fuel crisis and the already existing car manufacturers, Premier Automobiles, who owned the Premier Padmini, and Hindustan Motors, who owned the Ambassador, had proved difficult to maintain due to severe shortages and price hikes in fuel prices. The new automobile introduced under the brand of Maruti Suzuki was much lighter in weight, could be easily manoeuvred in narrow streets and was maintenance free for longer periods as compared to the rival cars. That proved a boon for Maruti and it soon became the most popular car in the country. Hyundai, the Korean car manufacturer, further redefined automobiles for the Indian market when it introduced the ‘tall boy’ concept in Santro, offering larger leg space and luggage boot in cars. Clearly, then, competition is the ideal source to find out not only the customers’ needs but also to analyse and provide what has not so far been offered by earlier competitors in international marketers. An international marketing firm can also tap science institutes, technology development organisations and industrial institutes for drawing upon their findings about new innovations and technologies to locate and identify opportunities of introducing new products to their markets.

Evaluating and Screening New Product Ideas A new product idea will have to be worth the while to be pursued further. This means that the new prototype must be in line with the corporate thinking and objective of the international marketing firm. It should also meet the expectations and aspirations of the target market. A checklist developed by the firm will screen out the ideas not in line with these two objectives. As discussed above, the product idea must offer superior, tangible and intangible benefits to the customer. The right mix of positioning of unique features, designs, attributes and satisfaction beyond expected levels will ensure early establishment of the product in the already overcrowded markets. Product positioning and the ingredients involved in international product positioning will be discussed separately in this chapter. The international firm will evaluate product feasibility against the self-reference criterion of the firm’s own resources, technology, manufacturing and marketing capabilities.

Developing and Evaluating International Product Concepts The ideas thus selected and shortlisted will be developed into a drawing board concept of the product, as the product has so far been in intangible shape and needs to be developed into an actual offering that can be shown to the customers to assess how they look at the new product developed. Market research at this stage will undertake product description testing to evaluate the willingness, the purchasing capacity and the product attributes acceptance from a select representative sample drawn from the intended universe of customers.

Analysing Product Business Proposal The analysis of product business proposal is also called performing a product business analyses. The international marketing firm will undertake analyses of commercial feasibility, projected project investments,

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productions, sales potential and estimated demand projections, which, in turn, will also spell out the projected returns in terms of profits from the product. At this stage, the firm will be able to identify an acceptable price level to the customers and one that can be profitable for the organisation and, thereby, fixing up a sales price at which revenue or profit best fits the organisation’s objectives.6

Developing the Product Prototype The international marketing firm at this stage will develop a product prototype in its physical form, as it had been originally spelt out in the identified product ideas and the drawing board concept. It is absolutely essential that the product so developed remains close to the original idea as redesigning the whole thing may cost both time and money. This is the stage when technological bottlenecks can also be solved by the firm, as the product manufacturing actually is taken up at the assembly line. The firm may have to undertake revised testing, should the product so designed fail to match the original product concept.7 The various departments of the firm, such as engineering, purchase, finance, marketing and sales as also the international sales and marketing wing, will work in close coordination with each other. Now the product will have an identity separate from the research and development laboratory product and will be ready to be put into the market place for testing. At the same time, the coordinating efforts will be required across many international boundaries if the products are being tested in many countries simultaneously.

Market Testing It will be appropriate to test the product in selective markets under simulated and controlled conditions for a fair estimate of the performance of the product before launching it commercially. This is a risky venture because the competitors can sabotage the whole game plan. However, simulated and controlled test marketing can be done without giving any such opportunity to the competition. Such test marketing can give answers to customers’ perception about the price, packaging, promotional media and positioning of the product against the competition. In a simulated test market, various tests, such as the LITMUS test for consumer durables, ASSESSOR test used for packaged goods, BASES for food and health and cosmetics and ESP used for packaged goods, can become effective tools for assessing the marketability of the new product.8 To undertake simulated testing, many times, products are offered directly to selected customers, without the middlemen, and their views and experiences are reviewed /checked periodically. Such a test drive has often been offered by car manufacturers across two-three countries simultaneously. This allows the organisation to understand consumers’ actual experience with their technology on the road-worthiness of the car they are about to launch commercially. Currently, Nissan has been conducting similar tests on their fuel-cell powered cars in Japan and for another X-TRAIL FCV with a 70 MPa (10,000 psi) storage cylinder that supports an increased range of more than 500 km. (311 miles tests are on in Canada, as is evident from the following extract from the company’s website.)

6. Wyner, “Product Testing”, pp. 46–48. 7. Robert S. Doscher, “How to Create New Products,” Target Marketing, 1994, vol. 17, No. 1, pp. 40–41. 8. For more details on these tests, refer to Kevin J. Clancy and Robert S. Shulman, “It’s Better To Fly A New Product Simulator Than Crash The Real Thing”, Planning Review, July / August 1992, vol. 20, No. 4, pp. 10–16.

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NISSAN PRESS RELEASE 30 MAY, 2006 Nissan Motor is offering consumers the chance to test drive be offered for up to a year from Nissan’s headquarters in Tokyo. for test driving every weekend. The schedule for the rest of the year will be announced at a later date. Nissan will use the feedback generated from customer test drives, as well as data its ongoing FCV development. Nissan also has developed an

Layout of the FCV components. The testdrive vehicle in Japan in using 35 MPa storage rather than the 70 MPa.

This vehicle is currently being tested on roads in Canada. Source:

Large Scale Test Marketing Large scale test marketing is a complete marketing activity undertaken by international firms in select cities of their home countries or, depending on the logistical and channel support available, these tests are extended across many nations to understand: 1. Product acceptance as against the competition. 2. The effectiveness of the promotional strategies adopted. 3. The competitors’ reaction to the new innovation. Based on which international marketing firm will be able to predict its expected market share at the initial stage of introduction and the costs of the marketing efforts that will be adding to the product costs and, in turn, effect the net realisations from this product. When Pepsi had introduced Tropicana orange juices, test marketing had been conducted across India and China to understand the consumers’ taste. In China, the company had to alter the taste and make it sweeter because the Chinese did not relish the bitter tinge to the orange juice. Similarly, when Pepsi Cola International had to test market its no-sugar Pepsi Max, it selected Northern Italy and United Kingdom for test marketing the product simultaneously.9 The international firms’ systems for test marketing may vary from county to country. For example, the firm may employ direct stores observation in one country and may take to direct mailers elsewhere to gauge the effectiveness of the modes of advertising and customer contact in different countries. It is not necessary that same testing in all the countries will produce similar results. The availability of database, large stores, customer footfalls, levels of literacy, local culture taboos and customs will limit the use of different media vehicles for approaching the customers. For example, it has been discussed in the chapter on ‘International Marketing Research’ and in the chapter on ‘Culture Environment’ about the challenges international marketers 9. Harriot Lane Fox, “Global Roll Out For Pepsi Max,” Marketing, April 7, 1994, p. 2.

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face while conducting such marketing tests and researches in many countries simultaneously. Thus, a test marketer has to be aware of the pitfalls like unrealistic and incorrect forecasts, wrong translations, self-culture and home country influences, and choice of wrong timings or seasons, or even markets, which will obviously lead to wrong conclusions. In fact, small and medium firms will do well to outsource an international product and market testing to marketing research firms that specialise in marketing research and testing services abroad. The international marketing division of the firm can work in close coordination with these outside agencies to ensure adherence to the firm’s basic objectives in conducting such testing and research.

Commercial Launching of Product Internationally The most preferred launch venue for any international product would be the firm’s own home country, as the variables of marketing are well known to the firm and, in case of any difficulty or bottleneck at the time of launch, such as adequate availability of the product, spread of information to the target customer universe through the right media, availability of quality after-sales services, availability of correct and sufficient promotional material and, availability of promotional support by the distribution and logistics channels, etc., can be immediately corrected. However, the firm will have to take the following decisions after scanning the results of the test marketing: 1. 2. 3. 4. 5.

What will be the right time and season to launch the product? In which markets, or countries, will the product be launched? Who will be the target universe of customers? What strategy should be adopted to market the product? What strategy should be adopted to promote the product in international markets?

Product Positioning in International Marketing The term ‘product positioning in international marketing’ is also referred to as ‘product positioning abroad’. It has especially been used to distinguish the exercise undertaken by the international marketing firms for establishing improved product perception in and amongst the customers in foreign countries. A firm’s products may or may not have the same acceptance and preference levels in all countries. The perception of the product will depend on the price strategy, the communication strategy and the strategy to differentiate product features from that of the home country’s products and competitors’ products in the countries where the firm is planning to establish its sales base. For example, a firm manufacturing 100 cc motorcycles in India may advance the unique feature of fuel efficiency as an attraction in India, whereas if the same product is offered in a country where the cost of fuel is not that high, the manufacturing and marketing firm will have to emphasise other features like quick pick-up or the driving comfort to create an acceptance level in that country. We will analyse features and attributes that an international firm needs to take care of while positioning its products in international markets.

Quality Attributes—Value for Money “Product quality is defined as a set of features and characteristics of goods or service that determines its ability to satisfy needs.”10 Besides establishing an accepted quality level of their products, as set out by the specifications of a particular product vs. customer segment, an international marketing firm will have 10. Row Johnson and William O. Winchell, Marketing and Quality Control, American Society for Quality Control, Milwaukee, 1989.

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to establish, in each market, the value a customer will associate with the product’s tangible and intangible quality features as against the price he pays for the product. This strategy does not refer to actual price fixation per se. For example, high fashion garments cannot be sold at the same price as street clothes. Similarly, Mercedes Benz, Bentley cars and Hyundai Sonata are high value products that give a different high to the buyers all around the world. Benson & Hedges cigarettes have always been positioned as a mild brand as against Marlboros’ strategy of emphasising strong and powerful individuals. Some of the Indian companies too have been able to establish international quality standards. MRF Tyres, the TVS Group, Ceat Tyres, Hero Motors are some of the Indian companies that have associated their names with international excellence in their respective fields.

User Attributes Products serve different purposes in different markets. For example, an air conditioner could be, besides cooling temperatures, a status symbol for the buyers in the Third World countries because very few people can afford this machine in poor nations. The same machine, however, is considered a necessity in developed countries. Firms will have to differentiate brand promotion from country to country and, in the process, incur heavy costs on advertising and other brand building campaigns. Barring the cultural variations of colours, symbols, attached local meanings to names and local variants of translations, global positioning is easy to build up for the international firms like Pepsi, Coca Cola , McDonald’s, Lux and Surf, etc. These global corporations have developed a unified and unique global positioning strategy to encash association with better quality, international high technology and being in line with the latest from developed countries. The American way influences young cultures in all countries today and, relying on this attitude, companies position their products accordingly, addressing the need for freedom of choice. Again, ‘Japanese high technology’ attracts people everywhere. Products like Sony, Suzuki and Honda are some brands that have been associated with world-class technology by consumers around the world. It will be inappropriate for these multinational corporations to think of any another name in any country of the world.

Aligning Product Designs Aligning the design of a product is the key factor in deciding the success or failure of a product in international markets. Connotation of a design may differ from country to country, depending on culture perceptions and preferences, technology compatibility, and statutory provisions. International firms are always in a dilemma about marketing a single design, which has already been well established in the home markets, in other countries or to redesign the product as per the need of the eligible country. While positioning the product design, a company will have to take into account the cost of marketing a separate design or modified design for each country separately. If the cost and benefit analysis permits, any international firm will prefer to design a separate product for each country, as many times a product design that has done well in one region of the world may not be acceptable in another part of the globe.

Customer Perception and Preferences Even though the user attributes remain similar, customers’ preferences for size, shape, taste and colour may differ from country to country, as the perceptive choices are influenced by cultural factors, purchasing capacities and conveniences. Pepsi and Coca Cola, which market their products all around the world, will know for sure that consumer’s perceptions and preferences have guided their products designs and tastes in different countries. When these companies wanted to enter the Indian rural markets, where the consumers

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were not very familiar with the idea of paying for coloured cold water, they introduced a smaller pack for Rs. 5 per bottle to make it affordable and attractive. In urban areas, they have done away with the system of 24 glass-bottle crates against a deposit of the like amount to be paid to the retailers, which the consumers were always resisting, making it more convenient with packs of 500 ml to 2-litre PET bottles. Similarly, Cheetos the cheese balls, which are quite popular in India due to their cheesy taste, have been redesigned to have a taste of steaks in China as the Chinese did not like the cheesy flavour. Many other products have also been designed for different countries to suit the taste and preference of local customers. Primus, a Belgian beer manufactured under a local license arrangement in Rwanda, has been selling beer in one-litre bottles, as against 33 cl bottles because the manufacturer found that customers there preferred buying beer by the crates and carried to their homes in far away places and enjoy with other members of their families.11

Technology Compatibility A product’s design developed under one technology for a country may not work in another unless the designs are made compatible for all kinds of usages under different technologies too. For example, differences in electric voltage, which may vary from 110 volts to 220 volts to be run on frequency of 50 Hz to 60 Hz. In India, we have frequency of 50 Hz and electric current of 220 volts, whereas in United States the electric current operates on a frequency of 60 Hz at 110 to 120 volts. International firms have to ensure products are acceptable and usable under varying conditions of different technologies. Similarly, automobile manufacturers have to take care of the right-hand drive or left-hand drive while positioning their products abroad. Mobile phone technology, too, faces a similar problem when it comes to marketing products internationally. Bluetooth technology in many places is catching on, while some of the countries still remain on GSM technology. Within the United States, three different technologies of cell phone are in use. European standards of pollution control and fuel emissions, Euro I and Euro II, have to be adhered to by the car manufacturers of India while marketing cars to European and other countries.

Statutory Provisions International product designs are also influenced by the laws and regulations of the countries where the products are going to be marketed. The firms will have to implement necessary statutory features, such as safety standards, health standards, quality certifications standards, ISO, Bureau of Quality Standards, etc., in order to ensure their products are allowed to be sold across different countries.

PACKAGING AND LABELLING Labelling carries valuable information regarding the ingredients, usage, precautions, expiry, warranty or guarantee, validity and conditions of warranty or guarantee and retail price, and so on. International marketing firms will have to carry out this information on their product labels because it is generally mandatory by law in most countries to print such details on the outer label and also insert other detailed printed instructions inside the outer packaging. The international marketing firms also have to print such instructions in as many languages as the laws of the land demand, to ensure these are widely understood by the customers of different countries. There are essential operating instructions for many kind of electronic and home appliances for 11. Dana- Nicoleta Lascu., International Marketing, Biztantra, pp. 119–120.

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which firms will have to issue printed manuals along with the packaged items. Drugs and pharmaceuticals regulations of all the countries in the world insist on printing detailed ingredient information, along with the likely side effects of such medicines and drugs, on the labels. Not mentioning such details could mean a violation of the laws of the host country and an offence can be made out against the international firm.

Some Other Considerations in International Product Packaging Besides the statutory provisions, international firms will have to ensure that the packaging of their product for international sales takes into account the following important features:

Importer Specific Instructions Many times, in addition to the statutory provisions that firm is supposed to provide, the buyer abroad may like the international marketing firm to print specific instructions on the packaging.

Cultural Factors Cultural influence cannot be ignored while designing the packaging. The customs, traditions, colour combinations, the styles of writing and even the packaging materials used will have to take care of religious and culture philosophy and beliefs of different countries. The impact of culture on international marketing has been discussed in the chapter ‘Cultural Environment’.

Point-of-Purchase Features International marketing has been witness to exponential growth of retail activities worldwide. In most of the western countries, as also in the developing countries in the east, wider exposure is given to the products in super markets and shopping malls, where the point-of-purchase salesman hardly gets any role to play. It is the packaging and labelling that has to attract the customer. The packaging, therefore, has to be attractive enough to perform the task of point-of-purchase salesman and act as a product hoarding to create a favourable sales impression.

Environmental Features International marketing firms will have to take into account the weather, climatic conditions, availability of air conditioned stores or open stores, other storage conditions available in different countries and the intransit handling of packaging. The retail store handling of the package, before it is finally sold off, will also be kept in mind. Packaging should be designed in such a way that it is able to withstand the stress and strains of handling under extreme conditions.

After Use Disposability The disposal of used products in many countries has been subjected to legal environmental conditions. Medicines, wrapping and outer packing papers have to be made environment-friendly. Similarly, chemicals, plastics and materials that cannot be destroyed without affecting the normal environmental conditions are being banned in many countries. The international marketing firms will have to ensure their product packaging meets the specific requirements of the pollution and environment controls statutes of the country concerned. Similarly, reusable or recyclable packaging is being used in many Third World countries. The manufacturers will also prefer such reuse of packaging as it can be a good cost saving effort, but the same reuse will also give rise to selling of spurious and bogus products, which may hamper the brand perceptions in international markets.

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Product Spread in International Markets This refers to the manner in which a product is accepted by customers in different countries. For example, the speed at which customers adopt a new product or idea. This process has also been explained as “the diffusion process—the process by which innovations through a social system over time”.12 This speed of product spread is affected by many factors in international markets, which are discussed below.

Product Features A unique advantage offered by a product, as against the normal run-of-the-mill features, will certainly accelerate the process of its adoption. Similarly, the offer and the product must be in compatibility with the actual need of the customer. The newness must offer a fair trail to the customers. For example, a new fruit juice offered by Pepsi will have to be released in sampling sachets in the markets where it is being launched. When Nestle had launched Maggi Noodles’ new flavours in India, the firm had put up stalls serving small helpings of cooked noodles at retail stores and supermarkets, shopping malls and other public places to offer a trial taste to the customers, (who research had indicated) were young children who would generally accompany their mothers to these stores. This helped the multinational spread their product message to the actual users in no time.

Country Culture Features The rate of product spread is affected by the cultural context, with high-context cultures accepting a product faster as compared to the low-context cultures, where the customers are a little reluctant to try any thing that is new and innovative.13 The spread of a new product and innovation is faster in high-context cultures. For instance, the better developed and highly industrialised countries in the west, with high per capita income levels, will take to a new innovation faster, as compared to the countries of the east, majority of which are still in the developing or emerging stage. In Japan and South-East Asian countries, the spread of new product is faster as against the speed at which a new product will be adopted in India and the other countries of Asia. Similarly, in the United States, Canada and the Scandinavian countries, customers will take to a new innovation a little faster than they will in the low-context countries. These cultural differences have been shown by drawing interrelationship between context and product spread in Table 11.1. Table 11.1

Diffusion Rate/Product Spread Amongst Nations

High Context/Fast Diffusion

High Context/Slow Diffusion

South-East Asia Japan Low Context/Fast Diffusion

India Asia Low Context/Slow Diffusion

Scandinavia USA Canada Interconnection between Context and Diffusion

UK Eastern Europe

Source: Wills, A.C. Samli, and L. Jacobs, “Developing Global Products and Marketing Strategies: A Construct and a Reach Agenda”, Journal of the Academy of Marketing Science, vol.19, Winter 1991, pp. 1–10. 12. Everest M Rogers, Diffusion of Innovation, 3rd edition, The Free Press, New York, 1983, pp 2–13. 13. Wills, A.C. Samli, and L. Jacobs, “Developing Global Products And Marketing Strategies: A Construct And A Reach Agenda,” Journal of the Academy of Marketing Science, vol.19, Winter 1991, pp. 1–10.

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We will refer to the countries where the international marketing firm introduces its new product first as the lead countries. The countries that take to the new product after it has been accepted in lead countries will be referred to as the lagging countries. By referring to the above culture context analysis conducted by Wills, A.C.Smith and others, international marketing companies can adopt their strategies on product launch accordingly. It has been observed that after the product has been accepted in the lead countries, the speed of new products spread is much faster when the same is introduced in the lag countries. The consumers of lag countries learn from the experiences of customers of the lead countries, where the product must have attained some level of success already. In fact, the later the product or service is introduced in the lag country, the faster will be the adoption rate.14 A classic example is that of the spread of scanners in Europe, Japan, Australia and Latin America. The information about the usage of retail store scanners and their success in obtaining information on retail customers and sales data in the United States had resulted in quick and rapid spread of scanners in the countries mentioned above.15 Product diffusion or the product spread in a modern marketing environment (where the information can be reached through the Internet in as little as a second), hardly distinguishes amongst the lead country or lag country. Worldwide product launches have been held by countries like Pepsi, Coke or Nestle while introducing a new taste or a new ingredient into their food and beverage items.

CONCEPT OF INTERNATIONAL PRODUCT LIFE CYCLE Like human beings, products also have a life cycle. They are conceived at a prenatal stage and take birth at the introductory stage. They grow like human beings, reach a maturity stage and eventually decline in their acceptance at the market place, till eventually meeting their resting place in the annals of product history.16 International products too pass through four different stages of yielding profits, gaining market shares, overcoming competition and, finally, succumbing to the competitive pressures or till the international marketing firms themselves decide to come out with a substitute or innovation. The product life cycle refers to the four different stages: introduction, growth, maturity and decline. Figure 11.4 draws a typical product life cycle.

Introduction Stage The benefits of innovation, the new technology breakthrough, the new production systems and entering a virgin field can be taken advantage of at this stage. Generally, highly developed and industrialised countries will be introducing new inventions, green field projects as the costs of research and development in developing a new product will be very high. The firms will initially market these products in the country of origin and, after having obtained a sizeable adoption rate, will export them to developing countries. The international marketing firm can adopt either of the two following policies.

14. Hikarazu Takada and Dipak Jain “Cross – National Analysis of Diffusion of Consumer Durable Goods in Pacific Rim Countries,” Journal of Marketing, vol. 55, No. 1, 1991, pp 48–54. 15. Jai Shankar Ganesh and V. Kumar, “Capturing the Cross National Learning Effect: An Analysis of an Industrial Technology Diffusion,” Journal of the Academy of Marketing Science, vol. 24, No. 4, 1996, pp. 327–328. 16. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd, pp. 40–41.

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Maturity Growth Competition builds up set up manufacturing base in developing country

Decline

Introduction

Exports to Developing Countries

Emphasis on economies of scale exports continue

Skim the Cream

Home country on decline Viability targeted abroad.

Penetration Pricing

Fig. 11.4

International Product Life Cycle

Skim the Cream The price will be set fairly high, since there will not be much competition at the top end. The high price will attract consumers at the top of the demand curve. The high price may yield low volumes, but it will pay for the initial investments made on product development, new technology development and the huge expense incurred on R & D and innovative marketing. International cell phones manufacturers like Nokia, Motorola and Siemens introduced their products in Indian market in early 1990s.They took advantage of technology advancement and adopted the policy of skimming the cream off the Indian markets at the introduction stage. Their products were priced very high for the Indian consumers.

Market Penetration Strategy This could be adopted when the aim is to capture as much market share as possible before others wake up to the situation.17 Generally in a price sensitive market, where the customer is not willing to pay a higher price as the product cannot be distinguished from the other existing products, the low price benefit will attract the users of other products and will spell into large volumes, resulting in low production cost at the very initial stage. When Coca Cola re-entered the Indian market in the early 1990s, and was then followed by Pepsi, it adopted the market penetration policy with a low price innovative pack of Rs. 5 per bottle, which enabled it to corner a sizeable slice from other indigenous soft drinks.

Growth Stage The firm will face increasing competition here as the market wakes up to the rapid new product adoption. Price competition will increase at this stage. The products that are being hit and replaced due to massive

17. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd, pp. 40–41.

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adoption of a new product by their established customer base will react to the situation. They will take corrective actions with their market price and product mix strategies. The international marketing firm will continue exporting to developing countries. There will be more emphasis on developing economies of scale in the production process.

Maturity Stage This is the longest stage in the product life cycle. The firm will notice the sales growth chart of its new product showing stagnating trends. The product profit realisations will be under tremendous strains due to increase in competition. The international marketing firm will fight the competition through other promotional mix like advertising, POP material and trade incentives at the maturity stage to keep the demand and price going. The firm will set up manufacturing bases in developing countries or source out the major components to gain price advantage over the competition as the standards of competition will be quantified by now. We discussed Motorola above and how it adopted the ‘skim the cream’ strategy for the Indian market. At this stage of maturity, Motorola had moved its European software centre and chip plant to Krakow Poland.18 The automobile ancillary industry from Japan and United States have been actively setting up bases in India and China to enter into strategic alliances with the local manufactures to produce viable products at low cost. These local manufacturers will sell their products to international marketing firms from the developed countries like the United States to create competition for the firms based in these highly industrialised economies. India is fast emerging as the back office of many international marketing firms for process outsourcing, as a major cost saving devise. The software industry is another example of moving manufacturing bases to the developing economies. Today, companies like Microsoft, Motorola, IBM, Cap Germany and Intel have all set up their process divisions in India and export back the software solutions to United States and other parts of Europe.

Decline Stage The dynamic forces of growth and change in the marketplace take their toll on these products too, as they lose their market shares and customers’ perceptions to new introductions. Consequently, their sales suffer and profitability and contributions from these products come down as the demand declines. The international marketing firms will try to extend declining product life cycle curve for a while by injecting fresh appeals and attractions to the product line. But it cannot be sustained for long. The firm will have a look at the possibility of continuing with the same product only in the developing countries’ market and seek fresh innovations for the lead and developed economies.

Points to Remember Economic Cost: Actual sacrifice involved in performing an activity, or following a decision or course of action. It may be expressed as the total of opportunity cost (cost of employing resources in one activity than the other) and accounting costs (the cash outlays).It is the value of a resource in its most productive alternative use. 18. Milton Keynes, “Motorola Chooses Poland For New Site”, Corporate Location, European Edition, May/June 1998, p. 7.

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Per capita Income: Total national income (GDP) divided by total population. It is not the average income (because it includes children and non-working population) but serves as an indicator of a country’s living standards. Purchasing Parity: Economics concept which explains exchange rates between currencies should be based on their relative purchasing power in their domestic markets for a fixed basket of goods and services. In practice, however, relative interest rates and trade position have more effect than the purchasing power of the currencies. Prototype: Pre-production model of a product, engineered for full service test. Changes based on test results are incorporated into the prototype which undergoes the same tests again. On achieving the desired results, the product is approved for volume production. Point of purchase: A place where sales are made. On a macro-level, a point of purchase may be a mall, market or city. On a micro-level, retailers consider a point of purchase to be the area surrounding the counter where customers pay. Process outsourcing: Contracting, sub-contracting, or ‘externalising’ non-core activities to free up cash, personnel, time, and facilities for activities where the firm holds competitive advantage. Firms having strengths in other areas may contract out processes or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost.

Objective Type Questions 1. Which of the following products have been classified by the traditionalists based on the buyer behaviour and the purchase action of its consumers? (a) Convenience products (b) Shopping products (c) Specialty products (d) None of these (e) All of these 2. A product’s life cycle in its entirety will mean product passing through (a) Local product (b) National product (c) International product (d) Global product (e) All of these 3. Factors that favour standardisation of global products are (a) High technology intensive industry (b) Prohibitive adaptation costs (c) Emergence of global customers (d) Country of origin trend (e) All of these. 4. Large scale test marketing as a complete marketing activity is undertaken by the international marketing firms to understand (a) Product acceptance as against the competition (b) The effectiveness of the promotional strategies adopted (c) The competitors’ reaction to the new innovation (d) To predict expected market share (e) All of these

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5. To which of the following considerations, an international firm should pay special attention for an international products’ packaging ? (a) Importer specific instructions (b) Cultural and environmental factors (c) Point of purchase features (d) After use disposability (e) All of these 6. Product spread in international markets refers to the manner in which a product is (a) Accepted by customers in different countries (b) Marketed in different countries (c) Introduced in different countries (d) Manufactured in different countries (e) Distributed in different countries 7. Connotation of a design of an international product may differ from country to country depending on (a) Culture perceptions (b) Customer preferences (c) Technology compatibility (d) Statutory provisions (e) All of these 8. Product/communication adaptation strategy, as introduced by Keegan, refers to the situation when (a) Firm modifies both the product and the communication in the international markets (b) Only products are modified by the firm (c) Communications related to the product is modified (d) An extension of product along with the extension of communication is adopted (e) New products are introduced 9. Product extension/communication adaptation strategy refers to the situation when (a) Communications related to the product is modified (b) Products are modified by the firm (c) New products are introduced (d) New communication as well new product is adopted (e) An extension of product along with the extension of communication is adopted 10. Product standardisation is the process of marketing a product in international markets by (a) Affecting little change in the basic nature of the product (b) Introducing new products (c) Altering the basic nature of the product (d) Changing product as well its positioning (e) Changing only the product positioning

Review Questions 1. Briefly examine the process of product extension and product standardisation in international markets. 2. What are the challenges to product adaptation in international marketing? Explain the process with the help of examples of product adaptation undertaken by a product. 3. Discuss the process of new product development in international marketing. What are the challenges you expect as an automobile manufacturer of your country to face when developing a new product? Build a launch plan for a new car in a foreign market.

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4. Discuss the concept of an international product life cycle. Critically examine all four stages an international product has passed through and is currently at the decline stage. 5. Write short notes on the following: (a) Local products, national products, international products and global products (b) Country of origin trend in international marketing (c) Labelling and packaging in international marketing (d) Product positioning in international marketing (e) International product marketing strategies

Project Assignment 1. Visit a shop/franchisee of a multinational firm that sells luxury goods. Compare the product feature and price with that of a similar product of a local firm.

Suggested Readings Clark, Terry and Daniel Rajaratnam, “Inspirational Services: Perspective at Century’s End”, Journal of Service Marketing, vol. 13, No. 5, 1999. Elliott, Gregory R. and Ross C. Cameron, “Consumer Perception of Product , Quality, and Country-of -Origin Effect, Journal of International Marketing, vol. 2, No. 2, 1994, pp. 49–62. Faulds, David Orlen Grunewald, and Denise Johnson, “A Cross National Investigation of the Relationship between the Price and Quality of Consumer Products,” 1970–1990, Journal of Global Marketing, vol. 8, No.1, 1994, pp. 7–24. Hill. John S. and William L. James, “Product and Promotion Transfers in Consumer Goods Multinationals,” International Marketing Review, vol. 8, No. 2, 1991, pp. 6–17. Johansson, Johny K. and Hans B. Thorelli “International Product Positioning”, Journal of International Business Studies, vol. 16, No. 3, 1985, pp. 57–76. Keegan, Warren J. Sandra Moriarity, and Tom Duncan, Marketing, 2nd ed., Upper Saddle River, N.J: Prentice Hall, 1995. Kotabe Masaaki, “Corporate Product Policy and Innovative Behavior of European and Japanese Multinational: An Empirical Investigation”, Journal of Marketing, vol. 54, No. 2, April 1990, pp.19– 33. Kuczamrski, Thomas D., “Managing New Products: The Power of Innovation”, Upper Saddle River, NJ: Prentice Hall, 1992. Papadopoulos, Nicolas, and Louis A. Heslop, “Product-Country Images: Impact and Role in International Marketing, New York: International Business Press, 1993. Samiee, Saeed, “Customer Evaluation of Products in a Global Market,” Journal of International Business Studies, vol. 25, No. 3, 1994, pp. 579–604. Witt, Jerome and C.P. Rao, “The Impact of Global Sourcing on Consumers: Country-of-Origin Effects on Perceived Risk, Journal of Global Marketing, vol. 6, No. 3, 1992, pp. 105–128.

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Useful Weblinks http://timesofindia.indiatimes.com/articleshow http://www.animalfrontline.nl/macdonalds-eng.php http://www.nestlefamily.com http://www.nissan-global.com www.etfoodprocessing.com/.../images/nnews03.jpg

Case Louis Vuitton in Japan Justin Paul and Charlotte Feroul (Nagoya University of Commerce and Business, Japan) (Authors prepared this case solely as the basis for class discussion. This case is not intended to serve as endorsement, source of primary data, or illustrations of effective or ineffective management.)

In Japan, whether you are in Tokyo, Osaka or Nagoya, just turn your head and Louis Vuitton is everywhere. The celebration of the 30th anniversary of the illustrious glittering French Multinational Louis Vuitton in Japan took place in one of Tokyo’s fashionable district Aoyama. A unique vision of luxury took shape when Louis Vuitton opened yet another new store inside Comme des Garçons on September 4, 2008 in the heart of Japan’s capital. The Pop-up store, situated on the prestigious street of Omotesando, was the illustration of Louis Vuitton’s attachment for the Japanese luxury market. Yves Carcelle, Chairman and CEO of Louis Vuitton, said, “This project not only brings a new meaning to luxury, but also speaks volumes about how the know-how and heritage of Louis Vuitton have always been perceived in Japan, including by its foremost designers. We are very proud to have been able to help Rei Kawakubo1 relive her memories in such an original and creative way.”2 The Omotesando guerrilla marketing event reflected Louis Vuitton’s success in Japan. Louis Vuitton has been following an aggressive marketing strategy in Japan opening glimmering, extravagant stores as the ones in Ginza or Roppongi. Take a walk in Tokyo Ginza’s main street Chuo Dori, the heart of a paradise for shoppers with long-established Department Stores such as Mitsukoshi, Takashimaya and Matsuzakaya. Continue through the high end fashion street Namiki-dori. Stop. There it is. You have reached it. A massive flagship with a brand’s name on it, says: “Louis Vuitton”. When Louis Vuitton, the world’s biggest luxury-goods firm, inaugurated its huge shop in the district of Omotesando, Tokyo in 2002, hundreds of people were queued outside. During the first few days, the sales exceeded by ¥1 million the initial estimations.3 In the last decade, Japan had 1. Rei Kawakubo is a famous Japanese fashion designer. She founded the fashion House Comme des Garçons Co. Ltd. in 1973. The designer, known for her anti-fashion, austere and conceptual universe, was the “Guest” designer of Louis Vuitton for one of its collections in 2008. 2. Lesley Scott, “Louis Vuitton at Comme des Garcons in Tokyo”, http://fashiontribes.typepad.com, accessed on July 11, 2008. 3. “Japan’s Luxury Good market—Losing its shine”, The Economist, www.economist.com, accessed on September 18, 2008.

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been Louis Vuitton’s most profitable market, representing almost half of its profits, but it seemed that with the 2008–09 economic crisis, it might be the start of the decline in sales. Facing a weak economy and a shift in consumers’ preferences, Louis Vuitton headed to adapting its strategy in the Japanese market. The days of slapping on a logo and charging an expensive price seemed to be gone as there was more interest in craftsmanship and value of money. To support its sales, the company had to launch less expensive collections made with cheaper materials. The brand has also been opening stores in smaller cities, where the lure of the logo still works. Louis Vuitton might be French, but Japan has become the land of Louis Vuitton’s lovers. Over the years, Japanese consumers had demonstrated fascination and passion for the iconic brand. What would be the keys of Louis Vuitton’s continuing success in the Japanese market?

Louis Vuitton—the History behind a Modern Fashion Powerhouse Foundation Louis Vuitton Malletier, often referred as Louis Vuitton (LV), is an internationally well-established brand mostly famous for its craftwork leather bags and trunks. It was created in 1854 by Louis Vuitton and is one of the oldest French luxury fashion houses. Louis Vuitton, the company founder, was born in 1821 Anchay, in the Jura, France. He became a Layetier in Paris and built his reputation working for the Empress Eugénie de Montijo, wife of Napoleon III. Learning from his work for the French Aristocracy, he acquired a hand-made “savoir-faire”4 for leather luggages. In 1854, he founded his company “Louis Vuitton: Malletier à Paris”5. The flat-bottom trunks of Louis Vuitton with trianon canvas represented a real revolution for travelling as they combined lightness and storage capacities. In 1885, the company opened its first overseas store in London, England on Oxford Street. In 1888, Louis Vuitton developed the Canvas Damier Pattern in order to make the Louis Vuitton experience unique and recognisable by anybody. The logo “marque Louis Vuitton deposée” meaning “mark Louis Vuitton deposited” was created. Following the death of Louis Vuitton in 1892, his son, Georges Vuitton, took over the leadership of the company. He was ambitious to take Louis Vuitton to a next step: a worldwide corporation6. He participated in the Chicago World Fair in 1893 presenting the company’s product and moved all around the United States to promote his brand. In 1896, Georges Vuitton created the Monogram Canvas and established worldwide patents on it so as to limit counterfeiting. The origin of LV’s monogram and of its graphic symbols were inspired from the Japanese and Oriental designs of the Victorian era. By 1914, the company opened the Louis Vuitton Building of the ChampsElysées, now a symbol of success and prestige of the company. Though World War I had begun, the company initiated its global expansion strategy by opening stores in New York, Bombay, 4. “Know-how” 5. “Louis Vuitton: Malletier in Paris”. 6. Louis Vuitton from 1936 through 2000 Official Louis Vuitton My Space, www.myspace.com/ louisvuittonmyspace, accessed on June 25, 2010.

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Washington, London, Alexandria and Buenos Aires. In 1936, Gaston-Louis Vuitton took over the direction of the company when his father, Georges Vuitton, passed away.

Modern Age of Louis Vuitton Gaston-Louis Vuitton guided the brand into its Modern Age. The company expanded its range of line by applying the craftwork and design of the leather to small leather goods, such as purses and wallets, and to all its luggage line. As a consequence, the Monogram Canvas was redesigned in 1959 to fit all the new ranges of products. The brand started its first advertising strategy by handing bags to Hollywood Celebrity Actresses. Audrey Hepburn carried a Louis Vuitton Bag in 1963 in the film Charade directed by Stanley Donan. By that time, Louis Vuitton had become the world’s biggest luxury brand. The VuittonRacamier Family7 owner of the brand had focused mainly on building a Japanese clientele that accounted for 75 percent of sales. By 1977, the company owned two stores with annual profits of $10 million USD. It began tapping into the Asian market in 1983, in Taipei, Taiwan and in Seoul, South Korea in 1984. The creation of Louis Vuitton Moët-Hennessy (LVMH) in 1987 established the largest luxury goods conglomerate in the world. Moët et Chandon and Hennessy represented the leading manufacturers of Champagne and Brandy. The merger resulted in an increase of profits of 49 percent in 1988 compared to 1987. By 1989, Louis Vuitton had entered into 130 countries all over the world.8 In 1990, Yves Carcelles was nominated president of Louis Vuitton. He carried on with an international expansion strategy inaugurating the first Chinese store in the Palace Hotel in Beijing. The Monogram Canvas centennial was celebrated in 1996. Seven cities across the world held extravagant parties at stores and Louis Vuitton asked seven prestigious designers to imagine new products in monogram. Azzedine Alaia, Manolo Blahnik, Romeo Gigli, Helmut Lang, Isaac Mizrahi, Syvilla and Vivienne Westwood created seven original and functional objects in limited edition series.9

Louis Vuitton in the 21st Century In 1998, the American designer Marc Jacobs was appointed as Louis Vuitton’s Art Director. Marc Jacobs was already a highly successful international designer, known for the distinct honour of being the youngest fashion designer to be awarded the industry’s highest tribute, The Council of Fashion Designers of America (CFDA) Perry Ellis Award for New Fashion Talent. The challenge was huge as Marc Jacobs had to guide Vuitton’s first shoes and ready-to-wear collection. With this nomination, Louis Vuitton aimed at establishing the brand as a future consistent classic timeless trendsetter in high fashion. Since the late 1990s, creating limited-editions collections had become Louis Vuitton’s marketing strategy to capture the consumers’ attention and reinvigorate the brand’s identity 7. Henri Racamier married a descendant of Louis Vuitton. He was asked at the age of 65 by the family of his wife, Odile Vuitton, the great-granddaughter of Louis Vuitton, to run the family’s leather goods business. 8. Louis Vuitton from 1936 through 2000, Official Louis Vuitton My Space, www.myspace.com/ louisvuittonmyspace, accessed on June 25, 2010. 9. Diana Prince, “Louis Vuitton: The history behind the purse”, http://www.associatedcontent.com, July 26, 2006.

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while boosting the bottom line. By 2001, Stephen Sprouse and Marc Jacobs collaborated to design a limited edition of Louis Vuitton Bags. Stephen Sprouse was already a highly popular artist as he had collaborated with the extravagant Andy Warhol or with contemporary artists and musicians such as Debbie Harry and Duran Duran. In line with what the New York Times called the Sprouses’ mix of “uptown sophistication design in clothing with a downtown punk and pop sensibility”, the collaboration with Marc Jacobs resulted in a limited edition that featured green and white graffiti written over the monogram pattern. All bags were made for Vuittons’ VIP list and were meant to be “collectors’” items. In 2001, following the success of the Louis Vuitton limited edition, Marc Jacobs designed the first jewellery piece of Louis Vuitton. In 2002, the Tambour watch collection was introduced. Pursuing its globalisation strategy in the 21st century, LV opened one of its most famous stores on Fifth Avenue in New York City, then in Sao Paulo, Brazil, Johannesburg, South Africa and Shanghai, China. The brand re-opened its store on the Champs-Elysées which became the largest Louis Vuitton store in the world. The brand celebrated its 150th anniversary in 2004 worldwide. It had taken more than a century starting with a family house to build an image of class, luxury, and elegance that was forever timeless. The luxury conglomerate of LVMH had been a major player in Louis Vuitton’s success. The luxury industry leader had been setting the tone and the practices of the brand. The LVMH group operated five reportable business divisions: fashion and leather goods, selective retailing, wines and spirits, perfumes and cosmetics, and watches and jewellery. At that time, the group comprised some 50 luxury brands, spanning wines and spirits, including Moët et Chandon Champagne and Glenmorangie Whisky; perfumes and cosmetics, including Christian Dior; jewellery and watches, including Tag Heuer; and fashion and leather goods such as Kenzo, Givenchy, Fendi and Marc Jacobs. By combining forces, these ambitious brands were securing their future and maintaining their prestige. Louis Vuitton had been returning the favour well to its parent company, as it represented the group’s best performing brand due to continuous double-digit growth during the past years. Although LVMH did not disclose sales for Louis Vuitton alone, analysts had reckoned that in 2003, they had grown at least 16 per cent worldwide and had repeated that growth in 2004. Thanks to Louis Vuitton’s levitating act, LVMH’s Paris-traded shares had almost doubled in 2004, to more than $75. Exhibits 1 to 4 show LVMH’s financial results for 2008, LVMH’s Fashion & Leather Goods Division10 2008 Financial Statements and its key figures. This trend was said to continue as Chairman Bernard Arnault’s expectations for the future were very optimistic. At that time, Louis Vuitton had already quintupled sales and increased margins six fold since Bernard Arnault had bought the company in 1989, the brand was said to have the greatest potential for growth of all luxury brands.

Vuitton Machine: Inside the World’s Biggest Luxury Brand Thinking of Louis Vuitton, what would come to mind? It would certainly be Top Model Celebrity ads in trendy fashion magazines, fashionistas in new Louis Vuitton retail temples from the Champs Elysées to Tokyo’s high-end Omotesando shopping district. Behind the luxurious and glamorous image of Louis Vuitton, one could see what made it unique, and what made it the most profitable brand worldwide. 10. The Louis Vuitton Company is part of the Fashion & Leathers Goods Division of LVMH.

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As Louis Vuitton had been following its way smoothly for the past years, Yves Carcelle, the charismatic textile executive who had been widely credited with masterminding Louis Vuitton’s ever rising growth, had commented about the brand’s growth that “The sky’s the limit’’. With $3.8 billion in annual sales, Louis Vuitton represented in 2004 about twice the size of the two main competitors Prada and Gucci Group’s Gucci division. This fact was even more relevant when LVMH announced a 30 percent increase in Louis Vuitton’s earnings in 2003 due to a record operating margin at 45 percent. The standard average margin in the luxury accessories business equalled 25 percent.11 Efficient management practices Louis Vuitton had been establishing through the years a strictly controlled distribution network, thanks to an efficient organisation of the company relying on continuous increasing productivity in design and manufacturing. Louis Vuitton owed much to its executives. Emmanuel Mathieu, a former factory manager at food and beverage giant Danone, who had headed the brand’s industrial operations since 2000, had boosted the manufacturing productivity to 5 percent a year, with improvements ranging from more efficient leather-cutting equipment to new teamwork models. In 1999, it took 12 months from the time Louis Vuitton decided to launch a new product until the item hit stores. In 2004, it took about six months. This continuous improvement had been the leitmotif of Louis Vuitton’s industrial operations facilitated by the manufacturing methods from auto makers and other industries that had been adopted to boost the productivity. Managers such as Emmanuel Mathieu had helped transform the brand from a family industry business to a 21st century business12. The manufacturing of Louis Vuitton was still labourintensive, with a team of 24 workers producing about 120 handbags a day. The brand had seemed to achieve close to the perfect equilibrium between mechanisation and handmade. Quality products Louis Vuitton focused on constant improvement on quality as Louis Vuitton offered lifetime repair guarantees for its customers. The brand had been striving to increase both fidelity and endless desire for the quality of its consumers. Louis Vuitton based its strategy on the loyalty of its consumers by moving loyal shoppers up from the classic tan-and-brown monogrammed bags to newer lines such as the Murakami line, which started at around $1,000, and Suhali, to a line of goatskin bags that averaged more than $2,000. As they bought Louis Vuitton items, loyal shoppers stepped into the dream of the brand. The more the prices were put up, the more they would come back. When Marc Jacobs joined Louis Vuitton, the New York designer associated with the grunge look had a challenge: attract young buyers. He seemed a risky choice when Bernard Arnault hired him in 1998. However, Marc Jacobs happened to be the perfect match as the ready-to-wear and shoe lines that he had introduced tapped into a market of younger consumers, even if those lines accounted for less than 15% of the brands sales. The renewal of the brands image attracted younger buyers and continued to attract older clients with its quality and lifetime free repairs. Production and quality control The efficiency of the manufacturing facilities and employees helped Louis Vuitton compensate for its decision to keep most manufacturing in France, one of 11. Carol Matlack, “The Vuitton Money Machine”, Business Week, www.businessweek.com, March 22, 2004. 12. ibid

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the world’s most expensive labour markets. Of the 13 factories that made Louis Vuitton bags, 11 were in France. The brand had never planned to manufacture its products in some place cheaper as the quality control standards in France were very high and customers expected “un savoir-faire à la Française” meaning the famous refined French know-how. The quality control was checked in the brand’s tests laboratories. The leather used came from hides from Northern European cattle, which had relatively few blemishes from insect bites. Despite high quality leather, the qualities of the bags were tested with mechanical arm hoists that carried handbags half-meter off the floor then dropped them. The bags, loaded with an 8-pound weight, would be lifted and dropped, over and over again, for four days. Then, ultraviolet rays were projected to the handbags in order to determine their resistance to fading. Eventually, zippers were opened and shut 5,000 times. For other pieces such as jewellery bracelets, mechanized mannequin hands were strongly shaken to make sure none of the charms would fall off. In all Louis Vuitton factories, employees worked in teams of 20 to 30. Each team worked on one product at a time, and team members were not only encouraged to suggest improvements in manufacturing but also briefed on details about the products, such as its retail price and how well it was selling. The aim was to have autonomous and multi-skilled employees. Taking the example of the Boulogne Multicolour shoulder bag enabled to see how the whole production process worked. With the success of the Murakami line in 200313, the marketing executives thought that this line could be source of further revenue. They canvassed store managers and found out that customers wanted a Murakami shoulder bag. A prototype of this new Boulogne Multicolour bag went directly from the marketing department to top executives. Straight away, they approved it. Moving to production was easy: Factories could use existing templates. The prototype went to the factory in Ducey on the Normandy coast, France. The teamwork efficiency of Louis Vuitton’s factory paid off. When the Boulogne Multicolor prototype arrived at Ducey, workers who were asked to make a test run discovered that decorative studs were causing the zipper to bunch up. Following this discovery, managers were informed right away and technicians managed to place the studs a few millimetres away from the zipper in less than one or two days. The problem was solved. Advertising As Louis Vuitton had been going global, they had been able to develop a successful advertising strategy in line with its global expansion strategy. The advertising strategy of the company remained on the idea that productivity would not sustain growth. Rather than cutting its ad budget like most luxury groups, the company increased by 20 per cent its spending in 2003. This figure might have seemed very high, but in fact it only represented 5 per cent of revenues, half the industry average.14 The company carefully cultivated a celebrity following and had used famous models and actresses such as Jennifer Lopez and more recently Madonna in its marketing campaigns. However, in 2007, the firm operated a change in its strategy by announcing that the former USSR 13. In 2003, Takashi Murakami, in collaboration with Marc Jacobs, created the Monogram Multicolour canvas range of handbags and accessories. First designed for the Japanese Market, the line resulted in a worldwide success. 14. Carol Matlack, “The Vuitton Money Machine”, Business Week, www.businessweek.com, March 22, 2004.

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leader Mikhail Gorbachev would feature its campaign along with Steffi Graf, Andre Agassi, and Catherine Deneuve.15 The firm wanted a shift in hiring traditional top models. Louis Vuitton commonly used print ads in magazines and billboards in cosmopolitan cities. Yet, previously it had been relying on selected press for its advertising campaigns frequently involving famous stars like Gisele Bündchen, Eva Herzigova, Sean Connery and Francis and Sofia Ford Coppola. However, Antoine Arnault, director of the communication department, decided to enter the world of television and cinema with the 90 seconds commercial, “Where will life take you?”. Translated into 13 different languages, it represented the first Louis Vuitton commercial ad ever and had been directed by renowned French director Bruno Aveillan. Future challenges The major serious issue that would remain for the years to come was to know whether Louis Vuitton had reached its limited growth potential or not. One of its challenges would consist in reducing its risky dependence on the Japanese market. In 2004, 55 percent of revenues came from Japanese consumers. To do so, the brand aspired to continue building its sales in the US as well as tapping new emerging markets, mainly China and India. The second challenge would be to fight against worldwide counterfeiting. This was important because Louis Vuitton had been itself an arbiter of style and needed to keep convincing customers that they were members of a privileged club. In the future, Louis Vuitton would have to face a shift that all fashion houses feared, the possible departure of Marc Jacobs. Yet, Marc Jacobs had signed a contract as Louis Vuitton artistic director until 2018 and Bernard Arnault Marc Jacobs’ label16 as one of the rising stars in LVMH’s portfolio. However, the biggest challenge relied in keeping control of this worldwide machine. As the company was going global, the temptation for many brands was to immediately find new outlets, new sources of distribution, and price points. Yet, Louis Vuitton was highly disciplined and focused on quality.

Japan—a Key Market Overview of the Japanese Luxury Market Over the past few years, Japan had become the capital of luxury, the paradise for luxury brands in a new mass market. According to an estimate of HSBC in February 2009, it was the final destination of 45 percent of the luxury goods sold worldwide.17 According to some luxury analysts, the statistics were exaggerated. Indeed, Japan was considered the world’s largest market for luxury brands but statistics said that Japan represented between 12 and 40 per cent of worldwide sales. The rate would vary according to the definition of the market. Claudia D’Arpizio upheld that “Japan is the world’s largest market, and has the highest per capita spending for luxury goods.” She added that “much of that volume is from Japanese purchases while on trips to Hawaii, the US or Asia.”18 15. 16. 17. 18.

Official Louis Vuitton My Space, www.myspace.com/louisvuittonmyspace, accessed on 25 June, 2010. Marc Jacob created his own label Marc Jacobs Co. Ltd in 1994. The company is part of LVMH. Glenn Smith, “Luxury sector loses its recession-proof status”, Media, February 12, 2009, p. 19. Ibid.

International Product Policy, Planning and Strategy

Competition Japan was the world’s most concentrated source of revenue for luxury brands. Japan represented the mass market and consequently the first source of profit for many international luxury brands. Exhibit 6 shows the percentage of each company’s overall revenue that is generated in Japan. The CEO of Bulgari, Francesco Trapani, revealed, “Accounting for 26 per cent of total revenues, Japan is for Bulgari the first and most important market.” In 2006, Japan represented the biggest market for other luxury brands such as Baccarat, Burberry, the Gucci Group, Louis Vuitton and Salvatore Ferragamo. In addition, Japan was the second biggest market for Coach and Tiffany & Co.19 Comparing Japan’s geography to the US geography, the former is equivalent to the region of the Montana. Within its tiny territory, Japan was sprinkled with 34 Bulgari stores, 37 Chanel stores, 115 Coach stores, 49 Gucci stores, 64 Salvatore Ferragamo boutiques, 50 Tiffany & Co. boutiques, and 252 stores of the LVMH Group including leading brands such as Louis Vuitton, Donna Karan, Marc Jacobs, Berluti, Moet & Chandon, TAG Heuer and De Beers LV.20,21 Quality had always been a key factor for successful brands in the Japanese market, most especially for smaller brands or niche brands that did not enjoy the same success compared to larger brands such as Louis Vuitton. But new challenging brands were shaking up some segments of the luxury market in Japan by offering designer quality at competitive prices. The worldwide Swedish popular brand H&M tapped into the Japanese market in 2008 with its fast fashion concept. The entry of H&M in the market completely revolutionised it. As a consequence, the effectiveness of the business model of brands like Zara, H&M or Uniqlo would enable them to compete with quality brands amazingly. Affordability, a new concept that was radically changing Japanese mindset always eager to resemble to fashion top-models from famous catwalk shows.

Consumer Behaviour in Japan Japan had been known for a group-oriented culture in which there was a real pressure to possess luxury status-driven brands. Successful brands such as Prada, Hermès or Louis Vuitton had made the Japanese luxury market the mass market. The Japanese way of consumption was different from the Western one. In Japan, the young women were more beauty-conscious. The proportion of the urban population in Japan that possessed a famous and expensive luxury brand item was of immense size, a tendency that was not as deeply ingrained in other developed cities such as New York, Sydney or even Paris, the high-end capital of luxurious fashion. From the Japanese way of consuming cosmetics and luxury brands, it seemed more like a compulsory form of social expression. 19. “Japan is the world’s most concentrated source of revenue for luxury brands,” Japan External Trade Organisation, www.jetro.org, May 2006. 20. Louis Vuitton had settled an agreement for a Joint Venture with the diamond company De Beers for the Japanese Market. 21. “Japan is the world’s most concentrated source of revenue for luxury brands,” Japan External Trade Organisation, www.jetro.org, May 2006.

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According to Davide Sesia, the president of Prada Japan, Japanese women, to a much greater extent than Europeans, had a “psychological need to own something considered to be beautiful.”22 In Western societies, luxury shopaholic was not that well perceived among society. However, the cultural and social homogeneity among the Japanese society helped explain this attachment for luxury items. The existence of a large middle class and the high population density affected the Japanese habits. Japanese people were used to spending more time out of their homes compared to any other culture. The Japanese society was qualified as an “impersonal” society in which looks were very important, people were supposed to dress in a way that corresponded to their social position. Yet, times had changed and Japanese consumers were becoming less inclined to tolerate high prices that used to create desirability among consumers. Although young Japanese women would still be eager to save money for the “it-brands”, they had become more aware of the value of money. The lower priced accessories and small leather items such as wallets, travellers or clutches had reported a huge increase in sales in the recent past. Since the year 2000, luxury goods held a different positioning in the consumer mindset. As the market had evolved towards a more sophisticated one, luxury brands were no longer purchased as badges of membership to the new urban class. The norms of mature brand behaviour and consumer habits seen in the Western world were about to become part of the Japanese luxury market. Davide Sesia had advocated that “The increased attitude of Japanese women in their 20s and 30s understanding themselves much better than in the past was a key phenomenon.”23 As a consequence, in the luxury market, the ready-to-wear segment had most incontestably been affected by the new trends in Japanese women choices.

New Perspectives In response to the sluggish economy and appreciation of Japanese Yen, foreign luxury brands were lowering their prices. Louis Vuitton and Christian Dior had lowered their prices the week before Christmas in 2008. Louis Vuitton had made a 7 percent price reduction on leather goods, accessories, ready-to-wear, shoes, watches and jewellery. The decrease in prices was justified by “a policy of offering its products at appropriate prices.”24 This policy relied on the exchange rate fluctuation, the manufacturing costs and quality considerations as the Yen had strengthened against Euro in 2008. This unusual adjustment was relevant of the current situation for Louis Vuitton had announced that during the past 30 years it had revised prices 34 times but had not stated if those adjustments had been increases or decreases.25 Although sales of luxury products had notably decreased, due to the global financial crisis which originated from the US and spread all over the world during 2008–09, a new curious phenomenon had taken over, the rental of bags. Nonetheless, many luxury brands were aiming 22. Davide Sesia, president of Prada Japan, quotation extracted from a release of Carter Associates, “The State of Luxury in Japan”, http://carterassociates.net/about/Japan/view_04_Luxury.html. 23. Davide Sesia, president of Prada Japan, quotation extracted from a release of Carter Associates, “The State of Luxury in Japan”, http://carterassociates.net/about/Japan/view_04_Luxury.html. 24. Miles Socha , “Vuitton, Dior To Lower Prices In Japan”, WWD: Women’s Wear Daily, February 12, 2008. 25. Miles Socha , “Vuitton, Dior To Lower Prices In Japan”, WWD: Women’s Wear Daily, February 12, 2008.

International Product Policy, Planning and Strategy

for the return of better days as the luxury Belgian chocolatier Godiva who was carrying on with plans to open two new cafés in Tokyo, and a shop for the Vertu luxury mobile phone was foreseen to open in Ginza. The evolution of the Japanese ageing-population such as wealthier families and older women with an increased purchasing power represented new perspectives for the future of the Japanese Luxury market. Though there was sustained slowdown in the demand for luxury goods in 2008 and 2009 due to the adverse consequences of global recession, the Japanese luxury market would remain a healthy and on-going growing industry. There had never been an annual sales decline and the growth for the next few years was still expected to be around 6 percent.26 The Japanese market was defined as cyclical in the sense that there were periods of huge spending, often followed by periods of remorse and moderation. In order to compete, brands would have to rethink their decisions and strategy in a more complex way than in the past years. Milton Pedraza, the chief executive officer of the Luxury Institute of New York upheld that “Luxury has to reinvest itself every few years, and I believe it will return to the traditional meaning of something unique and exclusive.”27 In the nearest future scenario, prices of goods and lines of products would oscillate, but the average price would be considered as the crucial issue in the luxury market for the future.

Louis Vuitton in the Japanese Market The year 1978 saw the opening of the first stores of Louis Vuitton in Japan in Tokyo and Osaka. In the 1980s, with the economic boom in Japan, there was an actual “Vuitton-mania” in Japan. Around 20 million Japanese women (out of a population of 127 million people in Japan) would own a bag of the brand and each year, the brand would sell more than 5 millions of “Keepal” and “Speedy”, the classic leather monograms bags of Louis Vuitton.28 The famous Malletier made more than a third of its profit in Japan. What had been the keys of its successful strategy?

Entry in the Japanese Market Louis Vuitton was the first multinational luxury House to open its own shop-in-shops in Japan, without the help of a Japanese distributor. This strategy had become an actual efficient economical and commercial business model in the luxury market. In the 1970s and 1980s, foreign firms manufactured and distributed their products by licensing. As Louis Vuitton decided to opt for a controversial strategy and to establish its own subsidiary, the company turned out to be a pioneer. They decided to import products from France to Japan. Kyojiro Hata had been the CEO of Louis Vuitton Japan for 28 years. Louis Vuitton’s headquarters management style implied a strict control of the selective retail store network 26. Carter Associates, “The State of Luxury in Japan”, http://carterassociates.net/about/Japan/view_04_Luxury. html. 27. Quotation of Milton Pedraza, chief executive officer of the Luxury Institute of New York extracted from the article of Glenn Smith, “Luxury sector loses its recession-proof status”, Media, p. 19, February 12, 2009. 28. Phillipe Adam, “La passion japonaise de Louis Vuitton”, International Commerce, www.actu-cci.com, July 9, 2007.

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all over the world. Each subsidiary was extremely autonomous to a certain extent. The French headquarters had been relying on the Japanese business savoir-faire as they considered that they were more likely to make efficient market-driven decisions as they understood the local people. Louis Vuitton entered into Japanese market, first time, through department stores with a single brand of Louis Vuitton’s portfolio. The brand offered its Japanese partners, like Seibu or Mitsukoshi, an interior design such as the Parisians’ flagships of Louis Vuitton. The purpose remained in making a French luxury purchasing experience and in controlling entirely the shopin-shops (prices, products, sales team, etc.). A few years later in 1981, Louis Vuitton opened its first retail store in Namiki Dori, Ginza in Tokyo. Louis Vuitton followed its expansion strategy and by 2007 controlled 54 stores through directly owned shop network in Japan.29 LVMH as a group has over 250 stores in Japan. Some of them were stores opened as franchisees, during the last decade. New generations of shops opened in Nagoya, Osaka, Sapporo, Tokyo and elsewhere, revolutionising the whole purchasing experience of luxury goods. The architecture had become part of the brands’ identity. The perfect illustration of that was the architecture of the Louis Vuitton building in Omotesando, Tokyo, built by Jun Aoki as if several trunks were piled up. Louis Vuitton had shifted towards a new area in which the experience in a store would go along with the emotion brought up by the products. Louis Vuitton took advantage of the Japanese demand for high fashion. Japan had been and remained a source of creative ideas and trends. In a sense, Japan represented a fantastic laboratory to experience new selling methods and to inaugurate innovative Vuitton stores. Contrary to Europe, there were few rules and standards to follow in terms of urbanism and architecture in Japan. This aspect enabled Louis Vuitton to design audacious and amazing stores like the one in Ginza, Ometesando and Roppongi in Tokyo, or even one of the latest stores inaugurated in February 2007 in Nagoya’s Midland Square, just below the Toyota headquarters. The Japanese clientele was at the rendezvous as they were truly avid for new products and very regarding on the quality of the products they bought.

Strategic Approach Louis Vuitton had always been a trend maker brand strategist in Japan, a country that was all about tradition and culture. Since the designation of Marc Jacobs as the Artistic Director of the brand, Louis Vuitton had entered the Japanese ready-to-wear market successfully. Marc Jacobs had strived to combine his own artistic universe with the tradition and heritage of the brand. The designer had created a new energy and enthusiasm for each Ready-to-wear Runway Collection mixing tradition and innovation. Yet, the fulcrum point of the success of Louis Vuitton in Japan started with the events of the September 11, 2001 terrorists attacks in the United States. Since 1995, the worldwide luxury market had been growing by 10% each year.30 In 2002, the global economy faced a slowdown. The direct consequence was a decrease of tourist flows in 29. Phillipe Adam, “La passion japonaise de Louis Vuitton”, International Commerce, www.actu-cci.com, accessed on July 9, 2007. 30. Claudia D’Arpizio, “Luxury goes local”, The Wall Street Journal Europe, http://www.bain.com/bainweb/ home.asp, accessed on May 1, 2004.

International Product Policy, Planning and Strategy

traditional expansion markets such as luxury shopping Duty Free Zones in international airports and prestigious luxury destinations as Tokyo’s Ginza Namiki Dori, the Place Vendôme in Paris, and the Madison Avenue in New York. September 11th attack on World Trade Centre in the US had represented a major turn in tourist flows and in the luxury market. In Europe, foreign tourists accounted for 60% of the customers.31 At that time, Louis Vuitton realized that they had to focus on local consumers rather than tourists. Luxury started to go local.32 Louis Vuitton reacted early to proceed to this major shift of strategy. The brand realized that for the past years it had been setting the past for taste but the guarantee for future growth would rely on adapting and understanding the local customer. To do so, the company tried to adjust its approach and products to reach local customers. The breaking revelation came from the Japanese market. Limited Editions: A New Marketing Strategy After Marc Jacobs had seen an exhibition at the Fondation Cartier pour l’art contemporain in Paris of Takashi Murakami, Louis Vuitton decided to collaborate with the Japanese artist for its 2003 Spring/Summer Collection. Takashi Murakami, who was known as the “Japanese Andy Warhol”, re-created a colourful and pop version of Louis Vuitton’s Monogram in 33 colours on a black or white background. As in-store, Louis Vuittons’ handbags with smiling-blossom designs became huge sellers in Japan. The strategy appeared to be a huge success for the luxury leader conglomerate LVMH, as the Murakami line increased by 10 per cent Louis Vuitton’s profit.33 The success was not only for the Japanese market but also for the European and American market that showed a true admiration for the Japanese culture. Following the massive hit of the line, in 2003 and 2005, the collaboration between Murakami and Jacobs revealed the Monogram Cherry Blossom line, a trendy motif inspired by the fruit of the cherry blossom—Japanese art wedded to Louis Vuitton’s perfection—and the Monogram Cerise pattern, a new pattern that gave freshness and cheerfulness to the Monogram. While announcing the exclusive Louis Vuitton store at the Murakami Exhibition in the Brooklyn Museum, in April 2008, Marc Jacobs had commented on their collaboration. “Our collaboration has produced a lot of work, and has been a huge influence and inspiration to many. It has been and continues to be a monumental marriage of art and commerce. The ultimate crossover, one for both the fashion and art history books.”34 He had it all right it was “commerce” and strategy as Takeshi Murakami had been the starting point of Louis Vuitton’s success in Japan. The Limits of Limited Editions For the past years, Louis Vuitton had boosted its sales with continuous limited editions in the Japanese Market. Once again in June 2008, Louis Vuitton had launched a major new accessory line. The line, called Monogram ouflage, combined the iconic brand’s monogram canvas with a new camouflage print designed by Takashi Murakami and Marc Jacobs. It was unveiled at the pop-up Louis Vuitton shop opened at the Brooklyn Museum of Art. 31. 32. 33. 34.

Ibid. Ibid. Ibid. Sally Williams and Mona Sharf, “The Brooklyn Museum announces the inclusion of an exclusive Louis Vuitton store within the retrospective of Japanese Artist Takashi Murakami”, www.brooklynmuseum.org, March 21, 2008.

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However, limited editions were under a threat. The company had used it to market several lines of bags. In the end, this flood of mass-market interest would end-up robbing the category of some of its cachet and overdoing this profitable strategy would confuse consumers as they would no longer be able to differentiate a real limited edition and a marketing ploy. Democratised luxury for all was good, but with precautions. Market Dilution: A Luxury Brand is Dead, A Fashion Brand is Born How did the brand that had been synonymous with luxury and exclusivity grow while retaining its cachet? Though Louis Vuitton had been an enduring status symbol in Japan, it had to face a major challenge: the brand dilution as it moved into offering new product lines. As a leader of the sector, the challenge was to continue growing in the Japanese market and still preserve the exclusivity and great quality the brand had always offered. There were two stages in the luxury culture: the “Show off” stage and the “Fit in” stage. Japan had already passed the two stages. The “Fit in” stage was represented by Louis Vuitton. As an example, over three quarters of the women in Tokyo of about twenty year’s old possessed an item of the brand. This phenomenon was considered as normal as luxury goods were the symbol to being part of the “acceptable” group of the society. In that sense, mass expansion and mass distribution had become a real issue. In 2007, in the sulphurous book “Deluxe: How Luxury Lost Its Luster”, Journalist Dana Thomas reported that 40 percent of all Japanese owned a Louis Vuitton-monogrammed item. She compared Louis Vuitton’s expansive growth over the past decade to that of McDonald’s suggesting that the ‘LV’ logo had become almost as ubiquitous as that of the fast food chain’s.35 The declarations damaged Louis Vuitton’s image. In addition to this, the constant questioning of the origins of Louis Vuitton’s product and the repetition of limited editions over the past years had marked a new era for Louis Vuitton—an era characterized by disposable “it” bags with a shelf life of two fashion seasons at most. This strategy seemed to be contrary to what was the essence of Louis Vuitton, tradition and longevity. Counterfeiting As for now, the famous monogram-bag maker had been trying to battle against issues regarding the falsification of the logo and the market dilution. Since the end of the 1990s and the Asian crisis, there had been a mass flood of fake Louis Vuitton products coming from Seoul, Hong Kong, Tokyo and Los Angeles. Though China was the largest producer of Louis Vuitton counterfeited bags, South Korea was the largest producer in terms of high-quality bags. Most South Korean Louis Vuitton counterfeits were exported to Japan. Louis Vuitton had been fighting this issue and remained optimistic. In 2001, at an International Herald Tribune conference in Paris, Christophe Girard, director of fashion strategy of LVMH, declared that when the economy is bad, consumers still wish to refer to luxury products as their value is reliable and long-lasting. He added that “The quest for pleasure” did not fade away and “it even happens in war. People want to enjoy themselves.”36 This statement appeared to be accurate in Japan. Japan had been suffering from the Asian economic crisis and had been facing 35. Dana Thomas (2007), Deluxe: How Luxury Lost Its Luster, The Penguin Press. 36. Velisarios Kattoulas, “Counterfeiting bags of trouble”, Far Eastern Economic Review, March 21, 2002.

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10 years of economical slow-down. Yet Japanese women still had an actual ‘cult’ for luxury brands. In 2000, Louis Vuitton sales in Japan had increased by 16 per cent, reaching ¥100 billion for the first time in Louis Vuiton’s history.37 However, Japanese consumers had been eager to buy Louis Vuitton bags at inexpensive prices. According to Hidehiko Sekizawa, the executive director of the Hakuhodo Institute of Life and Living in Tokyo, “Japanese shoppers have always been very fussy about quality. Now that the counterfeits are hard to distinguish from authentic products, they no longer mind buying fakes, even though they probably own a couple of authentic bags. They save the genuine articles for formal events like weddings and parties, and dinners and dates, and use counterfeits on rainy days, or to go to the supermarket for milk.”38 The Japanese jurisdictions had been modified in 1985 regarding intellectual property. They were now similar to the Western ones. These rules did not really diminish counterfeiting, and counterfeiting remained a gigantic issue for the next years. A few years later, in 2008, a scandal went public. The Japanese “Super Girls Auction” site (Girl-Oku) was accused of selling more than 90% fake Louis Vuitton brand products, thanks to online auctions.39 The website was a Japanese auction site of the MediaMatrix Inc Member Company of the XAVEL group that targeted mobile-phone consumers. Louis Vuitton reacted through the Union des Fabricants Tokyo (UDFT). A federal inspection was led in order to prove that the auction site had, indeed, broken the law. Following the investigation, there was a noticeable decline in sales due to Girl-Oku’s countermeasures, but the issue remained unsolved.

“Louis Vuitton—Further Growth in Japan”40 A change in Management Even though there were doubts about the future opportunities of Louis Vuitton in Japan Kiyotaka Fujii, the new Chief Executive Officer (CEO) of Louis Vuitton Japan announced the contrary on December 2006. The designation of Mr. Fujii as the new CEO appeared to be the first change in the Japanese Management team of the firm. Kyojiro Fujii, a 49 years old businessman, had previous work experiences in consulting and information technology. He had served as the director of Quintiles Transnational Japan K.K.—a leading pharmaceutical services organisation providing professional services, information and partnering solutions to the pharmaceutical, biotechnology and healthcare industries—and executive committee member. He had also been worked at McKinsey & Co in the New York headquarters. He had graduated from Tokyo University and had obtained an MBA degree from the Harvard Business School. His vision was to steer the Japanese subsidiary of LV to a next level relying on Louis Vuitton’s long-term vision and high quality business. When Yves Carcelles revealed the appointment of the new CEO, he pointed out that the person who had to be chosen as CEO had to be necessarily Japanese and had to have a clear vision of the Japanese culture. Kyojiro Hata’s term of office 37. 38. 39. 40.

Ibid. Ibid. Kenji Toda, “Mobile-phone auction sites flooded with fake brand products”, Nikkei Business, August 20, 2008. Koji Hirano, “Vuitton Sees Further Growth in Japan”, WWD: Women’s Wear Daily, December 6, 2006.

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had been an absolute success. Among his remarkable acts, the creative collaboration with the Japanese architect Jun Aoki and the artist Takashi Murakami had resulted in smashing hits boosting LV’s sales in the market. He had also introduced Kabuki in Paris. Through the years, one of the strengths of the firm’s global strategy had been to take the best practices from other cultures and implement them in selected markets. To do so, part of the challenges that Kyojiro Fujii would have to face would remain in exporting the originality of Japanese artists and the best practices internationally. Next Steps for Further Growth Next to the designation of Kyojiro Fujii as CEO of LV in Japan, Fujii announced that the priorities for the brand would be in establishing an Internet business and expanding the range of Vuitton’s products for children. Sales for smaller leather goods and other products as for instance jewellery and eyewear had outstripped initial sales objectives. Mr. Fujii had said that “Ready-to-wear is another category to grow, and this communicates the message from Louis Vuitton to consumers and increases the brand value of Louis Vuitton. Business on the Web is another possible approach to consumers.”41 The marketing strategy had been one of the key points of Louis Vuitton’s success in Japan. The brand was now expanding its strategy towards mid-size and smaller cities. At that time, Louis Vuitton had already 52 stores and 40 shops-in-shops and was reconsidering its strategy adapting it to the Japanese demographic changes and consequently, rethinking the range of products offered. Despite the changes among the Japanese society, Louis Vuitton was still confident in its future. In 2006, the analyst of Mitsubishi UFJ Securities’ research division assessed that “the Japanese market is not considered saturated yet; the strength of Louis Vuitton is its high recognition among people of wide generations, so opening more shops in middle-size cities makes sense. That’s the integrated power of the brand that includes product development and image management.”42 Louis Vuitton’s power was not about to fade away.

Conclusion The after-shocks of global recession was a threat for Louis Vuitton’s luxury business in Japan since their products were priced very high. Signs showed that young Japanese women did have the same vision as the previous generation. They were no longer eager to buy Vuitton products so easily. It represented an actual change in the Japanese mindset and Louis Vuitton was already suffering the consequences. Japan had always been the luxury mass market symbol of Louis Vuitton’s golden age. Over the years, Louis Vuitton had been building its global strategy, thanks to the experiences and lessons learned from Japan. In a gloomy economical context, the market is tending towards saturation, sales were declining, and competition is fiercer than ever, how can Louis Vuitton reinvent itself and regain what used to be a well-attested fame in Japan?

41. Koji Hirano, “Vuitton Sees Further Growth in Japan”, WWD: Women’s Wear Daily, December 6, 2006. 42. Ibid.

International Product Policy, Planning and Strategy

Exhibit 1

Louis Vuitton Moët-Hennessy: Financial Highlights (Financial Year 2008)

Key consolidated data (EUR millions and percentage) Revenue

2008

2007

2006

17,193

16,481

15,306

Profit from recurring operations Net Profit

3,628 2,318

3,555 2,331

3,172 2,160

Group share of net profit Cash from operations before changes in working capital (1)

2,026 4,096

2,025 4,039

1,879 3,504

1,039 13,887

990 12,528

771 11,594

Operating investments Total Equity

Net financial debt (2) / Total equity ratio 28% 25% 29% (1) Before income taxes and interest paid. (2) Net financial debt does not take into consideration the purchase commitments for minority interests included in other non-current liabilities.

Data Per share 2008

2007

2006

Basic Group share of net profit

4.28

4.27

3.98

Diluted Group share of net profit

4.26

4.22

3.94

1.60

1.60

1.40

Earnings per share (EUR)

Dividend per share Gross amount paid during the period (3)

(3) Excludes the impact of tax regulations applicable to the beneficiary. Source: Official Financial Report 2008, Louis Vuitton Moët-Hennesy website, www.lvmh.com, accessed on December 31, 2008.

Exhibit 2

Louis Vuitton Moët-Hennessy: Revenue by Business Group (Financial Year 2008) (EUR millions)

Product Category

2008

2007

2006

Wines and Spirits

3,126

3,226

2,994

Fashion and Leather Goods

6,010

5,628

5,222

Perfumes and Cosmetics

2,868

2,731

2,519

879

833

737

4,376

4,164

3,877

(66)

(101)

(43)

Watches and Jewellery Selective retailing Other activities and eliminations

Total 17,193 16,481 15,306 (1) Restated after reclassifying La Samaritaine from Selective Retailing to other activities. Source: Official Financial Report 2008, Louis Vuitton Moët-Hennesy website, www.lvmh.com

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Exhibit 3

Louis Vuitton Moët-Hennessy: Fashion and Leather Goods Division 2008: Financial Statements 2008

2007

2006

6,010

5,628

5,222

8

9

9

Europe (excluding France)

21

20

19

United States

19

20

21

Japan

20

22

26

Asia (excluding Japan)

25

23

20

7

6

5

100

100

100

Retail

47

49

50

Wholesale

Revenue (EUR millions) Revenue by geographic region of delivery (%) France

Other markets Total Type of revenue as a percentage of total revenue (excluding Louis Vuitton)

44

38

36

Licenses

8

8

7

Other

1

5

7

Total

100

100

100

1,927

1,829

1,633

32.1

32.5

31.3

Louis Vuitton

425

390

368

Fendi

180

160

135

Other brands

485

439

451

Operating investments (EUR millions)

311

246

319

Profit from recurring operations (EUR millions) Operating margin (%) Number of stores

Source: Official Financial Report 2008, Louis Vuitton Moët-Hennesy website, www.lvmh.com, accessed on December 31, 2008.

International Product Policy, Planning and Strategy

Exhibit 4

Louis Vuitton Moët-Hennessy: Fashion and Leather Goods Division 2008 Key Figures

Revenue and Profits from Recurring operations Millions of Euros

2006

2007

2008

Revenue

5222

5628

6010

Profit from recurring operations

1633

1829

1927

Investments in millions of Euro

Revenue by Geographical region of delivery in 2008

Fashion and Leather Goods Number of stores

Source: Compiled and drawn graph using statistics from Louis Vuitton Moët-Hennesy website, www.lvmh. com, accessed on December 31, 2008.

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Exhibit 5

Louis Vuitton SA: Financial Data

Financial Data are given in EURO (in Million terms) 12/2007

12/2006

%

12/2005

Number of months Summarised results Turnover Export Turnover Wages and expenses Value added Gross Operating surplus Operating income Financial result Exceptional result Net income Cash flow

12 12/2007 1848 1650 5 688 667 637 491 –5 866 919

12 12/2006 1697 1513 6 676 655 659 456 –55 819 892

12 % 9 9 –17 2 2 –3 8 91 6 3

12 12/2005 1566 1385 5 618 598 588 462 –8 815 841

Balance Sheet

12/2007

12/2006

%

1242 1297 2187 1 286 40

1242 1315 2197 3 291 61

Net fixed assets Net assets Equity Long term debt Current liabilities Yearly investments

%

12/2004

%

% 8 9 20 9 10 12 –1 –588 0 6

12/2004 1444 1307 5 578 559 560 378 –50 650 706

% 8 6 0 7 7 5 22 84 25 19

12/2005

%

12/2004

%

0 –1 –0 –67 –2 –34

1229 1545 2154 3 555 46

1 –15 2 0 –48

1062 1495 1952

16 3 10

513

8

%

12/2004

12/2007

12/2006

%

12/2005

Net working capital Working capital requirements BFR overall turnover days Cash

945 946

956 957

–1 –1

927 926

3 3

889 890

4 4

184

203

–9

213

–5

222

–4

–1

–1

0

–1

Main indicators (%)

12/2007

12/2006

%

12/2005

%

12/2004

%

46.89 37.26 286 86.14 0.01

48.25 39.84 291 85.96 0.03

–3 –6 –2 0 –67

52.03 39.43 555 77.66 0.15

–7 1 –48 11 –80

45.03 40.01 513 76.32 0.13

16 –1 8 2 15

Cash

Profitability Rate of value added Solvency Financial independence Debt ratio

%

Source: Kompass International Neuenschwander SA website, www.kompass.fr/recherche.php?action= signin/, accessed on December 31, 2007. The original French version was translated in English.

International Product Policy, Planning and Strategy

Exhibit 6

Top Multinational Luxury Fashion brands—Percentage of Overall revenue from Japan in their total sales

Baccarat Bulgari Burberry Coach Hermes Gucci Group LVMH Group Louis Vuitton brand Salvatore Ferragamo Tiffany & Co.

35% 26% 36% 22% 25% 27% 15% 30% 27% 20%

Van Cleef and Arpels

33%

Source: Article from Japan External Trade Organisation, “Japan is the world’s most concentrated source of revenue for luxury brands”, http://www.jetro.org/content/361, accessed on May 2006.

Exhibit 7 Rank

The Leading Luxury Brands in the World in 2008. Brand

2008 Brand Value in USD

2008 Brand Value in Euro (€m)

Country of Origin

($m) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Louis Vuitton Gucci Chanel Rolex Hermès Cartier Tiffany & Co Prada Ferrari Bulgari Burberry Dior Patek Philippe Zegna Ferragamo

21,602 8,254 6,355 4,956 4,575 4,236 4,208 3,585 3,527 3,330 3,285 2,038 1,105 818 722

16,718 6,388 4,918 3,836 3,541 3,278 3,257 2,775 2,730 2,577 2,542 1,578 855 633 559

France Italy France Switzerland France France United States Italy Italy Italy United Kingdom France Switzerland Italy Italy

Source: Business Report of Interbrand, “2008 Leading Luxury Brands”, www.interbrand.com, released in 2008.

275

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Exhibit 8

Louis Vuitton Best Seller Handbags in Japan

Keepall 55

Speedy 35

The Alma Normande

The world’s most famous travel The LV Speedy is one of the most Inspired by a shape invented by bag that dates back to the 1930s. classic and easily recognizable Gaston Vuitton in the 1930s, LV bags. Alma is now a classic. Price: $1270.00

Price: $725.00

Price: $1290.00

Keepall 55 roses

Multicolore Speedy

Multicolore Tote

Artist: Stephen Sprouse

Artist: Takashi Murakami

Artist: Takashi Murakami

Year of Release: 2001

Year of Release: 2003

Year of Release: 2008

Price: $2000.00

Price: $2,240.00

Price: $1,200.00

Source: Nagoya franchisee of Louis Vuitton. The price has been converted at 100 yen = 1USD exchange rate.

Discussion Questions 1. Analyse this case with reference to product features, product differentiation and product adaptation. 2. Do you think that the focus on product such as limited editions, etc. helped LV in Japan, in its marketing activity? 3. What should the firm (LV) do to overcome the challenges in Japan?

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12

277

PRICING STRATEGY AND DECISION FOR INTERNATIONAL MARKETING

Learning Objectives After reading this chapter, you will understand: Basic pricing concepts

maintaining international marketing pricing strategies

INTRODUCTION Price is the currency value a customer is asked to pay for the product or service offered for sale by the seller. This price determines the profitability, the competitive positioning and the relative quality perception customers will assume for the product. The price fixation of a product or service is a comprehensive exercise undertaken by the firms to: (a) Ensure the product competes with like competitive products. (b) Convey a relationship between customers’ need and the value perception they attach to the product or service to fulfil that need. (c) Ensure that the manufacturer gets adequately compensated for the inputs (factors of production) employed in the manufacturing process of the product. (d) Adequately compensate the distribution channels and middlemen involved in rendering services of making that product available to the customers at the place and time of their choice and convenience. Pricing is an exercise for the products to be marketed. Manufacturers make use of three basic factors to fix their prices. The first factor is the product cost, which includes the basic cost of raw materials, the conversion cost and the related sales costs. The second factor the firm keeps in mind is the competitive products’ pricing strategies, which will be based on the positioning the firm undertakes for its products. The third factor is the optimum price, which will be determined by the forces of demand and supply. A firm’s international pricing strategy will additionally be shaped and influenced by many other factors, such as fiscal and exchange controls of other countries, exchange fluctuations, subsidies provided and duties

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imposed by other countries’ governments, dumping undertaken by international marketing firms from other countries and the impact of grey markets or smuggled goods. For achieving a healthy growth in international markets, a firm will have to coordinate its pricing strategy in such a manner that each factor contributes positively to the acceptance of a firm’s products in international markets. “Pricing is especially a very important element of international marketing strategy decisions as it determines the stance a marketer will take on the product positioning, market segmentation, demand management and market share dynamics.”1 In international marketing strategy, the price of a product becomes the major factor that influences a customer’s purchase decision. In earlier chapter on ‘Product decisions’, it has already been discussed that the country of origin conveys connotations of quality to customers and, many times, customers are willing to pay a higher price for an imported product even though a competitive and better priced home product can easily be bought by the customers. While setting product price for international markets, manufacturers have to be extra careful as the strategy to reach the right price can spell success or failure in the international marketplace. Even though the marketing firm has introduced the best of products abroad and has selected the best distribution channels and the promotion mix, the product will not sell if it has not been priced correctly in the right segment. A product’s price must reflect the manufacturer’s objective in the market segment he wants his product to address. It must reflect the quality and the value the customers of this segment expect to be treated to and, finally, price the products in a manner that allows enough manoeuvrability to attend to the competitive reactions and responses to the price in the short and long run. A complete analysis of the factors associated with the price setting exercise of an international marketing firm will be undertaken in this chapter. The environmental as well as internal challenges that a firm will face in deciding the price levels in international markets will also be analysed. This chapter will focus on all the aspects of international pricing strategy an international firm takes into account while reaching decisions on pricing in international markets.

PRICING STRATEGY FOR INTERNATIONAL MARKETS “Pricing is like a tripod, the three legs being cost, demand and competition. It is no more possible to say that one or another of these factors determines price than it is to assert that one leg rather than either of the other two supports a tripod.”2 International marketing firms can be successful in formulating the right price combinations in various markets only if they are aware of the international consumers’ differences in their propensity to pay for the products, along with the elasticity that can affect the demand as well as the price in foreign countries. International marketing firms can decide to have either a universal price the world over or the price can be lower or higher in international markets, depending on the strategies to be adopted for each country separately. Two hypothetical situations have been given below.

Home Market Prices Higher than the International Markets A firm can justify a high price in the home market only if the following factors and differences are noticeably in favour of such a move: 1. Terry Clark, Massaki Kotabe and Dan Rajaratnam, “Exchange Rate Pass through and International Pricing Strategy: A Conceptual Framework and Research Propositions,” Journal of International Business Studies, Second Qr. 1999, vol. 30, No. 2, pp. 249–268. 2. “Administered Prices”, Hearing Before The US Senate Sub-committee.

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markets, and the cost of exports can come down by the export subsidies and other facilities provided by the government of the country. competition by keeping its products’ prices low in the home turfs of competitors. share in international markets. firm’s products. It has been observed in Chinese imports to India, where the Chinese firms are focusing on lower price segments of many items in Indian markets, such as cosmetics, toys, plastic items and utensils, whose prices are quite low as compared to the Indian products of similar quality.

Home Market Prices Lower than the International Markets The firm may opt for keeping its prices lower in the home market and charge higher prices abroad in international markets should any of the following factors favour such a decision: There may not be much competition available in international markets and the firm can definitely charge a higher price till the competition builds up. This can happen for new innovative products at the introductory stage, where the international firm would want to recover its investments made on research and development before others come out with similar or better products. Motorola, Nokia, Samsung and Siemens were all charging high prices for their mobile phones from Indian customers during the early 1990s, when the cell phone technology had been just introduced in India. Later, the entry of Chinese sets actually posed a competition for them, forcing them to reduce their prices. This aspect will be discussed in detail with the ‘skimming the cream’ strategy adopted by an international marketing firm. The cost of manufacturing may be cheaper in the home market, as compared to the cost incurred by the competition in other countries. The outsourcing of production abroad and the economies of scale may not offer much relief to the international firm if it shifts its manufacturing base abroad. propensity to pay for the international marketing firm’s products in their countries. The strategic options available to an international marketing firm in this regard have been discussed below.

Local Pricing or Standardised Pricing When companies set up their prices differently, while keeping in mind the needs of customers from different countries, their purchase patterns, their propensity to pay, the competition available and the price strategies adopted by different competitors in different countries, the local taxation policies and the product positioning, the distribution channels and the cost incurred thereof, the firm is said to have adopted a local pricing strategy. The international customers under this strategy can get the same product at different rate differentials across borders of adjoining countries. For example, a person living in France can actually get different rates for the vehicle of his choice even in unified European markets. By simply deciding to purchase his car from another country, he can save 24.3 percent on a Citroen, 18.2 percent on a Peugeot (both French cars) and 33 percent on Volkswagen Jetta (a German vehicle). This pricing strategy is also known as the tailor-made

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pricing strategy, which means adopting a strategy especially tailor-made to suit the market differentials of each country and segment.

Standardised Pricing Strategy On the other hand, visualises the entire international market as one single unit and the international marketing firm will devise a policy whereby the market prices for the product remain the same in all the markets, changing other promotion mix ingredients though to suit individual market needs. The standardised strategy may be adopted for each region too to ensure no price differentials exist. This can give rise to grey market operations and encourage parallel imports. Such a strategy will not take into account the local market conditions and other challenges that exist as deterrents to international pricing decisions. Such a strategy is possible only for those companies that have achieved similar levels of customer acceptance and perception the world over and whose quality acceptance by the customers all around the international markets remains unquestionable. Toshiba, IBM, Hewlett Packard and Compaq have all adopted regionalised, standardised plan.3

Market Penetration Pricing Strategy Volumes definitely play a large role in making an international business viable and sustainable. In order to achieve a sizeable market share in the introductory stage, an international marketing firm may adopt the strategy of keeping its prices lower than the competition in the international markets. Such a move will often result in instant acceptance of the firm’s product from the customers of competitive products and the firm will be able to penetrate the price-conscious segment of the market immediately. Such a move can be supported with other marketing mix and promotion elements to ensure that necessary information about the new product reaches all levels of customers. When Coca Cola and its other brand of soft beverages were reintroduced in the Indian markets in the early 1990s, the company preferred a launching price of Rs. 5 per bottle. A similar move had been adopted by Pepsi to fight the local competition and once both the multinational firms had been able to penetrate the market share of the competitive products, they hiked their prices. Sony found that its portable disc player, which was priced at $600 in the United States, could still gain a better market share if the price was brought down. The management of Sony decided to cut the price by half and take advantage of the economies of scale to penetrate the American market. The reduced price, in the range of $ 300, assured larger sales volumes to offset the price reductions and gain better market share for the product. Figure 12.1 exhibits the comparative difference in the basic approach to pricing adopted by a Japanese firm and an American firm. It is observed that both the firms begin the exercise by referring to the research findings and designing the product accordingly. However, the Japanese get down to the costing of the product after taking into account the planned selling price they expect to set up for the product. Working backwards from the planned sales price, the Japanese firm will always keep the target cost in view while designing a new product.

‘Skimming the Cream’ Pricing Strategy A firm uses skimming when the objective is to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price.4 This strategy of international pricing is based on the assumption that a firm will like to take advantage of having been first in the international market to introduce an innovative 3. Jack Sweeney, “PC Vendors Bend Pricing For Overseas Customers,” Computer Reseller News, January 23, 1995, No. 614, p. 3. 4. Cateora and Graham (2006), International Marketing, 12th ed., McGraw-Hill Education.

Pricing Strategy and Decision for International Marketing

Fig. 12.1

281

How the Japanese Keep Costs Low Source: Michael Robert, “Strategy Pure and Simple: How Winning CEOs Outthink their Competition” (New York, McGraw-Hill, 1993), pp. 114–115.

product. This firm would like to recover its investments on research and development by keeping its margins of profits from the new product very high. The firm can adopt the skimming strategy at the introductory stage, when its customer base is quite selective and the customers can genuinely differentiate their expectations of quality and value perception from the products offered by the international marketing firm. For example, a fashion designer would like to keep his prices high at the introductory stage, when the early adopters are willing to pay a higher price. The international marketing firm will deliberately like to keep its customer base limited, in order to meet the genuine demand by adopting a high price strategy. This way the firm also ensures that unnecessary trading into the new product by elements that can affect price holdings in various markets can be avoided. When television manufacturers like Sony, Samsung and LG had introduced the 29≤ colour television, they kept the skimming strategy as their base for Indian markets. The price range, varying from Rs. 25,000 to Rs. 35,000 per television, meant very few and selective customers could afford the same. Similarly, the current range of LCD and LED equipment has also been priced so high as to get only skimming response from the Indian market.

BASIC PRICING APPROACHES IN INTERNATIONAL MARKETS An international marketing firm can adopt various methods to set up the prices of its products in international markets. The firm can either simply look at the cost of production while finalising its price list or fix the price

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International Marketing

taking into account the competition, either lead or follow in fixing a price range for international markets. Let us have a detailed look at the various options available to an international marketing firm for pricing decisions in international markets.

Cost-based Pricing Approach A manufacturing and marketing organisation’s basic objective will always be to earn extra revenue as profits for itself, after taking care of the costs incurred in producing and marketing of the services produced by it. As a result, the cost becomes the deciding factor for any international marketing firm too. Unless the firm is able to recover the minimum floor cost, it may not be interested in continuing in business for long. The international marketing firms will generally be determining their export prices after taking into account the cost of produced goods and add their own profits and other expenses incurred on delivery, freight, insurance and conditions, etc. The profitability approach will, of course, be supporting such decision by the international marketing firm but such an action is fraught with the following shortcomings: The relationship of cost and price is always in-built. But, many times, the cost of a product may not lead to the actual price setting. In fact, it may happen the other way round. An international marketing firm gaining entry into the export market for the first time may take a lead from the competitors’ prices to determine the cost it should be incurring for manufacturing that product. The international marketing firm will have to take into account the cost incurred in producing the same product by a competitor and the price charged by him. In case this firm charges a lower price, the products’ perception in international markets might depreciate. A lower price setting, based on the lower production costs, will mean offering huge margins to the importer firm from abroad, which may not be necessary. The reverse may happen in case of higher price quotation by the international marketing firm, which will make its products unwanted by many of the customers in other countries. The price setting exercise is quite a comprehensive work out, which will have its beginning in the corporate objectives of the firm spelt out by the top management in advance. The mission statement issued by the board of directors will specifically point out and guide the firm through its pricing decisions at all stages. In addition, the other key factors like competition intensity, demand and supply situation, consumer needs and preferences, legal and fiscal tax structures and the long- and short-term pulls and pressures of the dynamic market forces will also have an equal role in determining the price structures of the firm’s products in international markets.

Full Cost Pricing The firm’s cost will vary as per the nature of the components of the cost. Some of the cost components will always remain fixed even though the firm may produce only one unit of product. Such costs will be covered under the following heads: Fixed Costs The cost of land, minimum number of employees, telephone, rentals, minimum electricity, water and the plant maintenance cost are the costs incurred by the firm. These costs are known as fixed costs. Variable Costs These are the costs that an international marketing firm will incur once it goes into production. These costs will vary as the level of production changes. Variable costs can be increased or decreased with the levels of volumes produced by the firm. The higher the production volumes, the lower will be the incident of variable costs for each additional unit produced.

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283

Total Cost The sum total of the fixed cost and the variable cost is called the total cost of producing a product, i. e. TC = FC + VC. Total Revenue Revenue refers to the sales price of the product realised for each unit of production from the domestic/international market. When the sales price of a single unit is multiplied with the number of units sold, it will give the total revenue earned through sales or exports of its products in the domestic or international market: TR = Price per unit x No. of units The firm will reach a breakeven point when the total revenue earned by the firm will be equal to the total cost incurred. Thus, breakeven analysis of the revenue income of the firm against the costs incurred will indicate whether the firm is recovering its cost at particular volumes of sales for the price per unit it is able to recover from the marketplace. This equation can be spelt as BEP = TR = TC where

TR = Units sold x price per unit TC = Fixed cost + Variable cost Breakeven analysis of a firm manufacturing electric irons and exporting them at a price of $10 per iron, when the fixed cost remains at $ 4000, will be calculated in the following fashion. The variable cost per unit of this iron manufacturer at this stage is $ 6 per piece.

Thus, when the price per unit of iron sold in the international markets is $ 10, the international marketing firm would have incurred a variable cost of $ 6 per iron. We can now work out the breakeven point (BEP) of desired production for international market by dividing the total fixed cost with per unit fixed cost. BEP production level = TFC/FC per unit= $ 4000/$ 4 = 1000 irons Thus, 1000 units of irons must be produced and sold in the international market at a market price of $ 10 per iron to cover the fixed costs as well as variable costs. This can be explained with the help of the definition given earlier: BEP TR P¥Q L100 ¥ Q $. 4 Q

= TR = TC = TC = TFC + TVC = $ 4000 + ($. 6*Q) = $ 4000 = 1000 units of irons

In $-value, the BEP will be $. 10 ¥ 1000 = $.10,000, which will also be the total revenue the firm must generate to reach the BEP. The breakeven point can also be explained with the help of Fig. 12.2, where the profit starts only after reaching the breakeven point.

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International Marketing Total cost and Revenue

TR

16000 Profit 14000 TC 12000 BEP 10000 8000 6000 Fixed Cost 4000 2000 0 200 400 500 600 700 800 900 1000

Units of Irons

Fig. 12.2

Breakeven chart

It is observed that TR and TC cut each other at 1000 units and $ 10,000 revenue, which is also the breakeven point for this manufacturer of irons. He must produce 1000 irons and export them at $ 10,000 ($ 10 for each unit to recover the total cost). If he is able to sell beyond $10,000 and above 1000 units, each extra unit sold will add extra profit to his kitty. However, this is only a hypothetical equation as the market will react to all kinds of elasticity on the demand curve. A firm can accordingly work out its international price and profit levels by drawing different positions of breakeven points.5 Such an approach is adopted by the international marketing firm at the initial stages of its international marketing activities in order to: research and development from international markets at the earliest. from the day one of its operations, as the firm’s marketing activities and the earnings thereof will be quite negligible in home country markets. international markets.

5. This exercise has been adapted from, Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India, pp. 42–46.

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Limitations of Full Cost Pricing Such full cost pricing will have its own limitations in the international markets, which are given below: based on cost factor alone, does not take into account the price of other international marketing firms. This kind of shortsightedness will result in prices being uncompetitive either way for the international firm. recovery of full cost will make the product price a major hurdle in reaching wider segments that would obviously compare the price of the firm’s products with the already established competitors.

Marginal Cost Pricing Marginal cost pricing is always used by the international marketing firms in relation to profits they can earn from the international marketing activity, in addition to the domestic sales volumes. Chapter 1 discussed that for some firms, international marketing activity pertains to only taking care of the surplus production after they have met the domestic demand. These firms believe that: sales should not be overladen with the overhead costs, for which they can always turn to domestic markets. offers from developed countries, whose perceptions will always be higher than that of the products from developing countries. These firms believe that price is the only factor that can manipulate market demand in their favour. income countries exists for the products from the developing countries. And, in such low income segments, price could be the only decisive factor. For such international firms, earning additional profits can also be the outcome of the Marginal Revenue (MR). These firms earn for each additional unit sold in international markets. This MR will depict the change in the total revenue (TR) of the firm every time it sells an additional unit of production to the export market. Similarly, for producing an additional unit of product for the export market, the firm will be incurring Marginal Cost (MC), in addition to the earlier total cost being incurred. The firm can determine if the additional unit produced for international markets is contributing to the profits by MC looking at the MR earned from that unit as against the P MC incurred. In case MR is greater than MC, the firm will make profits. However, where the profits decline Price. over a period of time, the firm will have to continue (Exports) producing till the point where MR = MC, as beyond that AR point the MR per unit may decline and the contributions MR from additional unit produced will become negative. Figure 12.3 indicates the international marketing Quantity for exports firm’s position. Fig. 12.3 International marketing firm’s position

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This firm’s average revenue (total sales revenue ∏ number of units sold, or the price per unit) has a sloping demand curve, which means each additional unit produced will be sold at a cost lesser than the earlier unit. Such a firm can make profits only where MR = MC. In this case, Price P = Quantity Q, as MR = MC is seen at this point only. If the firm produces higher/lesser quantity, the MC will be higher and the profits will decline. In a typical domestic-based firm, for whom international marketing activity will mean more emphasis on price earned from international marketing, the MR analyses helps in finding out if the firm is making profits from such international sales. Price and Marginal Revenue It can also be calculated by analysing the actual price on which each subsequent production unit is being sold. The additional unit, it is assumed, will be sold only if the seller reduces the price of that unit. The firm can continue till the contributions from each additional unit sold are positive. The moment this contribution equals cost, the firm will have to keep sales restricted to that level only. Limitations of Marginal Cost Pricing The marginal cost-based approach is not always successful and desirable in international pricing due to the following limitations it offers: international markets will have to forgo the fixed cost component if it adopts only marginal costs for price calculations. Or, it may have to overburden the home market with the additional load factor of higher prices. price of the competitors in international markets. The competitive prices can be low or high, which means that the firm will have to earn low profits from abroad or it will be settling for low volumes of sales. move will trigger an unnecessary price war in international markets. strategy.

Market-Based Pricing Approach Market-based pricing means the manufacturing firm must charge from the international markets what the market can bear. “It is an outward looking pricing policy as against inward looking cost oriented policy.” 6 The international marketing firms will have to take into account the character of each market, the customer needs, competitive positioning and the propensity to pay from each market. Market-based pricing approach means that no firm can adopt the stand-alone positioning of its price in international markets. The international marketing firms will have to take into account the price positioning of other competitors from developing and developed countries and work backwards to find out if it can match the price quoted by the competition. The international marketing firms, particularly from the developing countries, whose exports share in the total world exports will not be very significant, will find it difficult to adopt the price trend setting or leadership position. But the international marketing firms from emerging economies of BRIC nations, i.e. Brazil, India and China, where the growth in economies have also led to their attaining competitive position in some of the cost trends too, will have to decide any of the following price / product positioning statements they want to make for international markets. 6. Author R. Kapoor prepared this Chapter based on the insights from the article by André Gabor.

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Price and the Product Positioning The international marketing firm will have to position its price and product in the international markets with reference to the other international products, which provide similar or even substitutive volume satisfaction to the customer. This positioning will also have to be done considering the reactions of existing as well as potential competitive reactions to the entry of this product. The international marketing firm will do well to gauge and anticipate the reaction by studying past international market trends, the market research report of the international marketing research department and outside agencies, the projections of international sales people and other channels of distribution involved in distribution of its products abroad. The international price/ product positioning will have the following three options in relation to competitive products.

Leadership Positioning Leadership positioning means pricing the product in international markets above the New Product market price level of other international Existing Products competitive products. Such leadership Price pricing can be adopted for an innovative product that the international marketing firm wants to project as superior than other similar products available in the international market International market demand (see Fig. 12.4). The target customers in such Fig. 12.4 Leadership positioning cases will have to be predefined and a niche (Source: Adapted from Ramneek Kapoor, Fundamentals of market will have to be created to generate a Sales Management, Macmillan India, pp. 42–46.) favourable and positive customer perception about the product in that market. The innovative products with superior technical breakthrough, the distinctive, superior, tangible and intangible advantages that the product has to offer could be placed at a level higher than other international products till other competitive products catch up with it or a new innovation is introduced in the market. This strategy has been discussed in the skimming the market cream pricing strategy too within this chapter.

Follow the Competition Positioning Follow the competition strategy virtually amounts to keeping the price of the product in international markets at the existing market level of other products. The international marketing firm will counter the competition through other elements of the marketing mix. It is the ideal system to follow for homogeneous products that fulfil similar kind of needs and offer more or less the same satisfaction levels to the customer. In case of such products, no obvious tangible or intangible distinction can be separately identified for the advantage of the customers (see Fig. 12.5). For example, in the electric bulb industry, where one bulb is not distinguishable from another, the price of a new electric bulb entering the international market will have to be pegged at the level on which others are selling their products. Similarly, when P&G had launched the Tide detergent bar (Tide, as a brand, has a global turnover of $4 billion and is a market leader in 23 countries) in the Indian market, to take on the popular brands of Hindustan Lever, it entered the market with an introductory price of three bar points: Rs. 5 for a 75 gm bar, Rs. 8.50 for a 125 gm bar and Rs. 13 for a 200 gm bar. This price almost followed and matched the prevailing price of Rin Supreme. P&G introduced the bar because 95 percent of consumers in India use a combination of powder and bar. The new product had green speckles called Whiteons, a

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P&G proprietary technology, which helps in whitening the fabric. The Indian detergent market, valued at Rs. 5,000 crore and is the world’s third largest, responded favourably to the new introduction and Tide detergent made it to the second preferred choice of customers in a short period.7 This kind of product positioning will not lead to price competition, as it will match the rivals.

Below the Competition Positioning In international markets, a product’s price will be fixed at a level below the existing market prices of all other products. The main thrust will be to gain consumer acceptance in the international markets through the price element of marketing mix. The other products will take time in reacting as their marketing expenses and other overheads will already be operating on a fixed level and by the time they react, the product would have found its niche in the marketplace (see Fig. 12.6). When they entered the Indian market in the early 1990s, Sansui Television and Akai Televisions virtually followed the below the market price strategy to garnish a sizeable share of the colour televisions market in India.

New product Existing product Price

International market demand

Fig. 12.5

Follow the competition positioning (Source: Adapted from Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India, pp. 42–46.)

Existing Products Price

New Positioned product

International Market

Fig. 12.6

Below the competition positioning (Source: Adapted from Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India, pp. 42–46.)

FACTORS INFLUENCING PRICING DECISIONS These can also be called the challenges an international marketing firm faces from external factors or its own internal components when setting international prices. An international marketing firm will have to react to the changes in the legal, political, competitive, economic and financial environment in relation to its international pricing strategies and address any factorial change that can make its pricing uncompetitive or unbeneficial in the international markets.

Internal Factors Influencing Pricing Decisions The following are the internal factors that influence pricing decisions.

Production Location and Its Benefits An international marketing firm stands to benefit if its plants are located in low labour cost and low tax countries. While it will be easy for multinational firms to shift their production base to the countries that can offer lower costs and lower exchange rates, an international marketing firm with single production unit will find it difficult to take such a decision. Many times, such firm’s products are out-priced in international 7. http://www.domain-b.com/marketing/general/2004/20041125_marketing_review.html.

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markets. In order to become competitively priced, international marketing firms will have to ensure flexibility of shifting production base to low cost countries. India is fast emerging as a low cost based production location for the auto component industry of the world. Many auto manufacturers find India an attractive destination for cost reduction and are shifting their production base to India and source part of their component requirements from India. The international automobiles manufacturers are entering into strategic production sourcing alliances with some of their Indian counterparts to avail low cost advantages. MULTINATIONAL AUTO FIRMS IN INDIA like Nokia, Motorola and LG and car manufacturers like General Motors, Volkswagen, Federal Mogul,

Source: Manufacturing

Keeping Track of Cost We have seen that the costs of the product play a large role in deciding the profitability and revenue returns from the product. Any savings made on account of cost reworking can help the firm focus more resources on fighting competition by other means, in addition to the price of the product. The international marketing firms with manufacturing bases spread over various parts of the globe will have to keep track of the rise and fall in the cost of components that go into manufacturing and marketing of the product. These product components are manufactured in different countries, whereas the final product may be assembled in some other country. Such assembled products find markets all over the world, where they may have to compete with products from many developed and developing countries. Therefore, it becomes important for them to keep track of the competitive market-based prices of their rivals to ensure their products do not get priced out in international markets. Such market vigilance will help them to get back to the drawing board and rework the cost and price, if the market competition calls for it. Due to cost competitiveness attained by many of the industry leaders in their fields, India is becoming the outsourcing hub for I.T. services, back-office support systems and even in pharmaceuticals. Mr. Arun Shourie’s article, published in the Indian Express on 16th August 2003, illustrates the point. Indeed, the difference between the costs at which India provides services and many commodities of comparable quality and the cost in the developed world is too vast to affect the competitiveness of the importing firms and economies. The following are a few glimpses of India’s cost competitiveness in international markets: SKY IS THE LIMIT

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Source.

The Indian Express

th

External Factors Affecting Pricing Decisions Besides the internal considerations of cost and manufacturing facilities, international marketing firms’ decisions are influenced by many external environments. The following is the list of such environmental factors that influence the international pricing decisions:

International Competitive Environment Increasing internationalisation of business is putting greater competitive pressures on international marketing firms. In such a scenario, firms have to compete with companies from all over the world and adopt strategies that can protect the existing market share and also assure future growth in international markets for them to remain competitive. The international marketing firms will also get plenty of competition from the local manufacturers of each country. Pepsi and Coca Cola fight for market shares from each other’s turf. They also have to compete against the local manufacturers of soft drinks and fruit juices in India. As McDonald’s entered India, they had to adapt the American burger to Indian taste by introducing Mac Aloo Tikki at a low price of Rs. 20 per piece to compete against the low-priced Vada Pav. Similarly, Pepsi could not ignore the Real Fruit juice marketed by Dabur in India while pricing Tropicana for Indian markets. American giant Pizza Hut faces competition in all the towns where it has its outlets from local pizza sellers. Eventually, all international food retail chains like Dominos Pizza, Pizza Hut and Pizza Corner have added a distinct vegetarian Indian flavour to their new range of toppings that include peppy paneer, matter paneer and spicy chaat pizzas to go with the Indian taste at affordable prices.

Grey Market Since the pricing of international marketing firms’ products may vary from country to country, the differential poses a big challenge to the international firms to stop the inflow of its own goods from a low priced to high priced market of another country. The nexus of unauthorised brokers and border suppliers run a parallel marketing network not authorised by the parent company, to earn an extra buck from the price differentials of international products. This unauthorised distribution is known as the grey market. An international marketing firm, as a strategy, may decide to charge different prices for the same product in different countries due to the following reasons: low purchasing power countries, it may have a lower price tag. Some countries will have a weaker currency, where the products will cost cheaper.

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from country to country, depending on the potentials and the expected business volumes. Mechanics of Grey Marketing Many times, the lawfully appointed distributors themselves indulge in these kind of parallel imports from the neighbouring country to take advantage of the low prices prevailing there. This may happen where the manufacturer has set up manufacturing units in both the countries. The distributors from abroad will sell the products manufactured abroad to grey markets and encourage supplies into the home country of the principal manufacturers. Even though the manufacturers may not provide any kind of warranty or after-sales service assurances on such grey imports yet the low prices attract customers. The manufacturer may have priced the product substantially higher in the home market. The lower price so fixed abroad will encourage re-importing the same product from a low priced country. Due to low tariff rates prevailing in Canada, there is a substantial price difference between the United States and Canadian markets on automobiles. Since there is not much customs tariff between the two countries, the distributors from Canada often sell automobiles to customers in the U.S.8 Grey marketing into the well-established products of international marketing firms adversely affects the sales and the customer perception of the products in all countries. The firms will have to take necessary precautions to discourage such activities at all levels, either through the distributor of another country or through the unauthorised channels. The proactive strategy will mean clearly differentiating the product marking for each country in which goods are sold and specifying the benefit of warranty and guarantee for that particular country only. The reactive steps could be taking the help of authorities in curbing the illegal trade on which no taxes are being paid, confronting the traders involved in these activities, getting the goods confiscated or managing supply chain to control and keep track of inventories of distributors. A proactive and strategic pricing policy that could adapt itself to the changed scenario at the international market place will certainly help the firm curb such menace to a large extent.

Dumping Dumping, in simple words, will mean exporting goods to another country at rates much lower than those prevailing and being charged by the firm in its home country. GATT’s 1979 anti-dumping code also defines dumping as “the sale of an imported product at a price lower than that normally charged in a domestic market or country of origin.” The WTO is also against dumping and condemns it in stronger words by saying “dumping should be condemned if it threatens to cause injury to an established industry in a particular market and or if it delays the establishment of a viable domestic industry”. (ibid) In fact, the WTO considers dumping an “unfair trade practice” and anti-dumping duties can be levied on imports of products imported under dumping rates. However, the domestic industry of the affected country will have to provide sufficient proof of having suffered damages on account of dumping by the competing country. The government of the importing country will have to impose anti-dumping duty after having sufficiently assessed the material damages suffered and proven to its satisfaction that prices prevailing in the importing country are sufficiently lower than those prevailing in the exporting country. Such a move will restrict the inflow of goods on cheaper rates from the exporting country. The definition of anti-dumping though may differ from country to country. As per the anti-dumping and anti-subsidy regulations set forth by the State Council, China spells out dumping as “the subsidisation of exports resulting in substantial injury, to an establishment of a comparable industry.”9 According to this 8. Rakesh Mohan Joshi, International Marketing, Oxford University Press, pp. 398–399.

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definition of the Chinese council, dumping is proved if a product is sold below its normal value, which is based on production costs plus reasonable expenses and profits, or on the comparable prices in the exporting country for an identical or like product; if there is no comparable price for the product in the exporting country, reference is made to the price at which the exporter sells a similar product in the third country (ibid). It is interesting to note that the United States Department of Commerce, the department entrusted with the task of assessing whether dumping has taken place in the US, defines dumping thus: “Dumping is said to have taken place if products are priced only minimally above cost, or at prices below those charged in the exporting country” (op. cit, Ross & Ning). There are numerous instances of countries levying charges of dumping against China, Japan and even United States. India has been taking various actions against Chinese exporters of different commodities to restrict the damage caused to a range of domestic industry. Given below are the instances of imposition of anti-dumping duty on nylon tyres cord, rubber chemicals and even on automotive tyres by the Indian government authorities against the imports from China. ANTI-DUMPING DUTY ON CHINESE TYRES IMPOSED

Source: Tribune News Service, com/2006/20061013/biz.htm.

New

Delhi,

October

12,

2006

http://www.tribuneindia.

Similar to anti-dumping duties are the countervailing duties that countries impose to protect their domestic industry. These duties are imposed on subsidised products imported into the country. The exporter country government provides such subsidies to their own exporters to encourage exports of a particular industry’s produce. The subsidies are provided in the shape of aid in the production process or additional aid in the shape of subsidies on freight, etc., to bring down the cost of distribution. In the instance of United States and Japan dumping cold steel into Indian markets, the government of India had decided to impose an anti-dumping duty, varying from US$ 305 to US$ 450 per metric tonne, depending on the thickness of the cold-rolled steel sheets. ANTI-DUMPING DUTY ON COLD-ROLLED STEEL FROM US, JAPAN TO STAY

9. Lester Ross and Susan Ning, “Modern Protectionism: China’s Own Anti-Dumping Regulations”, The China Business Review, May/June 2000, No. 3, pp. 30–33.

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G. Srinivasan, Hindu Business line, internet edition, Oct. 2006.http://www.blonnet. com/2005/10/07/ stories/2005100702900300. htm.

However, countries do find ways and means to circumvent the anti-dumping legislation by modifying their products and by introducing additional benefits into the products so as to ensure their products are not directly comparable to the products of the country to which exports on low prices are being made. The government of United States introduced a unique way of fighting dumping at its doorstep. In order to escape the charge of providing subsidies to home industry and also to enable its home industry fight dumping activities of exporters from Australia, Brazil, Chile, Indonesia, Thailand and South Korea and a few other countries, the government of United States has imposed a law under which the proceeds collected by way of anti-dumping sanctions will be awarded to the affected United States industry. This step has been strongly challenged by many countries who have filed a complaint against this law, as can be seen from the news clipping given hereunder. INDIA FILES COMPLAINT AGAINST US LAW

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Source: The Tribune Online Edition, December 26, 2000, http://www.tribuneindia.com/2000/20001226/ index.htm.

International Political and Legal Environment Governments all across the world regulate prices and the margins allowed to the international marketing firms. The wholesaler’s margins, the retail recommended resale prices and the definitions of inclusive or exclusive of freights rates and the local taxes imposed thereof are some of the measures that the governments of the countries legislate to keep control over the price manipulations of the international firms. In addition, the governments can also impose additional tariffs and other duties on imports of products by international marketing firms in order to provide some kind of breathing space to their home industries. Many of the subsidies offered in the agriculture sector, cottage industry, small-scale industries are part of such measures taken by governments to protect infant and emerging industries. The international pricing strategies of the international marketing firms also get affected by the steps taken by the governments to control inflation, currency regulations and repatriation of profits to the home countries of international firms. Each such factor that an international firm will have to grapple with while finalising its international pricing strategy is discussed below. Transfer Pricing Transfer pricing strategy refers to the pricing strategy adopted for intra-firm’s sales whether within the same borders or outside the state borders but to the same corporate units to which this firm belongs. In other words, transfer pricing is a strategy by which a transaction between the buyer and the seller belonging to the same corporate parent takes place. For example, Ford Motors’ subsidiaries may buy or sell to each other in India or abroad and the pricing strategy for selling Ford Motors products to each other by different subsidiaries of Ford Motors is known as transfer pricing. “The pricing of products in the process of conducting transactions between the units of same corporation, within or beyond the national borders of parent company, is known as transfer pricing and regarded as a legitimate business opportunity by transnational corporations.”10 Under this strategy, the international marketing firms will try to ensure that the profitability of each unit is maintained when such an intra-corporate transfer takes place. The international marketing firms will have to adhere to the local laws, taxes, duties, tariffs and other government regulations while affecting such transfer 10. Messaoud Mehafdi, “The Ethics of International Transfer Pricing, Journal of Business Ethics, December 2000, vol. 28, No. 4, pp. 365–3810.

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pricing strategies. Under such transactions, the products can be priced at cost, at the market-based prices, known as market based transfer pricing, or even at the negotiated transfer prices, which could be a price in between the two strategies of cost and market. Cost-Based Transfer Pricing Strategy The cost-based transfer strategy could refer to any of the cost components discussed at the beginning of this chapter. It could be full cost consisting of variable and fixed costs. Some of the international marketing firms may add to the full costs the additional costs incurred on marketing, research and development and other logistical activities in reaching the product to the subsidiary. The local taxes, additional levies and duties will also have to be added up to the full cost pricing adopted for transfer pricing. When the international marketing firm decides to add profit margins to the full costs of production, such a strategy will be called a cost plus pricing strategy. The international marketing firm here wants to assure a nominal profit to all its units and each time a transfer takes place, a nominal profit margin is added to the cost factor adopted for pricing. Market Based Transfer Pricing Strategy “Market based transfer pricing is also referred to as arm’s length pricing wherein the sales transactions occur between two unrelated (arm’s length) parties.”11 Since the basic objective of the transfer pricing is ensuring profits at all stages of international transactions, the firm will prefer to purchase goods even from its subsidiaries at a low cost base, which could be lower if market prices of low tax based countries and low labour cost-based countries are taken into account. In most of the developing countries, firms will be operating on marginal cost pricing strategy, wherein the variable cost of each additional unit produced will be lower than the earlier production. Under such a situation, the international marketing firm’s market prices will be lower than the full cost-based pricing and the foreignbased subsidiary will prefer market-based prices. Besides, the low taxation will further encourage re-invoicing between the two arms of the corporate to get the additional benefits of tax heavens. Negotiated Transfer Pricing Strategy The affiliates of international marketing firm are also at liberty to negotiate the transfer prices between themselves. These negotiated prices could be anywhere between the total cost prices and the market-based prices. Government Regulations and Transfer Pricing The international marketing firms find their business is subjected to different corporate laws of different countries. Similarly, their product pricing too is subjected to different corporate tax rates and duties in each country. In such a situation of low and high tax incidences in various countries, where the subsidiaries of the international firms operate, it will be a natural tendency to maximise income in the countries with low tax base and minimise it in the countries that have very high tax incidence. In such situations, it is important for an international marketing manager to be aware of the country’s rules and regulations of each country the firm is operating in so that his firm does not have to unnecessary take flak for tax violations and at the same time, profits are maximised in all situations. Countries have introduced transfer pricing laws to curb the outflow of income by insisting that the transactions between the different subsidiaries of international firms be done at a fair market value or at arm’s length pricing. India had introduced the detailed law on transfer pricing in the Finance Act of 2001. Under this law, international companies are obliged to submit data related to their transfer pricing transactions, along with related price details and similar transactions of others, to justify their pricing to tax authorities. 11. Rakesh Mohan Joshi, International Marketing, Oxford University Press, 2005, pp. 394–395.

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In the United States, section 482 of the U.S. treasury regulations deals with the matter of transfer pricing. In fact, complete section 482 of the tax code and all the accompanying regulations are dedicated to transfer pricing. This law also deals with intra-company transfer of the raw material, finished and intermediate goods. Section 482 handles the issue of transfer of technology and other related matters too, when it is transferred from one unit of an international marketing firm to another against a price. Duty and Tariff Used for Protections Duties and tariffs imposed by the countries on imports too have a big impact on the international pricing strategies of international marketing firms. In spite of the fact that there has been considerable opening of the respective economies by different nations of the world, after the Uruguay round of trade liberalisation and the efforts of the WTO, countries still continue with the imposition of protective trade policies, to offer a competitive cushion to their domestic industry. These restrictive practices add to the final price to the customers, resulting in international marketing firms passing on the burden of incidence to the end consumers. Or, at another level, such impositions of restrictive trade practices and duties encourage the international corporate to optimise their transfer pricing. The international marketing firms have realised that it is pointless to save a few million dollars on taxation if they can optimise their pricing for products and services to the international customers. A straightforward pricing policy also results in minimising the investigation and interference of taxation authorities. The international marketing firms are moving towards the equalised pricing policies the world over, to take care of the high and low incidence of tariffs and taxations in different countries. Such a move, obviously, will result in some of the customers paying a higher price for the same products in their own countries. Some examples, wherein the cost to the customers goes up due to restrictive trade practices of the European Union and the retaliatory trade countermeasures adopted by the United States, are given below: AGRICULTURE, US AND EU

Source: IMPORT TARIFF AND BEEF

Source: Alan Matthews, Farm Incomes: Myths and Reality,

.

Joint Ventures and Transfer Pricing In joint ventures, business entity of international levels (where the partners belong to different countries), the emphasis will be on assuring profits to both the signatory partners. There will be a tendency to fix transfer prices at levels that can get a reasonable share of profits to both the

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owners of the enterprise. Such an agreement, spelling out transfer prices, will have to be signed by both the partners in advance. They will have to establish the transfer prices with the taxation authorities in advance, in order to avoid frequent taxation audits, which may otherwise hamper the smooth flow of business at a later stage. Timothy M. Collins and Thomas L. Doorley have listed out the following few considerations for joint transfer pricing:12 1. How do the partners propose to accommodate the exchange rate fluctuations in the proposed transfer prices? 2. How will the reductions in manufacturing costs be adjusted in transfer price once the learning curve improves?

International Economic and Financial Environment Let us now discuss about international economic environments and its implication on marketing. Volatility of Exchange Rates International exchange markets do not remain the same at all times. International companies have to monitor the exchange rate fluctuations to ensure they do not unnecessarily suffer uncalled for losses. Vigilance is called for at all times on the movement of currency exchange rates in different markets of the world. Otherwise, international marketing firms will find that what was a profitable proposition at the time of entering the import/export contract, has become a loss-making venture at the time of execution. So how do international firms handle the price adjustments? The best and the easiest way could be to fix the price of the products in the currency of the target markets, where any fluctuation will lead to gain or loss for the seller. This way the customer remains unaffected, as the exporting firm will have to handle the fluctuations of the home market. The other way of handling this could be to fix up the price in the home market currency, wherein any change will have to be borne by the importer. The seller exporter will remain immune from the dynamic nature of the exchange markets. International marketing firms, however, do not operate only on a short-term basis, affecting change every time a minor fluctuation takes place in the currency rates. Their agreements for their imports and exports are long-term contracts, wherein a specially stipulated exchange rate clause will specify up to what extent the change in exchange rate will not impact the contract either way. For example, a contract may specify that the exchange rate variation of plus or minus five percentage points will not affect the pricing agreement over the next three month period. In that case, a small drop or gains will not call for the renegotiation of the established prices. Should there be greater volatility than specified, the firms will have to sit for review and fix the fresh pricing strategy for their products. It has been observed that all international marketing firms have been specifically entering into international contracts with strong, stable and hard currency. Till the introduction of Euro as a strong viable alternative currency, the American dollar was considered the safest and the most dependable hard currency. The member countries to the E.U. have adopted Euro as a single currency for standard of exchange, in addition to the currency of the country of the seller. As such, all international prices will have two quotations, the standard of exchange and the national currency of the seller. International marketing firms will have to adopt the following different approaches to handle the currency fluctuations and to ensure long-term profits, as well as long-term healthy buyer–seller relationships. In the event of domestic currency being weak, an international marketing firm preferably should:

12. Collins and Doorley, “Teaming Up For The 90’s: A Guide To International Joint Ventures And Strategic Alliances”, Homewood, I.L, Business One Irwin, 1991, pp. 212–213.

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to penetrate hitherto unexplored markets.

to the domestic country.

currency of the home market. Such measures will help the international marketing firm strengthen its position both in domestic as well as the export markets, as its realisations from conversion will generate additional revenue against foreign currency conversions. The international marketing firm will have to resort to the following opposite steps, should the home country currency get strong: other sales supportive activities like timely and efficient logistic services. Such a move will ensure prevention of competition on price front.

from abroad.

Inflation and International Pricing Strategy Inflationary trends in any economy exert stronger pressures on a marketing firm’s profit earnings. The lower margin earned on account of cost escalation puts a question mark on the company’s strategy to continue in high-cost high-risk competitive markets. The firm will always be under stress to shift the cost burden to end customers but such a step could cost a few percentage points of sales at the international level.

COUNTER TRADE Counter trade is the kind of sales transaction in international marketing that involves reciprocal commitment of exchange of the products or goods of the value for which sales invoice is raised by the seller. No cash payments of hard foreign currency are involved in counter trade. In the counter trade context, there are three contracts involved in most transactions. The first covers the underlying business transaction, the second covers the counter trade transaction and the third covers the protocol or linkage that ties the two together compensatory arrangements. Also referred to as counter trade, reciprocal trade, offset, or counters purchase. A seller of a product or system (usually a multinational, diversified or decentralised company) is compelled

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by the buyer (usually a foreign government) into a direct or indirect reciprocal purchasing relationship as a condition of sale. “The seller must agree to one of a number of possible arrangements: Local manufacturing of components related to the product or system (direct); Purchase of unrelated commodities (indirect); Purchase of unrelated manufactured goods (indirect); Transfer of technology/licensing/investments to the buyer country (direct or indirect); Create foreign exchange to facilitate original sale. (The seller would “sell” an unrelated product from buyer country first and then uses the resulting foreign exchange to help the buyer pay for the product or system.)”13 Developing countries, in particular, face a crunch of hard currency (currency that is acceptable for payment by any international supplier of goods and services.) Low reserves of hard currency can further deplete if countries allow outflow of hard currency for payments against imports into the country. In such situations, importers from the country are forced to adopt alternative mode of payments for their import commitments through barter and other forms of counter trade. A typical counter trade exchange, generally, involves an international seller from a developed, industrialised country and a buyer importer from a developing country, in whose country the scarcity of hard currency has led to complete governmental control on the conversion and drawing of hard currency. This situation prevailed in the Indian economy during the early 1990s, when balance of payment had also been adverse due to shortage of hard currency. Banking finance also was available only for most essential imports. Unessential imports could be managed only against counter trade. Many governments make counter trade mandatory to control the outflow of hard foreign currency and maintain balance of payments in their international trade. Counter trade is, in fact, on the increase throughout the world and is currently estimated to be around 20 percent of the total world trade.14

Types of Counter Trade Various types of counter trade, as prevalent in international markets, are discussed below:

Barter Barter is a century-old system of exchange of goods and services. It started when mankind had not invented any standard of exchange to pay each other for the goods and services bartered. It calls for a simple, nonmonetised unit of exchange between two parties. Although there is no money involved, dealing international firms will calculate the value of goods or services exchanged in one particular currency and then exchange the goods at par value between the buyer and the seller. Russia has been the biggest barter exchange economy, with as high as 70 percent of Russian activity depending on barter.15

Clearing Arrangement This arrangement is also known as clearing account. Under this system of barter, the third party, a broker or even the governments of two countries, act as banks and create trade credits for respective parties under a mutually signed agreement, wherein both agree to import-export certain goods for a given period of time. Thus they agree to do against a mutually decided currency. Both parties keep trading with each other, in agreed upon goods, within the given time frame. Whenever there is an imbalance noticed in either party’s 13. http://www.barternews.com/countertrade.htm 14. Sam C. Okoroafo, “Determinants Of LDC –Mandated Counter Trade”, International Marketing Review, Winter 1998, vol. 5, pp. 16–24. 15. David Woodruff, Money Unmade: Barter and The Fate of Russian Capitalism, Cornell University Press, 1999.

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account, and one country has to make payment to the other to balance the accounts again, swing credits are paid in the agreed upon hard currency.

Switch Trading Switch trading involves the interference of a third party in the import-export deal that has already taken place between two parties. When the seller does not want to accept the goods offered as counter trade and the importer is not in a position to pay up the hard currency upfront, these goods are taken up by a third party, who pays hard currency to the exporter seller by selling the bartered goods at a discount in the international market.

Compensation This system of counter trade involves paying the exporter part in cash and part in kind by way of products. The cash payment is made in mutually decided convertible currency. The exporter seller firm is on safer grounds, especially if the cash component is higher because this firm then does not have to spend time, effort and money in hiving off the goods received in the exchange deal.

Buyback Arrangements It is a kind of collaborative arrangement where the seller provides technical collaboration in the form of technical know-how, builds and provides a turnkey plant to the international customer, along with other capital goods. The seller arranges for the necessary equipment, patents and licenses, along with the rights to produce and distribute the products. The sellers may be paid in agreed upon convertible currency, after the commissioning of the plant and the balance payment is deferred to be offset against the production of the plant over an extended period of time. Such arrangements can be found in Indian automotive tyres industry, where technical collaborations exist between Continental tyres of Germany and the Indian manufacturers Metro Tyres, on buyback arrangements. Metro tyres have put up a plant in north India, with technical knowhow from Continental of Germany. Continental has entered into an agreement with the Indian manufacturer to buy back a part of the production to meet its worldwide exports of two- and three-wheeler tyres and tubes (http://www.tribuneindia.com/2006/20060912/biz.htm).

Counter Purchase Counter purchase involves two parallel contracts, involving dealing in two parallel exchanges. The seller exporter enters into two separate agreements to buy products that are unrelated to its existing line of international business. These separate contracts will be entered into for different products, each specifying cash value separately. The seller exporter selects the products it wants to buy back from the list provided by the importer. These products will then be sold by the exporter into the international market to recover hard currency payments due from the importer. Such an agreement can be for total imports to be paid off or it could be part in cash and part in the form of goods. The advantage of this parallel barter is that the seller gets his cash by selling off goods to another buyer upfront. The famous counter purchase deal between PepsiCo and Russia spells out the typical counter purchase example. PepsiCo exported its syrup to Russia against the barter arrangement of Stolichnaya vodka, which it had planned to sell in the United States.16

16. Aschkenasy, “Give And Take”, International Business, pp. 10–12.

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Offset Purchase This is done generally in large government and public sector undertakings where the government of the importer country is not in a position to make the payment in hard currency, or even in a situation where balance of payment issues may be involved. Purchases such as public utilities, defence equipment, armaments, railway/road/township building equipment, telecommunication projects and river project equipments, etc, involve huge amounts of hard currency, which is difficult to be procured for developing countries. Therefore, the seller agrees to accept part of the payment in hard currency and the balance to be adjusted against sourcing of inputs from the importing country. The seller may also agree to make investments in the importing country to facilitate manufacturing of such goods. Or, it may enter into a deal to transfer technology to the importing country, or marketing different products sourced in the purchasing country.17

Points to Remember Price quotation: It is a formal statement of promise (submitted usually in response to a request for quotation) by potential supplier to supply the goods or services required by a buyer, at specified prices, and within a specified period. Market Penetration Strategy: A pricing strategy in which a retailer seeks to achieve large revenues by setting low prices and selling a high unit volume thereby increasing market share of an existing product. Marginal cost: The cost associated with one additional unit of production also called incremental cost. Homogeneous Product: Products that compete with each other in a market but which (from the consumer’s viewpoint) have little or no differentiation in terms of features, benefits, or quality and are, therefore, forced to compete on price or availability. Repatriation of profit: Repatriation of profits is the movement of profits made in a business or investment in a foreign country, back to the country of origin. Variable cost: A cost of labor, material or overhead that changes according to the change in the volume of production units. Combined with fixed costs, variable costs make up the total cost of production. Balance of Payment: An accounting record of all international transactions made by a country over a certain time period, comparing the amount of foreign currency taken in to the amount of domestic currency paid out. It has three component accounts: Current account, Capital account and Gold account.

Objective Type Questions 1. The firm can justify keeping its prices higher in home market only if the following factors and differences are noticeably in favour of keeping higher prices in home country’s market: (a) Labour or the raw material cost is higher in home country as compared to the international markets 17. Hennar, “Some Empirical Dimensions”, pp. 243–270.

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(b) Firm as a strategy wants to adopt the market penetration pricing objective (c) International markets’ consumers have a lower propensity to pay (d) Firm wants to fight the competition by keeping its products’ prices low in the home turfs of competitors (e) All of these The firm can justify keeping its Home Market Prices Lower than the International Markets only if the following factors are noticeably in such favour: (a) There may not be much of competition available in international markets. (b) Cost of manufacturing may be cheaper in home market. (c) International marketing firm caters to only a limited segment of customers at home country. (d) Customers of other international markets have a higher propensity to pay. (e) All of these. Standardized Pricing Strategy visualizes the entire international markets as one single unit and the international marketing firm will devise a policy whereby (a) Market prices for the product remain the same in all the markets (b) market prices differ from country to country (c) Market prices differs in home country (d) Market prices differ in other countries (e) Market prices differ in all countries Market Penetration Pricing Strategy refers to the situation when the international marketing firm adopts a strategy of (a) Keeping prices lower than the competition (b) Keeping prices higher than the competition (c) Keeping prices at par with competition (d) Not focusing on pricing (e) Making prices irrelevant External Factors affecting Pricing Decisions of an international firm are (a) International Competitive Environment (b) International purchasing parity and Currency exchange rates (c) Mechanics of demand and supply curve (d) Dumping (e) All of these and many more Counter trade is the kind of sales transaction in international marketing that involves (a) Reciprocal commitment of exchange of the products or goods of the value for which sales invoice is raised by the seller (b) Charging similar rates for all goods (c) Charging different rates from countries (d) Countering the imports from other countries (e) Countering exports to other countries

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7. Compensation system of counter trade involves (a) Paying the exporter part cash and part in kind by way of products (b) Compensating for exchange rates fluctuations (c) Compensating for lower prices in home market (d) Compensating for higher prices in third countries (e) None of these 8. Countervailing duties that countries impose to protect their domestic industry are imposed on (a) Domestic goods (b) All imported goods (c) All exported goods (d) Grey market goods (e) Subsidized products imported into the country 9. Local Pricing policy of an international marketing firm is based on (a) The needs of customers from different countries and Customers’ propensity to pay (b) Competition available and the price strategies adopted by competitors in different countries (c) Local taxation policies of different countries (d) The levels of distribution channels and the cost incurred thereof (e) All of these 10. State true or false: (a) The manufacturers while setting product price for international markets have to be extra careful as the strategy to reach the right price can spell success or failure in the international market. (b) International marketing firms can be successful in formulating the right price combinations in various markets only if they are aware of the international consumers’ differences in their propensity to pay. (c) Volumes definitely play a large role in making an international business viable and sustainable. (d) Skimming the Cream Pricing Strategy is based on the assumption that a firm will like to take advantage of having been first in the international market to introduce an innovative product. (e) Market Based Pricing Approach means the manufacturing firm must charge from the international markets what the market can bear.

Review Questions 1. Explain the concept of full cost pricing. What components of cost will you include in your price quotation to an international buyer? Explain with the help of examples from international markets. 2. What is marginal cost pricing? Explain the concept with the help of examples and a hypothetical case study from international market pricing of a product. 3. What are the factors that influence international pricing decisions of a firm? Critically examine one internal and one external factor with the help of examples.

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4. What are grey markets? How can the legally appointed distributors of an international marketing firm encourage grey marketing by indulging in parallel imports? Explain with the help of an example of parallel marketing of a product in your country. 5. “Counter trade helps an international firm gain access to markets that would otherwise be inaccessible”. Critically examine the statement, explaining the types of counter trade systems prevailing in the international markets. 6. What is a transfer price? Explain the three methods for determining transfer prices. 7. What is dumping? What measures will you suggest to stop the dumping activities of an international firm into your country’s market?

Project Assignment 1. Compare the price of Canon and Sony camera models (similar models) and discuss the pricing strategy of these firms.

Suggested Readings Acvusgil, S Tamer, “Pricing for Global Markets”, Columbia Journal of World Business, vol. 31, No. 4, 1996. Adite | hubpages.com/hub/Indian_Manufacturing Coopers and Lybrand, International Transfer Pricing, Oxford Shire: CCH Editions Ltd, 1993. Faulds, David J. Orlen Grunewald, and Denise Johnson, “A Cross National Investigation of Relationship between the Price and Quality of Consumer Products, 1970-1990”, Journal of Global Marketing, vol. 8, No. 1, 1994, pp. 7–25. Lancioni, Richard, and John Gattorna, “Strategic Value Pricing: It’s Role in International Business”, International Journal of Physical Distribution and Logistics, vol. 22, No. 6, 1992, pp. 24–27. Marn, Michael V. and Robert L. Rosiello, “Managing Price, Gaining Profit”, Harvard Business Review, vol. 70, No. 5, October 1992, pp. 84–94. Myers, Mathew B. “The Pricing of Exports Products: Why Aren’t Managers Satisfied With The Results?” Journal of World Business, vol. 32, No. 3, 1997, p. 277. Nagle, Thomas T., The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making, Prentice Hall, Upper Saddle River, NJ, 1987. Robert, Michael, Strategy Pure And Simple: How Winning CEOS Outthink Their Competition, McGraw-Hill, New York, 1993. Seymour, Daniel T., The Pricing Decision, Chicago Probus Publishing, 1989. Sinclair, Stuart, “A Guide to Global Pricing”, Journal of Business Strategy, vol. 14, No. 3, 1993, pp. 16–19.

Useful Weblinks http://www.asil.org/insights/insigh63.htm http://www.barternews.com/countertrade.htm http://www.blonnet.com http://www.tribuneindia.com/ http://www.tribuneindia.com/

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INTERNATIONAL DISTRIBUTION, MARKETING CHANNELS, LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Learning Objectives After reading this chapter, you will understand: The concept of international distribution and logistics Distribution and supply management channels in international markets The qualifying criterion, functions, advantages and disadvantages of middlemen in international supply chain management

The challenges in logistics in international marketing

INTRODUCTION Consumers in all countries buy goods and services at a place which is conveniently approachable, yet prominent to provide comparatively higher satisfaction levels as compared to the time, effort, and money spent by the consumer. Hence, the mega task of an international marketer is to manage its logistics, distribution and supply chain in a way that goods and services reach the customers in the most cost effective and efficient manner. However, in today’s multinational marketing set-up, all manufacturers cannot handle all the functions of reaching the product to the ultimate consumer all alone, hence the task of distribution of international level marketing has become the task of a specialist who can deliver goods to consumers across the countries efficiently, ironing out the bottlenecks on the borders of the countries and smoothening the deliveries within stipulated time deadlines. The selection of middlemen could be a little easier if the manufacturer has the first-hand knowledge about the legal, economic, financial and ethical implications of distribution and logistics. He should also be fully aware of the channels that could be utilised for his products by either benchmarking a successful competitive strategy or devising his own direct distribution plans to the end consumer. However, in international marketing, distribution channels are diverse and may vary from one country to another country, and even within countries, there may be different modes and systems required to reach the products to the final consumers. Under such circumstances, a domestic manufacturer has to either take the help of a third party professional international marketing firm or the manufacturer may decide to get into direct dealings with the trade channels in order to market his products abroad.

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In this chapter, we study all the aspects of managing international distribution and logistics and understanding the level of involvement of various types of middlemen. We also study the logistics facilitators and their participation in moving the goods and services from manufacturers to selling points. In international market, a company may not be in a position to change already established distribution systems as it is one of the most difficult functions to standardise distribution internationally. Each country will have its own distribution environment, citizens’ attitudes, efficiency levels of distribution and logistics facilitators, marketing legislations, labour laws, availability of retail stores, add-on costs of retail stores and middlemen, in addition to tax imposition at each stage of distribution. Hence, the international marketer will have to address several issues before finalising a distribution plan for multicountry operations. While on the one side, he will have the choice of hyper markets of Japan, where the shelf space may run into several thousand feet, he will also have to arrange distribution in countries where the distribution systems for both industrial and consumer goods are not yet fully developed. In Latin America, small stores called Pulperias, provision stores in India, and Pakistan, super markets in England, and 9-11 stores in United States exhibit differentiated marketing systems adopted in countries across the globe for establishing marketing strategies. Currently, internet, direct marketing, and network marketing too add to the facility of distribution worldwide. In this chapter, we try to find out how arrangement of logistic support may present a great challenge to the international marketing firm which has to define its choice from the surface transport of animal driven vehicles to the modern-day multi-model systems that provide all the three facilities of air, land and sea transportation in addition to warehousing and storage provisions in many countries of the world. These facilitators will also have answers to internet and its web world system of distribution. The network marketing poses another challenge to the international marketing firm as to how to arrange, a set of independent distributors to reach the products to yet some more people sitting at home.

DEFINING DISTRIBUTION The American Management Association calls the channels of distribution “organized network of agencies and institutions which in combination perform all the activities required to link producers with users to accomplish the marketing task.”1 Distribution thus establishes channels that: 1. Handle the physical flow of goods and related services from the factories of manufacturers to marketing channels which are easily approachable by the end user and consumers 2. Facilitate the transfer of ownership from the actual manufacturer or the middleman to the ultimate customer 3. Manage backward flow of the price of the goods realised from the customer to the manufacturers 4. Regulate the flow of information about the product performance and the customer feedback to the manufacturer and the other agencies involved in rendering services to the customer.

DISTRIBUTORS AND CHANNELS Let us now try to understand the role of distributors and channels.

Self-Involvement Multinational conglomerates decide to establish their own channels if they find that: 1. Peter D. Bennet, Dictionary of Marketing Terms, AMA, 1988, p. 29.

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provide the necessary facilities country will simply mean reallocation of some of the resources from the low point to high point priority area expectations

However, establishing own channel network involves commitment of resources on a high scale, and to arrange all kinds of distribution facilities will mean add-on costs to the customer price. It will also mean cutting into the margins of the producers and reducing net realisations from the product.

Outsourcing Distribution—Home Country Channels Once it has been identified by the international marketing firm that it has to initiate outside involvement in distribution and logistics, it may look at home country channels even for marketing in other countries through indirect exports. In such a situation, this firm will not be involved in handling the other factors of marketing mix in foreign destinations, e.g. redistribution, advertising and sales promotion and personal selling as all such activities will also be outsourced to others through the margins included in the export price which may or may not be converted into customer price at the end sales. All such controls, e.g. placement of products, segmentation of the customer and product profile are, in this case, passed on to the distributors abroad. International firms although have passed on the marketing controls to the home country middlemen, they can still establish their own liaison or sales coordination offices at a bare minimum level in other countries in order to maintain liaison and coordination with distributors abroad. The wholly-owned subsidiaries and coordination franchisees can also be utilised for extending support to home country middlemen abroad.

Home Country Middlemen Network (Trade Promotion Agents/Organisations) Home Country Export Agents Their basic task is to represent either one or many manufacturers from the home country for exports liaison and arrange a networking of importers and exporters. Such agents do not carry a title to the product, rather they work either on retainership basis or as commission agents. Many international firms have agents based in different countries who arrange purchases for their principals and the manufacturing firm does not have to get into direct exports in such cases. In India, agents for leading fashion houses are based in Noida, Gurgaon and in and around Mumbai for buying fashion garments and other lingerie. These buyers get the products manufactured and designed as per the specimens and samples of importing firms from their countries.

Export Houses These are export companies specialising in export business rather than domestic sales. Such export houses are recognised under the Exim Act and are designated different star status based on their export performance and become eligible for the incentives from government. The export houses may represent smaller companies

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of different industries, e.g. marines, surgical instruments, hand tools, garments, handicraft and many others such items are manufactured by cottage and small manufacturers. They conduct research into the buyer’s requirements abroad, organise trade fairs, exhibitions and importer exporters meets to procure business. They also undertake the task of preparing export documentation and managing all kinds of export requirements.

Trading and Merchandising Companies Trading companies and export merchandisers are middlemen who buy goods and products from the producers of their home countries and as such hold the legal title to the ownership and possession of the products they represent. Such products may remain under the brand umbrella of the actual producer or the merchant exporter many a time like to promote their own brands, but such merchandising companies have to handle the diverse product mix. They also get a complete control over the marketing mix of the products they represent for international markets. Japanese export trading companies are another example of trading and merchandising at the international level. Their marketing activities include finance, distribution, mining, gas exploration, and information trading at the international level. They also act as investment holding companies. Most of Japanese exports and imports are controlled by these members of “Keiretsus” families, who have interlocking stakes in the group companies.2 These trading companies, known as “Sogo Shashas” in Japan, offer intermediary services, information, conveyance, and financial assistance. US Exports Trading Companies Act 1982 had been enacted for formation of such export trading companies in United States. These companies have since risen to the level of multinational corporations representing smaller firms. These corporations now render exporting services to these firms all across the globe.

Export Promotion Councils and Corporations In India, such cooperative exports exist under the aegis of government and semi-government agencies. Mineral and Metal Trading Corporation handles such exports on behalf of many commodity cooperatives in India. Jute Corporation of India, Tea Board, Spice Board and Marine Export cooperatives are some of the cooperative associations formed by the member associations. These cooperatives handle the export functions by providing services of marketing research, enquiry generation, tender follow-up and subsequent logistical support. These corporations also arrange trade fairs, exhibitions, and exporters/importers meet within the home countries and abroad too. functions for each other such as a cycle manufacturer like Hero Cycles may export cycles’ spare parts of other small manufacturers as accompaniment to their exports. This also happens in motor parts trade where an automobile firm will arrange exports of spares required for after-sales service for the automobiles under exports abroad.

DIRECT AND INDIRECT MARKETING CHANNELS IN A FOREIGN COUNTRY While an international marketing firm may look for outside agents and seek their services and help within the home country, it has two options abroad to reach its products and services to the end consumers. 2. For more details on “Keiretsus”, refer to The Economist, “Japanese Trading Companies—The Giants that Refuse to Die,” June 1, 1999, vol. 319, No. 1109, pp. 72–73.

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1. Direct entry through its own sales force, sales offices, own retail stores, retail showrooms and retail franchisee outlets 2. Indirect entry through distributors, stockists, retailers, stores, and wholesalers Although both the strategies put strain and stress on the end price to customers and the realisations of the firms’ returns, the degree of impact may vary depending upon the nature of products and the level of distribution channels engaged in international marketing. While the number of channels will be limited in industrial products, in fast moving consumer products and white goods, e.g. furniture, fashion designers’ labels and daily needs branded products would require a large network of sales agents abroad to ensure wider distribution.

Direct Selling Channel Direct selling channel refers to door-to-door selling, network marketing and mail order catalogues. In India, foreign firms like Olivetti, Avon, and Amway have taken to the direct selling route. Although they have not gone strictly from door to door, a network of independent distributors help the companies reach a wide range of consumers. In the United States, Amway has already been a big success through the network marketing but the surprise success through the network marketing came in Japan where Amway was able to garnish a total of 10% of its turnover. Avon and Amway have entered China, too in a big way where more than half a million independent distributors are selling these American companies products from door to door. Burlington of USA has long been active in India through their mail order catalogue for selling fashion garments. In Japan, car manufacturers maintain the bare minimum inventories and showrooms as the cars’ owners are serviced by direct door to door salesmen through personal relations built up by repeated visits. Internet sales (we will cover this topic separately) is another form of direct selling; media and television channels instead of direct mail catalogues to display their products to end users and source orders.

(i) Manufacturers’ Direct Retail Stores Bata shoes, Singer sewing machines, and Italian furniture’s manufacturers preferred starting their own retail stores abroad and reach the customers directly. Many of the Indian fashion designers have their own label stores abroad. Ritu Beri’s store has been started in Paris. In case of wider product range such as shoes, beauty products, high priced expensive products, manufacturers will prefer remaining close to the customer to understand and cater to his needs better. Bata shoes have had their own stores in almost every corner of the world. Heavy machinery manufacturers may establish a showroom as a showcase to provide necessary display to customers’ benefit and obtain market related information from visiting customers abroad. Figure 13.1 describes the channels that a manufacturer can strategise for the distribution of consumer products abroad.

(ii) Franchisees This is an important mode of entry into the global market. Pizza Hut, McDonald’s, Domino’s, Coffee shops, KFC have all been established under franchisees arrangements. Max store, Reebok, Nike have franchisee arrangements all across the globe. Under these arrangements, a franchisee makes his own investments as per the norms set up by the manufacturers, using manufacturer’s brand name, logo, shop décor and advertising

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Fig. 13.1

Consumer products distribution channels

umbrella. Walls Stores, Burger Kings, TGT’S Fridays, Baskin Robbins are some of the other brands that have established their presence and marketing network across many countries through franchisees network.3

3. Waheeduzzaman A.N.M, ‘Can Modernisation Explain the Consumption of Durables in Emerging Markets? Journal of Global Marketing, The Haworth Press, vol. 19, No. 314, 2006.

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Indirect Selling Channels Abroad Not all manufacturers and marketing firms and independent producers can set up their own network abroad. These firms do require help and support of experts and specialists situated in foreign countries to carry their goods to the customers/retail stores in different countries. These intermediaries are of three kinds:

1. The Distributors and Merchant Middlemen They make their own investments in purchasing import products and thus inherit title to the goods before they distribute it in their home country. The marketing mix, advertising and sales promotion strategies are decided and controlled by them directly and independently. The selection criterion of merchant middlemen may vary from company to company but must be undertaken after thorough research and caution because once such alliance has been arranged and signed, companies in many countries will have to rely on these firms.

2. Import Agents and Import Houses Just as we have export houses in the business of managing exports for small and medium manufacturers, the import houses and commission agents act as brokers and representatives of the manufacturers based abroad. samples, arranging import orders and contract, managing release of goods from shipping agencies and customs and eventually delivery to the customers. In such cases, they will have their own logistical support of warehouses and multi model transportation, etc. But these merchant middlemen can also operate as mere commission agents helping procure orders from the customers in the country they are based in and earn their commissions on the orders booked.

3. Government Designated Agencies In India, till the opening up of the economy, imports of many items were put on the restricted list of quotas and licenses and were managed by government agencies directly. These agencies undertook the task of redistribution within the country through their own offices and branches. But current import/export policy allows everything to be imported and exported unless put on the restrictive or prohibitive list. This opening of the economy brought in all kinds of marketing opportunities to international marketers and manufacturers. In many other countries where government agencies control foreign exchange transactions imports are managed by government corporations and they help exporters from abroad or their redistribution process by enacting legislative procedures.

Industrial Products Many firms selling industrial products follow the indirect selling channels mentioned above like merchant middlemen, export agents, import agents and brokers, act on behalf of the manufacturers of industrial products by arranging distribution offices in different countries. These agents could be either stocking points for their manufacturers and arrange deliveries as and when it is needed by the industrial customer in case of raw material and consumables. These agents could also be the only liaison representatives arranging customer demand prototypes and samples, finalising export contracts and follow-up of the payments. In such cases, there can be different import and export agencies catering to the after-sales needs and spare parts needs of the clients.

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Fig. 13.2 Industrial products’ distribution channels

DISTRIBUTOR AND MIDDLEMEN SELECTION QUALIFICATION CRITERION The process of selecting a distributor abroad will require qualifying a distributor on the criterion set by the criteria could be simple export contract and the paying capacity of the importer. The criterion gets complex in case the international marketing firm has to establish a permanent relationship with marketing agents and ensure continuous brand building strategy across the globe. In such a situation, common criterion for distributor selection will include:

(i) Middlemen Criterion

(ii) Self-Reference Criterion

(iii) Specific Country Reference Criterion

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Costs Involved in Foreign Distribution We need to dwell a little longer on cost aspect of distribution qualification as cost add-ons gets important in deciding on the usage of (a) levels and tiers of distributors and (b) deciding the international pricing .The availability of infrastructure conditions in the country and the distributor’s capacity and commitment to provide the necessary facilities

Geographical Considerations Geographic locations of customers while in some countries could be easily accessible, it could be equally difficult in many other parts of the world, adding to not only the cost of logistical operations but also to the woes of the distributing channels. In many parts of the world, the goods can be reached through air only, which could be quite an expensive proposal. Again, even air facilities may not be fully developed in underdeveloped countries, which means adding to the time and cost by way of unconventional means of transportation. In United States, most of the states can be serviced through the interstate freeway system; the freeway is further connected with navigable roads getting into the inhabited townships but in Latin America, where the terrain is quite inhospitable, areas close to the coastlines are thickly populated. In Europe, countries are interlinked with each other by a wide network of tunnels. But in African countries and even in Middle East, a multi model transportation will also include camel backs, adding to transit period and cost of transportation thereof. Besides, the telecommunication network in many parts of the world is still not developed fully in spite of internet having made its inroads. The international marketer will have to take into consideration all such geographical and physical requirements before finalising the global supply chain and distribution management, which is another name given to logistics.

INTERNATIONAL LOGISTICS AND GLOBAL SUPPLY CHAIN MANAGEMENT The word ‘logistics’ has been derived from the French word loger, which refers to the arrangement of supplies and accommodation of the army troops, in real situation also the refurbishing of supplies to military troops and its management thereof refers to the logistics. Such exercise is undertaken by the troops in all kinds of peace and war situations to ensure the soldiers on the fronts are not deprived of the supplies and ammunition at the most crucial times. Thus, logistics will include, besides physical distributions of materials, the arrangement of transportations too. The term ‘logistics’ has becomes all encompassing and includes management of global supply chain and distribution of finished as well as raw materials across the countries and continents. Any firm planning

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international marketing has to arrange its global supply chain and distribution in such a manner that it is chain consists of the coordination and arrangement of materials, information and flow of funds, beginning from the suppliers of the raw material to the converters, to the carriers of materials’ ownership, to the ultimate consumer and its focus on the continuation of the cycles so established, and in the process, adding value at every stage of handling by the intermediaries till it finally satisfies a customer’s need. This process brings together designers of the product, suppliers of the man, machinery and materials, subcontractors, manufacturing agencies, carriers of finished goods to the customer. Such huge coordination continues through interaction between different entities engaged in the network. While at the national level it may not be such a huge exercise, at the international and global levels, it poses a big challenge to the firms to manage such a wider chain. Logistics is a part of global supply chain management that organises, plans, conducts and controls the flow, storage and delivery of information, services and products from the point of raw materials to the point of conversions and eventually from the point of conversions to the point of consumptions in order to meet, satisfy and delight a customer’s requirement and need in any part of the globe. To control this process of customer delight, logistics focuses on the transportation, storage and delivery of material and finished goods. Supply chain management will include the optimum and efficient handling of the entire process to build up customer and supplier relationship for future business alliances. A comprehensive logistics strategy should include the following key elements: (a) (b) (c) (d) (e) (f) (g) (h) (i)

customer service requirements plant and distribution centre network design inventory management outsourcing key customers and suppliers relationships business processes information systems organisational design and training requirements performance and evaluation metrics.

GLOBAL MANUFACTURING STRATEGIES In order to achieve global competitiveness and economies of scale, an international firm strategises its manufacturing in such a manner that it not only remains closer to the customer but many a time it prefers to move the production facilities closer to the elements of production. This is done for the following reasons: 1. To ensure compatibility between companies’ decision to move investments abroad and thereon retain competitive edge by efficiency, cost competitiveness, consistence of quality and flexibility of operations to react to genuine customer needs. It is generally believed that a multinational enterprise will prefer a low cost location. While it may be true to some extent, multinational may not opt for a low cost location for all its product lines. It will have to take into account the competitive priorities, market dynamics and its own resource mobilisation capacity to reach such a decision. When Continental A.G. of Germany wanted to outsource a manufacturing base to India in 2001–2002, it preferred only two and three wheeler tyres to the Indian continent and not the entire range of automotive tyres.

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2. Multinational manufacturing process of the firm will mean configuring the manufacturing base whether it could be one centralised facility which will cater to the entire globe or each country (wherever firm intends carrying on its business activities) will have a manufacturing base. The third option being regionalising the production facilities, e.g. Pepsi may have the Indian location for catering to the South Asian base. 3. However, the above two decisions will depend on the firms’ capacity and capability to control the logistics involved in massive operation of multi location manufacturing. It will involve moving men, material and machinery from the basic purchase to mid conversions in some factories, to, may be, warehousing of intermediaries raw materials, in process material, to semi-finished goods and ultimately, to transportation of finished and ready for sale materials. Unless the firm puts into operation a foolproof control system, consisting of organisational structure, performance ensuring checks and balances and eventually performance measurement systems, to optimise achievement of strategies and

GLOBAL SOURCING It is not necessary for an international firm to put up its own manufacturing facilities everywhere as it can adopt global sourcing strategy which will eventually mean: the firm will have to take a strategic decision about the product line to be outsourced, whether entire product should move out or only critical parts which the outside vendor is good at manufacturing should be sourced out. The firm will have to take into account the advantages of outsourcing within own country or in a third location foreign country.4 In any case, the firm stands to gain in the following ways, should it decide to outsource to a third country: (a) Reduction in costs of manufacturing due to lower wage bill for the labour (particularly in third world countries) (b) Free from labour unionisation and restrictive work rules of own labour (c) Lower investments on land, capital and manufacturing (d) Access to worldwide technological developments and third party research facilities (e) Improved logistical support and dependable supply due to factoring of foreign locations along with domestic production (f) Circumventing the import procedures and arrangements of materials which are available in foreign countries only, thus adding on many other cost saving devices (g) Multi locational presence generates additional advantages of fighting competition on various foreign turfs, particularly if the competition too has been outsourcing.

Challenges to Global Sourcing However, all is not so much advantageous as it is presented by the supporters of global outsourcing. Such a huge operation does present challenges to outsourcing international marketing firms: (a) The firm will have to give up some part of control on its qualitative as well as operational aspects as in spite of all stringent controls, the outsourcing avenue may not be able to put into practice the original visionary dream plans of the firm’s corporate think tank. 4. Allan Afuah (1999), “Strategies to Turn Adversity into Profits”, Sloan Management Review, vol. 40, No. 2, winter 1999, pp. 99–109.

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(b) Each firm has its own in built culture in the workforce; such splitting of production arrangements may create cultural barriers. (c) Unless the firm is able to trim down the profit margins expectations of the intermediaries handling outsourced material, it may not be able to get the cost advantages. (d) The international firm will have to work out long-term plans for either reducing dependency on the outsource agency or otherwise helplessness can be felt should any dispute arise in future between the two parties. However, such a situation will differ from company to company. The Japanese and Chinese will like to continue with the same source for life time and undertake mutual technological and product development. The firms from United States, on the other hand, will not undertake longterm business commitments with their vendors, whom they generally keep restricted to their free trade Table 13.1 lists out the key steps an international firm can undertake to ensure that the process adopted helps in selecting the best and the most suitable outsource for supplies at the global level. Table 13.1

Key Steps in Global Sourcing Process of global sourcing

Evaluating decision-making

Assess current operations and international competitive Will outsourcing globally add value to our products and scenario. services as against competition? Will global outsourcing provide a value plus proposition to the real customers to meet their actual need? Assess extent and scope of international outsourcing.

How intensive and extensive will be our global outsourcing effort? Do we need to outsource entire production? Or Do we need to outsource only spares? How do we organise our global sourcing team? What skills and qualifications will this team possess? Have we conducted cost benefit analysis? Will it be sustainable for short term/long term arrangements?

Conduct global research to identify available potential Make a profile of the best in the trade for each component sources worldwide. worldwide, i.e. in which country/continent are they situated. Can they be associated with our global aspirations? How has been their past performance? Total turnover handled Comparative cost vis a vis cost of their competitors Commitment to delivery Commitment to quality Orientation to innovation and research and development Commitment to agreements Determine the basis and nature of relationship with the Does the source agency’s geographical location, capabilities sourcing agencies. and capacity, meet our standards? Will the supplier be able to deliver in spite of all logistical challenges?

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Comparisons at total ownership level will give us the actual results. Identify the best source in the long run/short run.

Negotiate and enter into a contract with the best Will the contract be long term or will it be negotiable after source on mutually agreeable terms and conditions to periodical intervals? Does the contract clearly mention roles build long lasting relationships. and responsibility for both sides. Have the performance expectations been clearly stated, explained and understood by both signatories? Does the contract specify sharing and owning of resources, rewards, risks and the unforeseen? Periodical and consistent re-evaluation of agreement, its implementation, current changed circumstances and requirements thereof to build up additional capabilities.

Have there been complete implementation and cementing of relationship between both the agencies? Do we get the worldclass material? Does the sourcing agency maintain expected standards? Do the changed circumstances call for revaluation of the relationship? or Do we need to change/upgrade the source?

Establishing Suppliers’ Network Establishing global outsourcing calls for managing a supply source of raw materials, parts and consumables from the domestic country of the firm as also a chain of suppliers from abroad. In fact, any materials management process begins with the arrangement of source suppliers, inventories and transportations, all three arms of logistics as we have discussed in the earlier part of this chapter. We have also seen how companies can either manufacture their requirements of parts within their own production systems or they parts can be gathered at one central warehouse of the main manufacturing firm for assembling or it can still be outsourced as in the case of Iomega through Emery Worldwide from the home country to the third country base of the logistic support providers. Procuring and outsourcing from the home country is a little easier in the sense that (a) language and culture remains the same (b) the distances are short and supply lines can easily be managed and controlled (c) the international firm does not have to face exchange rate fluctuations and including tax differences, other statutory tariffs differences, etc (d) in the case of any other kind of natural calamity, wars, strikes, political stress and strains they pose efforts. However, the problem arises when the supply source has to be arranged from outside the country. The domestic sources may not be fully developed, may be expensive, raw material source may be available abroad only or some of the imports will be necessary to give the finished product an international acceptance for all times till the sources are developed within one’s own home country. An international firm is always in a dilemma when it comes to developing outsourcing points from abroad. Should they make every purchase centralised at the main work or should the subsidiaries abroad be allowed to make their own decisions and develop their own sources? Though both strategies have their own merits and demerits, companies can derive the benefits of increased production facility control by localising the purchase and other related decisions, as only then better and timely response to facility needs can be generated. In the

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centralised facility, the firm can though continue to have better leverage with the suppliers. It can manage to get better price, schedule and other services. There can also be avoidance of duplication of efforts and the vendors can be better educated to the needs of the firm as a whole to build up long lasting relationships.

INVENTORY MANAGEMENT The global outsourcing presents a big challenge to a multinational firm and its material management team in managing to bring down distance, time gap and the political and economical variations and ask every component of the international supply sources into one single whole. The supply source and the inventory management purchases by decentralised units must follow a continuous flow in order to keep factories and stores running as otherwise a breakdown in production stream on the shop floor, a few thousand miles away, can prove quite expensive. It can give a setback to the firm in the current highly competitive scenario, where factories around the world. In order to circumvent this kind of situations, the global suppliers do maintain their own warehouses close to the factory gates either directly themselves or by outsourcing inventory management to third parties. Huge warehousing facilities have of late come up in free trade zones across the world managed by third party logistic firms; the main function of these firms is to maintain a buffer line of inventories as an intermediate arrangement. Most of the original equipment suppliers are moving abroad to follow the manufacturer all around the world wherever they put up new production facilities. When Japanese car manufacturers like Suzuki, and Honda have production units in India, Bridgestone, the largest equipment supplier, too had to put up a factory in India even though there were enough international level manufacturers available in India. Similarly, Toyota also follows a pattern of taking its original suppliers along to foreign locations to maintain consistent quality and supply chain. Although all such companies that motivate, lure or force their original suppliers to move along with them do develop a multiple local vendor, institutions support to ensure dependence on more than

Establishing Transport System The logistics’ main function in any distribution and supply chain programme is to link the suppliers to the manufacturers and bring manufacturers closer to the ultimate customers by arranging the movement of materials by air, ocean or surface transport, as the case may be. They do it either by adopting individual means of transportation or by using all three mediums as multimodal transportation system. The transportation of goods across countries and continents is, however, not an easy task as the firm will have to ensure it follows all necessary legal and statutory formalities across borders of the nations. This calls for comprehensive documentation at each port of loading or offloading. In order to handle such statutory requirements of authorities, the international firm may establish either its own international transportation and shipping department or it may decide to outsource the management of trans-shipment and transportation to a third party, outside the firm’s own network. Such third party intermediaries are equipped with the services to gather necessary details on the logistic management, e.g. details on the routes, freights, shipping details and also the essential surveillance instrumentation systems, communication technologies, to track the movement of materials across the frontiers. They also are well familiar with the compulsory documentation at the ports and can take care of official as well as unofficial requirements. The logistics firms handling international movement of freights

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are generally well-equipped to handle complete multi modal need of transportation and they operate worldwide. Emery Worldwide, a $ 3billion integrated U.S. based logistic firm, provides global, air and ocean freight transportation, logistics management, customs brokerage and expediting services. Its client’s list includes customers from manufacturing, retail, industry and government agencies. Based in Redwood City, the company provides services to more than 200 countries through a service outlet network of more than 600 centers around the world. Iomega, the San Diego, California in the United States, one of the many clients of Emery worldwide,

also handles inventories of spares and semi knocked down kits of plastic/metal parts etc, which go into the making of zip drives of Iomega brought into the Emery centers from San Diego and Utah

QUALITY MANAGEMENT The global operations do present a challenging situation to the international firm to maintain a consistent and desired levels of quality in and at all levels of the global supply chain network. Even though the firms insist on global quality assurances certification, e.g. ISO 9000, company specific and country specific acceptable quality level (AQL) zero defects and six sigma, the organisations find it difficult to inculcate the culture that it has been following at the home country work. Companies like Toyota and Suzuki develop and train the local vendors’ employees by way of posting their own key technical staff and other quality inspectors and trainers at the factories of suppliers. When Maruti Suzuki5 started manufacturing their cars in India in the early 1980s, the Suzuki technical staff had worked literally on the shop floor along with factory workers on production line to ensure total quality management which insists on customer satisfaction, employee involvement and continuous improvement in quality seeps deep into the work culture of the new plant and the Indian employee too picks up the same work culture that Suzuki had been following in all its plant globally. TOYOTA PRODUCTION SYSTEM Under the Toyota production arrangements entered into with the partners in foreign countries or own subsidiaries, the Toyota Company’s own production representatives are posted at the manufacturing

In order to ensure continuity Toyota always divide the outsourcing amongst at least two suppliers and

Source: www.Toyota.co.jp

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The global quality assurance statement made by Managing Officer Koichi INA General Motor Global Production Centre amply spells out the role played in education of local production hands by Toyota manufacturing management (see the box below). “Made By Toyota”—Aiming For Global Quality Assurance INA

of our production bases, in line with our policy of “producing vehicles

in seven locations overseas, showing that “from development and design to production, sales and service, Toyota has now achieved There are a number of hurdles that this globalisation of production

Source:

EDI, ERP and E-Commerce Global supply chain system can function only if foolproof, responsive and efficient information network is established amongst various components of the global suppliers. Companies use different electronic mediums electronic Data Interchange, Enterprise Resource Planning, E-Commerce and finally the Internet. Many companies use Electronic Data Interchange (EDI) to electronically link suppliers, manufacturers, customers and third party intermediaries (especially in high volume replenishing industries e.g. food and

Global Information Management, Idea Group of Publishing, vol. 14, No. 4, October–December 2006.

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perishables) to expedite documents and financial flows. Globally, Electronic Data Interchange has been adopted in export import management to interlink customs offices and exporters and importers to facilitate quick processing of electronically designed customs forms, speeding up the process of clearance of documents and delivery across the ports. Walmart has adopted EDI to connect over 15,000 suppliers across the globe and $ 250 billions worth of purchases across the world are managed efficiently through this system, every year. However, the EDI is relatively limited in its flexibility to meet the ever changing situations of international dynamic trade. Enterprise Resource Planning integrates every system in the back offices of the international firms. It brings the information together from within the firm’s own offices and also from the geographically spread other international arms of firm’s own offices across the globe. However, its limitations are felt when the customer database cannot be linked to the firm’s own data bank. E-commerce helps in linking together different parts of global supply chain, where the customers and suppliers are allowed to plug into the database to keep track of their orders from the works, inform sudden changes, emergencies, stock outs and expected date of actual deliveries, and so on. Dell Computers, who have a factory in Ireland, supplies custom built personal computers all across Europe. Dell accepts orders from its customers transmitted via call centers or even through its own websites. The company transmits the demand for spares and components to its suppliers through the information extranet established with its own information system through the internet, in order to enable them to organise production of parts and deliver as and when Dell needs it. The customers can also plug in into the Dell system to track and follow their orders placed for which money has already been paid in advance by them (see box). The Internet has been revolutionising trade communications across all levels of global supply chain network, even though its speed varies from country to country. Internet saw worldwide growth of users in the 21st century, leading to trade over the net growing at 75% in the recent year. On-line trade spending also saw an expansion of 58% during this period. The global trade has been using internet as a source of linking suppliers from across the globe with the manufacturing bases and to the users and customers all across the world, both as an intranet system and also as an internet network outside their own systems to speed up the process of global supply chain and bring down the cost of operations for the ultimate gain to the end customers. Private Technology Exchange (PTX), an on-line collaboration model that brings together manufacturers, distributors, value adding resellers and customers to execute on-line trading transactions, is the latest addition to the global supply chain management. Facilitators, the subscribers to the PTX can share information about demand, production, supply situation and other supply line data and so on. The introduction of private technology exchange has resulted into increased efficiency of the supply chain and resultant reduced costs to the participants. Ford Motor Company, Ace Hardware, Cisco and many other companies in defense, aerospace, and motor vehicle manufacturing have been participating in the PTX to manage their global supply chain. However, not all companies can subscribe to fully integrated private technology exchange and such organisations can always take recourse to the services of the third party logistical providers who handle all tasks such as movement and shipping of goods to storage of inventories, management of electronically storage of data and follow-up with the government authorities for customs and exports formalities. It is because of the easy availability of support systems by the third parties that global supply chain management system has come to exist and flourish to its current position.

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DELL BUSINESS MODEL

by building computers only after customers place orders and by requesting materials from suppliers

enhanced Dell’s business model, making it easier for customers and potential customers to contact Dell

Points to Remember Direct Selling: It refers to door-to-door selling, network marketing and mail order catalogues. Logistics: It is a part of global supply chain management that organises, plans, conducts and controls the flow, storage and delivery of information, services and products from the point of raw materials to the point of conversions and eventually from the point of conversions to the point of consumptions in order to meet, satisfy and delight a consumer’s requirement and need in any part of the globe. Private Technology Exchange: It is an on-line collaboration model that brings together manufacturers, distributors, value adding resellers and customers to execute on-line trading transactions. Trading and Merchandising Companies: These are middlemen who buy goods and products from the producers of their home countries and as such hold the title to the ownership and possession of the products they represent.

Objective Type Questions 1. Distribution establishes channels that (a) Handle physical flow of goods and related services (b) Facilitate the transfer of ownership (c) Handle backward flow of the price of the goods (d) Handle the flow of information about the product performance and the customer feedback (e) All of these 2. In international marketing (the distribution through), home country middlemen network consists of (a) Export houses (b) Trading and merchandising companies (c) Export co-operative firms (d) Export marketing companies (e) All of these 3. In international marketing, indirect selling channels abroad consist of (a) The distributors and merchant middlemen (b) Import agents and import houses (c) Government designated agencies (d) None of these (e) All of these

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5.

6.

7.

8.

abroad are (a) Availability of infrastructure conditions (b) Distributor’s capacity and commitment (c) Number of levels and channels involved in the distribution (d) Inefficiencies inherent in the distribution system in the target country (e) All of these A company’s supply chain consists of (a) Coordination and arrangement of materials (b) Flow of information and funds (c) Carriage of materials (d) Transfer of ownership of the material (e) All of these Procuring and outsourcing from the home country is a little easier because (a) Language and culture remain the same. (b) The distances are short. (c) International firm does not have to face exchange rate, fluctuations. (d) International firm does not have to face taxation and other statutory tariffs differences. (e) All of these. Some of the challenges to global sourcing are (a) Losing part of control on qualitative as well as operational aspects (b) Firm’s own culture in built, in the workforce (c) trimming down the profit margins expectations of the intermediary (d) Working out long term plans for reducing dependency on the outsource agency (e) All of these While selecting middlemen abroad, common criteria for distributor qualification will include (a) Financial strength (b) Personal and ethical commitment of intermediary (c) Intermediaries’ reach and relations with the customer

(e) All of these 9. While selecting middlemen specific country reference criteria will include (a) Availability of channels in the target market (b) Legal and statutory requirements of home and host country (c) Specific product and service requirements (d) Specific marketing mix requirement (e) All of these 10. State true or false: (a) An international marketer will have to address several issues before finalizing a distribution plan for multicountry operations. (b) The basic task of Home country export agents is to represent either one or many

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manufacturers from the home country for exports liaison and arrange a networking of importers and exporters. (c) Trading and merchandising companies are middlemen who buy goods and products from the producers of their home countries and as such hold the legal title to the ownership and possession of the products they represent. (d) The distributors and merchant middlemen abroad make their own investments in purchasing import products and thus inherit title to the goods before they distribute it in their home country. (e) The process of selecting a distributor abroad will require qualifying a distributor on the

Review Questions 1. “A manufacturer can either distribute his products directly or employ third party services.” Explain the above statement in the light of middlemen available in your home country. 2. Explain who will you employ for distributing your fast-moving consumer products in a foreign country and why. 3. Explain what criterion you will refer to while selecting middlemen abroad for industrial products manufactured by your company. 4. Briefly discuss the components of global logistics. 5. What is global sourcing? Discuss briefly challenges to global sourcing. 6. Discuss briefly the role played by the Internet in global logistics. In what way has the Internet created utility for international marketing firms and their customers? Discuss with the help of examples.

Suggested Readings Bello, Daniel C., and Ritu Lohtia, “Export Channel Design: The Use of Foreign Distributors and Agents”, Journal of Academy of Marketing Science, vol. 23, No. 2, 1995, pp. 83–93. Carr Mark, Arlene Hostrop, and Daniel O Connor, “The New Era of Global Retailing”, Journal of Business Strategy, vol. 19, No. 3, 1998, pp. 11–15. Hill, John S. Richard Still, and Unal O Boya, “Managing the Multinational Sales Force”, International Marketing Review, vol. 8, No. 1, 1991, pp. 19–31. Kale, Sudhir and Roger P. Macintyre, “Distribution Channel Relationships in Diverse Cultures”, International Marketing Review, vol. 8, No. 3, 1991, pp. 311–345. Kapoor Ramneek, Fundamentals of Sales Management, Macmillan India Ltd., Multinational Study”, Journal of Macro Marketing, vol. 10, No. 2, 1990, pp. 61–77. Paul, Justin, International Business, Prentice Hall of India, New Delhi, Sachdev, Harash J., Daniel C., Bello, and Bruce K Pilling, “Control Mechanisms within Export Channels of Distribution”, Journal of Global Marketing, vol. 8, No. 2, 1994, pp. 31–50. Stern, Louis and Adel L., Ansary, Marketing Channels, 4th Ed. Prentice Hall, 1992.

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Useful Weblinks http://www1.ap.dell.com. www.iomega.com

Case Logistics Solutions in Information Technology Business–Approach to International Distribution and Supply Chain Management History of the Company Redington India, incorporated in 1961, commenced operations in 1993 distributing information technology products. From then on, the company has continuously expanded its operations across India covering a broad range of IT and Telecom Products. Redington (India) Ltd. acquired Redington Gulf FZE (Middle East and Africa operations) in April 2004 from its promoter, Redington Mauritius Limited. Redington Gulf FZE was set up as a subsidiary in 1999 by Redington Mauritius Limited for catering to Middle East and African markets. Leveraging its experience earned over the years, Redington Gulf FZE expanded its operations to 11 countries in the Middle East and Africa. Redington (India) Limited also acquired Redington Distribution Pvt Ltd. (Singapore Operations) as well as Cadensworth (India) Pvt Ltd. in April 2005. In December 2004, the Synnex Group, the third largest IT Distribution Company in the world, headquartered in Taiwan, with a turnover of over USD 10 billion, made a strategic investment of 36% in Redington (India) Ltd. In March 2006, ChrysCapital, a private equity firm, acquired 11 percent stake in Redington (India) Ltd. through their investment company Beethoven Limited, Mauritius. Redington, through all its subsidiaries, distributes products from over 30 leading manufacturers, services over 10500 reseller customers and is one of the top distribution companies in India, Middle East and Africa.

Redington Financial Growth Highlights Redington achieved revenue of Rs. 19635.03 million in 2003–2004, Rs. 25028.22 in 2004–2005 and Rs. 36926.58 in 2005–2006, registering a CAGR of 37.14 percent from India operations. Its international wing Redington Gulf FZE, a subsidiary operating in the Middle East region, contributed Rs. 15451.5 million in 2003–2004, Rs. 22718.97 million in 2005–2006 and in six months period ending September 2006 contributed Rs. 16274.13 millions to Redington’s total revenue.

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Profit after Taxation PAT from India operations has grown from Rs. 149.16 million in 2003–2004 to Rs. 291.20 million in 2005–2006, with a CAGR of 39.72 percent. VISION AND MISSION OF REDINGTON GROUP

Our Mission is to provide the best value proposition to our vendors and reseller partners through innovation, and responsiveness and be the partner of choice for them (as

A Brief on the IT Distribution Industry Over the past three decades, as the information technology (IT) revolution gathered momentum in India, the IT distribution industry has also kept pace and evolved rapidly. It has undergone a channel and vendor expectations. This industry is witnessing growth fuelled by investment in the IT and ITES sector, increasing the need for automation and information technology in all industries, an increase in communication and computing infrastructure spending and greater internet usage. In this scenario, companies providing IT distribution services have tremendous scope to grow as IT distributors play a key role in providing supply chain services to enable the movement of technology products, solutions, and after-sales service from the vendors of the product to the end users of these products; the products include PCs, servers, notebooks, printers, and PC components, networking products, software products and license, storage products, power solutions, and mobile devices. The solutions are based on the integration of multiple products and technologies from several manufacturers, with services in the form of installations and configuration or customisation to cater to the unique needs of the customers. The after-sales services include installation, warranty support, post warranty support, maintenance contract, reverse logistics activities, etc. Apart from distributors, other entities like resellers, solutions providers, system assemblers, system integrators, and retailers form part of the IT industry’s distribution channels.

Redington as Leading Integrated Supply Chain Solution Provider Redington is a distributor of IT products and a provider of logistics in India, the Middle East, and in Africa. It has also recently commenced distribution of mobile handsets and accessories in Nigeria and in limited territories in India. Apart from distribution, it also provides support services for IT hardware and mobile phones. However, since the company operates in domestic as well as international markets, it must address many country specific factors in order to provide better and satisfactory services to its customers.

Redington’s Strategic Move from Distributor to Service Provider When Redington started with distribution of IT products in India, the Indian market was faced with shortage of service centres as most of the multinational vendors did not have any service

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infrastructure to support products sold by them. Redington capitalised its experience in IT distribution and went for forward integration into the service area. It began with three service centres and has grown to 43 which include three franchisees and 40 partner centres. At the service centres, redington provides a host of services such as warranty support, post warranty support, parts sales, service sales, centralised tests and repair facility and forward and reverse part logistics. Customer relationship executives at these centres receive customer complaints at the front desk; trained engineers provide detailed analyses of the customer complaint, arrange for parts required for repairs and make sure each complaint is attended and adequately addressed. Online systems track a service complaint in real time from the moment it is received at the service centre till the customer concern is resolved and all processes prescribed by the vendors are completed.

Redington as Master Part Reseller and Distributor of Spare Parts Redington also acts as a master part reseller for HP and operates as a distributor of spare parts for IT products for various vendors. This business has several advantages as it offers only genuine parts sourced from the vendor, assuring the buyers genuine quality. The company is able to make the parts available in the shortest possible lead time due to its large network of offices and warehouses. The company uses customised forecasting techniques as the failure patterns are unpredictable. Redington’s second area of focus is the upgrades and service sales. In the business of upgradation, the requirements of parts can be safely predicted. That simplifies the management of inventories. The company sells packaged services, specialy tailored to suit the customers’ after-sales service requirements. Redington’s revenue models are both event based and annuity based. The event based model is as per the repair based model where the service provider is compensated by the vendor for every customer request for service during the warranty period. In the same way, any repair out of warranty is also event based. Redington earned 32.66 percent of its total revenue in the year 2006, from event based model. The annuity based model of after-sales service contributed 17.54 percent of its total revenues in the year 2006. This included service provided to the outsourcing requirements of vendors serviced by the company. Annual maintenance contract is another form of annuity service model where the customer enters into the maintenance contract with the company for extended period after the warranty period provided by the original vendor has expired. Redington earned 16.55 percent of its revenues for the year 2006 from annual maintenance contracts.

Redington’s Robust Parts Logistics Management System Forward logistics is the set of activities associated with the planning, implementation and control of reaching the part from the point of source to the point of consumption. Reverse logistics, similarly, is the set of activities to deliver the defective part from the point of consumption to the point of origin. Parts recovered from a service event have a value since they can be recovered and it is therefore important that the defective part is returned to the source or a designated repair centre to enable recovery and recycling.

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In the forward and reverse part logistics, a key requirement for successfully concluding a service event is the ability to forecast the part requirement and ensure that the part is available at the point of demand. To meet this requirement of the business at the service centers, Redington has set up 11 warehouses connected to a central hub at Chennai. This is in addition to the part stock held at each of the 43 service locations to cater to the immediate requirement. The company has thus implemented a robust parts logistics management system to provide online information of parts movement and facilitate forecasting. (Source: Corporate Communiqué; Redington India Limited, The Economic Times, Mumbai, January17, 2007, p. 8.)

Discussion Questions 1. C play a key role in providing supply chain services to enable the movement of technology products, solutions, and after-sales service from the international vendors of the product to the end users of these products. 2. What are the forward and reverse parts logistics? How has Redington been able to implement the system successfully? 3. From the above case, identify three core services models that Redington provides to customers.

References http://www.redingtonindia.com/history.asp http://www.dqindia.com/content/ http://www.blonnet.com/i http://www.channeltimes.com http://www.dqchannels.com

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PRODUCT PROMOTION ADVERTISING AND BUILDING BRANDS IN FOREIGN MARKETS

Learning Objectives After reading this chapter, you will understand: Various tools available for product promotion The importance of brand buildings in foreign markets How to gather international marketing intelligence

PRODUCT PROMOTION AND BUILDING BRANDS The opportunities and challenges before a multinational company today are manifold. Globalisation, the general trend towards free markets, has worked both ways. On the one hand, it has paved the way for innumerable opportunities and hold lots of promises. On the other, it has posed new challenges, forcing corporations to continuously adapt or die. One of the important challenges a multinational faces when it goes abroad is product promotion. We shall now see the different modes a company can use for product promotion. First, let us look at the various tools available for product promotion. They are: 1. 2. 3. 4. 5.

Sales Promotion Advertising (International) Events and Experiences Personal Selling and Direct Marketing Public Relations

Let us know look at each mode and see how a multinational responds to these challenges in a foreign market.

Sales Promotion Sales promotion refers to a variety of short-term incentives given to encourage trial or purchase of a product or a service. This is particularly important for any company that enters into a new foreign market for the first time. In order to gain visibility and win approval of the first purchasers, these initiatives are very essential. These initiatives may typically include coupons, contests, premiums and the like to draw a stronger and

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quicker buyer response. The noise that is associated with a product also decides the amount of promotion. In highly competing markets and countries, all foreign companies have to make their products heard and seen above others. In such cases, sales promotion comes handy. Promotion is being increasingly seen by the top management as an effective sales tool. This probably explains the fact that the advertisement-to-sales promotion ratio has fallen with greater emphasis on promotion. However, there could be a problem in letting advertising take too much of a backseat to promotions, because advertising typically builds brand loyalty, on a long-term basis. One more thing that a multinational needs to keep in mind is the perception that is created in the minds of the consumer with a sales promotion. Usually, when a brand is price promoted too often, the consumer begins to evaluate its credibility and worth. Again this is a perception that varies across countries and hence companies must keep in mind these things before they decide a sales promotion scheme in a particular country.

Advertising An important choice that any company has to make when it goes international is whether to go for standardised advertising or not.1 Standardised advertising has significant economic advantages. It lowers the cost of value creation by spreading the fixed costs of developing advertisements over many countries. The scarce creative talent also favours this argument. A good example of this is the Marlboro Man. The Marlboro man was part of a tobacco advertising campaign by Philip Morris from the 1960s to the 1990s for their Marlboro cigarette. The image involved a rugged cowboy or cowboys, in nature with only time was considered a feminine cigarette. This ad proved popular in almost every major market around the world, and it helped propel Marlboro to the top of the world market.

Prof. Justin Paul co-authored this chapter with Bhavya Kapoor, Namrata T. Poddar, Chakradhar Gade and R. Vimal Kumar. Kiran Haresh Bhatia, Manan Gupta, Nitin Kumar Dokania and Rahul Prasad have also helped.

1. Subhas C. Jain, International Marketing, 6th ed., South Western Thomson Learning, 2001.

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However, there are important cultural differences that may make a good message in one country fail miserably in another. Many companies unfortunately find this hard way once their products fail. Culture specific messages directed at a given country may be more effective than global messages. Further, the advertising regulations in a particular country may block the standardisation. Kellogg

Kellogg T-shirt had to be edited out of the advertisement picture before it could be used in France, because the French law forbids the use of children in product endorsements. The key line, “Kellogg’s of competitive claims.

An appropriate method that most multinationals follow today is that of capturing some benefits of global standardisation while recognising differences in countries’ cultural and legal environments. By doing so, it may be able to save costs, build international recognition, and yet customise its advertisements to different cultures.

Events and Experiences Events are company sponsored activities and programmes designed to create daily or special brand-related interactions. It can involve sponsoring major games, entertainment festivals, arts, and so on. In 1996, Coca-Cola was one of the major sponsors of the 1996 Cricket World Cup held in the Indian subcontinent. It was a part of Coca Cola’s international strategy to sponsor major international events, from the Olympics to the Football World Cup, starting from 1978. The sponsoring of the Cricket World Cup was not only a ‘soft-sell’ of the product, but also created a lasting image of Coke in the minds of the average consumer in the cricket crazy-nation–India. Pepsi, which watched this from the sidelines, sponsored the 1999 World Cup.

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Thus, it is learnt that the foreign companies make use of such events to declare their commitment to the host country’s market. Further, fans of a particular sport develop strong loyalties to the products endorsed by their stars. The local festivals and entertainment shows can also be used as a means for building ‘Brand Image’. In 2004, Thumbs-up was one of the sponsors for the ‘Mumbai Festival’. The festival was a grand celebration of Mumbai’s culture and its specialties. Although it was important to Mumbai, the event had very little mileage outside Mumbai which could be exploited. Still, Thumbs-up sponsored it. Thumbs-up had a very good market in Mumbai compared to other major cities. This was the reason the Coca-Cola

Personal Selling and Direct Marketing Growing competition increases both the need and means for closer ties with both customers and suppliers.2 Direct marketing focuses on building long-term alliances rather than treating each sale as a one-time event.3 The main decision a multinational has to make with respect to product promotion is the choice between a push and a pull strategy. A push strategy emphasises personal selling rather than mass media advertising in the promotional mix. Although very effective as a promotional tool, personal selling requires intensive use of a sales force and is relatively costly. A pull strategy depends more on mass media advertising to communicate the marketing message to the potential customers. In today’s dynamic environment, most companies are forced to use a combination of both push and pull strategies. Some of the factors that determine whether to go for a push or pull strategy are product type relative to consumer sophistication, channel length, and media availability. A pull strategy is generally favoured by firms in consumer goods industries that are trying to sell to a large segment of the market. For such firms, mass communication has cost advantages and direct selling is rarely 2. Cateora and Graham, International Marketing, McGraw-Hill Education, 12th ed., 2006, p. 502. 3. ibid.

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used. An exception to this rule can be found in poorer nations with low literacy levels, where direct selling may be the best way to reach the consumers. Hindustan Unilever’s strategy (subsidiary of Unilever in India) in this regard is worth a mention. India has a large rural population with 600,000 villages. Nearly 91% of these people live in villages with a population of less than 2000. Rural retail stores are very small and carry limited stock. Since low literacy levels and poor cable TV penetration makes television media ineffective, Hindustan Uni Lever tries to establish a physical presence wherever people frequently gather in numbers. HLL sales representatives will visit these gatherings, display their products, explain how they work, gives away some free samples. The backbone, however, is a rural distribution network that encompasses 100 factories, 7,500 distributors, and an estimated 3 million retail stores, many of which are very, very small. A depot in each of India’s states feeds products to major wholesalers, who then sell directly to thousands of small towns and villages. All the investment that went into this has been worth it. Today with increasing purchasing power, Hindustan Lever is in an advantageous position to sell the most to the rural consumers. Further, in the future HLL can think of using the same network for marketing all its other products as well, i.e., when it is ready to be bought by the rural consumer. [HLL has been renamed as Hindustan Uni Lever Ltd in India.]

A pull strategy relies on access to advertising media. In the United States, a large number of media makes it easy to target a focused group of consumers. The same is true of the Internet where different websites attract different kinds of users. However, not all nations can boast of such a system. In Scandinavia, for example, until recently, there were no private commercial television or radio stations that existed; all electronic media were state-owned and carried no commercials. Hence, a firm’s ability to use a pull strategy is limited by media availability. All tobacco and alcohol ads are banned on the Indian media. Until a few years back, the biggest player in the tobacco market, ITC, had used the sponsorship of major sporting events as a pull strategy for its products. However, with the Indian Government bringing a ban on that as well, ITC was forced to come up with innovative ways to make its product known to the masses. Since it was enjoying a near monopoly in the market, it did not face serious problems. The optimal mix between push and pull strategies depends on product type and consumer sophistication, channel length, and media sophistication. Push strategies tend to be emphasised:4

Pull strategies tend to be emphasised:

Public Relations Public Relations (PR) involves a variety of programmes designed to promote or protect a company’s image or its individual products. It is easy to see why PR management is very important to any multinational company. 4. Philip, Kotler, and Kevin Keller, Marketing Management, Pearson Education, 2005.

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Each country has its own set of complex challenges in the form of perceived image amongst people, lobbying power and defending products that have run into problems. The source and country of origin effects play an important role in deciding how much attention a company must pay towards Public Relations. Products from South Korea tended to be associated negatively with respect to quality by people in Europe and the US. Hence, when Hyundai, the South Korean automobile company, went to the United States, it tried to create a good image by using advertisements that favourably compared the company’s cars to more prestigious brands. (See the advertisement of Santro Xing car of Hyundai in India given below.)

Public Relations is sometimes very crucial when companies have to overcome some huge blows to their image caused by damaging revelations about the company or lawsuits. The case is best exemplified by Cadbury’s India. Mr. Bharat Puri left Asian Paints to join Cadbury as a Director (Sales & Marketing) almost a decade ago. It was a time when India’s traditionally strongest chocolate brand Cadbury had received a sound drubbing in the marketplace, because of Nestlé’s Kit-Kat. Getting the share back and building excitement was a tough challenge. The toughest problem was a highly publicised incident in which it was claimed

It did more than just that. It got its biggest celebrity endorser, Amitabh Bachchan, to visit its labs and test out the process entirely with the scientists. After this, it made a series of advertisements in which helped turn its product around.

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INTERNATIONAL MARKET INTELLIGENCE STUDIES As multinationals turn their attention towards global expansion at the speed of thought based on market size and increasing purchasing power, all companies have to look at expanding their footprint to sustain and grow amidst severe competitive pressures. So, the survival and growth strategy is to build and compete on a global scale, expand into new markets and gain a foothold in the underdeveloped or developing markets. In industries as diverse as automotive, banking or even in services, companies are charting ambitious global growth strategies. As more and more corporations are embarking on such initiatives, there are several challenges they face. International market intelligence report is a prerequisite for companies trying to promote their products and build brands in the foreign markets.

Europe The European market is a tough nut to crack. However, many foreign companies have made successful entry in Europe. The disadvantage of doing business in Europe is compounded by rigid cultural and regulatory environment. Further, the European Union (EU) is a high-cost and high-taxes market and has imposed the Distance Selling Directive, in the recent past. The main provisions of this directive are:

the contract, they must be refunded within 30 days all money paid. The directive does not apply to:

Historically, standards have been used to effectively limit market access.5 With the expansion of the European Union eastwards to include Estonia, Latvia, Lithuania, Rumania, etc, the availability of low-cost skills or India’s famous cost arbitrage will no longer be its Unique Selling Proposition (USP). European firms also tend to see off-shoring as losing control over the project. There is the general European inward looking culture that may hinder the efforts of Indian companies trying to get outsourcing deals from the EU. Moreover, outsourcing is an accepted norm in the US as a means for cost saving, whereas Europe, with its strong trade union culture, is more resistant to outsourcing as that could mean job losses. Several European countries apply highly restrictive employment legislation. In countries such as France and Germany, such legislation makes traditional outsourcing arrangements more difficult, and less financially advantageous. The best way to deal with these conservative attitudes is to invest in a European company and use that as a front-end to do business with local companies (Foreign Direct Investment in the form of Joint Venture).

5. Cateora and Graham (2006), International Marketing, 12th ed., McGraw-Hill Education, p. 283.

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starting operations from scratch. In a landmark development in Indian automobile industry, MG Rover Group in association with Tata Motors rolled out City Rover for the European market. This is also precisely what companies such as Dr. Reddy’s, Ranbaxy, etc. have done by acquiring companies in the UK, France and Belgium, respectively. Although the trend towards converging languages into a common language like English has gathered momentum in the world, the European market represents different countries with their own languages. The divergence between European countries is a big challenge for foreign companies trying to acquire clients outside of the UK. Indian software companies face lesser issues in tapping UK-based clients as English is the medium of communication. Most Europeans prefer to speak in their own languages, which can be quite uncomfortable for expatriate professionals. Within Europe, the language issue partly explains why the UK alone accounts for 60 percent of Indian IT exports to the region. However, the Indian IT companies are still looking towards Europe. Various factors are responsible for this. Europe accounts for around 30 percent of the global IT services market. Financial services and telecom are the main sectors that represent huge opportunities for Information Technology companies in Europe. Many recent developments in European markets and industry structure are responsible for this. For example, in Europe, stock exchanges are required to implement the International Securities Identification Number (ISIN), for all securities trading. This paves the way to the opportunity for software firms. Some of the areas which can be tapped by foreign companies are software solutions, telecom software, mobile and wireless applications, e-business and IT-enabled services. The list of beneficiaries in the IT sector include not only big companies like Infosys and Wipro but many other companies like Mastek, Polaris, Blue Star Infotech, etc. They have also grown by leaps and bounds in Europe. For example, Mastek had taken the London Traffic project where they provided the solution for traffic congestion in London. Another significant factor unique to Europe is their conservative style of doing business. The companies are very particular about spending on specific projects and are risk-averse, unlike the American way of conducting business that encourages the spirit of entrepreneurship and is more adventurous in risk-taking. As European customers prefer dealing with vendors whom they know very well, foreign companies, therefore, have to invest substantial efforts in building relationships with their European counterparts. Also, the time taken for processing work permits is three times more in most European countries like Germany and France compared to the United States. European business culture involves much more face-toface contact as compared to the US where a lot of business deals get done over electronic means or telephone.

The Middle East The Middle East market is lucrative for foreign companies. It has a sizeable Non-Resident Indian (NRI) population that is familiar with brands. With the availability of Indian newspapers and television channels, the spill over of domestic advertising was another influential factor. This was the main reason why Titan, after tasting success in the Indian market, set its first global footprint Due to its large expatriate population and the natural resources (huge oil reserves), Middle East is a huge market for many industries. Again taking the example of Indian Pharmaceutical companies (since it is the fastest expanding Indian industry globally), Middle East offers an attractive market for branded generics.

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While the traditional route to establishing business in Middle East is to operate through the local agents, the emerging trend is to strike a joint venture or strategic alliance with the local companies. The technological strength of the Foreign companies and the production, regulatory, market intelligence and distribution network of the local company can be unified for providing the much needed boost to establish business rapidly. This synergism serves as a win-win situation for both the aspiring overseas partner and the local company to penetrate into the market and garner market shares quickly. Except in the free trade zone and a few other thrust sectors, the UAE requires at least 51% local citizen ownership in all businesses operating in the country as part of its attempt to place its citizens in leadership positions. This poses a challenge for the foreign companies even if they enter into join ventures with UAE firms. Still due to lot of initiatives taken by Middle East governments, especially UAE, foreign companies have all the more reasons to venture into that market. For example, Dubai offers free hold property. The Dubai Technology Parks objective is aimed at attracting medical, pharmaceutical and research companies to the UAE, while the Dubai Healthcare City aims to make the UAE the Regional Healthcare Centre and create a niche for ‘medical tourism’. More than 200 factories operate at the Jebel Ali Complex in Dubai, which includes a deep-water port and a free trade zone for manufacturing and distribution in which all goods for re-export or trans-shipment enjoy a 100% duty exemption. Another example of a South Asian company that entered into UAE market is India’s Tata. They have launched its special blend of tea by the name of its acquired brand Tetley. As a member of the Gulf Cooperation Council (GCC)*, the UAE participates in the wide range of GCC activities that focus on economic issues. These include regular consultations and development of common policies covering trade, investment, banking and finance, transportation, telecommunications, and other technical areas, including protection of intellectual property rights. Retail, hospitality and processed foods are other booming sectors in the Middle East where foreign companies can enter. Tata group already has the presence of its hotels in the Middle East, with properties in Dubai, Oman and Yemen. Authority (APEDA), a government of India initiative, is currently eyeing the Middle East market. Currently, the Middle East accounts for 16% of the market for Indian processed foods. Many companies are trying to capitalise on the large population of Indian expatriates in the region and long-standing political and economic ties between India and the Middle East. Products range from honey to basmati rice including ready-to-eat Indian ethnic foods (The example, Idly Mix).

The USA The United States of America is often the country of choice for exporters and multinational firms. The world’s most developed economy has a huge appetite for foreign goods and services, as can be seen from its huge trade deficits. Since America’s total import payment exceeds total export receipts, they have been in deficit in the Balance of Trade account. American firms in their homeland were subjected to criticism in the recent past from their countrymen for off shoring jobs to developing countries like India. The American government, at the same time, cannot

*GCC is a regional economic grouping in the form of Free Trade Area between countries like UAE and Oman.

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restrain its own companies from outsourcing work to emerge as cost leaders on the global scene. Many companies in the US today have their top managers and sales teams in the United States, but design products and softwares in India, where engineers earn a third of their US counterparts. For example, the IT industry in India has been the main beneficiary in this wave of outsourcing in the US. Financial services and ITES have also joined the bandwagon. What is important to note is the insight that has emerged among the Indian entrepreneurs, that it is not important to set up a manufacturing facility or trade in physical goods to earn dollars. Today, outsourcing business can be done from different places in India, based on the factors like knowledge, skills, and low cost of labourer. However, it is not always possible to conduct business activities over such a long distance. Here are a few key points that have to be kept in mind by foreign businessmen doing business in the USA.

Economy America’s economy is the world’s largest and is a major driver of the global economy. After nine years of robust growth, America’s economic bubble burst in 2000, technology shares plunged and the economy was in recession before the devastating terrorist attacks of September 11, 2001. But the economy made a comeback and despite a rash of corporate scandals and fears of a recession, growth picked up in 2002 and continued in 2003, 2004 and 2005. But it is in a less healthy state than is popularly assumed. The high price of oil is fuelling inflation and the country’s sizeable current-account deficit is a cause for concern. Consumer spending has slowed down. There has been a continuing weakening of the US dollar, against many currencies in the world during 2005–07. In this market-oriented economy, private individuals and business firms make most of the decisions. US business firms enjoy considerably greater flexibility than their counterparts in Western Europe and Japan in decisions to expand plant capacity, to lay off surplus workers and to develop new products.

Political The US is the oldest continuous democracy in the world. It was established in 1789, although not all features of the system were as democratic as they are now. The US is a federal system. This means that power is especially relevant for businesses as they need to adhere to laws that could vary from state to state.

Legal A strong judicial system ensures equity of justice and the trials are mostly fast and fair. The legal environment is one of the toughest for businesses as any breach of law can have serious repercussions. In addition to this, the number of laws such as regulations relating to anti-trust, anti money laundering, corporate disclosures and environmental regulations are among the most stringent.

Social The United States is a melting pot of cultures from around the world. Even though the immigration laws are not lenient, the popularity of US as a destination ensures that a host of internationals come here as students, employees and immigrants. The society is highly individualistic and capitalistic. Doing business in the US could be quite different from the way it is done in many other countries like India, Japan, etc. Employees do

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not expect long-term jobs but good working conditions. They are often the costliest to maintain and are more tolerant of diversity at workplace. Although every individual company sets certain standards for business outfits, usually, as a general rule, most of the large multinational enterprises require a more formal dress. Being on time is a very important rule of business etiquette. Canada Canada is the world’s eighth largest economy and is the gateway to the world’s richest market, a market of 400 million consumers and a combined GDP of nearly US$10 trillion. Canada is also a very easy and open market in which to live and operate. It has a highly skilled workforce, a world-class infrastructure, an excellent health-care system and a low crime rate. Interestingly, Canada is a melting pot of culture and languages. Besides, Canada offers highly competitive business costs. On an average, Canada’s costs are 14.5% lower than the US, with a massive 33.1% advantage over the latter in the area of electronic systems development and testing. By industry, Canada ranks first in electronics assembly, biomedical R&D, content development and electronics systems testing. Hence, in comparison to the regional counterparts, costs in Canadian cities are generally 10–20 percent lower. In addition, Canada is attracting huge foreign direct investments in the area of biotechnology, advanced telecommunications and multimedia. There has been a rapid increase in foreign investment in Canada, mostly in the areas of software development and life sciences. India and Canada have signed bilateral agreement for cooperation and international trade in five priority sectors – agribusiness, energy (including oil and gas), transportation, IT and telecommunications and financial services, science and technology cooperation was the sixth. Given Canada’s evident worldclass expertise in several areas of S&T – environmental technologies and clean development mechanisms, quality control mechanisms, nano technology, and oil and gas exploration and extraction, a large number of bilateral cooperation options are opening up which might, over time, become very important to countries like India. India’s major exports to Canada include readymade garments, textiles, cotton yarn, carpets, floor spreads, gem and jewelry and precious stones, organic chemicals, coffee, spices, light engineering goods, iron and steel articles, footwear and leather products, rice, cereals, processed foods and marine products. All this has contributed to Canada being a very attractive place to do business. In fact, many companies have already started taking advantage of all that Canada has to offer. Recently there has been a rapid increase in FDI in Canada by foreign software companies with the intent to establish software development centers in Canada. Indian companies include Tata Consultancy Services, Wipro, Infosys and Satyam. Areas of Indian investment also include pharmaceuticals, metals, petro chemicals, auto ancillaries, financial services, etc. The State Bank of India has four branches in Canada and ICICI Bank has recently started operations. iGate Global Solutions Ltd. plans to expand aggressively in Canada. The company, which has emerged as one of the fastest growing offshore IT vendors in Canada, has doubled its head count (of its global strength of over 4,200) in the Canadian market. Another example is VSNL’s acquisition in Canada. The Tata group controlled VSNL has acquired $240-million Teleglobe in Montreal. With this transaction, VSNL plans to make Montreal the centre of excellence for their communication network in North America. Dr Reddy’s Laboratories also entered a multi-product agreement for the development and marketing of generic products in Canada with Pharmascience Group. All in all, the future of foreign investment in Canada promises to yield high dividends and contribute to the growth of companies worldwide.

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Point to Remember Sales Promotion: It refers to a variety of short-term incentives given to encourage trial or purchase of a product or service. Events: These are company sponsored activities and programmes designed to create daily or special brand-related interactions. Public Relations: It involves a variety of programmes designed to promote or protect a company’s image or its individual products. Push and pull strategy: A push strategy emphasises personal selling while a pull strategy depends more on mass media advertising to communicate the marketing message to the potential customers.

Objective Type Questions 1. __________ refers to a variety of short-term incentive given to encourage trial or purchase of a product or service. 2. __________ are company sponsored activities and programmes designed to create daily or special brand-related interactions. 3. A __________ emphasises personal selling. 4. A pull strategy depends more on ______ 5. __________ is a prerequisite for companies trying to promote their products in foreign markets.

Review Questions 1. Discuss the various tools available for product promotion. 2. Distinguish between push and pull strategy. 3. How does international market intelligence report help companies to promote their products and build brands in foreign markets?

Suggested Readings Charles W. L. Hill, International Business, 7th ed., McGraw-Hill, 2008. Justin Paul, Business Environment, McGraw-Hill, 2008. Justin Paul, International Business, 3rd ed., Prentice-Hall, 2006. Philip Kotler, Marketing Management, 12th ed., Pearson Education, 2006.

Useful Weblinks

Product Promotion Advertising and Building Brands in Foreign Markets

www.economist.com www.globaledge.msu.edu

Project Assignment international marketing managers engage in such projects in developing countries.

Case SALOMON Promoting Brand in Foreign Markets1 (Salomon—French Firm) Salomon SA is a French firm, specialised in mountain sports and leisure articles. It was created in 1947, in Annecy, in the heart of the French Alps. The brand is particularly reputed for its quality, its innovative designs on ski equipment and for its revolutionary concepts in bindings, boots, skis, snowboards. Its commitment is the following: the world’s leading mountain people creating the world’s leading mountain product. Today, the Salomon products are sold in over 160 countries. The company now belongs to the group Amer Sports, which owns Atomic, Wilson, Suunto and Precor too. In 1969, the first subsidiaries of Salomon were established in Switzerland and in Austria, and then Salomon had set up two other subsidiaries in Germany and in Italy during the next two years. In the 70s, Salomon implemented its subsidiary in Japan. It should be mentioned that Salomon was the first French company which got listed in Japanese stock market. Furthermore, this subsidiary in Japan became the most profitable of the group by 1983. However, Salomon had financial difficulties during the 1990s; it was acquired by the group Adidas in 1997. In 2005, Salomon was acquired by the Finland group Amer Sports. Mr Jene-Rene Belliard, the chief of the Japanese subsidiary of Salomon, began his carrier in the firm with the responsibility of the relationships with the sole agents. Then he was in charge of setting up some subsidiaries of the company, for example in Sweden, Norway, Japan, and finally he ran the last one. He speaks no less than twelve languages. So, he is well accustomed with the international marketing strategy of this brand. Belliard has been working as a consultant, after having had a long experience in eastern countries. In fact, he has spent a long time in Lebanon at the time when the country was in war. His several experiences there led to a couple of interesting novels such as “Beyrouth, the 1. This case has been prepared by T. Zhao and Dr. Justin Paul, University of Washington, USA.

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spies’ hell. Furthermore, the business man is also a great sportive person as he practices a huge number of sports like climbing, skiing, and golf among others. In order to have an overview of the countries which are first targeted by Salomon, the authors of this case asked him what the main markets for Salomon are. The company is present in France, United States, Japan, Germany, Austria, Switzerland, Italy, Spain, United Kingdom, Norway, Finland, Sweden, South Korea, and Australia. The authors decided then to try to better understand the brand identity of Salomon, and to have an outline of their international marketing strategy. Thus, we asked what the image of the brand in France was, and whether it was the same abroad. As a matter of fact, the brand image is not adapted to the countries where the products are sold. It is the same in France as well as abroad. Salomon has indeed a worldwide image of quality and innovation. The company does not have a narrow target. It addresses to everyone interested in ski and snowboard and who looks for high value products. So, its target is very large: from beginners to experts. As a consequence, it has an undifferentiated communication strategy. The communication is carried out at a worldwide level, and is the same everywhere: as for its website, the only thing that changes according to the country is the language. How did the company select where they wanted to build their brand? Which criteria did they use? According to Belliard, the countries were cast according to the market size and potential. When the firm decided to export, they chose Switzerland as the first country to get into. Indeed, as the Alps are everywhere in there, people had been used to practice winter sports for a long time and infrastructures for these sports were developed a lot. In addition to that, it was very close from Annecy, so it reduced transport costs, and there were no language issues. It was the easiest market to capture and it had a strong potential because of the winter sport culture there. It was more challenging in some other countries, but every time Salomon wanted to get into a market, it was because they estimated the market potential, and so they knew that their investments and efforts were worth it. Even if, generally speaking, their marketing strategy is supposed to be the same everywhere, as we had just told above, we assumed that some elements must have been adapted to the culture. So we asked a few questions to discover which elements were modified. We wondered what Salomon did to adapt the advertisement to the culture, as the ways of living are different around the world. Mr Belliard told us again that the advertisement was never adapted to the culture of the different countries. As we insisted, he explained to us that in the sport field, the image is almost always worldwide. For instance, Nike and Adidas have the same image everywhere. Consequently, Salomon keeps the same logo for each country. Salomon did not have any motto, in order to have a more universal approach. The message is carried only by the image and logo of the brand. Designing a motto available everywhere in the world must be a complicated matter. Indeed, it has to be in English so as to be understood by most of the people. But the problem is that some countries do not use the same alphabet, and a same sentence may not be interpreted exactly in the same way, depending on the culture. And so, finding a sentence which does not have any negative connotation anywhere in the world is difficult. Salomon simplified the problem and avoided any risk by not using any motto. They can operate without a motto as the brand can rely on the quality of its products, and as they do not have a mass production. If it had been convenience products with a lot of substitutes and competitors, they could not have afforded that.

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Then, we asked if the same names for the products and also for the company were kept worldwide. Surprisingly, there is no translation of the name of the brand, even for the countries where they do not use the same alphabet. It is possible as the word “Salomon” has no negative connotation, for any country. The brand identity is indeed built on these elements, so it is necessary for worldwide brand recognition. For what regards the names of the products, the solution found was to choose names to be used all over the world, so there is no translation as the names are universal, to avoid cultural connotations. Advertisement for Salomon is homogenous everywhere in the world. As to better understand that, we asked Mr Belliard to explain to us what instructions he receives (from headquarters) for the advertisement in Japan. In fact, the communication campaign is decided in the headquarters in Annecy. The local agency has to adapt themselves to this campaign. More precisely, the advertisement is made by international agencies which are kept by Salomon for 4 or 5 years. Mr Belliard explained that the aim of these regular changes in advertisements agencies is to keep creativity. Indeed, if always the same people made the ads, they would get less and less innovative. And yet, Salomon added value in comparison to its competitors is its innovative spirit. So we have to feel it in their advertising campaigns. Consequently, Salomon chooses the communication criteria and gives its wishes, the agency chooses the media and ways of communication according to a media plan (in depends on the products and the targeted clients). Thus, the promotion and advertisement do not change according to the country. A fundamental question came. Are the products adapted to the country or not? As a matter of fact, the strategy of Salomon changed over time. Indeed, Salomon used to adapt their products depending on the population of each country. This was quite complicated. For instance, Japanese people were generally short, so the products were made according to that difference. Since 2000, it was the Japanese team which designs the international range. We thought about that and it appears to us that the change of strategy of the company must be closely related with globalisation and the development of the Internet. People are getting used to order abroad, on the Internet, the products that are not available in their country. In addition to that, there is a standardisation of the demand, especially for sports articles, at the international level. So, there is no use in spending a lot to create and produce differentiated goods in function of the country, if people prefer to buy on the Internet in order to have the same products as abroad. These considerations made us wonder about the location of the production. Actually, there is no link between the company presence in a country and the production. For instance, the skis are made in Ukraine. For the other products, fabrication is more and more done in China, but the assembling is partly done in Japan. To sum up, now the same products are sold all over the world: they are designed in Japan and in France, and their fabrication takes place in a few countries like Ukraine and China, while the assembling is in Japan. Given that, we asked whether the price for the products Salomon was different from one country to another. The price decision is tricky for Salomon in particular for the implementation in Japan. Indeed there are some paradoxes in people’s behaviour towards prices. The culture is an important factor in pricing. The pricing depends on the brand recognition, and on the links that people make between price and quality. So, Salomon made some mistakes, for example, when they settled in Japan. In this country, products are generally more expensive than in Europe, and Japanese people tend to associate low price with low quality. When they got into the Japanese

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market, they put the same prices as in Europe. As the Yen increased a lot at this time, it made the price even lower. Japanese people, who were not accustomed to this brand and so who did not know that it was quality products, associated the low price with a low quality and did not buy the products. Salomon had to increase significantly its prices to capture the customers. But except for Japan, the company cannot afford to have very different prices between the countries. Indeed if there is a big price difference, the clients will import the Salomon products directly from the “cheaper country”, which is called the “Grey Market”. We assume that this is all the more true since the international transportation costs and tariff barriers decreased a lot, and that the Internet is expanding. Consequently, the general policy of Salomon is to adapt to the competitors in the country, while making efforts to keep the prices quite homogeneous worldwide. Let us now focus on Salomon’s distribution policy. Salomon used to get into the countries thanks to sole agents, but the company quickly noticed how interesting it would be to set up its own distribution subsidiaries in the countries where people ski a lot. Its network of subsidiaries is relevant as it enables Salomon to keep a direct contact with customers. Salomon has a tight control. It decides on the communication, the margins, the discount etc., that is to say, all the commercial policy. Very few competitors have such an organisation and so they are dependant from sole agents. So, Salomon has here a real competitive advantage. In addition to that, it is hard for competitors to imitate them, as it takes a long time to set up so many subsidiaries. Salomon also uses the online channel, that is to say, the internet, so as to have a 100% margin on the products sold in this way. To better understand what a challenge opening a subsidiary can be, we asked Mr Belliard how long it takes to go from the idea to the opening of a new subsidiary. He said it takes two years, in general, to go from the idea to the actual opening. When you get into a market, there may be authorisation problems (as for the opening of a subsidiary, than for the use of sole agents). An important issue is how to choose a person responsible for the subsidiary. Should it be an expatriate? A native? Salomon sticks to the same policy for some years: they choose an expatriate the responsible person of each subsidiary in foreign countries. They prefer to act in this way, in order to keep a harmony inside the company. That is why it was possible for Mr Belliard to become the head of the Japanese subsidiary. To sum up, Salomon has a lot of subsidiaries around the world, and gives them instructions, so as to keep homogeneous marketing and commercial policies worldwide. But each subsidiary has a breathing space, in the allocation of the budgets. Indeed, each subsidiary pays for its communication and advertisement budget. For example, the subsidiary of Japan allocates 10 to 15% of its sales to this budget. (This budget is way less important in the European countries.) They can also choose how the communication and advertisement budget will be allocated (in Japan: 30% for media, 30% for promotion, 30% for events, 10% for public relation) provided they follow the international campaign. To conclude, the international marketing strategy of Salomon seems to have been quite successful up to now. The company is still alive despite its difficulties in the 90s and the strong international competition. It managed to adapt its strategy over time. Today its products are sold over 160 countries. The standardisation of the ski material it sells and the homogeneity of its strategy

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worldwide have been possible because Salomon works in the sport field, especially in the winter sport field. The needs are the same worldwide and the ski habits do not change a lot across countries. In addition to that, there is an important imitation effect in this field, which is stronger than chauvinism: customers do not look for local products; they look for the best products of the world, used by the better skiers of the world. They will not hesitate to look for information abroad and even to buy abroad. So, it is valuable for Salomon to have the same products, prices and advertising policies all around the world. Consequently, Salomon’s strategy is adapted to its field of activity.

Discussion Question 1. How did Salomon promote the brand in foreign markets?

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PERSONAL SELLING AND MULTINATIONAL SALES MANAGEMENT

Learning Objectives After reading this chapter, you will understand: The process of personal selling in international marketing The differences between home country salesman and an expatriate salesman The issues related to culture adjustments in international personal selling The functioning of multinational sales management How to overcome challenges to international sales assignments

INTRODUCTION The process of personal selling has often been associated with the push factor of promoting products to end customers. It is believed that marketing communication or the process of promotion through means other than personal selling, help create a pull factor that makes a customer aware of the existence of the marketing firm’s products. Such a communication brings the customer closer to the products offered by the marketing firm. The awareness so created generates some level of demand for the product and once the customer has been attracted by the pull factor, the last push is achieved by the personal selling efforts of the sales personnel involved in the act of marketing. In fact, the act of personal selling is a part of comprehensive marketing communication plan that a firm, whether domestic or international, adopts to convey to the intended markets messages about the product, services offered in order to make them buy this product or service. In recent, times, with each marketing firm taking to a sea of media channels for communicating with their customer and market, the role of personal selling has become very significant in educating the customer on the distinctive features and benefits of the product from one firm to another firm. While the official promotional material conveys a lot about the firm and its product, it certainly lacks the human touch of explanation, demonstration, persuasion and assurance that a visit from the salesman of the organisation can provide. Many firms have to pay dearly for not giving due importance to the personal selling aspect of promoting their product in the international market, as merely publicity brouchers or advertisements directed to faceless customers fail to generate enough orders for the product. In 1993, General Electric, a multinational giant, learnt this by not getting a contract of $ 700 billions from a Malaysian developer of power generation turbines, when it failed

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to send its representative to a personal meeting called by the customer. General Electric, along with Siemens A.G., was amongst the bidders for the supply of power turbines to YTL Corp, a Malaysian company. The managing director of YTL Corp. requested to see a senior company representative from both the companies. Siemens A.G. had sent its representative while the General Electric failed to do so. Needless to mention, Siemens A.G, was awarded the contract.1 In this chapter, we address issues related to managing personal selling of a product by an international marketing firm. We will also discuss management of issues related to expatriate employees and organisation of sales management by international marketing firms. Salesmanship has been defined as “the art and science of helping people identify their needs, create desire to fulfil these needs, find and match the products, services with these needs and desires, with the sole aim to obtain a minimum level of satisfaction. It also involves fixing up the value of these needs and match these value levels to the common denominators.”2 Personal selling as such means the meeting of the customer on one to one level with the sales personnel of the firm, in order to understand the needs of the former, evaluate those needs and equate those needs to the product offered by the marketing firm, and sell the product to the customer. Personal selling establishes a two-way communication with the customer; it establishes a link with the customer for the reasons given above and it also establishes a link with the marketing firm to keep the firm aware of the desires and needs of the customer. To achieve this kind of relationship between the firm and its customer, a sales person has to be deft not only in the art of selling but also be an adept communicator to ensure the relationship endures for longer periods. While it becomes easy in the home country to understand the customer and his needs, it is quite challenging at the international level, as the customer and the marketing firm may belong to different countries and come from different cultural backgrounds. The international marketing firm tries to bridge this gap by either training home personnel in the target country’s language, culture and other nuances or the sales personnel belonging to the target country may be employed. We will try to understand how international marketing firms try to bridge the cultural divide by training the field sales personnel to have an effective communication network with the international customers later in this chapter. It is, however, important to briefly understand the objectives of personal selling and the process of personal selling.

OBJECTIVES OF PERSONAL SELLING Some of the objectives of personal selling have been defined by William J. Stanton when he observes, “The goal of all marketing efforts is to increase profitable sales by offering want satisfaction to the market over the long run. Personal selling is by far the major promotional method or tool to reach this goal. More than ever sales people today are the dynamic power in the business world.”3 As per this statement of Stanton, personal selling is directed at ensuring long-term generation of orders and profitable sales for the firm, and, at the same time, the act of personal selling offers want satisfaction to the market (customer) for a long time to come. In other words, it ensures continuation of business and demand for the product offered by the international marketing firm. But the objective of personal selling goes 1. Marcus W. Brauchli, “Looking East: Asia on the Ascent, It is Learning to Say No to Arrogant West”, The Wall Street Journal, 13th April, pp. A1:A8. 2. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd., pp. 106–107. 3. William J. Stanton, Op. Cit, pp.440.

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much beyond merely perpetuating demand. While generation of the demand is the major task of personal selling, it also, in addition, performs the following functions for an international firm: 1. It provides an opportunity to the international marketing firm to come face-to-face with the international customer for a direct dialogue. 2. It provides an opportunity to identify and understand the international customer and his needs, his aspirations, his expectations, desires from the product manufactured by the international marketing firm. 3. It provides an opportunity to the international marketing firm to help customer identify his need and provide him information on the availability of the products that can help him fulfil that need. 4. It acts as a surveillance and marketing intelligence tool to get information on competition, market dynamics, product feedback, marketing efforts’ effectiveness and the changing trends of the industry. 5. It is a great tool to provide pre-and after-sales service facilities to the international customer and delight him by removing his grievance, if any. 6. It is the most cost-effective method to reach each customer as compared to other tools of sales promotion. 7. It provides an opportunity to the firm to demonstrate the product, explain features of the product, remove any lurking doubts in the mind of the customer about the product, by providing answers to any query, objection or doubt raised by the customer. 8. It acts as a supplement to other promotional tools employed by the international marketing firm, e.g., advertising, store display, direct mailers, international product exhibition and many others to get the attention of the customer. 9. It actually culminates into the final action of a purchase by the customer and establishes a customer – seller relationship between the (seller) firm and the buyer (customer).

PROCESS OF PERSONAL SELLING The process of personal selling is an exercise involving many steps before the salesperson is finally able to make a sale to the client, whether international or domestic. These steps can be identified as prospecting, preapproach, approach, presentation and demonstration, handling objections and oppositions, closing the sales call profitably and eventually following up after the customer’s order has been processed. The actual necessity and importance of each step may vary from country to country or from region to region. We will have a brief look at the steps involved in the selling process.

Identify the Prospects The sales person at this stage will have to identify the potential purchasers of the product. He will assess their probability and propensity to purchase the product offered by his marketing firm. This will mean conducting a market research of a mini scale on the potential customers. For example, if a manufacturer of air conditioning plant wants to sell his plants in the countries of the Middle East, the salesperson representing the manufacturer in the Middle East will have to find out which kind of buildings and industrial projects under construction will be requiring air conditioning plants in the near future. He may also have to find out if some of the old existing plants need to modernise their air conditioning plants and whether his firm can meet their needs. Thus, he will have to identify the prospects for his product in the target country through an extensive market survey.

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Preapproach This calls for gathering information on the prospect, his problems, and then prepare a business plan and presentation for the customer in such a fashion that the products of the salesperson will appear tailor-made to fulfil the customer’s need. The salesperson here will collect all relevant information about the customer he wants to call on so that a strategy can be prepared by him to make a sales call. This is the stage where the cultural norms, cultural peculiarity and cultural likes and dislikes will have to be studied by an international salesperson, in order to ensure he does not make any mistakes during his actual sales call.

Approach This refers to the stage when the salesperson actually comes face-to-face with the prospect to explain about his marketing firm and its products. “In order to get a favourable response from the customer, the salesman has to make sure: (1) the approach is made at the right time, (2) it creates a conducive atmosphere, (3) the prospect receives him in the receptive mind and (4) it helps him close the sales eventually.”4 It is important here at this stage that the salesperson makes use of the cultural protocol and norms that he has learnt about the prospect during the prospecting and preapproach stages.

Presentation During the presentation stage, the salesperson will have to demonstrate the product and present the story plan to the prospective customer. The prospect at this stage can have many doubts, objections regarding the product, its usage, its capacity to meet his need, the marketing firm or even the price of the product. The salesman will have to explain the advantages of his product to the customer. He, through the gentle touch of assurance and confidence building, will have to steer the customer towards the eventual close of the sales call. The objections will have to be handled carefully, particularly in a cross-cultural atmosphere where the language, the gestures, the small courtesies, the verbal and non-verbal use of language could be very challenging for both the parties. In many cultures, the presentation may not be complete in one meeting with the customer and may get extended over many such series of interviews till the prospect completely gets familiar with the salesman and his company on a personal level.

Closing the Sales Call This refers to the eventual booking of the order from the prospect and finalising the sales deal. Once all the objections have been overcome by the salesman and he has won the confidence of the prospect, he can complete his mission of selling the product to the prospect and convert him from the status of prospect to that of the buyer and the user of his product. “Closing the sales call means the salesman has been able to obtain the prospects’ agreement to all that he has presented and proposed and that the buyer has agreed to pay the price for the service or product offered by the salesman on the conditions suggested by the salesman. This spells success for all efforts the salesman has put in to look for the customer, studying and identifying his need, presenting a sales story that could relate the product to the need, making effort to organise demonstration at the place convenient to the customer, satisfying his objections and finally motivating him to buy.”5

4. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd., pp. 275–276. 5. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd., pp. 313–314.

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Post-sales-service The salesman’s relationship does not end with the booking of the order alone; he has to ensure the customer feels satisfied with the purchase decision he has taken, and there is no dissonance created on any account in the mind of the customer. The salesman will do well to get into many post sales activities, e.g., calling on the customer to extend thanks for having patronised his marketing firm and ensuring the product so sold yields the necessary value satisfaction to the customer. He will have to assure the customer on post sales services of the firm to maintain a life long relationship. “The customer will be retained and the consistency in repeat purchase will be maintained only if the value yielded by the product exceeds the perceived and projected value of the prospect.”6

MULTINATIONAL SALES MANAGEMENT A multinational sales or marketing firm will have presence in many countries of the world. In some of the countries, it will have its own team handling the sales job directly, yet in many others, it may seek an alliance with its partners, franchisees and outsourced outlets to handle the personal selling job for its product. An international marketing firm’s commitment to the market, the extent of involvement and the orientation it has towards its international operations will be the deciding factors in determining the (1) the type of sales personnel and (2) the size of sales team the firm should hire. A domestic firm primarily engaged in selling in the domestic market with little leanings towards exports will not be organising any kind of personal selling activities abroad. Such a company will simply leave the task of selling its product abroad to the exporter middleman or to the person/firm importing its product. The same way, if foreign-based middlemen and intermediaries are engaged by the exporter to promote its products, it may delegate the main task of personal selling to these intermediaries. Such a firm will have a bare minimum of its own sales staff situated abroad to lend a helping hand to the middlemen engaged abroad. However, if the international marketing firm has an orientation that spells into regeocentric or geocentric, and has a substantial presence in many countries of the world, it will have to take major decision of recruiting a sales team. The members of the team could belong to the home country. These members could be the expatriates from the home country sent abroad on a sales assignment or the firm can engage third country international expatriates depending on its local needs. The third alternative for the multinational firm is to hire sales staff belonging to the host country of operations. We will have a detailed discussion on the possibilities of each hiring process adopted by the firm.

Hiring Expatriates for Personal Selling Operations Abroad The multinational sales management could involve hiring sales personnel abroad who do not belong to the country of operations. Such sales personnel are called the expatriates.

Hiring Home Country Nationals Abroad International marketing firms marketing high technology oriented products and services prefer deputing technical sales staff from the parent company on sales assignment abroad. Software solutions marketing companies like Infosys, Wipro, Satyam and a host of other companies who are involved in high tech business 6. Ibid.

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processing solutions send home country nationals on foreign posting to handle the customer relationship and sales abroad. “In situations in which greater interdependence exists between an overseas unit and corporate headquarters, firms are more likely to dispatch home country nationals. This is also true for situations in which complex operations are involved, there is a greater political risk and there is greater level of competition.”7

Challenges to Hiring Home Country Nationals Abroad 1. Hiring home country nationals abroad involves double the expense. The firm will have to maintain the salary and allowances already being paid for the home country assignment in addition to bear the expense of settling down the employee abroad with additional salary benefits and other perks, e.g., children’s educational expense, household hard and soft furnishings, hiring household help, and fully paid vacation trips. 2. It poses major challenge on account of cultural barriers to the expatriate employees. Hence, the firm will have to spend on educating and training its employee so selected, in their cultural orientations towards the country of posting. 3. Maintaining liaison with the political sources, government departments, and other non–governmental agencies can also pose a major challenge. 4. Maintaining status quo and resettling these employees after their repatriation from abroad is another challenge the international firms will have to handle. There have been numerous cases of home country nationals being posted abroad as expatriates. When Maruti started its operations in collaboration with Suzuki Corporation of Japan, Suzuki had sent a hoard of its employees to begin operations. Similarly, Bridgestone, the tyre multinational company’s operations in India are headed by a Japanese managing director and the marketing and sales department is also headed by another Japanese expatriate director.

Hiring Third Country Nationals Abroad International marketing firms can hire third country nationals working in the same region. They may be hired from a country of their current posting and be sent on a posting to the country of operations by the international marketing firm. Such employees are the professional expatriates who have moved out of their own country to settle down in sales career abroad. These professionals can get acclimatised to different cultures easily as they would have had some posting or assignment in the country targeted for marketing and sales assignment. International marketing firms operating in the Middle East have been hiring Indians, Malays, Pakistanis and Phillipino. Similarly, in Singapore too, many third country professionals from Asian countries have been hired by international firms.

Hiring Host Country Nationals Many international companies prefer employing local nationals from the country of operations in order to maintain the culture positioning at the day-to-day operational levels within the company and also with the customers of the host country. Pepsi, Coca Cola, Hyundai, Samsung, Bridgestone, Goodyear International, Hindustan Levers, Proctor & Gamble and many other international companies have hired sales personnel from India who have internationally acceptable levels of education. However, many times, international companies prefer keeping the key positions reserved for nationals of their own country and only second or 7. Nakiye Boyacigiller, “The Role of Expatriates in the Management of Interdependence, Complexity and Risk in Multinational Corporation”, Journal of International Business Studies, Third Qr. 1991, vol. 22, No. 3, pp. 357–381

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third level positions are offered to the locals from the host country. The expatriates’ managers under such conditions try to utilise the experiences of locals in dealing with many arms of government and other market customers. The expatriates may not come in direct touch with the outside customers till they are acclimatised to the local culture, language, and so on.

MANAGING INTERNATIONAL SALES PERSONNEL International marketing firms cannot afford to have simply home country nationals or only host country citizens as their employees who handle the task of personal selling in different countries. In fact, internally the firm will have to employ many kinds of nationals with different cultures and personalities. The attitude of these employees towards their jobs, their customers and even towards their employers is governed and influenced, to a large extent, by the cultural exposures they would have had in their own countries. In such a situation, the multinational company will find it difficult to assign territories, establish quotas and define follow-up systems. Imagine if a sales person from the low context culture (where more emphasis is placed on the written communication) is asked to report to the sales manager who belongs to the high context culture (in high context culture, less emphasis is placed on the verbal and written communication). Personnel from high context will utilise cues, gestures and facial expression to convey the messages. Unless both the persons interacting are fully trained into each others’ culture and understand each other fully well, they will end up miscommunicating many messages in their daily working. Similarly, while dealing with their respective customers too, culture context plays an important role as we have seen in chapter on “Cultural Factors and Environment”. We discuss below the steps undertaken by the international marketing firms to establish a healthy and pleasant working environment in all its units.

Recruiting Expatriates with the Right Mindset It is not possible for every one to work outside their country of origin, as the work conditions, the work culture will not be the same as the one he is used to in his own country. International marketing firms will have to ensure they assign foreign posting to individuals who have the right mindset to work abroad. We give here some of the personality traits, in addition to the suitable technical and professional skills, companies should look for in individuals selected for an international sales assignment. 1. Openness and Sensitivity: The individuals so selected must have a high level of openness and sensitivity to others. They must be aware of their own cultural values, and be able to relate across other cultures. Cultural sensitivity and awareness should be the foremost consideration.8 2. Adaptability and Resiliency: The individuals so selected must be in a position to get acclimatised and adapted to the other culture at the earliest. In fact, the sooner they are able to do it, the better it is for the international marketing firm and its market abroad. High level of resiliency will ensure the acceptance of others point of views too.9 3. Willingness to Work Abroad: It is obvious that only a salesperson who has the desire to work overseas should be selected.10 Any kind of reluctance will become an obstacle in learning about other cultures and the person so selected will look forward for the first opportunity to get repatriated. 8. David M. Noer, Multinational People Management, Bureau of National Affairs, 1975. 9. Ibid. 10. Rasmusson, Can Your Reps., p. 110.

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Organising Training and Culture Orientation Workshops for International Assignments International marketing firms arrange various kinds of workshops and training sessions to get their employees familiarised with the cross culture communication, in order to reduce the culture shock of its employees and their families. These courses could be orientations into the behavioural aspects, in official communication, into the social dos and don’ts. Many companies also arrange for lessons on culture, customs and language of the country. Such teaching and training sessions are organised for the spouse and children too so that the culture shock of being exposed to unfamiliar world is reduced to the minimum.

Overcoming Challenges to International Sales Assignments Multiple opportunities are available to the highly skilled sales professionals within their own countries due to globalisation and internationalisation. The trends are reversal of brains returning to their home countries and get the maximum benefit from the developing and emerging economy. It definitely presents a challenge to the international marketing firms to motivate people to move out and work abroad. The firms adopt a few of the following steps to make international assignments attractive enough for the expatriates:

Motivation of Expatriates The firms employing the multicultural and multiple country nationals adopt various methods and incentives to keep their field sales personnel highly motivated. It is quite difficult for a firm to point out one single factor that could act as the best motivating factor for an employee to leave the security of the home country and move abroad. The firm will try a combination of cash compensations, early advancement in career, a chance to get exposed to global management systems, etc. to motivate the sales staff to opt for an opening abroad. Motivation, otherwise, proves very complicated to handle as the firm here is dealing with different cultures, different sources and different philosophies.11 International sales managers, while dealing with the subject of motivation, will have to keep in mind the cultural differences of various nationalities employed by the firm. While money could be the motivation for an expatriate from a developing country to lure him to the idea of a great life abroad, it could certainly not act in the same fashion for an individual from a highly industrialised country, where the wage levels will already be very high. The attitude towards money could differ from culture to culture. A European will like to have a large part as fixed pay or compensation and leave little for the performance incentive. An American could, however, believe in his personal freedom to make more money from the performance-linked bonus and incentives. Similarly, while designing other motivational packages, the firm will have to be aware of the cultural attitude towards the group mentality or individuality. A Japanese salesperson will always be keen to have a leaning towards the group activities and a sense of belonging to the peer group is more important for him than any other reward. The firm for such an attitude will do well to design motivation scheme for the entire peer group. Responsibility towards family, getting information on family, ability to communicate with the family on frequent intervals, arrangements for the education of children in the best schools/higher education institutes 11. James P. Neelankanvil, Anil Mathur and Yong Zang, “Determinants of Managerial Performance: A Cross Cultural Comparison of the Perceptions of the Middle Level Managers in Four Countries”, The Journal of International Business Studies, 200, vol. 31, pp. 121–140.

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etc. are some of the other motivational tools the international firms adopt, to keep its international sales personnel away from home sickness and depressions of being away from the near and dear ones.

Designing Compensation Systems for Expatriate/International Sales Force Companies adopt numerous compensation methods to keep the international sales force highly charged and motivated. It is expected by the sales persons who are moved out of the country, that the inconvenience of shifting base to the foreign location will be adequately compensated by the firm. The total pay package offered for a foreign assignment will cover (in addition to the salary paid at home posting) the following incentives: Cost Of Living Adjustment Allowances/City Compensatory Allowances Companies will often refer to the cost of expense index while deciding on this kind of allowance or incentive for the international staff. Cities like New York, London, Mumbai, Beijing, Seoul and Tokyo could prove very expensive for any executive. The companies offer additional allowances to cover for the expenses incurred on household help and other servants hired, e.g., driver, gardener and night watchman. Table 15.1 presents the list of top 20 most expensive cities of the world, issued by Mercer Consulting for the year 2006. The survey has especially been conducted for the expatriate employees. Various factors enter into a city’s cost of living for expatriate employees, e.g., monetary value, consumer confidence, investment, interest rates, exchange rates of the country’s currency and housing costs.12 House Rent/Housing Allowance International postings will include company leased accommodation, in case it is negotiated, otherwise the company will pay back the full or part of the expense incurred on housing by the expatriate. The hotel and boarding expense till such time as the expatriate finds the suitable accommodation are borne by the firm. While the senior management staff is offered fully paid family accommodation, such facility may not be provided to a junior expatriate personnel, who may be offered only a bachelor accommodation. Children Education/Hostel Expense This is another incentive that the firms have often used, as the career of offspring definitely interests parents belonging to all kinds of cultures. Many American and European multinational firms pay for the education of the children of their expatriate employees in the best possible schools and bear the expense of their hostels too. In order to retain the talented sales personnel for longer periods abroad, the firms go to the extent of arranging for higher education abroad too for their employees’ wards. Leave Travel Assistance- Paid Home Trips The expatriate employees do not expect to spend major part of their salaries for visiting their parents and other relations back home as otherwise such an expense can erode a large part of their savings. Leave travel assistance along with paid vacation is arranged by the international employer firms for these expatriate and their families for visiting extended family back home at least once in two years. The international firms many a time also pay for the air travel of the children of expatriate employees studying in hostels in home country or in another country abroad. Relocation Allowances Moving household and family to the place of posting abroad costs lots of money. Such expense is usually covered by the international firm employing expatriates. The companies may arrange for some more expense involved in retaining the part of family in the home country or arranging alternate accommodation etc., for storing household goods till the time of assignment abroad. 12. Betty Jane Punnett, International Perspectives on Organisation Behaviour and Human Resource Management, Prentice Hall, 2004.

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Table 15.1

Top 20 Most Expensive Cities for Expatriate Employees

Source: http://en.wikipedia.org/wiki/List_of_most_expensive_cities_for_expatriate_employees.

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Repatriation Expense Moving back to the home country after the foreign assignment has been completed by the expatriate employee will cost heavily again. The international employer firm usually will cover all such expense that will help the employee settle down in his home country again. However, not all the companies do this for their expatriate employees. The high commissions and the embassies of the countries along with the international firms arrange for lots of other recreation facilities for the benefit of these employees. The high commissions run courses in their home country cultures. They also run schools for the children of expatriate employees. These embassies also arrange for the national, religious and social functions within their premises in coordination with some of the international marketing firms. The other issue that can disturb an expatriate is about his future within the organisation after the completion of foreign assignment. International firms address this question by arranging for training into higher skills etc. needed for the next position within the hierarchy, which is generally assured to an employee posted abroad. The companies may also help the spouse of the employee by addressing his or her career-related concerns. The international firms can arrange employment for the spouse within the organisation or may arrange a job with another company of the group. Addressing Repatriation Issues Employees, when returning from a posting abroad, often find that every thing has changed in their absence. It is not the same office or the same people that they left behind while going abroad. This happens due to the reverse culture that the employee experiences on his return from abroad. The employees are virtually treated as very important persons when they are posted abroad. They may communicate directly with the top management on day-to-day basis. The protocol and bureaucratic systems of the home country, however, will virtually expect the employee to follow the established norms. Such an employee, if not treated in the right manner, may get the reverse culture shock and adjustment will become difficult. The family, too, can experience such reverse shock of not being in a position to adjust to the home country atmosphere after a high-profile living abroad. International firms can address this kind of alienation by offering a higher position on return from abroad, making a lateral move to another department along with huge cash incentives and/or offering resettlement allowances. Firms also arrange for counselling sessions of such employees by attaching a senior manager as a mentor to the returned employees.

Points to Remember Personal Selling: It means the meeting of the customer on one to one level with the sales personnel of the firm, in order to understand the needs of the forms, evaluate those needs and equate those needs to the product offered by the marketing firm, and sell the product to the customer. Approach: It refers to the stage when the salesperson actually comes face-to-face with the prospect to explain about his marketing firm and its products. Closing the Sales Call: This refers to the eventual booking of the order from the prospect caused finalising the deal. Expatriates: The multinational sales management could involve hiring sales personnel abroad who do not belong to the country of operations. Such sales personnel are called expatriates.

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Objective Type Questions 1. The process of personal selling involves (a) Prospecting (b) Preapproach and approach (c) Presentation (d) Closing the sales call (e) All of these 2. A domestic firm primarily engaged in selling in the domestic market with little leanings towards exports (a) Will be organising personal selling activities abroad (b) Will not be organising any sales activities abroad (c) Will simply leave the task of selling its product abroad to the exporter middleman (d) Will send home team abroad (e) Will hire foreigners abroad 3. Some of the challenges to hiring home country nationals abroad are (a) Incurring double the expense (b) Cultural barriers to the expatriate employees (c) Maintaining liaison with the political sources, government departments, and other non – governmental agencies (d) Resettling these employees after their repatriation from abroad (e) All of these 4. International marketing firms can for their international sales management employ (a) Home country nationals (b) Only host country citizens (c) A combination of home and host country nationals (d) Third country nationals (e) A healthy mix of all these 5. International marketing firms will have to ensure they assign foreign posting to individuals who have the right mindset to work abroad. Some of their personality’s traits could be (a) Openness and sensitivity (b) Adaptability and resiliency (c) Willingness to work abroad (d) Any one of these (e) All of these 6. Which of the following basic components of the compensation systems for expatriate/international sales force will have in addition to salary paid at home posting. (a) Cost of living adjustment allowances and house rent/housing allowance (b) Relocation and repatriation allowances (c) Children education/hostel expense (d) Leave travel assistance- paid home trips (e) All of these 7. Motivating an employee for a posting abroad proves very complicated for an international firm due to (a) Different cultures (b) Different mindsets (c) Different philosophies (d) Different nationalities (e) All of these

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8. Which of the following activities an international salesperson will have to undertake during the presentation stage? (a) Demonstrate the product (b) Present the story plan (c) Handle objections of the customer carefully (d) Steer the customer towards the eventual close of the sales call (e) All of these 9. Which of the following activities an international salesperson will have to undertake during the preapproach stage? (a) Gather information on the prospect and his problems (b) Study the cultural norms, cultural peculiarity and cultural likes and dislikes (c) Prepare his story plan and presentation plan (d) Prepare his strategy to make a sales call (e) All of these 10. State true or false: (a) Personal selling acts as a supplement to the other promotional tools employed by the international marketing firm, e.g. advertising, stores display, direct mailers, and international product exhibition. (b) The extent of involvement and the orientation an international marketing firm has towards its international operations will be the deciding factors in determining the (1) the type of sales personnel and (2) the size of sales team, the firm should hire. (c) International marketing firms will have to employ many kinds of nationals, cultures and personalities to undertake the task of personal selling and international sales management. (d) While dealing with the international customers, culture context plays an important role. (e) International marketing firms try a combination of advanced training, cash compensations, early advancement in career, a chance to get exposed to global management systems and global cultures, etc. to motivate the sales staff to opt for an opening abroad.

Review Questions 1. Briefly describe the process of personal selling. 2. What are the objectives of personal selling in international marketing? 3. Briefly describe three alternatives available to an international marketing firm for selecting employees for posting abroad. Explain why a company will prefer hiring host country employees abroad. 4. What is an expatriate sales person? Briefly explain the compensation methods adopted by international marketing firm for its expatriate employees. 5. Write short notes on the following: (a) Training and culture orientation for international assignment (b) Repatriation issues (c) Motivation of expatriates (d) Third country nationals.

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Suggested Readings Bovet, Susan Fry, “Building an International Team,” Public Relations Journal, August-September 1994, pp. 26–28. Honeycutt, Earl D., John B. Ford and Lew Curtzman, “Potential Problems and Solutions when Hiring and Training a World Wide Sales Team,” Journal of Business and Industrial Marketing, winter 1996. Kapoor, Ramneek, Fundamentals of Sales Management, Macmillan India Ltd., New Delhi. Lewin, Jeffery E. and Welsely J. Johnson, “International Sales Force Management: A Relationship Perspective”, Journal of Business and Industrial Marketing, vol. 12, No. 3, summer 1997, p. 232. Majaro, Simon, International Marketing, London, George Allen and Unwin Ltd. London.

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16

DECISION-MAKING FOR INTERNATIONAL MARKETS

Learning Objectives After reading this chapter, you will understand: The tools for selecting the countries for doing business How to take decisions with the help of indices such as Market Potential Index (MPI), Global Risk Index (GPRI) How to calculate MPI and its advantages The importance of GCI and FDICI Calculation of GPRI and the countries currently covered under GPRI

INTRODUCTION Firms expanding internationally need to carry out research on business opportunities, evaluate different countries and select the potential locations for doing business. International marketing research has to be done scientifically with the help of tools available to resolve business problem. The various tools for measuring the economic, political and social risk of a country can be classified as discussed below.

MARKET POTENTIAL INDEX (MPI) The market potential database contains more than 2,200 items, grouped into 35 categories that provide information about goods, services, attitudes, and activities collected from consumer surveys conducted by Mediamark Research Inc. Doublebase 2005. The various categories include:

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behaviour as compared to their country’s national average income. The index is tabulated to represent a value of 100 as the overall demand for the country. A value of more than 100 represents a high demand; a value of less than 100 represents low demand. For example, an index of 120 implies that demand in the trade area is likely to be 20 percent higher than the national average; an index of 85 implies demand is 15 percent lower than the national average.

Fig. 16.1 The world map.

Construction of MPI Global marketing is becoming more and more important along the years with the increasing trend in international markets to enter and the appropriate marketing strategies for those countries. These emerging economies comprise more than half of the world’s population, account for a large share of world output, and have very high growth rates—all indicators of enormous market potential.

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Uses of MPI and services. With market potential data, the companies can

Dimensions and Measures of Market Potential Dimension

Weight

Market size

10/50

Market growth rate

6/50

Market intensity

7/50

Market consumption capacity

5/50

7/50

5/50 Market receptivity

6/50 4/50

The advantages of MDI are:

Measures Used

1

6 3

20

18

25

16

2

5

10

4

6

11

7

22

15

3

17

8

26

13

24

21

23

14

1

12

28

17

21

24

12

26

56

52

31

53

40

16

27

30

54

26

38

1

27

12

17

12

27

100

2

14

16

20

18

0

24

13

11

17

25

10

12

5

23

22

21

4

7

3

15

6

1

26

46

45

37

37

42

61

22

47

54

44

12

58

66

25

27

67

63

68

45

64

100

1

73

Source http://globaledge.msu.edu/Resource Desk/ market potential.

18

5 3

11 17

2 11

20 5

6

10

Indonesia

4

16

4

Thailand

21

4 14 4

4

12

10

6 13

Argentina

Mexico

7 2

0 21

Turkey

38

2

3

25

25 3

1 4

23

1

22 15

1 10

7

1 24

1 100

26

25

26

12

16

21

4

17

20

6

24

7

22

23

14

11

10

8

3

5

2

1

18

13

15

1

60

48

55

52

42

75

20

75

38

24

50

60

73

75

70

74

100

48

60

57

17

23

18

22

21

26

24

16

11

20

14

10

15

13

12

25

8

5

6

7

2

4

1

3

41

13

41

26

30

1

4

46

56

32

47

46

2

64

65

82

70

70

100

34

14

25

10

11

21

20

15

22

12

23

10

1

13

17

16

24

4

0

7

3

5

2

26

6

47

65

5

38

43

61

20

38

46

54

63

100

51

44

45

7

81

70

77

05

77

1

77

17

23

14

12

16

22

3

6

7

6

3

5

1

15

7 26

3

6

1

12

15

13

4

3

24

3

16

6

23

14

15

4

100

20

13

25

11

6

10

24

3

21

5

15

4

8

2

10

1

18

13

25

22

21

16

26

17

24

20

14

5

11

7

23

12

15

0

4

3

6

2

10

1

35

47

13

25

27

40

1

40

14

34

46

72

51

63

35

24

55

48

43

61

74

77

67

55

100

26

25

24

23

22

21

20

18

17

16

15

14

13

12

11

10

8

7

6

5

4

3

2

1

1

2

3

8

15

16

17

18

23

24

26

31

31

33

33

36

36

40

48

53

54

61

100

Market Market Consumption Commercial Economic Market Country Overall Market Growth Rate Intensity Capacity Infrastructure Freedom Receptivity Risk Index Size Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index

Market Potential Index for 2009

India

Malaysia

Russia

Israel

Countries

Table 16.1

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Indonesia

Argentina Thailand

Mexico

Russia Malaysia India Turkey

Israel

Countries

Table 16.2

20 21 22 23 24 25 26

10 11 12 13 14 15 16 17 18

3 2 1 5 6

1 2 3 4 5 6 7 8

18 27 22 26

10 7 12 14 11 13 15 8 20 23 21 17 16 24 25

2008 Rank

2009 Rank

17 15 20 25 21 22 26 24 27

15 14 10

11 16 14 18 23

20 23 22 24

17

18 16 21 12

2 3 1 4 7 5 8 6 11 13

2005 Rank

3 1 2 6 7 5 10 8 13 12

2007 Rank

Year-to-Year Comparison of MPI

21 17 18 24 22 23

13

20 16

6 12 14 8 15 10 11

2 4 1 3 7 5

2004 Rank

18 16 20 22 21 24

23 12

17

14 11 10

2 5 1 3 7 4 8 6 15 13

2003 Rank

23 20 24

18 22

16 21 15 12

11

2 5 1 3 7 4 8 6 13 17 10 14

2002 Rank

21 17 23 22

13 12

18

15 11 20 16 14

10

1 5 3 2 7 8

2001 Rank

23 12 20 22

14 18

21

16 8 17 13 15

11

1 6 2 10 7 4

2000 Rank

16 15 23 21

17 13

20

8 10 18 14 22

5 2 3 7 4 12 11

1998 Rank

17 18 20 23

3 15

22

11 14

7 5 6 16 21 13 10

1 2 4

1997 Rank

21 22 16 17

12 8

20

4 13 15 23 7 10 18 14

1 3 2 5

1996 Rank

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GLOBAL COMPETITIVE INDEX (GCI) After several years of growth, the global economic landscape has changed a lot. Rising food and energy have confronted policymakers with new economic management challenges. Today’s volatility underscores the importance of competitiveness, supporting economic environment that can help national economies to overcome these types of shocks in order to ensure solid economic performance in the future. A nation’s level

been to provide benchmarking tools for business leaders and policymakers to identify obstacles to improve competitiveness, stimulating discussion on strategies to overcome them. For the past several years, the World highly comprehensive index for measuring national competitiveness, which captures the microeconomic and macroeconomic foundations of national competitiveness. productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. In other words, more competitive economies tend to be able to produce higher levels of income for their citizens. The productivity level also determines the rates of return obtained by investments more competitive economy is one that is likely to grow faster over the medium to long run. The concept of competitiveness thus involves static and dynamic components. Although the productivity of a country clearly determines its ability to sustain a high level of income, it is also one of the central determinants of the returns to investment, which is one of the key factors explaining an economy’s growth potential. Figure 16.2 shows the 12 pillars of competitiveness.

FOREIGN DIRECT INVESTMENT CONFIDENCE INDEX (FDICI)

revenue. China tops the list of Foreign Direct Investment Confidence Index.

largest companies. The countries ranked as attractive places in the recent years are as follows:

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Fig. 16.2 Twelve pillars of competitiveness

Table 16.3

Global Competitiveness Index: 2009–10 rankings Country/Economy

Denmark Finland Germany Japan

Australia France Austria

Rank 1 2 3 4 5 6 7 8 10 11 12 13 14 15 16 17 18 20

Source:

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GLOBAL POLITICAL RISK INDEX (GPRI) higher the number, the more stable the country. It is an index of country stability ratings for 24 emerging

to 100. A clear and concise analysis accompanies the index to illustrate what events impacted each country’s stability rating and makes forecasts for the coming month.

What Does GPRI Measure?

weighted subcategories: government, society, security, and economy.

Calculation of GPRI comparative state stability.

sources in developing their analyses. following characteristics:

Rare instances of political violence

Countries Currently Covered Under GPRI

The selection of countries for the index is based upon economic relevance for the international markets in

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Table 16.4

GPRI (April 2008) Country

GPRI 77 76 74 70

Mexico

67 66 65

Argentina

65

Turkey

64

Russia

63

Thailand

62

India

62

65

60 Algeria 58 58 57 Indonesia

56 55

Iran

51 51 46 42

Source:

Updating and Publishing of Scores The scoring process each month is completed by the end of the third week of the month and is published on risks.

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to offer the index to clients. The methodology remained constant, but the analytical product was redesigned

Advantages of GPRI 1. The index

4. It follows a monthly analysis. A m

Points to Remember Global Competitiveness Index (GCI): It is a highly comprehensive index for measuring national competitiveness, which captures the microeconomic and macroeconomic foundations of national competitiveness. FDICI: prospects of international investment flows. GPRI: It measures a country’s ability to absorb political shocks. It evaluates political, social,

MPI: It measures the likelihood of adults or households in a specified area to exhibit certain consumer behaviour as compared to their country’s national average income.

Objective Type Questions 1. __________ measures the likely demand for a product or service. 2. __________ measures a country’s ability to absorb political shocks.

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Review Questions tools available to identify and select countries for doing business. competitiveness. 3. Discuss the salient features of market potential index.

Suggested Readings International Business Business Environment

Useful Weblinks www.globaledge.msu.edu www.dictionary.bnet.com www.tetrad.com www.referenceforbusiness.com www.wikipedia.org www.weforum.org www.mhia.org www.worldeconomicforum.com

Case INTELLIGENT MARKETING STRATEGIES TO SUCCEED IN CHINA AND JAPAN Introduction The international expansion of foreign firms is most often driven by the belief that markets such Western business environments are predominantly focusing on individuality, whereas

harmony with others.1 distinction and promoting harmony.2 regarding the two markets differ on important points. Conceptions of self and performance-related feedback in the US, Japan, and China 2. Ibid.

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Theoretical Framework Japanese markets, focus is given to price, product, place, and promotion. Firms use strategies to compete in the international market, and therefore they apply the theory of marketing strategies for firms to succeed in foreign markets, which are classified into four different groups, of which two are relevant for our analysis: the international strategy and

price, place, and promotion. The marketing principles are not fundamentally different in either markets means dealing with different environments, different consumers tastes, different purchasing power, and different attitudes towards new and western products. Within the marketing mix framework, we will also make use of the concepts of diversified and standardised product strategies, and product differentiation and adaptation.

MARKETING STRATEGIES IN THE CHINESE AND JAPANESE MARKETS The Two Business Environments Chinese Business Environment prominent position in the world economy. This economic reform began a tremendous process, of the external trade and foreign investment.3 to international marketers has received a significant boost due to the country’s admission into new sectors of the economy to be opened up to foreign firms,4 and since then, growth, foreign investments, and competition has increased. Despite the dramatic impact of economic reform and the drive for modernisation over the that make it a challenging market in which to do business, e.g. internal protectionism and market diversity. Japanese Business Environment countries and has a third rank in the world in terms of gross national income.5 Sonia EI, Business in Asia Pacific: Text and cases, Oxford University Press, 2001 Journal of International Marketing Business Environments: Text and Cases,

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In the Japanese market, competition is seldom a matter of pricing alone; market share is rather determined by other features such as design, functionality, and advertising, despite continuous efforts by foreign companies to erode price levels and gain a foot hold in the Japanese market.6 which supports the assessment that the industry is still characterised by strongly oligopolistic structures. In the future, foreign competitors will increasingly be able to gain more market share in the Japanese market. The continuous deterioration of trade barriers will, therefore, in the future lead to a moderate decrease in oligopolistic power.7

Marketing Strategies for Firms to Succeed in the Chinese and Japanese Markets Chinese Market

this strategy orients itself towards achieving maximum local responsiveness and extensively

create valuable skills and products to foreign markets where indigenous competitors lack those skills. Japanese Market the international marketing strategy in Japan in that the Japanese market is much more mature,

the success of a foreign firm in the Japanese market where the foreign firm orients itself towards achieving maximum local responsiveness and extensively customise both its product offerings and its marketing strategy to suit the Japanese cultural needs. similar challenges in the two markets: these include challenges of adapting to a different culture and business practice, strategic planning, and the choice of appropriate international business operations. Furthermore, in both markets the lack of available information and knowledge has led to

experience or transfer of knowledge strategy.8

Marketing Mix: Product, Price, Place, and Promotion Strategies Chinese Market

6. Ibid. 7. Ibid. Business in Asia Pacific: Text and cases, Oxford University Press, 2009

Decision-Making for International Markets

product strategy would be the most appropriate choice of product strategy for a foreign firm: in

What is much less understood are the disparities within and between the provinces that make up this large country. Differences in natural endowments are to be expected, but in addition, there

personal goods.10

11

Japanese Market purchasing power the idea of a “global consumer” proposed by the standardised product strategy the West; despite the fact that they may be aware of and hungry for global western brands, their attitude towards foreign products is not the same.12 Therefore, the diversified product strategy will be more appropriate for foreign firms in the Japanese market in that the firm introduces modifications to its product due to the differences between Japanese and Western lifestyles, tastes, and physical differences, etc.

believed to be essential for business success in Japan, which is very specific and selective.13 strong position to gain market share in Japan. the selling firm to adapt its product to meet the needs of Japanese customers. With demands for adaptation from potential Japanese customers early in the product life cycle, it could be argued that the need for product adaptation may be more important in mature markets, where the needs

10. ibid. 11. ibid. 12. ibid. 13. Business Environments: Text and Cases

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and his/her existing suppliers is likely to exist.14 Traditionally, Japanese consumers or businesses exhibited strong preferences for a high price premium, and Japanese consumers’ perceive correlating of high prices with good product performance. Therefore, they are suspicious of price discounting.

amount of Japanese workers has lost the traditional lifetime employment, but is rather forced to income and the constant fear of maintaining development. This group might eventually be perceptive to lower price offerings by foreign competitors.15 which are crucial for successful promotion strategies in both markets: concern for aesthetics, 16 In both markets, consumers Japan will have to exert long and consistent efforts to develop the kind of reputation that the two

distribution system, the ability of a brand name to pull customers to the product is, therefore, crucial.17 brand names and images in the Japanese market.

Conclusion Western firms: threats in that these markets have the opportunities of removing the western firms from the global economic throne, and possibilities in that they are recognised as enormously profitable markets for western firms. The two markets are both mirages for foreign firms seeking to make a fortune, and, furthermore, they share some commonalities, e.g. regarding market entry obstacles for foreign firms and the

to be taken into consideration when foreign firms develop their marketing strategies. later than the Japanese “miracle”, and, therefore, the future decades will be interesting regarding the speed of development for the two markets. 14. 15. 16. 17.

Business Environments: Text and cases, 3rd ed., Tata McGraw-Hill Education, 2010 Business in Asia Pacific: Text and Cases, Business in Asia Pacific: Text and cases, , 2001

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COMMUNICATION AND NEGOTIATION FOR INTERNATIONAL MARKETS*

Learning Objectives After reading this chapter, you will understand: What is international negotiation Types and forms of negotiation BATNA as a powerful negotiating technique Cultural and international negotiations How culture affects international negotiations

INTRODUCTION International negotiation is as it says: inter-national. It is about negotiation between people from two or more countries. International negotiation occurs all the time between governments and is the main subject of today’s world. It happens between individuals and companies, where the traps and tricks of cross-border negotiation can ensnare even the most experienced home-country negotiators. International negotiation is often not just between individual people, but between small groups, each of which is well organised and where every person has specialised and skilled work. There may be cultural experts, linguists and subject specialists, as well as a chief negotiator and support negotiators. There may also be multiple and interlined sub-negotiations going on at the same time, for example, where a trade negotiation includes deal involving various industries and interests. The highest form of negotiations is experienced when the leaders of the countries visit other countries along with the delegates from their country. For instance, recently Chinese premier Wen Jiabao visited India along with 400 business delegates. The main intention was to hold negotiations on political and business front. Negotiation is, of course, one of the most challenging communication tasks in business. Negotiators have opposed interests, wants, and expectations in a delicate balance between conflict and cooperation. Negotiators often ask a basic question themselves: What is the least I have to give you in order to get the most from you while maintaining a favourable business relationship? *Harshi co-authored this chapter under the supervision of Dr. Justin Paul, University of Washington, USA.

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More than ever, firms are expanding into the global markets, whether it is an individual trying to buy a ticket for vacation or a business seeking to form a joint venture in a new market. The commonality for all those who travel abroad is that some form of negotiation will be prevalent. Cultural differences play a role in the outcomes of negotiations. The cultural aspects of individualism vs collectivism, egalitarianism vs hierarchy, and high vs low-context communication play a vital role. The importance of explicit and implicit information in the negotiating process is a quite significant.

TYPES AND FORMS OF NEGOTIATION Generally, negotiations are of two types, viz. transactional and dispute resolution. Transactional resolution is a win-win situation, a more positive form where negotiators use positive emotions to bring outcomes. A dispute, another term for conflict, is a rejected claim that shows the incompatibility of goals. A major difference between transactional and dispute resolution is the degree to which the negotiators bring emotion to the table.

Forms of Negotiation There are two forms of negotiation—distributive and integrative. Distributive agreements are the result of a distributive negotiating situation where negotiators divide a fixed set of resources and the negotiation usually turns into a competitive rivalry. Distributive bargaining can be beneficial when the other party is insignificant and the negotiator wants to maximise the value of a single deal. Integrative agreements are the result of integrative negotiation situations which involve bringing new issues to the negotiation in order to enhance a set of resources. By expanding the resources, negotiators can create integrative situations. Because most negotiation situations present opportunities to expand a set of resources, by bringing additional issues into the bargaining mix or by dividing a lone issue into several parts, a few negotiations are strictly win/lose situations. In this type of bargaining, the parties concentrate on Fig. 17.1 what they have in common, ideas are exchanged more openly, and the parties focus more on their issues and interests. Most negotiators employ distributive bargaining methods because they do not realise there is a potential for integrative negotiation. Implementing integrative techniques, however, can be very favourable to both parties. When negotiators gather information about the other sides’ priorities, they increase the chance of making higher profits. All it takes for joint profits to improve is for one side to share information. Bringing new issues to the bargaining table helps prevent the negotiation from reaching a stalemate and also helps to ensure that all of the resources are utilised, and nothing is left on the table (see Fig. 17.1).

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BATNA—A POWERFUL TECHNIQUE Power is the ability to make the other party concede. The party with the Best Alternative to a Negotiated Agreement (BATNA) is the more powerful. In transactional bargaining, the degree to which one party is economically reliant on the other results in power based on economics. When a negotiator knows own BATNA and the BATNA of the other party, they can effectively decide what to do in the negotiation. They can decide when it is appropriate to leave the negotiation without agreeing, when to demand more from their opponent, and when to agree on the conditions of the negotiation. Parties with a more appealing BATNA can set higher goals for themselves, can demand more from their adversary, and thus have more power in the negotiation. The negotiator with the desirable BATNA should communicate this to their opponent in order to take advantage of the benefits of having the better alternative.1 There are two types of information that are important before negotiating: information about the other parties’ power and information about their interest, or the motive for their positions. The information about power and interest is essential to both types of negotiations because interest must be known to construct integrative negotiation and integrative negotiation always contains distributive bargaining. Gathering information is tricky because power is a psychological representation of one’s strength during a negotiation. Besides, all perceptions tend to be biased. A negotiator might think they have more power than they do or they might be influenced by the persuasiveness of the other side’s argument. Sometimes, negotiators are even influenced by the role (i.e. buyer vs seller) or other contextual variables. Perceptions of power may be influenced by factors such as persuasion, ingratiation, substantiation, and appeals to sympathy.

CULTURAL AND INTERNATIONAL NEGOTIATIONS Culture is the most significant variable affecting worldwide negotiations, and the values and norms that are encompassed by culture can affect negotiations. Cultural values that the negotiators perceive are important, while cultural norms outline what is considered proper and improper behaviour. Together, cultural values and norms influence how one perceives situations and how one reacts to the behaviour of others. Cultural differences in negotiation styles can cause problems related to

When identifying the salient cultural characteristics that should be considered, the emphasis is on the words shared and enduring to help avoid cultural stereotyping.

Does Culture Really Affect Negotiations Globally? In a survey of 310 persons from 12 countries and 8 occupations, participants were asked to rate their negotiating style covering ten negotiation process factors. Table 17.1 lists the ten negotiation factors.

1. Hooper, Christopher; Pesantez, Maria and Rizvi, Syed, “Cross-Cultural Communication and Negotiation”, Spring 2005.

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Table 17.1

Ten Negotiation Factors

Negotiation Factors

Cultural Responses

Goal

Contract or Relationship

Attitudes Personal Styles

Informal or Formal

Communications

Direct or Indirect

Time Sensitivity Agreement Form

Specific or General

Agreement Building

Bottom Up or Top Down

Team Organisation Risk-taking

The countries that were represented in the survey were Spain, France, Brazil, Japan, the U.S., Germany, the U.K., Nigeria, Argentina, China, Mexico and India. The occupational specialties included law, military, engineering, diplomacy/public sector, students, accounting, teaching, and management/marketing.2 The purpose was to demonstrate through research, that culture does have an effect on negotiating styles. important: the formation of a final contract or pursing a long-term relationship among the parties. When the data was assembled by specific cultures, there was a significant difference in this area. For example, Indians, as opposed to Spanish, viewed the primary goal as a relationship. Culture also moulded the attitudes at the negotiation table. The Japanese viewed negotiations from a win-win perspective, but very few Spanish held this view. contract that will be relied upon when new situations should arise. Other culture groups view the contract as an instrument that outlines general principles versus detailed rules. Breaking down the responses by individual cultures indicated that a majority of the respondents also preferred specific agreements to general agreements. difference between cultures at the opposite ends of the spectrum. For example, British preferred a specific agreement. of a party to share information, seek alternatives through new approaches, or tolerate ambiguity in an attempt to find a joint resolution. The Japanese, for example, were highly risk-averse. More significant risk takers were France, India and the U.K.3

Cross-Cultural Negotiations”, 2007 3. ibid.

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Relevance of Cultural Values to Negotiation The cultural values of individualism versus collectivism, egalitarianism versus hierarchy and direct versus indirect communications are relevant to norms and negotiation strategies.

Individualism vs Collectivism Individualism vs. collectivism has influence on negotiating styles and priorities concerning goal. This is important for negotiators because goals direct behaviour and are also basic motivators. For collectivists, it is important to seek win-win outcomes whereas individualists tend to treat all negotiations as win-lose. This is because individualist, out of self-interest, strive for higher personal goals. Individualistic negotiators, when compared to collectivistic negotiators, tend to make more extreme offers and spend more time planning short-term goals. Collectivists are known to alter their negotiating style from cooperative to competitive when confronted with individualists. Nevertheless, even though collectivists are competitive, they still remain sensitive to the other’s outcome. Mexico is much farther on the scale towards collectivism than the U.S. Mexicans place relationships as an important aspect to business success and they are loyal to those they have formed a personal relationship with. They tend to do business with those whom they have developed a personal relationship with as opposed to those who can offer them a better deal. Consequently, this is the same for the collectivistic Japanese and Arabs who are “more interested in finding out about you, your future plans and your relationships”. This is in stark contrast to the more individualistic Americans who tend to seek the best deal, regardless of who they get it from. Collectivist executives will allow their personal feelings about the other party influence their decision making. At certain levels of negotiation, a criterion such as cost does become important. They exhibit genuine team spirit and a willingness to help everyone in the group while promoting higher levels of inter-group communication.

Egalitarian vs Hierarchy Those higher up on the social ladder are given authority and advantage, whereas those lower on the social scale are duty-bound to submit to social superiors and abide by their request. However, these high-status members in a hierarchy culture are obligated to look out for the needs of the lower status members. Cultures that are more egalitarian do not have the same obligations to their lower status members that high-status members of more hierarchical focused cultures do. This is because, even though there are social status distinctions, the social boundaries of the egalitarian society are fluctuating, making one’s superior status subject to change. Conflict between different status groups in hierarchical cultures becomes incompatible to the social structure where the norm is for lower status members not to challenge the directives of social superiors. In a hierarchal society, if two members of the same social class are at odds, they will refer the conflict to a superior rather than have a direct confrontation. This happens because hierarchical societies count with rules that facilitate interaction among members through the routing of conflict that reaches superiors. “The decision by the high status third party reinforces their authority without necessarily conferring differentiated status on the contestants as would be the case in a negotiation in which one party won and the other lost.” During transactional negotiations, egalitarian cultures rarely use BATNA as a source of power, unless things are not progressing towards an agreement because they would rather concentrate on the issues, priorities and interest relevant to the current negotiations. On the other hand, cultures that are more hierarchical tend to use all forms of power in negotiation, whether it is status, BATNA, and/or persuasion.

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Americans are more inclined towards egalitarian traits, while the Japanese are more hierarchical. It is understood that the Japanese, more than the Americans, pay more attention to power in regards to their preparation. When they recognise distributive tactics, they follow distributive norms more forcefully than the U.S negotiators. The Japanese, when compared to the Americans, tend to rate role and company as more important factors to negotiation. The Japanese do not see BATNA as power like the Americans do and this difference may add to a lower level of joint gains for the cross-cultural negotiators. The Japanese tend to view BATNA as a point to reach for in negotiations rather than a starting point to begin negotiations.1

High vs Low-Context Communication High versus low-context communication refers to the amount of direct or indirect communication a specific culture uses for its internal dialogue. In high-context cultures, a large part of the message is conveyed in the context or background of the dialogue, while little information is actually being said. On the other hand, in low-context cultures, information is explicitly transmitted through clear and precise messages. High versus low-context communication directly affects the way in which negotiators bargain. The amount and quality of information each party has when entering a negotiation essentially determines the extent to which a negotiation can be integrative. This information sharing technique involves trading proposals throughout all phases of a negotiation. If a proposal is rejected by the other party and they offer their own, the exchange of information about each party’s priorities and preferences is inevitable. Cultures using direct communication methods are as capable of reaching integrative agreements as cultures using indirect communication techniques. To contrast Japan and US, for example, it is known that “Japanese intra-cultural negotiators, using indirect communications, and US intra-cultural negotiators, using direct communications, reached similarly efficient agreements.” In contrast, when Japanese negotiators faced bargaining with U.S. personnel, the outcomes were not as optimal. The Japanese, a high-context communication culture, understood the interests of the US party, while the US negotiators, a low-context culture, were not able to understand the Japanese’ priorities, even when the Japanese negotiators changed their normal style of indirect approach of information sharing to a direct approach used widely by the Americans in their negotiation. In fact, even a successful change in approach of information sharing during negotiations does not imply or suggest a superior outcome. There are several reasons attributable to the Japanese’s tendency to give unclear, ambiguous and incomplete answers. One reason is that the Japanese subjects do not expect the first answer to be thorough and clear. Secondly, it could be they are unwilling to admit the lack of a witty answer. A third reason is that their straightforwardness depends on the level of agreement of the listener with the answer. The Japanese subjects prefer persistent questioning as their information-gathering method. According to Japanese cultural values, it is necessary to ask repeated questions about a topic in order to receive detailed information. Another reason why the Japanese are inclined to use persistent questioning as an information-gathering method is to avoid misunderstandings and to confirm that all members of the other team agree with all the parts of the answer. When high and low-context cultures meet at the bargaining table, the communication differences may present difficulties during negotiations. High-context cultures do not put as much weight on explicit verbal communication, and for them, direct communication may be seen as a crude way of communicating, signifying no concern or respect for the other party’s position. For Japanese people, for example, nonverbal behaviour and context are as important as direct communication, and they can be extremely indirect when expressing a negative response. The Japanese may see conveying a direct denial as unreasonably offensive and harsh. Adversely, westerners consider good negotiators to be “people with strong verbal skills, adept in the art of

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argument or debate and good at communicating directly and explicitly”. These differences in communication styles could be overwhelming when not taken into consideration during negotiations.4

Culture and Context in Negotiation As we have shown, there are important cross-cultural differences in negotiating. Next, we emphasise that culture alone is not sufficient to account for the actions of negotiators interacting across borders. The contextual effect of role and the preconceptions about bargaining are just as influential as culture.

Culture as Shared Values Geert Hofstede is one of the most cited intercultural researchers. He defines culture “as the shared values and beliefs held by members of a group, and is considered the most comprehensive and extensive programme of research on cultural dimensions in international business.” The Culture as Shared Values theory draws heavily from evaluating the American style of negotiating with the techniques used by negotiators in Mexico, Japan, Korea, Russia or China. The differences are thought to spring from contrasting cultural values that are represented by individualism and collectivism, especially when comparing between distributive and integrative approaches. The Culture as Shared Values is based on what we have described earlier: that collectivism will lead negotiators to engage in more integrative and less distributive bargaining. Cultures that are more collective will have negotiations that are less inclined to view negotiations as competitive and less likely to fall into the mythical fixed pie belief. This is because collectivists regard success by how well the group does. Culture as Shared Values also concludes that cultures on the collective side of the continuum should lead them towards greater information exchange.

Culture in Context The theory, Culture in Context, covers the variations mentioned in the preceding subsection. The Culture in Context theory “treats negotiators not as passive representatives of culture, but as regulators of a complex negotiation system”. Basically, this view says that contextual factors (personality, age, prior relationship and experiences, organisation culture, etc...) affect a negotiators’ style as much as the culture they are from. The contextual factor that we will focus our attention on is role, which is defined as a “set of rights, obligations, and normative expectations attached to social positions.” Interestingly, experienced negotiators are aware of the differences attributed to buyer-seller roles. Russian, Chinese and Japanese tend to agree that role is an important identifier in determining one’s outcome, whereas Americans often do not recognize role as a factor. In the culturally individualistic U.S. and in the collectivistic cultures of Japan, Korea, and Mexico, buyers regularly receive higher profits compared to sellers. Some attribute this to power differences: “Sellers may perceive greater dependence on buyers than the reverse. That is, sellers may perceive the need to contract with a given buyer, and as many buyers as possible, to obtain profits. In contrast, buyers may perceive that if a profitable agreement is not possible with a given seller, then a number of alternative sellers (some of whom may offer better prices) are available.” These divergent perceptions can appear to make integrative bargaining more suited to a seller and distributive bargaining appear more attractive to a buyer. This suggests that difference in integrative and distributive bargaining 4. Hooper, Christopher; Pesantez, Maria and Rizvi, Syed, “Cross-Cultural Communication and Negotiation,” Spring 2005.

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preferences may have to do more with contextual factors as opposed to cultural factors like collectivism/ individualism. Buyers and sellers reveal different outcomes according to the exchange of information. “Buyers capitalise on information that corrects their mythical fixed pie beliefs, but sellers use information to reinforce their zerosum notions.” So, it seems that buyers are more inclined to use mythical fixed pie beliefs as opposed to sellers. However, as information is exchanged, buyers are more likely to reduce their mythical fixed pie beliefs. In conclusion, cultural differences like individualism vs. collectivism and role differences both contribute to distributive and integrative negotiation patterns.5

How to Negotiate Successfully While doing Business in China, the US and Japan

NEGOTIATING IN CHINA Patience, perseverance and a long-term approach are the keys to success in China. Negotiations can take years due to the number of people involved and the complicated government system.

Negotiation Tips that works on the basis of personal favours and commitments. It is essential in order to negotiate to hire an agent or look for a partner with the right connections. The Chinese tend to get suspicious. They will request a lot of information from the other party. However, the foreign negotiator must also be wary of what his/her Chinese counterparts may do with the information. Do not give any confidential information, since sooner or later, some Chinese business competitor will use it. Be prepared for a barrage of questions; sometimes the same questions will be asked over and over again. It is a tactic that they use to check the truthfulness and commitment of the proposals they receive.

Etiquette Tips For the Chinese, honour (mianzi) is more important than power or money. It is better to avoid comments or arguments that show them up to the rest of the group, and always give them an opportunity to correct what they have said if they have made a mistake. Face-saving is vital when negotiating in China.

NEGOTIATING IN THE US Americans appreciate negotiators who are practical, quick and hard, like the actor James Cagney as the director of Coca-Cola in Berlin in the 1960s who dictates messages to his secretary in the film One, Two, Three: “One: put me through to the head of the Russian delegation”; “Two: confirm whether Mr McNamara’s flight has arrived”; “Three: And where did my damn coffee get to?”

5. Hooper, Christopher; Pesantez, Maria and Rizvi, Syed, “Cross-Cuttural Communication and Negotiation”, Spring 2005.

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Negotiation Tips Negotiations focus on the concept of return: a proposal is good if it generates profits for the company (the bottom line) and, better still, if they are achieved in the short-term. clear answers can be interpreted as distrust or insincerity. The pace of negotiation is very quick compared with other cultures. Time is highly valued (time is money). Some sales are even concluded in the first interview. In longer negotiations, they may give on some point in order to reach an agreement as soon as possible and pass on to another matter.

Etiquette Tips A foreign negotiator should take particular care not to criticise their culture or the American way of life.

HOW TO NEGOTIATE SUCCESSFULLY IN DOING BUSINESS IN JAPAN Business cards (meishi) are a key factor. These are exchanged at the beginning of the meeting and it is considered impolite not to offer them. You should give your card with both hands and with each thumb holding a corner of the card on the side written in Japanese. During all the meetings the cards must be on the table. You must not write on them.

Negotiation Tips the meeting will finish all the same. This is because Japanese executives usually have a very full business diary. The Japanese appreciate information. Presentations must contain lots of detail, figures, technical data, and so on. All the numerical data that you present must be accurate; otherwise they will quickly detect the mistakes. In most negotiations, there is one person in the Japanese negotiating team who takes the initiative. It is usually a middle manager, who knows the market and competitors well and who studies the negotiations of prices and figures in depth. Once he has been identified, you should establish a good relationship with him.

Etiquette Tips The business culture is very formal. People are addressed by San (= Mr or Ms), followed by their surnames. When you know the person you can use the suffix san, meaning Mr, after the surname. For example, Obuchisan (Mr Obuchi). Better not to use first names. Source: www.global negotiator.com, accessed on Junuray 31, 2010

IMPLICATIONS FOR MANAGERS AND NEGOTIATORS Companies and countries do not negotiate—people do. Negotiating with International Customers, Partners, and Regulators,” International Marketing, The McGraw-Hill Companies, Inc, 2007.

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The following four steps lead to more efficient and effective international business negotiations, which include: 1. Selection of the appropriate negotiation team: (a) Willingness to use team assistance (c) Influence at headquarters (senior executive) (d) Gender should not be used as a selection criterion for international negotiation teams. 2. Management of preliminaries, including training, preparations, and manipulation of negotiation settings : (a) (b) (c) (d) (e) (f)

Assessment of the situation and the people Facts to confirm during the negotiation Agenda Best alternative to a negotiated agreement (BATNA) Concession strategies Team assignments

(b) Physical arrangements (c) Number of parties (d) Number of participants (e) Audiences (news media, competitors, fellow vendors, etc.) (f) Communications channels (g) Time limits 3. Management of the process of negotiations, that is, what happens at the negotiation table: interest for cues about appropriate communication styles and judgments about the “kind” of person in the negotiation. large number of questions but little feedback, allow periods of silence, use multiple communication channels, understand the lack of, or the bluntness of negative feedback and meet aggressive first offers with questions, not anger. (c) Persuasion: Task-related information exchange versus persuasion, avoid threats, warnings, and other aggressive negotiation tactics, avoid emotional outbursts, ask more questions and use third parties and information channels of communication. (d) Concessions and agreement: Write down concession-making strategies, understand differences in decision-making styles, in many cultures, no concessions are made until the end of the negotiations. 4. Appropriate follow-up procedures and practices: In most countries other than America, legal systems are not depended upon to settle disputes. In Japan, contacts primarily contain comments on principles of the relationship. In China, contracts are more a description of what business partners view their

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Follow-up communications are very important. MAKING BUSINESS COMMUNICATION IN CHINA EASIER ICEC- India China Economic and Cultural Council is one initiative which tries to bridge the gap between various businesses which could arise due to the effects of cultural differences.“When the establishment are familiar with the old system of planned economy. You can establish contacts by phone, fax, email investigation to the company in person may show your sincerity to cooperate.”

Source: www.icec-council.org/china/culture.htm, accessed on October 16, 2010

Points to Remember Egalitarianism: Believing in or based on the principle that all people are equal and deserve equal rights and opportunities. Autonomy: The right or condition of self-government. BATNA: Best Alternative to a Negotiated Agreement (BATNA) Meishi: Japanese term for business cards

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Review Question 1. Do you think that international negotiation is different from negotiating domestically?

Project Assignment 1. Form two groups within yourselves to study ‘for and against’ of a recent issue. Then, after certain point of time, negotiate on a particular conclusion. Note down various observations while negotiating for the conclusion. Share your findings.

Case Negotiation Success in China—The Joint Venture Overview This case is about an international joint venture that involves Celanese Corporation of the United States, a producer of value-added industrial chemicals, and China National Tobacco Corporation (CNTC). The venture produces tow, the fluffy synthetic fiber in cigarette filters. CNTC decided to increase its production of filter cigarettes for its international suppliers. For this, it decided to set up a joint venture with Celanese, a highly regarded Chinese tow producer.

a result, CNTC promptly made Celanese the preferred supplier of tow, even before the jointventure plant was established.

First Steps Some of the main issues for negotiation were: the new venture, with details to be agreed later. Meanwhile, the U.S. firm insisted that they would only regard the overall venture as generally agreed to after agreement on each component of the new venture had been reached.

was eventually reached.

Stage Two The second stage, comprehensive planning, took two years to complete. Chinese regulations were not well suited to the new enterprise, so much time was spent anticipating problems related to the design and construction of the plant, its general management,

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human resources policies and practices, purchasing, finance, and accounting. Therefore, specific plans were drawn up by U.S. and Chinese teams. Cultural problems were not lacking, and included the difficulty the Chinese encountered when their Celanese colleagues argued with them or expressed differences of opinion. Cross-culturally

Stage Three This stage involved construction of the plant, in the city of Nantong, Jiangsu province. New cultural difficulties arose daily, as Chinese practices collided with Western performance imperatives. Celanese employees noted:

supervised by Chinese, the workloads were usually reduced and additional employees hired. But overall, a long-term perspective was taken regarding the factory, where training was provided to enable employees to carry out prescribed operations.

Efforts Bear Results There are few joint ventures in China that have been as successful and learned so much from their own experiences. At the same time, the Chinese laws and regulations affecting joint ventures have seen tremendous changes since 1989, making it easier to do business in China. In May 2001, after ten years of increasingly successful operations, the two partners announced they had “formed joint work teams to complete a feasibility study on an expansion of their joint venture to produce diacetate tow cigarette filters in China” (Chemical Market Reporter, May 21, 2001). This coincided with the Celanese plan to phase out its Rock Hill, South Carolina plant. It is to be assumed that Celanese and CNTC will be more professional this time around in planning their joint venture, particularly since China is a growing contributor to the bottom line. Celanese is now firmly established as a profitable corporate firm in China, but cross-cultural learning and problems remain part of the joint-venture life. Source: Dr Robert M. March’s The Chinese Negotiator, http://www.negotiations.com/case/raresuccess/

Discussion Question 1. Do you think that there exists difference in communication style of Chinese and Americans?

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18

EXPORT DOCUMENTATION AND PROCEDURES

Learning Objectives After reading this chapter, you will understand: The role and importance of export documents How to prepare each document carefully The step by step procedure involved in export business Important steps in processing of an export order Procedure for preshipment inspection

EXPORT DOCUMENTATION The procedural and documentary formalities involved in the import and export marketing are diversely different from those required for the domestic marketing. In domestic marketing, a firm will have to meet the specific statutory requirement of the excise and taxation departments of its own country and raise a simple sales invoice on the customer. In export marketing, however, the agencies involved are too many and the exporter or importer will have to raise documents to the satisfaction of each organisation separately. The agencies involved include: 1. 2. 3. 4.

The importing organisation that has placed the export order on the marketing firm. The statutory, exchange control, customs and taxation authorities of both the countries. The port authorities at the port of loading and unloading of the goods meant for import and exports The shipping and warehousing or multimodal agencies involved in the process of moving goods and material from the point of manufacturing to the ultimate point of delivery as given out in the export contract. 5. The exporting firm will also have to prepare documents meant for the inspection agency if specifically mentioned by the importer in the export contract if the item is under inspection list. 6. The exporter will have to prepare documents meant for the agencies involved in financial transactions of releasing payment against the credit created by the importing organisation i.e. the foreign bank and the local country bank and the bank standing guarantee, etc, if involved.1 1. Alan Branch, Export Practices and Management, Thomson Learning, Business Press, 2000.

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In addition, there are many other agencies who would be specifying their own need for different documents to be complied with by the exporter before he gets released his proceeds collected from abroad. Export documentation to meet the needs of all these agencies constitutes heavy and cumbersome work for the exporting firms. They will have to do a lot of paper work and procedural formalities. Even though there are outsource agencies available that can be entrusted the task of preparing these necessary documentations and handle the procedural formalities, it is absolutely essential for the exporter to understand the importance of each document which, if ignored, can hold back his payment or even get the export contract rescinded altogether, in addition to creating legal complication at home or abroad. We will, in this chapter, undertake an exhaustive study of documents and procedures which an exporter has to comply with in an export contract. Export documentation is important as it plays a significant role in regulating the flow and movement of goods and services in international markets. Each country will have its own prescribed statutory documents to be filled up by the exporters and importers. Similarly, the signatories to the export contract will specify their own need of the documents to be submitted along with the shipments. The complexities of such comprehensive documentation call for the scrutiny of the paper work by the experts in the fields which are available with the experienced shipping and forwarding agencies in each country, who, in addition to the task of moving goods and commodities, also undertake the job of handling these documents for their clients. It is, however, important that exporters themselves are fully familiar with the export documentations and procedures so that unnecessary delay in getting the goods cleared from the ports can be avoided and the goods can be delivered as per the time schedule mentioned in the export contract. The export documents can be classified into the following four categories based on the specific functions performed by each of them:

Commercial Documents Commercial documents are the documents that are necessary to meet the customs and traditions of the export trade. These documents are essential to move the goods from one place to another and facilitate the transfer of ownership from the seller to the buyer after the realisation of sales proceeds. These documents include commercial invoices, bills of exchange, bills of lading, letters of credit, marine insurance policy, certificates of origin, and so on. These documents are the principal export documents. In addition, some of the other documents which are auxiliary to the export contract can be the proforma invoice, intimation for inspection, shipping instructions, insurance declaration, shipping order and letters to the banks for collection / negotiation of the documents.

Regulatory Documents Regulatory documents are the documents which have been prescribed by the regulatory authorities of the exporting country. Most of these are preshipment documents, compliance of which is mandatory for the fulfillment of an export contract. These documents include: 1. Excise gate pass I or II for clearance of goods as prescribed be central excise authorities. Earlier forms known as AR4/AR4A have been replaced by ARE1 form 2. Shipping bill/(being treated as Bill of Export) 3. Export application/dock challan as prescribed by port trust authorities 4. GR/ SDF/ PP forms as prescribed by the Reserve Bank for monitoring foreign exchange flow and control 5. Insurance payment certificate, depending upon ‘International Commerce Terms’.

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Export Assistance Documents Export assistance documents are needed for claiming governmental assistance and subsidies offered by the government departments and other exports promoting bodies in the country. A certificate of origin is required to avail of concessional duty by an importer wherever there is free trade agreement.

Documents as Prescribed by the Importers’ Countries Any purchase from abroad or import transaction is governed by the laws and regulations of his country. The importer, in order to satisfy the statutory provisions of his country’s government, will insist on the submission of such documents. Such documents may refer to mandatory pre-inspection, quality approval, child labour norms, environment norms, consular invoice or certificate of origin of goods, and so on. The export documentation can also be classified on the basis of function each document is purported to perform, i.e. the documents related to sales transaction of the goods, documents related to transportation and shipment of goods, documents related to inspection of exportable goods, documents related to negotiation of documents and receipt of payments, documents related to collection, control and conversion of foreign exchange proceeds and documents related to excise and other taxes as prescribed by the respective governments.

Documents Related to Sales Transaction of Goods (Commercial Documents) The commercial documents pertaining to the sales transaction of goods have been discussed as follows.

Proforma Invoice It refers to the advance copy of the proforma of the invoice sent to the importer to understand how the bill will finally be prepared for the goods ordered by him.

Invoice It is the basic document for an export transaction on the basis of which many other documents related to the exports of goods will be prepared.2 It is the sales bill of the goods ordered by the importer. It contains particulars related to the customer whom goods are being supplied, his name, address, his bankers details and import license numbers, etc. It also relates to the goods to be supplied, e.g., the price per unit, the number of units being supplied by this bill, the total sales value of the invoice, the taxation description and calculation if any, the terms of sales, packing units, the packing specifications, identification and private markings of the packing, bill of lading numbers, name of the ship and the intended destination of the goods, etc. Though invoices are signed by the authorised signatory of the exporter, some of the countries insist on their consular’s invoice which is nothing but an invoice raised by the exporter but signed by the consular of the importer country who is based in the exporter’s country.

Packing List The packing list refers to a consolidated statement of the contents packed in each large case and the numbers of such large cases meant for shipment. Such a list will mention the packing date, the name and address of the exporter, the name and address of the importer, the export order number and date, the contents of the goods in terms of quality and quantity, weight, special handling instructions, if any, and finally the marking numbers 2. C. Ramagopal, Export-Import Procedures, New Age Publisher, 2006.

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to identify the consignment. It does not, however, mention the export price, etc., which will be mentioned in the invoice.

Certificate of Origin3 The certificate of origin as the name suggests certifies the name of the country in which the goods meant for export have been produced. This certificate is sent by the exporter to the importer, as it will be needed by him to get the goods cleared by the customs authority of his country. The customs law of the country may have preferential duty rates for a particular country or the country may have put an embargo on the imports of specific goods from a particular country. In each such case, the submission of the certificate of origin will be required. The exporters can approach the chambers of commerce, the export promotion councils and many other trade promotion associations, authorised by the government to issue such certificates of origin.

Generalised System of Preference (GSP Certificate) It refers to the situation wherein the imports from a particular country are given a preferential treatment by the importing country for levying of import duties, etc. In such circumstances, the importing agency will prescribe and insist upon a special certificate from the exporter country, which can prove that the goods under export to the importer’s country are genuinely manufactured within the country only. “In India the goods are certified to be manufactured in India only if the goods have been wholly manufactured or produced in India or have been produced from the imported raw material which have undergone sufficient working or processing in India to be regarded as originating there.”4 In India, such a certificate is issued by the following agencies: (1) Directorate general of foreign trade and all its regional offices (2) All development commissioners of special economic zones (3) Export promotion councils (4) Export inspection councils and agencies (5) Commodity Boards and Export Authorities

Transport Documents (Documents Related to Shipment of Goods) Let us now try to look at the importance of transport documents in import/export business. These are the documents normally handled by the people in the logistic department.

Shipping Bill It is the principal document needed to obtain the permission of the customs to export the goods by sea or air. This document contains details regarding the exporter’s name and address, particulars and description of goods under export, details of the packages of goods, total number of packages, total weight, fob prices, value as defined in the sea customs and act, the name of the vessel, port of destination, and interim port if any before transshipment to final destination.

Mate’s Receipt The cargo is handed over to the ship only after all formalities by the custom authorities and port authorities have been completed, i.e. the examination of the goods by the custom’s authorities, and the payment of port charges, etc. have been paid by the exporter. The captain of the ship issues this receipt which contains 3. Justin Paul, International Business, 3rd Ed., Prentice Hall of India, 2007. 4. Justin Paul, International Business, Prentice Hall of India, Pp. 306-307.

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information regarding the name of the vessel, berth, date of shipment, description of packages, identification marks and numbers, condition of the cargo at the time of loading into the ship, etc. The mate’s receipt forms the basic document for issuing the bill of lading and the mates receipt will be exchanged for the bill of lading.

Bill of Lading It pertains to the official receipt issued by the shipping company or their authorised agent for carrying the goods to its destination. This bill of lading also forms a shipping contract between the exporter and the shipping company, to deliver the goods in the condition in which these have been received at the port of loading. The bill of lading is a document that establishes the ownership title to the goods and as such is the most important document. This document can be freely transferred and endorsed for delivery; hence the exporters have to be extra careful while obtaining a bill of lading from the shipping company. The bill of lading is prepared on the prescribed form of the shipping company and contains the following information:

Three original sets of bill of lading are issued by the shipping company. The non-negotiable copies can also be obtained with clear markings of “non-negotiable” for other necessary records, etc. Types of bill of lading Different kinds of bill of lading can be issued by the shipping company depending on the conditions in which goods have been received: Clean Bill of Lading It is issued when exportable goods have been received by the shipping vessel in good order and condition and no remarks are necessary on the conditions of the consignment. Claused Bill of Lading A bill of lading forms a contract between the shipper and the exporter to deliver those goods in the like order in which the same have been received. Hence, the shipping companies are extra careful while acknowledging receipt and issuing a bill of lading. The goods received in loose, badly packed, soiled or damaged conditions are issued only “claused bill of lading “will carry remarks on the conditions of the goods in which these have been received by the ship. Trans-shipment Bill of Lading If the shipping company has to use multimodal systems of transportation, e.g. rail, road, air or another shipping company, the ship’s commanding office can issue a through or transshipment bill of lading. Freight Paid Bill of Lading It refers to a bill of lading the freight for which has already been paid by the exporter. Freight Collect Bill of Lading It is similar to freight to pay consignment note issued by a transport. The freight in such conditions will be paid after arrival of the goods at the destination, by the consignee (importer).

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Airway Bill It is the receipt issued by the airline company or its booking agency for the carriage of goods by air. The air way bill can also be either freight paid or freight collect bill and the airline agency will clearly mention other charges, if any, are to be collected while delivering the consignment.

Financial Documents Financial documents in an export contract include Bill of Exchange, Letter of Contract to be opened by an importer, etc. Since the Bill of Exchange has to be prepared by an exporter, we will discuss about it in detail here.

Bill of Exchange Bill of Exchange is the common system to collect payment in international trade. A bill of exchange is as good as any other negotiable instrument covered by Section 5 of the Negotiable Instrument Act 1881. A bill of exchange is also known as draft, which is drawn by the exporter, calling upon the importer or the purchaser “to pay or accept obligation to pay a certain sum of money at a fixed future date”. Once this bill of exchange has been accepted and the drawee (importer) has signed on the face of the bill of exchange, it becomes obligatory on the importer (drawee) to arrange for the payment within the specified period of time. The accepted bill of exchange becomes a tradable instrument like any other negotiable instrument and can be transferred to a third party too. Broadly, there can be following three types of bill of exchange. However, for practical purposes, Bill of Exchange can be classified as (1) sight bill and (2) usage bill. Sight Bill of Exchange If refers to the situation when the drawer has asked the drawee to make payment against the draft bill of exchange immediately on receipt of the intimation about the document from the intermediary bank. The importer will be given the shipping documents for getting the delivery of the goods only after he has paid the sum drawn in the bill of exchange. This also means that the exporter has not allowed any credit period to the importer and has asked for payment against delivery. Usance Bill of Exchange When the export contract entered into by the signatories’ parties has allowed a specific period of credit to the importer , the exporter will draw usance bill of exchange and accordingly the draft drawn will also mention the credit period allowed by him to the importer. The drawee importer will accept the obligation after putting his seal and signature on the face of bill of exchange drawn. The bank will present the documents for collection of payment to the drawee after the stipulated period of credit and the proceeds will be remitted to the exporter by the bank as per the instructions sent along with the draft bill of exchange. Documentary Bill of Exchange When the bill of exchange is accompanied by the shipping documents e.g. bill of lading, marine insurance policy, commercial invoice, inspection certificates, certificate of origin, etc. (the documents that can establish title to the goods), it may be called Documentary bill of exchange. Such documents are handed over either against sight payment or against usance bill of exchange after acceptance of the same by the drawee importer as the case might be. The bill of exchange draft can, however, be used by the exporter for discounting to a bank and collecting payment thereof or he can also place them as collateral for loans etc., with his bankers. In any case, people do not use the term documentary bill of exchange in real life.

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LETTER OF CREDIT International trade involves business transactions between exporters and importers who are from different countries spread across the boundaries of two different sovereign nations. Each of them will have to strictly adhere to the rules and regulations set by their respective countries. Such a situation makes it quite a risky business for the seller. He either has to collect his payment for the goods supplied in advance or he has to negotiate the documents through bank. The third option available to an exporter is to extend clean credit facilities to his customers abroad. However, the bankers all across the world present a fourth viable option to both the parties involved in the international business, i.e. opening a letter of credit. The letter of credit arrangement offers an easy way out to handle the international payment system for the seller as well as the buyer from another country. “A letter of credit is an undertaking by a bank to pay or to arrange to pay for the specified merchandise provided that certain stipulated conditions are met by the beneficiary.” The letter of credit has been defined by the international Chamber of Commerce as “an arrangement, however named or described, whereby a bank (the issuing bank) acting on the request of and in accordance with the instructions of a customer (the applicant to the credit), to make payment to or to the order of a third party (the beneficiary), or is to pay, accept or negotiate bills of exchange (drafts) drawn by the beneficiary, or authorise such payment to be made or such drafts to be paid, accepted or negotiated, by another bank, against stipulated documents and compliance with stipulated terms and conditions.”

Basic Features of an Import Letter of Credit From the above definition, we can draw out the following basic features of a letter of credit: 1. It is an undertaking given by a bank to honour a financial commitment. 2. It is an undertaking given by the bank on behalf of its importer client. 3. It is an undertaking given by the bank to an exporter who may not be a client of the bank. 4. The undertaking will be honoured subject to the fulfillment of certain conditions by the exporter. 5. There is another bank being involved for collection of the sum promised in the letter of credit. The letter of credit offers a way out to meet certain financial commitments, which is advantageous to both the seller and the buyer, who otherwise cannot decide on either cash payment or a confirmed clean credit period owing to their unknown dealing characteristics in business transactions. The seller will not be in a dilemma to send material as the letter of credit ensures him the payment for the goods, he will be sending across the borders of his own country provided he follows the instructions as given by the importer in the letter of credit. The importer, on the other hand, is assured of the dispatch and shipment of material as per his instructions; even though he may have to take the trouble of opening a letter of credit with his bankers.

Parties to Letter of Credit5 Let us now classify the different parties to letter of credit. The Opener Applicant: The importer has to initiate the opening of the letter of credit with his bankers. The Issuing Bank: It is the bank that issues the credit in favour of the importer applicant. 5. For more details, refer to Management of Banking and Financial Services by Justin Paul and Padmalatha Suresh, Pearson Education.

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The Beneficiary: It is normally the exporter of the goods who is the beneficiary of the receipt of payment from the importer. Advising/Notifying Bank: It is the bank in the exporter’s country that will be notifying the beneficiary about the opening of credit in his favour, stating that the letter of credit is a genuine one. Confirming Bank: The confirming bank is situated in the exporter’s country. This bank confirms to the exporter about the availability of the opening of the credit and it also undertakes the obligation of paying the like amount should the issuing bank fail to honour its commitment. Thus, in a way, local banks stand guarantee for the payment of credit created by a bank in a foreign country. Negotiating Bank: The paying or negotiating bank is the bank on which the draft or bills of exchange have been raised by the importer and the commercial credit so created will be paid by this bank. It is not necessary to have three separate banks. The same bank can act as the notifying bank, the confirming bank and the paying bank too. Hence, the exporter’s bank is known as the negotiating bank.

Types of Letter of Credit The letter of credit can be classified into the following categories based on their operational features: 1. Documentary Letter of Credit: When the opener of the letter of credit specifies presentation of some documents to the paying bank along with the draft, it is called documentary letter of credit. 2. Assignable (Transferable) Letter of Credit: This kind of letter of credit can be endorsed to and the rights in the letter of credit can be assigned to a third beneficiary by the main beneficiary either within the stipulated period or before the expiry of the credit. 3. Non Assignable Letter of Credit: In such a letter of credit the beneficiary mentioned can not transfer or endorse this credit to some other party (merchant exporter to manufacturer). 4. Revocable Letter of Credit: Such letter of credit can be altered, cancelled, revoked or amended by the issuing bank without reference to the beneficiary or to the applicant as the rights for such an action vests with the issuing bank. 5. Irrevocable Letter of Credit: The issuing bank here cannot amend, cancel, or alter the letter of credit as a firm understanding exists between the bank and the applicant. Unless and until it is specified by the issuing bank that the letter of credit issued is revocable all letters of credit are deemed to be irrevocable. 6. Sight Letter of Credit: This is also known as the payment/cash credit. The payment against the credit so created will be paid on presentation of the sight draft by the beneficiary. Such a letter of credit is useful when the goods are not readily available and the order fulfillment will take little more time. In such a case whenever the goods are ready for shipment, the documents can be presented to the bank to encash the sight draft. 7. Acceptance Credit: Under such an arrangement, the bank will only accept the draft drawn by the exporter. Once the bank has accepted this draft, the draft becomes a valid bank acceptance and gains acceptance as a negotiable instrument. The same draft can now be readily discounted, sold or endorsed by the exporter to either of the same bank or any other third party. 8. Deferred Credit: The payment in this kind of credit becomes due in parts after specified future periods as per the terms of the export contract. Such a credit is created in those situations where the goods are supplied in different lots and when one lot is ready for the shipment the payment against the deferred

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credit created is released by the bank. This can also be utilised by the purchaser to gain some time to verify the goods shipped and only after he is satisfied, the payment against the credit is released by the bank. Confirmed Credit: When the letter of credit is confirmed by a bank in the beneficiary’s country, it is called a confirmed credit. Such confirmation constitutes a legal guarantee and undertaking on the part of the confirming bank that the credit will be duly honoured by it whenever the draft is presented for payment by the beneficiary or endorsee on completion of conditions mentioned in the letter of credit and presentation of stipulated documents. Unconfirmed Letter of Credit: Whenever the credit is not confirmed by any third bank that is a bank other than the issuing bank, it is known as unconfirmed credit. Such a credit carries undertaking of only of the issuing bank. LC can be advised by a reputed bank in this case. Back to Back Credit: When the credit is opened by the security of another credit, it is known as back to back credit. It is basically a secondary credit opened by a bank to facilitate the shipping of goods from the local market for a domestic manufacturer who can use the foreign credit to get acceptance of domestic suppliers and meet his commitment towards exports. Revolving Credit: The exports’ shipments could continue over a longer period of time, and to eliminate the need of opening a new credit every time the goods are ready for shipment, a revolving credit is arranged by the importer from abroad. In the revolving credit, provisions are inbuilt to make another credit available to the beneficiary as soon as the earlier draft presented to the bank is taken care of by the applicant. The principle applied here is that the fresh credit is automatically created after the original credit is withdrawn by the beneficiary. The other system will create a revolving credit only after the issuing bank reconfirms arrangement of fresh credit. Red Clause Credit: The red clause credit provides for the predetermined advance payment to the beneficiary against the credit created. It authorises the negotiating bank to release advance payment to the beneficiary to purchase the relevant goods which go into the making of exportable goods. The letter of credit sent to the negotiating bank will specify the conditions on which such advances can be released by the bank.

Step-by-Step Illustration of an Import Contract with a Letter of Credit Ø arranging a letter of credit. (The importer will not pay in advance, therefore the need for LC arises.) Ø letter of credit in favour of his supplier Ø documents that will be submitted along with draft upon usance or sight Ø Ø

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of such a credit and will ask the exporter’s bank to confirm the availability of such a credit to the exporter Ø stipulated to the credit Ø attached to the credit Ø making arrangement of the shipment for exports Ø the bank; this will include bills of exchange too Ø the documents with the terms set in the LC Ø importer. Source: Justin Paul and R. A. Serkar, Export–Import Management, Oxford University Press.

EXPORT PROCEDURES The export procedures refer to the essential steps involved in registering a firm for exports and imports with the offices of the Director General of Foreign Trade in India. No activity under the Exim Act for export or import can be undertaken by any individual or organisation until and unless they have obtained an importerexporter code from the offices mentioned above.

Importer–Exporter Code Number Importer–exporter code number refers to the registration obtained by the exporter or importer from the regional licensing authority. Each person who intends taking to export business (unless specifically exempted) will have to make an application to the regional offices of the Directorate General of Foreign Trade on the prescribed format in duplicate along with the following documents: 1. The profile of the individual, company (in duplicate) 2. True copy of Income Tax Pan Account number 3. True copy of the sales tax registration certificate if available 4. The prescribed government fee 5. The certificate from the bankers as per format 6. Full address of the applicant in India along with details of the branches if any

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7. Three passport size photographs signed by the applicant on the reverse 8. Small scale industry or cottage industry registration duly certified by the competent authority 9. Declarations as prescribed in duplicate. This IEC number, which is in ten digits, will be incorporated in all documents by the exporting / importing firm in all their documentations in future. It is a permanent number and is valid for all products, the applicant intends to deal into.

Membership cum Registration From Export Promotion Councils6 The membership of export promotion councils and other bodies involved in export promotion activities will help the exporter gain relevant information on various countries and commodities from time to time. These export promotion councils, commodity boards and export development authorities keep their member informed of emerging trends and opportunities in international markets. They also undertake providing market information systems to their members on emerging enquiries from importers abroad. Exporters can also become members of chambers of commerce, productivity councils and other such trade promotion agencies and associations in order to obtain the following benefits: a. to get commercially useful information on how to develop exports potentials and products b. to get professional advice on technological upgradation, design and quality improvements, international and country specific standards and specifications, to get value innovation in productions systems and products c. to join the delegations sponsored by the trade promotion councils for exploring exports business and participation in international trade fairs and exhibitions d. to get an opportunity to interact with state and central government authorities, exporters and importers from other countries.

Registration cum Membership Certificate The exporter will have to make an application for membership to one of the councils related to his main line of business and immediately, on receipt of such application, the exporter will be allotted a registration cum membership certificate. The membership will be subject to the rules and regulations framed by the councils from time to time. LIST OF EXPORTS PROMOTION COUNCILS IN INDIA Following is the list of various export promotion councils and commodities boards actively involved in extending advice and assistance to exporters on different export and import aspects related to international business.

6. Refer Justin Paul, International Business, 3rd Ed, Prentice-Hall for more information.

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Source: http://exim.indiamart.com/reference-directories/export-promotion-councils-india.html

Registration with Sales Tax Authorities The firm will have to register itself with the local sales tax authorities and obtain a tax identification number (TIN) in order to become eligible for sales tax exemptions on export goods.

IMPORTANT STEPS IN PROCESSING OF AN EXPORT ORDER 1. Inquiry and Offer The exporter may get an inquiry for exports through the trade promotion councils or a direct request from the prospective importer from another country. The enquiries will contain information on the details of products

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and goods required by the importers from abroad. The inquiry will also specify complete details of the goods, e.g., the volume and the value, the grading, catalogues, sizes, weights, the international standardisations certificates, the expected time of delivery and the mode of shipment along with the port of destination etc. The exporter can obtain more information on the intended importers through the trade promotional councils, if required. He must immediately attend to the enquiry by responding through the email and provide details on products through literature and catalogues etc. At the outset, the exporter will have to make his offer to the importer in which he will have to submit his quotation on a proforma invoice and other relevant details like the products to be supplied, their rates, quantity, quality, value, details regarding the freight, insurance and other charges. He will also quote the time of payment, the method of payment if letter of credit needed, the conditions of sale, delivery period and other details on warranty/inspection, approval by the home authorities, certification by the international standardisation authorities etc.

2. Acceptance and Confirmation of Purchase Order Once the importer has accepted the offer made to him, he will have to place an order with the exporter. The negotiation if any will take place before placing of a confirmed order by the foreign buyer. The exporter, on his part, will have to confirm the acceptance of the order by immediately conveying his acceptance in writing. He will have to send a proforma invoice in triplicate to the buyer and ask him to return two copies duly acknowledged and signed by him so that out of these two signed copies, one copy can be signed by the exporter too and sent back to the importer buyer. This will signify the confirmation and acceptance of the order by the exporter too and an international contract for the export order will become binding between both the parties.

3. Export Sales Contract The confirmation and the acceptance of the offer will result into formation of an export contract between the exporter and the importer. This contract will carry details on the terms and conditions of the international deal. Although there are no specified rules by any competent authority on the export contracts, a normal contract will carry details pertaining to details of goods, their quality and quantity, price per unit and the total value of the contract, validity of prices, delivery/ shipment periods, packing and forwarding instructions, inspection if needed, terms of payment, insurances and finally documents and certificates needed to fulfil the documentary requirements.

4. Export Permissions and Licenses There is freedom to export all items unless these items are banned or put on the restrictive list for which a license will be required from the competent authority. The exporter will have to check if he needs to get the license issued for the items for which he has received the export order.

5. Managing Finances for Exports There are various schemes and finances available for pre-shipment finances. The exporters can check with the banks and export promotion councils of their respective products as to how to avail these financial assistances.

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6. Managing Production/Procurement of Goods Once all formalities have been completed and the exporter has entered into a sales contract with the importer, the exporter has to now ensure he manufactures or procures goods as per the specification given in the export contract.

7. Reserving Shipping Berth Though the leading shipping companies announce their schedules in leading media papers and daily shipping intelligence news from time, to time but generally the task of booking berth space for cargo is outsourced by shipping companies to the carrying and forwarding agents (C&F agents). These C&F agents work as commission agents and will reserve the shipping space on a commission. The exporter needs to get in touch with them immediately after the export order has been confirmed and book the required shipping berth with the shipping company on the port through which shipment will be taking place.

8. Packing and Marking The importer will specify in the export contract about the standards and specifications to be followed for the packing and marking of the goods meant for exports. In the absence of any such instructions the standard practices prevailing in the industry will have to be followed. The Bureau of Indian Standards have specified ceratin standards for packing of export items, the exporter can get these details from the bureau. Similarly Indian Institute of Packaging set up by the government of India in 1966 the requisite know how on export packing standards and the institute have been advising the exporters on these developments at the international level. The international institutes e.g. the British Standard Institution and the standard institutions of many other countries have their own packing standards for different items. In addition the shipping companies will have their own specifications for the packings that can be accommodated on the shipping berths. The exporter will have to follow these instructions thoroughly in order to avoid facing rejections at a later stage. The standardised international markings will have to be followed in addition to the special marking instructions given by the importer. Generally, these markings will include the private marking of the consigner, the shipping marking of the consignee, the port of destination, measurements, the country of origin and special handling instructions if any e.g., fragile, handle with care etc. Besides, the exporters can also refer to the recommendations of various international cargo handlers associations and trade associations to understand the usage of symbols and markings in use for shipment of export cargo. Organisations like International Cargo Handling Co-Ordination Association and International Trade Forum have framed certain rules to be followed by shippers in this regard. These instructions will help the exporter mark his cargo correctly and in accordance with the practices prevailing.

9. Preshipment Inspection In order to ensure the exporters from India strictly adhere to the quality expectations and standards of international trade, the government of India had introduced the Export Quality Control and Inspection Act in the year 1963. As per this Act, certain items meant for exports have been put on compulsory preinspection list and these items cannot be exported unless a certificate of preinspection have been obtained from the Export Inspection Council of India based in New Delhi or from any of their regional offices situated in Mumbai, Kolkata, Chennai, Kochi or Ahmedabad. But exemptions are given under some circumstances. The Export Inspection Council is responsible for the operation of the (Export Quality Control and Inspection Act). Under the Act, a large number of exportable commodities have been notified for compulsory preshipment

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inspection. The quality control and inspection of various export products is administered through a network of more than fifty offices located around major production centers and ports of shipment. In addition, organisations may be recognised as agencies for inspection and /or quality control. Recently, the government has exempted agriculture and food products, fruit products and fish and fishery products from compulsory preshipment inspections; provided that the exporter has a firm letter from the overseas buyer stating that the overseas buyer does not require pre-shipment inspection from official Indian inspection agencies.8

Procedure for Preshipment Inspection Once the exporter has identified that he will have to undertake pre-inspection of the goods meant for export, he will have to send intimation for inspection to the regional or local inspection office of the council alongwith the following information: 1. Written intimation of inspection request in three copies 2. Three copies of invoice 3. Three copies of packing list which should carry package wise details, net weight of products in each package and the gross weight 4. Specification of the product under export 5. A copy of the export order from the importer buyer from abroad 6. The requisite fee for inspection.

Types of Preshipment Inspection Two kinds of preshipment inspections have been there in this field:

Consignment Shipment Under this arrangement, every consignment ready for export has to be compulsoril inspected by the inspectors from the offices of the export inspection agencies and only after clearance from the EIA, the consignment can be sent for shipment.

Self Certification Scheme Export houses with star status, public limited companies, large scale manufacturers, international organisations with manufacturing base in India, manufacturers who have set up their own research and development units along with the testing facilites are given the authority to self inspect their products and submit a self declaration certificate of having met the required quality standards. The export unit or the exporter will have to apply to the Directorate Inspection and Quality Control, New Delhi for the permission of self certificate scheme. Exemption from Preshipment Inspection The following categories are exempted from the compulsory preshipment:

8. http://www.indiadairy.com/zone_importexport.html

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Excise and Customs Clearance Excise Clearance The exporter can export the products under (except for the products for which the exemption has been granted from excise duty) either against a bond submitted to excise authorities or he may pay full excise duty at the gate and then remove excisable goods from the factory. In a situation where he has paid full excise duty, he may lodge a claim for the refund of excise duty later on with the excise authorities. However, in the case of goods cleared from the factory under a bond, sufficient surety and security will have to be provided to the excise authorities. The quantum of such a surety will be fixed by the Controller of Central Excise. ARE I form will be used for making an application for removing excisable goods from the factory.

Customs Clearance The exporter will be allowed to ship the export order only after he has obtained clearance from the port customs authority. Although there are Custom House Agents available at each port who specialise in documentations for customs clearance, it will be important to understand the procedure and the documentation involved in customs clearance. The exporter or the CHA* will have to submit the following documents to the customs authorities at the port of clearance: 1. The shipping bill 2. Declaration regarding truthfulness of the statement made in the shipping bill 3. Invoice 4. GR/SDF form 5. Export License in case of restricted goods being exported 6. Quality control inspection certificate/ self declaration 7. Original contract for exports or the export order 8. Letter of credit if applicable 9. Packing list 10. ARE I form 11. The customs authorities can specify any other relevant document for submission. (We have discussed in detail the purpose of each document in an earlier part of this chapter.) The customs authorities, after verification and scrutiny of all these documents, will approve the cargo to be brought in inside the shed for exports at the port. The shipping bill so approved will have to be presented to the cargo in charge of the steamship company for allowing the goods meant for exports inside the cargo shed. The customs clearance can be arranged at the factory premises too by making an application to the Assistant Collector of the Customs of that particular industrial area. Similarly, the Inland Container Depots too have the arrangement of customs clearance at the inland container depots from where the goods can be loaded into the containers after the verification by the customs authorities. However, in both such cases, the preventive officer at the port can inspect the sealed containers before these are allowed to be loaded into the ship. The government authorities have established Inland Container Depots at the places where there is no international sea port, i.e. in India places like Indore, Nagpur, Tughlakabad (near Delhi), Coimbatore to facilitate multi-modal transport of export/import cargo in containers. The procedures at an ICD can be specified in a box. *CHA stands for Customs House Agent.

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Handling Exchange Control Transactions for Exports The Reserve Bank acts as the controller and monitor of all foreign exchange reserves of the country in India. An exporter who has undertaken an export transaction will have to satisfy the Reserve Bank of India about the inflow of foreign exchange into the county against the payment due from the export transaction. The exporter or his CHA will have to submit the following forms prescribed by them as given below:

GR/SDF Form GR/SDF form contains the following information: 1. Name and address of the exporter alongwith the description of goods 2. Name and address of the authorised dealer (bank) through whom the proceeds against the export supplies will be realised or have been collected 3. The details of the commissions and discounts, incentives to be paid to the foreign agent or buyers 4. The complete breaks up of the full export value e.g., break up of the fob, freight, insurance, discount, commission etc.

Disposal of GR Form shipment.

duplicate copy will be handed over to the exporter or his CHA. The original will be forwarded by the customs to the RBI. days of the shipment, to his authorised dealer (bank). There are other kinds of forms, e.g. Statutory Declaration Form (used at the computerised points), the Softex Form (used in case of export of computers software etc) and the PP Form (used in case of post parcel exports) the disposal of which will be as under:

A. Softex Form It is used in respect of exports of computer software, audio/video television software. Three copies of this form are submitted to the designated officer of the Departments of Electronics, Government of India, based at the software technology parks of India, or at the free trade zones, or at the export processing zones. The original copy, after certification, will be sent to the office of the Reserve Bank, duplicate returned to the exporter and the third copy is retained by the electronic authority.

B. Post-parcel Form In case of goods exported through the post parcel, the exporter has to fill up post parcel form in triplicate. The original copy will be signed by the banker which will be submitted to the post office for booking of the post parcel. The post master shall forward the original copy to the office of the RBI. The duplicate copy will be retained by the dealer bank that will be given the original documents for collections of remittances of foreign exchange from abroad, within the prescribed time limit of 21 days.

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Insurance of the Export Consignment In order to cover up the risks and to take preventive care of the goods being sent by the ship, the exporter will be required to get the marine insurance for the consignment under exports. The cost of such marine insurance will be borne by either party depending on the terms agreed to in the export contract. The subsidiaries of the General Insurance Corporation undertake the task of marine insurance in India. Besides, many other underwriters too are handling the business of marine insurance, e.g. Lloyds, Royal Sundaram and host of others. The details of such agencies can be had from the website http://www.tradeindia.com/Service_ Providers/Indianserviceproviders/Consulting/Insurance. The exports risks related to payment of export credits, etc. are covered by the Export Credit Guarantee Corporation. The details can be had from the official website: https://www.ecgcindia.com/Portal/ productnservices/guarantees/postshipmentexport/postshipment.asp

Shipment of the Goods Goods for export can be sent to the customers abroad by way of sea, air, post land or river.

Shipping by Sea We had noticed earlier that the goods are sent to the port-shed after they have been scrutinised by the customs authorities. The retention of the goods at the port-shed involves payment of various charges which are to be paid to the port commissioner before goods are allowed to be put on board in the vessel. Once the Preventive Officer of the Customs Department has given the permission for exports, he will issue a let ship order. Based on this slip of let ship, endorsement is carried by the preventive officer on the duplicate copy of the shipping bill. The shipping company or the commander of the ship will permit the loading of the cargo only on production of the shipping bill along with the let ship slip. The master of the ship will issue a Mate’s Receipt containing information about the name of the vessel, berth, and date of shipment, description of packages, marks and number and the condition of the cargo at the time of loading. Based on the details given in the Mate’s Receipt, two copies of the Bill of Lading will be prepared by the exporter or his agent. These two copies of the Bill of Lading along with the Mates Receipt will be submitted to the shipping company. The shipping company will be calculating freight on the basis of the measurements or weight etc given in the mates receipt. On payment of the freight by the exporter, the shipping company will be issuing duly signed Bill of Lading to the exporter. This Bill of Lading duly signed by the authorised signatory of the shipping company, establishes the title to the export goods shipped on the vessel. We have already given the process of loading the goods at the inland container depots in this chapter in an earlier section.

Shipping by Air Shipping by air is advantageous in many cases where the goods are perishable in nature, or seasonal, are high in cost and less bulky in nature. The shipment by air can be fast, timely and pilferage and theft free. The detailed discussion on airway bill has already been done in an earlier section of this chapter.

Shipping by Post The post parcel can be sent for commercial goods to a foreign buyer. The export of goods by parcel post either for gift purpose or for meeting the commercial export contract are governed by or regulated by the provisions of the postal notice no. 13, dated 3rd November 1973. This notice is also reproduced in the Hand Book of

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Export Import Procedures published every year by the Ministry of Commerce. The exports by post are also governed by the foreign trade and foreign trade regulations as in force in the country from time to time. It is for the exporter to satisfy the legal and statutory provisions of the export post parcel and the post office may not hold any responsibility even in the eventuality of having accepted a parcel for exports. Such parcel, if rejected by the customs, will be confiscated and the contents will not be returned.

Shipping by Land The procedure for export by land routes are similar to the procedure adopted by the sea route. However, the treatment of form AREI will be slightly different. The excisable goods will have to be presented to the frontier customs officer once again and resealed and repacked in the presence of the frontier customs officers.

Presenting Documents to the Bankers for Collection The last step pertains to the presentation of documents to the negotiating bank for encashment of the draft against the letter of credit. The exporter will be presenting the following documents to the bankers: 1. Letter of credit 2. Bill of lading 3. Commercial invoice 4. Packing slip 5. GRI/SDF form 6. Certificate of origin 7. Marine insurance policy. The negotiating bank will forward the set of shipping documents to the foreign bank of the importer for payment.

Points to Remember Commercial Documents: These are the documents that are necessary to meet the customers and traditions of the export trade. Regulatory Documents: These are the documents which have prescribed by the regulatory authorities of the exporting country. Proforma Invoice: It refers to the advancy copy of the invoice sent to the importer to understand how the bill will finally be prepared for the goods ordered by him. Packing list: It refers to a consolidated statement of the contents packed in each large case and the numbers of such large cases meant for shipment. Bill of loading: It pertains to the official receipt issued by the shipping company or their authorised agent for carrying the goods to its destination.

Objective Type Questions 1. Which one of the following is not a kind of bill of lading? (a) Clean bill of lading (b) Claused bill of lading

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(c) Stale bill of lading (d) Clear bill of lading (e) Transshipment bill of lading. Which of the following features the importer–exporter code number does not have? (a) It is a ten digit number (b) It is incorporated into all exim documents (c) It is a permanent number (d) Directorate general of foreign trade or its regional offices issue this number (e) Each product will have a separate import export code number Which one of the following authorities issues the letter of credit? (a) Advising/notifying bank (b) Paying/Bank (c) Negotiating bank (d) Confirming bank (e) Issuing bank Which one of the following is not a party to letter of credit? (a) Opener applicant (b) Beneficiary (c) Paying bank (d) Negotiating bank (e) Inspection authority Which one of the following is not a kind of letter of credit? (a) Red clause credit (b) Revolving credit (c) Back to back credit (d) Issuance credit (e) Confirmed credit Which one of the following documents will not be submitted by the exporter or the CHA to customs authorities at the port of clearance? (a) Shipping bill (b) Quality control inspection certificate/ self declaration (c) Letter of credit (d) GR/SDF form (e) Bill of exchange Which one of the following is not a kind of bill of exchange? (a) Sight bill of exchange (b) Usance bill of exchange (c) Clean bill of exchange (d) Documentary bill of exchange (e) Unconfirmed bill of exchange An exporter who has undertaken an export transaction will have to satisfy one of the following banks about the inflow of foreign exchange into the county against the payment due from the export transaction: (a) Reserve Bank of India (b) State Bank of India (c) Central Bank of India (d) Bank of India (e) None of these Which one of the following documents will not be submitted by the exporter to his bankers for collection of payment? (a) Letter of credit (b) Bill of lading (c) Commercial invoice (d) Packing slip (e) Membership cum registration certificate of export promotion council

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10. Which of the following government agencies covers the exports risks related to payment of export credits, etc. (a) Reserve Bank of India (b) Export promotion councils (c) GIC and its subsidiaries (d) Export credit guarantee corporation (e) Export inspection council

Review Questions 1. What is a letter of credit? Explain briefly the operation of a letter of credit. 2. What documents will be sent to the negotiating banker for collection of export payments? Explain what a packing slip is. 3. Discuss various types of letter of credit. 4. Write short notes on: (a) Consular invoice (b) Mates receipt (c) Bill of lading (d) Bill of exchange (e) Parties to a letter of credit

Suggested Readings Alan Branch, Export Practices and Management, Thomson Learning – Business Press, 2000. Justin Paul, International Business, 3rd ed, Practice-Hall of India, 2007. Paul Justin and R. Aserkar, Export-Import Management, Oxford University Press, 2010. Paul Justin, International Business, PHI, 5th ed., 2011.

Useful Weblinks http://exim.indiamart.com/reference-directories/export-promotion-councils-india.html) http://www.indiadairy.com/zone_importexport.html http://cenexcisenagpur.nic.in/Customs/export.htm http://www.tradeindia.com/Service_Providers/Indianserviceproviders/Consulting/Insurance https://www.ecgcindia.com/Portal/productnservices/guarantees/postshipmentexport/postshipment. asp

Annexure 1 Export Procedure at Inland Container Depot A Specimen of Instructions and Systems from ICD Ajni, Nagpur 1. Presentation of Shipping Bill: The Exporter/CHA will file five copies of Shipping Bill in the case of Non Drawback shipment, i.e. original, duplicate, triplicate (Export promotion copy) and two transference copies. In the case of shipment covered under drawback/DEEC the Exporter/CHA will file six copies of Shipping Bill, i.e. original, duplicate, triplicate (Drawback copy), quadruplicate (Export promotion Copy) and transference copies.

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2. Noting: All copies of the Shipping bill will be presented in the prescribed proforma along with all relevant documents in the Noting Section of Export Branch of ICD, Ajni, Nagpur. In addition to the normal information given in the Shipping Bill, the Exporter should be requiring to mention the port of Exit. However, at the time of noting, they may not give the Container No., if the same is not available with them. But the same should be furnished before the ‘Let Export’ order is given. Each container must have different mark and number. 3. Processing: Classification and assessment will also be completed at ICD, Ajni, Nagpur. The Shipping Bill will be presented together with the copies of G. R. Forms, Invoice, Packing list, Quality Certificate (whenever required), contract/buyer’s orders etc. to Noting clerk. After scrutiny, the Noting clerk will stamp the date of presentation and assign the serial number to the Shipping Bill. The inspector will process the Shipping Bill by conducting usual prescribed checks. 4. Assessment: The inspector will pass on the Shipping Bill to Appraiser/Superintendent (Supdtt.) (Assessment). The Appraiser/Supdtt. will complete the assessment by carrying-out all necessary checks. Further, if drawback amount is less than Rs. 25,000/- and no DEEC benefit is claimed, the Appraiser/Supdtt. will process the shipping bill finally. If the drawback amount involved is more than Rs. 25,000/- or above or the shipment is under DEEC claim, the Shipping Bill will be put up to Assistant Commissioner of Customs for finalisation. Thereafter, after detachment of first copy of the Shipping Bill and G. R. I. form, the remaining copies of the Shipping Bill and G. R. I. form, the remaining copies off the Shipping Bill will be returned to the Exporter/CHA who will acknowledge the receipt thereof. 5. G.R.I. Formalities: The exporter would be required to submit along with Shipping Bill a full set of G.R.I. forms. The assessing officer will verify the full export value as usual in G.R.I. form. The original G.R.I. form shall be retained by the Customs and subsequently forwarded to the Reserve Bank of India. Shipment certificate on the duplicate copy of G.R.I. form shall be furnished after the Customs examination of the export cargo and sealing of the containers by the proper officer of the export shed at ICD, Ajni, Nagpur. The explorer shall be handed over duplicate G.R.I. form which will subsequently be presented to the Bank by the Exporter. 6. Arrival of Export Goods at ICD,: One copy of the processed Shipping Bill will be presented by Exporter/CHA to the Shed incharge (Exports) for giving space availability certificate and other formalities. The CONCOR will thereafter give carting permission on one copy of the Shipping Bill. The Exporter/CHA after arrival of goods presents Shipping Bill to the Goods Arrival Clerk who will make necessary entries about the arrival of goods in the register maintained for this purpose. On receipt of the acknowledgement from the Shed In-charge (Export) that the goods have been received in the shed, Shipping Bill will be presented to the Appraiser/Superintendent who will give examination order on the duplicate copy of the Shipping Bill. 7. Examination–I: On receipt of the Shipping Bill the examining officer in the shed will examine the goods in presence of the exporter/CHA and will give his examination report. In case of Drawback, Shipping Bill, samples, whenever necessary, will also be drawn in presence of exporter/his representative. The examination report will be counter-signed by the Appraiser/Supdt. (Exam) who will also verify the export value on the G.R.I. form. 8. Examination – II: After examining, the stuffing of containers will be done only after obtaining permission from the Supdt. (Exports) by the Manager, ICD. The stuffing of containers will be done strictly under Customs supervision and CONCOR/CHA or exporters representative of shipping-

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line. The stuffing sheets will then be prepared and signed by the exporter/representative of the shipping-line and jointly signed by shipping-line and shed in-charge. A complete record of number of shut out packages and the quantities of goods loaded will be recorded on the Shipping Bill after the stuffing of container is done. Thereafter the container will be duly sealed with Customs OTL (One Time Lock) seal. However, the case of shut out cargo Shipping Bill will be put up to the Assistant Commissioner of Customs. After the Customs copy of the stuffing sheet is presented to the Supdtt. (Exports), he will give the “Let Export” order on the duplicate copy of the Shipping Bill as also the transference copies. Simultaneously with stuffing of the goods in container, exporters will prepare in quadruplicate, the invoice and container-wise packing list/weight specification indicating inter-alias, the number of packages with marks and numbers, description and total quantity/net weight packed in each container along with corresponding Shipping Bill Number. The Appraiser/Supdtt. will certify these details on the invoice/packing list. The duplicate copy of the Shipping Bill will be retained in the ICD, and triplicate handed-over to the exporter. The export promotion copy of the Shipping Bill shall be handed-over to exporter after “Let Export” order has been given by the Customs Officer and the container has been sealed. The copy will be suitably endorsed by the Customs Officer to the effect that the goods will be transshipped at the Gate-way port for their destination outside India. The two transference copies of the Shipping Bills will be placed in a sealed envelope and handedover to the CONCOR who will be responsible for producing it along with the container to the Customs Office at the port of exist. A register in Proforma “C” should be maintained by the custodian for the cargo dispatched from ICD, Ajni, Nagpur, to the Gate-way (Exit) Port and a copy of thereof submitted to Customs Officer. The factory stuffing of the export containers will be allowed after seeking permission from the Assistant Commissioner of Customs, ICD, Ajni, Nagpur. In such cases the containers will be stuffed by the exporters under Central Excise supervision and the containers will be sealed with punch seals (Lead seals) by Central Excise and forwarded to ICD, Ajni, Nagpur for onward transshipment to the gateway ports. On arrival of the container at ICD, Ajni, Nagpur the goods will not be done only if the seals of the containers are found to have been tempered with or damaged. At the gateway port, the container will normally be allowed to be exported under preventive supervision on checking the seals without any further examination. Examination will only be done if the seals of the containers are found to have been tempered with or damaged or on the basis of any information, doubt, etc. The preventive officer, who will be inspecting the container, will suitably endorse two transference copies of the Shipping Bill regarding the fact of shipment in the following manner:(i) Inspected and found intact the container bearing the following marks and numbers:- (1) (2) (3) (ii) The customs seals on the above mentioned containers found intact. (iii) All the containers mentioned above have been shipped under my supervision.

1. In token of having allowed shipment the Preventive Officer at the Gate-way Port would be required to put his dated signatures with full name/officer seal. 2. At the port of shipment, the steamer agent will also file the export manifest in duplicate. After the

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shipment of the goods, the officer concerned must send the transference copies of the Shipping Bill within 24 hours of loading of the goods to the container unit of the Export Department. 3. Within 24 hours of receipt of the Shipping Bills, the container unit will send a telex regarding the fact of shipment mentioned under (i), (ii) & (iii) above to the ICD, Ajni, Nagpur, giving reference of the Shipping Bill No. to which it pertains. The Container Unit shall then dispatch one copy of the transference Shipping Bill and one copy of the export manifest under registered acknowledgment due to the Assistant Commissioner of Customs, ICD, Ajni, Nagpur within 48 hours of their receipt. 4. The Assistant Commissioner of the Container Unit of the Gate-way Port will ensure that all the Shipping Bills and manifests have been duly dispatched to the ICD, Ajni, Nagpur. The second of the transference shipping bill will be retained by the Customs House at the Gate-way Port. 5. At the ICD, Ajni, Nagpur the export manifest and transference copy of the Shipping Bill, received from the Gate-way Port, will be co-related with the duplicate copy of the Shipping Bill and other relevant documents for closure of export manifest and cancellation of bonds, if any. The transference copy of Shipping Bill will be sent to the Drawback Section for further action if it is drawback shipment. If there is no drawback claim, the transference copy of Shipping Bill will be filed with the parent EGM. Thereafter, the EGM will be closed after audit. 6. Drawback claims may be filed with the Drawback Section in ICD, Ajni, Nagpur within the stipulated period and in the prescribed proforma. The claim will be processed preaudited by the special audit team of the Hqrs. and cheques will be issued at ICD, Ajni, Nagpur. Source: http://cenexcisenagpur.nic.in/Customs/export.htm

Annexure 2 Institutional Framework for Export Promotion There are many organisations in the public sector with the purpose of promoting international trade. Their objectives can be listed as follows:

The important institutions responsible for monitoring and promoting exports are as follows.

Department of commerce (Ministry of Commerce) The department of commerce is an umbrella organisation for the entire foreign trade.

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Ministry of commerce comprises seven different divisions, each headed by a divisional head. These divisions are:1

Institutional Framework The apex institutions set up by the Ministry are as follows:

Export Promotion Councils There are at present Export Promotion Councils under the administrative control of the Department of Commerce and nine export promotion councils related to textile sector under the administrative control of Ministry of Textiles. These councils are registered as non-profit organisations under the Companies Act/Societies Registration Act. The Export Promotion Councils perform both advisory and executive functions. These councils are also the registering authorities under the Export Import Policy, 1997–2002.These councils have been assigned the role and functions under the said policy.

Role The main role of the EPCs is to project India’s image abroad as a reliable supplier of high quality goods and services. In particular, the EPCs encourage and monitor the observance of international standards and specifications by exporters. The EPCs keep abreast of the trends and opportunities in international markets for goods and services and assist their members in taking advantage of such opportunities in order to expand and diversify exports. MAJOR FUNCTIONS OF THE EPCs increasing their exports;

and state levels. and imports of their members, as well as other relevant international trade data. 1. Ministry of Commerce website, accessed on 21 September 2010.

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Non-Profit, Autonomous and Professional Bodies The Ministry of Commerce and Industry/Ministry of Textiles of the Government of India, as the case may be, would interact with the Managing Committee of the Council concerned, twice a year, once for approving their annual plans and budget and again for a mid-year appraisal and review of their performance.

Registration-cum-Membership An exporter may, on application, register and become a member of an Export Promotion Council. On being admitted to membership, the applicant shall be granted forthwith Registration-cum-Membership Certificate (RCMC) of the EPC concerned, subject to such terms and conditions as may be specified in this behalf. Prospective/potential exporters may also, on application, register and become an associate member of an Export Promotion Council. Export promotion councils have been set up for apparels, basic chemicals, pharmaceuticals and cosmetics, chemical and allied products, carpets, cashew, cotton textiles, electronics, computer software, engineering, gems and jewelry, handicrafts, handloom, leather, overseas construction, plastics and linoleums, shellac, silk, synthetic and rayon textiles, sports goods ,wools and woolens. These councils offer advice to members in areas of technological development, design improvement standards, and specifications, product development and innovations to meet the international standards. There are different Export Promotion Councils under Department of Commerce. They are as follows: S.No

Export Promotion Councils

Websites

1.

Engineering Export Promotion Council

http://www.eepcindia.org or http://www. eepcindia.com

2.

Project Exports Promotion Council of India

http://www.projectexports.com/

3.

Basic Chemicals, Pharmaceuticals and Cosmetics Export http://www.chemexcil.gov.in Promotion Council

4.

Chemicals and Allied Products Export Promotion http://www.capexil.com Council

5.

Council for Leather Exports

http://www.leatherindia.org

6.

Sports Goods Export Promotion Council

http://www.sportsgoodsindia.org/

7.

Gem and Jewellery Export Promotion Council

http://gjepc.org

8.

Shellac Export Promotion Council

http://www.shellacepc.com

9.

Cashew Export Promotion Council

http://www.cashewindia.org

10.

The Plastics Export Promotion Council

http://www.plexconcil.org

11.

Export Promotion Council for EOUs & SEZ Units

http://eouindia.com

12.

Pharmaceutical Export Promotion Council

www.pharmexcil.com

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Export Promotion Councils under the Ministry of Textiles are as follows: S.No 1.

Export Promotion Councils

Websites

Apparel Export Promotion Council

http://www.aepcindia.com

2.

Carpet Export Promotion Council

http://www.indiancarpets.com

3.

Cotton Textile Export Promotion Council

http://www.texprocil.com

4.

Export Promotion Council for Handicrafts

http://www.epch.com

5.

Handloom Export Promotion Council

http://www.hepcindia.com

6.

Indian Silk Export Promotion Council

http://www.silkepc.com

7.

Powerloom Development Export Promotion Council

http://www.pdexcil.org

8.

Synthetic and Rayon Textile Export Promotion Council

http://www.synthetictextiles.org

9.

Wool & Woolens Export Promotion Council

http://www.wwepc.org

Commodity Boards under Department of Commerce The commodity boards such as Rubber Board, Silk Board are public sector organisations. They are related to specific products. They deal with entire range of problems of production, development and marketing of products in overseas markets. Undertake promotional activities, e.g. participation in international trade fairs, exhibitions, sponsorship of delegations for international trade studies etc. The following are the commodity boards in India: Commodity Boards in India

Website Links

Central Silk Board

http://silkboard.com/

Coconut Development Board

http://www.coconutboard.nic.in/

Coffee Board

http://www.indiacoffee.org/

Coir Board

http://coir-india.com/

Rubber Board

http://www.rubberboard.com/

Spices Board

http://www.indianspices.com/

Tea Board India

http://tea.nic.in/

Tobacco Board

http://www.indiantobacco.com/

Export Inspection Council (EIC), New Delhi The EIC, an autonomous body under the government, is responsible for the enforcement of quality standards and compulsory pre-shipment inspection of the various commodities meant for export and notified under the Export (Quality Control & Inspection) Act, 1963. It is headed by a Director. EIC is assisted in its functions by the Export Inspection Agencies (EIAs) located at Chennai, Delhi, Kochi, Kolkata and Mumbai along with a network of 42 sub-offices and laboratories to back up the preshipment inspection and certification activities.

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Indian Institute of Foreign Trade (IIFT), New Delhi The IIFT, the premier institute under the Ministry of Commerce, is headed by the director. The institute became functional on 1st April 1964. The Ministry of Commerce facilitates foreign trade through service institutes, such as Indian Institute of Foreign Trade. The activities of IIFT are:

through publications. IIFT acts as a nucleus of human resource development in the field of foreign trade and organises special training programme on exim business.

Indian Institute of Packaging, Mumbai The Indian Institute of Packaging is registered under the Societies Registration Act 1860. It was established in the year 1966 jointly by the Ministry of Commerce (now Department of Commerce) and the Packing and Allied Industries of the country. It is located in Mumbai. The main aim of the institute is to undertake research for the packaging industry, to organise training programmes on packaging technology, and to create awareness about the need for good packaging.

Marine Products Export Development Authority (MPEDA), Cochin MPEDA was set up under Section (4) of MPEDA Act, 1972 and became functional from 20th April 1972. It is a statutory body functioning under the Department of Commerce. MPEDA is responsible for development of the marine products industry with special reference to exports. It has its headquarters at Kochi and has a number of regional and sub-regional offices. Besides, it has overseas Trade Promotion Offices at Tokyo and New York.

Agricultural and Processed Food Products Export Development Authority, New Delhi APEDA was set up in the year 1986 and came into being on 13th February 1986. APEDA is also a statutory body which is entrusted with the tasks of agricultural exports, including the export of processed foods in value added form. The headquarters is located in New Delhi and it has a number of regional offices.

Other Organisations Federation of Indian Export Organisations (FIEO) The FIEO, New Delhi, is an apex body of various export promotion organisations and institutions. It was set up in 1965. It also functions as a primary servicing agency to provide integrated assistance to Government recognised Export Houses/Trading Houses and acts as a Central Co-ordinating Agency in respect of export promotional efforts in the field of consultancy services in the country. FIEO organises seminars and sends trade delegations to overseas markets for export promotion. The Federation brings out ‘FIEO News’, a monthly publication, for the use of its member exporters and importers.

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Indian Council of Arbitration, New Delhi The Indian Council of Arbitration promotes arbitration as a means of settling commercial disputes and popularises the concept of arbitration among the traders, particularly those engaged in international trade. The main objectives of the Council are to promote the knowledge and use of arbitration and provide arbitration facilities for amicable and quick settlement of commercial disputes with a view to maintaining the smooth flow of trade, particularly, export trade on a sustained basis.

Indian Diamond Institute (IDI), Surat IDI is registered under the Societies Registration Act. It was established in 1978 with the objective of strengthening and improving the availability of trained manpower for the gems and jewellery industry by conducting various Diploma/Post Graduate Diploma level courses in this field.

National Centre for Trade Information National Centre for Trade Information (NCTI) is a joint venture of India Trade Promotion Organisation (ITPO) and National Informatics Centre (NIC) under the aegis of Ministry of Commerce. It has been incorporated and registered as a company under Section 25 of the Indian Companies Act, 1956. The company has a Board of Directors for administration of its affairs, which include representatives from National Informatics Centre, India Trade Promotion Organisation, Apex Chamber of Commerce/ Industry/Trade, Export Promotion Councils and Commodity Boards etc. NCTI is set up to synergise the efforts of different organisations engaged in collection, processing and dissemination of trade and investment information.

Export-Import Bank (EXIM Bank) Exim Bank is an apex organisation that finances, facilitates and promotes exports. The major function is to arrange loans/funds for exporters either directly or through other commercial banks. The bank undertakes financing with regional/global development banks, agencies and other FIs. They also arrange pre and post bid finance for export projects, for a relatively long time period. However, ordinary exporters do not avail EXIM bank’s finance as they get export finance easily from commercial banks.

Government Embassies There are Embassies, High Commissions, commercial counsellors, Commercial Secretaries attached to India houses abroad which act as eyes and ears of Government in that country for trade opportunities. They help in settlement of trade disputes.

Freight Investigation Bureau Freight Investigation Bureau is based at the office of Director General, Shipping, Mumbai. Their activities can be classified as follows:

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Customs and Central Excise Department Central Excise Goods enjoy exemption from excise duty on the final product, meant for export. Where exemption is not availed, refund of excise duty paid is made, after actual export. Secondly, refund of excise duty is made on inputs used for manufacturing meant for export. Form ARE-1 for central excise clearance. Custom Department The department handles and implements the policy related to drawback imposition and recovery of customs and central excise.

Public Sector Undertakings The following trading/service public sector undertakings are functioning under the administrative control of the Department of Commerce.

The State Trading Corporation of India Ltd. and its Subsidiaries The Corporation has the following subsidiaries that help promote exports of commodities:

ECGC is a wholly owned subsidiary of the Government of India under administrative control of Ministry of Commerce with insurance services. Their functions are listed below:

India Trade Promotion Organisation (ITPO) Indian Trade Promotion Organisation (ITPO), New Delhi, is the premier trade promotion agency of India and provides a broad spectrum of services to trade and industry so as to promote export. With headquarters and exhibition complex in New Delhi and regional offices at Bangalore, Chennai, Kolkata and Mumbai, ITPO ensures a representative participation of trade and industry from different regions of the country at its events in India and abroad.

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Advisory Bodies Board of Trade (BOT) The Board of Trade functions with a view to providing an effective mechanism to maintain continuous dialogue with trade and industry in respect of major developments in the field of international trade. Its role is to, inter-alia, advise the Government on measures connected with the Foreign Trade Policy and how to achieve the desired objective of boosting exports. The terms of reference of the Board are: increasing exports in the light of emerging national and international economic scenario; export earnings; from time to time for optimum use; international competitiveness of Indian goods and services; and

Export Promotion Board (EPB) The Export Promotion Board functions under the Chairmanship of the Cabinet Secretary to provide policy and infrastructural support through greater coordination amongst concerned ministries for boosting exports. All ministries directly connected with facilitating foreign trade are represented on the Board by their Secretaries. This, inter-alia, includes Secretaries of Department of Commerce; Ministry of Finance; Department of Revenue; Department of Industrial Policy & Promotion; Ministry of Textiles; Department of Agriculture & Cooperation; Ministry of Civil Aviation and Ministry of Surface Transport.

Inter State Trade Council The Inter State Trade Council was set up on 24th June, 2005 with a view to ensuring a continuous dialogue with State Governments and Union Territories which, inter-alia, advises the Government on measures for providing a healthy environment for international trade in the States with a view to boosting exports. The Council is represented by Chief Ministers of the States or State Cabinet Ministers nominated by Chief Ministers, Lt. Governors or Administrators of the Union Territories or their nominees, Secretaries of the Departments of Commerce, Revenue, Industrial Policy & Promotion, Agriculture & Cooperation, Shipping, Road Transport & Highways, Ministries of External Affairs and Power and Chairman, Railway Board. It also co-opts the Chairman-cum-Managing Director of Export Credit Guarantee Corporation, Managing Director of EXIM Bank, Deputy Governor of Reserve Bank of India, Chairman of Agricultural and Processed Food Products Export Development Authority, Chairman of Marine Products Export Development Authority and Presidents of CII, FICCI, FIEO and ASSOCHAM.

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Attached and Subordinate Offices Directorate General of Foreign Trade The Directorate General of Foreign Trade is headed by the Director General of Foreign Trade and through its various offices provides facilitation to exporters in regard to developments in the area of international trade, i.e. WTO agreements, Rules of Origin, Anti-Dumping issues, among others, to help the exporters to strategise their decisions in an internationally dynamic environment. DGFT also issues authorisations to exporters/ importers and monitors their corresponding obligations through a network of 34 regional offices. The main activities include:

Directorate General of Supplies and Disposals (DGS & D) The DGS&D functions as the executive arm of the Supply Division of the Department of Commerce for conclusion of rate contracts for common user items, procurement of stores, inspection of stores, shipment and clearance of imported stores/cargo. It has three regional offices located at Chennai, Mumbai and Kolkata.

Office of the Chief Controller of Accounts (CCA) The payment and accounting functions of the supply division, including those of DGS&D are performed by the CCA under the Departmentalised Accounting System. The organisation is one of the largest in the country in so far as payments of suppliers’ bills are concerned.

Directorate General of Commercial Intelligence and Statistics This Directorate is the primary Government agency for collection, compilation and publication of the foreign trade statistics and dissemination of various types of commercial information. The Directorate brings out a number of publications, particularly on trade statistics, which are utilised in framing economic policies and formulating trade agreements.

Special Economic Zones SEZs, set up as enclaves separated from domestic tariff areas by physical barriers, are intended to provide a duty free environment for export promotion. Each zone is headed by a Development Commissioner. Units may be set up in SEZ for manufacture, trading, re-conditioning, repair or for service activity. The units in the Zone have to be a net foreign exchange earner but they shall not be subjected to any predetermined value addition or minimum export performance requirements as in the case of EOUs. Sales in the Domestic Tariff Area by the SEZ units shall be subject to positive foreign exchange earning and on payment of full Custom Duty and import policy in force. The Government has since converted all the existing Export Processing Zones into Special Economic Zones. The Special Economic Zones are responsible for administration of the Export-Oriented units located within the zones.

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Directorate General of Anti-Dumping & Allied Duties The formal set up of DGAD came into existence in April 1998 in the Department of Commerce. It is responsible for carrying out investigations and to recommend, where required, under the Customs Tariff Act, the amount of anti-dumping duty/countervailing duty on the identified articles which would be adequate to remove injury to the domestic industry. The Directorate General of Anti-Dumping & Allied Duties is headed by a Designated Authority of the level of Additional Secretary to the Government.

Pay and Accounts Office The Pay and Accounts Office, common to both the Department of Commerce and Ministry of Textiles, is responsible for the payment of claims, accounting of transactions and other related matters through the four Departmental Pay and Accounts Offices in Delhi, two in Mumbai, two in Kolkata and one in Chennai. These departmental Pay and Accounts offices are controlled by the Principal Accounts Office at Delhi with the Chief Controller of Accounts as the Head of the Department of the Accounts Wing.1

1. http://commerce.nic.in/aboutus

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Learning Objectives After reading this chapter, you will understand: Meaning and scope of Incoterms Incorporation of Incoterms into the contract of sale The terminology used in Incoterms The Incoterms that are in use The Incoterms groups The features of Incoterms 2010

INTRODUCTION Incoterms (International Commercial terms) are a series of international pricing terms, published by the International Chamber of Commerce (ICC), which is based in Paris. Incoterms are widely used in international commercial transactions to avoid the uncertainties of different interpretations of such terms in different countries. Most of the governments and industry chambers have accepted those incoterms worldwide. Incoterms safeguard the following issues in the foreign trade contract or international trade contract1: 1 To determine the critical point of the transfer of the risks of the exporter to the importer in the process of forwarding of the goods (risks of loss, deterioration, robbery of the goods) and allow the person who supports these risks to make arrangements in particular in terms of insurance. 2 To specify who is going to pay for the contract of carriage, that is to say, the seller (exporter) or the buyer (importer). 3 To decide between the seller and the buyer the logistic and administrative expenses at the various stages of the process.

1. www.comxport.com/dic/incoterms_eng.htm

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MEANING AND SCOPE OF INCOTERMS2 Incoterms seeks to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree. The most commonly used incoterms can be specified as follows: 1.

Free on Board (FOB) = Cost of the item+ Dock dues + Loading charges

2.

CFR (C& F) = 1 + Sea freight charges

3.

2 + Port to port Marine Insurance charges

INCORPORATION OF INCOTERMS INTO THE CONTRACT OF SALE (INCOTERMS 2000 AND 2010) As the changes are made to the Incoterms from time to time (every 10 years), it is important to ensure that where the parties intend to incorporate Incoterms into their contract of sale, an express reference is always made to the current version of Incoterms. This may easily be overlooked when, for example, a reference has been made to an earlier version in standard contract forms or in order forms used by merchants. A failure to refer to the current version may then result in disputes as to whether the parties intended to incorporate that version or an earlier version as a part of their contract. Merchants wishing to use Incoterms 20103 should therefore clearly specify that their contract is governed by “Incoterms 2010”.

TERMINOLOGY4 While drafting Incoterms 2000 and revising them in 2010, considerable efforts have been made to achieve as much consistency as possible and desirable with respect to the various expressions used throughout the thirteen terms. Thus, the use of different expressions intended to convey the same meaning has been avoided. Also, whenever possible, the same expressions as appear in the 1980 UN Convention on Contracts for the International Sale of Goods (CISG) have been used.

Shipper It has been necessary to use the same term to express two different meanings simply because there has been no suitable alternative. Traders will be familiar with this difficulty both in the context of contracts of sale and also of contracts of carriage. Thus, for example, the term ‘shipper’ signifies both the person handing over the goods for carriage and the person who makes the contract with the carrier. However, these two ‘shippers’ may be different persons, for example under an FOB contract where the seller would hand over the goods for carriage and the buyer would make the contract with the carrier. 2. www.searates.com/reference/incoterms 3. Source: International Chamber of Commerce (ICC) 4. www.iccwbo.org/incoterms

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Delivery The term ‘delivery’ is used in two different senses in Incoterms. First, it is used to determine when the seller has fulfilled his delivery obligation which is specified in the A4 clauses throughout Incoterms. Second, the term ‘delivery’ is also used in the context of the buyer’s obligation to take or accept delivery of the goods, an obligation which appears in the B4 clauses throughout Incoterms. Used in this second context, the word “delivery” means first that the buyer “accepts” the very nature of the “C”-terms, namely that the seller fulfils his obligations upon the shipment of the goods and, second that the buyer is obliged to receive the goods. This latter obligation is important so as to avoid unnecessary charges for storage of the goods until they have been collected by the buyer. Thus, for example, under CFR and CIF contracts, the buyer is bound to accept delivery of the goods and to receive them from the carrier and if the buyer fails to do so, he may become liable to pay damages to the seller who has made the contract of carriage with the carrier or, alternatively, the buyer might have to pay demurrage charges resting upon the goods in order to obtain the carrier’s release of the goods to him. When it is said in this context that the buyer must “accept delivery”, this does not mean that the buyer has accepted the goods as conforming with the contract of sale, but only that he has accepted that the seller has performed his obligation to hand the goods over for carriage in accordance with the contract of carriage. So, if the buyer upon receipt of the goods at destination were to find that the goods did not conform to the stipulations in the contract of sale, he would be able to use any remedies which the contract of sale and the applicable law gave him against the seller, matters which, as has already been mentioned, lie entirely outside the scope of Incoterms.

Usual The word “usual” sometimes appears in several terms, for example in EXW with respect to the time of delivery (A4) and in the “C”-terms with respect to the documents which the seller is obliged to provide and the contract of carriage which the seller must procure (A8, A3). It can be difficult to tell precisely what the word “usual” means. However, in many cases, it is possible to identify what persons in the trade usually do and this practice will then be the guiding light. In this sense, the word “usual” is rather more helpful than the word “reasonable”, which requires an assessment not against the world of practice but against the more difficult principle of good faith and fair dealing. In some circumstances, it may well be necessary to decide what is “reasonable”.

Charges With respect to the obligation to clear the goods for import, it is important to determine what is meant by “charges” which must be paid upon import of the goods. In Incoterms 1990, the expression “official charges payable upon exportation and importation of the goods” was used in DDP A6. In Incoterms 2000 DDP A6 the word “official” was deleted, the reason being that this word gave rise to some uncertainty when determining whether the charge was ‘official’ or not. No change of substantive meaning was intended through this deletion. The “charges” which must be paid only concern such charges as are a necessary consequence of the import as such and which thus have to be paid according to the applicable import regulations.

LIST OF INCOTERMS The following are the Incoterms that were in use till 2010. After the 2010 revision, the total number of incoterms have come down to 11.

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1. EWX 2. FCA 3. FAS 4. FOB 5. CFR 6. CIF 7. CPT 8. CIP 9. DAF This has been removed from January 2011, as per 2010 Revision 10. DES This has been removed from January 2011 11. DEQ This has been removed since January 2011 12. DDU This has been removed since January 2011 13. DDP In spite of the nature of the contract, the seller has the following set of obligations: conformity with the contract of sale. which are necessary for the purpose of delivering the goods. Provide at his own expense packaging. In spite of the nature of the contract, the buyer has the following obligation:

Ex Works Cost (EWQ) EWQ refers to an agreement between the buyer (importer) and the seller (exporter) wherein the former pays the latter for the cost of the finished goods only. The seller has the minimum legal obligation. The buyer bears the cost of transporting the goods from the seller’s place or the place mentioned in the contract.

Obligations

discretion. place. After the delivery is made, the risk is passed on to the importer.

buyer is entitled to provide the seller with appropriate evidence of having taken delivery of the goods. shipment inspection (including inspection mandated by the authorities of the country of exportation). electronic messages and reimburse those incurred by the seller.

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Free Carrier (FCA) “Free Carrier” means that the exporter fulfils his obligation to deliver the goods to the buyer when he has handed over the goods, for export, into the charge of the carrier named by the imported at the exporter’s seaport/airport.

Legal Responsibilities delivery of the goods in accordance with the conditions stipulated in the sales contract. (e.g. a freight forwarder) named by the buyer, or chosen by the seller in accordance with the terms of the contract. Delivery to the carrier is completed only (i) In the case of rail transport, delivery would be completed when the loaded wagon or container is taken over by the railway or by another person acting on its behalf. (ii) In the case of road transport when loading takes place at the exporter’s premises, delivery is completed when the goods have been loaded on the vehicle provided by the importer. When the goods are delivered to the carrier’s premises, delivery is completed when they have been handed over to the road carrier. (iii) In the case of transport by inland waterway when loading takes place at the exporter premises or at a harbour, delivery is completed when the goods have been loaded on the carrying vessel provided by the buyer. (iv) In the case of sea transport when the goods constitute a full container load (FCL), the exporter’s legal responsibility is completed when the loaded container is taken over by the sea carrier. When the goods are less than a container load (LCL), or are not to be containerised, the seller has to carry them to the transport terminal. Delivery is completed when the goods have been handed over to the sea carrier or to another person acting on his behalf. (v) In the case of air transport, delivery is completed when the goods have been handed over to the air carrier or to another person acting on his behalf. delivered in accordance with the terms. the mode of transport, as well as the date or period for delivering the goods to him and, as the case may be, of the point within the place where the goods should be delivered to the carrier. authorities of the country of exportation unless there is a contract to the contrary.

Free Alongside Ship (FAS) “Free Alongside Ship” means that the exporter delivers when the goods are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. This term can only be used for sea or inland waterway transport.

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Obligations any export license or other official authorisation necessary for the exportation of the goods. carriage and insurance expenses. The importer must contract at his own expense for the carriage of the goods from the port of shipment. the buyer at the named port of shipment on the date or within the period stipulated and in the manner customary at the port. transport document (for example, a negotiable bill of lading a non-negotiable sea waybill, an inland waterway document). When the seller and the buyer have agreed to communicate electronically, the aforementioned document may be replaced by an equivalent electronic data interchange (EDI) message. weighing, counting) which are necessary for the purpose of placing the goods at the disposal of the buyer.

Free On Board (FOB) The term “Free On Board” means that the exporter delivers when the goods pass the ship’s rail at the named port of shipment. This means that the importer has to bear all the costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. This term can be used only for sea or inland waterway transport. If the parties do not intend to deliver the goods across the ship’s rail, FOB term should not be used. (Source: Information compiled from the book ICC–Incoterms, published by International Chamber of Commerce, Paris.)

Obligations carry out all customs formalities necessary for the exportation of the goods. The buyer has to carry out all customs formalities for the importation of the goods and, where necessary for their transit through another country. has to contract at his own expense for the carriage of the goods from the exporter’s port of shipment. of shipment on the date or within the period stipulated and in the manner customary at the port. goods until such time as they have passed the ship’s rail at the named port of shipment. buyer has to give the seller sufficient notice of the vessel name, loading point and required delivery time.

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Cost and Freight (CFR) “Cost and Freight” means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel is transferred from the seller to the buyer when the goods pass the ship’s rail at the port of shipment. The CFR term requires the seller to clear the goods for export.

Legal Responsibility The exporter delivers the goods on board the vessel at the port of shipment on the date or with the period stipulated. The buyer receives the goods at the named port of destination. ship’s rail at the port of shipment. The buyer bears all risks of loss of or damage to the goods from the time they have passed the ship’s rail at the port of shipment.

Cost, Insurance and Freight (CIF) “Cost, Insurance and Freight” means that the exporter has the same obligations as under CFR but with the addition that he has to procure marine insurance against the buyer’s risk of loss or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium.

Legal Responsibility period stipulated. The buyer receives the goods at the named port of destination. ship’s rail at the port of shipment. (i) pays the freight as well as costs of loading the goods on board and any charges for unloading at the port or discharge which may be levied by regular shipping lines when contracting for carriage; (ii) pays the costs of customs formalities necessary for exportation and other official charges payable upon exportation. as well as any other notice required in order to allow the buyer to make measures which are normally necessary to enable him to take the goods. usual transport document for the agreed port of destination. rail at the port of shipment.

Carriage Paid to (CPT) “Carriage paid to...” means that the seller pays the freight for the carriage of the goods to the named destination. The risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier is transferred from the seller to the buyer.

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Legal Responsibility carry out all customs formalities necessary for the exportation of the goods. named place of destination by a usual route and in a customary manner. If a point is not agreed or is not determined by practice, the seller may select the point at the named place of destination which best suits his purpose.

Carriage and Insurance Paid to (CIP) CIP is an incoterm that is commonly confused with CIF. CIP is very similar to CIF in that it includes insurance as well as cost and freight. In CIP, the seller/exporter arranges for the goods to be delivered to the named port of destination. Similar to CPT, the seller’s risks do not end until the moment the goods have been delivered to the carrier, but typically do not end until the carrier reaches the agreed destination. Because this incoterm can be used for any mode of transport, a carrier in this case could be a steamship line, a trucker, a railroad, or a freight forwarder. The seller is responsible for all costs until the goods have been delivered to the named port of destination. In this case, the named port of destination is domestic to the importer, meaning that the named port must be a port in the importer’s country. However, unlike, other similar incoterms the named port of destination is not necessarily the final delivery point: it could be, an agreed upon point at the port of destination. So if we were selling cherries to Thailand, we would use the term “CIP, Carriage and Insurance Paid to Laem Chabang Port, Thailand”, however, Laem Chabang might or might not be the final delivery point at the port of destination. Under CIP terms, the exporter’s risks end the moment the goods are delivered to the carrier, but typically do not end until the carrier reaches the agreed destination. The exporter is responsible for all costs up to the named port of destination.

Obligations The exporter

agreed point in the named port of destination. The importer

arrange for import clearance and formalities at own risk and cost. port of destination.

Delivered at frontier (DAF), Delivered Ex. Ship (DES), Delivered Duty Unpaid (DDU) There three terms have been removed and replaced by DAP in 2010 Revision.

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Delivered Duty Paid (DDP) “Delivered duty paid” means that the exporter fulfils his obligation to deliver when the goods have been made available at the named place in the country of importation. The exporter has to bear the risks and costs, including duties, taxes and other charges of delivering the goods thereto, cleared for importation. Whilst the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation. If the parties wish the buyer to clear the goods for importation and to pay the duty, the term DDU should be used. If the parties wish to exclude from the seller’s obligations some of the costs payable upon importation of the goods (such as value added tax (VAT)), this should be made clear by adding words to this effect: “Delivered duty paid, VAT unpaid ... (named place of destination)”. This term may be used irrespective of the mode of transport.

INCOTERMS GROUPS Incoterms can be listed by category. Terms beginning with F refer to shipments where the primary cost of shipping is not paid for by the seller. Terms beginning with C deal with shipments where the seller pays for shipping. E-terms occur when a seller’s responsibilities are fulfilled when goods are ready to depart from their facilities. D terms cover shipments where the shipper/seller’s responsibility ends when the goods arrive at some specific point. Because shipments are moving into a country, D terms usually involve the services of a customs broker and a freight forwarder. In addition, D terms also deal with the pier or docking charges found at virtually all ports and determining who is responsible for each charge.

Group E—Departure EXW—Ex Works (Named Place) The seller makes the goods available at his premises. The buyer is responsible for all charges. This trade term places the greatest responsibility on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included. EXW means that a seller has the goods ready for collection at his premises (works, factory, warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also bears the risks for bringing the goods to their final destination.

Group F—Main Carriage Unpaid (i) FCA—Free Carrier (Named Places) The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road, and containerised /multi-modal sea transport. This is the correct “freight collect” term to use for sea shipments in containers, whether LCL (less than container load) or FCL (full container load).

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(ii) FAS—Free Alongside Ship (Named Loading Port) The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export. Suitable only for maritime transport only but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). This term is typically used for heavy-lift or bulk cargo.

(iii) FOB—(Named Loading Port) The seller must himself load the goods on board the ship nominated by the buyer, cost and risk being divided at ship’s rail. The seller must clear the goods for export. Maritime transport only but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). The buyer must instruct the seller the details of the vessel and port where the goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder. It DOES NOT include Air transport. This term has been greatly misused over the last three decades ever since Incoterms 1980 explained that FCA should be used for container shipments.

Group C—Main Carriage Paid (i) CFR or CNF—Cost and Freight (Named Destination Port) The seller must pay the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods have crossed the ship’s rail. Maritime transport only and Insurance for the goods is NOT included. Insurance is at the cost of the buyer.

(ii) CIF—Cost, Insurance and Freight (Named Destination Port) Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. Maritime transport only.

CPT—Carriage Paid To (Named Place of Destination) The general/containerised/multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.

CIP—Carriage and Insurance Paid (To) (Named Place of Destination) The containerised transport/multimodal equivalent of CIF. The seller pays for carriage and insurance to the named destination point, but risk passes on when the goods are handed over to the first carrier.

Group D—Arrival DEQ—Delivered Ex Quay (Named Port). This was Replaced by DAT (Delivered at Terminal) in 2010. DEQ was similar to DES, but the passing of risk does not occur until the goods have been unloaded at the port of destination.

DDP—Delivered Duty Paid (Named Destination Place) This term means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term “Free Domicile”. The most

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comprehensive term for the buyer. In most of the importing countries, taxes such as (but not limited to) VAT and excises should not be considered prepaid being handled as a “refundable” tax. Therefore, VAT and excises usually are not representing a direct cost for the importer since they will be recovered against the sales on the local (domestic) market.

DAT (Delivered At Terminal) Delivery takes place by providing the goods to the buyer, unloaded from the arriving way of transport.

DAP (Delivered At Place) This replaced DAF, DES and DDU in 2010. Delivery takes place by providing the goods to the buyer, ready to be unloaded. With this term, the seller bears all costs and risks associated with transporting the goods to the agreed destination.

INCOTERMS 2010 NEW RULES and TERMS5 On 1st January 2011, the International Chamber of Commerce (ICC) released a new version of INCOTERMS under the title, “Incoterms 2010 ICC rules for the use of domestic and international trade terms”. Such version, through a clear and easy understanding wording, encourages the application of the International Commercial Terms (INCOTERMS) not only for international trade but also for domestic. This revision, the first since 2000, aims to adapt changes that have occurred in global trade over the last ten years. According the ICC website, the reason for the changes include: “The importance of cargo security, the resulting new obligations on traders, developments in container transport, and the 2004 revision of the United States’ Uniform Commercial Code, which resulted in a deletion of the former US shipment and delivery terms.” Incoterms 2010 have been arranged into the following groups: Any Mode of Transport (Seven Incoterms): CIP—Carriage and Insurance Paid CPT—Carriage Paid To DAP—Delivered At Place DAT—Delivered At Terminal DDP—Delivered Duty Paid EXW—Ex Works FCA—Free Carrier Sea and Inland Waterway Transport Only (Four Incoterms): CFR—Cost and Freight CIF—Cost, Insurance and Freight FAS—Free Alongside Ship FOB—Free On Board 5

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The details on the ICC website show that the most glaring changes to the 2010 version were the elimination of four Incoterms, DDU, DEQ, DES, and DAF. DEQ was replaced by DAT. DDU, DES and DAF were replaced by DAP, DAT and DAP, bringing the new total of Incoterms to 11. In addition to the 11 rules, Incoterms 2010 include: each transaction;

Use of INCOTERMS Companies are increasingly applying INCOTERMS in those transactions that entail goods delivery. INCOTERMS are the terms that are well established and worldwide accepted, yet it is always advisable, for those companies, to execute an agreement whereby, besides the application of the INCOTERM, there are other aspects within the transactions that need regulating which the INCOTERM cannot cover. Moreover, such other aspects, in many cases, are directly related to the INCOTERM per se. It is also important to take into account that the INCOTERMS are not law and therefore new versions shall not overrule previous ones. That is why it is so important that the INCOTERM is written clearly and referring to the version that it applies. The correct formula would be: INCOTERM-delivery place-ICCversion. Regarding the delivery place, the new version 2010 suggests to clearly specify the exact place where the goods are to be delivered in order to know where risk and responsibilities are transferred. Eg: EXW 42, Padwell Road, London SW6 7LZ UK ICC 2010.

New Classification The ICC has decided to classify INCOTERMS in two groups, depending on modes of transport: the first group would consist of INCOTERMS that apply for more than one mode of transport (EXW, FCA, CPT, CIP, DAT, DAP, DDP) and the second group would consist of INCOTERMS that apply only for sea or inland watergate transport (FAS, FOB, CFR, CIF). Therefore, the old classification by groups of letters (E, C, F, D) shall no longer exist. As an outstanding novelty, 4 INCOTERMS (DAF, DES, DEQ, DDU) have been eliminated and 2 new INCOTERMS (DAT and DAP) have been brought in. Therefore, the new version will consist of the following INCOTERMS: EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAT, DAP, DDP.

Pragmatic Approach The ICC, being aware of the technology progress within the business world, has tried to facilitate the possibility that the parties may “use any electronic record or procedure if agreed between the parties or customary”. Other relevant novelties are: on the one hand, the regulation of the allocation of costs between the seller and the buyer, which is mainly based on trying to avoid that the costs of terminal handling charges (THC) are borne twice and, on the other hand, the preoccupation for the safety of the goods while transporting them, establishing therefore reciprocated obligations for both parties.

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Choosing the appropriate INCOTERM In order to choose the appropriate INCOTERM, we should take into consideration some circumstances that in principle may seem irrelevant, but in reality they may entail costs that may have not been budgeted in advance, for example: rail but once the goods have been placed on board. The risk in stowing is borne by the buyer although stowing costs are included within the costs of loading which are borne by the seller;

delivered on board the ship; agreement of transport; credit; in the event that the parties agree a DDP this shall be “VAT excluded”; the seller shall hire such insurance under the name of the buyer not under its own name, otherwise, the INCOTERM’s nature would be diminished.

Two New Incorporations Finally, a brief summary about the new two INCOTERMS, DAT and DAP, that the ICC has incorporated to this new version 2010: DAT (Delivered at Terminal) replaced for sea transportation, the old DES and DEQ. With the INCOTERM DAT the seller bears the costs of transport and the risks until the goods are left unloaded at the terminal that the parties had agreed upon. “Terminal includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.” DAP (Delivered at Place), however, replaced the old DAF, DES and DDU. With the INCOTERM DAP the seller shall bear all transport costs and the risk up to delivery which will take place “when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination”.

Points to Remember Incoterms: These are a series of international pricing terms, published by the international chambers of commerce. Slipper: It signifies both the person handing over the goods for carriage and the person who makes the contract with the carrier. EWQ: It refers to an agreement between the buyer and the seller wherein the former pays the latter for the cost of the finished goods only.

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FOB: It means that the exporter delivers when the goods pass the ship’s rail at the named part of shipment. CPT: It means that the seller pays the freight for the carriage of the goods to the named destination.

Review Questions 2. When responsibility for the goods transfers from the seller to the buyer under the terms of Incoterms

Case

PARTIES: BP OIL INTERNATIONAL AND BP EXPLORATION & OIL INC V. EMPRESA ESTATAL PETROLEOS DE ECUADOR (PETROECUADOR ET AL).

A Texan company (the seller) entered into a contract with an Ecuadorian company (the buyer) for the sale of gasoline. The contract stated that the gasoline was to be delivered “CFR La Libertad, Ecuador”, and contained the following choice of law clause “Jurisdiction: Laws of the Republic of Ecuador”. Another provision of the contract required that the gasoline have a specified maximum gum content. Before the gasoline was loaded on the ship, an independent inspector, designated by buyer, certified that its gum content was within contractual limits. However, after its arrival in Ecuador, the gasoline was again tested and found to contain an excessive gum district court of Texas which decided that Ecuadorian law applied to the contract and granted On appeal, the Court of Appeals noted that the parties had their places of business in two different States which are parties to CISG and that the sales contract was therefore governed by CISG (Art. 1(1)(a) CISG), unless the parties had excluded its application according to Article 6 CISG. The Court observed that CISG was the law of Ecuador, and that the choice of law clause was not sufficiently specific to exclude the application of CISG in favour of Ecuadorian domestic sales law. The Court, quoting a U.S. legal writer, stated “If the parties decide to exclude the Convention, it should be expressly excluded by language which states that it does not apply and also states what law shall govern the contract.” According to the Court, such “an affirmative optout requirement promotes uniformity and the observance of good faith in international trade, two principles that guide interpretation of the CISG” pursuant to Art. 7 (1). On the merits of the dispute, the Court noted that “CFR” is part of the 1990 INCOTERMS issued by the International Chamber of Commerce, which the CISG incorporates through Article 9(2). Indeed, according to the Court even if the usage of INCOTERMS is not global, the fact that Source:

US Court of Appeals for the fifth circuit.

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they are well known in international trade means that they are incorporated through Article 9(2). In a CFR transaction, the risk of loss passes to the buyer once the goods “pass the ship’s rail” at the port of shipment. The Court stated that pursuant to Article 36(1), seller fulfilled its obligations when the inspector certified the goods as conforming prior to shipment, and that under Article 39(1), buyer ought to have discovered any lack of conformity after the inspection and prior to the shipment of the cargo. According to the Court, seller could still be found to have breached the contract under Article 40 CISG, notwithstanding the inspection of the goods prior to shipment, if it knew or could not have been unaware that the gasoline was defective prior to the passing of the risk of loss to buyer. As a consequence, the Court remanded the case to the District Court for clarification of this particular point.

Suggested Readings 1. 2. 3. 4.

http://www.iccwbo.org http://www.worldclassshipping.com Justin Paul (2011), International Business, 5th ed., PHI, New Delhi www.unilex.info/case.cfm

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20

INTERNATIONAL E-TAILING*

Learning Objectives After reading this chapter, you will understand: The concept of e-tailing and differences between e-tailing and retailing The The role of government in designing the policies related to e-tailing How India and China are emerging as online markets The importance of promotion strategies The best practices in e-tailing

INTRODUCTION The Internet has revolutionised the way we live today. It has a strong impact on our lifestyle, shopping habits, social networks, etc. It has developed into a new distribution channel, and online transactions are rapidly increasing. The Internet has no time and geographic boundaries, where the business to consumer (B2C) transactions can take place easily. It is a world wide accessible series of computer networks that transmit data by packet switching, using the standard internet protocol. It is a “network of networks” that consists of millions of smaller domestic, academic, business and government networks, which, together, carry various information and services, such as electronic mail, file transfer, interlinked web pages and other documents of the World Wide Web. Originally, the Internet was mainly used by academics, research scientists and students; however, that scenario has changed as commercial organisations have moved to incorporate the World Wide Web into their promotional campaigns by offering the facility of commercial purchasing.1 According to Vesterby Chabert,2 the Internet can make it easier for companies to have information about their products and services available to their customers or potential customers. A company can satisfy the consumers’ individual needs of information at a low cost in comparison to sending out product brochures. According to the report from internet world statistics, there are 1.9 million internet users as on 30th June 2010. * This chapter has been written by T. Sudhakar Paul, Founder and President, Lebanon International Foundation, Bangalore. 1. Jobber, D. and Fahy, J. (2006), Foundations of Marketing, 2nd ed., Maidenhead, McGraw-Hill Education. 2. Vesterby T. and Chabart M. (2001), E-Marketing, Viby J, Jyllands-Posten Erhversbogkluff.

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The Internet has given rise to new services like online travel ticket, or cinema ticket or ads or hotel or tourism package booking etc., which is cost-effective and time-saving for the modern busy consumers. According to Global Nielsen Consumer report3 ‘Trends in online shopping’, over 875 million consumers have shopped online, the number of Internet shoppers up 40% in two years. Among Internet users with Internet access using it for shopping, the highest percentage shopping online is found in: South Korea (99%), U.K. (97%), Germany (97%), Japan (97%), U.S. (94%). The most popular and purchased items are: Books (41% purchased in the past three months), and Clothing/Accessories/Shoes (36%). According to the survey by digital life, 61% of the respondents out of 48804 around the globe access internet daily, and the drivers of online behaviour of the consumers are categorised into the following eleven activities. Social, Email, Knowledge, Organise, Admin, Shopping, Browsing, News, Interest, Multimedia and Gaming. Eighty percent of respondents ever shop online and 12% of respondents shop online daily, which gives a clear picture of the growth of e-tailing.

CONCEPT OF E-TAILING E-tailing can be described as online retailing/e-retailing where transactions are conducted over an electronic network (Internet), where the buyer and the seller are dispersed at different geographic locations. E-tailing is synonymous with business-to-consumer (B2C) transactions, e.g. Dell and Amazon.com. In 1997, Dell computers reported multimillion online orders from its customers and Auto-by-Tel reported that they had sold their millionth car over the Web.

TYPES OF E-TAILING The following are the types of e-tailing:

Click The businesses that operate only through the online channel fall into this category. E-tailer uses internet as its primary means of retailing. They have no physical outlet for sales; all the sales transactions are carried out online only which will be called virtual business houses. Prominent examples in this category include: Dell, Amazon.com and e-Bay.

Click-and-Brick The businesses that use both the online and the offline channel fall into this category. Common examples include: Barnes and Noble’s. E-tailer has traditional retail outlet and also uses internet to push its products or service. Online sales is for the comfort of customers and expanding the target audience without geographic boundaries. It is the combination of both online and offline sales.

Brick-and-Mortar This is the conventional mode of retailing. The businesses that do not use the latest retailing channels and still rely upon the conventional mode belong to this category. 3. Nielson Company (2008), Trends in online shopping—a global Neilson consumer report.

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RETAILING VS E-TAILING The differences between retailing and e-tailing are given in Table 20.1. Table 20.1

Comparison of Retailing and E-tailing

Sl. No.

Area

E-tailing

Retailing

1.

Reach

Global reach

Limited area of operation

2.

Presence

Virtual

Physical

3.

Infrastructure cost

Comparatively nothing

High cost of establishing and maintaining a shop/mall

4.

Customisation of advertising and sales promotion

Customised according to the individual needs

Customisation is not possible according to the individual needs

5.

Customer convenience and time

Information at his desk by the convenience of click of the mouse in no time

Consume more of the customers time in searching a product

6.

Product comparison

Facility to compare a wide range Such benefit is very less and timeof products for price and variety consuming

7.

Human resources

No trained sales assistants are needed to run the store

Trained sales assistant plays a major role in sales

BENEFITS AND POTENTIAL PITFALLS OF E-TAILING The benefits of e-tailing can be categorised as benefits to business and benefits to consumers.

Benefits to Business The following are the benefits to the business houses:

Low Investment Cost E-tailing does not require a retailer to invest in showrooms or commercial properties at prime locations which are very costly.

Low Maintenance/Operation Cost Since the e-tailer operates through a website, the cost of maintaining a website is negligible in comparison with physical store.

Wide Audience An e-commerce website can be accessed from any part of the world. It has no physical barriers of geographic distance. So, e-tailer has global audience with large customer base.

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Benefits to Consumers The following are the benefits a consumer can reap from e-tailing:

Customer Convenience Out of the four marketing mix elements (product, price, place, promotion) or (customer value, customer cost, customer convenience, customer communication), customer convenience plays a major role in e-tailing. The internet offers ease and comfortable access to all the required information by a consumer. Over the Internet, product information is just a few clicks away, easily accessible from the comforts of a home.

Time Owing to the modern lifestyle and work pressure, consumers are busy and fall short of time, which has greater effect on consumer behaviour. The limited purchase time often limits information search related to products. E-tailing is growing rapidly as a result of time pressure felt by consumers. Consumers can save their precious time by internet shopping.

Product Comparison With the web-search capability, it is easier to find a particular product and compare it with a wide range of products for price and variety.

Potential Pitfalls of e-tailing The following are the pitfalls of e-tailing:

Security Issues Security is the major concern which discourages online shoppers. Lack of trust and privacy are the key issues. Customers are concerned with the misuse of personal data provided at the time of online transactions.

Customer Retention Retaining an online customer is difficult, since most of the people do online shopping out of curiosity and this makes repurchase highly unlikely.

Feel Factor/Unsuitable for Certain Products Some products like cloths, cosmetics require high customer involvement where customers like to touch the cloth and feel it before making the decision of purchasing. Technological advancements may solve these problems in future.

Limited Access to Internet Not all customers have access to internet. However, the speed at which the internet is evolving will solve the problem soon.

Family Shopping The customer will be deprived of the family shopping experience, which is considered as pleasant experience in some countries.

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Cut-throat Competition Since the cost and maintenance of setting up an online store is low, many players are entering into e-tailing which has given rise to cut-throat competition.

UNDERSTANDING ONLINE CONSUMER BEHAVIOUR IN E-TAILING The fundamental issue of e-tailing is how to attract and win over the consumer in the highly competitive internet marketplace. Understanding the online consumer behaviour is important for an e-tailer. Allred, Smith and Swinyard4 identify the online consumer to have the following characteristics: younger, wealthier, better educated, having a higher “computer literacy” and are bigger retail spenders. Donuthou and Garicia5 identify online consumer as: older, make more money, convenience seeker, innovative, impulsive, variety seeker, less risk aware, less brand and price conscious, and with a more positive attitude towards advertising and direct marketing. It is also known that the type of product has significant influence on the online consumer behaviour, which makes it more difficult to identify consumer characteristics.6

Online Consumer Characteristics The following are the characteristics of online consumers which will enable us to understand the online consumer better:

Cultural Online Characteristics Smith and Rupp7 identified that the difference in the social class creates a difference in purchasing online behaviour. Consumers from higher social class have higher computer literacy, and it is quite possible that they have access to computer with internet connection, which enables them to spend more time on the internet. On the other hand, the consumers from lower social class may not have computer literacy and access to computer with internet connection, which will disable them to spend more time on the internet.

Social Online Characteristics The online consumer is exposed to new reference groups called social networking sites like facebook, twitter, orkuk, etc., where he gets the information about the products and services. Christopher and Huarng identified the new reference groups called virtual communities and links to product-related websites from where the consumer gets information.

Personal Online Characteristics Income has a vital role for online purchasing behaviour.8 The consumers with higher household income will 4. Allred, R.C., Smith M.S. and Swinyard, R.W (2006), “E-shopping lovers and fearful conservatives: a market segmentation analysis”', International Journal of Retail & Distribution management. 5. Donthu, N. and Garcia, A. (1999), “The Internet Shoppers'” Journal of Advertising Research 6. Huarng S.A and Christopher. D (2003), “Planning an effective Internet retail store”, Marketing Intelligence and Planing 21:4, 230-238 7. Smith. D.A. and Rupp, T.W. (2003), ‘Strategic online customer decision making: leveraging the transformational power of the internet’, Online Information Review 8. Monsuwe, P.T., Dellaert, C.G.B. and Ruyter, K (2004) 'What drives consumers to shop online? A literature review', International Journal of Service Industry Management

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have a more positive attitude towards online shopping.9 The households with higher household income would have a positive correlation with the possession of computer, internet access and higher education. Smith and Rupp also identified age factor as a determinant for online purchase intentions. The older people who have no frequent interactions with computer and internet would not use internet as a medium of purchase, while young adults who are exposed to technology use internet as a purchase medium.

Psychological Online Characteristics Smith and Rupp10 identified the psychological characteristics of consumer behaviour as questions the online consumer would ask himself before making a purchase online. Motivation The psychological character motivation plays a major role in online consumer behaviour. The consumer is reasoning for incentives to motivate himself in a particular behaviour. He may ask himself questions like: should I look around for better price? If online shopping saves my time, should I shop online more often? How much do I really need this product? Perception The consumer is interpreting acquired information by classing it. Questions such as the following may come about: I feel that this site seems pretty secure. It seems that this site has a good product but how can I be sure? Personality The consumer is adapting to the influences of his cognitions. He may ask himself what types of websites are best suited for his personal buying preferences. Attitude The consumer is working with his likes and dislikes with respect to a particular situation. He may ask himself: I am pretty unsure about the extra costs, should I really be buying items from the internet? If I do not buy the item online, how else can I get it? Emotions The consumer without conscious effort is detecting how he is being affected by his cognitive choice. He may ask himself : The last time I ordered from the internet I had a really bad experience. Should I try buying online again? What is the future of buying online? If web sites get better, should I invest more time in buying online?

Factors Affecting Online Consumer Behaviour The factors that affect online consumer behaviour are price, trust and convenience (Fig. 20.1).

Price The consumers are price sensitive; it is one of the marketing mixes that stimulate the consumer. The price factor has two attributes: (a) saving money and (b) price comparison. The internet facilitates by providing price comparison features where the online consumer can compare a wide variety of products, its features and prices which will help consumers save money. On the internet, it is after all the price comparison prospect that interests price sensitive consumers. 9. S. Bellman, G.L. Lohse, and E.J. Johnson (2000), “Predictors of online buying behavior,” Communications of the ACM, vol 42, no. 12, 1999, pp. 32-38. 10. Smith. D.A. and Rupp, T.W. (2003) ‘Strategic online customer decision making: leveraging the transformational power of the internet’, Online Information Review

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Fig. 20.1

Factors affecting online consumer behaviour Source: Trust in electronic Commerce-Based on Lee, Mathew K.O, and Efraim Turban, “A Model for Consumer Internet Shopping”, International Journal of Electronic Commerce, vol. 6, No. 1 (Fall 2001).

Trust The second important factor affecting the online consumer behaviour is trust. According to Lee, Mathew, K.O. and Efraim Turban,11 trust is dependent on two attributes: (a) trust in internet merchant and (b) trust in internet as shopping channel. The variables influencing trust in internet merchant are (a) seller, (b) competency, (c) benevolence and the variables influencing trust in internet as shopping channel are (a) reliability, (b) understandability, and (c) security and payment. A company must show the consumer that it is competent in managing information and supporting a consumer after a purchase is done. If that can be achieved, the consumer is more likely to “engage in trust related internet behaviours like purchasing, cooperating and sharing information”.12

Convenience Robert Lauterborn suggested that the seller’s four Ps correspond to the customer’s four Cs. Winning companies will be those who can meet customer needs economically and conveniently and with effective com11. Lee, O.K.M. and Turban, E. (2001), “A Trust Model for Consumer Internet Shopping”, International Journal of Electronic Commerce 12. McKnight, D.H. and Chervany, L.N. (2001-2002), ‘What trust means in E-commerce Coustomer relationships: An interdisciplinary Conceptual Typology’, International Journal of Electronic Commerce

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munication. Azjen13 claims that online shopping provides convenience for customers such as time saving and search convenience if compared to the traditional way of shopping. Kim and Park14 concluded that consumers that found the internet to be easily accessible and used, would spend more time online and search for information and also shop more online. Saving time is also mentioned by Kim and Park. The consumer is not required to leave his home in order to shop online and at the same time the information search and price comparison process is much more available and easy to access. Swaminathan et al.15 state that consumer characteristics play an important role in the consumer’s decision to shop online. The authors then identify the so-called convenient oriented consumer as the most potential online buyer since they value the convenience of shopping at homes as a large motive for purchase. The characteristics of convenience with online shopping can be summarised as follows: (a) shopping from home, (b) less effort, (c) time saving, and (d) search engine.

Framework of Online Consumer Behaviour M.K. Christy, Cheung et al.16 have proposed a unifying framework for online consumer behaviour which could eventually guide research in this area. They have identified the following five major domain areas which include (i) individual/consumer characteristics, (ii) environmental influences, (iii) product/service characteristics, (iv) medium characteristics and (v) online merchant and intermediary characteristics.

Individual/Consumer Characteristics Individual/consumer characteristics refer to the factors specific to the consumer such as demographics, personality, value, lifestyle, attitude, consumer resources, consumer psychological factors (flow, satisfaction, trust), behavioral characteristics (looking for product information, access location, duration, and frequency of usage), motivation, and experience.

Environmental Influences In addition to personal characteristics, marketing scholars such as Engel et al.17 contend that environmental factors like culture, social influence, peer influence, and mass media play an important role in affecting consumer purchasing decisions.

Product/Service Characteristics Jarvenpaa and Todd18 argue that price, quality, and product type are the three key elements in shaping consum13. Ajzen, I (1991), “The theory of planned behavior”, Organizational Behaviour and Human Decision Process, Vol. 50, pp. 179-211 14. Park, H.C. and Kim, G.Y. (2003), ‘Identifying key factors affecting consumer purchases behaviour in an online shopping context’, International Journal of Retail and Distribution Management 15. Swaminathan, V., Lepkowska-White, E. and Rao, P.B. (1999) ‘Browsers or Buyers in Cyberspace? An Investigation of Factors Influencing Electronic Exchange’, Journal of Computer Mediated Communication 16. Christy M. K. Cheung, Lei Zhu, Timothy Kwong, Gloria W.W. Chan, Moez Limayem (2003), ‘Online Consumer Behavior: A Review and Agenda for Future Research’, 16th Bled eCommerce Conference, eTransformations, City University of Hong Kong. 17. J F Engel, R.D Blackwell, P.W.Miniard, Consumer Behavior, The Dryden Press Series in Marketing, 2001. 18. S.L Jarvenppa and P.A.Todd, :Consumer reactions to electronic shopping on the world wide web, “ International Journal of Electronic Commerce, vol. 1, no.2, 1996, pp 59-88.

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ers’ perception. In suggested fragmentation, product/service characteristics mainly refer to knowledge about the product, product type, frequency of purchase, tangibility, differentiation and price.

Medium Characteristics Characteristics of systems have been extensively studied in the IS literature. Traditional IS attributes such as ease of use, quality, security and reliability are included in the study of electronic commerce systems. Additionally, web specific factors such as ease of navigation, interface and network speed are also considered.

Online Merchant and Intermediary Characteristics Researchers such as Hoffman and Novak19 and Spiller and Lohse20 have suggested a broad classification of Internet retail stores as well as the key attributes and features of online stores. The framework includes factors such as service quality, privacy and security control, brand/reputation, delivery/logistic, after-sales services and incentive.

Online Consumer Purchase Intention Since the e-tailers and online consumers are geographically dispersed, it is difficult for the e-tailers to understand purchase intention of the online consumers. The e-tailers should formulate a strategy to attract and win online consumers in the internet market place. Understanding the online consumer purchase intention is important for an e-tailer. Based on the theory of reasoned action and other related theories in the research area, the key factors of attitude, subjective norm, and perceived behaviour control are largely postulated as the determinants of consumer online purchase intention (e.g. Bhattacherjee,21 Keen et al.,22 Limayem23). Similarly, perceived ease of use and perceived usefulness stemming from technology acceptance model (TAM) have also received enormous attention (e.g. Chau et al.,24 Lin and Lu25).

19. Hoffman, D.L. and T.P. Novak, “Marketing in Hypermedia Computer-Mediated Environments: Conceptual Foundations, “Journal of Marketing, vol 60, no. July, 1996, pp 50-68. 20. P.Spiller and G.L.Lohse, “A classification of interner retail stores”, International Journal of Electronic Comerce, vol.2, 1998, pp 29-56 21a. A. Bhattacherjee, “Acceptance of e-commerce services: the case of electronic brokerages,” IEEE Transactions on Systems, Man and Cybernetics, Part A, vol 30, no 4, 2000, pp. 411-420. b. A.Bhattacherjee, “An empirical analysis of the antecedents of electronic comerce service continuance,” Decision support system, vol 32, no 2, 2001a, pp 201-214. c. A. Bhattacherjee, “Understanding Information Systems Continuance: An Expectation Confirmation Model,” MIS Quarterly, vol 25, no 3, 2001b, pp 351-370. 22. C.Keem, K.D.Ruyter, M.Wetzels, and R.Feinberg, “ An Empirical Analysis of Consumer Preferences Regarding Alternative Service Delivery Modes in Emerging Electronic Service Markets,” Quarterly Journal of Electronic Comerce, vol 1, 2000, pp 31-47 23. M.Limayem and M.Khalifa, “Business-to-Consumer Electronic Commerce:A Longitudinal Study,” Proceedings of the Fifth IEEE Symposium on Computers and Communications, 2000, pp 286-290. 24. P.Y.K Chau, G.Au, and K.Y.Tam, “Impact of Information Presentation Modes on Online Shopping: An Empirical Evaluation of a Broadband Interactive Shopping Service,” Journal of Orgznizational Computing and Electronic Commerce, vol 10, no 1, 2000, pp 1-22. 25. J.C.-C.Lin and H.Lu, “Towards an understanding of the behavioral intention to use a web site,” International Journal of Information Management, vol 20, no 3, 2000, pp. 197-208.

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Trust and perceived risk (e.g. Jarvenpaa et al.,26 Pavlou,27 Ruyter et al.28) have been widely investigated in the study of consumer online purchase intention. Some recent studies (e.g. Cheung and Lee,29 Lee and Turban30) focused primarily on the trust formation process in the context of Internet shopping. In terms of product/service characteristics, the key research topics are product type (e.g. Bobbitt and Dabholkar,31 Sohn32) and price (e.g. Degeratu et al.,33 Liao and Cheung34). For instance, Sohn35 argued that products like CDs, books or canned food which do not require a physical examination before being purchased are easier to sell on the Internet. Brand/reputation (e.g. Jarvenpaa et al.,36 Ruyter et al.37)and service quality (e.g. Ruyter et al.,38 Song and Zahedi39) are also important in affecting online purchase intentions.

Consumer Online Purchase (Adoption) As is the case for consumer online purchase intention, researchers (e.g. Chau et al.,40 Goldsmith and Bridges,41 26. S.L Jarvenppa and P.A.Todd, :Consumer reactions to electronic shopping on the world wide web, “ International Journal of Electronic Commerce, vol. 1, no.2, 1996, pp 59-88. 27. P. A.pavlou, “Integrating Trust In Electronic Commerce with The Technology Acceptance Model:Model Development and Validation,” Proceedings of the Seventh Americas Conference on Information Systems (AMCIS 2001), 2001, pp 816-822. 28. K.d. Ruyter, M.Wetzels, and M. Kleijnen, “ Customer adoption of e0service: an experimental study,” International Journal of Service Industry Management, vol. 12, no. 2, 2001, pp. 184-207. 29. C.M.K Cheung and M.K.O. Leee, “Trust in Internet Shopping: Instrument Development and Validation Trrough Classical and Modern Approaches,” Journal of Global Information Management, vol.9, no 3, 2001, pp 23-32. C.M.K. Cheung and M.K.O.Lee, “Trust in Internat Shopping: A Proposed Model and Measurement Instrument, “ Proceedings of the Sevents Americas Conference on Information Systems (AMCIS 2001), 2001a, pp.681-689. 30. M.K.O.Lee and E.Turban, “A trust model for consumer Internet shopping,” International Journal of Electronic Commerce, vol 6, no 1, 2001, pp 75-91. 31. L.M.Bobbitt and P.A.Dabholkar, “Integrating attitudinal theories to understand and predict use of technologybased self-service: The Internet as an illustration,” International Journal of Service Industry Management, vol 12, no 5, 2001, pp 423-450. 32. C. Sohn, “The Properties of Internet-based Markets and Customers' Behavior,” Proceedings of the Fifth Americas Conference on Information Systems (AMCIS 1999), 1999. 33. A.M.Degeratu, A.Rangaswamy, and J.Wub, “Consumer choice behavior in online and traditional supermarkets: The effects of brand name, price and other search attributes,” International Journal of Research in Marketing, vol 17, no 1, 2000, pp 55-78. 34. Z.Liao and M.Cheung, “Internet-based e-shopping and consumer attitudes: an empirical study, “Information & Management, vol 38, no 5, 2001, pp 299-306. 35. C. Sohn, “The Properties of Internet-based Markets and Customers' Behavior,” Proceedings of the Fifth Americas Conference on Information Systems (AMCIS 1999), 1999. 36. S.L Jarvenppa and P.A.Todd, :Consumer reactions to electronic shopping on the world wide web, “ International Journal of Electronic Commerce, vol. 1, no.2, 1996, pp 59-88. 37. C.Keem, K.D.Ruyter, M.Wetzels, and R.Feinberg, “ An Empirical Analysis of Consumer Preferences Regarding Alternative Service Delivery Modes in Emerging Electronic Service Markets,” Quarterly Journal of Electronic Comerce, vol 1, 2000, pp 31-47 38. ibid. 39. C.Song and F.M Zahedi, “Web Design in E-Commerce: A Theory and Empirical Analysis,” Proceedings of the International Conference of Information Systems 2001, 2001, pp 205-220. 40. P.Y.K Chau, G.Au, and K.Y.Tam, “Impact of Information Presentation Modes on Online Shopping: An Empirical Evaluation of a Broadband Interactive Shopping Service,” Journal of Orgznizational Computing and Electronic Commerce, vol 10, no 1, 2000, pp 1-22. 41. R.E.Goldsmith and E.Bridges, “E-Tailing Vs Retailing: Using Attitudes to Predict Online Buying Behavior,” Quarterly Journal of Electronic Commerce, vol. 1, no 3, 2000, pp. 245-253.

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Koufaris et al.,42 Limayem et al.,43 Raijas and Tuunainen,44 Vellido et al.45) extensively employed attitudinal theoretical models in the study of consumer online purchase and thoroughly investigated the antecedent factors like intention, attitude, subjective norm, perceived behaviour control, ease of use, and perceived usefulness. Moreover, we observed a significant number of empirical studies that proposed and tested factors affecting consumer online purchase. Compared to the study of intention, the studies of consumer online purchase are quite fragmented and widely dispersed in the five main categories. For example, demographics (e.g. Bellman et al.,46 Bhatnagar et al.,47 Li et al.,48 Phau and Poon,49 Ramaswami et al.50) have been widely considered in the study of online consumer behaviour. Researchers primarily investigated factors such as age, gender, income, education, and the like in determining consumer online purchase. In terms of medium characteristics, a number of web specific factors including navigation (e.g. Chau et al.,51 Liang and Lai52), interface (e.g. Schoenbachler and Gordon53), security (e.g. Goldsmith,54 Kim and Lim55), accessibility (e.g. Chen and Sukpanich,56 Lee57), social presence (e.g. Kumar and Benbasat58) and online shopping aid 42. M.Koufaris, A. Kambil, and P.A. Labarbera, “ Consumer Behavior in Web-Based Commerce: An Empirical Study,” International Journal of Electornic Commerce, vol. 6, no. 2, 2001, pp 115-138. 43. M.Limayem and M.Khalifa, “Business-to-Consumer Electronic Commerce: A Longitudinal Study,” Proceedings of the Fifth IEEE Symposium on Computers and Communications, 2000, pp. 286-290. 44. Raijas and V.K.Tuunainen, “Critical factors in electronic grocery shopping,” International Review of Retail, Distribution and Consumer Research, vol. 11, no. 3, 2001, pp. 255-265. 45. A.Vellido, P.J.G. Lisboa, and K.Meehan, “Quantitative characterization and predicition of on-line purchasing behaviour: A latent variable approach,” International Journal of Electronic Commerce, vol. 4, no. 4, 2000, pp.83-104. 46. S.Bellman, G.L. Lohse, and E.J. Jphnson, “Predictors of online buying behavior,” Communications of the ACM, vol 42, no. 12, 1999, pp.32-38. 47. A.Bhatnager, S. Misra, and H.R.Rao, “One risk, convenience, and Internet shopping behavior-why some consumers are online shoppers while others are not,” Communications of the ACM, vol. 43, no 11, 2000, pp. 98-105. 48. H.Li, C.Kuo, and M.G. Russell, “ The Impact of Perceived Channel Utilities, Shopping Orientations, and Demographics on the Consumer’s Online Buying Behavior,” Journal of Computer-Mediated Communication, vol. 5, no. 2, 1999 49. I.Phau and S.M.Poon, “An Exploratory Study of Cybershopping in Singapore,” Quarterly Journal of Electronic Commerce, vol. 1, no 1, 2000a, pp. 61-75. 50. S.N. Ramaswami, T.J.Strader, and K.Brett, “Determinants of on-line channel use for purchasing financial products,” International Journal of Electronic Commerce, vol. 5, no. 2, 2000, pp 95-118. 51. P.Y.K Chau, G.Au, and K.Y.Tam, “Impact of Information Presentation Modes on Online Shopping: An Empirical Evaluation of a Broadband Interactive Shopping Service,” Journal of Orgznizational Computing and Electronic Commerce, vol 10, no 1, 2000, pp 1-22. 52. T.P.Liang and H.J.Lai, “Effect of Store Design on Consumer Purchases: An Emprical Study of on-line bookstores,” Information & Management, vol. 39, no 6, 2002, pp. 431-444 53. D.D.Schoenbachler and G.L.Gordon, “Multi-channel shopping: understanding what drives channel choice,” Journal of Consumer Marketing, vol. 19, no.1, 2002, pp 42-53 54. R.E.Goldsmith and E.Bridges, “E-Tailing Vs Retailing: Using Attitudes to Predict Online Buying Behavior,” Quarterly Journal of Electronic Commerce, vol. 1, no 3, 2000, pp. 245-253. 55. S.Y.Kim and Y.J.Lim, “Consumers’ Perceived Importance of and Satisfaction with internat Shopping,” Electronic Markets, vol 11, no 3, 2001, pp 148-154. 56. L.D.Chen and N.Sukpanich, Assessing Consumers’ Involvement in Internet Purchasing,” Proceedings of the Fourth Americas Conference on Information Systems (AMCIS 1998), 1998, pp. 281-283. 57. P.M.Lee, Behavioral Model of Online Purchasing in E-Commerce Environment,” Electronic Commerce Research, vol 2, no . 1-2, 2002, pp 75-85. 58. N.Kumar and I.Benbasat, “Shopping as Experience and Web Site as a Social Actor: Web Interface Design and Para-Social Presence,” Proceedings of the Twenty Second International Conference on Information Systems, 2001, pp. 449-454.

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(Vijayasarathy59) have been widely investigated in these prior studies. In terms of merchant and intermediary characteristics, factors like privacy and security protection (e.g. Kim and Lim,60 Lee61) and brand/reputation (e.g. Ruyter et al.,62 Ward and Lee63) are frequently studied in consumer online purchase adoption.

Consumer Online Repurchase (Continuance) Research on continuance is in its infancy. Bhattacherjee’s64 recent study is one of the very first attempts to explain consumer online repurchasing behaviour. His proposed model was formulated on the basis of expectation and confirmation theory (ECT), and postulated satisfaction, confirmation, and loyalty incentives as the salient factors affecting consumer online repurchasing. Literature review and analysis revealed that prior research on consumer online repurchase placed more emphasis on the impact of psychological factors. For instance, considerable attention has been given to the study of trust (Fung and Lee,65 Lee et al.66) and satisfaction formation (Khalifa and Liu67) in the context of consumer-based electronic commerce. Very few studies, however, have attempted to investigate the impact of product/service characteristics, medium characteristics, and merchant and intermediary characteristics on consumer online repurchasing. Liang and Lai68 was one recent study that explored the impact of web page design such as navigation, security, search attribute, and shopping aids. Similarly, Gefen and Devine,69 focused on merchant characteristics and investigated the effect of service quality on consumer online purchase continuance using SERVQUAL.

59. L.R.Vijayasarathy, “The Impact of Shopping Orientations, Product Types, and Shopping Aids on Attitude and Intention to Use Online Shopping,” Quarterly Journal of Electronic Commerce, vol. 2, no. 2, 2001, pp 99-113. 60. S.Y.Kim and Y.J.Lim, “Consumers’ Perceived Importance of and Satisfaction with internat Shopping,” Electronic Markets, vol 11, no 3, 2001, pp 148-154. 61. P.M.Lee, Behavioral Model of Online Purchasing in E-Commerce Environment,” Electronic Commerce Research, vol 2, no . 1-2, 2002, pp 75-85. 62. K.D. Ruyter, M.Wetzels, and M. Kleijnen, “ Customer adoption of e0service: an experimental study,” International Journal of Service Industry Management, vol. 12, no. 2, 2001, pp. 184-207. 63. M.R.Ward and M.J.Lee, “Internet shopping, consumer search and product branding,” Journal of Product & Brand Management, vol. 9, no. 1, 2000, pp. 6-20. 64. A. Bhattacherjee, “An empirical analysis of the antecedents of electronic commerce service continuance,” Decision support systems, vol.32, no.2, 2001a, pp.201-214. A.Bhattacherjee, “Understanding Information Systems Continuance: An Expectation Confirmation Model,” MIS Quarterly, vol.25, no.3, 2001b, pp. 351-370. 65. R.K.K.Fung and M.K.O.Lee, “EC-Trust(Trust in Electronic Commerce): Exploring the Antecedent Factors,” Proceedings of the Fifth Americas Conference on Information Systems (AMCIS 1999), 1999, pp. 517-519. 66. Lee, O.K.M. and Turban, E.(2001), “A Trust Model for Consumer Internet Shopping’, International Journal of Electronic Commerce 67. M.Khalifa and V.Liu, “Satisfaction with Interner-based Services: A Longitudinal Study,” Proceedings of the International Conference of Information Systems 2001, 2001, pp. 601-606. 68. T.P.Liang and H.J. Lai, “Effect of Store Design on Consumer Purchases: An Empirical Study on on-line bookstores,” Information & Management, vol. 39, no. 6, 2002, pp.431-444. 69. D.Gefen and P.Devine, “Customer Loyalty to An Online Store: The Meaning of Online Service Quality,” Proceedings of the International Conference of Information Systems 2001, 2001,pp. 613-618

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SEGMENTATION IN E-TAILING Segmentation is the process of dividing a market into distinct subsets of consumers with common needs or characteristics and selecting one or more segments to target with a distinct marketing mix. In simple words, it is grouping people according to their similarity related to a particular product category. An online consumer can be segmented based on consumer traits and online behaviour. Consumer traits:

Online behaviour:

BARRIERS TO THE GROWTH OF E-TAILING The following are the barriers for the growth of e-tailing:

Lack of Touch-Feel-Try Experience Lack of ability to try a product before buying acts as a barrier for some internet users.

Quality Difference The difference in the perceived quality online from the quality of the product actually delivered acts as a barrier.

Credibility in Payment System Online credit card fraud and breach is the biggest barrier to online sales. As a result, the prospective buyers prefer staying away from revealing credit card and bank details.

Untimely Delivery of Products It might take a few minutes to search, book and pay for products and services online, but the delivery of the product may take unreasonable time.

PRICING STRATEGIES IN E-TAILING Price is one of the key elements in marketing mix. To be a successful e-tailer, an online pricing strategy is essential, apart from traditional pricing strategies. The following are the strategies discussed.

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Online Pricing Strategies Freebees Freebees dominate the market consciousness today. Everyone likes the word “free”—even those who contribute to piracy love it. It is a leading search aspect at any given time; people are searching for something or the other with the word ‘free’ incorporated in their query. Free is such a tempting term that it can make the demand approach infinity. Many of us think that giving something for free is an insane act, but it is not so. There is a sensible economic logic for giving away things for free and that is to create awareness. Moreover, they can knock out the potential and actual competitors.

Versioning It may be defined as creating multiple versions of the goods or services and selling them to different market segments at different prices. Versioning presents solution to the problem of free as the business providing free products and services exists as long as its offerings are free. There are many examples for this type of pricing strategy. Many websites offer services for free, but with the presence of annoying advertisements. When a person goes for the paid version, the annoying advertisements disappear. Moreover, a reduced value version can even be offered for free and the premium versions can be offered at higher prices. But, in order to get customers for premium versions, the marketer should ensure that the free version is valuable and does the value addition for the customer but to a certain extent and leave customer aspiring for more.

Bundling It is the most common pricing strategy visible in the bricks and mortar business. In this type of pricing strategy, people buy two but pay for one, also known as “twofer”. This concept is based on idea that:

more than that price.

Traditional Pricing Strategies Skimming Pricing When a new product is introduced into the market, the company can initially charge a high price, since the “early adopters” are not very price sensitive. Then move to lower prices to “skim” off the next layer of buyers, etc. Eventually, the price will drop as the product matures and competitors offer lower prices.

Penetration Pricing When a new product is introduced into the market, the company can initially set a low price in order to penetrate quickly into the mass market. A low initial price discourages competitors from entering the market, and is the best approach when many segments of the market are price sensitive. Amazon.com, for example, offers a discount price and may lose money on the first sale, but this way they gain more customers who will purchase products later at a lower marketing cost (since it costs much less to attract them back for the second or third sale if they are happy with their first purchase experience).

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Prestige Pricing Cheap products are not taken seriously by some buyers unless they are priced at a particular level.

Odd-even Pricing Takes advantage of human psychology that feels like $499 is less than $500. Studies of price points by direct marketers have found that products sell best at certain price points, such as $197, $297, $397, compared to other prices slightly higher or lower.

PROMOTIONAL STRATEGIES IN E-TAILING A business’ total marketing communications programme is called the “promotional mix” and consists of a blend of advertising, personal selling, sales promotion and public relations tools. The objectives of promotion are: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)

Increase sales Stimulate impulse and reminder buying Raise customer traffic Get leads for sales personnel Present and reinforce the retailer image Inform customers about goods and services Popularise new stores and Web sites Capitalise on manufacturer support Enhance customer relations Maintain customer loyalty Have consumers pass on positive comments (word-of-mouth)

The following are the promotional strategies: (a) Contents: Customers compete for prizes by completing a contest (games) such as a crossword puzzle, a slogan or a lottery. Winning is at least partially based on correct answer (skill). (b) Sweepstakes: Similar to a contest, except that participants merely fill out application forms and the winner is picked at random (chance). No skill is involved. Direct mail e-tailers use this tool quite often. (c) Coupons: E-tailers advertise special discounts for customers who redeem advertised coupons. (d) Frequent Shopper Programmes: Customers are given points or discounts based on the amount of purchase. These points are accumulated to acquire goods or services. (e) Gift-with-Purchase: Similar to frequent shopper programmes, except that the retailer gives prizes immediately. (f) Free Shipping on all Products: Many of the e-tailers offer free shipping on all the products purchased, e.g.amazon.com. (g) $ or % Off on Next Purchase: The e-tailers to encourage repurchase offer price discount for the future purchase.

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ELECTRONIC CUSTOMER RELATIONSHIP MANAGEMENT (ECRM) IN E-TAILING eCRM is enterprises using IT to integrate internal organisation resources and external marketing strategies to understand and fulfil their customer needs. It is not just customer service, self-service web applications, sales force automation tools or the analysis of customers’ purchasing behaviours on the internet, but it is all of these initiatives working together to enable an organisation to respond more effectively to its customers’ needs and to market to them on a one-to-one basis. eCRM program, as defined in an SAS Institute white paper (2000), is “the creation of knowledge from process automation and the collection, synthesis and delivery of data derived from the Internet and information technology (IT) based interactions between the company and its customers/channel partners.” eCRM provides the following solutions: (i) Virtual Call Center: Virtual integrated call centre which can handle millions of calls and millions of interactions with customers over the web in real time with phone, e-mail and text based chat. (ii) 24/7 Service: Round the clock customer service. (iii) Campaign Management: eCRM helps in campaigning to customers in an organised way, which leads to measure the effectiveness of the marketing campaign. (iv) Customer Interaction Management: Regular interaction with customer along with recording of each and every interaction will give feedback from customers. eCRM provides the following benefits: (i) Personalised Experience: The interaction between the customer and the company is personalised. The company can know the person who is calling, what products or services the customer enquired about in previous interactions and what products or services may be of interest to the customer. (ii) Multi-Channel Interaction: eCRM will enable customer to communicate with the company through any available channel like phone, web, VIOP, e-mail, text based collaboration, video. (iii) Knowledgebase: Each and every interaction with the customer, over whatever channel, is duly recorded and is available to all service professionals whenever the customer initiates the interaction again. The knowledge of customers taste and preferences will enable to bring to customer notice more of available goods and services, and help to compare with competitors products and services, thus increasing sales. (iv) One-to-One Marketing: Interaction with each customer helps to reinforce brand loyalty. (v) Target Marketing: Customers get information about selective new products and services based on their previous buying pattern, profile, tastes and interests.

LEGAL ASPECTS OF E-TAILING Unlike Retailing, e-tailing is not restricted to any one country or geographic location. The customers who visit the online store are from different corners of the world. Since internet is the base for the global village, so any legal issues between the global customer and the e-tailer who may be from different parts of the world is difficult to resolve. A globally accepted legal frame work should be developed to protect the interest of the global consumers and e-tailers. A predictable framework, with clear rules on jurisdiction and electronic contracts, secure property rights, builds trust and boosts confidence in e-tailing.

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Legal uncertainty can arise within a country if electronic contracts are unclear in terms of their enforcement or redress potential. In light of these uncertainties, some observers have proposed a uniform international commercial code, or a “model law” for international electronic commerce (OECD,1997c). This should recognize, facilitate and enforce international electronic commerce, and thereby strengthen the predictability of the legal environment. Initial work in this regard is being conducted by the UN Commission on International Trade Law (UNCITRAL, 1997; OECD,1997c)70. Self-regulation, laying down codes of conduct or “model contracts”, is also frequently cited as a useful avenue, as companies are interested in building confidence and weeding out the “black sheep”(The Economist, November 1,1997).

Retail Electronic Payment Systems An electronic payment system is a mechanism that facilitates transfer of value electronically between a payer and a beneficiary. The history of payment system can be said to be virtually co-terminus with evolution of money. In the pre-historic days, barter system prevailed before the coin age. The traditional electronic payment systems are as follows: (i) Electronic Clearing Service (ECS): Electronic Clearing Service is a retail payment system that can be used to make bulk payments/receipts of a similar nature, especially where each transaction is of a repetitive nature and of relatively smaller amount. ECS has two variants: (i) ECS-credit clearing and (ii) ECS-debit clearing. While ECS-Credit clearing operates on the principle of ‘single debitmultiple credits’ and is used for making payment of salary, pension, dividend, interest etc, the ECSdebit clearing functions on the principle of ‘Single credit-multiple debits’ and is used for collecting payments by utility providers like electricity, telephone bills, banks for receiving principle/interest repayments for loans from the borrowers. (ii) Electronic Fund Transfer (EFT): Electronic Fund Transfer (EFT) is a system where anyone who wants to make payment to another person/company can approach his bank and make cash payment or give instructions/authorisation to transfer funds directly from his own account to the bank account of the receiver/beneficiary. E-tailware is software for creating online catalogs, ordering forms, credit checking, and similar services for Web sites that sell goods and services to consumers. A number of e-tailware products provide a complete range of support so that a company that already has a Web site can easily add e-tailing capability to the site. (iii) Card Payment System: In card payment system, payment is made by the customer either through debit/credit card issued by the respective bank. The emerging electronic payment systems are as follow: (i) Smart Cards: A pocket sized card with embedded integrated circuit, also called chip card or Integrated Circuit Card (ICC). Smart cards provide identification, authentication, data storage and application processing. These are much more popular in Europe than in the United States. 70. John Dryden’s (2001), “Business-to-Consumer E-Commerce Statistics”, Consumers in the online market place OECD workshop on the guidelines

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(ii) PayPal: PayPal is the faster, safer way to pay and get paid online. The service allows members to send money without sharing financial information, with the flexibility to pay using their account balances, bank accounts, credit cards or promotional financing. (iii) VeriSign: It provides solutions that allow consumers/companies to engage in communication and commerce online with confidence.

Best Practices in E-tailing The following are the best practices in e-tailing: (i) Have a Great Looking, Customizable Website: Having a great looking website is the key for the success of e-tailing. (ii) Make Payment Simple and Secure: Many customers are discouraged to purchase online because of cyber crimes. The company should ensure that the transactions meet the payment card industry data security standards (PCI-DSS) compliance and multi-level fraud protection for customer safety. (iii) Integrated Communication to the Consumer: The consumer may choose any channel to purchase such as retail, catalogue, telesales or e-tail. The communication message sent to the customer should be the same.

Points to Remember business and government networks, which, together, carry various information and services, such as electronic mail, file transfer, interlinked web pages and other documents of the World Wide Web. electronic network (Internet), where the buyer and the seller are dispersed at different geographic locations.

of operation.

online shopping pattern. try experience.

base, personalized experience. Cards. and (c) integrated communication to consumer.

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Objective Type Questions 1. 2. 3. 4.

The price factor has two attributes saving money and ________ The businesses that operate only through the online channel fall into ________ category. The businesses that use both the online and the offline channel fall into ______ category. The businesses that do not use the latest retailing channel and still rely upon the conventional mode belong to ________ category. 5. An online consumer can be segmented based on _______ and ________. 6. __________ may be defined as creating multiple versions of the goods or services and selling them to different market segments at different prices.

Review Questions 1. 2. 3. 4.

Compare and contrast traditional retailing and e-tailing. Discuss the online payment systems available in your country. Discuss the benefits to the e-tailers in establishing an online store. Discuss the barriers to the growth of e-tailing.

Project Assignment 1. Identify the problems and challenges faced by e-tailers in your country and give solution.

Case PROBLEMS AND CHALLENGES FACED BY E-TAILERS IN INDIA Reasoning, a digital commerce-centric company, conducted a survey research and interaction with over 50 retailers and over 25 solution providers and identified the following problems and challenges faced by e-tailers in India: (a) Offline and Online Businesses are Disconnected Affects consumer confidence, cost of maintaining online channel and synergy for retailers. (b) Technology Technology is not the core strength of retailers and most solutions require significant capital investment. (c) Right Payment Solution The retailers found it difficult to integrate the payment gateway with their website and high transaction commissions for online payments are not friendly for retailers. (d) Logistics Experience High cost of shipping the goods which were ordered online, and the integration of payment and shipping also requires technology experts and incurs additional investment.

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(e) Online Customer Acquisition Getting online customers is a new concept for the retailers, and they need help in understanding and leveraging the opportunity. Companies Working on Solution Google, HDFC Bank, Reasoning & Aramex came together and identified the key obstacles that retailers face today such as, technology difficulties, complex payment solutions, lack of understanding of capturing consumers online and the difficulty in managing the logistics of an online business. To provide one stop solution to all Indian retailers, these 4 major players are building an eco-system which would help create simple, usable and affordable solutions to address all these issues. Saurabh Chandra, Product Marketing Manager, Google India on ‘Today’s consumers search & Shop!’. While talking about today’s consumers and their shopping habits, he said, “Internet and mobile are the fastest growing media currently. Also, the online activity of the Indian internet population is maturing with significant amount of time being spent looking for products and also researching for purchases. In this context, it is imperative that Indian retailers are present online and leverage various forms of Internet marketing to reach out to their customers.” “Enabling e-commerce is a natural extension of banking services” by Srikant Siddi, Dy. VP, HDFC bank. While commenting on online banking services, he said, “Online space is a fast growing segment and a very safe channel to transact. HDFC Bank along with the partners is bringing an end-to-end solution for merchants who want to set up online stores.” “Challenges and Solution for setting up a profitable online store” by Anubhav Kushwala, VP Business Strategy & Alliances, Reasoning Global eApplications Limited. While talking about E-tailing trend and benefits of online store, he mentioned, “The market today is very conducive for retailers to start building a new sales channel using the Internet. By building an online store, retailers can increase their consumer reach significantly and increase their sales both online and in-store. MartJack, the multi-channel commerce solution is a complete solution designed specifically for Indian retailers to meet their end-to-end requirements for building an effective online sales channel. With MartJack, retailers can build an online store in 3 days and then leverage the in-built promotional tools as well as integration with Google Adwords to advertise and get consumers to their online store. With the capability to publish products to marketplaces, retailers can get access to an even larger consumer base. With easy to use interfaces which can be integrated with existing ERP, POS etc. systems for managing orders, leads, customers and operations, MartJack also helps in maintaining a low cost of operations thus making it easy to build a profitable online store. Lastly, he also talked about integrated payment solutions which complete the offering to provide a one-stop solution for building an online store. ” Percy Avari, Country head, Aramax International, India on of the important aspect of e-tailing “the Role of logistics in e-commerce order fulfillment”. While talking about the crucial role of logistics, he said, “We are going to leverage the entire eco-system to take the brick and mortar business online where they can build a new sales channel. The focus is to enable this without having the retailers to reinvent the wheel and build their website, marketing, payment systems and logistics systems separately. The goal is to have all of this as a single solution with the retailers getting superior technology, payment solutions, marketing tools and logistics solutions

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without having to build anything from scratch. With this eco-system, the retailers stand to benefit from the economies of scale of all the involved partners of the system – this would provide them superior, cost-effective, one-stop solution for their entire logistic requirement.” Today, Indian e-commerce market is estimated to be 20,000 cr, which is believed to be just the tip of the iceberg. There are always new challenges and nature of retailing itself is changing. There is an opportunity and requirement today for every retailer—to stay competitive, reach a larger number of consumers and maintain a strong, active customer base. Here is the gap which Reasoning has tried to fill up by organizing an E-tailing conclave with an aim of educating and empowering the retail community to endure rapid transformations of the Indian retail industry in context with the growing adoption of the Internet as a shopping channel among consumers Solution to the Above Problems Faced by e-tailers in India Reasoning is a digital commerce-centric company that develops platforms and solutions to enable businesses to leverage the immense capabilities of the Internet and mobile platforms as powerful customer acquisition, customer connection and marketing channels Martjack, a comprehensive multi-channel retailing solution, from Reasoning, enables retailers, manufacturers and other businesses to easily establish and manage their online stores. MartJack enables businesses in the following ways:

Solution for Connecting Offline and Online Business MartJack is for building an online store in 3 days, specially for retailers who do not have IT exposure. It is not technology but an eco-system of solutions. It combines and enables endto-end online commerce requirements for retailers across Internet, mobile and in-store kiosks to help both direct online and influenced offline sales. It simplifies the entire cycle of building and managing a profitable online store with the combination of leading industry solutions like Google, HDFC Bank, Aramex, etc.

Solution for Online Customer Traffic To solve the problem of acquiring online customer, Mart Jack uses Google AdWords for online advertising, and getting consumers to online store. AdWords is Google’s advertising product, which displays your ads to people looking for your products or services on Google or its partner sites. AdWords enables you to create online advertisements and display them on Google and across a huge network of partner websites. Advertising with AdWords allows you to reach new customers at the precise moment when they are searching for your type of products and services. MartJack Exchange simplifies business supply chain by connecting power publishers to a large network of reputed suppliers and niche retailers, and manufacturers. It enables a singleclick creation of a robust digital commerce channel with automatic communication between consumers, publishers, retailers, logistic partners and customer service teams. It is designed to cater to the needs of retailers, e-commerce players and retail-preneurs to significantly grow their business by offering a wide product range to their consumers. It is currently fuelling thousands of transactions daily by providing publishers with an access to more than 10 lakh products along with rich content and thousands of local online/offline deals.

International e-Tailing

Solution for Online Payment MartJack is integrated with a number of payment solutions to enable you to accept payments in a flexible way for online sales, ranging from credit card, debit card, net banking, cash on delivery to innovative solutions for getting cash paid to you before the delivery of the products (IPayNear). With preferred payment gateway partner HDFC bank, MartJack brings an integrated, ready to use, affordable and reliable payment solution for businesses, MartJack enables you to get one of the best payment gateways at one of the most affordable pricing! iPayNear is an innovative payment method that enables consumers to pay by cash safely and thereby conduct remote/online business transactions securely. Consumers who do not have a credit or debit card or who simply prefer traditional paper money approach can use this payment network to do online shopping. It is a definite way to explore market of consumers that businesses can serve. Why should a merchant work with iPayNear?

iPayNear’s cash payment platform:

pull on the request.

merchant’s system and transaction details shall be pulled from merchant’s system in realtime basis.

basis

Solution to Logistics Problems Aramex is a leading global provider of comprehensive logistics and transportation solutions. The range of services offered by Aramex includes international and domestic express delivery, freight forwarding, logistics and warehousing, records and information management solutions, e-business solutions, and online shopping services. Gati Limited is India’s leading express distribution and supply chain solutions company, committed to make their customers’ business always ‘Ahead’. The Gati’s advantage of seamless connectivity across air, road, ocean and rail has resulted in a plethora of offerings to the customer unmatched in the industry. Gati operates a fleet of more than 4000 vehicles on road, 150 reefer trucks, 5 marine vessels and 5000 business partners across India. A market leader in India, Gati has a strong market presence in the Asia Pacific region and SAARC countries. Today, Gati has offices in China, Singapore, Dubai, Hong-Kong, Thailand, Nepal and Malaysia and has plans to foray into other markets.

Quick Facts –GATI

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Conclusion The MartJack eco-system helps businesses go online effectively and easily. The problems faced by online retailers in India are technology difficulties, complex payment solutions, lack of understanding of capturing consumers online and the difficulty in managing the logistics of an online business. Reasoning is a digital commerce-centric company that develops platforms and solutions to enable businesses to leverage the immense capabilities of the Internet and mobile platforms as powerful customer acquisition, customer connection and marketing channels it has developed Martjack, a comprehensive multi-channel retailing solution, which will address all the above problems and help retailers to set up an online store in just 3 days.

Discussion Questions 1. 2. 3. 4. 5.

Discuss the challenges and problems faced by Indian e-tailers. Discuss the advantages to the e-tailers by IpayNear service. Can Martjack solution solve the problems of e-tailers? Discuss. Suggest a better solution to the problems faced by e-tailers. Discuss your online shopping experience.

Sources “Martjack Eco-system the complete solution”, http://www.martjack.com/ecosystem.html, accessed on December 11, 2011 “Reasoning empowers Indian Retail Industry with E-Tailing India Infoline News Service/12:27”, Sept. 2, 2010, http://www.indiainfoline.com/Markets/News/PrintNews. aspx?NewsId=4921884429, accessed on January 8, 2012

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GLOBAL ISSUES: THE INTERNET AND E-COMMERCE

Learning Objectives After reading this chapter, you will understand:

INTRODUCTION The Internet and E-commerce are global web and tool that have contributed towards the increase of international commerce significantly over the last decade or so. These represent enormous opportunity for international trade and marketing, because networks are great levelers, easy to enter into countries without violating the traditional territorial barriers, e.g. air, sea or land. In fact, they dissolve many long-established barriers to entry of one nation’s knowledge, technology, products and services into another. The technological breakthrough in the fields of tele-communication, transportation, telephony and internet, coupled with the nations’ willingness to open their economy for the new light of international integration through the World Trade Organization, have created a single global marketplace. The distance holds no meaning in this kind of economic and geographical scenario. The evolution of outsourcing has started a trend of making the best of products and services available to the global customer. The tastes and the preferences of this global customer are changing equally fast. The discerning customer of the emerging world today wants his products to be customised in the same manner, as is being done in the factories of the highly developed and technologically advanced countries of the west. This has brought a new awakening amongst the manufacturers and the international firms to look for value innovations across their operations, so that the benefit can be passed on to the customers across the globe. The international firms today are making the best use of the information and communication technology to understand this newly emerging market and customer even in low income and middle income countries. The reach of the manufacturer and the knowledge peddlers has gone beyond the boundaries of traditional urban markets to explore hitherto untouched potentials of rural and semi rural markets in all countries. We will, in

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this chapter, undertake an in-depth study of these emerging new trends and try to understand how internet and e-commerce play such a vital role in the new international marketing scenario of business to business, business to customers, customer to business and consumer to consumer flow of knowledge and commerce. The Internet has brought about a revolutionary change in the way communication channels were traditionally being operated in the world of commerce and trade across the globe. Only a decade ago, telegraph and telex were the mainstay of quicker communication in the world and otherwise the distance was traversed through the traditional means of regular postal services through air, land and sea. The breakthrough in the field of telecommunications, information technology and the availability of World Wide Web have given a new meaning to communicating with customers across the globe. The role of marketing stands revised with the opening of two-way communication channels on the net. The unknown customer across the seas has suddenly gained a familiar face for all international marketers. The distant and only aspired for products and services have suddenly come within the reach of the flick of a finger. Such is the power of internet and new communication technology. International marketing today faces the challenge of feeding the right information to the enlightened customer, whose knowledge base about the competitive products and services has already been widened by the storehouse of information available on the global search engines like Google and many others. Under this kind of highly competitive marketing environment, it is obvious that the manufacturer and the marketer both have to re-devise their business strategies.

ELIMINATION OF DISTANCE AND TIME ZONES The emergence of Internet and IT-enabled services has led to the death of distance. It has completely eliminated any kind of distance among the nations. The traditional way of international trading would always prefer dealings within the proximity of the neighbourhood to save on the costs incurred on transportation and communication. Trade blocks of nations had traditionally been formed between the neighbouring countries only, e.g., Asian countries will prefer dealing within Asia. Europe formed a different trade block and countries from South America ordinarily preferred dealings within the proximate distance. This distance today holds no meaning, as the advent of new communication technologies, the speeding up of the air transportation systems and the spread of knowledge through the web world have eliminated all time gaps from the world map. It is a level playing field so far as the cost of communication is involved. Setting up a web site either in Europe or in India can attract almost any numbers of hits. Similarly, no additional charge is added to the cost of sending an email either to the next door neighbour or to the person based in the United States. This has led to the proliferation of trade enquiries for the international marketing firms from all across the world. The smallest firm based in any remote corner of the world today can display its products on the virtual retail market available on the net and attract customers of any nationality and segment. The customer, too, can approach a manufacturer sitting in another continent and order through the internet and pay for it through the internet by using his credit card. The IT-enabled services have brought in new financial systems too in the world of international trade. The invoices and billings can be communicated on the net and the instant financial transactions have improved the bottom lines of many companies across the world. The email and the internet do not recognise any time zone in their systems and operations. You can have access to a computer across any time zone and communicate freely. This has increased the possibilities of rendering services to customers from the long distance outsourced service agencies, which has led to the availability of hitherto unknown sources of employment in middle income and emerging countries.

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Emergence and Availability of Huge Global Market Potential The markets across the world have suddenly been converted into a huge globally knit accessible market. The reduction and virtual bringing down of non-trade barriers across the world by all countries under the influence of the World Trade Organization has opened economies for new competitors from all over the world. This facilitates the path for a free market where capitalism will play a large role in the industrial and trade development of a country. Countries like China and Russia are moving from strictly controlled markets to market-driven economies. The integration of all countries by way of economic liberalisation also creates opportunities of foreign capital flowing into the countries. The countries are also opening up to the technologically advanced systems of research and development. The highly advanced production systems are making the products and services available to the customers across the world at very competitive prices. The international markets today, however, are presenting new kinds of challenges and barriers to the international marketers. The countries are taking resort to issues such as environmental protection, human rights, child labour, technical and qualitative specifications, etc. to offer some kind of protection to their domestic industries. It is obvious that when such issues are raised, the low income, underdeveloped countries will always be at the receiving end.

Emergence of Global Customer Segment In fact, the emergence of global customer segment has been the biggest impact of television networks, the websites and the world wide internet. Generation X, as they call it, is emerging as the citizen of a common world. Their tastes, preferences and their attitudes towards life are getting similar all over the world. The young generation today displays similar liking and buying habits towards international brands, e.g., Reebok, Pepsi, Coke or Pizza Hut. This has led to market being treated as a single global segment for many of the international products. The multinational corporations can concentrate more on product standardisations for the global customer, which results in economies of scales. The traditional dissimilarities of separate segments are giving way to convergence of market into one international culture. The concept of segmentation has gone beyond the idea of grouping the market into identifiable segment.

Relationship Building and Internet-based Teleconferences Marketing, over the past few years, has been emphasising more on the relationship building with the customers in order to retain them forever. Internet has made it possible to build a relationship with each and every segment of customer base, whether an individual customer, a channel member or a vendor situated abroad in any part of the globe, a logistics supplies contractor or even a sales representative on the move. International marketing today can deliver value to the customer without incurring an extra cost through the internet. The company brochures, the products catalogues and the technical data, the supply chain position can be made available to all those interested with the flick of a finger. What a value addition indeed! The international marketing firms are using internet to build up a corporate image by dispersing information about their corporate activities on the internet to a big universe of individual customers. This relationship building has become more interactive and has led to two-way communication between the customer and the firm. The individual customer can post his or her opinion on the company website. Such information board can be analysed by the marketing expert of the organisation and the customer can also be informed about the action initiated by the firm on his feedback. That makes the marketing communication a two-way interactive process. The emergence of internet conferences has in fact made

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information dissemination very inexpensive, yet a useful activity bringing benefits to millions of users across the world. (For example, you can conduct telephonic interviews and teleconferences using the software that can be downloaded from skype.com free of cost, anywhere in the world.)

Speed to Product Proliferation and Shortening of Product Life Cycles The traditional marketing used to launch their products in one market, watch and analyse the reactions and acceptance before these were moved to the national and then the international level. The advent and spread of internet has created a new instant way of reaching to millions and billions across the globe. That means product proliferation has become instant and the communication about the new introductions can be communicated across the seas simultaneously. That has opened new vistas for not only products but for services and entertainment world too. The Indian film industry, particularly Hindi film industry, has made the best use of world wide web. The Indian television network has helped the Indian films and serials go across all continents in a very short span of time. The demand for Hindi films has gone up as a result, and the films become instant hits worldwide in the first week of their release. Similarly, any product put on the net can become known to the subscribers within a short span of time. But an instant proliferation has also resulted into bringing down the life cycle for many products. The competitive pressures from the developed economies and their technologies keep the manufacturers researching for new and innovative products in order to maintain a lead over their competitors. The mobile handset market is a standing proof of the models being changed almost every fortnight. Similarly, many popular models become obsolete every year. In the field of software marketing, almost every product has an inbuilt obsolescence feature, forcing the firm to come out with a revised or improved version of their brand every year. The ultimate benefit, of course, goes to the consumer who gets new innovations every year which are definitely improvements over the previous models of any thing available.

Emergence of Services Marketing The breaking down of geographical boundaries by the internet has resulted in a revolutionary approach to services marketing all across the world. The Third World stands to gain the maximum from the potential opened up by the reach of internet and IT-enabled services. India has become the hub of back office processing for many developed countries. The revenue generated from concept of e-learning, software development and information technology amounts for almost half of India’s GDP. The IT-enabled services have encouraged many multinational companies to select India as their hub for support systems. India, today, provides a number of IT-enabled service in the fields of health, tourism, accountancy and manufacturing facilities. According to a NASSCOM’s and McKinsey’s study, “Indian IT and software sector will account for US $ 70 to 80 billion in revenues, will employ 4 million people and account for 70% of India’s GDP and 30% of India’s foreign exchange inflow in the near future.1” Given hereunder is the list of channels of services where India has shown strategic strength in offering services to international markets.

1. Rakesh Mohan Joshi, International Marketing, Oxford University Press, 2008, pp. 688–689.

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INDIA’S STRATEGIC STRENGTH IN OFFERING SERVICES TO INTERNATIONAL MARKETS TELE MEDICINE * TELEPLUMBING

* TEXT ADVISORY SERVICES E-LEARNING ADULT PROFESSIONAL COURSES

TOURISM TOURISM, ADVENTURE TOURISM DUTY FREE SHOPPING ZONES EDUCATION DEVELOPED COUNTRIES INDIA’S HERITAGE CULTURE

RESKILLING * PERSONAL PRIVACY SERVICES

AYURVEDA, CUISINE, YOGA ETC NURSING HOMES AND RETIREMENT

PROVIDING SERVER SPACE TO

SERVICES

TOWNS IT SERVICES

IT ENABLED SERVICES

EARNING CONTENT, PUBLISHING AND

OTHERS R&D ACROSS INDUSTRY VERTICLES, SEMI CONDUCTOR TECHNOLOGY, DRUG

Source:

Emergence of the Internet The Internet today is widespread in all spheres of international marketing. It has in fact introduced to the world a new and faster way of conducting business known as E-business or E-commerce. The mobile technology has further developed a wireless and station free mode of conducting business. The wireless mechanisms

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have brought in a new kind of customer empowerment, where he can remain in touch with the supplier and conduct his business from the offices while on the move. It has done away with the requirements of even having a specifically earmarked space and place for conducting business. The Internet had come into offing in the year 1969, when the US department of defense had introduced Arpanet, which permitted the transfer of electronic messages ( email) apart from enabling access to remote computers.2 The initial exposure of the internet has been only for military purposes. However, in 1992, with the introduction of World Wide Web by Tim Burners Lee at a European institute in Switzerland by the name of Conseil European Pour La Recherché Nucleaire (CERN), commercial aspects of internet became known to the world. This protocol, for the first time, exhibited and permitted the graphic use of information on the internet. This World Wide Web, in a way, gave birth to the current usage of internet and www sites across the world. It is surprising that while radio and telephone took a long time to connect the world, the internet took hardly five to seven years to access the current network of internet users in major countries. The speed at which it is further spreading its wings can be assessed from the figures given in Table 21.1. Table 21.1

World Internet Usage Data

World regions

Population (2007 Est.)

Population % of World

Internet Usage, % Population Usage % of Latest Data (Penetration) World

Africa

933,448,292

14.2%

33,545,600

3.6%

2.9%

Asia

3,712,527,624

56.5%

436,758,162

11.8%

37.2%

Europe

809,624,686

12.3%

321,853,477

39.8%

27.4%

Middle East

193,452,727

2.9%

19,539,300

10.1%

1.7%

North America

334,538,018

5.1%

232,655,287

69.5%

19.8%

Latin America

556,606,627

8.5%

109,961,609

19.8%

9.4%

Oceania/Australia

34,468,443

0.5%

18,796,490

54.5%

1.6%

World total

6,574,666,417

100.0%

1,173,109,925

17.8%

100.0%

96

33

19

16

Africa

Middle East

Australia/Oceania

233

North America

315

Europe

399

Asia

500 400 300 200 100 0

Latin America

Source: http://www.internetworldstats.com/stats.htm, accessed on 10 June, 2007.

Source:

Fig. 21.1

Region Wise Breakup of Internet Users of the World

2. Robert Zakon, Info.Asoc.Org/Guest/Internet/History/Hit.Html # Growth, August 29, 1999.

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It can be observed from the above data that the spread has been skewed towards Asia, Europe and North America. The actual power of internet will be felt when it covers up the remaining countries where the spread of knowledge through the internet is still a far-fetched dream for billions of people.

Source:

Fig. 21.2

Percentage of Population Covered by Internet in the World

But even where the number of internet users has been growing, they may be only a miniscule portion of the total population. We can see that the number of internet users is the highest in Asia (399 millions); however, it is only 10.7% of the total population. In North America, a total of 69.7% of total population has been using internet. The real power of internet will be unleashed when the low income and the poor underdeveloped economies too get interlinked with the World Wide Web and make commercial use of the potential. SOME OF THE CONCEPTS AND DEFINITIONS OF INTERNET VOCABULARY

E-Marketing Internet

Intranet Extranet

World Wide Web

Portals Web Browser Virtual Reality

E-Commerce

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E-COMMERCE E-commerce is also referred to as e-marketing that permits the marketing and commercial transactions, e.g., buying, selling, distributing and collection of data, making payment and collecting information through the electronic media between the businesses organisations and customers. This model has its base in Electronic Data Exchange (EDI), where the transfer of standardised data between corporations takes place on the electronic media. EDI has been further empowered by the emergence of a commercial platform on the internet, wherein the information on the product, display and demonstration of the virtual product, dialogue, negotiation and the finalisation of the deals are arranged by the electronic media. The emergence of e-accounts, e-banking and the prevalence of debit and credit cards have facilitated e-payment systems wherein the customer does not have to virtually get into any kind of paperwork and the debit and credit transaction takes place on the net. For example, Rediffbooks.com, amazon.com, Ebay.com and a host of other such sites conduct business on the net where they are interconnected to many of the interlinking associated sites and customer information on their products, prices discount structures, opinions and purchase experiences are shared amongst millions of users of the net. The publishers of this book McGraw-Hill publishers too have their own web site, //www. mcgraw-hill.com/, where thousands of books are offered to the customers on the net. Similarly, e-banking is virtually the in-thing in many developed and emerging countries. In several countries, many banks have already started the operation of customer accounts through the electronic systems. The customers can access their bank accounts by the use of a secured password on the internet and conduct business transactions without visiting a branch of the bank. They can issue payment/ collection instructions to their bankers, secure information on the bank products and have the information sent to their clients by using the electronic media. E-marketing has opened up altogether new systems of conducting business. The companies can organise their loyal consumer clubs for chat and discussions on the efficacy and effectiveness of their products. They can seek the opinions of the users worldwide about the new product launches, new technologies and socially active issues that affect business and trade internationally. But that does not mean the e-marketing is only for approaching a customer. In fact, it is finding more usage in attracting business to business transactions. Forester Research has found a ratio of 5:1 between business to business and business to consumer.3

Types of E-Commerce Models E-commerce can be categorised into four distinct categories based on the inter exchange of business transactions, followed by each commercial activity undertaken on the net.

Business to Business (B2B) E-Commerce When two or more firms undertake transactions using the electronic network, it takes the shape of e-marketing or e-commerce. The transactions can be intra-firm or between the firm and the government agencies, for exchange of information, data, and business deals’ details on the internet. The electronic process of such business transactions shortens the value chain and results into cost savings for all the parties involved. It also facilitates a greater exchange of dialogue and deliberations between two parties as the free flow of information from all corners of the world does encourage a healthier information exchange. The manufacturers would like to be wary of the competition springing up on the world wide web, hence will be more careful in providing the 3. E-bussiness, What Every Business CEO Needs to Know, Business Week, March 22, 1999, p-10.

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accurate and useful information on the internet. Such business to business transaction of commercial dealings result in a win-win situation for the customers of undifferentiated products, as they can have a comparison of the same products worldwide and negotiate with the seller better. At the same time, the information about the highly technical and precision based products can be obtained from the internet to ensure the customer and the business are buying the right fit. “In the B2B world, the process of making a sale requires more one on one communication, with details of a product or service spelled out. In manufacturing, fabrication, and engineering design, this requires extensive communication. If a B2B company can provide a quality product or service, even if that price is higher than the competition, a customer will be willing to pay for it, provided there is a perceived value in what is being sold. That value can be in the form of customer service, engineering design assistance, on-time delivery, and quality.”4

Business to Consumer (B2C) E-Commerce The emergence of internet has resulted in the proliferation of direct sales to the end consumer. The international electronic retail chains, online stores and e-brokers have been offering their products and services directly to the customers through the internet. Credit card marketers, financial companies offering personal loans and e-learning institutes have all been selling their products on the internet. The world of B2C has gone one step further and even airlines bookings, hotel bookings, holiday packages and conducted tours are being sold on the net. Auction of mobile phones, computers and electronics devices are the in-thing on business to consumer marketing on the internet. Sites that are most popular on B2C sales include Amazon.com, Dell Computers, Fiction Publishers and many other such sites put up by the international manufacturing firms directly. People in foreign countries can buy airline tickets for travel within the United States on www. priceline.com at competitive prices. In B2C, customers place a lot of emphasis on price comparisons. Customers go shopping online for the best price possible. What used to take a customer all day of driving around town, comparing one store’s price with that of another can now be done in a matter of minutes on the internet, jumping from one website to another or even having all the websites open at the same time for comparisons. Some international marketing firms handle both the B2B and the B2C models of e-business. For example, large furniture manufacturers and designer furnishings marketers have online service for both the consumer and the corporate buyer. In this type of model, the firm has to handle both the consumer and business customers from each one’s own different purchase patterns and preferences. This can affect the handling of online transactions. Individual consumers most likely would want to handle e-commerce with a credit or debit card, while the business buyer would probably set up an account with the outlet store to keep the business relationship flowing. However, the success parameters and the operational dynamics of the international markets (when exposed to the online markets) are changing at a very fast pace. In order to respond to those changes, an international marketing firm needs to address marketing on a number of different challenging factors. For the B2B, a lot of manufacturing processes have been outsourced overseas to cost-effective viable alternatives. This outsourcing has caused a number of companies to go out of business in recent years, yet, at the same time, it has also helped some of them to implement economies of scale and bounce back into the business with a renewed vigour. Companies that have weathered all kinds of competition and are prospering are using 4. James A. Warholic, Internet Marketing B2B Vs B2C, Comparisons for the Twenty First Century, http://pwebs.net/ marketing/articles/marketing-b2b-b2c.htm.

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a number of marketing and advertising means available to them. In order to meet the challenge of some B2B companies staying in business and reaching prospective clients, the internet and their web site is an ideal key for doing businesses in the twenty-first century. Likewise, B2C companies need to approach this with ever increasing scrutiny and promptness. After all, they too need to garnish sales by spending their advertising and marketing budgets wisely, even an online customer needs to be delighted.

Consumer to Business (C2B) E-Commerce The customer here invites proposals from the sellers and the suppliers to cater to his needs and requirements. The market dynamics are handled and decided by the customer rather than by the seller. Large government tenders, turnkey projects put up their tenders on the internet and invite international marketing and contracting firms to put forward their bids. This is like open tender invitation from the intended participants.

Consumer to Consumer (C2C) E-Commerce The formation of community websites, online inter trading portals and chat rooms are examples of setting up consumer to consumer business. The portals like rediff and eBay invite person to person trading offers for new and second hand items for sale on line. The web site bazee.com is another popular website for individual bargain hunters. These portals encourage consumer to consumer sale offers on their websites to gain the maximum hits and also to set up a virtual bazaar on their sites. The items offered may vary from second hand books to designer garments, from mobile phones to motorcycles and fashion accessories. Every thing is virtually available on the net for consumer to consumer selling.

COMPONENTS OF E-COMMERCE VALUE CHAIN Harvard University Professor Michael E. Porter had first used the phrase “value chains” to describe a management approach to the supply chain. But value chain management also has some analogues to the internet. Value chains on the internet can represent the components of any given transaction, where the customer sits at one end and the product or service sits at the other. The components form the middle of the route that leads the customer to the end point, defines how value is derived from the transaction and split among the parties contributing to the chain. The important value chains on the internet can be named as commerce, connectivity and content. But of these chains, which pieces are important to the process of e-commerce. Let us look at the business to consumer (B2C) commerce value chain. Example of ordering a book online, the ISP Earthlink provides connectivity to the web, Yahoo! delivers content through a homepage, NetGravity’s ad serving technology delivers the banner advertisement for bookseller Amazon, Net Perceptions’ predictive collaborative filtering engine recommends a book, Amazon sells the book and UPS delivers it to the customer. Given hereunder is a list of the intermediaries that form a value chain on the network to provide special services to the e-commerce.

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Context Suppliers These are the portals that support the use of electronic way bridge to both the customer and the supplier to get in touch with each other. Their main task is to provide an electronic platform that can be accessed by the business channels to put up information about their business on the net for the customers’ benefit. The customer also finds it easier to access the electronic channel by the routes provided by these portals, ISP Earthlink, America Online, Netscape Communicators, Microsoft Explorer. And the search engines, e.g. Yahoo, Google and Rediff are some of the major context suppliers.

Sales Agents/Data Providers They are those components of the business to consumer commerce value chains that own the customer and eyeballs which can be converted into transactions. These agencies provide value to the e-commerce by providing list of the addresses of the potential customers that can be approached by the companies on the net. These agents will have complete demographic profiles of the markets on the net, e.g., the age, income, preferences and other data on the customer. They sell these customer data banks to the intended advertisers and the product/ service suppliers on the net.

Market Developers The internet market owes a lot to these developers who provide an online exchange to the customers and sellers. The large number of auction sites, online trading sites and online merchandise sellers all add up to complete the list of market developers. For instance, ebay.com, philatelic auctioneers, auction agents for electric power industry, amazon.com, auctionwatch.com and Yahoo! get millions of hits on their sites every day, bringing buyers and sellers together to generate e-commerce.

Buying Agents They are also known as purchase agents; they act as agents for the customers on line to find the goods, services they are looking for on the net. Their task is to search the net and find the best deals and the right prices to the purchasers. For example, priceline.com, eximinfo.net, homes101.net, thealexanderreport. com, googoochina.com, indospan.net, are some of the sites that bring together the buyers and sellers on the net and perform the services of on line buying and purchasing agents.

Logistics and Business Processing Specialists Online banking, credit cards and debit cards have been the mainstay of financial transactions on the e-commercial selling. These intermediaries arrange and manage the transfer of money to the sellers on a nominal service charge. Similarly, physical distribution of goods has to be handled by the intermediaries who have to raise a bill, make arrangements for the packing and shipping and finally deliver the ordered goods to the customer on the addresses provided. A complete chain of international distribution experts and operational back office experts are interlinked by the net to deliver value to the customer. The Business Process Outsourcing industry has been fast developing in many countries to attend to and extend support to the logistics and business processing functioning part of the e-commerce value chain.

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Point to Remember E-commerce: It is referred to as e-marketing that permits the marketing and commercial transaction, e.g., buying, selling, etc. Context Suppliers: These are the portals that support the use of electronic way bridge to both the customer and the supplier to get in touch with each other. Buying Agents: They are also known as purchase agents; they act as agents for the customers on line to find the goods, services they are looking for on the net. Context Suppliers: These are the portals that support the use of electronic way bridge to both the customer and the supplier to get in touch with each other. Sales Agents: They are those components of the business to consumer commerce value chains that own the customer and eyeballs which can be converted into transactions.

Objective Type Questions 1. Internet had come into offing in the year (a) 1969 (b) 1961 (c) 1979 (d) 1962 (e) 1989 2. US department of defense had introduced which system that permitted the transfer of electronic messages (email) apart from enabling access to remote computers. (a) Apnanet (b) Alphanet (c) Electronet (d) Arpanet (e) Intranet 3. World Wide Web had been introduced by (a) Tim Burners- Lee (b) John Burners Lee (c) Michael E. Porter (d) Tony Burner Lee (e) None of these 4. Which of the following is not one of the types of e-commerce models? (a) Business to business (B2B) e-commerce (b) Branch to branch e commerce (c) Business to consumer (B2C) e-commerce (d) Consumer to business (C2B) e-commerce (e) Consumer to consumer (C2C) e-commerce 5. Which of the following will not form one of the components of e-commerce value chain? (a) Context suppliers (b) Sales agents (c) Market developers (d) Business processors (e) Hardware suppliers 6. The formations of community websites, online inter trading portals, and the chat rooms are living examples of —————— form of e commerce.

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8.

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(a) B2B (b) B2C (c) C2B (d) C2C (e) Br. to Br Portals like .ISP Earthlink, America Online, Netscape Communicators, Microsoft Explorer and the search engines e.g. Yahoo, Goggle and Rediff, basically handle the task of (a) Context suppliers (b) Sales agents (c) Market developers (d) Business processors (e) Logistics specialists Sales agents/data providers are those components of the business to consumer commerce value chains that (a) Own the customers addresses and eyeballs (b) Provide online exchange (c) Act as agents for the customers on line (d) Handle physical distribution of goods (e) Provide logistical support Intranet is a computer network that links users in: (a) A single company (b) The entire web world (c) A single country (d) A single continent (e) a single city State true or false: (a) E commerce is also referred to as E marketing that permits the marketing and commercial transactions on the internet. (b) The breaking down of geographical boundaries by the internet has resulted in a revolutionary approach to services marketing all across the world. (c) The advent and spread of internet have created a new instant world of reaching the message to millions and billions across the globe. (d) The relationship building has become an interactive and two-way communications due to the spread of internet. (e) The distance and time holds no meanings in the world of internet and e commerce.

Review Questions 1. 2. 3. 4.

“E-marketing is boundary less.” Critically examine this statement in the light of growth of the Internet. Identify the types of models on the e-commerce. Support your arguments with suitable examples. Identify the key intermediaries forming a value chain on the internet. Explain each one’s functioning. Write short notes on: A. Business to Business (B2B) E-Commerce B. Business to Consumer ( B2C) E-Commerce C. Consumer to Consumer (C2C) E-Commerce

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Project Assignment 1. Visit www.skype.com, register online and download the software that can be used for teleconferences and video conferences. Ask your friends/relative, in a Foreign country to get a skype id like arjustinpaul@skype and share the id with you. Both of you should use this for talking each other and share your experience in the classroom.

Suggested Readings Phil, Carpenter, E Brands, Boston Harvard Business School Press, 2000. Francis, Cairncross, The Death of Distance Economist Special Report on Telecommunications, 30th September, 1995. Grey, Dempsey, A Hands on Guide for Multilingual Websites, World Trade, 1999. Komenar, Margo, Electronic Marketing, John Wiley and Sons, New York, Inc., 1996. Rayport, Jeffery F. and John J. Sviokla, “Exploiting the Virtual Value Chain”, Harvard Business Review, November–December 1995, pp. 75–85. Keegan, Warren J, Global Marketing Management, Pearson Education, Inc, 2005.

Useful Weblinks http://usinfo.state.gov/journals/itgic/1097/ijge/ijge1097.htm Info.Asoc.Org/Guest/Internet/History/Hit.Html # Growth http://www.internetworldstats.com/stats.htm http://pwebs.net/marketing/articles/marketing-b2b-b2c.htm

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Learning Objectives After reading this chapter, you will understand: The geo-political and economic systems in foreign countries Rules and legal framework, policy change in the countries where you have to do business Industries, companies and the market structure with special reference to the Middle East Countries The features of Canadian market The recent trends with reference to India – Canada bilateral trade

DOING BUSINESS WITH MIDDLE EAST COUNTRIES Doing business with companies from other countries requires knowledge about religion, places, people, etc. The Middle East is a region with numerous opportunities, yet, like all markets, it carries its own set of risk factors. Before doing business in the Middle East, it is imperative therefore to learn and understand the business culture, etiquette, legal framework along with the many business and investment opportunities. Understanding the Middle East (also Gulf) region’s unique history, religion and culture significantly improves the business prospects of today’s traders and investors. For millennia, these countries have been trade crossroads between Europe, Asia and Africa, actively engaging in and facilitating international trade. The Gulf economies present an array of market types, ranging from extremely poor Yemen and lower middle income Iran, to the very wealthy Saudi Arabia, the UAE, Qatar and Kuwait. Unusual demographic, ethnic and cultural diversity also influence commercial opportunities. The outlook for this region, of course, depends on how the price of oil and the production levels of oil will move up. As of now, oil prices are largely beneficial to the region because of the additional revenue and wealth it creates in a large number of countries in the region. If one looks at these countries in a more detailed manner, one sees that many of the countries that have undertaken economic reforms, such as in the financial and banking sector, in the fiscal sector by introducing tax reform and budget restraint, in the labour markets to make the labour markets more flexible, and in trade liberalisation, have generally done better in terms of growth than those that did not undertake. * The Section ‘Doing Business with Middle East Countries’ of this chapter has been co-authored by Dr. Justin Paul, Yatinder Agrohi and Sudarsana Reddy.

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And if these countries and others proceed with deepening those reforms and accelerating the agenda of implementation of reforms, it is quite likely that the regions will continue to grow at reasonably satisfactory rates. The Middle East had housed some of the most advanced cultures of its time, like the Muslim Caliphate and the early stages of the Ottoman empire. Today, the region is characterised by strong political tensions, like the issue of Palestine/Israel, the issue of Kurdistan, the issue of rights to water resources, as well as a number of smaller, yet important issues like Syrian presence in Lebanon, border disagreements between Syria and Turkey, between Saudi Arabia and Yemen and the civil rights of Shiai minorities in Iraq and Bahrain. In the Middle East countries, wealth is unevenly distributed between the countries, with the United Arab Emirates and Israel offering highest living standards for the entire population and Yemen with the serious financial problems for its majority of the population.

Economic Overview In general, the Middle East region commands abundant natural resources, accounts for a large share of world petroleum production and exports, and enjoys, on an average, a reasonable standard of living. Within this general characterisation, countries vary substantially in resources, economic and geographical size, population and standards of living. At the same time, intra-regional interaction is weak, being restricted principally to labour flows with limited trade in goods and services. Most Middle East countries have experienced population growth in the recent years. Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates have registered population growth rates exceeding 3.5 percent in recent years, while Bahrain has recorded rates below the 2 percent average of the developing countries. Although the region is plagued by harsh climate, limited groundwater and rainfall and scarce arable land, it enjoys abundant natural resources. About two-thirds of the world’s known crude-oil reserves lie under this region, with one quarter located in Saudi Arabia. The region also possesses numerous non-fuel mineral and non-mineral resources. The region’s natural resources include potash, iron ore, coal, ammonia, urea, etc. Reflecting the various advantages, Middle East region constitutes a sizable economic entity and enjoys a reasonable standard of living by international standards. Saudi Arabia is the largest economy, accounting for one-fifth of the region’s total GDP. The highest per capita income countries ( Kuwait, Qatar, and the United Arab Emirates) enjoy an average per capita GDP of around $15,000. The region trades mainly with the industrial economies. The countries of the EU are the most important trading partners. The United States and Japan account for sizeable percent of the region’s both exports and imports. The region’s oil trade heavily influences these indicators. Oil and oil-related products account for about three quarters of the region’s exports and about 50 percent of world exports of these products. The United Arab Emirates per capita export is around $11,000. This region depends on imports of foodstuffs. Gross food imports of the region accounts for 4 percent of world food imports. All countries are, on an average, net food importers. The Middle East region enjoys sizable interest income inflows, reflecting a high level of foreign assets. Finally, in terms of intra-regional capital flows, two distinct groups exist in Middle East: providers of significant foreign assistance mainly the oil exporters, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates and recipients. Political considerations have also played an important role in this regard, but private capital flows have been relatively limited.

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Regional Outlook Changes in the policies have affected the region’s economic outlook and the way trading partners and domestic and foreign investors view the region.

Peace Process The region is closer than ever to resolving the long-standing Arab-Israeli conflict. This conflict had adversely affected economic development in certain countries of the region. The conflict had accentuated macroeconomic imbalances and diverted resources from productive investments in infrastructure and in the social sectors. By aggravating perceptions of socio-political risks, it has discouraged investment in certain countries. It has also inhibited efficient regional projects for electricity, water management and tourism. The Iraq war had created a great deal of uncertainty in this region, but most economies in the region weathered that storm reasonably well and continued on their growth path since then. The establishment of a comprehensive, just and durable peace in the Middle East is expected to result in a significant economic peace dividend, provided it is accompanied by sound economic policies. Of how much worth the peace dividend is difficult to estimate, but military spending cuts could over time lead to higher capital formation and less severe resource misallocation. The impact is expected to be large, but will probably materialise with some lag.

Closer Integration with the EU Initiative for close trade links with the EU emphasises the private sector as an engine of growth and the establishment of a free trade area, initially between the EU and individual Middle East countries and subsequently between the EU and Middle East as a region. The gains associated with this initiative would materialise from improved efficiency as a result of growing competition, somewhat better access to EU markets and improved domestic and foreign investment flows associated with “policy credibility” resulting from closer integration with the EU.

Business Environment Understanding the Gulf region’s religion, culture and business environment remains critical to doing business in those countries. Important issues include appropriately using local agents, choosing local investment partners, understanding the role of chambers of commerce and managing the region’s bureaucratic culture.

Religion Islam, the region’s dominant religion, permeates policy making and daily life far more than religion does in western economies. For example, while exceptional by regional standards, the leader of the Islamic Revolution in Iran and conservative Islamic theologians in Saudi Arabia considerably influence law making and economic policy. Islam also guides food and drink consumption, clothing patterns, financial sector activities and products, attitudes to advertising, sayings and phrases and most of the population’s world view, common cultural issues influencing business. Persian and Arabian cultures share many characteristics, regarding honour, face, modesty, hospitality, patience and trust as important indicators of character. Usually, foreigners’ minor, unintentional cultural and social mistakes are forgiven; many business people and senior officials are western educated or experienced in dealing with westerners. Nonetheless, culturally acceptable behaviour greatly assists communication between business people.

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Friendship and Trust in Business Relationships In both social and business contexts, many Middle Easterners are unwilling to trust people they do not know. Mutual respect and trust is the key protection in a relationship and most effective in ensuring fair treatment for all parties. Hence, while building trust takes time, it is an essential prerequisite for business relationships. An introduction from a trusted third party can slightly speed up this process, but several meetings, including some socialising, are normal before commencing serious business negotiations. Once established, regular visits and contact should nurture a business relationship. One order does not necessarily become several, even if the client is satisfied, unless the relationship is maintained.

Legal Environment The region has a distinct legal environment with Sharia law forming a basis for regional constitution and applying to such civil issues as marriage, divorce and inheritance. Sharia law recognises property rights and contractual obligations. However, beyond that, its direct business impact is limited; business law is not usually cited in religious texts and tends to be government legislated. Nonetheless, legal frameworks are not as well developed as in western economies and avoiding litigation often is critical to business success. Legal problems include complying with often complex and ambiguous foreign ownership laws, achieving intellectual property protection and terminating agency agreements. Consequently, thorough due diligence on potential partners and use of all available means of dispute resolution, such as negotiation or arbitration, if problems do arise, are essential.

Demographics The Gulf economies’ young population create reform pressure and stimulate demand for education, music products, electronics, information technology and communications, snack foods, travel, housing and mortgage financing. The population structure in Middle East economies is shown in Fig. 22.1.

Fig. 22.1

Population Age Structure in GCC (Gulf Co-operative Council) Economies

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Non-nationals, from the Indian sub-continent, other Middle Eastern states and western economies, play on important role in GCC1 workforces and market demand. Expatriates account for about 70 per cent of the population in the UAE, Qatar and Kuwait and 60 per cent in Bahrain and are significant in most other Gulf economies. Non-nationals not only do all dangerous and unskilled work, but fill many private sector skilled and managerial positions.

Key Regional Business Issues Regional business issues important to commercial success include:

Economic Prospects are the desire to diversify out of oil, fiscal pressures and declining oil reserves in Oman, Bahrain, Qatar and Dubai in the UAE. opportunities for foreign firms; fiscal pressures have increased the importance of private finance and privately provided infrastructure, while the drive to diversify has opened new opportunities in gas, heavy industry and service sectors. Efforts to boost the employment of Gulf nationals have resulted in the need for education and skills training. the reasons for ‘Gulf economies’ moderate growth performance. However, now the young, rapidly growing population and massive infrastructure needs of the major oil producers like Saudi Arabia, Iran, UAE and Kuwait are generating strong pressures for economic reforms. These reforms should help stimulate more balanced and robust growth, reduce vulnerability to swings in international oil prices and expand business opportunities for foreign traders and investors. diversify economic activity. Besides providing a huge workforce, they also create a strong demand for education, health services and infrastructure like roads, water supply and electricity, which the state traditionally provides in Gulf economies. The demand for new services imposes fiscal pressures on Gulf governments. This demand creates a major incentive to increase private sector involvement in infrastructure provision. 1. GCC stands for Gulf Co-operation Council (Regional Group for Co-operation between Gulf Countries).

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setting the pace, with their service sectors accounting for majority of their respective GDPs, compared to only small per cent in Saudi Arabia. Dubai is the Arabian Peninsula’s premier re-export centre, servicing the Middle East and Africa. It also is a substantial tourism, financial, exhibition and conference centre. Bahrain is a major offshore banking centre and like Dubai, targets regional headquarters and tourism investment. With a growing imperative to strengthen private sector employment, all countries are trying to expand their telecommunications, information technology, tourism, finance and education sectors. As a part of this process, increasing opportunities should emerge for foreign service providers.

Impact of WTO Accession WTO membership is an important driver of reform, limiting the forms of protection, countries can apply and generate commitments to future liberalisation. For example, trade liberalisation, particularly in agriculture and services, elimination of subsidies, protection of intellectual property and equal treatment of domestic and foreign companies are all requirements of WTO membership.2 Since most of the countries have joined WTO, they have removed non-tariff barriers, such as licensing and quarantine regimes that are not in accordance with the WTO rules. WTO requirements have driven considerable trade and investment reform in Gulf economies. This should result in increased transparency, intellectual property protection, and equal tax treatment for domestic and foreign companies. For example, Oman’s accession to WTO has led to opening up of the telecommunications sector and liberalised foreign investment regulations. WTO requirements have created a new business environment in countries including Qatar and UAE. Their governments have opened up important new sectors to foreign competition. For example, the UAE telecommunications monopoly, Etisalat, has been facing competition from foreign telecommunications companies. WTO rules also caused Bahrain to eliminate exclusive agencies for trade.

Business Opportunities in the Middle East Region The Middle East region has enormous assets. It has enormous financial and natural resources, very well developed infrastructure in most of the countries, heavy investment in education, a strategic location, very close to all markets, especially European, African and Asian. We can also expect these economies to grow at much higher rates. This, indeed, illustrates that this region provides enormous business and investment opportunities.

Goods and Services Market Analysts suggest that the region faces buoyant markets for non-oil products. The scope for expansion is significant as non-oil exports account currently for only a quarter of the region’s exports. As regards petroleum prices, there seems to be a consensus that, at best, nominal prices would increase moderately and real prices would remain constant or would decline. The consensus reflects expectations of restrained growth in world demand, particularly by developing countries. At the same time, non-OPEC suppliers are expected to maintain broadly their current market shares. Turning to the region’s imports, projections suggest moderate increases in import unit values (in U.S. dollar terms). Prices of non-oil imports are expected to rise by an annual average of 2–3 percent. A source of upward pressure in this context is the price of food imports, an important component of the region’s total import bill. 2. Justin Paul, Business Environment, McGraw-Hill, Chapter on WTO.

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Agricultural, textile, and clothing sectors offers good opportunities for organisations from other regions as the countries in the Middle East have reduced tariff and lifted non tariff barriers in these segments. The traditional non tariff barriers were:

The improvement in the overall trading environment because of strengthened rules applicable to subsidies, countervailing duties, anti-dumping, safeguards and the reinforcement of the institutional structure will also provide the investors an opportunity to have a better understanding of the markets and much needed freedom to do business with these countries. Tourism has growth potential in many countries of the region and larger tourist inflows would benefit from both a more integrated transport system and a regional approach to the promotion of this sector. The other areas can be: Agricultural Exports Rapid population growth and fiscal pressures limiting the capacity of governments to expand domestic agricultural subsidies have created more demand for bulk wheat, sugar, and frozen meat imports. With local incomes rising and air links improving, prospects also are good for higher value fresh and processed food exports, including dairy products, inputs for the processed food industry and snacks products. Minerals and Energy Major projects related to gas pipeline should stimulate the Gulf’s heavy industry development, boosting demand for alumina and steel making resources from countries like India. Further expansion of these heavy industries could stimulate Gulf interest in investing in mineral sectors, in other countries. Services Excellent opportunities also exist for service exports, including building infrastructure, education, tourism, construction, mining and business services. Indian IT industry has excellent opportunities in the region with reference to this sector, because of geographical proximity and availability of low cost skilled labour.

Capital Markets some developing countries with access to external financing to supplement domestic resources in funding investment opportunities. This provides a platform for foreign direct investment flows to “emerging equity markets” and also provides access by developing countries to bond and equity markets in industrial countries. In recognition of the need to attract sustainable inflows of private capital and given the potential for capital markets to finance productive investments, many Middle East countries are emphasising financial sector reforms (banks and capital markets) to encourage the mobilisation of funds from domestic, regional and international sources and to minimise the associated risks. Foreign Investment Due to their huge oil export receipts, GCC economies are traditionally capital exporters. Abundant capital and restrictive foreign investment regimes had made FDI a much less significant capital source for the Gulf economies than for East Asia. However, efforts to strengthen growth, diversify economies and create employment are changing rapidly these restrictive policies.

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Remaining constraints on inward FDI to the Gulf economies include caps on foreign ownership outside the free trade zones, prohibitions on investing in many sectors (particularly oil), restrictions on foreign participation in key infrastructure, energy and manufacturing sectors and imprecise regulatory frameworks. However, Qatar, Oman and Saudi Arabia lead reform efforts and further opening of FDI regimes is likely in the short to medium term. The prospect of large scale foreign involvement is more in the region’s huge emerging gas industry than in oil, as regional expertise in the gas sector is less developed. The scale of investment and need for internationally competitive operations should make foreign investment more attractive than majority state ownership, the previous approach. Private infrastructure investment opportunities also should expand due to ongoing liberalisation and massive needs for telecommunications, roads, pipelines construction, railway construction and electricity and water production and distribution services. Free trade zones also provide export and distribution opportunities, for companies from Asia, Europe, USA, etc.

Analysis of Select Countries of the Region Saudi Arabia the Saudi family since. The ruler manages the day-to-day affairs of government. While the Kingdom is an absolute monarchy, the ruling family governs by consensus, taking careful account of public sentiment. Oil largest oil reserves, 261.5 billion barrels or 25 per cent of the world’s total oil reserve. At current production the Kingdom’s infrastructure, agriculture and industry. Saudi Arabia has been undergoing, since the late international. A number of laws have been passed in the area of financial and banking-sector reform. More recently, a capital-markets law has been passed to allow the development of deeper capital and diversified capital markets. Other prospective reforms include redrawing the tax law, improving stock market regulation, redrafting labour laws and the mining code and privatising the telecommunications, electricity, petrochemicals and airline industries. Foreign direct investment has, of course, been encouraged subject to cap in different sectors. As a result of these reforms, Saudi Arabia has achieved reasonable growth rates. The non-oil sector has grown at about three-and-a-half to 4 percent per year steadily. It is expected that, in the coming years, the Saudi economy will do well and provide enormous opportunities to the investors in financial sector, human resource development projects and non-oil sectors.

UAE were British protectorates. The UAE has close defence links with other Gulf Cooperation Council (GCC), states and the United States, Britain and France. Only 20 per cent of the UAE’s population are nationals; the remainder are expatriates from South Asia (64 per cent), other Middle Eastern countries (15 per cent) and western countries (1 per cent). Skilled and unskilled labour shortages among UAE nationals, relatively high wages and ‘no income tax’ natural gas reserves. Dubai accounts for 26 per cent of UAE GDP and is a regional trade centre, with foreign trade more than double its US$13 billion GDP. The Dubai government aggressively promotes the Emirate as

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a regional commercial services and tourism hub and developed the Gulf’s largest free trade zone and port at Jebel Ali. Dubai benefited from business relocation from Kuwait and Bahrain, during and after the Gulf War. UAE is one of those countries in the region that have been open for business for some time new. It has chosen the way of opening its economy for trade, for financial intermediation and for the development, especially of transshipment trade and financial and insurance sectors. And, in fact, in this regard the UAE has succeeded to a great extent. Growth in the UAE has been highly satisfactory because of two reasons: (1) strengthening of the oil market in the recent past and (2) increased activity related to trade, banking and finance in Dubai and in the United Arab Emirates as a whole. The United Arab Emirates also has been one of the more diligent countries in terms of passing legislation and enforcing anti-money laundering and the integrity of its financial and banking system. And also, UAE has been one of the more transparent countries in terms of sharing the information. including improving business laws and intellectual property protection, privatising and opening previously closed sectors to foreign direct investment, particularly in the utilities sector. The UAE is a rapidly growing transshipment point for Europe-Asia cargo and for air-sea cargo combinations. Dubai’s large international airport hubs the flights of its successful Emirates Airline, Lufthansa has its largest cargo hub outside Frankfurt in Sharjah. Newly opened airports, free trade zones in Dubai and Sharjah, the continued growth of Jebel Ali and other traditional free trade zones, and the UAE’s growing role as a regional headquarters, shopping and distribution centre, would contribute for the expansion of air and sea transport hub activities. Led by Dubai, tourism is a significant growth industry in these countries. This open trade culture will further provide opportunities for investors in most of the sectors.

Kuwait

sabotage, the US-led United Nations forces ejected Iraq in Operation Desert Storm. Kuwait has around 10 per cent of the world’s oil reserves and significant excess production capacity. Petroleum accounts for 40

reduce subsidies and privatise health care, telecommunications and utilities. The country seeks to liberalise foreign direct investment rules, allow full foreign ownership of Kuwaiti projects and find mechanisms to allow foreign oil companies to operate oil fields in Northern Kuwait. However, considerable resistance in the National Assembly to these reforms has slowed down the reform measures.

Sultanate of Oman Oman has an ancient history as a commercial centre and occupies the choke point of the Strait of Hormuz, facing Iran, through which two-thirds of the world’s oil trade passes. Oman was largely closed to the

transfer project, BOT, the Manah power station. Currently, Oman is extending BOT type arrangements to

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other infrastructure areas and privatising ports telecommunications, airports, utilities, banking, insurance and power generation. Further, it is developing a strong regulatory framework in the electricity sector, allowing competition between generators. Oman is diversifying into the gas and services sectors. Liquified natural gas, (LNG), exports began in April 2000, following a US$2.5 billion investment. Tourism facilities also are being upgraded rapidly and new hotel investment has been eagerly sought from the private sector.

Yemen Modern Yemen resulted from the amalgamation of the former People’s Democratic Republic of Yemen

of Aden, and arrest of former PDRY leaders, thereby confirming unification. undertaking IMF-sponsored reforms to reduce subsidies, control inflation, improve the Government’s fiscal position and encourage investment. Reflecting its strong economic reform record, the IMF extended meet its external obligations. The port of Aden is undergoing large scale redevelopment, under a 20-year management contract with the Port of Singapore Authority, which holds 60 per cent equity. The port should capture significant Europe-Asia container traffic, as it avoids the detour into the Persian Gulf.

INDIA–CANADA BILATERAL BUSINESS In the recent past, there has been a lot of talk about the economic partnership between the two countries, viz. India and Canada. Both these countries have realised the immense potential that lies there for them. To tap it in terms of increasing trade between them, there have been high level talks between the two countries to devise steps that will help in the creation of policies or conditions that would lead to enhancement in trade relations between them. India and Canada have been really old trade partners and enjoy cordial relations with each other. This chapter looks at the pattern, growth and the composition of the trade between the two and provides suggestions that could lead to an increase in trade. Let us begin with the origins of the trade relations between the two countries and how the same has changed since then. We would also look at the following aspects: and sectors in the same. economic slowdown on the same. d Canada to augment the economic ties between them.

Data Analysis and Interpretation Background Ever since the establishment of diplo countries have enjoyed a connection based on shared democratic values, multi-cultural, multi-ethnic and multi-religious nature of two societies.

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Canada is rich in natural resources like potash, uranium, coal, oil and gas, diamonds, forest products, etc. and thus provides India with opportunities for investments. Also, Canada, which is quite superior in its technological capabilities, can become India’s natural partner in agriculture, food processing, education, science and technology, innovation, environment, cleaner technologies, etc. India has been looking for partnerships with Canada which focus on making use of India’s skilled and trained manpower base. On the other hand, the government has made efforts to get Canadian investments in the areas of infrastructure, energy, mining, health, education, communication, food processing, information technology, to name a few.

Indian Economy India’s economy has followed an impressive growth path in the recent decade with real gross domestic recession, India’s economy is expected to remain among the fastest growing in the world, in the years to come.

contrast, the contribution of the agricultural sector in the total value-added has declined during the past decade, although it remains the biggest source of job opportunities.

Canadian Economy

performance, but the economy has returned to positive growth in 2010. Similar to India, over the last decade,

History

market in South East Asia region with economic scope for business collaboration.

Export Situation

Table 22.1

India’s Exports to Canada Year 2002–03 2003–04 2004–05 2005–06 2006–07

Total Exports(In USD Million)

Growth%

763.20 13.75

1266.64 14.13 1364.41 7.72 1122.77 (17.71) Source: UNCTAD, ComTRADE Database. The third column has been computed by the author.

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From Table 22.1, we can clearly see that due to the economic slowdown or recession, there was a

Figure 22.2 illustrates the trend seen in the level of exports to Canada.

Fig. 22.2

Level of exports to Canada

Import Situation

Table 22.2

India’s Imports from Canada Year

Total Imports (In USD Million)

2002–03 2003–04 2004–05 2005–06 2006–07

775.72

Growth %

11.56 24.10 (14.7) Source: ComTRADE Database, UNCTAD. Third column computed by the author.

As noticed in the phenomenon for exports, the same happened in the case of imports. Due to the slowdown, compared to the previous year.

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Figure 22.3 illustrates the trend seen in the level of imports from Canada.

Fig. 22.3

Level of imports from Canada

Trade Balance

Table 22.3

India’s Trade Balance with Canada Year 2005–06 2006–07

Trade Balance (In USD Million) 101.71 (666.35)

Source: UNCTAD and ComTRADE Database

As can be clearly seen that India has a trade deficit with Canada. Figure 22.4 illustrates the trade balance situation.

Investment Data Canadian investors are present in the Indian banking, insurance and financial services sectors, as also in engineering and consultancy services. Canadian investment in India has targeted telecommunications, environment, energy and mining. Indian investment in Canada has increased steadily in the recent years, especially in the information technology and software sectors. The same has been illustrated graphically in Fig. 22.5, i.e. India invested more money in Canada in the

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Fig. 22.4 Trade balance situation with Canada

Table 22.4

India’s Investment in Canada and vice versa (Figures in USD million) Year

India’s Investment in Canada

Canada’s Investment in India

2005

163

304

2006

201

644

2007 747 572 Source: World Investment Report, UNCTAD. www.unctad.org/ WIR.

Fig. 22.5 Two-way investment (India–Canada)

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487

Merchandise Trade

trade in merchandise with India has been expanding rapidly over the past ten years. Canadian merchandise th

merchandise trade partner.

trading partner. Canada’s and India’s respective merchandise trade data also show that while Canada’s relative importance as a trading partner for India has declined over the past decade, India’s share of both total Canadian imports and exports has increased.

equipment. Canada’s merchandise trade exports to India were also concentrated in four sectors, comprising dried peas and lentils), pulp and paper products, and machinery and equipment. It appears that the India–Canada trade relationship is significantly under-traded (not yet fully utilised). For example, total trade between India and Canada is three times smaller than the size of trade between India and

Services Trade

commercial services to India peaked in 2001 and 2002, and have since been declining, India’s exports have this expansion were India’s exports of computer and information services and business services to Canada, which mirrored the dynamics of India’s services sector in the age of services outsourcing.

India–Canada Investment Relationship While the bilateral Canada–India investment relationship has been expanding, it remains modest compared Canada’s 20th largest source of foreign direct investment (FDI) while Canada is India’s 40th largest source of FDI. Nevertheless, bilateral investment flows have picked up substantially since 2005. The stock of Canadian

Canada became a net importer of FDI from India.

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Tariff Profiles India India gives primacy to engagements in multilateral negotiations at the WTO, and has attached significance to her participation in regional trading agreements within the framework of multilateral regulations. It has accepted the Fourth and Fifth Protocols and is a Member of the Information Technology Agreement. As a long-term objective of achieving a high growth rate, India embarked on unilateral tariff liberalisation as a part of comprehensive economic reforms and is increasingly involved in bilateral and regional trade agreements. India undertook comprehensive economic reforms in the aftermath of the balance of payments crisis movement in tariff reforms with the objective of making India’s tariff structure comparable to international standards, particularly to those of its immediate competitors in the South and South East Asia. Customs tariff reforms in recent years involve lowering of the peak customs duty rate progressively, reducing endues exemptions to check revenue loss due to duty foregone and streamlining export promotion schemes. Tariff policy has occupied the centrestage of trade policy for quite some time in India. Customs tariff has been an important source of revenue in the total collection of revenue of the Union Government. India has been effectively lowering its average customs duty and a substantial number of national lines realisation. Basic duty, have given rise to keeping the collection rate below the average customs duty rate.

Canada Alongside India, Canada is one of the original signatories of the General Agreement on Tariffs and Trade (GATT). In addition to the tariff reductions brought about by the successive rounds of the GATT, Canada has also engaged in a number of free trade agreements and instituted unilateral tariff reductions. Most recently, and competitiveness benefits to domestic manufacturers and to the overall economy. The most recent federal Budget, presented on March 4, 2010, implemented a second phase of tariff relief by unilaterally eliminating all remaining tariffs on manufacturing inputs and machinery and equipment. Three-quarters of the affected tariffs were eliminated immediately with the balance being gradually phased out by no later than January 1, 2015. This historic step will position Canada as the first among its G20 partners to allow manufacturers to operate without the cost of tariffs on inputs and machinery and equipment. The World Trade Organisation calculated that Canada’s average applied Most-Favoured Nation (MFN)

imports. Canada has also featured a broad tariff preference programme for developing countries, including India, called the General Preferential Tariff (GPT).

Canada’s View towards India Canada’s Global Commerce Strategy has identified India as a priority market for Canadian companies. The reasons are two-fold: first, India has the potential to become the third largest global economy by 2050. Its growing middle class, gross domestic product per capita, population and associated infrastructure requirements will propel domestic demand for resources, manufactured goods and services. Second, India

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has the potential to become a regional manufacturing hub and economic powerhouse. It could be the next lowcost manufacturing centre (after China), and a key link in the evolving global value chains. In tandem with its move to low-cost manufacturing, India also continues to move towards a knowledge-based economy. The country’s strengths in sectors such as information and communications technologies make it a key partner in science and technology.

Indians in Canada

in the Senate. Air India and Jet Airways have regular flights to Canada from India. State Bank of India, ICICI Bank, Government of India Tourist Office, Air India and Jet Airways have offices in Canada. Many renowned Indian companies have presence in Canada such as Tata, Aditya Birla, Reliance, Essar, etc. and reputed Indian IT companies have opened branches in Canada. On the other hand, Canada has established Trade Offices in Ahmedabad, Bangalore, Chandigarh, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi. Reputed Canadian companies such as Bombardier, SNC Lavalin, CAE, Inc., etc. have a presence in India for the past several years.

Points to Remember

arable land, it enjoys abundant natural resources. doing business in these countries.

Objective Type Questions 1. 2. 3. 4. 5. 6. 7.

Name the major public sector telecom company in UAE. Name the major airline company based in UAE. Petroleum resources accounts for GCC stands for _______. Name the capital of Oman. UAE gained independence from Britain in _______. Kuwait became an autonomous British protectorate in __________.

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Review Questions 1. 2. 3. 4.

Discuss the structure of Middle East countries. What are the advantages of doing business with middle east countries? Discuss the salient features of UAE and Oman economy. Trace the development of trade between India and Canada.

Suggested Readings Canada-India Joint Study Group Report, September 2008. FICCI. Foreign Affairs and International Trade Department, Canada. Growth and Stability in the Middle East and North Africa – Summary, from Website of IMF. India Canada – A New Era of Cooperation. India Canada Bilateral Relations, MEA India. India Canada Chamber of Commerce. Internatiooal Financial Statistics, IMF, 2004. Macroeconomic Aspects of the New Demography in the Middle East and North Africa by Tarik M. Yousef, Department of Economics, School of Foreign Service, Georgetown University, Washington. Ministry of Commerce, India website www.commerce.nic.in. Paul, Justin, Subhash. S. (2005), International Migration and its Impact with reference to Gulf migration – Some perspectives, Management and Labour Studies. New Delhi, ILO ARTEP. The Economic Times. Transcript of a Press Briefing on the Economic Outlook in the Middle East and North Africa by George Abed, Director, Middle Eastern Department, David J. Robinson, Deputy Director, Research Department, Abdelali Jbili, Assistant Director, Middle Eastern Department, and Mohamad Chatah, Advisor, External Relations Department at the Dubai International Convention Centre, Dubai, United from Website of IMF. Websites of Central Banks and Ministries in Middle East countries. WORLD BANK report overview on Middle East And North Africa Region - 2005 Economic Developments, from Website of World Bank. www.countrywatch.com

APPENDIX: PROMOTION OF INTERNATIONAL TRADE IN INDIA

DEPARTMENT OF COMMERCE (MINISTRY OF COMMERCE)

INSTITUTIONAL FRAMEWORK

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Export Promotion Councils Commerce and

under the administrative control of

have been assigned the role and functions under the said policy.

Role

MAJOR FUNCTIONS OF THE EPCs (a) To provide commercially useful information and assistance to their members in developing and increasing their exports; (b) To offer professional advice to their members in areas such as technology upgradation, quality (c) To organise visits of delegations of its members abroad to explore overseas market opportunities; (d) To organise participation in trade fairs, exhibitions and buyer–seller meets; (e) To promote interaction between the exporting community and the Government both at the central and state levels. (f) To build a statistical base and provide data on the exports and imports of the country, exports and imports of their members, as well as other relevant international trade data.

Non-Profit, Autonomous and Professional Bodies

Registration-cum-Membership

Appendix: Promotion of International Trade in India

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Department of Commerce. They are as follows: S.No

Export Promotion Councils

Websites

1. eepcindia.com 3. 4. Council 5. 6. 8.

11.

Ministry of Textiles are as follows: S.No

Export Promotion Councils

1. 3. 4. 5. 6. 8.

Commodity Boards under Department of Commerce

Websites

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Commodity Boards in India

Website Links

Coffee Board Coir Board

Tobacco Board

Export Inspection Council (EIC), New Delhi

Indian Institute of Foreign Trade (IIFT), New Delhi

publications.

Indian Institute of Packaging, Mumbai

Marine Products Export Development Authority (MPEDA), Cochin

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Agricultural and Processed Food Products Export Development Authority, New Delhi

Other Organisations Federation of Indian Export Organisations (FIEO)

FIEO News

Indian Council of Arbitration, New Delhi

Indian Diamond Institute (IDI), Surat strengthening and improving the availability of trained manpower for the gems and jewellery industry by

National Centre for Trade Information

Export-Import Bank (EXIM Bank)

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Government Embassies

settlement of trade disputes.

Freight Investigation Bureau

Customs and Central Excise Department Central Excise

Custom Department

Public Sector Undertakings

The State Trading Corporation of India Ltd. and its Subsidiaries

of Commerce with insurance services. Their functions are listed below:

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India Trade Promotion Organisation (ITPO)

ensures a representative participation of trade and industry from different regions of the country at its events

Advisory Bodies Board of Trade (BOT) The Board of Trade functions with a view to providing an effective mechanism to maintain continuous inter-alia

Export Promotion Board (EPB)

inter-alia

Inter State Trade Council inter-alia

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Attached and Subordinate Offices Directorate General of Foreign Trade

activities include:

Directorate General of Supplies and Disposals (DGS & D)

Office of the Chief Controller of Accounts (CCA)

Directorate General of Commercial Intelligence and Statistics

formulating trade agreements.

Special Economic Zones

Appendix: Promotion of International Trade in India

Directorate General of Anti-Dumping & Allied Duties

Pay and Accounts Office

1

1.

499

Index

501

INDEX

A Acquisitions 23, 40, 44, 45, 63, 213, 221 Adaptation 5, 7, 18, 85, 87, 124, 127, 130, 141 Advertising and marketing budgets 468 Airway Bill 393, 405 Arbitration 106, 185, 186, 192, 193, 194, 416, 476, 495 Assertiveness 136, 138 B Bill of Exchange 393, 407, 408 Bill of lading 390, 392, 393, 405, 406, 407, 408, 426 Body Language 140, 141, 149 Bureau of Quality Standards 247 Business process outsourcing 135, 469 C Casteism 131 Certificate of Origin 390, 391, 393, 406 Civil Law 183, 184, 192, 193 Code law 181, 183, 184, 193 Collective programming 129 Collectivism 109, 138, 162, 164, 175, 376, 379, 381, 382 Commercial Documents 389, 390, 406 Commercial Launching 245 Common law 181, 182, 183, 184, 192, 193 Communism 131, 163 Conciliation 185, 192, 193 Consignment 391, 392, 393, 402, 405 Consumerism 391, 392, 393, 402, 405 Contract Law 183, 184 Corporations 2, 94, 128, 145, 161, 204, 242, 294, 311, 335, 433, 466 Cost-based Pricing 282, 295

Counter trade 298, 299, 300, 302, 303, 304 Countervailing duties 31, 292, 303, 479 Country of origin 26, 134, 234, 250, 253, 255, 275, 291, 334, 401 Cultural Adiophora 132, 133 Cultural norms 117, 119, 150, 349, 358, 377 Cultural sensitivity 109, 128, 352 Cultural Values 128, 141, 148, 149, 352, 377, 380, Culture 5, 18, 44, 75, 94, 100, 117, 126, 141, 152, 162, 173, 195, 202, 214, 228, 240, 250, 254, 263, 294, 316, 319, 323, 331, 335, 342, 351, 370, 385, 418, 443, 461, 473, 480, 498 Customer Perception 236, 246, 287, 291 Customs Clearance 403 D Data Interchange 320, 321, 426 Direct Marketing 6, 12, 28, 108, 306, 308, 329, 332, 440 Distance Selling Directive 335 Documents 133, 321, 388, 400, 423, 436, 453 Domestication 171, 176 Dumping 3, 9, 27, 158, 277, 286, 291, 302, 419, 479, 498 Duties and tariffs 296 E E-Commerce 81, 320, 438, 442, 452, 460, 470 English common law 183 Enterprise Resource Planning 320, 321 Exchange Rates 67, 172, 253, 288, 297, 302, 303, 354 Excise Clearance 403, 417, 496 Expatriate 5, 9, 117, 128, 141, 150, 157, 167, 173, 174, 336, 337, 344, 350, 351, 352, 353, 354, 356, 358, 477, 480 Export Houses 45, 307, 311, 322, 402, 415, 495

502

Index

F Femininity 138, 139 Franchisees 7, 70, 184, 220, 266, 307, 309, 310, 327, 350 Free trade zones 318, 404, 480, 481, 318, 404, 480, 481 G Generalised System of Preference 391 Generation X 46, 461 Global competition 1, 123, 146, 160 Global Products 145, 232, 249 Global Sourcing 256, 315, 316, 323, 324 Globalisation 17, 22, 29, 32, 127, 145, 227, 233, 259, 320, 343, 353, 479 Greenpeace campaigners 173 Grey Market 277, 278, 280, 290, 291, 303, 304, 344 Grey marketing 291, 304 H High context 100, 141, 249, 352, 380 I Individualism 109, 138, 142, 149, 150, 162, 164, 376, 379, 381, 382 Intellectual property 21, 25, 37, 42, 50, 52, 182, 186, 195, 204, 208, 209, 269, 337, 476, 478, 481 International Franchising 45, 195, 197, 205 International Laws 181, 182, 192, 193 Invoice 297, 302, 388, 424, 460 J Joint ventures 18, 35, 39, 41, 43, 48, 162, 195, 199, 213, 214, 215, 216, 218, 226, 228, 296, 297, 387 L Language 18, 44, 79, 99, 168, 178, 206, 247, 262, 317, 323, 336, 341, 349, 377, 383, 434 Legal Framework 181, 182, 192, 203, 473, 476 Letter of Credit 394, 395, 396, 397, 400, 403, 406, 407, 408 Licensing 29, 40, 41, 44, 54, 58, 166, 174, 187, 195, 196, 200, 201, 208, 210, 212, 223, 265, 299, 397, 478 Limited Liability Companies 215 Local content 171, 176 Logistics 171, 176 Low-context 141, 249, 376, 380

M Marginal Cost Pricing 285, 286, 295, 298, 303 Marginal Revenue 285, 286 Market Entry Modes 195, 201, 207, 209, 211, 221, 227 Market Testing 239, 243, 245 Marketing and advertising strategies 108, 129 Masculinity 136, 138, 149, 150 Materialism 136 Mega mergers 128 Merchandising 208, 308, 322, 324 Mergers 23, 54, 97, 120, 128, 191, 213, 221, 232 N Non-verbal Language 139, 140, 150 O Online exchange 469, 471 Optimal mix 333 P Packing list 390, 402, 403, 406, 409, 410 Partnerships 215, 223, 483 Personal selling 28, 101, 307, 329, 359, 450 Political Environment 157, 158, 159, 160, 176 Political expediency 158, 159 Political Stability 166 Power Distance 137, 138, 148, 149, 150 Power equation 137, 138, 150 Preapproach 348, 349, 357, 358 Preshipment Inspection 388, 401, 402, 414, 424 Price 1, 4, 5, 6, 7, 8, 10, 15 Private infrastructure 480 Process of socialisation 130 Product 1, 6, 22, 32, 36, 44, 46, 50, 69, 70, 74, 95, 106, 114, 118, 120, 124, 128, 134, 138, 144, 152, 156, 160, 176, 183, 189, 193, 194, 196, 200, 206, 214, 218, 225, 229, 257, 258, 263, 273, 275, 307, 337, 348, 356, 361, 371, 386, 398, 411, 417, 418, 436, 443, 453, 455, 459, 466, 473, 478, 487, 491, 498 Product Adaptation 8, 234, 235, 237, 254, 276, 373 Product positioning 118, 234, 242, 245, 254, 255, 278, 279, 286, 287, 288 Production Location 288, 289 Prospecting 348, 349, 357

Index Public Relations 5, 28, 80, 166, 217, 329, 333, 334, 340, 359, 450 R Religion 127, 131, 134, 141, 142, 144, 146, 149, 150, 165, 473, 475, 489 Repatriation Expense 356 Repatriation of funds 168, 171, 176 S Sales promotion 28, 78, 82, 97, 131, 197, 307, 311, 329, 330, 340, 348, 438, 450 Sanctions 22, 137, 160, 165, 168, 172, 174, 293 Segregation of women 133 Skimming the Cream 251, 279, 280, 303 Social behavioural norms 132 Social democracy 163 Social stratification 134, 149 Socialism 162, 163, 165, 166, 175 Spending patterns 129, 137, 138, 374 Standardised 11, 79, 107, 114, 126, 185, 197, 198, 233, 234, 279, 280, 330, 371, 373, 401, 466

503

Strategic Alliances 7, 35, 42, 44, 54, 214, 222, 223, 252, 297 Subsidiaries 4, 7, 11, 29, 35, 41, 51, 67, 98, 128, 152, 188, 195, 202, 213, 294, 307, 317, 325, 341, 405, 417, 496 T Theocratic Law 181, 183, 192, 193 Total Cost 226, 283, 284, 285, 286, 295, 301 Total Revenue 39, 263, 272, 283, 285, 325, 327 Totalitarianism 142, 163, 164, 165, 175 Transfer Pricing 27, 294, 295, 296, 297, 304 U Uncertainty Avoidance 138, 149, 150 V Value for Money 101, 240, 245 Variable Costs 125, 282, 283, 301 W World Wide Web 436, 443, 445, 453, 460, 462, 464, 465, 466, 470