International marketing : text and cases 9780070635883, 0070635889

Table of contents :
Cover
Half Title
About the Authors
Title Page
Copyright
Preface
Contents
Chapter 1. Concept and Process of International Marketing
Section 1: Introduction
Section 2: International Marketing—A Definition
Section 3: A Comparison of Domestic Marketing with International Marketing
Challenges Firms Face in International Marketing
Political and Legal Environment
Cultural Environment
Competitive Environment
Section 4: Stages of International Marketing—An Evolutionary Process
Domestic Marketing Company
Export Marketing Company
Multinational/International Marketing Company
Global/Worldwide Marketing Company
Section 5: International Marketing Orientations
Ethnocentric Approach
Polycentric Approach
Regiocentric Approach
Geocentric Approach
Section 6: Motivating Factors of International Marketing
International Marketing: Environment Motivating Factors
Firm-specific Motivating Force
STAR Network’s Adaptation to Indian Culture—a Media Success Story
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Case Study
Chapter 2. WTO and Implications on International Marketing
Section 1: WTO and Globalisation: Issues
WTO and Developments in the World Economy
Integration of Financial Markets
Computer-based Technologies and Information Systems
Section 2: The Marketing Scenario
WTO: Impact on Marketing
Product
Price
Promotion
Place
Section 3: Other Factors
Section 4: Conclusion
References
Objective Type Questions
Review Questions
Chapter 3. Emerging Trends & Internationalisation of Firms
Section 1: Internationalisation—Reasons and Strategies
Global Market Entry of Firms: Some Reasons
Domestic Competition
To Avoid Dependence on Domestic Market
Economies of Scale
Section 2: Ranbaxy Laboratories—Internationalisation Strategies
Section 3: Dr. Reddy’s Laboratories: Going Global and Growing Multinational
Section 4: Aurobindo Pharma’s International Expansion Strategies
Long-Term Growth Strategy
Learnings
References
Objective Type Questions
Review Questions
Case Study
Chapter 4. Country Analysis, Selection, Market Size and Marketing Mix
Section 1: Introduction
Section 2: Country Evaluation and Selection
Section 3: Country Risk Analysis
Competitive Risk
Political Risk
Section 4: Market Research and Consumer Behaviour
Market Size Analysis
Section 5: The International Marketing Mix
Product Policy
Reasons for Product Alterations
Pricing
Promotion
Branding and Distribution
References
Review Questions
Game
Chapter 5. International Marketing: Research and Opportunity Analysis
Section 1: Introduction
Section 2: Why do Firms Conduct International Marketing Research?
Section 3: International Marketing Research
The Scope of International Marketing Research and Country Analysis
Section 4: Conducting Formal Marketing Research
Section 5: Collecting, Analysing and Interpreting Data
Section 6: Assessing International Market Size and Sales Potentials
Section 7: Managing International Marketing Research Globally
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 6. Cultural Factors and Environment
Section 1: Introduction
Section 2: Defining Culture
How Does Culture Influence Marketing Activities?
Section 3: Correlates of Culture
Section 4: Elements of Culture
Cultural Values
Section 5: The Nation as a Culture
Social Systems
Section 6: Language as an Element of Culture
Silent and Non-verbal Language
Body Language or Kinesics
Information Processing
Section 7: Religion as an Element of Culture
Section 8: Cultural Dynamics
Is Globalisation Leading to Homogenisation of Cultures?
International Marketing and Cultural Dynamics
Local Cultures and Globalisation
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 7. Political Factors and Environment
Section 1: Introduction
Section 2: Political Environment
Section 3: Types of Government and Political Economic Systems
Section 4: Political Risks in International Marketing
Domestication
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 8. Legal Aspects and International Marketing
Section 1: International Legal Environment: An Introduction
Section 2: Legal Frameworks
Section 3: Different Legal Systems
Section 4: International Dispute Settlement Processes
Section 5: Other Legal Issues
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 9. Market Entry Modes, Framework, Structure and Strategies
Section 1: Introduction
Rationale for International Collaborative Arrangements
Section 2: Market Entry Modes: Framework and Structure
Some of the Considerations in Collaborative Arrangements
International Licensing
International Franchising
Management Contracts
Turnkey Operations
Section 3: Global Market Entry Modes: Problems and Challenges
Section 4: Control Strategies
Distance
Diversity
Degree of Certainty
Control Mechanism
Objective Type Questions
Review Questions
Case Study
Chapter 10. Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries
Section 1: Modes of Global Market Entry and Strategies
Section 2: Joint Ventures
How to Build Successful Joint Ventures?
Benefits and Limitations of International Joint Ventures
Legal Forms of Joint Ventures in the World
Section 3: International Joint Ventures in China
Section 3: Global Mergers and Acquisitions
Examples
Section 4: International Strategic Alliances
Section 5: Subsidiaries
References
Websites Visited
Objective Type Questions
Review Questions
Case Study
Chapter 11. International Product Policy, Planning and Strategy
Section 1: Introduction
Defining a Product
Basic Classification of Products
Industrial Products (Capital Goods and Raw Materials)
Consumer Products
Section 2: Product Planning in International Markets
Local Products
National Products
International Products
Global Products
Section 4: Product Extension
Product Standardisation and Adaptation
Advantages of Standardisation
Factors that Favour Standardisation
Product Adaptation
Product/Communication Adaptation Strategy
Section 5: New Product Invention/Development
Process of New Product Development for International Markets
Challenges to New Product Launch in International Markets
The Process of Generating New Product Ideas
Domestic and International Customers
Direct and Indirect Competitors
Evaluating and Screening New Product Ideas
Developing and Evaluating International Product Concepts
Analysing Product Business Proposal
Developing the Product Prototype
Market Testing
Large Scale Test Marketing
Commercial Launching of Product Internationally
Product Positioning in International Marketing
Quality Attributes–Value for Money
User Attributes
Aligning Product Designs
Customer Perception and Preferences
Technology Compatibility
Statutory Provisions
Packaging and Labelling
Some other Considerations in International Product Packaging
Importer Specific Instructions
Cultural Factors
Point-of-Purchase Features
Environmental Features
After Use Disposability
Product Spread in International Markets
Product Features
Country Culture Features
Section 6: The Concept of International Product Life Cycle
Introduction Stage
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 12. Pricing Strategy and Decision for International Marketing
Section 1: Introduction
Section 2: Pricing Strategy for International Markets
Home Market Prices Higher than the International Markets
Home Market Prices Lower than the International Markets
Local Pricing or Standardised Pricing
Standardised Pricing Strategy
Market Penetration Pricing Strategy
Skimming the Cream–Pricing Strategy
Basic Pricing Approaches in International Markets
Cost-based Pricing
Full Cost Pricing
Fixed Costs
Variable Costs
Total Cost
Total Revenue
Limitations of Full Cost-based Approach
Marginal Cost Pricing
Price and Marginal Revenue
Limitations of Marginal Cost-based Approach
Market-Based Pricing Approach
Price and the Product Positioning
Leadership Positioning
Follow the Competition Positioning
Below the Competition Positioning
Section 3: Factors Influencing Pricing Decisions
Internal Factors Influencing Pricing Decisions
External Factors Affecting Pricing Decisions
International Competitive Environment
Section 4: Grey Market
Mechanics of Grey Marketing
Section 5: Dumping
Section 6: The International Political and Legal Environment
Transfer Pricing
Cost-based Transfer Pricing Strategy
Market Based Transfer Pricing Strategy
Negotiated Transfer Pricing Strategy
Government Regulations and Transfer Pricing
Duty and Tariff Used for Protections
Joint Ventures and Transfer Pricing
Section: 7 The International Economic and Financial Environment
Volatility of Exchange Rates
Inflation and International Pricing Strategy
Counter Trade
Types of Counter Trade
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 13. International Distribution, Marketing Channels Logistics and Supply Chain Management
Section 1: Introduction
Section 2: Defining Distribution
Section 3: Distributors and Channels
Self Involvement
Outsourcing Distribution – Home Country Channels
Home Country Middlemen Network (Trade Promotion Agents/Organisations)
Section 4: Direct and Indirect Marketing Channels in a Foreign Country
Direct Selling Channel
Consumer Products
Indirect Selling Channels Abroad
Section 5: Distributor and Middlemen Selection Qualification Criterion
Middlemen Criterion
Self Reference Criterion
Specific Country Reference Criterion
Costs Involved in Foreign Distribution
Geographical Considerations
Section 6: International Logistics and Global Supply Chain Management
Section 7: Global Manufacturing Strategies
Section 8: Global Sourcing
Challenges to Global Sourcing
Key Steps in Global Sourcing
Establishing Suppliers’ Network
Section 9: Inventory Management
Establishing Transport System
Section 10: Quality Management
EDI, ERP and E-Commerce
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 14. Product Promotion, Advertising and Building Brands in Foreign Markets
Section 1: Product Promotion and Building Brands
Sales Promotion
Advertising
Events and Experiences
Personal Selling and Direct Marketing
Public Relations
Section 2: International Market Intelligence Studies
Europe
The Middle East
USA
Canada
References
Websites Visited
Exercise
Chapter 15. Personal Selling and Multinational Sales Management
Introduction
Section 1: Objectives of Personal Selling
Section 2: The Process of Personal Selling
Section 3: Multinational Sales Management
Section 4: Managing International Sales Personnel
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Chapter 16. Organising and Doing Business with Other Countries–Analysis of Middle East Countries
Section 1: Introduction
Section 2: Politics and Economy
Economic Overview
Regional Outlook
Section 3: The Business Environment
Religion
Friendship and Trust in Business Relationships
The Legal Environment
Demographics
Key Regional Business Issues
Economic Prospects
Impact of WTO Accession
Section 4: Business Opportunities in the Middle East Region
Goods and Services Market
Capital Markets
Section 5: Analysis of Select Countries of the Region
Saudi Arabia
UAE
Kuwait
Sultanate of Oman
Yemen
Conclusion
References
Objective Type Questions
Review Questions
Chapter 17. Export Documentation and Procedures
Section 1: Export Documentation
Commercial Documents
Regulatory Documents
Export Assistance Documents
Documents as Prescribed by the Importers’ Countries
Documents Related to Sales Transaction of Goods (Commercial Documents)
Proforma Invoice
Invoice
Packing List
Certificate of Origin
Generalised System of Preference (GSP Certificate)
Transport Documents (Documents Related to Shipment of Goods)
Shipping Bill
Mate’s Receipt
Bill of Lading
Airway Bill
Financial Documents
Bill of Exchange
Section 2: Letter of Credit
Section 3: Exports Procedures
Importer–Exporter Code Number
Membership cum Registration of Export Promotion Councils
Registration cum Membership Certificate
Registration with Sales Tax Authorities
Section 4: Important Steps in Processing of an Export Order
Export (Quality Control & Inspection) Act, 1963
Procedure for Preshipment Inspection
Types of Preshipment Inspection
Excise and Customs Clearance
Handling Exchange Control Transactions for Exports
GR/SDF Form
Softex Form
Post Parcel Form
Insurance of the Export Consignment
Shipment of the Goods
Shipping by Sea
Shipping by Air
Shipping by Post
Shipping by Land
Presenting Documents to the Bankers for Collection
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Annexure
Chapter 18. Global Issues: The Internet and E-Commerce
Introduction
Section 1: Elimination of Distance and Time Zones
Emergence and Availability of Huge Global Market Potentials
Emergence of Global Customer Segment
Relationship Building and Internet-based Teleconferences
Speed to Product Proliferation and Shortening of Product Life Cycles
Emergence of Services Marketing
Emergence of Internet
Section 2: E-Commerce
Section 3: The Components of E-Commerce Value Chain
References
Websites Visited
Suggested Further Readings
Objective Type Questions
Review Questions
Case 1: International Market Entry of a Foreign MNC in India: Case 1: The Case of Holcim
Case 2: Logistics Solutions in Information Technology Business
Case 3: Internationalisation of Wipro Technologies
Objective Type Questions
Index

Citation preview

International Marketing Text and Cases

About the Authors Prof. Justin Paul is with Nagoya University of commerce and business, Japan. He has been a visiting professor, speaker, trainer and consultant to many institutes and companies in the Asia-Pacific region. He has been serving as a Ph D examiner, director on the board of studies of institutes and reviewer of reputed journals. He has served as Department Chairperson at IIM Indore and as Associate Professor at IIFT, New Delhi. A consistent rank holder, he holds two masters degrees, two PG diplomas and a doctorate from IIT Bombay. He has also received national awards for research papers and case studies. He has hands-on experience of working with two commercial banks and has been recognised as a role model and achiever by the Hindu and other magazines. He has been invited by University of San Francisco, Fudun University, China and University of Washington Business School in the recent past. He has been conducting executive training programmers in UAE, Oman, Mauritius and several other countries. He can be contacted at [email protected] and his website is www.drjustinpaul.com Mr. Ramneek Kapoor is a well-known management trainer and author in the areas of sales, marketing and soft skills. He has had a varied and rich experience with many national and multinational companies in the area of sales and marketing management for 28 years. He has conducted workshops in leading organisations including B.S.N.L, Life Insurance Corporation of India, Piramal Healthcare, Caparo Group and many others. Currently he is the Principal of Omegan School of Business, Indore. Mr. Kapoor has been associated with Indian Institute of Management, Indore for their management development programme on export-import management and international marketing for three years. Besides, he is also actively involved with many other management institutes of India as a visiting and adjunct faculty. He has presented many papers related to sales and marketing in various national and international seminars. He is the author of Fundamentals of Sales Management, published by Macmillan India Limited.

International Marketing Text and Cases

Justin Paul Nagoya University of Commerce and Business, Japan and Indian Institute of Foreign Trade, New Delhi

Ramneek Kapoor Omegan School of Business, Indore

Tata McGraw-Hill Publishing Company 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

Published by the Tata McGraw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008. Copyright © 2008, by Tata McGraw-Hill Publishing Company Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw-Hill Publishing Company Limited. ISBN-13: 978-0-07-063588-3 ISBN-10: 0-07-063588-9 Managing Director: Ajay Shukla General Manager—Publishing: (B&E/HSSL and School): V Biju Kumar Editorial Manager—B&E: Tapas K Maji Junior Editorial Executive: Hemant K Jha Junior Executive—Editorial Services: Anubha Srivastava Senior Production Executive: Medha Arora General Manager Marketing—Higher Education & School: Michael J. Cruz Asst. Product Manager: Vijay Sarathi Jagannathan Production Controller: Rajender P Ghansela Asst. General Manager—Production: B L Dogra Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw-Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Tej Composers, WZ-391, Madipur, New Delhi 110063, and printed at Avon Printers, 271, FIE, Patparganj Delhi 110 092. Cover Design: K Anoop Cover printed at: SDR Printers RQLQCDLYRQDCQ

Preface

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], [email protected] and [email protected].

vi

Preface

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

Contents

Preface

v

1. Concept and Process of International Marketing

1

Section 1: Introduction 2 Section 2: International Marketing—A Definition 3 Section 3: A Comparison of Domestic Marketing with International Marketing 5 Challenges Firms Face in International Marketing 5 Political and Legal Environment 5 Cultural Environment 5 Competitive Environment 6 Section 4: Stages of International Marketing—An Evolutionary Process 6 Domestic Marketing Company 7 Export Marketing Company 7 Multinational/International Marketing Company 7 Global/Worldwide Marketing Company 8 Section 5: International Marketing Orientations 9 Ethnocentric Approach 9 Polycentric Approach 9 Regiocentric Approach 9 Geocentric Approach 10 Section 6: Motivating Factors of International Marketing 11 International Marketing: Environment Motivating Factors 11 Firm-specific Motivating Force 14 STAR Network’s Adaptation to Indian Culture—a Media Success Story 19 References 16 Websites Visited 17 Suggested Further Readings 17 Objective Type Questions 17 Review Questions 19 Case Study 19

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2. WTO and Implications on International Marketing

23

Section 1: WTO and Globalisation: Issues 24 WTO and Developments in the World Economy 25 Integration of Financial Markets 25 Computer-based Technologies and Information Systems 25 Section 2: The Marketing Scenario 26 WTO: Impact on Marketing 27 Product 27 Price 29 Promotion 30 Place 31 Section 3: Other Factors 32 Section 4: Conclusion 33 References 33 Objective Type Questions 34 Review Questions 35

3. Emerging Trends & Internationalisation of Firms Section 1: Internationalisation—Reasons and Strategies 38 Global Market Entry of Firms: Some Reasons 38 Domestic Competition 38 To Avoid Dependence on Domestic Market 38 Economies of Scale 38 Section 2: Ranbaxy Laboratories—Internationalisation Strategies 39 Section 3: Dr. Reddy’s Laboratories: Going Global and Growing Multinational Section 4: Aurobindo Pharma’s International Expansion Strategies 45 Long-Term Growth Strategy 46 Learnings 47

37

42

References 47 Objective Type Questions 47 Review Questions 48 Case Study 48

4. Country Analysis, Selection, Market Size and Marketing Mix Section 1: Introduction 52 Section 2: Country Evaluation and Selection 52 Section 3: Country Risk Analysis 53 Competitive Risk 53 Political Risk 53 Section 4: Market Research and Consumer Behaviour Market Size Analysis 53

53

51

Contents

ix

Section 5: The International Marketing Mix 56 Product Policy 56 Reasons for Product Alterations 58 Pricing 59 Promotion 61 Branding and Distribution 62 References 64 Review Questions 64 Game 64

5. International Marketing: Research and Opportunity Analysis Section 1: Introduction 66 Section 2: Why do Firms Conduct International Marketing Research? 67 Section 3: International Marketing Research 68 Section 4: Section 5: Section 6: Section 7:

65

The Scope of International Marketing Research and Country Analysis 69 Conducting Formal Marketing Research 74 Collecting, Analysing and Interpreting Data 85 Assessing International Market Size and Sales Potentials 87 Managing International Marketing Research Globally 91 References 92 Websites Visited 93 Suggested Further Readings 93 Objective Type Questions 94 Review Questions 95

6. Cultural Factors and Environment Section 1: Introduction 98 Section 2: Defining Culture 99 How Does Culture Influence Marketing Activities? 100 Section 3: Correlates of Culture 101 Section 4: Elements of Culture 102 Cultural Values 102 Section 5: The Nation as a Culture 104 Social Systems 104 Section 6: Language as an Element of Culture 109 Silent and Non-verbal Language 110 Body Language or Kinesics 110 Information Processing 111 Section 7: Religion as an Element of Culture 111 Section 8: Cultural Dynamics 115 Is Globalisation Leading to Homogenisation of Cultures? 115 International Marketing and Cultural Dynamics 115 Local Cultures and Globalisation 117

97

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Contents

References 118 Websites Visited 119 Suggested Further Readings 119 Objective Type Questions 120 Review Questions 121

7. Political Factors and Environment Section 1: Section 2: Section 3: Section 4:

123

Introduction 124 Political Environment 125 Types of Government and Political Economic Systems Political Risks in International Marketing 132 Domestication 137

129

References 141 Websites Visited 141 Suggested Further Readings 142 Objective Type Questions 142 Review Questions 144

8. Legal Aspects and International Marketing Section 1: Section 2: Section 3: Section 4: Section 5:

International Legal Environment: An Introduction Legal Frameworks 146 Different Legal Systems 147 International Dispute Settlement Processes 149 Other Legal Issues 150

145 146

References 156 Websites Visited 156 Suggested Further Readings 156 Objective Type Questions 157 Review Questions 158

9. Market Entry Modes, Framework, Structure and Strategies Section 1: Introduction 160 Rationale for International Collaborative Arrangements 160 Section 2: Market Entry Modes: Framework and Structure 160 Some of the Considerations in Collaborative Arrangements 160 International Licensing 161 International Franchising 161 Management Contracts 162 Turnkey Operations 162 Section 3: Global Market Entry Modes: Problems and Challenges 162 Section 4: Control Strategies 164 Distance 164

159

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Diversity 165 Degree of Certainty 165 Control Mechanism 166 Objective Type Questions 168 Review Questions 168 Case Study 169

10. Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries

173

Section 1: Modes of Global Market Entry and Strategies 174 Section 2: Joint Ventures 174 How to Build Successful Joint Ventures? 175 Benefits and Limitations of International Joint Ventures 175 Legal Forms of Joint Ventures in the World 175 Section 3: International Joint Ventures in China 176 Section 3: Global Mergers and Acquisitions 182 Examples 182 Section 4: International Strategic Alliances 183 Section 5: Subsidiaries 186 References 187 Websites Visited 187 Objective Type Questions 188 Review Questions 188 Case Study 188

11. International Product Policy, Planning and Strategy Section 1: Introduction 192 Defining a Product 192 Basic Classification of Products 193 Industrial Products (Capital Goods and Raw Materials) 193 Consumer Products 193 Section 2: Product Planning in International Markets 193 Local Products 194 National Products 194 International Products 194 Global Products 195 Section 4: Product Extension 196 Product Standardisation and Adaptation 196 Advantages of Standardisation 196 Factors that Favour Standardisation 196 Product Adaptation 197 Product/Communication Adaptation Strategy 199 Section 5: New Product Invention/Development 200

191

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Process of New Product Development for International Markets 201 Challenges to New Product Launch in International Markets 202 The Process of Generating New Product Ideas 203 Domestic and International Customers 204 Direct and Indirect Competitors 204 Evaluating and Screening New Product Ideas 204 Developing and Evaluating International Product Concepts 205 Analysing Product Business Proposal 205 Developing the Product Prototype 205 Market Testing 205 Large Scale Test Marketing 206 Commercial Launching of Product Internationally 207 Product Positioning in International Marketing 208 Quality Attributes–Value for Money 208 User Attributes 208 Aligning Product Designs 209 Customer Perception and Preferences 209 Technology Compatibility 209 Statutory Provisions 210 Packaging and Labelling 210 Some other Considerations in International Product Packaging 210 Importer Specific Instructions 210 Cultural Factors 210 Point-of-Purchase Features 210 Environmental Features 211 After Use Disposability 211 Product Spread in International Markets 211 Product Features 211 Country Culture Features 211 Section 6: The Concept of International Product Life Cycle 213 Introduction Stage 213 References 215 Websites Visited 216 Suggested Further Readings 216 Objective Type Questions 217 Review Questions 218

12. Pricing Strategy and Decision for International Marketing Section 1: Introduction 220 Section 2: Pricing Strategy for International Markets 221 Home Market Prices Higher than the International Markets 221 Home Market Prices Lower than the International Markets 221 Local Pricing or Standardised Pricing 222 Standardised Pricing Strategy 222

219

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Section 3:

Section 4: Section 5: Section 6:

Section: 7

Market Penetration Pricing Strategy 222 Skimming the Cream–Pricing Strategy 224 Basic Pricing Approaches in International Markets 224 Cost-based Pricing 224 Full Cost Pricing 225 Fixed Costs 225 Variable Costs 225 Total Cost 225 Total Revenue 225 Limitations of Full Cost-based Approach 227 Marginal Cost Pricing 227 Price and Marginal Revenue 228 Limitations of Marginal Cost-based Approach 229 Market-Based Pricing Approach 229 Price and the Product Positioning 229 Leadership Positioning 230 Follow the Competition Positioning 230 Below the Competition Positioning 231 Factors Influencing Pricing Decisions 231 Internal Factors Influencing Pricing Decisions 231 External Factors Affecting Pricing Decisions 233 International Competitive Environment 233 Grey Market 233 Mechanics of Grey Marketing 233 Dumping 234 The International Political and Legal Environment 237 Transfer Pricing 237 Cost-based Transfer Pricing Strategy 238 Market Based Transfer Pricing Strategy 238 Negotiated Transfer Pricing Strategy 238 Government Regulations and Transfer Pricing 239 Duty and Tariff Used for Protections 239 Joint Ventures and Transfer Pricing 240 The International Economic and Financial Environment 240 Volatility of Exchange Rates 240 Inflation and International Pricing Strategy 242 Counter Trade 242 Types of Counter Trade 243 References 244 Websites Visited 245 Suggested Further Readings 245 Objective Type Questions 246 Review Questions 248

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13. International Distribution, Marketing Channels Logistics and Supply Chain Management Section 1: Introduction 250 Section 2: Defining Distribution 251 Section 3: Distributors and Channels 251 Self Involvement 251 Outsourcing Distribution – Home Country Channels 251 Home Country Middlemen Network (Trade Promotion Agents/Organisations) 252 Section 4: Direct and Indirect Marketing Channels in a Foreign Country Direct Selling Channel 253 Consumer Products 254 Indirect Selling Channels Abroad 255 Section 5: Distributor and Middlemen Selection Qualification Criterion Middlemen Criterion 256 Self Reference Criterion 256 Specific Country Reference Criterion 257 Costs Involved in Foreign Distribution 257 Geographical Considerations 257 Section 6: International Logistics and Global Supply Chain Management Section 7: Global Manufacturing Strategies 258 Section 8: Global Sourcing 259 Challenges to Global Sourcing 259 Key Steps in Global Sourcing 260 Establishing Suppliers’ Network 261 Section 9: Inventory Management 262 Establishing Transport System 262 Section 10: Quality Management 263 EDI, ERP and E-Commerce 265

249

253

256

257

References 267 Websites Visited 267 Suggested Further Readings 267 Objective Type Questions 268 Review Questions 269

14. Product Promotion, Advertising and Building Brands in Foreign Markets Section 1: Product Promotion and Building Brands Sales Promotion 272 Advertising 272 Events and Experiences 274

272

271

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Contents

Personal Selling and Direct Marketing 275 Public Relations 276 Section 2: International Market Intelligence Studies 278 Europe 278 The Middle East 279 USA Canada

280 281

References 282 Websites Visited 283 Exercise 283

15. Personal Selling and Multinational Sales Management Section 1: Section 2: Section 3: Section 4:

Introduction 286 Objectives of Personal Selling 287 The Process of Personal Selling 288 Multinational Sales Management 289 Managing International Sales Personnel

285

291

References 295 Websites Visited 296 Suggested Further Readings 296 Objective Type Questions 296 Review Questions 298

16. Organising and Doing Business with Other Countries–Analysis of Middle East Countries Section 1: Introduction 300 Section 2: Politics and Economy 300 Economic Overview 301 Regional Outlook 301 Section 3: The Business Environment 302 Religion 302 Friendship and Trust in Business Relationships 302 The Legal Environment 302 Demographics 303 Key Regional Business Issues 304 Economic Prospects 304 Impact of WTO Accession 305 Section 4: Business Opportunities in the Middle East Region 305 Goods and Services Market 305 Capital Markets 306 Section 5: Analysis of Select Countries of the Region 307 Saudi Arabia 307

299

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UAE 307 Kuwait 308 Sultanate of Oman Yemen 309 Conclusion 309

308

References 309 Objective Type Questions 310 Review Questions 310

17. Export Documentation and Procedures Section 1: Export Documentation 312 Commercial Documents 313 Regulatory Documents 313 Export Assistance Documents 313 Documents as Prescribed by the Importers’ Countries 313 Documents Related to Sales Transaction of Goods (Commercial Documents) Proforma Invoice 314 Invoice 314 Packing List 314 Certificate of Origin 314 Generalised System of Preference (GSP Certificate) 314 Transport Documents (Documents Related to Shipment of Goods) 315 Shipping Bill 315 Mate’s Receipt 315 Bill of Lading 315 Airway Bill 316 Financial Documents 316 Bill of Exchange 316 Section 2: Letter of Credit 317 Section 3: Exports Procedures 321 Importer–Exporter Code Number 321 Membership cum Registration of Export Promotion Councils 321 Registration cum Membership Certificate 322 Registration with Sales Tax Authorities 323 Section 4: Important Steps in Processing of an Export Order 323 Export (Quality Control & Inspection) Act, 1963 325 Procedure for Preshipment Inspection 325 Types of Preshipment Inspection 325 Excise and Customs Clearance 326 Handling Exchange Control Transactions for Exports 327 GR/SDF Form 327 Softex Form 327 Post Parcel Form 328

311

313

Contents

xvii

Insurance of the Export Consignment 328 Shipment of the Goods 328 Shipping by Sea 328 Shipping by Air 329 Shipping by Post 329 Shipping by Land 329 Presenting Documents to the Bankers for Collection 329 References 329 Websites Visited 330 Suggested Further Readings 330 Objective Type Questions 330 Review Questions 331 Annexure 332

18. Global Issues: The Internet and E-Commerce

335

Introduction 336 Section 1: Elimination of Distance and Time Zones 336 Emergence and Availability of Huge Global Market Potentials 337 Emergence of Global Customer Segment 337 Relationship Building and Internet-based Teleconferences 338 Speed to Product Proliferation and Shortening of Product Life Cycles 338 Emergence of Services Marketing 339 Emergence of Internet 340 Section 2: E-Commerce 342 Section 3: The Components of E-Commerce Value Chain 344 References 346 Websites Visited 346 Suggested Further Readings 346 Objective Type Questions 347 Review Questions 348

Case 1: International Market Entry of a Foreign MNC in India: Case 1: The Case of Holcim Case 2: Logistics Solutions in Information Technology Business Case 3: Internationalisation of Wipro Technologies

349 357 363

Objective Type Questions Index

369 377

Visual... Learning Objectives Every chapter begins with chapter objectives which tell the reader what he will find in the chapter and what he will gain from it.

Case Studies 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, Case Studies have been provided liberally in the text. These cases are live examples from the industry or first-hand experiences by authors.

Walkthrough Boxed Examples 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.

References/Websites Visited/Suggested Further Readings These tell the reader where material has been taken from and, to the interested reader, where he should look for more indepth knowledge into the subject.

Walkthrough 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.

Companion Website (Student Edition) Students can test their knowledge by clicking on answers on the website. Their score will be generated automatically. They can even email the result sheet to the instructor.

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

Index A detailed index at the end of the book will help the reader in locating the entries in the right context in an accurate manner.

Chapter

C oncept and Process of International Marketing

Learning Objectives The reader should be able to • understand the concept of international marketing vis-à-vis domestic marketing • identify, understand and explain the evolution process and stages of international marketing growth of a firm • explain the reasons for firms/manufacturers/service providers for taking to international marketing • identify the environmental and firm-specific motivating factors that propel the international business decisions of a firm • describe and explain a firm’s orientation and philosophy towards international marketing • identify, understand and explain the challenges that firms face during the growth of their international marketing activities.

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ntil a few years ago, the international market had been 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 its own standards to internationally accepted levels. Today, international markets offer unlimited opportunities to companies like Infosys, Wipro, 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 will introduce the reader to the concept, scope and process of international marketing. It will analyse 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 will also provide an understanding of the firms’ orientation towards international marketing.

SECTION 1: INTRODUCTION There are 192 countries in the world, each offering 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) 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. Peter F. Drucker describes this situation in “Management Challenges of 21st Century”, wherein he states “No institution whether a business, a university, or hospital can hope to survive let alone to succeed unless it measures up to the standards setup 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 color 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 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 also geared up to the internationalisation of their businesses. The pharmaceutical industry witnessed a manifold increase in its production levels ever since 1. Peter F. Drucker, Management: Challenges for the 21st Century, Harper Business, New York, 1999.

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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 Indian 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. The following, Table 1.1 demonstrates the growth of world exports for the past 50 years. Table 1.1 Growth of World Exports

Year

Value of Merchandise Exports in Billion US$

1950 1960 1970 1980 1990 2000 2002 2005

55 113 280 1846 3311 6350 6455 7875

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

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 in 2003, exhibits the status of the top 30 importing and exporting countries of the world (See Table 1.2).

SECTION 2: INTERNATIONAL MARKETING—A DEFINITION 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 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, behavioral 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.

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Table 1.2 Leading Merchandise Traders

Rank/ Share 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30

Exporters USA Germany Japan France China U.K. Canada Italy Netherlands Belgium Hong Kong Korea, Rep. of Mexico Taipei, Chinese Singapore Spain Russia Malaysia Ireland Switzerland India World

Value $Billn 693.9 613.1 416.7 331.8 325.6 279.6 252.4 251.0 244.3 214.0 201.2 162.5 160.7 135.1 125.2 119.1 106.9 93.3 88.2 87.9 49.3 6455.0

Share % 10.7 9.5 6.5 5.1 5.0 4.3 3.9 3.9 3.8 3.3 3.1 2.5 2.5 2.1 1.9 1.8 1.7 1.4 1.4 1.4 0.8 100.0

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 27

Imoporters USA Germany United Kingdom Japan France China Italy Canada Netherlands Hong Kong Belgium Mexico Spain Korea, Rep. of Singapore Taipei, Chinese Switzerland Malaysia Austria Australia India World

Value $Billn 1202.4 493.7 345.3 337.2 329.3 295.2 243.0 227.5 219.8 207.2 197.4 173.1 154.7 152.1 116.4 112.6 83.7 79.9 78.0 72.7 49.6 6693.0

% 18.0 7.7 5.2 5.0 4.9 4.4 3.6 3.4 3.3 3.0 2.9 2.6 2.3 2.3 1.7 1.7 1.3 1.2 1.2 1.1 0.8 100.0

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

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 a part of international marketing for the firms situated abroad that undertake the 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

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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 GDP of many small developing nations.

SECTION 3: 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 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 Though many a people call these difficulties, reluctance and hurdles for the international firms, we will 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 firm 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 non-tariff and non-tariff barriers. Similarly, political ideologies of the nations may not see eye to eye. 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

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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. (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 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.

SECTION 4: STAGES OF INTERNATIONAL MARKETING— AN EVOLUTIONARY PROCESS 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 services. Such firms take much longer time to become truly international marketing organisations. Domestic Company

Export Marketing Company

Multinational/ International Marketing Company

Global/ World Wide Marketing Company

Fig. 1.1 Evolutionary Stages of a Global Marketing Company

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In the evolutionary process of international marketing, 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 such 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. The following table reveals the turnover of Birla Tyres, showing the break-up for the domestic and export markets. It is interesting to note that even though exports are growing every year, the company still manages to earn 70% of its revenue from the domestic market, with exports making up only 30% of total turnover. 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 18% during 2002-03, and its products are well accepted in the domestic and export markets. The company exports 30% of its production, against the 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: http://www.birlatyre.com/

Multinational/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.

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Fig. 1.2

Exports Turnover of Birla Tyres Source: website http://www.birlatyre.com/

Global/Worldwide Marketing Company The focus will be 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 adapt 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 world-class 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 TGA-Australia, have audited and approved Ranbaxy’s manufacturing facilities for compliance with international Good Manufacturing Practices and have registered its products for safety, quality and efficacy”. Source: http/ www.ranbaxy.com 2. Warren J. Keegan, Global Marketing Management, Seventh Edition, Pearson Education Singapore Pvt. Ltd. New Delhi, 2002.

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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.

SECTION 5: 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, Wind 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 addon 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 centers 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, etc., could form one group, China and Japan could be the other group. Europe forms a different rigeocenter 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 3. Howard Perlmutter, The Tortuous Evolution of the Multinational Corporation”, Columbia Journal of World Business, January –February, 1969.

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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 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? Researchers have identified the criteria to identify firms and managers that are international in outlook. These indicators, such as foreign sales and foreign employees, are relatively easy to measure. Attitudes, however, are more abstract and it is more difficult to measure a person’s attitude towards overseas consumers and markets. A geocentric scale was designed to measure egocentricity. The scale consists of five questions and the statements constructed as a Likert Scale of agreement or strong disagreement to each statement of five variations. The five statements in the context of a company in USA are: 1. A manager who began his or her career in any country has an equal chance of becoming a CEO of my company. 2. In the next decade, I expect to see a non-US CEO in my firm. 3. In the next decade, I can expect to see one or more non-US nationals serving as a senior corporate officer on a routine basis. 4. In my company, nationality is unimportant in selecting individuals for managerial positions. 5. My company believes that it is important that the majority of top corporate officers remain American. 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 Mind-Set and Multinational Strategy?” Journal of International Business Studies, 25 (No. 3 1994) 439-511.

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SECTION 6: MOTIVATING FACTORS OF INTERNATIONAL MARKETING With the shortening of distances in global economy due to development of means of communication and travel, interdependence amongst nations on each other has increased many folds. 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 amongst the haves and the have-nots, amongst 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 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: (i) (ii) (iii) (iv) (v)

Competitive edge Worldwide integration of economies Technology 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

International Marketing: Environment Motivating Factors 1. Competitive Edge Competition brings out the best. In a closed economy of the kind India had till 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 * Bridgestone is a Japanese multinational. They established production unit in places like Indore in India.

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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 trade. Given the fact that each sovereign country today is receptive to trans border 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 multi-modal 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 counties, 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 reach of a flick of a finger. A WORLD MARKET LEADER 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 aircraft engines, appliances, capital services, lighting, medical systems, NBC Broadcasting, films and 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 in profits in 1995, which have grown to $ 18.3 billion in 2005, a whopping 300 percent growth, the current year’s revenues at 149.7 billion dollars. 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 declining profits, the company’s

Concept and Process of International Marketing

power division, GE Industrial 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 in Latin America and 6 percent in the Pacific Rim. 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. By 2002-03, sales in India had risen from $400 to $1 billion. 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 center 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 net works, Super Channel NBC Asia and CNBC Asia, reaching 180 million homes worldwide. The film King Kong, produced by NBC, has earned 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.

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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 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 centers, software development organisations and health and medical development centers 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. Emergence of Demanding Consumers The global media has brought world-class 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 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 These 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 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. 1.3) 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,

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Concept and Process of International Marketing

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

Oman

Gas Distribution

Mexico

Exploration in NELP (new)

Poland

Fig. 1.3 The International and Domestic Profile of Videocon Source: http://www. videoconworld.com/about/corporate-profile/index.php 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

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International Marketing–Text and Cases

world, it is a highly matured and saturated market, offering a limited potential for profit. While the 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 a follow 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 planning many more in China, Hungry, Lithuania, Russia and Thailand. When the Soviet Union collapsed, Coca Cola invested more than $ 1.5 billion to build a new business, from almost zero 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: Pepsi fights for India’s beverage business, 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.

REFERENCES 1. Peter F. Drucker, “Managing For the Future”, Oxford, Butterworth Heinemann Ltd. 1991 Pp. 33-34. 2. (ibid, p.4) 3. Warren J. Keegan, Global Marketing Management, Seventh Edition, Pearson Education Singapore Pvt. Ltd. New Delhi, 2002. 4. Howard Perlmutter, “The Tortuous Evolution of The Multinational Corporation”, Columbia Journal of World Business, January–February, 1969. 5. Stephen J. Kobrin, “Is There a Relationship between a Geocentric Mind -Set and Multinational Strategy?” Journal of International Business Studies, 25 (No. 3 1994) 439-511. 6. “GE’s Brave New World”, Business Week, 8 Nov. 1993, 64-68, 7. “A Big Offshore Surge for GE’s Juice Factory”, Business Week, 21st June 1993. 72. 8. “NBC to Expand Programming in Asia”, Global Direct Marketing, 20 Feb 1995, 7. 9. Pepsi fights for India’s Beverage business, the Wall Street Journal, 3 June 1994. 10. In Business This Week, Business WEEK, 27 July 1992. 11. Coke Makes China Foray with accelerated Fizz Sales, Bangkok Post, 16th Nov, 1993, The Wall Street Journal, 22 August 1995.

Concept and Process of International Marketing

WEBSITES VISITED 1. 2. 3. 4. 5. 6. 7.

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/ http://www.mhhe.com/justinpaul

SUGGESTED FURTHER READINGS 1. International Marketing, Twelveth Edition, Philip R. Cateora, John L.Graham, Tata McGraw-Hill Publishing Co. Limited, New Delhi. 2. International Marketing, Rakesh Mohan Joshi, Oxford University Press, New Delhi. 3. Global Marketing Management, Seventh Edition, Warren J. Keegan, Pearson Education, New Delhi. 4. Keegan, Warren J. and Bodo B. Schlegelmilch, Global Marketing Management: A European Perspective, New York, Prentice Hall International, 2000. 5. Malnight, T.W., Globalization of Ethnocentric Firm: An Evolutionary Perspective, Strategic Management Journal, 16 Feb., 1995. 6. Johnson Johnny K., and Ikujiro Nonaka, Relentless the Japanese Way of Marketing, New York, Harper Business, 1997. 7. Dana – Nicoleta Lascu, International Marketing – Managing Worldwide Operations In A Changing International Environment, Atomic Dog Publishing, U.S.A. (Biztantra, New Delhi.) 8. Ohmae, Kenichi. The End of Nation State: The Rise Of Regional Economies, New York: The Free Press, 1995. 9. Halal William E. Global Strategic Management in A New World Order, Business Horizons, 36 November – December 1993.

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.

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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 in their article “The Tortuous Evolution of The Multinational Corporation”, Columbia Journal Of World Business, January –February, 1969”. (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. 5. Geocentric Approach believes that (a) Entire World is a perceived single market (b) World market can be divided into regions. (c) World market can be divided into different countries. (d) 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) Market can be segmented on the basis of country borders. (c) Markets can not be segmented. (d) Markets are homogeneous. (e) All markets are heterogeneous. 7. In international marketing, Firm Specific Motivating Force refers to (a) Analyzing own strengths to leverage against the external factors. (b) Analyzing opportunities within the country. (c) Analyzing external factors. (d) Analyzing competitive opportunities. 8. Experiences Transfer/Benchmarking in international marketing refers to: (a) Adapting experiences earned and utilized in establishing 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, guiding principles, towards internationalization of a company’s operations.

Concept and Process of International Marketing

(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 breakevens are moving up due to higher cost of setting up globally viable units. (True/False) (b) Many a 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. (True/False) (C) International companies have information systems that can scan the world over marketing cases of success or failure. (True/False)

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 difference 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.

Case Study STAR Network’s Adaptation to Indian Culture— A Media Success Story The entry of global media conglomerates into the 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

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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. (Source: STAR website). The successes 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 boringly 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 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. 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 subcontinent, 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 promarket 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).

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Concept and Process of International Marketing

As a global player, STAR TV suffered an initial setback when it failed to read 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 and Kahani Ghar Ghar Ki and 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 the following table, 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. Table 1 Market reach of Cable and Satellite TV–the top ten channels in India

Channel Name

Type

SET MAX STAR Plus Sony TV Zee TV Ten Sports Zee Cinema STAR Sports DD2 Aaj Tak STAR Gold

Entertainment/sport General General General Sports Indian films Sports General News and current affairs Hindi movies

Market reach 8.3 7.2 7.1 6.3 5.9 5.7 5.6 5.4 5.1 4.8

Market share (million homes) 12.2% 10.5% 10.4% 9.2% 8.6% 8.3% 8.2% 7.9% 7.5% 7.0%

Source: Data from TAM Media Research, Satellite & cable TV magazine, May 2003

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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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.

Websites Visited: 1. http://www.wacc.org.uk/wacc/publications 2. http://www.startv.com.

Questions on Case Study 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. Please explain in the light of the case study presented. 4. Carry out critical analyses of STAR TV network’s orientation towards international marketing based on EPRG model.

Chapter

WTO and Implications on International Marketing

Learning Objectives The reader should be able to understand and explain • the implications of WTO Agreements • how the WTO facilitates the international marketing function.

2

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International Marketing–Text and Cases

W

orld Trade Organisation was established on the basis of the General Agreement on Tariffs and Trade (GATT). Seven rounds of negotiations occurred under the 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 the 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 it 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. 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 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.

SECTION 1: WTO AND GLOBALISATION: ISSUES It is worth noting that the WTO stands for removing the non-tariff barriers in short-run and import duty rates in 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 that 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 worthnoting that the globalisation has gathered pace in the past 20 years. WTO and globalisation is not about making and selling products in all regions of the world and it is not restricted to marketing and selling. 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 slowing moving towards a regime of free capital flow. As markets This chapter has been co-authored by Prof. Justin Paul, B. Arun Kumar, Deepak Balan, Sagar Sunil, Sandeep Kumar Mishra, Sandeep S. and Syed Ashref.

WTO and Implications on International Marketing

25

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 that some social and political groups find 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 costcompetitively 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, 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 a competitive rates, with the slash in import duty rates & removal of import restrictions with the implementation of WTO agreements. They have (those with purchasing power) emerged as kings & queens in the market.

Integration of Financial Markets Financial markets are now e-based and operate 24 hours a day and at speeds that are several times higher than a generation ago. Organisations, irrespective of size, can now cost-effectively manage banking relationships outside the home base. The financial sector has been the most affected of all sectors. Mergers and acquisitions in the banking sector have been both a driver of globalisation and a response to its anticipated potential. Though a firm may be incorporated in one country, many are 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/differentiation and operational efficiency/ cost leadership. The dimensions of quality and price are no longer a trade-off. 1. Arun Goyal, WTO in the New Millennium, Academy of Business Studies, New Delhi, 2001

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International Marketing–Text and Cases

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.

SECTION 2: THE MARKETING SCENARIO 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, customer support are undertaken just as if the company is regional. Behaviours are converging, albeit at a slow rate. 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 reality with flooding of the imported items in the market. Customer value can be derived from any element or 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 Technologies/systems Logistics

Finance

Customer Delight

Base Materials

R&D

Sustained Customer Satisfaction

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.

WTO and Implications on International Marketing

27

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 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 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.2

Product WTO rules have a bearing on both tangible and intangible products attributes. Regarding tangible attributes, WTO rules deal with product specifications (norms and standards), labelling and products content (foreign 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.

2. Jean Emile Denis (2003) Making International Marketing Decisions under WTO Rules, Thunderbird International Business Review, Vol 45(2), March-April, Page 185-210.

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WTO System

Decision to Internationalise

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 & the WTO System3 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 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. 3. 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), 185-210. Reprinted with permission from the author.

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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 country-oforigin 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 respects.4 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 a good 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 4. See Krishna Rao (2005)—WTO: Text and Cases, Excel Books for more information on TRIPS.

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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 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. 5. See Justin Paul, International Business, Prentice Hall of India for more information on Dispute Settlement Body.

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The issue of staff working abroad is dealt within 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 personnel 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. 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 various 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.

Place In marketing terms, place refers to the convenience that a firm can offer to its customer 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 aimed at ensuring 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 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. 6. See Arun Goyal (2001), WTO in the New Millennium, Academy of Business Studies for more information on GATS. 7. Visit www.wto.org for more information on the TRIPS Agreement.

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SECTION 3: 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 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 8. B. L. Das, WTO-Guide to the Framework for International Trade, Bookwell, New Delhi.

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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.

SECTION 4: CONCLUSION WTO rules and regulations, when viewed from a firm’s perspective rather than that of a trade policy, show that, in international business, only a limited number of rules affect the marketing mix decisions. Product and pricing are the decision areas most affected by WTO, followed by entry modes/distribution and marketing communication. However, organisations are usually unaware of the opportunities or threats they face as a result of the implementation of the WTO rules. This is even more so in developing countries, where admission to the GATT/WTO has been more recent, and where firms have not been traditionally active in international business. Firms should be more attentive to WTO developments. They should be more involved in the design of national trade policies and as lobbyists when their governments are negotiating agreements. WTO rules make the international business environment more transparent and predictable. WTO and its predecessor, GATT, are major factors in the expansion of world trade. Over the years, the coverage of the system has expanded, rules have been clarified and, to a certain extent, protectionism has been checked. The result is an international marketing environment that is more open and competitive than ever before. This chapter is only an overview of the important implications. A number of issues can still be considered. In particular, two types of considerations have not been discussed, the preferential treatment granted to developing and to least-developed countries and the unfinished work on many issues like rules of origin or trade in agriculture. International marketers should keep themselves informed about these developments, as they may have a significant impact on their performance in foreign markets.

REFERENCES 1. 2. 3. 4.

International Business, Cherunilam, Prentice Hall of India International Business, Sharan, Pearson Education International Business, Justin Paul, Prentice Hall, Third Edition Taking International Marketing Decisions under WTO Rules, Jean-Emile Denis http:// cat.inist.fr/?aModele=afficheN&cpsidt=14392202

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5. What is Globalisation? Daniel Park 6. An Ethical and Legal Synthesis of Dumping: Growing Concerns in International Marketing, Nejdet Delener http://www.springerlink.com/content/h14472014267302q/ 7. World Trade Organisation http://en.wikipedia.org/wiki/WTO 8. Business Environment, Justin Paul, McGraw-Hill Education 9. Coulson, Thomas, Colin (1992), Creating the Global Company, McGraw-Hill.

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 the above. 4. One of the most important reasons of the WTO system is to resolve their difference 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)

WTO and Implications on International Marketing

REVIEW QUESTIONS 1. Discuss how the WTO facilitates the process of international marketing. 2. Discuss the link between the new world trade system and the 4 Ps of marketing: Product, Price, Place and Promotion.

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Chapter

Emerging Trends & Internationalisation of Firms

Learning Objectives The reader should be able to understand and explain • the process of internationalisation of a firm • the strategies of companies that are successful in the international markets

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SECTION 1: INTERNATIONALISATION—REASONS AND STRATEGIES

M

any 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 factors can be specified as

(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 an imperative 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 keep their business solely to the fortunes of one country. When an economy is booming, companies are adding to 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 In a business, firms follow generic strategies: cost leadership, differentiation. Each business must develop a competitive strategy focused on its own domestic market1. In pursuing this strategy, the home country of operation is often the most 1. See Justin Paul (2007), International Business, Prentice Hall, 3rd Edition, www.phindia.com/justinpaul

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important source of competitive advantage. The resources and capabilities of the home country frequently allow the firm to pursue the strategy into markets located in other countries. The generic strategies under this category are: (a) International Cost Leadership Strategy: An international cost strategy is likely to develop in a country with a large demand. Operations for such an industry are centralised in the home country and obtaining economies of scale is the primary goal. Outsourcing of low-value-added operations may take place, but high-value-added operations are retained in the home country. Accordingly, products are often exported from the home country.2 (b) International Differentiation Strategy: Firms based in a country with advanced and specialised factor endowments are likely to develop this strategy. In order to be a leader in this category, a firm has to continue to differentiate its product in ways that are attractive to the mass market. Firms may differentiate their products and services through physical characteristics or they may also differentiate in the minds of the consumer.

SECTION 2: RANBAXY LABORATORIES— INTERNATIONALISATION STRATEGIES3 Ranbaxy Laboratories Limited was registered in India in 1961. Dr. Parvinder Singh joined Ranbaxy in 1967. He was appointed as 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 company. 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. 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 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. • First, it was decided that the company will not look at diversification into unrelated or areas but that it will stick to its core area of pharmaceuticals. • Second, it stated its intent to be an multinational company. This implied a focused and rapid expansion into foreign countries. • Third, it clarified that it will be a research-based company, which meant that it wanted to discover its own proprietary innovative drugs to leverage in the era of worldwide intellectual property rights. Growth Challenges, Phases and Strategies In 1970s and 1980s a lot of criticism was encountered within and outside the company. E.g. 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 select the latter’s 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, 1994 was a very important year in the growth phase of the company. 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.

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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, 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. 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. 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

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 4. Compiled from Business Today, September 10, 2006.

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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.

SECTION 3: 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, develops and manufactures generic and branded pharmaceuticals and bulk pharmaceutical ingredients. Later, it started manufacturing formulations and enhanced its trust on entering the international market with exporting methyldopa in 1986. On continuation of 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. 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 development and manufacture of pharmaceutical intermediates, bulks 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, etc. It was in 1990, Dr. Reddy’s Laboratories exported Norfloxacin and Ciprofloxacin to Europe and to the Far East. By spreading its arm to export field 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, 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. Became the first Indian pharmaceutical company to out-license an original molecule. 5. US FDA stands for United States Food & Drug Authority

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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 (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 In terms of geographic mix, domestic operations accounted for 36 percent of Dr. Reddy’s Laboratories revenues and international operations for 64 percent in 2004. In international business, North America was the largest market for Dr. Reddy’s Laboratories (41 percent of international sales of the company) followed by Europe (22 percent), Russia and other commonwealth of independent state (CIS) countries (18 percent) and others (19 percent). In the product mix, active pharmaceutical ingredients (APIs) accounted for 38 percent of company sales. In term of the therapeutrix mix 75 percent of branded formulation sales derive from gastrointestinal, cardiovascular, anti-injectives, pain-management and nutrients segment. The company has established its present in US generic market, where it is currently marketing over 20 products. In 2005, Dr. Reddy’s Laboratories had wholly owned subsidiaries in US, UK, France, The Netherlands, South Africa, Singapore and Hong Kong; joint ventures in China, Brazil, Russia and Uzbekistan; and, representative offices in Romania, Ukraine, Vietnam, Kazakhstan, Sri Lanka, Uzbekistan, UAE and Malaysia, etc. Dr. Reddy’s Laboratories has proposed to set up Branded Marketing Organisation (BMO) in North America. On September 28, 2005, Dr. Reddy’s Laboratories announced the formation of India’s first integrated drug development company, Perlecan Pharma Private Limited. It will be engaged in clinical development and out-licensing.

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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i. Agreement with Merck (Strategic Alliance): On 2 February, 2006, the company entered into an agreement with the US-based Merck to distribute and sell generic versions of Proscar and Zocor in India. This made Dr. Reddy’s Laboratories the first Indian pharmaceutical company to become an authorised generics manufacturer for a multinational. ii. Tie up with an Australian Firm (Strategic Alliance): Dr. Reddy’s Laboratories entered into a deal with Bioignal Ltd. of Australia to develop mass manufacturing processes for furanone, which are antibacterial and antifouling found in a seaweed indigenous to Australia’s east cost. iii. Acquisition: DRL acquired Roche’s Active Pharmaceutical Ingredients (API) business, including the state-of-the-art manufacturing unit in Cuernavaca, Mexico in November 2005. iv. Marketing Pact with a New Zealand Firm (Strategic Alliance): The company formed a strategic alliance with the New Zealand-based nutraceutical major, Symbolic, for marketing its nutritional and immune boosters in India. 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

The company aims to become one of the top ten generic companies in the US. • Dr. Reddy’s Laboratories focuses on the design, development and production of costeffective drugs for markets around the world. • The company is involved in a number of strategic alliances with companies and universities in India and the US. 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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• Dr. Reddy’s Laboratories’ subsidiary ‘Reddy US Therapeutical’ is involved in drug discovery research, focused on new molecular target. • It plans to build a robust marketing infrastructure in the US for branded products. • To support the expended formulation business covering the US, Europe, China and Russia, the company is setting up a new formulation plan in Goa. In short, all the foreign acquisitions have paved the way for DRL to enter into valueadded business in the global market.

SECTION 4: 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 semisynthetic 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. 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 U.S, 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 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.

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Summarised Details of Shri Aurobindo Pharmaceutical’s Subsidiaries and Joint Ventures

Name of the Entities

Country

Category

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 Subsidiary The Subsidiary Netherlands India Joint Venture

100 100

Marketing Marketing

50

Marketing

Joint Venture Joint Venture Subsidiary Subsidiary

50 50 100 100

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

% of Stake

Main Activity

Manufacturing JV Manufacturing JV Marketing and Manufacturing Marketing

Long-term Growth Strategy A brief summary of the activities/features of some of the subsidiaries are: 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 with manufacturing and marketing activities. f. Citadel Aurobindo Biotech Ltd (CABL) This is a joint venture with Citadel for marketing bio-tech products in India.

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47

LEARNINGS 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 and 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.

REFERENCES 2. 3. 4. 5. 6. 7. 8.

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

OBJECTIVE TYPE QUESTIONS 1. The following information is set forth before commencement of franchising operations:(a) Bankruptcy history. (b) Litigation History. (c) Financing arrangements. (d) All the above. (e) None of the above. 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 the above. 3. Contractual forms of market entry include (a) Licensing. (b) Franchising. (c) Both the above. (d) None of the above. 4. Technology is driving globalization because of economies of scale. (True/False) 5. International Corporate planning is essentially a short term incorporating generalized goals. (True/False) 6. International Franchising is a form of Licensing. (True/False) 7. Export houses have to obtain export house certificate from DGFT. (True/False) 8. ‘Contract manufacturing’ is a form of? (a) Acquisition. (b) JV. (c) Licensing. (d) Franchising.

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REVIEW QUESTIONS 1. Discuss the reasons for the internationalisation of firm. 2. Why did the 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.

Case Study 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 last year. “Where this thrusts 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 $91m last year. 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 past three 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 & 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

Question on Case Study 1. Why does Tata Group invest billions for acquisitions?

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Chapter

4

Country Analysis, Selection, Market Size and Marketing Mix

Learning Objectives The reader should be able to understand and explain • 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. Hitul Poladia, Raju Ranjan Singh, Vitesh K. Giri and Neeraj Verma helped in collecting the material for this chapter. Authors Justin Paul and Ramneek Kapoor are thankful to them.

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SECTION 1: INTRODUCTION

T

he 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.

SECTION 2: COUNTRY EVALUATION AND SELECTION Since companies seldom have enough resources to take advantage of all international opportunities, they must carefully choose how to commit 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 Choosing a country to set up sales offices, franchisees and production units, etc. should be based on the following conditions: i. A geographic strategic location plan must let a company 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 have the most influence are market size, ease and costs, resource availability and red tape. v. Market size and sales potential is probably the most important variable for manager’s use while determining whether to make an investment and where. A technique for making rough estimates of market size is to base projections on 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. Few techniques that can be used by companies to compare potential projects include discounted cash flow, net present value, and internal rate of return. 1. Daniels, Radebaugh and Sullivan-International Business, Pearson Education, 10th Edition.

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53

SECTION 3: 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 relatively less familiar environment.

Competitive Risk Companies may develop strategies to find countries in which there is least likely to be significant competition; efforts will have to be taken 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 general strikes and destroying property and supply lines; frustration is dissatisfaction as a result of unfulfilled needs, i.e., aspirations.

SECTION 4: MARKET RESEARCH AND CONSUMER BEHAVIOUR Companies undertake research to reduce uncertainties in their decision processes, to expand or narrow 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 payoff 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; 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. 2. F.A. Goldstein, International Marketing Research – Myth or Reality? European Research 15, No. 2 (May 1987): 94-98.

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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 estimates its own market share potential. The techniques used to determine the market size are the same as used domestically. The major indicators are:3 • Present income • Population • Growth rate in income and population It has been found that: • The product demand changes with increasing income levels (per capita income). • Countries whose economies are growing experience a growing demand for products. • Regression analysis can be done on the data collected for the consumption of a given product in countries at different income levels to project sales. This technique generally gives good fits, but there are certain factors, other than the per capita income, that affect demand for some products in some countries. The main reasons are: Obsolescence of Product Consumers in developing countries do not necessarily follow the same pattern as consumers in higher income countries. 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 consumer. It depends on the nature of products: Normal Goods have a positive income elasticity of demand. So, as incomes of the consumer rise, 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. 3. Coteora and Graham, International Marketing, McGraw-Hill.

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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. Given all the above factors, projecting the potential demand perfectly is not possible. However, a workable estimate of sales can be made. GAP ANALYSIS Gap Analysis is a tool for estimating a company’s potential sales by identifying market segments it is not serving adequately. If a company’s sales are lower than the estimated market potential, it means that the company has potential for increased sales. 4 Usage Gap A Competitive Gap (The remainder unexplained gap)

Actual Sales for all Companies

Product Line Gap (Represents sales lost to customers who have product variations the company does not have)

Distribution Gap (Represents sales lost to customers who distribute where company does not)

Sales Lost to Competitors

Potential Sales for all Companies

B

Company’s Current Sales

Different companies may have to modify their marketing programmes because of the different gaps. Competing in world markets required careful preparation and analysis. This requires evaluation of global, regional and national demands and gaps5 4. Kumar (2005), International Marketing Research, Prentice Hall of India, 2004. 5. John S. Hill (2005), World Business, Thomson South Western, Page 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.

SECTION 5: THE 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

i. 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 • Commodity sales, where there is little need for differentiation. • Passive exports that serve to reduce domestic surplus. 6. This is an original write-up based on the ideas given in the books, Global Marketing Strategies, Jeannet and Hennessey, International Marketing, Subhash C. Jain and Global Marketing, Keegan.

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• Foreign market segments or niches that may resemble the market aimed at initially. • Small developing countries with only a small market potential. Passive sales occur when • Advertising spills over. • Foreign buyers seek new products. • Unaltered domestic product may have appeal abroad. However, if companies make little marketing efforts in the above cases, they can achieve higher sales. 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 • when there is spill over in product information from its home country. • when it develops a new product to launch almost simultaneously in multiple countries. • when it develops the product abroad. 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 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 on the buyers to determine what the final customers 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. When Hero Honda motors launched its motorcycle CD-100, it was the only one with a four-stroke engine at that time in the Indian market and became a runaway success. Interestingly, it was Mr. Munjal of the Hero group, who persuaded the Honda Motor Company (HMC) of Japan to launch the 100cc vehicle instead of the 70cc version that HMC had originally planned to offer. Given his long experience with the manufacture of 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 of the US. H-D realised that if its growth is to continue, Europe will have to play

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a significant part. ”A critical issue 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 central to their appeal to European and Asian customers. “The US and Harley are tied together,” says Hugo Wilson of Britain’s magazine. “The guy who’s into Harleys here is also the guy who owns cowboy boots. You get a Harley and you’re buying into the US mystique.” At the same time, the composition of demand and the customer profile is different in overseas markets. 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, H-D has never had a major position in Europe and it must fight to take market share from the established leaders in the heavy bike segment: BMW, Honda, Kawasaki and Yamaha. The European motorcycle market differs significantly from the American market in that 70 percent of the heavy motorcycle market is for performance bikes (such as the popular Japanese high-power, racing-style bikes), while the touring/cruiser bikes such as those Harley makes, account for only 30 percent. European buyers tend to be knowledgeable and highly style conscious. Also, European roads and riding style are different from the US. As a result, Harley has modified some of its models to better meet the needs and tastes of its European customers. Another example could be bicycles in China and USA. While the same bicycle might be sold in China and the U.S., it might be positioned as a serious means of transportation in the former and as a recreational tool in the latter. Societal Marketing Orientation Companies with societal marketing orientation give serious consideration of 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 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 U.S. 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.

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59

(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 • If foreign countries lack sufficient income, consumers may not be able to buy the product and the company will need to design low price models or small quantity packs for such countries. • Infrastructure changes may also require product alterations to suit the infrastructure of the foreign country. • Income inequality may also cause product alterations. 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. However some alterations can be costly. Therefore, before taking a decision, a company must always 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. • Narrowing the product line allows for concentration • Broadening the product line may gain distribution economies 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 but 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 following factors: • • • • • •

Different degrees of government intervention Greater diversity Price escalation for exports Changing values of currencies Differences in fixed versus variable pricing practices Retailers’ strength with suppliers in company to company sales

Government Intervention Government price controls may • set the minimum or maximum price • prohibit certain competitive pricing practices

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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 stage of product in the PLC. A company may exercise considerable pricing discretion by using the following strategies: • A skimming strategy • A penetration strategy • A cost plus strategy 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 are well established and with which consumers were familiar. Though the brand may have had a superior offering in 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 order of 2-3 percent. The Heinz advertising campaign mentioned that the brand was synonymous with 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 maximize profits. Currency Value and Price Changes In 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: • The receipts of funds in a foreign currency, which when converted, buy less of the company’s own currency than expected • The frequent readjustment of prices necessary to compensate for continuing cost increases

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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.

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: • • • • • • •

Type of distribution system Cost and availability of media to reach target markets. For example, access to TV and radio Consumer attitudes towards sources of information Amount of consumer involvement in making a decision varies by country because of income levels Price of the product compared to incomes Amount of contact between salespeople and consumers Government regulations in terms of advertising.

Thus, push is more likely when • Self-service is not predominant • Advertising is restricted • Product price is a high portion of income • When the distribution system is more tightly controlled, push is more likely. whereas 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 introduce 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 don’t translate well. Sometimes, direct translation is not possible as what is an acceptable word in one place may seem obscene at another place.

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Legal Varying national views on consumer protection, competitive protection, promotional civil rights, standards of morality and nationalism put legal constraints. What is legal in one country may be illegal in other country. For example, large supermarket chains are not allowed to advertise on TV in France. In some European 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 hundred advertising messages a day. TV advertising is losing its effectiveness because of the growing 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 has 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. • As distribution norms differ among countries, the distribution function may vary substantially among countries • There are many factors like citizens’ attitudes towards owning their own stores, cost of paying retail workers, labour legislations and efficacy of the postal system, etc., that influence the type of distribution of goods in a country • The distribution is difficult to change.

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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: • • • • • •

Volume is high Companies have sufficient resources Prices or technology are high or when there is complex after-sales servicing There is a need to deal directly with the customer due to the nature of the product The customer is global Company wants to gain a competitive advantage.

Distributor Qualification The common criteria for selection of distributors include: • Financial strength • Good connection with customers • The extent of its other business commitments • The current status of its personnel, facilities and equipment. Gaining Distribution Distributors choose what they will handle. Companies • may need to give good incentives • may use successful products as bait for new ones • must convince distributors that the product and company are viable. 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. Infrastructure conditions 2. Number of levels in the distribution system 3. Retail inefficiencies 4. Size and operating hours restrictions 5. 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 Geography has a surprisingly large impact on distribution in many areas. While in the U.S., most communities 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 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 in may be through air cargo, which is expensive. Goods may be trucked to one relatively accessible retailer, 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

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transportation, reliable communication, such as mail, phone, fax and the Internet, is also essential to allow for the flow of goods.

REFERENCES 1. International Marketing, R. M. Joshi, Oxford Higher Education. 2. International Marketing, Keegan, Pearson. 3. International Business, Justin Paul, Prentice Hall.

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.

GAME Download the Seterra Software from the internet. (Accessible on google.com or www.educational-freeware.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.

OBJECTIVE QUESTIONS True or False 1. Interior Goods have a negative income elasticity of demand. 2. DELL, Computer Company is known for its online ordering proposition, internationally. 3. Products of some con...tend to have a higher quality image than those from other countries. Multiple Choice 1. Common criteria for selection of distributors include (a) Financial Strength (b) Good connection with Customers (c) Extent of its other business (d) All of these commitments (e) None of these 2. Common Product policy include (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

Chapter

International Marketing: Research and Opportunity Analysis

Learning Objectives The reader should be able to understand and explain • • • •

the definition and concept of international marketing research reasons why firms undertake international marketing research the scope and ambit of international research the steps involved in the process of international marketing research and constraints felt thereof • the sources of international marketing research information, i.e. secondary data and primary data • sales forecasting methods and techniques.

5

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SECTION 1: INTRODUCTION

I

nternational 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, opinion, possessions, needs, and aspirations. Generally, such international marketing research will include research on consumers, industry, psychological, demographical, economical and political investigations, observations and panel studies. 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 has been 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 promotion. The chapter will also discuss 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. 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 will also address the process of marketing research both at the firm’s own level through in house analyses of data collected as well as 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 1. David Ricks, Big Business Blunders, Dow Jones1983. 2. Alecia Sway, Soap Opera. The inside story of Proctor and Gamble, Times Books 1993.

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subject at the global level. The discussion will also take into account varied cross-cultural, cross-country and cross ethnic issues that sway and influence research decisions.

SECTION 2: 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 in 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. The heavy outlay of costly mistakes made due to lack of adequate and appropriate marketing research at the international level can be seen in the way the Chinese firms are paying a gigantic price for entering the Western markets without proper home work. Their foray into the West began when consumer electronic giant TCL took over the loss-making German TV brand Schneider. The assumption was that they will have a profitable beginning into the Western market. TCL had also acquired Thomson of France, thereby becoming the largest maker of televisions in the world. But it became clear soon that TCL had not conducted its research, as it should have. Schneider had not been the preferred brand for many years. Similarly, the European electronic market had already been facing price competition of very low margins; often resulting in net losses as well. The Chinese management, which was entering these markets for the first time, could not understand the fragmented market of Europe. Similarly, when BenQ, the Taiwanese cell phone maker, announced its intentions of closing the German plant it had bought from Siemens just a year ago, because its market share had shrunk from 5 percent to 3 percent, it became clear that the market research conducted had not given solutions to BenQ to fight out the costs and market complexities of business in European markets. Adapted from: Stefan Theil, “Cultural Confusion, The Week, October 16, 2006, Pp.42-43. http://www.newsweekinternational.com/ From the above two references, 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 3. Kumar V (2003), International Market Research, Prentice Hall of India may be referred for more information.

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1. Identifying and understanding the strengths, weaknesses, opportunities and threats in existing and emerging markets vis-à-vis the in-house references pertaining to

2. 3. 4. 5.

(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. Understand the complexities of consumer behaviour all across the designated countries, under conditions specific to that country alone. Understand the cultural and religious factors affecting its business in various countries. Understand the political and legal set ups and their impact on its business. 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 master in order to run their business profitably, both for themselves and for their customers too.

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.

SECTION 3: 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 the other parts of the world. Such a huge exercise obviously presents its own challenges and limitations in the form of different decisions thrown

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up by the research findings. A firm has to adapt 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, multi-legal and multi-personnel aspects, as each factor assigns its own outlook to the research involved.

The Scope of International Marketing Research and Country Analysis Differences in national values, culture, economic structures and history all contribute to competitive success. First, country competitiveness affects an Multinational Enterprise’s (MNE) selection of its global operations 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. 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 strength 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 into a buyer’s mind and the external factors affecting preferences, behaviour, attitudes, likes and dislikes. Brand awareness of the firm’s products and services and also that of the competition is studied through this research.

4. Oded Shenkar and Yadong Luo (2004), International Business John Wiley & Sons, Singapore, Page 127.

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Du Pont had conducted a similar research to understand qualitative and quantitative preferences in 20 countries and amongst 85,000 respondents over a period of six months. The research concluded that 65 percent of the respondents interviewed preferred clothes made with the Du Pont Lycra brand over others and they found the stretch in their clothing was better when Lycra had been used. This prompted Du Pont to launch its first global advertising and sales promotion campaign to promote its Lycra brand amongst men and women aged 21-49, whose household income was more than $ 35,000 per annum and amongst teenager girls, in the age group of 12-17, throughout the continents of Europe, Asia and America. Source: Kim Thy Balin, “Du Pont Lycra Goes Global” Sporting Goods Business, March 28, 1999 vol. 32 no. 5 page 16. 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. 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. When Pepsi Co Foods International decided to launch its Cheetos snack food brand in China, it undertook an extensive product testing there. The survey indicated that the customers did not like too much cheese in snack food and, as a result, Pepsi Co had to replace the taste of cheese with that of cream and steak. The new flavour introduced resulted into larger sales volumes. Source: Helen Johnstone, ‘Little Emperors Call the Shots’, Asian Business, September 1996, vol.32, No.9, pp 67-8 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.

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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. 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 color. 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, multicoloured 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 head quarters 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 its 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. In order to understand the actual needs, requirement and delight levels of the foreign consumers, test marketing 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

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conditions, language, excise and other conditions. Timely deliveries, safety of material and reach through the appropriate channels to the best satisfaction of ultimate customers becomes 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 EXERCISE/PROJECT WORK 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: Estimating the value dollar potential available in Sri Lanka, Thailand, Singapore and Bangladesh. Research hypothesis: Customers must be willing to purchase this premium product at a premium price, over and above the best of local products. Research coordinators: The research project will be headed by a lady executive and the field surveyors will also be female executives. (Preferably) Secondary Data Research: • Total sales of premium facial acne removing creams in countries of research. • Percentage share catered to by local manufacturers. • Percentage share of international brands. • Incidence of acne growth in the country of research. • Incidence of facial acne cream being used amongst ladies. • Price variant between the premium segment and second line products. Primary Data Research: • Sample size - 500 beauty and skin clinics from Sri Lanka, Thailand, Singapore and Bangladesh. • 200 women clients to be interviewed, both through individual contact and focus group discussions. Sampling Procedure: Random selection from amongst the most frequented and popular clinics. Data to be Collected: • Data of customers from beauty and skin clinics. • Questionnaire distributed through the clinics. • Telephonic interviews. • Focus group discussions. 5. John S. Hill (2005), World Business: Globalization, Analysis and Strategy, Thomson South Western.

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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 as well as 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 researcher will have to ensure that the message conveyed through advertising enhances and adheres to the norms set up by the country-specific culture, which will definitely have 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 lot 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. Proctor and Gamble’s commercial on Camay beauty soap caused quite a furore and embarrassment for the firm. The advertisement commercial showed a man walking into the bathroom, where his wife was taking her bath. This advertisement could not possibly have conducted detailed research into the bathing habits of the Japanese. The privacy of a wife in the bathroom in a Japanese household is considered absolute and the husband must respect that also. Adapted from: Alecia Sway, Soap Opera, the inside story of Proctor and Gamble. New York, Random House 1993 p 268

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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.

SECTION 4: 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 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 inhouse 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. • Identifying and Defining the Research Problem. • Developing and Formulating a Research Plan. • Determining Information Extent and Need.

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• Collecting Data. • Analysing Data and Interpreting Results. • Finalisation of Report and Presentation. 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 title 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 a to-the-point definition of the problem is established. 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, etc. 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.

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The following figure, Fig. 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 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 self-reference criteria will not be 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. 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 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

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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. Secondary Data Secondary data is 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 user-provided 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, etc., 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, etc. 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 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

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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. 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 only this year 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. A World Bank study undertaken to estimate the bilateral trade between India and Pakistan indicated the potential at $1.85 billion per year. Some other researches are more optimistic. The Indian Council for Research on International Economic Relations (ICRIER) estimated $6.5 billion, while a State Bank of Pakistan study had worked out the potential of trade at $5.2 billion. Informal estimates by the Karachi Chamber of Commerce made in 2004 put the potential at $10 to 15 billion. The wide range in estimates partly reflects the difference in estimating the unofficial trade. Source: Business India, November 19 2006, Page 103, Great Opportunities International marketing researchers will have to validate the data through the following check list: 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 a part of the actual research conducted or is it merely based on survey reports to support a decision already taken?

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4. 5. 6. 7. 8.

The timing of the data. The environmental, economic, political and fiscal conditions prevailing when this data was collected. Is it internal data or did an external agency conduct it? Was any other agency or entity affected by the information contained in the data? 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 the some 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 as well as 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, etc. 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 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. The westerners while 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) Very happy

J

Happy

J

Not happy nor unhappy K Unhappy L Very unhappy L Source: C.K.Corder, “Problems And Pitfalls In Conducting Marketing Research In Africa” In Betsy Gelb Ed. Marketing Expansion In A Shrinking World, Proceedings Of American Marketing Association Business Conference. (Chicago AMA1978) Pp. 86-90 A pretest of the questionniare, on a smaller scale, will help the researchers avoid pitfalls of blunders.

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A White Goods Manufacturer’s comprehensively explained questionnaire. Translated from English to Urdu, Chinese, French, Japanese, Persian and Hindi. Strongly disagree

Strongly agree 5

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

4

3

2

1

It is not important for me to know which brand of air conditioner I will purchase. I often visit showrooms selling air conditioners. I obtain knowledge about air conditioners from the print media. I watch television advertisements to get information about air-conditioners. Whenever any manufacturer offers schemes on air conditioners, I visit their showrooms to get details.. Companies do not provide after-sales service. After-sales service plays a big role in my selection of an air conditioner. Companies can still give better discounts on air conditioners.. Gifts mean charging a higher price for air conditioners. The gift attracted me to this air conditioner.

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 the 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. The 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.

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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 not be noticed in the emerging market of China, where cities are divided into administrative districts, administrative streets and resident committees. 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. Lack of basic infrastructure, such as telephones, postal efficiency and transportation, make 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, a family in western countries like the U.S. and many parts of Europe, a family will usually only consist 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 require 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.

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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-third 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 In e-mail surveys E-mails are sent to unknown addresses with questionnaires, which are to be filled up 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, etc., 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.

SECTION 5: COLLECTING, ANALYSING AND INTERPRETING DATA This 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

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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 up 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 interviewrelated bias and cultural misunderstandings. 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 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 head quarters 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 head quarters 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, etc. .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. 3. Refer William R Dillon , Thomas J. Madden , And Neil Firtle, Marketing Research In A Marketing Environment, Irwin 1953

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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.

SECTION 6: 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: • To estimate the expected adoption rate of motorcycles in India, it will be appropriate to understand 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. • Similarly the researcher can also undertake product development and production adoption analogies 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. • For instance, if Videocon wants to estimate the market size for its DVD players in Sri Lanka, for the 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.

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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. 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 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

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firm had applied autoregressive moving average model4. 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 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, 4. Refer Philip Hans Franses, “Primary Demand for Beer in Netherlands: an Application of Aramex Model Specification,” Journal of Marketing Research, May 28, 1991, Pp240–245.

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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. 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. 5. Ramneek Kapoor, Fundamentals Of Sales Management, Macmillan India ltd., Pp. 236-237.

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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.

SECTION 7: 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 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 co-ordinated so that 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 head quarters. The establishment required for conducting research of such a massive size will otherwise mean recruiting permanent staff in each country, which many organisations can illafford. 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

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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 head quarters will have to pay personal attention to day-to-day coordination between different agencies. The head quarters 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, 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 Option A – international firm – home country agency – consumers abroad. Option B – international firm – home country agency – host country agency – consumer. Option C – international firm – foreign office – host country agency – consumer. Option D – international firm – foreign subsidiary – host country agency – consumer. Option E – international firm – host country agency – consumer. Adapted from: International Marketing, Cateora Graham, Cultural Barriers, Page 234 Publisher Tata McGraw-Hill 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 head quarters 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 analyses is also carried out by the researchers in the correct spirit and findings presented to the decision makers correctly.

REFERENCES 1. David Ricks, Big Business Blunders, Dow Jones 1983. 2. Alecia Sway, Soap Opera. The inside story of Proctor and Gamble, Times Books 1993. 3. Stefan Theil, “Cultural Confusion, the Week, October 16, 2006, Pp.42-43.

International Marketing: Research and Opportunity Analysis

4. Kim Thy Balin, “Du Pont Lycra Goes Global” Sporting Goods Business, March 28, 1999 vol. 32 no.5 p 16. 5. Helen Johnstone, ‘Little Emperors Call the Shots’, Asian Business, September 1996, vol. 32, No. 9, pp 67-68. 6. Alecia Sway, Soap Opera, the inside story of Proctor and Gamble. New York, Random House 1993 p 268. 7. Business India November 19 2006, Page 103, Great Opportunities. 8. C.K. Corder, “Problems and Pitfalls in Conducting Marketing Research in Africa” Betsy Gelb Ed., Marketing Expansion in a Shrinking World, Proceedings of American Marketing Association Business. Conference, Chicago AMA, 1978 pp 86-89. 9. William R Dillon, Thomas J Madden, and Neil Firtle, Marketing Research in A Marketing Environment, Irwin 1953. 10. 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. 11. Ramneek Kapoor, “Fundamentals of Sales Management, Macmillan India Ltd, pp 236-237. 12. International Marketing, Cateora Graham, Cultural Barriers Page 234 Publisher Tata McGraw-Hill.

WEBSITES VISITED 1. 2. 3. 4.

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

SUGGESTED FURTHER READINGS 1. 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: 305-308. 2. Czinkota, M.R. And I.A., “Marketing Research for Your Export Operations, Aprt1, International Trade Forum, 3, 1994, pp. 22-33. 3. 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. 4. Keegan, Warren J. “Scanning In International Business Environment: A Study of International Acquisition Process”, Doctoral Dissertation, Harvard Business School, 1967.

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5. Kapoor Ramneek, Planning For Future, Sales Forecast, “Fundamentals of Sales Management”, Macmillan India Ltd, Pp 230-238. 6. Mullen Michael R., “Diagnosing Measurement Equivalence In Cross National Research”, Journal of International Business Studies, 26, Third Qr. 1995, Pp. 573-596. 7. Stanat, Ruth, “Tracking Your Global Competition”, Competitive Intelligence Review, Spring 1991, Pp.3-5. 8. Sharer, Kevin, “Top Management’s Intelligence Needs, An Executives View of Competitive Intelligence”, Competitive Intelligence Review, Spring 1991, Pp. 3-5. 9. Steenkamp, Jan Benedict E.M., “Assessing Measurement Invariance In Cross National Consumer Research”, Journal of Consumer Research, 25, No. 1 1998 Pp. 78-91. 10. Cateora Graham, “International Marketing”, Cultural Barriers, pp. 234, Tata McGrawHill.

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.

International Marketing: Research and Opportunity Analysis

7.

8.

9.

10.

(b) Sales Force Forecasts. (c) The Delphi Technique. (d) Jury of Expert Opinion. (e) Time Series Analysis. 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. 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. State if the statement is true or false: (a) The firm’s research objective and problem get better defined and identified after the market researcher has analyzed the secondary data. (True/False) (b) Each country may adopt different methodology to collect and tabulate the data in the absence of any standardized global yardstick established. (True/False) (c) Primary data pertains to “collecting information for first time for a specific project”. (True/False) (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. (True/False) Fill in the blanks: (a) A is the pre requisite to gather primary data whether in person, by mail, or even 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. Define international marketing research. What are the major objectives of international marketing research? 2. Define secondary data. How will you validate secondary research data? 3. Outline the basic steps of international marketing research process for an international project.

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4. What do you understand by the term questionnaire? What constraints will you come across while preparing a questionnaire for multi-country research? 5. Define back translation and parallel translation with the help of examples. 6. Explain sampling in international marketing research. 7. What do you understand by the term scalar equivalence? Explain with the help of examples from international marketing research process. 8. What is international sales forecast? Explain any two methods that an international firm can employ to forecast sales.

Chapter

Cultural Factors and Environment

Learning Objectives The reader should be able to understand and explain • what culture is and explain how it affects the international marketing environment around the globe • the elements that form the culture of any society • 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.

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CULTURAL DIFFERENCES? DO THEY REALLY EXIST? Mr. Vijayratne, a Sri Lankan Businessman, had his first opportunity to visit Russia as a representative of a trade delegation. He was there to seek some technical assistance in the area of agricultural labor management. “Russians are a very polite people,” he had been tutored before his arrival. One of interpreters explained that a gentleman will pour the limonad (type of juice) for the ladies and show other courtesies. Toward the end of his three-week trip he was invited by his young Russian host and friend and his 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 satisfied 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 polite thing to do?” “Would you like a banana?” he asked the house lady. “Yes,” she smiled, but made no attempt to take any of the three bananas in the fruit basket. “What now?” he thought. “Which one would you like?” he fumbled. “That one,” she pointed at one of the bananas. So all the while thinking about Russian politeness he picked the banana, 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 world know that in Russia, the polite thing is to peel the bananas for the ladies. Sometime during his third trip, he was politely disabused of his notion. “Oh no, Vijayratne,” a Russian graciously corrected him. “In Russia, when a man peels a banana for a lady it means he has a romantic interest in her.” How embarrassed he felt. And he had been proudly telling everyone about this tidbit of cultural understanding.

SECTION 1: INTRODUCTION

T

he world economy is in the middle of globalisation. For 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 equipments), 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.

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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 that Proctor and Gamble suffered huge losses till 1987, until it eventually understood the local culture and started playing the marketing game the same way as 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. 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.

SECTION 2: 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 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 a 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

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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 multicountry 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 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.

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 CA2000. 3. Melvin Herksokvitz, Man and His Works p 634.

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SECTION 3: 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 a 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-to-develop 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 behavior”; 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 content 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 4. Phillip Parker, Physioeconomics, Cambridge, MA, MIT PRESS.

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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, intercaste 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.

SECTION 4: 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 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 multicountry 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. 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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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 work nor shop. Often, local society looks on foreigners and its own citizen differently. For example, Western female flight attendants are permitted to wear jeans and T-shirt in public when they stay 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. 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 for the 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. 6. David A. Ricks, Blunders in International Business, Blackwell publishers, 1993.

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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’re 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.

SECTION 5: 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 groups, races and classes, some of which transcend national boundaries. Therefore, managers find country-by-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 lead 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

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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. 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 manners 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, etc., 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 child 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

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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, 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.

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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 lowerorder 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 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’re 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 junior is covered by the seniors by exhibiting solidarity with

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Malaysia

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Arab Countries

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Brazil

Thailand

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County Source adopted from Geert Hofstede, Culture’s Consequences: International Differences in Work Related Values, Sage Publications, Beverly Hills CA, 1980.

Fig. 6.1 Hofstede’s Value Survey Model: Power Distance 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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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 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 every day 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

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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 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-and-effect 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”.

SECTION 6: 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 (the way in which people walk, touch and move their bodies) This also differs in countries. 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 gestare 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 highcontext 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.

SECTION 7: 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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Muslims perform an evening prayer called tarawih, the night before the holy fasting month of Ramadan begins, at Faisal Masjid in Islamabad, Pakistan on Sunday, Sept. 24, 2006. During the day, observant Muslims refrain from eating, drinking and smoking during the Ramadan period. http://pakpics.wordpress.com/

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 lead to the industrialisation and commercial development of the western world, even though as a religion Judaism has had to pay a massive price. 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 and,

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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 The Government of India raised permitted levels of the flavour enhancer monosodium glutamate (MSG) 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 campaign pressured the Delhi government to close KFC’s first outlet in the capital. Source: 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 and let live’ in people’s minds. One’s mouth is not a dust bin that one can put any rubbish into it, as and 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

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imbalance. Many doctors in Delhi believe that 160 types of ailments prevalent in the world are 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 cancer. Shri Ramesh Chandra, Working President of Bharatiya Gyanpeeth, mentioned that vegetarianism is not just a mode of eating but it is a scientific 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. Source: Ahimsa Times, November 2002 issue. The systems of official working days, the calendar of week days, annual calculation of the festivals, holy days 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’s 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 and nor can they have any kind of dealings with strangers. Field surveys, door-to-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

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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.

SECTION 8: 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. 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

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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. 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 toward 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, Slavic-Orthodox, 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.

8. Mascarenhas Preeti, Glocalisation ibid. 9. Samuel Huntington’s article “The Clash of Civilizations?” appeared in the Summer 1993 issue of Foreign Affair.

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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. 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 mini China 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 the 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:

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“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 calamity.... If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he 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 plainly an object less interesting to him, than this paltry misfortune of his own.”10 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 take 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, the legal system, and other mechanisms of international organisations.

REFERENCES 1. Geert Hofstede, “Culture’s Consequences”, 2nd Edition, Thousand Oaks, CA Sage 2001. 2. Geert Hofstede, “Culture Consequences Comparing Values, Behavior, Institutions, and Organizations Across The Nations” 2nd Edition, Sage Publications CA2000. 3. Melvin Herksokvitz, “Man and His Works”. 10. Adam Smith, the Theory of Moral Sentiments, 1759. 11. Peter Berger, 1997, http://www.globalization101.org.

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4. Phillip Parker, Physioeconomics, Cambridge, MA, MIT PRESS 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, Pp55-69. 6. David A. Ricks, “Blunders in International Business”, Blackwell Publishers 1993. 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. 8. Geert Hofstede, Culture’s Consequences: International Differences in Work Related Values, Sage Publications, Beverly Hills CA, 1980. 9. The Ecologist, November-December, 1995. 10. Ahimsa Times, November 2002 issue. 11. Mascarenhas Preeti, Glocalization. 12. Samuel Huntington’s article “The Clash of Civilizations?” appeared in the Summer 1993 issue of Foreign Affair 13. Adam Smith, the Theory of Moral Sentiments 1759, Kessinger Publishing Reprint 2004. 14. Peter Berger, Against the Current, 1997.

WEBSITES VISITED 1. 2. 3. 4. 5. 6.

http://www.thenation.com http://www.globalization101.org http://multinationalmonitor.org. http://www.prospect-magazine.co.uk http://pakpics.wordpress.com/ http://drjustinpaul.com

SUGGESTED FURTHER READINGS 1. Benedict, Ruth, Patterns of Culture, Boston; Houghton Mifflin, 1959. 2. Dulek, Ronald E, John S. Fielden and John S. Hill, “International Communications: An Executive Primer,” Business Horizons, 34(January/ February 1991. 3. Gupta, Prabhu, “Multicultural Aspects of Managing Multinationals”, Management Japan, 26, (Spring 1993). 4. Hagen. E. on the theory of social change, Homewood, IL: Dorsey press, 1962. 5. Hall Edward T. “Beyond Culture”, Garden City, New York, Anchor Press, Doubleday, 1976.

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6. Harris Philip R. And Robert T. Moran, “Managing Cultural Differences: High Performance Strategies For A New World Of Business, 3rd Edition, Houston, Gulf Publishing Company, 1991. 7. Hofstede, Geert, “Cultural Constraints in Management Theories”, Academy of Management Executive, 7, No. 1, 1993. 8. Warren J. Keegan, “Global Marketing Management”, Seventh Edition, Pearson Education, 2007. 9. Rakesh Mohan Joshi, “International Marketing” Oxford University Press 2005. 10. Dana-Nicoleta Lascu, “International Marketing – Managing Worldwide Operations in a Changing International Environment”, Atomic Dog Publishing U.S.A, Biztantra 2003. 11. Cateora Graham, International Marketing, Tata McGraw Hill 2005.

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) Colors. (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.

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7.

8.

9.

10.

(c) Immaterial. (d) Remain the same. (e) None of these. 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. (c) Knowledge about all cultures. (d) Knowledge about home culture. (e) None of these. Imperatives (. David A. Ricks, “Blunders in International Business”, Blackwell publishers, 1993) 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. 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. 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 to (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.

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Learning Objectives The reader should be able to understand and explain • 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 • how a firm can assess vulnerability to political environments across the world and take preventive measures to avert it.

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SECTION 1: INTRODUCTION

T

he 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 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 antidumping 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 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 go into the making of soft drinks. Possibly for the first time in the history of these companies, after Center for Science and Environment, a nongovernmental 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.

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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 will focus on different political and legal environments that have a direct and indirect bearing on the international business operations of the firm.

SECTION 2: 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.

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 to unionise. Wal-Mart has fiercely opposed American workers’ attempts to unionise, in one case, closing a meat-cutting division after ten butchers voted to unionise. Nu Wexler, a spokesman for Wal-Mart Watch, says the company “is applying an inconsistent double standard. In the U.S., they aggressively fight unions in their stores. But if unions are a barrier of entry to an emerging market, Wal-Mart is willing to flip-flop on its position.” 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 government. “ We find that the political environment of both the home as well as host country (countries) become the most critical factors in implementing and influencing a firm’s decision of moving capital and investments to any part of the world.( http://www.washingtonpost.com/wp-dyn/ content/article/2006/08/09/AR2006080901924.html)

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“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. 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

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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 toward 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 Castro to leave office, nor has it forced an abandonment of the communist form of government in 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 eventually does leave office.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 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 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 2. Changing Concepts of Sovereignty: Can The United Nations Keep Pace, Muscatine IA; the Stanley Foundation, 1992 Page 7.

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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 nations 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 latest war against Iraq by 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. 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 the Chinese government (which had been following a closed-door policy till then) to open its doors for direct foreign investments. The joint ventures, entered into by Chrysler of United States, Volkswagen of Germany, and Peugeot of France became the major beneficiaries. But relationship soured again 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. 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 3. S. Prakash Sethi, Setting Global Standards; Guidelines for Code of Conduct in Multinational Corporations. (Hoboken N J: WILEY 2003).

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complete philosophy and thinking of the government and the foreign relation policy of the countries, directly jeopardising the interests of multinational business.

SECTION 3: 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 goal over individual goals and the needs, welfare and benefits of a society as a whole are given more importance over that 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 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 the 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. 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 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 4. Harry C Triandis, “The Self and Social Behavior in Differing Cultural Contexts” Psychological Review July 1989, Vol. 96, Page 506-520. 5. Joseph A Schumpeter, Capitalism, Socialism and Democracy/New York Harper And Collins 1947.

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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 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. 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 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 society good 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 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.

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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. 8. 9.

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

Totalitarianism 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. 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. 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, rule 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. History of many African nations is replete with stories of mass massacres and subjugation of the opponents of the ruling tribe.

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Right Wing Totalitarianism Occurs when 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 right-wing extremism through military dictatorship, even though majority of these countries are committed to true democracies now. Even in Latin America, till early 1980s, the right-wing dictatorship prevailed through the military.

SECTION 4: 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 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. Besides, the firms themselves can keep on regularly monitoring the following elements of different countries to keep an eye on business activities and environmental changes. 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 few countries have changed their international policies with change in government. In India when Narasimha Rao’s 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

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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 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 government or parliament makes it unlikely that we’ll see an expansion of fiscal policies”. China’s ongoing boom illustrates how fixed asset investment can be a powerful growth driver. Until Thailand’s 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. Adapted and Extracted from The Newsweek October 16, 2006, George Wehrfritz, Growth Or Happiness? , 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

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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 identified as the highest form of patriotism and 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. 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’. 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

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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. 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 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 has not been too exciting. Dr Reddy’s Labs set up a manufacturing facility in China more than five 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 well nigh 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 American firms. The auto sector finds itself in a similar bind when it comes to putting China on its radar. For one thing, 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 trade in automotives sector moving towards India and China the bilateral figures for the two are very low”. Kant feels that auto manufacturers and component makers of both the countries should work together in areas of product development, branding and marketing. Adapted from Business India, December 2006

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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. 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. • Many countries are in the process of privatising the nationalised industries, after having realised that private sector manages the assets better than the public sector. • The Egyptian share in the Suez Canal Company was bought out by the British Government in 1875. • A key issue in nationalisation is whether the private owner, more so if it happens to be an international 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.

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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 contracts. (Adapted from Wikipedia, the free encyclopaedia) “When Mr. Evo Morales became President in January, he pledged to lift his country out of poverty. Bolivia, one of the poorest countries in South America, has suffered from colonial (Spanish) exploitation and then from rapacious multinationals. Mr. Morales, a former coca grower and a member of the country’s 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 it be once in power—take back these assets and let the poor benefit! Unfortunately, the reality is more 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. Market Realities Soften Bolivian Nationalisation. C. Gopinath, 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 twowheeler 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

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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 classified by the host countries as luxuries but they may take a more lenient approach to products that are considered necessities. Exchange controls are extended to products by applying a system of multiple exchange rates to regulate trade in specific commodities that are classified as either necessities or luxuries. Necessary products are placed in the most favourable (low) exchange categories, whereas luxuries are heavily penalised, with high foreign exchange rates. Myanmar has, for example, three exchange rates for kyat (kt.): the official rate (kt6=US$1), the market rate (kt100-125=US$1) and an import duty rate (kt 100: US$1). Since the kit is not convertible, that is not officially exchangeable for the currencies that can be spent outside the country, investors are severely affected by tax liability and their ability to send profits outside the country is diminished. Under such exchange rates, tax liability can be very high. For instance, a profit of kt 1,35,000 is worth US $ 22,500 at the official exchange rate of kt 6 to US $1, but at the market rate 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. Source: 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. 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,

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Washington agreed that the United States and North Korea would respect each others’ sovereignty, exist peacefully together and take steps to normalise their relations.” Four days later, the U.S. treasury department imposed sweeping financial sanctions against North Korea, designed to cut off the country’s access to the international banking system, branding it a “ criminal state” guilty of counterfeiting , money laundering and trafficking in weapons of mass destruction. Adapted From: North Korea’s Nuclear Gamble, Selig S. Harrison, The Newsweek, October16, 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. 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 didn’t 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,

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INDIA’S BT COTTON FRAUD Monsanto rides roughshod over Indian cotton farmers, leaving a wake of false claims and doctored information, despite being fined for bribery in Indonesia. As the battle for control over cotton farming in India intensifies, Monsanto’s tactics to extend approval for its Bollgard BT Cotton call to mind those for which it was recently fined US$1.5m for bribery and 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 Director of Agriculture of Warangal District, Andhra Pradesh (AP). The data in the original report, commissioned under a memorandum of understanding between the AP government and Monsanto-Mahyco, 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 rate of Rs. 20,000 (US$458.5) per acre, but Monsanto has refused to pay up so far. 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 authenticity of any data that the Genetic Engineering Advisory Committee (GEAC) would use to review BT Cotton.” Adapted From Rhea Gala, Isis Press Release 03/05/05 , http://www.i-sis.org.uk/IBTCF.php Sometimes, the small issues of workforce retrenchment can blow out of proportion due to the cudgels taken up by militant labour, social and political activists, causing embarrassment to international firms. 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. http://www.blonnet.com/2006/04/12/stories/2006041203780100.htm Australia, Europe and many other countries, by attacking the computers of government agencies and multinational corporations. 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. Exercise India primarily exports, labor-intensive manufactured goods, such as gems and jewelry, handicrafts, textile product, etc. and imports items such as petroleum, raw materials, and metals. Analyse the impact of the following events.

Political Factors and Environment

(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.

REFERENCES 1. “The Times”, August 5, 2006. 2. “The United States-Cuba Relationship A Time for Change”, Colonel Ralph J. Capio, USA Fand Christopher J. Capio. 3. Changing Concepts of Sovereignty: Can The United Nations Keep Pace, Muscatine IA; the Stanley Foundation, 1992 Page 7. 4. Harry C Triandis, “The Self and Social Behavior in Differing Cultural Contexts” Psychological Review July 1989, Vol.96, Page 506-520. 5. Joseph A Schumpeter, Capitalism, Socialism And Democracy / New York Harper and Collins 1947. 6. The Newsweek October 16, 2006, George Wehrfritz, Growth or Happiness? pp. 44-45. 7. The News Today Special Story by V. Sundaram. 8. Sons of Soil, Immigrants and Civil Wars, James D Fearson, David D. Laitin, Stanford University. 9. Business India, December 2006. 10. Wikipedia, the free encyclopaedia 11. Market Realities Soften Bolivian Nationalisation. C. Gopinath, Business Line, Nov. 13, 2006. 12. “Myanmar Crumbling Kit”, Asia Week, March 2001, P.8, And “Catastrophe”, www.economist.com, March 20, 2003. 13. North Korea’s Nuclear Gamble, Selig S. Harrison, The Newsweek, October 16, 2006, p. 31. 14. Rhea Gala, Isis Press Release 03/05/05.

WEBSITES VISITED 1. 2. 3. 4. 5. 6. 7. 8.

http://www.washingtonpost.com/wp-dyn/content/articl http://www.airpower.maxwell.af.mil/airchronicles/cc/cuba2.html http://en.wikipedia.org/wiki/Sino-American_relations. http://www.newstodaynet.com/2006sud/06aug/2308ss1.htm http://iicas.ucsd.edu/papers/GTCconf/s.oil11.pdf http://www.blonnet.com/2006/11/13/stories/2006111300020900.htm http://www.asiaweek.com/asiaweek http://www.economist.com/index.html

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9. http//www.newsweekInternational.com 10. http://www.i-sis.org.uk/IBTCF.php 11. http://www.blonnet.com/2006/04/12/stories/

SUGGESTED FURTHER READINGS 1. Amine, Lyn S. “The Need for Moral Champions in Global Marketing.” European Journal of Marketing, 30 (May 1996):81. 2. 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). 3. Howell, Llewellyn D. and Brad Chaddick, “An Assessment of Three Approaches to Political Risk”, Columbia Journal of World Business (fall 1994): 71-91. 4. Ohmae, K. “Putting Global Logic First.” Harvard Business Review (January/February 1995): 119-125. 5. Ohmae, Kenichi. The Borderless World. New York: Harper Perennial, 1991. 6. Robock, Stephan H., and Kenneth Simmonds. International Business and Multinational Enterprises. Homewood, IL: Irwin, 1989. 7. Root, Franklin R. Entry Strategies for International Markets. New York: Lexington Books, 1994. 8. Samuels, Barbara C. Managing Risk in Developing Countries: National Demands and Multinational Response. Princeton, NJ: Prinston University Press, 1990. 9. Vagts, Detlev. Transnational Business Problems. Mineola, NY: The Foundation Press, 1986.

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.

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4.

5.

6.

7.

8.

9.

(c) Norway and Spain (d) Sweden. (e) All of these. 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. 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. 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. 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. 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. 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.

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(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 (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.

Chapter

Legal Aspects and International Marketing

Learning Objectives The reader should be able to • • • •

understand how legal systems of the world affect international marketing differentiate between home country, host country and international laws differentiate between common law, code law and theocratic law explain international dispute settlement procedures.

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SECTION 1: INTERNATIONAL LEGAL ENVIRONMENT: AN INTRODUCTION

T

he 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 adhere to. The legal environments of countries differ in significant ways, in relation to the type of government a country has adopted. In the chapter on International Political Environment, which deals with the kinds of governments a country can opt for, an oblique reference was made to the legalities of rights and duties a country’s government allows to its citizens, depending on the constitutional authority adopted by the country. 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 will focus on the basics of different legal systems of the world that affect the international flow of business and marketing. It will also discuss 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 international legal environment will also steer 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 will also discuss 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.

SECTON 2: LEGAL FRAMEWORKS Internationally, business gets affected by three main legal frameworks when it spreads into multi-country operations: (a) 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’re 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.

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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). (b) 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. (c) 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 some times more important, than those of the host country, even though they may be registered for their other country operations externally. Thus 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, Anti-Corruption Laws and the U.S. Corporate Governance Rules and Regulations, as applicable to firms abroad. 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.

SECTION 3: DIFFERENT LEGAL SYSTEMS The world over, countries ascribe to three main legal systems, i.e. 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 1. Phillip R. Cateora and John L.Graham, International Marketing, New Delhi, Tata McGraw Hill 2001, p 167.

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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 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 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 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 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, e.g. the firm itself or the other partner, feels aggrieved due to violation in letter or spirit of the contract agreement.

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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. 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 may specify 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? (2) where the contract has been executed? In the international commercial scenario, dispute settlement system 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.

SECTION 4: INTERNATIONAL DISPUTE SETTLEMENT PROCESSES Litigation in common or civil courts can cause bad blood between the parties in dispute because both, the 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. 1. 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.

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2. 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 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

SECTION 5: 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 how 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 as well as 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 tea companies named by the Assam police who had allegedly financed extremists are

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Goodricke and Williamson Magor (formerly MacNeill & Magor). The controversy has caused a furor in the Rs 22 billion tea industry in Assam. A top police source confirmed that the Williamson Magor group had provided the maximum funding to the outlawed groups. He, however, added that although some of the money was given under compulsion, a sizeable amount was given voluntarily to buy peace. 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 as well as regular quarterly payments — were finalised by the company’s top management. The police may summon the head of the Williamson Magor group to unearth the “clandestine” deals. “We can understand the compulsion of ransom paid to secure the release of abducted executives, 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: Extracted and adapted from the rediff on the net by Syed Firdaus Ashraf. 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 have-nots, 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

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THAIS MAY REDRAW LAW ON FOREIGN OWNERSHIP Thailand is considering a dramatic revision of what constitutes a foreign company. The change to the long-standing definition could force many multinationals to reduce their Thai holdings, unless they are exempted from the new rules or Thailand significantly liberalises its service sector. Pramon 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 deemed foreign. Bangkok’s current practice is to consider only nominal share-holding structures. That approach, facilitated by Thailand’s deliberately ambiguous foreign investment laws, has allowed many 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 have checked and most countries in the World Trade Organisation have this definition, which takes into 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 foreign companies’ local subsidiaries would be in breach of Thai law under the proposed legislation. The report identifies two options for the administration. It could exempt existing players from the 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 subsidiaries over a period of time. While most committee members favoured the first option, Pramon 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 for them”. But he added, “I would hope that if they decide to be very strict, they would be able to explain”. Western diplomats have warned that Thailand could be accused in the World Trade Organisation of expropriation of property if the new laws forced foreign companies to sell their Thai holdings. The widespread circumvention of foreign equity limits in the Thai service industry and Bangkok’s 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 to Singapore’s Temasek Holdings earlier this year. Source: News adapted from Business Standard, Ahmedabad, 29 December, 2006, Amy Kazmin, Bangkok 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 public servants in international deals and also for business within the country. Any

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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 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. The 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. 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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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. 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 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 3. James Schofield, “Beating Piracy Proves To Be No Soft Touch”, Financial Times, 1 April, 1999, P.7.

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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 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 U.S. drug maker Pfizer has won a landmark legal battle in China, with a local court upholding the validity of the patent for Viagra and ordering two Chinese companies to pay compensation for infringing on the registered trade mark. The Beijing No. 1 Intermediate People’s Court ordered Beijing Health New Concept Pharmaceuticals and Jiangsu-based Lianhuan Pharmaceutical to stop sales and production of blue rhomboid pills similar to Viagra and pay Yuan 600,000 ($76,726) to Pfizer. Pfizer sued the two companies in September 2005, claiming “Weige” the Chinese name of Viagra, 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 anti-competitive, 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

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legislate the anti-trust laws. In India, the Monopoly and Restrictive Trade Practices Act (MRTP) 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.

REFERENCES 1. Phillip R. Cateora and John L.Graham, International Marketing, New Delhi, Tata McGraw Hill 2001, p 167. 2. News from www.rediff.com, by Syed Firdaus Ashraf. 3. Business Standard, Ahmedabad, 29 December, 2006, Amy Kazmin, Bangkok. 4. 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. 5. James Schofield, “Beating Piracy Proves To Be No Soft Touch”, Financial Times, 1 April, 1999, P. 7. 6. The Economic Times, Ahmedabad, 29 December, 2006. 7. Charles Hill, International Business, McGraw-Hill. 8. Justin Paul, International Business, 3rd Edition.

WEBSITES VISITED 1. http://www.rediff.com/news 2. www.uspto.gov 3. www.european-patent- office-org

SUGGESTED FURTHER READINGS 1. Chukwumerige, Okezie, Choice of Law in International Commercial Arbitration, Westport, Ct. Quorum Books 1994. 2. Clarke Irvine III, “The Harmonization of Product Country Marketing Statutes: Strategic Implications for International Marketers”, Journal of International Marketing, .7, No. 2. 1999, Pp. 81-103. 3. Graham John L. “The Foreign Corrupt Practices Act: A New Perspective, “Journal of International Business Studies”, Winter 1984, Pp. 107-121. 4. Jacoby Neil, H., Peter Nehmenkis and Richard Eels, “Bribery and Extortion in World Business”, Macmillan, New York, 1977.

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5. Kaikati, Jack and Wayne A. Label, “The Foreign Anti Bribery Law: Friend Or Foe?” Columbia Journal of World Business (Spring 1980) Pp. 46-51. 6. Neimanis. G.J. “Business Ethics in Former Soviet Union: A Report”, Journal of Business Ethics, 16, February 1997, Pp. 357-362. 7. Slomanson William R., Fundamental Perspectives on International Law, St. Paul, MN. West Publishing 1990. 8. Vernon Raymond “The World Trade Organization: A New Stage in International Trade and Development”, Harvard International Law Journal, 36 Spring 1995, Pp. 329-340.

OBJECTIVE TYPE QUESTIONS 1. Internationally any business gets affected by three main legal frameworks. These legal frameworks are (a) International Laws. (b) Host Country Laws. (c) Home country laws. (d) None of these. (e) All of these. 2. The worlds 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. (c) Common laws. (d) International Laws. (e) Civil Laws. 6. 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. 7. 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.

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(c) Theocratic Laws. (d) Patent laws. (e) Administrative laws. 8. Ownership over intellectual properties is established by (a) Patents. (b) Copyrights. (c) Trademarks. (d) None of these. (e) All of these. 9. 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. 10. State true or false (a) Theocratic Law is a system based on the religious teachings as enshrined in the religious scriptures. (True/False) (b) The process of conciliation involves a third party who tries to settle the dispute between two aggrieved firms by resolving differences. (True/False) (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. (True/False) (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. (True/False) (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. (True/False)

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? 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?

Chapter

Market Entry Modes, Framework, Structure and Strategies

Learning Objectives The reader should be able to understand and explain • the modes of global entry • the problems and prospects of international franchising and licensing.

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SECTION 1: INTRODUCTION

T

his 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 to gain specific assets, overcome legal constraints, diversify geographically and to minimise exposure in risky environments.

RATIONALE FOR INTERNATIONAL COLLABORATIVE ARRANGEMENTS 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 counties that have poor enforcement and strong piracy cultures, as in India and China. 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.

SECTION 2: 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 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 Control Parents company has to see the extents of controls while deciding or collaborative arrangement like franchising.

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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. 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: • Good locations can be secured through franchising. • Government or legal restrictions can overcome through franchising because, otherwise, it is difficult to get operating permission (countries with the restrictions on Foreign Direct Investment) • Reduces the potential risks of directly operating overseas. The disadvantage is that the acceptance of the franchising concept depends very much on the existence of awareness, education, quality and brand building exercises. Success for a domestic franchiser comes from 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 its acceptance in a foreign country.

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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 works 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.

SECTION 3: GLOBAL MARKET ENTRY MODES: PROBLEMS AND CHALLENGES Many companies’ global market operations breakdown primarily because partners • • • •

view the arrangements different have different objectives for the franchisee/licensee etc. disagree on control issues or fail to provide sufficient direction perceive they contribute more than their counterparts do.

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: • One partner wants to reinvest earnings for growth, the other wants to receive dividends • One partner may want to expand the product line and sales territory, the other may see this as competition for its wholly-owned operations • One partner may wish to buy or sell from the venture, the other may disagree with the prices • There may be different views among the partners in terms of performance standards Control Problems A number of factors may influence the control methods. These include:1 • Communication systems - have heavy influence on control mechanisms - electronic control measures may not always be available 1. Daniels, Sullivan and Radebeugh, International Business, Pearson Education.

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• Distance - the greater the distance, the bigger the physical and psychological differences • The product - the more technological the product, the easier it is to implement uniform standards • Environmental differences - the greater the environmental differences, the greater the delegation of responsibility and the more limited the control process • Environmental stability - the greater the instability in a country, the less relevance a standardised measure of performance has • Subsidiary performance - the more a subsidiary does or reports a non-variance, the less any likelihood of interference from the headquarters • Size of international operators - the bigger and greater the specialisation of the headquarters staff, the 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. 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. • US companies tend to evaluate performance on the basis of profit, market share and specific financial benefits. • Japanese companies tend to evaluate primarily on the strategic importance of the operation. • European companies rely more on a balance between profitability and achieving social objectives. 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 the searches to outsiders. One may use a participatory management style, other may be authoritarian. One 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: • • • •

How companies change their operating forms. How they find and negotiate with potential partners. What contractual provisions are most important. How they need to assess performance.

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. Organisational tension may develop internally as a company’s international operations change and grow. Various profit centres may perceive that they have rights to the sales in a country that the company is about 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.

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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: • • • •

Through monitoring journals and participating in technical conferences. Through social activities. By building a rapport with other managers and consequent introductions. By increasing own visibility through advertisements and trade fairs, etc.

Negotiating Process Some technology transfer considerations are unique to collaborative arrangements. However, there are two issues: • The seller does not want to give information without assurance of payment. • The buyer does not want to pay without evaluating information 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 • • • • •

How to terminate the agreement if parties do not adhere to the directives. Methods for quality testing. Geographical limitations on an asset’s usage. Management control guidelines. Future commitments of partners.

SECTION 4: CONTROL STRATEGIES Companies often have some concerns when they do try to market their product abroad, like: • Where the decision-making power resides. • What would be the reporting structure to headquarters. 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 US branches to operate independently, with hardly any control from the headquarters in Ireland. One of its foreign exchange traders at US dealing room lost $730 million before AIB became aware of it. There are several factors that make control difficult and in the international strategies alliance, licensing and franchising Some of the factors 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.

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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.

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. Although these 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. (i) 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. 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 next 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. 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: • The location of value-added functions – the choice of where to locate each of the functions that comprise the entire value-added chain, from research to production to after-sales servicing. • The location of sales targets – the allocation of sales among countries and the level of activity in each one, particularly in terms of the market share. • The product/services strategy – the extent to which a worldwide business offers the same or different products in different countries. • Marketing – the extent to which a company uses the brand names, advertising and other marketing elements in different countries.3 2. Charles W-Hill, International Business, McGraw-Hill, Fifth Edition. 3. Cateora and Garham, International Marketing, McGraw-Hill, 12th Edition.

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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, and they are less subject to re-evaluation. Operating plans formulate short-term objectives and the means to 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 place 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. (ii) The 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: • Balancing pressures for global integration versus for local responsiveness. • Balancing the capabilities of its headquarters. • Balancing the expediency versus the quality of decisions. Companies going global through franchising and licensing etc., need to be locally responsive. Few issues have been discussed here.

CONTROL MECHANISM Various factors influence how much control a company needs at different stages of internationalisation. The following are the mechanisms by which a company can hold control in foreign markets. 1. Corporate Culture All the companies have certain common values that its employees share. These constitute its 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 knowledge, which MNEs need to transfer from operations in one country to operations in another, to gain 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. 2. Written Reports Reports are another control mechanism. Headquarters need 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. 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. 4. Daniels, Sullivan and Radebough, International Business, 12th Edition.

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MNEs use reports to identify deviations from plans that could indicate problem areas. The focus of the reports may be to monitor short-term performance or long-term indicators that match the organisation’s strategy 3. 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. 4. 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: • Information generated for centralised coordination like cash balances. Information on external conditions, such as analyses of local, political and economic conditions, so that the headquarters can plan where to expand and constrict operations. • Information for external reporting needs, such as to stakeholders and tax authorities. 5. Special Situations Special situation 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 accepting either majority or minority stake. Ownership sharing limits the flexibility or corporate decision-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 non-voting 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 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. 5. Jeannet Hennessey (2001), Global Marketing Strategies, Houghton Mifflin Company.

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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: • The ability of the parent company to sell its ownership • The number of stockholders required to establish the subsidiary • The percentage of foreigners who can serve on the board of directors

OBJECTIVE TYPE QUESTIONS 1. …….is a specialized form of licensing. (a) JV (c) Franchising

(b) Subsidiary (d) None of the above

2. In…………, ownership sharing limits the flexibility or corporate decision-making. (a) Wholly-owned subsidiary (b) Joint Venture (c) Franchising (d) Exporting 3. A foreign ………. is not legally separate from a parent company. (a) Branch (b) Subsidiary (c) Joint Venture (d) None of these.

REVIEW QUESTIONS 1. Distinguish between international franchising and licensing. 2. Discuss the benefits of international collaborative strategies in comparison to foreign direct investment. 3. What are the problems and challenges of collaborative arrangements?

Prof Justin Paul acknowledges the data and information provided by Vineet Verma, Ashutosh.P., Kaustaub Sant, Atul Kochhar and Krishna Kumar.

Market Entry Modes, Framework, Structure and Strategies

Case Study 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. 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 Study TATA Group of India: Overseas Subsidiaries and Operations The Tata Group has a cluster of companies operating as the international arms of its many businesses. Brief descriptions of their activities, are given below. Tata International: Established in 1962, Tata International offers value-added services in 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 fivestar 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: Established in London in 1907 as the Tata Group’s representative in Europe, the company today operates as an agent for the global procurement of goods and services for the entire Tata Group. It offers comprehensive and highly specialised services that cover almost every type of industry and activity.

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Tata Incorporated: This company was established in 1945 as the representative office of the Tata Group in the United States, Canada and Latin America. Headquartered in New York, it 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: Established in 1972, Tata Precision Industries was promoted by Tata Motors, Tata International AG and the Development Bank of Singapore. The company specialises in high-precision machining, engineering plastic moulded parts and tool design. Tata International AG: Tata International AG is the international investment and holding company of the Tata Group. With the combined strength of its subsidiary, Tata AG and its associate, Tata Enterprises (Overseas) AG, headquartered in Zug, Switzerland, promotes and 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. The following is a list of the sectors in which the Tata companies have a presence in Africa: Engineering Tata vehicles were introduced in the African market in 1977, when Tata Zambia began importing 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 Tata Novus range of tippers and trailers. Tata Zambia sells a range of Tata pick-ups, trucks and buses, and has supplied a sizeable order of Tata vehicles to the Zambian government over the years. Tata De Moçambique and Tata Ghana are involved in the sale of Tata vehicles and their aftersales service. Tata Africa has a large railway wagon and steel fabrication facility in Mozambique. Engineering 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 systems. Other activities include infrastructure projects where metal fabrication is required, such 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.

Market Entry Modes, Framework, Structure and Strategies

Hospitality Tata Africa made a splash in the African hospitality sector when Tata Zambia, the Taj Pamodzi is managed by the Taj and offers guests the best of leisure and business amenities. Marketing and Sales The Engineering Division of Tata Africa sources steel and engineering products from India (from Tata and non-Tata companies), the US, the UK and Germany. These products, which include steel ropes, conveyor belts, rails, rollers and pipes among others, are sold not just in South Africa but are exported to Zambia, Tanzania and Ghana as well. Tata Ghana is involved in the marketing of steel products and mining consumables. Question: Discuss the rationale for establishing subsidiaries and overseas office, by the Tata Group in many foreign countries as part of their international marketing strategy.

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Chapter

Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries

Learning Objectives The reader should be able • to learn about the modes of global market entry as strategies • to analyse modes and strategies with special reference to: i. Joint ventures (JV) ii. Global mergers and acquisitions (M & A) iii. Strategic alliances iv. Subsidiaries.

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SECTION 1: MODES OF GLOBAL MARKET ENTRY AND STRATEGIES The following are the various ways through which firms can enter the global market: 1) Exporting 2) Licensing and Franchising 3) Strategic Alliances/Joint Ventures (JV) 4) Mergers and Acquisitions 5) Subsidiaries The following are their characteristics in brief: 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 Acquisition

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 prospectus and consequences of the various global market entry modes, as above, have been illustrated by way of examples from: A) B) C) D) E)

Joint Ventures in China Strategies of the Birla Group Strategies of the Tata Group Strategies of the Mittal Steel Strategies of Cisco Systems

SECTION 2: JOINT VENTURES1 There are good business and accounting reasons to create a joint venture (JV) 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.

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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STEPS FOR ESTABLISHING A JOINT VENTURE Step 1 Step 2 Step 2 Step 3 Step 4 Step 5 Step 6

Screening of prospective partners Short listing a bet of prospective partners Joint development of a detailed business plan and short listing 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.

Benefits and Limitations of International Joint Ventures 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 reason for the failure of international joint ventures are: • Cultural differences • Poor integration process

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.

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a) 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). b) 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. c) 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.

SECTION 3: 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. Author 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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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 Typically, toll road projects in China involve construction and operation of roads that have been classified 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 and when profits are ultimately divided. Toll roads are ‘build-operatetransfer’ projects (the assets—the 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 domestic demand and heavy government investment in the sector from the 1980s to the mid-1990s. With the deregulation of China’s mining laws, the nation’s entry into the WTO in December 2001, and the official opening of the Shanghai Gold Exchange in October 2002, many observers believe the risk for foreign investment in this sector has fallen. The vast majority of foreign investments in this sector have been through CJVs. Foreign companies set up CJVs in mining for many reasons. CJVs help to counter government restrictions and allow foreign investors to seek attractive financial returns and management control in exchange for taking risk and contributing capital. A CJV’s flexibility can also help investors survive the high risk of failure in an individual mine because the partners can sign new contracts for new mines. Companies also form CJVs in mining because no one can predict what will be extracted and because it is difficult to determine the value of an exploration and mining permit or mineral right, which are intangible assets that are usually owned by the state. For potentially ore-rich areas, this might not grant enough shares for Chinese parties that do not wish to put up capital. Even though valuation methodologies for prospective mines exist, valuation could make the investment cost too high for foreigners who contribute most of the capital, want a significant return for their risk and seek majority control of the project. The joint venture’s Chinese partner is responsible for preventing the loss of state assets. If the exploration venture fails, rendering the exploration permit worthless, the foreign investor is likely to return the exploration permit to the original Chinese owner so that there is no ‘loss of state assets’ on paper. This is another reason why Chinese partners prefer the CJV structure. In one example of a gold mining CJV, Victor Mining Ltd., a wholly-owned subsidiary of SKN Resources Ltd. (SKN) of Canada, formed a CJV with a subsidiary company of the Henan Provincial Governmental Geological Bureau (HPGGB) in 2004, to acquire a 70 percent effective equity interest in a high-grade silver and gold project in Henan. After initial

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exploration and contract revision, the contract was modified to give SKN the right to acquire 77.5 percent of the silver and gold project. SKN will earn its stake by funding the exploration and development and making cash payments over four years, with a first year minimum contribution of $750,000. HPGGB has a 22.5 percent interest on the basis of its contribution of the mineral rights (exploration permits) covering the project. After SKN has earned its 77.5 percent interest, contributions to fund the exploration and development of the project will be made pro rata. The share capital of HPGGB, the Chinese property owner, may be diluted to no less than 10 percent if it elects not to make cash contributions. An SKN representative explained that CJV structures are attractive for mining projects because the Chinese parties typically do not contribute working capital. To attract foreign investors, the Chinese side contributes the right to use, but not own, the property (Land in China is owned by the state). After 25 to 30 years the foreigners walk away. An EJV structure is unsuitable in this sector because foreign investors usually require a share of profit period that is higher than their share of investment to compensate for their risk during that time. EXAMPLE 3: A ‘SMART CARD’ WIRELESS SECURITY TECHNOLOGY CJV IN CHINA E-Smart Technologies, Inc., a US company with wireless security technology for smart cards, signed a CJV agreement with two Chinese companies in early 2004. Under the agreement, the CJV would operate nationwide value-added networks made up of e-Smart’s operating platform and its multi-application, secure ID and payment smart cards, market the system and technologies to the government and financial sectors and maximise the use of the technology in as many fields as possible. One of the Chinese CJV partners is an entity of the Ministry of Information Industry (MII). The other is made up of Chinese media and public relations personnel. E-Smart owns half of this joint venture (the maximum allowed by law for a value-added service venture). The two Chinese companies own 30 percent and 20 percent, respectively. E-Smart will contribute roughly $3 million in capital to the CJV over time, after all required permits and licenses are issued. This $3 million represents 100 percent of the CJV’s registered capital, though the venture may be expanded. E-Smart owns the exclusive 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, address network infrastructure issues and help to obtain financing. According to e-Smart executives, “The CJV gave us the flexibility required to deal with the constantly changing circumstances, regulations, and laws one must contend with when doing business in China,” they said. The CJV contract’s flexibility allowed the company to negotiate with its prospective partners without having to argue about valuation methods. The CJV form also allowed e-Smart to obtain the management rights it desired, and the company’s tax advisors felt more comfortable with the CJV for overall international tax planning.

Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries

The CJV required a detailed agreement and, coupled with all the ancillary agreements and a clear licensing agreement, e-Smart believed that this detail helped to protect its technology. According to a company spokesperson, “All of the agreements mentioned made it very clear that the technology was not being transferred and that the ownership remained in our hands alone....While the CJV is often more time-consuming and complex to negotiate in the beginning, it is this complexity that is its main benefit. You are forced to 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 the context of co-operative and equity Joint Venture?

CASE STUDY 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. 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.

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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 Corporation) 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 sectorspecific 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 ISO 9001:2000 certification. The proof of its relentless commitment to high quality in

Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries

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 know-how 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. Question: Discuss the rationale for establishing many joint venture by Birla group.

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SECTION 3: 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 (a) Cisco Systems Acquisition of Arroyo Video Solutions On September 13, 2006, Cisco Systems® announced that they have completed the acquisition of privately-held 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. (b) 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. (c) 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. 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.

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SECTION 4: 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: • Define their business vision and mission in order to understand how an alliance fits their objectives • Evaluate and select potential partners on the basis of the level of synergy and the ability of the firms to work together • Develop a working relationship and mutual recognition of opportunities with the prospective partner • Negotiate and implement a formal agreement that includes systems to monitor performance. Strategic alliances are formed to: • Reduce costs through economies of scale • Get access to new technology • Inhibit competitors • Enter new markets • Improve research and development efforts • Improve quality 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 isn’t 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 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

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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 Intel and BEA provide a jointly optimised infrastructure enterprise solution—the BEA WebLogic application server—designed to achieve scalable performance on flexible Intel® Itanium® 2 processor-based servers and Intel® Xeon® processor-based servers. SAP Solutions For more than a decade Intel and SAP have worked together to optimise the performance of SAP Solutions on Intel®-based architecture, from the backend to the mobile client. Today Intel and SAP continue to develop new usage models that extend the value of core business applications. Oracle Solutions By combining Oracle and Intel® technologies, they have created a powerful, standards-based service-oriented enterprise that speeds implementation and helps drive business transformation. Oracle and Intel work closely together to ensure exceptional performance and compatibility between their products and optimise their solutions to meet customer requirements. These joint efforts improve the performance and cost-effectiveness of Oracle solutions running on Intel-based 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

* EMEA stands for Europe, Middle East and Africa.

Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries

MILAN, September 13, 2006—Italtel, one of the leading companies providing solutions, products and services for Next Generation Networks (NGN) and Next Generation Services (NGS) and Cisco Systems announced today the signing of a new agreement to extend their strategic technology and commercial alliance, with an expanded market coverage beyond Europe, Middle East and Africa to include the Latin America region. 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 unified communication services for the business segment. Recent successful deployments include BT-Albacom, Belgacom, EITC (du) in the United Arab Emirates, Telecom Italia and Telekomunikacja Polska, among others. As part of the extended agreement, Italtel has identified a set of solutions to help service providers deliver fixed-mobile converged services and embeded intelligence in the network to accelerate service creation and reduce operational costs. The extension of the agreement to support the Latin American market resulted from successful joint activities, including implementation of VoIP infrastructure in Brazil and Argentina for fixed and wireless service providers with the goal of optimising and expanding existing networks. The Yankee Group expects the aggregate market for Next Generation Network infrastructure and services to grow worldwide from £3.5 billion to £6.7 billion, resulting in a 24 percent compound annual growth rate (CAGR) between 2005 and 2008. More specifically, the prospects for growth within EMEA for NGN and NGS are very strong. Capital expenditures will show a 22 percent CAGR, growing from £833 million to £1.5 billion, according to the Yankee Group. The Yankee Group research also shows that incumbent operators in Argentina, Brazil, Mexico and Chile all indicate progress towards Next Generation IP/MPLS Network deployment, helping fuel demand of new systems. (Source: Yankee Group February 2006). “Through their work with major carriers across Europe, Cisco and Italtel have the combined experience and expertise to help service providers to select the right technology strategies to succeed in a dynamic and disruptive market,” said Geraint Anderson, vice president of Service Providers in European markets at Cisco Systems. “The extended relationship between their two companies will help operators gain a competitive edge by accelerating next-generation network transformation and speeding the delivery of innovative services.” Massimo Migliuolo, vice president of Service Providers in emerging markets at Cisco Systems added: “The Middle East and Latin America are regions where there is strong growth and countless opportunities for operators who are moving into next-generation, triple and quadruple-play services. Our joint, recent project in the United Arab Emirates demonstrates our ability to bring proven solutions to new 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.”

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The two companies will continue to cooperate on the development and marketing of joint solutions based on the Italtel Softswitch and Cisco IP Technologies. Italtel and Cisco joint solutions include Multimedia carrier-class IP communications, hosted and managed Unified Communication Services, Service and Network Control Solution, IMS (IP Multimedia Subsystem) Solution, and Next Generation Operational Support System (NG-OSS). Telecom Italia successfully implemented the Cisco and Italtel solution to deploy hosted and managed Unified Communications services. Several large enterprises, particularly in the finance sector, have decided to deploy these services. Strong demand is expected for hosted and managed Unified Communication Services in the enterprise market as well as in the public sector over the next three years. Telecom Italia is also considering the Cisco and Italtel joint solutions for the delivery and management of innovative services and fixed and mobile convergence. Source: Financial Times, Milan Frankfurt Editions, Sep 13, 2006

SECTION 5: SUBSIDIARIES Reason 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 ANKARA, Turkey, and SAN JOSE, Calif., September 26, 2006 - Cisco Systems® today announced a significant investment initiative in Turkey totalling up to US $275 million over five years. This announcement was made by John Chambers, President and CEO of Cisco Systems, during his visit to Central and Eastern Europe and highlights the growing importance of Turkey in the global emerging markets. Chambers discussed Cisco’s investment plans in Turkey with Prime Minister Recep Tayyip Erdogan while in Ankara today. Chambers’ meeting with the Prime Minister focused primarily on enabling Turkey to better compete globally through the adoption of information communications technology (ICT) and improved education. “Technology is able to drive the productivity and standard of living for communities and countries on 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 Chambers. “Cisco’s announcement about its investment in Turkey supports the country’s entrepreneurial focus and e-transformation initiatives, which are focused on establishing a more connected country 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.” Cisco Systems’ five-year investment plan for Turkey allocate investments in the following areas:

Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries

• Create technology investment initiatives aligned with Turkey’s Networked Economic Agenda to help accelerate the country’s transformation and economic growth. • Support the Turkish Prime Minister’s Connected Turkey e-transformation agenda by providing 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. • Develop a Cisco Systems Technology Innovation Centre to foster closer collaboration with local companies and partners. As part of this, Cisco will provide a lab platform for testing complex new technologies for the Turkish marketplace with local partners and entrepreneurs and increase the number of engineers in the country. • Establish the Cisco Entrepreneurship Institute, an initiative between Cisco, the Union of Chambers and Commodity Exchanges of Turkey (TOBB) and the Turkish government, to teach skills for opening and running small businesses. The education partner in the program is the University of Economics and Technology. As part of this initiative, Turkish entrepreneurs and small businesses will be eligible for equity and project financing, supporting information and communications technology development in Turkey. • Support the establishment of 200 new networking academies in the country over the next five years to provide enhanced technical programmes in concert with leading local universities. There are currently 47 networking academies across Turkey. • Offer localised products as well as customer service and support for the technical needs and requirements of local service provider customers. • Increase overall headcount of Cisco employees in Turkey from 80 to 400 employees and expand office space to accommodate employee growth. Question: Why did Cisco (a US Company) decide to set up subsidiary in Turkey? Source: Compiled from Newspaper USA Today and Financial Times.

REFERENCES 1. Joshi, Rakesh Mohan (2005); International Marketing, Oxford University Press. 2. Justin Paul (2006); International Business, Prentice Hall 3. Justin Paul (2006); Business Environment, McGraw-Hill Education

WEBSITES VISITED 1. www.mhhe.com/justinpaul 2. www.phindia.com/justinpaul

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OBJECTIVE TYPE QUESTIONS 1. The main two 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 Sep, 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.

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?

Case Study 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:

Market Entry Modes—JV, M & A, Strategic Alliance and Subsidiaries

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) b) c) d) e)

A country can save money by relying on domestic airlines in times of unusual air transport needs. A government wants its own company to carry mail abroad. Public opinion favours spending at home. Airlines are the source of national pride. Countries have 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.

Questions on Case Study 1. Why does airlines enter into strategic alliance each other in the international segment? 2. Do you think that the alliance is a marketing strategy?

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Chapter

International Product Policy, Planning and Strategy

Learning Objectives The reader should be able to • explain different products with special reference to customer needs and differentiate between industrial and consumer goods • identify different dimensions that make a product an international product, with special company illustrations • explain the process of new product development in international markets and address the international diffusion process • explain the international product life cycle and identify international marketing strategies adopted by companies at each stage.

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SECTION 1: INTRODUCTION

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he 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. What attribute of a product 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 keep the manufacturers on their toes and lead them to innovate on their existing product and marketing mix to cater to the ever changing taste and demand scenario in the international market place. This chapter will discuss the product policy and planning strategies of the international marketing firms. An attempt will be 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 as well as foreign markets. 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 1. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Limited, pp 34-35.

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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 midsized 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 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.

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 custom-made 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.

SECTION 2: 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. 2. Fundamentals of Sales Management, Ramneek Kapoor, Macmillan India Limited Page 34-35.

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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. 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.

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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.

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?

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SECTION 4: 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 non-resident 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 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 This 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 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.

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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 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 the 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 3. Stoner and Wankel, Management, Prentice Hall, Englewood Cliffs, N.J., 1986, p.653.

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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 early 1970s, Boeing and Airbus Industrie adapted the larger aircrafts 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 in 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. 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 4. Keegan, Global Marketing Management 7th ed. Pearson Education- Prentice Hall, 2007. Pp.372-375.

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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 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 advertisements 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.

Product/Communication Adaptation Strategy As the McDonald’s company entered new markets, it showed flexibility with respect to the local preferences. In Germany, McDonald’s serves beer with meals. In Israel, the first kosher McDonald’s 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”. Haroeer Collins Publishers, 2002.http://www.animal frontline.nl/macdonalds-eng.php)

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This strategy involves modifying both the product as well as 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 the product as well as communication strategy in different countries. Today, however, international markets are offering huge potentials to marketers, making such an exercise worthwhile for international marketing firms.

SECTION 5: 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 enhance the value of purchase to the customer on a reduced, affordable price to fulfil the same needs and attain higher levels

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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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. 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. Thus, marketing firm can bring up the value (against price paid) to the customers and bringing 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.

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

The firms with marketing focus are always on the look out 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.

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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 has not caught the fancy of customers and is still struggling in many other parts of India too. Similarly, when McDonald’s 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.

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 new and 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

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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. Market 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 market place. 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, etc. 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 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 exaggerated estimates of demand. This was most striking in telecom, but also affected estimates of 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 TV sets, auto companies could not sell enough cars, Pepsi and Coke could not sell enough fizzy drinks. 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 improved, not so much to help foreign companies as to help Indian firms in harnessing their full potential. http://timesofindia.indiatimes.com/articleshow/1602986123.cms (Swaminomics/Swaminathan’s Anklesaria Aiyer)

The 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.

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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

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 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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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 This stage is also called performing a product business analyses. The international marketing firm will undertake analyses of commercial feasibility, projected project investments, 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. 6. Wyner, “Product Testing”, pp46-48. 7. Robert S Doscher, “How to Create New Products,” Target Marketing, 1994, vol 17, no.1, pp 40-41.

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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.) NISSAN PRESS RELEASE 30 May, 2006 Nissan Offers Fuel-Cell Test Drives to Japanese Consumers Nissan Motor is offering consumers the chance to test drive its X-TRAIL fuel cell vehicle (FCV). The test drive program will be offered for up to a year from Nissan’s headquarters in Tokyo. Starting in June, the hydrogen-powered model will be available 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 acquired through public-road testing Layout of the FCV components. The in Japan and overseas, for its ongoing FCV test-drive vehicle in Japan in using 35 development. Nissan also has developed an X-TRAIL MPa storage rather than the 70 MPa. FCV with a 70 MPa (10,000 psi) storage cylinder that supports an increased range of more than 500 km (311 miles). This vehicle is currently being tested on roads in Canada. ttp://www.nissan-global.com/EN/NEWS/2006/_STORY/060530-02-e.html

Large Scale Test Marketing This 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.

8. For more details on these tests please 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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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 nosugar 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 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. (See International Marketing Research, Kumar, Prentice Hall for more information)

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?

9. Harriot Lane Fox, “Global Roll Out For Pepsi Max,” Marketing April 7, 1994, P2.

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Product Positioning in International Marketing The term 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 100cc 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 his products in international markets.

Quality Attributes–Value for Money “Product quality is defined as a set of features and characteristics of a good 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 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. 10. Row Johnson and William O. Winchell, Marketing and Quality Control, American Society for Quality Control, Milwaukee, 1989.

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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 analyses 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 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 glassbottle 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 500ml 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 33cl 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 50Hz 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. 11. Dana- Nicoleta Lascu., International Marketing, Biztantra, pp119-120.

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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 etc. 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 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.

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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 in-transit handling of packaging. The retail store handling of the package, before it is finally sold off, will also be kept in mind. The packaging should be such 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.

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 12. Everest M Rogers, Diffusion of Innovation, 3rd edition, The Free Press, New York, 1983, pp 2-13.

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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 explained by drawing interrelationship between context and product spread in the following manner: Diffusion Rate/Product Spread Amongst Nations High Context/Fast Diffusion

High Context/Slow Diffusion

South-East Asia Japan

India Asia

Low Context/Fast Diffusion

Low Context/Slow Diffusion

Scandinavia USA Canada

UK Eastern Europe

Interconnection between Context and Diffusion

Sources: 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, and Pp. 1-10.

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 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. 14. Hikarazu Takada and Dipak Jain “Cross – National Analysis of Diffusion of Consumer Durable Goods in Pacific Rim Countries,” Journal of Marketing, 1991, Vol.55, No.1, 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, 1996, Vol.24, No.4, Pp.328-327.

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countries like Pepsi, Coke or Nestle while introducing a new taste or a new ingredient into their food and beverage items.

SECTION 6: THE 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. The figure below draws a typical product life cycle: Maturity Growth Competition builds up set up manufacturing base in developing country

Decline

Introduction

Exports to Developing Countries Skim the Cream

Emphasis on economies of scale exports continue

Home country on decline Viability targeted abroad.

Penetration Pricing

International 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 state. 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. A) 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. 16. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd, Pp40-41.

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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. B) Market Penetration Strategy 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 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 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 market place take their toll on these products too, as they lose their market shares and customers’ perceptions to new introductions. Consequently, 17. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd, Pp40-41. 18. Milton Keynes, “Motorola Chooses Poland For New Site”, Corporate Location, European Edition, May/June 1998, P.7.

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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.

REFERENCES 1. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Limited, Pp 34-35. 2. Wikipedia. 3. Stoner and Wankel, Management, Prentice Hall, Englewood Cliffs, N.J., 1986, P.653. 4. Global Marketing Management 7th ed. Pearson Education- Prentice Hall, 2007. Pp.372375. 5. Schlosser, Eric. “Fast Food Nation” Haroeer Collins Publishers. 6. “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. 7. Swaminomics/Swaminathan S. Anklesaria Aiyar, Times of India. 8. David Leonhardt, “It was a hit in Buenos Aires- o why not Boise?” Business Week, December 7, 1998, vol.3594, pp.56-57. 9. Wyner, “Product Testing”, pp46-48 10. Robert S Doscher, How to Create New Products, Target Marketing, 1994 Vol 17, No 1, pp; 40-41. 11. 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. 12. www.nissan.global.com. 13. Harriot Lane Fox, “Global Roll Out for Pepsi Max,” Marketing April 7, 1994, P2. 14. Row Johnson and William O. Winchell, Marketing and Quality Control, American Society For Quality Control, Milwaukee, 1989 15. Dana- Nicoleta Lascu, International Marketing, Biztantra, pp119-120. 16. Everest M Rogers, Diffusion of Innovation, 3rd edition, The Free Press, New York, 1983, pp 2-13. 17. 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. 1-11. 18. 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, 1996, Vol.24, No.4, Pp.328-327. 19. Hikarazu Takada and Dipak Jain “Cross – National Analysis of Diffusion of Consumer Durable Goods in Pacific Rim Countries”, Journal of Marketing, 1991, Vol.55, No.1, Pp 48-54

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20 & 21. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd, Pp40-41 22. Milton Keynes, “Motorola Chooses Poland for New Site”, Corporate Location, European Edition, May/June 1998, P.7.)

WEBSITES VISITED 1. 2. 3. 4. 5. 6.

www.wikipedia.com http://www.animalfrontline.nl/macdonalds-eng.php). www.etfoodprocessing.com/.../images/nnews03.jpg http://timesofindia.indiatimes.com/articleshow http://www.nissan-global.com/ http://www.nestlefamily.com

SUGGESTED FURTHER READINGS 1. Clark, Terry and Daniel Rajaratnam, “Inspirational Services: Perspective at Century’s End”, Journal of Service Marketing, 13, No.5, 1999. 2. Elliott, Gregory R. and Ross C. Cameron, “Consumer Perception of Product , Quality, and Country-of -Origin Effect, Journal of International Marketing 2, no.2, 1994, pp.49-62. 3. 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, 8, No.1, 1994, Pp.7-24. 4. Hill. John S. and William L. James, “Product and Promotion Transfers in Consumer Goods Multinationals,” International Marketing Review, 8, No2, 1991, Pp6-17. 5. Johansson, Johny K. And Hans B. Thorelli “International Product Positioning”, Journal of International Business Studies, 16, No.3, 1985, Pp.57-76. 6. Keegan, Warren J. Sandra Moriarity, and Tom Duncan, Marketing 2nd Ed. Upper Saddle River, N.J: Prentice Hall, 1995. 7. Kotabe Masaaki, “Corporate Product Policy and Innovative Behavior of European and Japanese Multinational: An Empirical Investigation, Journal of Marketing 54, No.2, April 1990, and Pp.19-33. 8. Kuczamrski, Thomas D. “Managing New Products: The Power of Innovation”, Upper Saddle River, NJ, Prentice Hall, 1992. 9. Papadopoulos, Nicolas, and Louis A. Heslop, “Product- Country Images: Impact and Role in International Marketing, New York: International Business Press, 1993. 10. Samiee, Saeed, “Customer Evaluation of Products in a Global Market” Journal of International Business Studies, 25, No.3, 1994, Pp.579-604. 11. Witt, Jerome and C.P. Rao, “The Impact of Global Sourcing on Consumers: Country- of Origin Effects on Perceived Risk, Journal of Global Marketing, 6, No.3, 1992, Pp.105-128.

International Product Policy, Planning and Strategy

OBJECTIVE TYPE QUESTIONS 1. The products have been classified by the traditionalists into these categories based on the buyer behavior 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 these stages (a) Local Product. (b) National Product. (c) International Product. (d) Global Product. (e) All of these. 3. Factors that favor standardization 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. 5. An international firm should pay special attention to these considerations 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 these factors (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 in Global Marketing Management 7TH E. Pearson Education- Prentice Hall, 2007. Pp.372-375 refers to the situation when

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(a) Firm modifies both the product as well as 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 standardization is the process of marketing a product in international markets (a) By affecting little change in the basic nature of the product. (b) By introducing new products. (c) By altering the basic nature of the product. (d) By changing product as well it’s positioning. (e) by 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 an automobile manufacturer of your country to face when developing a new product? Build a launch plan for a new car by this manufacturer. 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 following: (a) (b) (c) (d) (e)

Local products, national products, international products and global products Country of origin trend in international marketing Labelling and packaging in international marketing Product positioning in international marketing International product marketing strategies.

Chapter

Pricing Strategy and Decision for International Marketing

Learning Objectives The reader should be able to • understand the basic pricing concepts • identify the challenges an international marketing firm faces while adopting a pricing strategy • address international pricing decisions and strategies of international marketing firms • understand and address threats from grey markets, dumping, exchange fluctuations and other environmental factors while maintaining international marketing pricing strategies.

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SECTION 1: INTRODUCTION

P

rice 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 ensure: (A) The product competes with like competitive products. (B) To convey a relationship between the customers’ need and the value perception customers attach to the product or service to fulfil that need. (C) To ensure that the manufacturer gets adequately compensated for the inputs (factors of production) employed in the manufacturing process of the product. (D) To 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 firm keeps in mind is the competitive products’ pricing strategies, which will be based on the positioning the firm undertake 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 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 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 market place. 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 manufacturers’ objective in the market segment he wants his product to address. It must reflect the quality and the value the costumers 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 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.

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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.

SECTION 2: 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: • The labour or the raw material cost is higher in the home country, as compared to the international markets, and the cost of exports can come down by the export subsidies and other facilities provided by the government of the country. • The local competitors are quite strong in international markets and the firm wants to fight the competition by keeping its products’ prices low in the home turfs of competitors. • The firm as a strategy wants to adopt the market penetration pricing objective and attain better market share in international markets. • Consumers in international markets have a lower propensity to pay for an international marketing 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 early 1990s, when the cell phone technology had been just introduced in India. Later, the entry 2. “Administered Prices” Hearing Before The US Senate Sub-committee.

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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. • The international marketing firm caters to only a limited segment of customers in the home country. • The customers of other international markets have a higher 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) (ibid). This pricing strategy is also known as the tailor-made 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 3. Jack Sweeney, “PC Vendors Bend Pricing For Overseas Customers,” Computer Reseller News, January 23, 1995, No. 614 P.3.

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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. The figure that follows 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. UNITED STATES

JAPAN

Market Research

Market Research

Product Characteristics

Product Characteristics

Design

Planned Selling Price Less Desired Profit

Engineering

TARGET

Supplier Pricing Design

Engineering

Supplier Pricing

COST Manufacturing If cost is too high, return to design phase.

Continuous Cost Reduction

Manufacturing Periodic Cost Reduction

Source of the Diagram: Michael Robert, “Strategy Pure and Simple: How Winning CEOs Outthink their Competition” (New York McGraw Hill, 1993) Pp.114-115.

Fig.

How the Japanese Keep Costs Low4

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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 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 equipments have 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 components while finalising its price list or taking into account the method adopted by the competition, either lead or follow in fixing a price range for international markets. We will have a detailed look at the various options available to an international marketing firm for pricing decisions in international markets.

Cost-based Pricing 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. 4. Cateora and Graham (2006), International Marketing, Twelth Edition, McGraw-Hill Education.

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• 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 the 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.

Total Cost The sum total of the fixed cost and the variable cost is called the total cost of producing a product = 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 Break Even 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 market place. This equation can be spelt as

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BEP = TR = TC where, TR = Units sold x price per unit TC = Fixed Cost + Variable Cost. Breakeven analyses 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. (1) Exporting price per iron = $ 10 (2) Variable cost per iron = $ 6 (3) Fixed cost = $ 4000 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 workout 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 cost. This can be explained with the help of the above definition: BEP = TR = TC TR = TC PxQ = TFC + TVC L100xQ = $ 4000 + ($. 6*Q) $. 4 = $ 4000 Q = 1000 units of irons In $-value, the BEP will be $. 10x1000 = $.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 the following figure, where the profit starts only after reaching the breakeven point. 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: • Recover the investment incurred on setting up the international business and the expense for product research and development from international markets at the earliest. • When the international marketing firm wants to fully ensure that its profitability levels are maintained 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. 5. This Exercise has been adapted from “Fundamentals of Sales Management”, Macmillan India Ltd, Ramneek Kapoor, Pp. 42-46.

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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

Breakeven Chart • The international marketing firm wants to simplify its operations and the pricing strategies in international markets.

Limitations of Full Cost-Based Approach Such full cost-based pricing will have its own limitations in the international markets, which are given below: • International markets offer strong competition from many countries and companies. Such an approach, based on cost factor alone, does not take into account the price of other international marketing firms. This kind of short sightedness will result in prices being uncompetitive either way for the international firm. • In case this firm decides to adopt a market penetration strategy for its market share objectives, the 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. The first chapter of the book 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:

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• Sales from the international markets are additional sales and, as such, the price earning from these sales should not be overladen with the overhead costs, for which they can always turn to domestic markets. • There is generally a view that these firms will not be able to compete with the superior products on 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. • These firms also believe that a separate segment of the market in the underdeveloped and low national 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 looking at the MR earned from that unit as against the MC incurred. In case MR is greater than MC, the firm will make profits. However, where the profits decline over a period of time, the firm will have to continue producing till the point where MR = MC, as beyond that point the MR per unit may decline and the contributions from additional unit produced will become negative. The diagram below will indicate the international marketing firm’s position.

P

MC

Price. (Exports)

AR MR

Quantity for exports

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 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

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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-Based Approach The marginal cost-based approach is not always successful and desirable in international pricing due to the following limitations it offers: • Marginal cost pricing refers to only the variable component of the total costs. A firm dealing only in 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. • Such an approach refers to only the home cost calculations and has no relevance to the actual market 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. • The competitors can also react with their marginal cost pricing, which could still be lower. Such a move will trigger an unnecessary price war in international markets. • The anti-dumping stance taken by the signatories to WTO does not permit such short-sighted pricing strategy.

MARKET-BASED PRICING APPROACH This approach 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. This 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.

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 6. André Gabor. ibid

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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 This means pricing the product in international markets above the market price level of other international competitive products. New Product Such leadership pricing can be adopted for an innovative product Existing Products that the international marketing firm wants to project as superior Price than other similar products available in the international market. The target customers in such cases will have to be predefined and a niche market will have to be created to generate a favourable and positive customer perception about the product in that International market demand market. The innovative products with superior technical (Figure Adopted from Fundamentals of Sales breakthrough, the distinctive, superior, tangible and intangible Management, Ramneek Kapoor, Macmillan advantages that the product has to offer could be placed at a level India, Pp. 42-46) 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 This strategy virtually amounts to keeping the price of the product in international markets at the existing market level of New product other products. The international marketing firm will counter the Existing product competition through other elements of the marketing mix. It is the Price 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. For example, in the electric bulb International market demand industry, where one bulb is not distinguishable from another, the (Figure Adopted from Fundamentals of Sales Management, Ramneek Kapoor, Macmillan price of a new electric bulb entering the international market will India, Pp. 42-46) 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 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 7. http://www.domain-b.com/marketing/general/2004/20041125_marketing_review.html.

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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 market place. 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.

Existing Products Price

New Positioned product

International Market (Figure Adopted from Fundamentals of Sales Management, Ramneek Kapoor, Macmillan India, Pp. 42-46)

SECTION 3: 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 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 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. “Auto giants like General Motors, Ford and Hyundai have set base in India. Cellular phone manufacturers like Nokia, Motorola and LG and car manufacturers like General Motors, Volkswagen, Federal Mogul, Toyota, Ford and Mico Bosch are using India as a manufacturing base for car components as well as a base for their R&D facilities to

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develop cheap cars. Automobile manufacturers like the Korean company Hyundai Motors have already made India a manufacturing hub for its small car. The Indian arm of the world’s second largest car maker – Ford – has emerged as one of the largest exporters of cars. Tata Motors too has signed up with the UK-based MG Rover Group to export an estimated 100,000 cars over the next five years.” Indian Manufacturing Companies Aspire to be World Beaters adite | hubpages.com/hub/ Indian_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, backoffice support systems and even in pharmaceuticals. Mr. Arun Shourie’s article, published in the Indian Express on 16th August 2003, illustrates the point. • The cost competitiveness of Indian goods and services gives India an edge over other countries. 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: • Indian IT firms provide world class services at one tenth the cost of what the same services will cost in the United States. • An MBA degree costs about us $ 5000 in India; in the U.S. an MBA degree will cost around US dollar 120,000. • Developing a new automobile model in the United States will cost around US $ one billion. Indica, Scorpio has been designed, developed and produced totally in India. They have been acclaimed abroad and found to be up to the international standards. The cost of designing them is half of what it would have cost in U.S. • India is highly competitive in medicines and surgery. A bypass surgery in India costs around Rupees 40000; in the United States it can cost anything above rupees 6 lakhs. The cost of open heart surgery can be anything between rupees 15 lakhs and 35 lakhs as against Rs. 1.5 lakhs to Rs. 5lakhs in the best of hospitals in India. Source. Arun Shorie, When Sky Is the Limit, the Indian Express, 16th August 2003.

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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.

SECTION 4: 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 price 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: • The purchasing parity may differ from country to country and to encourage customer acceptance in low purchasing power countries, it may have a lower price tag. • The local exchange rate of different countries as against the standard currency of exchange may differ. Some countries will have a weaker currency, where the products will cost cheaper. • The discounts and other quantity incentives offered by the international marketing firm may differ 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

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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.

SECTION 5: 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 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). 8. International Marketing, Rakesh Mohan Joshi, Oxford University Press, and Pp398-399. 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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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 as “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”. (ibid). 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 The government has announced to impose anti-dumping duty on import of cross-ply truck and bus tyres and tubes from China and Thailand, according to a notification issued by the Ministry of Finance. Now, 36.5 per cent multiple import duties are levied on tyres and tubes. The direct impact of government move of putting up interim anti-duty shall make tyres import from China costlier by Rs 800-Rs1,000 per pair of truck and bus tyres and tube. Now, a pair of imported truck/bus tyres shall be available at a price around Rs 17,000 as against earlier price of Rs 16,000 per pair. The ministry has taken this step, on the basis of preliminary findings submitted on by the Directorate-General of Anti-dumping and Allied Duties. The domestic tyres majors — Apollo Tyres and Ceat Limited — had filed a complaint before the Anti-dumping Authority, Ministry of Commerce, and the designated authority instituted investigation on the allegations of domestic tyres manufacturers. Tribune News Service New Delhi, October 12, 2006 http://www.tribuneindia.com/2006/ 20061013/biz.htm 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 Due to the negative injury margin in respect of imports from the EU and Canada, the antidumping duty on them might be withdrawn. The Designated Authority in the Commerce Ministry has recommended continuation of the anti-dumping duty on imported cold-rolled flat stainless steel products from the US and Japan while withdrawing the levy on such products from the EU and Canada, after undertaking a mid-term review.

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In its final findings notification, gazette recently, the Authority held that the subject goods have been found to be exported from the US and Japan below their normal value, resulting in dumping. The domestic industry continues to suffer material injury and due to the likelihood of injury to the indigenous industry as a sequel to the persistent dumping, the anti-dumping duty might continue to remain imposed. However, due to the negative injury margin in respect of imports from the EU and Canada, the antidumping duty on EU and Canada might be withdrawn, the Authority said. As the prices of subject goods have seen volatility during the recent past, the Authority deems it appropriate to recommend fixed anti-dumping duty, following its review. Thus, in the case of firms exporting cold-rolled flat products of stainless steel of width of 600 mm or more or whether further processed or not from the US, the anti-dumping duty is $445.69 a metric tonne and in the case of firms exporting from Japan the recommended anti-dumping duty is $ 305 per metric tonne. 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 in the box hereunder. INDIA FILES COMPLAINT AGAINST US LAW India has joined a group of countries, including Japan and the 15-nation European Union (EU), in filing a joint complaint with the WTO against a new US law that would award the proceeds of anti-dumping sanctions to the affected US industry. The complaint made before the Geneva-based WTO recently challenges an amendment passed by the US Congress last month to the anti-dumping law barring the sale of foreign goods in US markets at prices below their cost of production. The other countries who are party to the complaint are Australia, Brazil, Chile, Indonesia, Thailand and South Korea. Most of the complaining countries have been subjected to punitive levies for selling steel at prices lower than the production costs. According to WTO officials, a three-member WTO dispute settlement panel would review the joint complaint if no agreement was reached between the US and the complaining parties through consultations.

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The existing US law, which has been invoked by the US industry against foreign imports, allows the US Government to impose tariffs against below-the-market price products. But the new amendment, known by its sponsor’s name Robert Byrd, a Democrat senator of West Virginia, goes beyond and would divert the tariff revenues from the treasury and award them to the complaining industry. The complaint alleged that the diversion of tariff revenues amounted to giving the complaining US industry a subsidy, which is barred by global free-trade rules. It also said the amended law encouraged US companies to make claims of dumping because they would receive a “double reward” — less competition from imports and income from increased tariffs. Analysts said the revenues from anti-dumping levels could range from $40 million to $ 200 million a year, but it was uncertain because heavily taxed imports were less likely to be sold in the U.S. markets, which would bring down any tariff income from them. The USA has been dragged to the WTO in recent weeks through several complaints by countries questioning its steel import policy. The EU said it wanted WTO consultations with the USA to negotiate on import restrictions on steel wire rod and welded pipeline that the Clinton administration had imposed this year. South Korea had already brought a complaint against the same measure on Berlin, in Dec 25 (PTI). Source: The Tribune Online Edition, December 26, 2000, http://www.tribuneindia.com/ 2000/20001226/index.htm.

SECTION 6: THE 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, the transfer pricing is a strategy by which a transaction between the buyer and seller belonging to the same

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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 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 foreign-based 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. 10. Messaoud Mehafdi, “The Ethics of International Transfer Pricing, Journal of Business Ethics, December 2000, Vol. 28, No.4, Pp 365-3810. 11. Rakesh Mohan Joshi, International Marketing, Oxford University Press, 2005, Pp.394-395.

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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. 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 large 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, follow: Agriculture has traditionally been a primary source of economic tension between the United States and the European Union. The dispute over the EU’s banana regime has been among the most contentious in recent years. It is also among the more legally and politically complex. The European Union restrictions on banana imports from the United

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States have cost European consumers up to 2 billion a year. United States decided to take punitive action against these restrictions and imposed 100 percent advalorem punitive tariff on $191.4 billion worth of imports from European Union. This further aggravated the burden on the European customers, who had to pay for the restrictive and tariff rate quota system of the European Union. (ibid) http://www.asil.org/insights/insigh63.htm Another example can be seen in the imposition of heavy tariffs on imports of beef in European countries. The European Union has imposed a complete ban on the import of hormone-treated beef from the United States; while at the same time it has also imposed a tariff of 125 percent on beef imports, in addition to offering heavy subsidies to farmers in E.U... Such double impact costs amount to almost $ 15 million to the European customers in the prices of beef going up. Farm Incomes: Myths and Reality by Alan Matthews. Cork University Press

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 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?

SECTION: 7 THE INTERNATIONAL ECONOMIC AND FINANCIAL ENVIRONMENT 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 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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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 short-term basis, affecting change every time a minor fluctuation takes place in the currency rates. Their agreements for their imports and exports are longterm 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 firm 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: • Raise sales invoices on foreign importers currency, to get better realisation from the export price. • As far as possible, adopt full cost international pricing strategy. Marginal cost pricing can be adopted to penetrate hitherto unexplored markets. • Expand its own product line and add substantial value addition features to the product. • Reduce outsourcing from outside the home market and all sourcing/manufacturing should be shifted to the domestic country. • Explore export opportunities worldwide, aggressively. • Purchase supportive marketing services like advertising, logistical and marine insurance, etc., in local 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: • The firm should focus its competitive strategy on improving product quality, after-sales service and other sales supportive activities like timely and efficient logistic services. Such a move will ensure prevention of competition on price front. • Encourage a cost reduction exercise all around in the firm to conserve resources. • Increased productivity will help attain economies of scale. • Arrange outsourcing/ manufacturing from foreign markets. • Shift focus on exports to relatively strong currency markets.

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• Marginal cost pricing strategy will make the international price an attractive proposition for the buyers from abroad. • Defer repatriation of foreign currency funds from abroad. • Counter trade with weak currency countries. • Prefer expenditures on supportive marketing activities in local host country currency abroad. • Raise sales invoices on importers from abroad in their own countries currency. • Borrowings can be arranged in local host country for expansions, etc.

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 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, 13. http://www.barternews.com/countertrade.htm

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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 centuries 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, non-monetised 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 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 up front, 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 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 know-how from Continental of Germany. Continental has entered into an agreement with the 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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Indian manufacturer to buy back a part of the production to meet its worldwide exports of two- and threewheeler 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 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 equipments, 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

REFERENCES 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 U.S. Senate Sub Committee”. 3. Jack Sweeney, “PC Vendors Bend Pricing For Overseas Customers”, Computer Reseller News, January 23, 1995, No. 614 P.3. 4. Michael Robert, “Strategy Pure and Simple: How Winning CEOS Outthink Their Competition” New York McGraw Hill, 1993, pp.1214-115. 5. Fundamentals of Sales Management, Macmillan India Ltd, Ramneek Kapoor, Pp. 42-46. 6. Fundamentals of Sales Management, Ramneek Kapoor, Macmillan India Ltd, Pp. 42-46. 7. Indian Manufacturing Companies Aspire To Be World Beaters, Adite Hubpages.Com/ 8. Arun Shourie, When Sky Is The Limit, The Indian Express, 16 August 2003. 16. Aschkenasy, “Give And Take” International Business Pp.10-12. 17. Hennar, “Some Empirical Dimensions”, Pp.243-270.

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9. Rakesh Mohan Joshi, International Marketing, Oxford University Press, Pp 398-399. 10. 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. 11. Ibid. 12. Tribune News Service New Delhi, October 12, 2006 13. G. Srinivasan, Hindu Business Line, Internet, Edition, Oct, 2006 14. The Tribune Online Edition, December 26, 2000. 15. Messaoud Mehafdi, “The Ethics of International Transfer Pricing”, Journal of Business Ethics, December 2000, Vol. 28, No.4, Pp 365-3810. 16. Rakesh Mohan Joshi, International Marketing, Oxford University Press, 2005, Pp.394395). 17. (Ibid). 18. Farm Incomes: Myths and Reality By Alan Matthews, Cork University Press. 19. Teaming Up For the 90s: A Guide to International Joint Ventures and Strategic Alliances, Homewood, I.L; Business One Irwin, 1991, PP.212-213. 20. Barternews.Com/Countertrade. 21. Sam C. Okoroafo, “Determinants of LDC –Mandated Counter Trade”, International Marketing Review, winter 1998, Vol.5, Pp.16-24. 22. David Woodruff, Money Unmade: Barter and the Fate of Russian Capitalism, Cornell University Press, 1999. 23. Aschkenasy, “Give And Take” International Business Pp.10-12. 24. Hennar, “Some Empirical Dimensions”, Pp.243-270. 25. Pepsi Will Be Bartered For Ships And Vodka In Deal With Soviets, New York Times. April, 09, 1990, P.1

WEBSITES VISITED 1. 2. 3. 4. 5. 6.

Adite | hubpages.com/hub/Indian_Manufacturing http://www.tribuneindia.com/ http://www.blonnet.com http://www.asil.org/insights/insigh63.htm http://www.barternews.com/countertrade.htm http://www.tribuneindia.com/

SUGGESTED FURTHER READINGS 1. Acvusgil, S Tamer, “Pricing For Global Markets”, Columbia Journal of World Business, 31, No.4 1996.

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2. Coopers and Lybrand, International Transfer Pricing, Oxford Shire: CCH Editions Ltd. 1993. 3. 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, 8, No.1, 1994. Pp. 7-25. 4. Lancioni, Richard, and John Gattorna, “Strategic Value Pricing: It’s Role in International Business”, International Journal of Physical Distribution and Logistics, 22, No.6 1992 Pp. 24-27. 5. Marn, Michael V. and Robert L. Rosiello, “Managing Price, Gaining Profit”, Harvard Business Review, 70, No.5 – Octobwer1992, Pp.84-94. 6. Myers, Mathew B. “The Pricing of Exports Products: Why Aren’t Managers Satisfied With The Results?” Journal of World Business, 32, Nio.3 1997, 277. 7. Nagle, Thomas T., “The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making”, Upper Saddle River, NJ, Prentice Hall, 1987. 8. Robert, Michael, “Strategy Pure And Simple: How Winning CEOS Outthink Their Competition”, New York: McGraw-Hill 1993. 9. Seymour, Daniel T., “The Pricing Decision”, Chicago Probus Publishing, 1989. 10. Sinclair, Stuart, “A Guide to Global Pricing”, Journal of Business Strategy, 14, No.3, 1993, Pp.16-19.

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 favor of keeping higher prices in home country’s market (a) Labor or the raw material cost is higher in. home country as compared to the international markets. (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. 2. The firm can justify keeping its Home Market Prices Lower than the International Markets only if following factors are noticeably in such favor (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. 3. Standardized Pricing Strategy visualizes the entire international markets as one single unit and the international marketing firm will devise a policy whereby

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4.

5.

6.

7.

8.

9.

(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. 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. 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. 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.

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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. (True/False) (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. (True/False) (c) Volumes definitely play a large role in making an international business viable and sustainable. (True/False) (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. (True/False) (e) Market Based Pricing Approach means the manufacturing firm must charge from the international markets what the market can bear. (True/False)

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. 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?

Chapter

International Distribution, Marketing Channels Logistics and Supply Chain Management

Learning Objectives The reader should be able to • explain the concept of international distribution and logistics • discuss distribution and supply management channels in international markets • explain and discuss the qualifying criterion, functions, advantages and disadvantages of middlemen in international supply chain management • address the challenges in logistics in international marketing.

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SECTION 1: INTRODUCTION

C

onsumers 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 dead lines. 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. In this chapter we will study all aspects of managing international distribution and logistics and understanding the level of involvement of various types of middlemen. We will 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 world wide. In this chapter we try to find out how arrangement of logistic support may present a great challenge to the international marketing firm who have 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, next a set of independent distributors to reach the products to yet some more people sitting at home.

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SECTION 2: 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 handle 1. 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. it facilitates the transfer of ownership from the actual manufacturer or the middleman to the ultimate customer 3. it manages backward flow of the price of the goods realised from the customer to the manufacturers 4. it regulates the flow of information about the product performance and the customer feed back to the manufacturer and the other agencies involved in rendering services to the customer.

SECTION 3: DISTRIBUTORS AND CHANNELS Self Involvement Multinational conglomerates decide to establish their own channels if they find that: • the volume of business to be handled is quite high and the middlemen may not have the resources to provide the necessary facilities • when multinational firm finds that it has enough resources and facilities of its own world wide and starting operations in another country will simply mean reallocation of some of the resources from the low point to high point priority area • when the after sales servicing needs are too complex and only own establishment can justify customers’ expectations • the price of product is too high • the customer is too important and big with global operations • the competitive strategy demands producer being in direct touch with the customer. 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. 1. Peter D Bennet, Dictionary of Marketing Terms, AMA 1988. p.29.

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International firms although have passed on the marketing controls to the home country middlemen it can still establish its 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 retainer ship 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 etc. 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 of different industries e.g. marines, surgical instruments, hand tools, garments, handicrafts 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 times 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 2. For more details on “Keiretsus” refer 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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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. Under these cooperative exports, two or more complementary producers join hands and organise export 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.

SECTION 4: DIRECT AND INDIRECT MARKETING CHANNELS IN A FOREIGN COUNTRY While the international marketing firms 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. 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 whole sellers. Although both the strategies put strain and stress on the end price to customers and the realisations of the firms’ returns, but 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 This refers to door to door selling, network marketing and mail order catalogues. In India Olivetti, Avon, Amway, etc. foreign firms have taken to the direct selling route. Although they have not gone strictly from door to door but 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 show rooms 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 too have joined the bandwagon of direct sales outlets where the manufacturers use television channels instead of direct mail catalogues to display their products to end users and source orders. Manufacturers’ Direct Retail Stores Bata shoes, Singer sewing machines, Italian furniture’s manufacturers preferred starting their own retail stores abroad and reach the customers directly. Many of the

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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 manufacturer 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 show case to provide necessary display to customers’ benefit and obtain market related information from visiting customers abroad.

Consumer Products The figure below describes the channels that a manufacturer can strategise for the distribution of consumer products abroad. Manufacturer (Consumer Goods)

Distributors

Direct Selling Own Sales Representatives

Agents/Stockists/ Whole sellers

Door to Door

Franchisee

Whole sellers Mail Order Catalogue

Direct Exhibitions

Retailers

Retailers

Retailers Network Marketing

Internet Customers

Consumer Products Distribution Channels

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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 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

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 two 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. They represent the exporter in the country of imports for all jobs, related to finding customers, demonstrating 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 Almost 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 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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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. Manufacturer

Own Technical Sales staff

Distributor/Agent abroad

Distributors

Own office

Whole sellers/ Stockists

Whole sellers

Industrial Custormers

Industrial products distribution channels

SECTION 5: DISTRIBUTOR AND MIDDLEMEN SELECTION QUALIFICATION CRITERION The process of selecting a distributor abroad will require qualifying a distributor on the criterion set by international firm to attain its corporate objectives. In case the objective is mere exports the qualification 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 • • • •

financial strength of the intermediaries to provide necessary infrastructure personal and ethical commitment of intermediary to business intermediaries’ reach and relations with the customer. synchronisation of the intermediaries’ objectives with that of the exporter.

(ii) Self Reference Criterion • international business objectives and long and short term plans of the international marketing firm • international marketing firm’s marketing image and perception • brand image and perception exercise needs in international markets.

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(iii) Specific Country Reference Criterion • • • •

availability of channels in the target market legal and statutory requirements of home and host country specific product and service requirements, if any specific marketing mix requirement, if any.

Costs Involved in Foreign Distribution We need to dwell a little longer on this aspect of distribution qualification as cost addons gets important in deciding on the usage of (a) levels and tiers of distributors (b) deciding the international pricing .The following five major considerations amount to cost variations: • availability of infrastructure conditions in the country and the distributor’s capacity and commitment to provide the necessary facilities • number of levels and channels involved in the distribution • inefficiencies inherent in the distribution system in the target country • operational restrictions due to governments and cultural pressures • inventory stock outs and inventory overstocks.

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.

SECTION 6: 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.

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The term logistics has becomes all encompassing and will include management of global supply chain and distribution of finished as well as raw materials across the countries and continents. Any firm planning international marketing has to arrange its global supply chain and distribution in such a manner that it is efficient, cost effective and makes positive contributions to firms’ overall objectives. A company’s supply 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. 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 but at the international and global level 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. The 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 center network design inventory management outsourcing key customers and suppliers relationships business processes information systems organizational design and training requirements performance and evaluation metrics.

SECTION 7: 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 times it prefers to move the production facilities closer to the elements of production. This is done to: 1. 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, but while it may be true to some extent multi national 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 objectives, such large scale operations will not be worth implementing.

SECTION 8: GLOBAL SOURCING It is not necessary for international firm to put up its own manufacturing facilities every where 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 labor unionisation and restrictive work rules of own labour c. Lower investments on land, capital and manufacturing d. Access to world wide 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 firms 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, 40, No. 2, winter 1999: 99-109.

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(B) Each firm has its own in built culture in the work force, 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. 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 long term business commitments with their vendors, whom they generally keep restricted to their free trade zone areas from where they can service these American companies with just in time inventories. We give hereunder 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.

Key Steps in Global Sourcing The process of global sourcing Assessing current operations and international competitive scenario.

Evaluating decision-making Will outsourcing globally add value to our products and services as against competition? Will global outsourcing provide a value plus proposition to the real customers to meet their actual need?

Assessing 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 sources worldwide.

Make a profile of the best in the trade for each component 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 Contd.

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Determine the basis and nature of relationship with the sourcing agencies.

Does the source agency’s geographical location, capabilities and capacity, meet our standards? Will the supplier be able to deliver in spite of all logistical challenges?

Invite proposals and evaluate.

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 source on mutually agreeable terms and conditions to build long lasting relationships.

Will the contract be long term or will it be negotiable after periodical intervals? Does the contract clearly mention roles 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 world class material? Does the sourcing agency maintains 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 can outsource the job works, complete manufacturing of parts to the outside agencies. Eventually the sub 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 case of any other kind of natural calamity, wars, strikes, political stress and strains they pose equal threat to the vendor and the supplier and both of them will have to manage the same by joint 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

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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 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.

SECTION 9: 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 set back to the firm in the current highly competitive scenario, where the inventories are being managed directly on the production line to feed just in time the requirements of 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 equipments 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 one source just in case of breakdowns or any other emergency at the vendors’ end.

ESTABLISHING TRANSPORT SYSTEM The logistics’ main function in any distribution and supply chain programm 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

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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 are generally wellequipped 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 clients 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, utilizes services of the logistic firm for freight forwarding and warehousing in Singapore. The zip drive manufacturer supplies finished products to its Asian customers spread all over Asia, by maintaining inventory of finished material in the warehouses maintained by Emery Worldwide. 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 manufacturing centers. These parts are used into assembly of finished products which are then supplied by Emery worldwide to customers all over the Asian continent. There are many such organisations worldwide handling complete logistics solutions for their clients and the international firms do take the benefits of services offered to optimise their costs and efficiency for the advantage of their global clients. (Website www.iomega.com)

SECTION 10: 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 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 5. Maruti Suzuki is a joint venture company between Maruti India and Suzuki Japan.

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improvement in quality seeps deep into the work culture of the new plant and the Indian employee too pick 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 units from where the Toyota Company will be procuring production from. These manufacturing experts keep an expert observer’s check on the production systems and key quality issues in that factory. They also render expert advice to the vendor as to how to increase productions and cut costs without affecting the set quality standards of Toyota. In order to ensure continuity Toyota always divide the outsourcing amongst at least two suppliers and both are encouraging a healthy competition amongst themselves. Both the vendors are assured of long term relationship, due to inherent Japanese culture of maintaining long term alliances. Source: www.Toyota.co.jp 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— a Message from Managing Officer INA Since 1957, when Toyota began exporting the Crown to the United States, we have expanded the scope of our automobile sales across the entire globe. 50 years since we first began exports, Toyota vehicles have found their way to over 170 countries and regions throughout the world. As our exports have continued to develop so has the localisation of our production bases, in line with our policy of “producing vehicles where the demand exists.” Currently there are 52 bases in 27 different countries and regions. In addition, there are design and R&D bases in seven locations overseas, showing Managing Officer, Koichi INA that “from development and design to production, sales and service, Toyota has now achieved consistent globalisation as well as localisation.” There are a number of hurdles that this globalisation of production has to overcome. Among these the most important is “quality assurance,” which requires that “no matter where Toyota vehicles are made, they have the same quality.” To put it another way, we don’t put a label on our vehicles which says “Made in such and such a country;” we put the same label on all vehicles which reads “Made by TOYOTA.”

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This means that we need to spread Toyota’s manufacturing philosophy—the “Toyota Way”—to all of our overseas bases. And on top of this it is important that we minimise the necessary support that comes from Japan and let each of our overseas bases become self-reliant. For example, the Toyota plant that recently commenced production in Texas made maximum use of the know-how which has been cultivated over the past 20 years by the Toyota plant in Kentucky. This is just the latest example of how the localised “Toyota Way” is being passed on overseas. Toyota believes that the way to achieve “quality assurance” and to “spread the Toyota Way” is by educating people: “Making things is about developing people.” So, in 2003, we established the Global Production Center (GPC) within the Motomachi Plant in Toyota City. Furthermore, in 2006, we established regional GPCs in United States, United Kingdom and Thailand to carry out corresponding activities in the North American, European, and Asia-Pacific regions respectively. Website: http//www. Toyota .co.jp/en/vision/globlisation

EDI, ERP AND E-COMMERCE6 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 to keep the communication channels working around the world. These major electronic mediums include: electronic Data Interchange, Enterprise Resource Planning, E-Commerce and finally 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 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. Wall Mart 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 firms own offices across the globe. However it’s limitations are felt when the customer database can not 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 etc. 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 6. The Authors have prepared this part based on the readings of many articles, particularly journal of Global Information Management, Idea Group of Publishing, Vol 14, No. 4, October-December, 2006.

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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). 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 etc. The introduction of private technology exchange has resulted into increased efficiency of the supply chain and resultant reduces 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. DELL BUSINESS MODEL Dell hardware firm sells all its products both to end-use consumers and to corporate customers, using a directsales model via the internet and the telephone network internationally. Dell maintains a negative cash conversion cycle through use of this model: in other words, Dell Inc. receives payment for the products before it has to pay for the materials. Dell also practices just in time (JIT) inventory management, profiting from its attendant benefits. Dell’s JIT practices approach utilizes the “pull” system by building computers only after customers place orders and by requesting materials from suppliers as needed. In this way Dell mirrors Toyota by following Toyota Way Principle #3 (“Use ‘pull’ systems to avoid overproduction”). Since the original dominance of telephone ordering, the Internet has significantly enhanced Dell’s business model, making it easier for customers and potential customers to contact Dell directly from anywhere in the world. Website: http://www1.ap.dell.com.

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REFERENCES 1. Peter D Bennet, Dictionary of Marketing Terms, AMA 1988. p.29. 2. “Keiretsus” the Economist, Japanese Trading Companies – The Giants That Refuse to Die, June1, 1999 Vol. 319 No. 1109,pp 72-73. 3. ibid

WEBSITES VISITED 1. www.iomega.com 2. http//www. Toyota .co.jp/en/vision/globalisation 3. http://www1.ap.dell.com.

SUGGESTED FURTHER READINGS 1. Bello, Daniel C., and Ritu Lohtia, “Export Channel Design: The Use of Foreign Distributors and agents” Journal of Academy of Marketing Science, 23, No 2, 1995, pp. 83-93. 2. Carr Mark , Arlene Hostrop , and Daniel O Connor, “The New Era of Global Retailing” Journal of Business Strategy, 19, 3 , 1998 pp. 11-15. 3. Hill, John S. Richard Still, and Unal O Boya, “Managing the Multinational Sales Force”, International Marketing Review, 8, N0.1, 1991, pp. 19-31. 4. Kale, Sudhir and Roger P. Macintyre, “Distribution Channel Relationships in Diverse Cultures”, International Marketing Review, 8, No. 3, 1991, pp. 311-345. 5. Olsen, Ajneen E., and Kent L. Granzin, “Economic Development and Channel Structure: A Multinational Study”, Journal Of Macro Marketing 10, No.2, 1990: pp. 61-77. 6. Sachdev, Harash J., Daniel C., Bello, and Bruce K Pilling, “Control Mechanisms Within Export Channels Of Distribution”, Journal of Global Marketing 8, No.2, 1994, pp.31-50. 7. Stern, Louis and Adel L. “Ansary, Marketing Channels”, 4th Ed. Prentice Hall, 1992. 8. Ramneek Kapoor, “Fundamentals of Sales Management”, Macmillan India Ltd. 9. Paul Justin, International Business, Prentice Hall Of India.

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OBJECTIVE TYPE QUESTIONS 1. Distribution establishes channels that handle (a) Physical flow of goods and related services. (b) Facilitates the transfer of ownership. (c) Backward flow of the price of the goods. (d) 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. 4. Major considerations that amount to cost variations while selecting foreign distribution channels 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. 5. 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. 6. Procuring and outsourcing from the home country is a little easier because (a) Language and culture remains the same. (b) The distances are short. (c) The 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. 7. Some of the challenges to global sourcing are (a) Losing part of control on qualitative as well as operational aspects.

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(b) Firm’s own culture in built, in the work force, (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. 8. While selecting middlemen abroad common criterion for distributor qualification will include (a) Financial strength. (b) Personal and ethical commitment of intermediary. (c) Intermediaries’ reach and relations with the customer. (d) Synchronization of the intermediaries’ objectives with that of the firm. (e) All of these. 9. While selecting middlemen Specific country reference criterion 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. (True/False) (b) The basic task of Home country export agents is to represent either one or many manufacturers from the home country for exports liaison and arrange a networking of importers and exporters. (True/False) (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. (True/False) (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. (True/False) (e) The process of selecting a distributor abroad will require qualifying a distributor on the criterion set by international firm to attain its corporate objectives. (True/False)

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.

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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 internet in global logistics. In what way has internet created utility for international marketing firms and their customers. Discuss with the help of examples.

Chapter

Product Promotion, Advertising and Building Brands in Foreign Markets

Learning Objectives The reader should be able • to understand various tools available for product promotion • to learn the importance of brand buildings in foreign markets • to gather international marketing intelligence.

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SECTION 1: PRODUCT PROMOTION AND BUILDING BRANDS

T

he opportunities and challenges before a multinational company today are manifold. Globalisation, the general trend towards free markets has worked both ways. On 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.

1. 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 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 back seat to promotions, because advertising typically builds brand loyalty, on 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.

2. Advertising An important choice that any company has to make when it goes international is whether to go for standardised advertising or not1. 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 favors this argument. A good example of this is the Marlboro Man.

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 Edition, South Western Thomson Learning.

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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 a cigarette. The ads were originally conceived as a way to popularise filtered cigarettes, which at the 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.

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 could not use a television commercial it produced in Great Britain to promote its cornflakes in many other European countries. A reference to the iron and vitamin content of its cornflakes was not permissible in the Netherlands, where claims relating to health benefits are outlawed. A child wearing 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 make their cornflakes the best they have ever been” was disallowed in Germany because of a prohibition 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.

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3. Events and Experiences These are company sponsored activities and programs designed to create daily or special brand-related interactions. It can involve sponsoring major games, entertainment festivals, arts etc. 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 Company allowed Thumbs-up and not its flagship product, Coke to sponsor it.

4. 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 emphasizes 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 favored 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 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 Uni Lever’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

2. Cateora and Graham, International Marketing, McGraw-Hill Education, 2006, 12th Edition, Page 502 3. Cateora and Graham, ibid

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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 didn’t 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 • for industrial products and / or complex new products • when distribution channels are short • when few print or electronic media are available. Pull strategies tend to be emphasised: • for consumer goods • when distribution channels are long • when sufficient print and electronic media are available to carry the marketing message.

5. Public Relations Public Relations (PR) involves a variety of programs 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. 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.

4. Kotler, Philip, and Kevin Keller “Marketing Management”, Pearson Education, 2005.

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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 that a batch of Cadbury’s flagship brand, Cadbury Dairy Milk, was infested with worms. The issue is now history. “The sensible thing to do was to influence what we could. We spoke to consumers, changed packaging in a record 90 days and bounced back,” Mr. Bharat Puri said. 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 Amitabh Bachchan testifies to the product’s purity and safety. The new packaging, the new ads all helped turn its product around.

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SECTION 2: 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 pre-requisite 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: • consumers must be given clear information about the goods or services before buying • goods must be delivered within thirty days unless agreed otherwise • where consumers notify the supplier in writing or another durable medium that they wish to cancel the contract, they must be refunded within 30 days all money paid. The directive does not apply to: • Business-to-Business contracts • contracts for the sale of land – although the regulations do apply to consumer rental agreements • goods or services bought at an auction with an auctioneer. 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 an European company and use that as a front-end to do business with local companies (Foreign Direct Investment in the form of Joint Venture). In this context, acquiring and/or partnering with companies in this geography may be a better option than 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. 5. Cateora and Graham (2006), International Marketing, Twelth Edition, page 283, McGraw-Hill Education

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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, therefore, foreign companies 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 in United Arab Emirates—the largest market in the Middle East. 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’s the fastest expanding Indian industry globally), Middle East offers an attractive market for branded generics. 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

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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 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 deepwater port and a free trade zone for manufacturing and distribution in which all goods for re-export or transshipment 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. The newly established Export Promotion Council - Agricultural and Processed Food Exports Development 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 (Example, Idly Mix).

USA 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 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 * GCC is a regional economic grouping in the form of Free Trade Area between countries like UAE, Oman etc.

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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 divided between a Central/National Government and the States. The federal nature of the government 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 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 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 work force, 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

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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 co-operation 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 world class 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 & jewelry & precious stones, organic chemicals, coffee, spices, light engineering goods, iron & 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. 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.

REFERENCES 1. 2. 3. 4.

“International Business”, Charles W.L.Hill, McGraw-Hill “Marketing Management”, Philip Kotler, Kevin Lane Keller, Pearson “Business Environment”, Justin Paul, McGraw-Hill International Business, Justin Paul, Prentice Hall, Third Edition

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WEBSITES VISITED 1. 2. 3. 4. 5. 6. 7. 8. 9.

http://www.cia.gov/cia/publications/factbook/print/us.html www.globaledge.msu.edu www.economist.com http://en.wikipedia.org/wiki/Coca-Cola http://en.wikipedia.org/wiki/Marlboro_Man http://en.wikipedia.org/wiki/Kellogg http://en.wikipedia.org/wiki/Pepsi#Pepsi_in_India http://www.rediff.com/news/2003/oct/03cad.htm http://www.televisionpoint.com/news2006/newsfullstory.php?id=1139575838

EXERCISE Visit the website www.hp.com/e-inclusion/en/index.html and discuss why Hewlettpackard’s international marketing managers engage in such projects in developing countries.

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Personal Selling and Multinational Sales Management

Learning Objectives The reader should be able to • understand the process of personal selling in international marketing • define and differentiate between home country salesman and an expatriate salesman • address issues related to culture adjustments in international personal selling • understand the functioning of multinational sales management.

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he 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. Infact 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 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.

INTRODUCTION Salesmanship has been defined as, “the art and science of helping people identify their needs, create desire to fulfill 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 is 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 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 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.

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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 cover up 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.

SECTION 1: 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 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 fulfill 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. Personal selling acts as a supplement to the 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). 3. William J. Stanton, Op. Cit. Pp.440.

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SECTION 2: THE PROCESS OF PERSONAL SELLING 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 Middle East, the sales person representing the manufacturer in 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. Preapproach This will call 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 sales person will appear tailor made to fulfill the customer’s need. The sales person 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 sales person, in order to ensure he does not commit any mistakes during his actual sales call. Approach This will refer to the stage when the sales person 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 (4). it helps him close the sales eventually”.4 It is important here at this stage that the sales person 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 sales person 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 sales man 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. 4. Ramneek Kapoor, “Fundamentals of Sales Management”, Macmillan India Ltd., Pp. 275-276.

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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 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

SECTION 3: 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. 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 into 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: 5. Ramneek Kapoor, “Fundamentals of Sales Management”, Macmillan India Ltd., Pp. 313-314. 6. Ramneek Kapoor, “Fundamentals of Sales Management”, Macmillan India Ltd., Pp. 313-314.

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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 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 head quarters, 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. 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, fully paid vacation trips etc 2. 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, lot 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 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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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 a times the international companies prefer keeping the key positions reserved for nationals of their own country and only second or 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 and language etc.

SECTION 4: MANAGING INTERNATIONAL SALES PERSONNEL International marketing firms can not afford to have simply home country nationals or only host country citizen as its 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 our 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 Mind Set 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 mind set 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 8. David M. Noer, Multinational People Management, Bureau Of National Affairs, 1975. 9. David M. Noer, Multinational People Management, Bureau of National Affairs, 1975.

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3. Willingness to Work Abroad: it is obvious only a sales person 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 person so selected will look forward for the first opportunity to get repatriated. 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 multi cultural and multiple country nationals adopt various methods and incentives to keep its 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 sales person 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 10. Rasmusson, Can Your Reps., Pp.110. 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 etc. Given hereunder is 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 etc.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 times 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 (2004), International Perspectives on Organisation Behaviour and Human Resource Management, Prentice Hall

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List of 20 Most Expensive Cities for Expatriate Employees March 2006 Rank

City

March 2005 Rank

1

Moscow, Russia

4

2

Seoul, South Korea

5

3

Tokyo, Japan

1

4

Hong Kong

9

5

London, United Kingdom

3

6

Osaka, Japan

2

7

Geneva, Switzerland

6

8

Copenhagen, Denmark

8

9

Zurich, Switzerland

7

10

Oslo, Norway

10

11 (tie)

New York City, United States

13

12

St. Petersburg, Russia

15

13

Milan, Italy

11

14

Beijing, People’s Republic of China

19

15

Istanbul, Turkey

22

16

Paris, France

12

17

Singapore, Singapore

34

18

Dublin, Ireland

13

19

Sydney, Australia

20

20

Shanghai, People’s Republic of China 30

Mercer Human Resource Consulting 2006 Survey Source: http://en.wikipedia.org/wiki/List_of_most_expensive_cities_for_expatriate_employees 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 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

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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.

REFERENCES 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. 106107. 3. William J. Stanton, Op. Cit., Pp.440. 4. Ramneek Kapoor, “Fundamentals of Sales Management”, Macmillan India Ltd., Pp. 275276. 5. Ramneek Kapoor, “Fundamentals of Sales Management”, Macmillan India Ltd., Pp. 313314. 6. 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. 7. David M. Noer, Multinational People Management, Bureau of National Affairs, 1975. 8. David M. Noer, Multinational People Management, Bureau of National Affairs, 1975. 9. Rasmusson, Can Your Reps., Pp.110.

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10. 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. 11. Mercer Human Resource Consulting 2006 Survey.

WEBSITES VISITED 1. http://en.wikipedia.org/wiki/List_of_most_expensive_cities_for_expatriate_employees

SUGGESTED FURTHER READINGS 1. Bovet, Susan Fry, “Building an International Team”, Public Relations Journal, AugustSeptember 1994, Pp. 26-28. 2. 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. 3. 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, Pp. 232. 4. Ramneek Kapoor, Fundamentals of Sales Management, Macmillan India Ltd., New Delhi. 5. Simon Majaro, International Marketing London, George Allen and Unwin Ltd, London.

OBJECTIVE TYPE QUESTIONS 1. The Process of Personal Selling involves these steps (a) Prospecting. (b) Preapproach and approach. (c) Presentation. (d) Closing the Sales Call. (e) All of these. 2. A domestic firm primarily engaged into selling in the domestic market with little leanings towards exports (a) Will be organizing personal selling activities abroad. (b) Will not be organizing 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.

Personal Selling and Multinational Sales Management

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 mind set 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. Compensation Systems for Expatriate / International Sales Force will have these basic components 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. 8. During the presentation stage the international sales person will have to undertake these activities (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. During the Preapproach stage the international sales person will have to undertake these activities (a) Gather information on the prospect and his problems. (b) Study the cultural norms, cultural peculiarity and cultural likes and dislikes

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(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, international product exhibition etc. (True/False) (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 (2) the size of sales team, the firm should hire. (True/False) (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. (True/False) (d) While dealing with the international customers culture context plays an important role. (True/False) (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. (True/False)

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 following: (1) Training and culture orientation for international assignment (2) Repatriation issues (3) Motivation of expatriates (4) Third country nationals.

Chapter

Organising and Doing Business with Other Countries—Analysis of Middle East Countries

Learning Objectives The reader should be able • to understand the geo-political and economic systems in foreign countries • to get first hand information about rules and legal framework, policy change in the countries where you have to do business • to collect information about industries, companies and the market structure with special reference to Middle East Countries.

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SECTION 1: INTRODUCTION

D

oing 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 themselves. 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 influences 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. 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.

SECTION 2: POLITICS AND ECONOMY 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. Dr. Justin Paul, Yatinder Agrohi and Sudarsana Reddy co-authored this chapter.

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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 both the region’s 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.

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.

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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.

SECTION 3: THE 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.

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 is 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.

The 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

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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 below: Population Age Structure in GCC (Gulf Co-operative Council) Economies

Non-nationals, from the Indian sub-continent, other Middle Eastern states and western economies play 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.

1. GCC stands for Gulf Co-operation Council (Regional Group for Co-operation between Gulf Countries)

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Key Regional Business Issues Regional business issues important to commercial success include: • • • • • • • • • • •

Information about agents and their changing role Choice of a local investment partner Degree of market risk Taxation matters Changing demography Bureaucratic culture Key role of chambers of commerce Arab-Israeli relations Importance of negotiation Need for a different emphasis in marketing Visa requirements

Economic Prospects • In most Gulf economies, economic growth is lower than workforce growth. Other major reform drivers are the desire to diversify out of oil, fiscal pressures and declining oil reserves in Oman, Bahrain, Qatar and Dubai in the UAE. • Despite modest economic growth over the 1990s, these reform pressures have created new opportunities for foreign firms; fiscal pressures have increased the importance of private finance and privately provided infrastructure, while the drive to diversify have 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. • In the 1990s, lower and volatile oil prices and failure to open economies and diversify from oil were 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. • Young, rapidly growing population are creating significant pressures to lift economic growth and diversify economic activity. As well as 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. Demand for new services imposes fiscal pressures on Gulf governments. This demand creates a major incentive to increase private sector involvement in infrastructure provision. • Gulf economies are expanding their service sectors to diversify their economies. Dubai and Bahrain are 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,

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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 liberalise foreign investment regulations. WTO requirements have created 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.

SECTION 4: BUSINESS OPPORTUNITIES IN THE MIDDLE EAST REGION 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. 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: 2. Justin Paul, Business Environment, McGraw-Hill, Chapter on WTO

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• • • •

Exclusive agency requirements Government procurement policies favouring nationals Significant numbers of prohibited imports Restrictive labelling requirements

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 A dramatic integration and globalisation of capital markets occurred in the first half of the 1990s, providing 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. 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.

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However, Qatar, Oman and Saudi Arabia lead reform efforts and further opening of FDI regimes is likely in the short to medium term. 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 are 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.

SECTION 5: ANALYSIS OF SELECT COUNTRIES OF THE REGION Saudi Arabia The modern Kingdom of Saudi Arabia was formed in 1932, following reunification and has been ruled by the Saudi family since. The ruler manage 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 was discovered in 1938 and commercial exploitation began after World War II. Saudi Arabia has the world’s largest oil reserves, 261.5 billion barrels or 25 per cent of the world’s total oil reserve. At current production rates, proven reserves will last for 75-80 years. Oil revenues allowed successive governments to develop the Kingdom’s infrastructure, agriculture and industry. Saudi Arabia has been undergoing, since the late 1990s, a series of structural reforms to improve the market environment for investment, both domestic and 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 The United Arab Emirates, UAE, gained independence from Britain in 1971; before then, individual emirates 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’ attract expatriate to UAE. The UAE has 9.7 per cent of the world’s crude oil reserves and 4.1 per cent of its 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 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.

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UAE is one of those countries in the region that has 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 trans shipment 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, 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. The UAE joined the WTO in 1995. Currently, the UAE is implementing a series of economic reforms, 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 trans shipment 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 Kuwait became an autonomous British protectorate in 1899. Despite affirming Kuwait’s borders a number of times, Iraq invaded and occupied Kuwait in 1990. In 1991, following widespread Iraqi destruction and 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 per cent of GDP, 89 per cent of export revenues and 78 per cent of government revenues. Between 1991 and 1993, Kuwait experienced rapid growth driven by reconstruction; after that, real growth returned to 2 per cent per year until 1998. Since 1999, the Government has undertaken began a reform program designed to 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 outside world and undeveloped until Sultan Qaboos acceded in 1970. He used oil revenues to provide basic infrastructure and services. In the 1990s, his efforts focused on implementing structural reform and increasing the private sector’s role, particularly in utilities provision. In 1994, Oman offered the Gulf’s first build, operate, transfer project, BOT, the Manah power station. Currently, Oman is extending BOT type arrangements to 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

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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 (PDRY) and the Yemen Arab Republic (YAR) in 1990. Before this, the two countries had fought a number of wars. Civil war erupted in 1994, following attempted secession by the South, which ended with the capture of Aden, and arrest of former PDRY leaders, thereby confirming unification. Yemen is a poor Gulf economy, but grew strongly in the mid 1990s when oil production began. It is 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 refinancing of US$512 million between 1997 and 2000, which with rising aid inflows, allows Yemen to 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.

CONCLUSION With enormous natural and financial resources, well developed infrastructure in most of the countries, good growth rates makes this region a heaven of international business opportunities. Being a strategic located and close to most of the prominent markets with untapped potential makes, this region is more attractive to investors. The need to improve modest economic growth rates and to diversify, are likely to drive considerable structural change in Gulf economies. This would boost international marketing opportunities.

REFERENCES 1. Justin, Paul, Subhash. S. (2005), International Migration and its Impact with reference to Gulf migration – Some perspectives, Management and Labour Studies. 2. Rashid, Amjad (Ed. 1989), To the Gulf and Back: Studies on the Economic Impact of Asian Migration, New Delhi, ILO ARTEP. 3. Various articles published in Gulf News and Khaleej Times. 4. Various articles published. in ‘Gulf Business’ magazine 5. Websites of Central Banks and Ministries in Middle East countries 6. www.countrywatch.com 7. Internatiooal Financial Statistics, IMF, 2004. 8. 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

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Dubai International Convention Centre, Dubai, United Arab Emirates on September 18, 2003, from Website of IMF. 9. Growth and Stability in the Middle East and North Africa – Summary, from Website of IMF. 10. WORLD BANK report overview on Middle East And North Africa Region - 2005 Economic Developments, from Website of World Bank. 11. 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.

OBJECTIVE TYPE QUESTIONS 1. 2. 3. 4. 5.

Name the major public sector telecom company in UAE. Name the major airline company based in UAE. Petroleum resources accounts for % of GDP in Kuwait. GCC stands for . Name the capital of Oman.

REVIEW QUESTIONS 1. Discuss the structure of Middle East countries? 2. What are the advantages of doing Business with Middle East countries? 3. Discuss the salient features of UAE & Oman economy?

Chapter

Export Documentation and Procedures

Learning Objectives The reader should be able to • Understand the role and importance of export documents • Understand how to prepare each document carefully • Understand the step by step procedure involved in export business.

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SECTION 1: EXPORT DOCUMENTATION

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he 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 his 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 involved1 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 otherwise can hold back his payment or even get the export contract rescinded altogether in addition to creating legal complication for the exporter 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 these play 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: 1. Alan Branch (2000), Export Practices and Management, Thomson Learning, Business Press.

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(i) Commercial Documents These 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 buyer after realisation of sales proceeds. These documents include commercial invoices, bills of exchange, bills of lading, letters of credit, marine insurance policy and certificates of origin etc. These documents are the principle 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.

(ii) Regulatory Documents These 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 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’.

(iii) Export Assistance Documents These 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 concessional duty by an importer wherever there is free trade agreement.

(iv) Documents as Prescribed by the Importers’ Countries Any purchase from abroad or import transaction of the importer 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 etc. 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.

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Proforma Invoice 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 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 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 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) 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 2. C Ramagopal, Export-Import Procedures, New Age Publisher, 2006. 3. Justin Paul, International Business, 3rd Edition, Prentice Hall, 2007.

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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) (2) (3) (4) (5)

Directorate general of foreign trade and all its regional offices All development commissioners of special economic zones Export promotion councils Export inspection councils and agencies Commodity Boards and Export Authorities

TRANSPORT DOCUMENTS (DOCUMENTS RELATED TO SHIPMENT OF GOODS) Shipping Bill Shipping bill is the principle 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 trans shipment 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 information regarding 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 The bill of lading 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: (1) (2) (3) (4) (5) (6)

The shipping company’s name and address Date and place of shipment The name of the consignor The name and destination of vessel The description, quality, and destination of goods The private markings and numbers

4. Justin Paul, International Business, Prentice Hall of India, Pp. 306-307.

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The invoice number and date of shipment The gross weight and net weight of the consignment The number of packages Freight details Signatures and seal of the shipping company’s authorised agent.

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 the receipt and issuing a bill of lading. The goods received in lose, 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 shipping company has to use multi modal 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 exporter.

It refers to a bill of lading the freight for which has already been paid by the

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).

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 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 the 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

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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 (2) usage bill. (I) Sight Bill of Exchange 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. (II) 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 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. (III) 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 don’t use the term documentary bill of exchange in real life.

SECTION 2: 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

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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 definition above, we can draw out the following basic features of a letter of credit: 1. 2. 3. 4. 5.

It is an undertaking given by a bank to honour a financial commitment It is an undertaking given by the bank on behalf of its importer client It is an undertaking given by the bank to an exporter who may not be a client of the bank The undertaking will be honoured subject to fulfillment of certain conditions by the exporter 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 can not 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 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. 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 bank stands 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 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 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. 5. For more details, refer to Management of Banking and Financial Services by Justin Paul and Padmalatha Suresh, Pearson Education.

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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 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. 9. 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. 10. 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. 11. 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. 12. 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.

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13. 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. The Step by Step Illustration of an Import Contract with a Letter of Credit • An Indian exporter signs an export contract with an importer from the United States

Ø • The exporter instead of drawing his payment from the U.S. importer directly will request for arranging a letter of credit. (The importer will not pay in advance, therefore the need for LC arises)

Ø • The importer from the United States makes an application to his bankers in United States to open a letter of credit in favour of his supplier from India

Ø • The application will mention the terms and conditions on which such LC will be opened and the documents that will be submitted along with draft upon usance or sight

Ø • The importer will sign a contract with his bank for servicing the LC

Ø • The bank after opening the letter of credit will inform the notifying bank in India about the availability of such a credit and will ask the bank in India to confirm the availability of such a credit to the exporter

Ø • The notifying bank will now inform the exporter about the letter of credit along with the conditions stipulated to the credit

Ø • The exporter satisfies himself to the conditions given in the export contract vis-a-vis the conditions attached to the credit

Ø • Once the letter of credit is found satisfactory, the exporter proceeds with the manufacturing or making arrangement of the shipment for exports

Ø • Once the shipment has taken place, the exporter will prepare export documents to be presented to the bank; this will include bills of exchange too

Ø • These documents alongwith the draft will be submitted to the negotiating bank, who will verify all the documents with the terms set in the LC

Ø • The negotiating bank will send these documents, bills of exchange etc. to the foreign bank of the importer.

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SECTION 3: EXPORTS PROCEDURES The exports 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 importer- exporter code from the offices mentioned above.

Importer–Exporter Code Number It 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 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 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 6. Refer Justin Paul, International Business, 3rd Edition, Prentice Hall for more information and to get the addresses of these councils.

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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 exports and imports aspects related to international business. • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

Agricultural and Processed Food Products Export Development Authority (APEDA) Apparel Export Promotion Council Chemicals Pharmaceuticals & Cosmetics Export Promotion Council (CHEMEXCIL) Carpet Export Promotion Council Cashew Export Promotion Council of India Chemical & Allied Products Export Promotion Council Cotton Textile Export Promotion Council Coffee Board Coir Board Electronic & Computer Software Export Promotion Council Engineering Export Promotion Council Federation of Indian Export Organisations (FIEO) Gems & Jewellery Export Promotion Council Export Promotion Council for Handicrafts Handloom Export Promotion Council Handicrafts & Handloom Export Corporation Office of the Development Commissioner for Handlooms Development Commissioner for Iron Steel Indian Silk Export Promotion Council Indian Trade Promotion Organisation Council for Leather Export Marine Products Exports Development Authority (MPEDA) National Agricultural Cooperative Federation of India Ltd. (NAFED) Overseas Construction Council of India Powerloom Development and Export Promotion Council Plastic & Linoleum Export Promotion Council Rubber Board Shellac Export Promotion Council Sports Goods Export Promotion Council

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Spices Board Central Silk Board Synthetic & Rayon Textiles Export Promotion Council Tea Board Tobacco Board Wool & Woollens Export Promotion Council

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

SECTION 4: 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 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 importer. This contract will carry details on the terms and

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conditions of the international deal. Although there are no specified rules by any competent authority on the export contracts, but 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 fulfill 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 preshipment finances. The exporters can check with the banks and export promotion councils of their respective products as to how to avail these financial assistances. 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

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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 can not 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.

Export (Quality Control & Inspection) Act, 1963 The Export Inspection Council is responsible for the operation of this Act. Under the Act, a large number of exportable commodities have been notified for compulsory preshipment 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: • The Consignment Shipment • The Self Certification by the Exporter (i) The 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. 8. http://www.indiadairy.com/zone_importexport.html

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(ii) 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 Following categories are exempted from the compulsory preshipment: • Holders of ISO900/ BIS14000 or any other international quality certification • Products with ISI mark given by the Bureau of Indian Standards • In case the export contract has specifically waived off the inspection clause.

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 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 details 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. * CHA stands for Customs House Agent.

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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, ie. 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.

HANDLING EXCHANGE CONTROL TRANSACTIONS FOR EXPORTS 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 This 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 • The exporter or his CHA will be submitting two copies of the GR form to the customs at the time of shipment • The value and the particulars of the goods declared in this GR form will be verified by the customs • Once the shipment has taken place, the original GR form will be retained by the customs and the duplicate copy will be handed over to the exporter or his CHA. The original will be forwarded by the customs to the RBI • The exporter on his part is under the obligation to submit the duplicate copy of the GR form within 21 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.

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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.

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.

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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 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 ARE I 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.

REFERENCES 1. New EXIM Policy 2002-2007 and Handbook of Procedures, 2002-2007, Ministry of Commerce 2. Justin Paul, International Business, Prentice Hall of India, pp. 306-307.

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WEBSITES VISITED 1. 2. 3. 4.

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 5. https://www.ecgcindia.com/Portal/productnservices/guarantees/postshipmentexport/ postshipment.asp

SUGGESTED FURTHER READINGS 1. Alan Branch (2000) Export Practices and Management, Thomson Learning – Business Press. 2. Justin Paul (2007), International Business, 3rd Edition.

OBJECTIVE TYPE QUESTIONS 1. Which one of these is not a kind of bill of lading? (a) Clean Bill of Lading. (b) Claused Bill of Lading. (c) Stale Bill of Lading. (d) Clear bill of lading. (e) Transshipment Bill of Lading. 2. Importer–Exporter Code. Number does not have one of the following features (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. 3. Which one of these authorities issues the letter of credit? (a) Advising / notifying bank. (b) Paying Bank. (c) The Negotiating Bank. (d) Confirming bank. (e) The issuing bank. 4. Which one of the following is not a party to Letter Of Credit? (a) The opener applicant. (b) The beneficiary. (c) Paying Bank. (d) The Negotiating Bank. (e) The inspection authority.

Export Marketing Documents and Procedures

5. 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 6. 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) The shipping bill. (b) Quality control inspection certificate/ self declaration. (c) Letter of credit. (d) GR/SDF form. (e) Bill of exchange 7. 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. 8. 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. 9. 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... 10. The exports risks related to payment of export credits etc are covered by which government agency (a) Reserve bank of India. (b) Export promotion councils. (c) GIC and its subsidiaries. (d) Export Credit Guarantee Corporation. (e) The 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:

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A. B. C. D. E.

Consular invoice Mates receipt Bill of lading Bill of exchange Parties to a letter of credit

Annexure 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 case of Non Drawback shipment i.e. original, duplicate, triplicate (Export promotion copy) and two transference copies. In 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. 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

Export Marketing Documents and Procedures

6.

7.

8.

9.

10.

11.

12. 13.

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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. 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. 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. 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 shippingline. 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

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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. 14. 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 following manner:i. Inspected & found in tact the container bearing the following marks and numbers :- (1) (2) (3) ii. The customs seals on the above mentioned containers found in tact. 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 shipment of the goods, the concerned officer 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 Gateway 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

Chapter

Global Issues: The Internet and E-Commerce

Learning Objectives The reader should be able to • understand the significance of emerging issues in international marketing • understand how internet acts as catalyst to bring the world economies closer • understand the concept of global e-commerce.

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INTRODUCTION

T

he Internet and E-commerce are global web and tool that have contributed towards the increase of the international commerce by storm 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 into the fields of tele-communication, transportation, telephony and internet coupled with the nation’s willingness to open their economy for the new light of international integration through the World Trade Organization have created a single global market place. The distance holds no meaning in this kind of economic and geographical scenario. The new evolution of outsourcing have 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 have 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 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. Internet has brought 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 main stay 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 into the field of telecommunications, information technology and the availability of World Wide Web has given a new meaning to communicating with customers across the globe. The role of marketing stands revised with the opening of two ways 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 redevise their business strategies.

SECTION 1: 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

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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 has 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 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.

Emergence and Availability of Huge Global Market Potentials 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 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, Russia are moving from strictly controlled markets to market driven economies. The integration of all countries by way of economic liberalisation also brings forth the 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 on 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 when such issues are raised the low income, underdeveloped countries will always be at the receiving end.

Emergence of Global Customer Segment Infact, this 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 multi national corporations can concentrate more on product standardisations for the global customer, which results in economies of

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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 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. The 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 feed back. That makes the marketing communication a two way interactive process. The emergence of internet conferences has infact made 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 it was moved to the national and then 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 world wide 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.

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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 potentials 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 TELE MEDICINE * D -I-Y SUPPORT * TELEPLUMBING * AUTO REPAIRS * TEXT ADVISORY SERVICES * HOROSCOPE READING E-LEARNING * HOME SCHOOLING ADULT PROFESSIONAL COURSES RESKILLING * PERSONAL PRIVACY SERVICES PROVIDING SERVER SPACE TO INDIVIDUAL FOR RECORD MAINTENANCE

IT SERVICES • IT CONSULTING • SOFTWARE APPLICATION CONSULTANCY • KNOWLEGDE NETWORKING IT ENABLED SERVICES • DATA ANALYSIS AND DATA BASE CONSULTING. • HR AND ADMINISTRATION OUTSOURCING. • DIGITAL MEDIA AND CONTENT DEVELOPMENT. EARNING CONTENT, PUBLISHING AND ENTERTAINMENT ETC. • CAD/CAM DESIGN. • ANIMATION. • BIO INFORMATICS. • OIL-SHORE FINANCIAL SERVICES. • REAL ESTATE MANAGEMENT SERVICES. OTHERS R&D ACROSS INDUSTRY VERTICLES, SEMI CONDUCTOR TECHNOLOGY, DRUG RESEARCH ETC. LEGAL ADVISORY SERVICES FOR MNCs.

TOURISM • MEDICAL TOURISM, SPIRITUAL TOURISM, ADVENTURE TOURISM • DOLLAR SHOPPING CENTRES DUTY FREE SHOPPING ZONES EDUCATION • HIGHER EDUCATION FOR DEVELOPED COUNTRIES • TRAINING COURSES REVOLVING INDIA’S HERITAGE CULTURE AYURVEDA, CUISINE, YOGA ETC NURSING HOMES AND RETIREMENT SERVICES • ASHRAM MODEL • SETTLEMENT NEAR UNIVERSITY AND TOWNS TOURISM FOR CORPORATE CLIENTS EDUCATION SERVICES FOR CORPORATE CLIENTS

Source: India’s New Opportunity – 2020, All India Management Association, The Boston Consulting Group, 2003, Pp-19.

India’s Strategic Strength in Offering Services to International Markets

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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 field 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

Emergence of Internet Internet today is widespread in all spheres of international marketing. It has infact 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 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. 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 below: World Internet Usage Data

World regions

Africa Asia Europe Middle East North America Latin America Oceania/Australia World total

Population (2007 Est.) 933,448,292 3,712,527,624 809,624,686 193,452,727 334,538,018 556,606,627 34,468,443 6,574,666,417

Population % of World 14.2% 56.5% 12.3% 2.9% 5.1% 8.5% 0.5% 100.0%

Internet Usage, Latest Data 33,545,600 436,758,162 321,853,477 19,539,300 232,655,287 109,961,609 18,796,490 1,173,109,925

% Population (Penetration) 3.6% 11.8% 39.8% 10.1% 69.5% 19.8% 54.5% 17.8%

Usage % of World 2.9% 37.2% 27.4% 1.7% 19.8% 9.4% 1.6% 100.0%

Source: http://www.internetworldstats.com/stats.htm accessed on 10.06.2007.

1. Source: International Marketing, Rakesh Mohan Joshi, Oxford University Press, Pp 688-689 2. Source: Robert Zakon, Info.Asoc.Org/Guest/Internet/History/Hit.Html # Growth, 29 August, 1999.

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19

16

Middle East

Australia/Oceania

96 Latin America

233 North America

315 Europe

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Asia

500 400 300 200 100 0

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Global Issues: The Internet and E-Commerce

Source: http://www.internetworldstats.com/stats.htm accessed on 10.06.2007.

Region Wise Breakup of Internet Users of the World It can be observed 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. Percentage of Population Covered by Internet in the World North America Australia/Oceania Europe Latin America Asia Middle East Africa

70 60 50 40 30 20 10 0

69.7 53.5 38.9 17.3 10.7 10

3.6

1

Source: http://www.internetworldstats.com/stats.htm accessed on 10.06.2007

But even where the number of internet users have 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 (399millions), 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 Jerry Wand and Vijay Mahajan (Wharton school, University of Pennsylvania) in their unpublished working paper “Digital Marketing” have defined some of the concepts as under: • E-Marketing marketing.

The integration of information technology and the internet into

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• Internet The largest computer network in the world which links over 130 million people in the world. By 2003 this number was projected to grow to 350 million users in the world. (currently only Asia has 339 million users linked to the internet, and over 1000 million across the world) • Intranet A computer network that links users in a single company or organisation. Access to an intranet is limited to authorised users who are company or organisation members or employees. • Extranet A computer network that links authorised users. In contrast to the internet, it is not open to the general public and in contrast to the intranet it is not limited to members of a single organisation or a company. • World Wide Web It makes the internet more accessible and easier to use by non experts. Technically it is a system of hypermedia linking text, graphics, sounds and video on computers spread across the globe. • Portals Context suppliers that attract millions of web users with a wide swath of information, search services, email and chat rooms. • Web Browser Software used to navigate the hyperlinks that make up the World Wide Web. • Virtual Reality Imaginary worlds created by cutting edge computer technology, for example by wearing special head sets, consumers might get the idea of walking through the house and visualising and experiencing the rooms before the house is actually built. • E-Commerce Selling goods and services over the internet [business to consumer (B2C), consumer to consumer (C2C) and business to business (B2B)]. This is also sometimes referred to as E–business.

SECTION 2: 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 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.

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Similarly e-Banking is virtually the in thing in many developed and emerging countries. In many 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 world wide 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. Infact 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 will like to be wary of the competition springing up on the world wide web, hence will be more careful in providing the accurate and useful information on the internet. Such business to business transaction of commercial dealings result into a win win situation for the customers of undifferentiated products, as they can have a comparison of the same products world wide 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 into 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 3. Source: E-bussiness, What Every Business CEO Needs to Know, Business Week, 22nd March 1999, Pp-10. 4. Source: 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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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 as well as 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 consumer 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 the manufacturing process has 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 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, turn key 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.

SECTION 3: THE 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

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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’s 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. • • • • •

Context suppliers Sales agents Market developers Business processors Logistics specialists.

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! etc 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 main stay of financial transactions on the e-commercial selling. These intermediaries are arranging and managing the transfer of money to the sellers on a nominal service charge.

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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.

REFERENCES 1. President Bill Clinton, Global Issues, October 1997, Volume 2, Number 4. 2. International Marketing, Rakesh Mohan Joshi, Oxford University Press, Pp688-689 3. India’s New Opportunity – 2020, All India Management Association: the Boston Consulting Group, 2003, Pp19. 4. E-BUSINESS, What Every Business CEO Needs to Know, Business Week, 22nd March 1999, Pp10. 5. James A Warholic, “Internet Marketing B2B Vs B2C: Comparisons for the Twenty First Century.

WEBSITES VISITED 1. 2. 3. 4.

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

SUGGESTED FURTHER READINGS 1. Carpenter Phil, “E Brands”, Boston Harvard Business School Press, 2000. 2. Cairncross Francis, “The Death of Distance Economist Special Report on Telecommunications”, 30th September, 1995. 3. Dempsey Grey, “A Hands on Guide for Multilingual Websites”, World Trade, 1999. 4. Komenar , Margo, “Electronic Marketing”, John Wiley And Sons New York, Inc., 1996 5. Rayport, Jeffery F. and John J. Sviokla, “Exploiting the Virtual Value Chain”, Harvard Business Review, November –December 1995, Pp75-85. 6. Warren J Keegan, Global Marketing Management, Pearson Education, Inc, 2005.

Global Issues: The Internet and E-Commerce

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 this system, which 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. (a) B2B. (b) B2C. (c) C2B. (d) C2C. (e) Br. to Br. 7. 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. 8. 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.

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9. Intranet: 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. 10. State true or false (a) E commerce is also referred to as E marketing that permits the marketing and commercial transactions on the internet. (True/False) (b) The breaking down of geographical boundaries by the internet has resulted into a revolutionary approach to services marketing all across the world (True/False) (c) The advent and spread of internet have created a new instant world of reaching the message to millions and billions across the globe. (True/False) (d) The relationship building has become an interactive and two way communications due to the spread of internet. (True/False) (e) The distance and time holds no meanings in the world of internet and e commerce. (True/False)

REVIEW QUESTIONS 1. “E-Marketing is boundary less”, critically examine this statement in the light of growth of the Internet. 2. Identify the types of models on the e-commerce. Support your arguments with suitable examples. 3. Identify the key intermediaries forming a value chain on the internet. Explain each one’s functioning. 4. 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.

EXERCISE 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.

1

Case Study

International Market Entry of a Foreign MNC in India: The Case of Holcim

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olcim, the multinational giant in cement industry, entered into a strategic alliance on 20th January 2005, with Gujarat Ambuja Cement to make an entry into the growing and emerging Indian market.

H

A BRIEF ON HOLCIM Holcim holds the number two position amongst the leading cement producers of the world with a turnover of US$ 9.4 billions (2003) and a market capitalisation of US$ 12 billion. It is one of the world’s biggest suppliers of cement, aggregates (gravel and sand), concrete and construction related services. The group has had a very humble beginning in 1912 in a remote Swiss village and has ever since covered many milestones to reach the coveted position of being number two in the world cement industry. The company today has very strong market presence in more than 70 countries the world over through minority or majority stakes. Value creation is Holcim’s goal. Three distinct strategic thrusts support this goal: • product focus • geographic diversification, and • local management with global standards All of this rests upon a most important base: the people who work for Holcim. Holcim’s strategy is characterised by sustainability—in the sense of long-term profitability in harmony with environmental and social progress. Holcim’s core competencies are innovative production and marketing of value-adding products and services. With a market presence in every continent, Holcim is a global company. As part of its growth strategy, the Group has continuously strengthened its position in emerging markets. Around three quarters of operational capacity is based in emerging markets, accounting for 45.7 percent of the Group’s net sales. However, Holcim aims to keep a balanced portfolio between developed industrial and emerging high growth markets. It was but natural that the emerging economies of India would attract the attention of this global player and the international giant entered into strategic alliance with Gujarat Ambuja Cement Limited to acquire ACC Limited, and added the 71st country to its list. We will, through this case, try to understand the implication of this high profile international foreign direct investment into one of the leading Indian cement companies.

HOLCIM’S CORPORATE PROFILE In 2006, Holcim recorded sales of over 23 billion Swiss francs. The Group currently employs some 90,000 people. With market oriented structures, new products, skilled employees and efficient environmental management systems, Holcim ensures a strong position now—and for the years ahead.

Holcim’s Mission Statement and Corporate Goals The main mission of the Holcim group is to provide foundations for society’s future. The company’s mission is to be the world’s most respectable and attractive company in the cement industry, creating values for all the stake holders. The major goals as elicited on the official website (http://www.holcim.com/), of the company are: • Continually set the highest standards of customer satisfaction in our industry • Secure the strongest competitive position in our markets

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• • • • • • •

351

Partner with suppliers to deliver value for cost procurement for the group and customers Be recognised as an employer of first choice Empower our employees and integrate them fully into our global network Selectively grow our world wide presence of companies Demonstrate our commitment to sustainable development Be valued as a trusted partner in our community Be the most recommended stock in our industry

HOLCIM’S HISTORY • Founded 1912: Holcim was established as a company in Switzerland. • 1920: The company tasted international expansion by investing in cement business in other European countries as also in Egypt, Lebanon and South Africa. • 1945: Holcim’s network spread into North and Latin America and continued spreading in fifties and sixties too. • 1970: The company ventured into emerging markets of Asia Pacific region. • 1980: This year saw Holcim getting into Eastern Europe. • 1990: The company increased its focus on core business in cement, concrete, and aggregates. Leadership position attained through, employees’ empowerment, best management policies. • 2000: Holcim emerged the numero uno in Asian countries too. The name too changed from Holderbank Financiere Glaris Ltd. to Holcim Ltd.

The Deal: Holcim-Gujarat Ambuja Strategic Alliance True to its trend of growing through acquisitions and participation in the global network of cement manufacturers, Holcim has been keen to enter into the Indian cement market. The opportunity presented itself when the board of directors and executive committee of Holcim agreed to get an entry into Indian market through an alliance with the one of the major cement manufacturers of India, Gujarat Ambuja Cement Limited. As per this alliance the two signatories to the joint venture will create value addition projects in India and become common partners to gain long term benefits from the emerging and growing cement and other aggregates’ market in India. The following are the major features of this alliance: 1. Technical collaboration between a major global group of the status of Holcim and Gujarat Ambuja Cements Limited in order to encash the local expertise, strong brand presence and sizeable market share of Gujarat Ambuja Cements Limited 2. Strengthening of the alliance by sharing experience in all areas of cement manufacturing, marketing and through exchange of managerial and technical talents 3. Strengthening the cement and clinker trading activities in South Asia and the Middle East 4. Using India as an additional base for the IT operations of Holcim and its research and development projects. India can also be used as a procurement / sourcing hub by Holcim to generate additional synergies and value for the group. The Investment Methodology: Holcim enters into an agreement with AIG / GIC, both private investors to acquire 40% stake of Ambuja Cement India Limited and simultaneously signs a share

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subscription agreement with Ambuja Cement Limited that allows Holcim to raise its participation to 67 percent in Ambuja Cements. As per the understanding of the strategic alliance between Gujarat Ambuja Cements Limited and Holcim, Ambuja Cement India Limited announces the public purchase offer for acquiring a majority share holding in the Associated Cement Company Limited (ACC). Through ACIL, Holcim makes an offer of Rs. 370 per share to the existing shareholders of ACC, with the plans to raise share holding to 50.01 percent. (ACIL, already owns stakes of 13.8% in ACC.) ACIL also holds 94% shares of Ambuja Cement Limited, a company that has shown the maximum profits in Indian cement industry in recent years. Through this arrangement Holcim will be investing a total of US $ 850 millions, financed through internal accruals, and already established credit sources.

A BRIEF ON INDIAN CEMENT INDUSTRY India is the second largest cement market of the world growing at a rate of 7 to 8%. The Indian cement industry posted a turnover of US$ 9,700 millions in the year 2005, having produced 141.81 million tons of cement in the year 2005-2006. The demand for cement in India is directly related to the growth in construction, infrastructure development and housing sector. This sector has been the major focus area of

Jammu & Kashmir

Uttarachal

Haryana

Delhi Bihar Uttar Pradesh

Rajasthan

Gujarat

Arunachal Pradesh Meghalaya Assam Sikkim

Himachal Pradesh

Punjab Chandigarh

Nagaland

Manipur

Madhya Pradesh

Tripura Mijoram West Bengal Jharkhand Orissa

Maharashtra

Andhra Pradesh Goa Chhattisgarh

Tami l

Kerala

Nadu

Karnataka

Cement Map of India (as on 31.03.2006) Source: http://www.cmaindia.org/industry.html

Padicherry

Andaman & Niocobar

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growth ever since the economy opened itself to international participation and the CAGR of 7 to 8 percent in this sector is likely to continue for some more years to come. Besides, the Indian cement industry offers a major cost advantage as compared to the industry in other parts of the world. Over the years it has introduced major technological upgradation. The consolidation of Indian cement industry into the controls of a limited number of players has further added to the strengthening of the volumes profitability in the business. Today Indian cement industry is better placed in terms of profitability as compared to the other cement manufacturers of the world. Given below is the comparative statement of the operating profitability of some of the top cement manufacturers of the world. Lafarge

Holcim

Italcement Cement

Madras Cement

India Ambuja

Gujarat

13.38%

26.3%

24.76%

24.6%

12.9%

33.9%

Operating Profit Margins: World Select Top Cement Companies.1 Given below is the major capacity and market share position of top five Indian manufacturers who control more than 50% capacity and market share of the Indian cement industry. Company Grasim Cement Associated Cement Co. Ltd. Gujarat Ambuja Cement Ltd India Cement JK Group Total

Percentage capacity 19.94 11.30 8.01 5.64 4.11 49.00

Percentage market share 21.44 12.78 9.51 5.39 4.70 53.82

Capacity Built Up /Market Shares Top 5 Indian Cement Companies2

The Opportunities for Growth in Indian Cement Industry According to Crisil estimates, a demand supply gap of 40 millions tonnes still exists which is likely to be filled up in next five years. Two-thirds of this demand will be met by setting up green field projects which offer a great scope for new projects and foreign direct investments. In addition to this the following few factors make Indian cement industry a favorable investment decision. Developing Infrastructure Indian infrastructure is actively involved in developing stage. The national highway development project is in the process of building up the road network running from the North South Corridor to East West Corridor, in addition to the Prime Minister’s Golden Quadrilateral project. The total road network of around 14,000 kms is under construction, which offers a huge potential of cement consumption. In addition, the emphasis of local bodies in towns planning to go for cemented roads, the laying of six lanes and four lanes of national /state highways, will add additional 3 to 4 percent demand to 1. Source: CMA Website Site:http://www.cmaindia.org/industry.html 2. Source: CMA Web Site:http://www.cmaindia.org/industry.html

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the existing CAGR of 8 percent per annum. The development and modernisation of four international airports, sea ports, rail roads, power plants all will boost the demand for cement. Developing Housing Sector The Indian housing sector has witnessed unprecedented boom in its growth rate due to burgeoning population, attractive interest rates and customer friendly schemes offered by the banking sector. The tax sops and incentives offered by Government policy further attract new investments in housing sector. The Housing Finance Ministry estimates show a growth of 50% per annum for the next three years in the housing sector with latent demand of 33 million houses in this period. This unprecedented boom will generate demand for cement all across the country. Liberal Fiscal Policies Sales tax incentives, exemptions, tax free periods are offered by the state governments to attract location of plants in their respective states. The government import / export policy too offers incentives in the shape of duty draw backs on imports of coal, furnace oil etc., to encourage imports and exports of cement. The laws related to urban land ceiling are also being relaxed in many states to make land available for housing projects.

A Brief on Gujarat Ambuja Cement Limited— The Strategic Alliance Partner The producer with the lowest cost and highest operating profits was set up in 1986 with installed capacity of two million tons, in Chandrapur (Maharashtra). The company also has manufacturing facilities in Himachal Pradesh, Gujarat, Chhattisgarh, Punjab and Rajasthan. As seen above, the company currently controls around 10 percent of Indian market share. It has shown highest operating profit margins of around 34 percent due to its cost efficiency measures introduced in cement manufacturing. Gujarat Ambuja also holds 14.45 percent shares of ACC Limited which makes it obvious why Holcim has chosen this company as a strategic alliance partner. The company posted a total sales turnover of US$ 526 millions in the year 2003-20043, 4.

A Brief on Associated Cement Companies Limited ACC Limited is India’s foremost manufacturer of cement and ready mix concrete with a countrywide network of factories and marketing offices. Established in 1936, ACC has been a pioneer and trend-setter in cement and concrete technology. ACC’s brand name is synonymous with cement and it enjoys a high level of equity in the Indian market. Among the first companies in India to include commitment to environment protection as a corporate objective, ACC has won several prizes and accolades for the environment friendly measures taken at its plants and mines. The company has also been felicitated for its acts of good corporate citizenship. Products ACC range of cements and blended cements is marketed through a network of 19 sales units, 54 area offices, and 194 warehouses. This is backed by a countrywide network of over 9,000 dealers who, in turn, are assisted by their sub-dealers. 3. http://www.gujaratambuja.com/index1.html#. 4. http://www.business-standard.com/common/storypage

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ACC’s marketing, sales and distribution processes are of best industry standards. It has been the major supplier to some of India’s most admired projects; ACC is essentially a people’s brand of cement with more than 80 percent of sales made through an extensive dealer network that covers every state in India. Its customer base represents the masses of India - individual homebuilders in small towns, rural and semi-urban India. ACC cement enjoys an image of assuring consistency and of high quality backed by in-house research and expertise. Complementing this is a unique customer services cell comprising qualified civil engineers, who assist and advice customers with prior and post sales service. This service begins with selection of type and grade of cement (where applicable) to troubleshooting and on-site assistance. ACC manufactures the various kinds of portland cement for general construction and special applications. In addition to this, ACC offers two value added products namely, Bulk Cement and Ready Mix Concrete.5

REFERENCES 1. 2. 3. 4.

The Times of India, Mumbai. The Economic Times, Mumbai Business Standard, Ahmedabad. Cement Manufacturers’ Associations’ Reports.

WEBSITES VISITED 1. 2. 3. 4. 5.

http://www.holcim.com http://www.cmaindia.org/industry.html http://www.gujaratambuja.com/index1.html#. http://www.business-standard.com/common/storypage http://www.acclimited.com/newsite/products.asp

REVIEW QUESTIONS 1. Discuss the impact of economic growth on cement demand in India. 2. How do you visualise the role of foreign direct investment in core industry of India? Discuss some of the merits and demerits of opening of the core industry to FDI. 3. Visit website of the competitors of Holcim e.g. LAFARGE (http://www.lafarge.com) and prepare a similar corporate profile for that company. 5. http://www.acclimited.com/newsite/products.asp

Case Study

Logistics Solutions in Information Technology Business–Approach to International Distribution & Supply Chain Management

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HISTORY OF THE COMPANY

R

edington 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 of September 2006 contributed Rs. 16274.13 millions to Redington’s total revenue. Profit after Taxation PAT from India operations have 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 Vision is to make Redington the most innovative Supply Chain Management Services Company, focused on highest value creation for its customers and shareholders. 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 downloaded from the official website http://www.redingtonindia.com/history.asp )

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 major transformation during this period in terms of number of products, distributors, and resellers, channel and vendor

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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 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 centers as most of the multinational vendors did not have any service 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 centers and has grown to 43 which include three franchisees and 40 partner centers. At the service centers 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 centers 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 center 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

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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, specialty 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 center to enable recovery and recycling. 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 location 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.)

WEBSITES VISITED 1. 2. 3. 4. 5.

http://www.redingtonindia.com/history.asp http://www.dqindia.com/content/ http://www.blonnet.com/i http://www.channeltimes.com http://www.dqchannels.com

Logistics Solutions in Information Technology Business

REVIEW QUESTIONS 1. Carry out a survey on the internet to identify at least five major IT distributors in India who 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 article identify three core services models that Redington provides to customers.

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Case Study

Internationalisation of Wipro Technologies

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A

t Wipro they have fine-tuned the science of viewing innovation though the lens of practicality to design unique solutions for end customers. Applied Innovation is the ability to infuse newer ideas and newer ways of doing things into all parts of the organisation, and improve business outcomes, often without major disruptive change. It is a 360-degree business approach covering process, delivery, business and technology Innovations that help Wipro to work collaboratively with clients for cost take-outs, speed to market and new business opportunities. This approach is backed by a 25-year heritage in providing domainintensive technology solutions and a solid delivery backbone with industry leading credentials and certifications such as CMMi Level 5 and BS15000. (Source: http://www.wipro.com/index.aspx)

HISTORY OF COMPANY WIPRO, the short form has been derived from The Western India Vegetable Products Company which was founded in early 1950s basically to manufacture and market vegetable cooking oil. The transition of The Western India Vegetable Products Company to Wipro is an interesting journey and through this case study we will have a brief look into the Wipro fact file to understand how it moved from a regional company to an international giant in a short span of 35 to 40 years. The reigns of the company had been inherited by Mr. Aziz Premji from his father in 1966. The company continued making inroads into the vegetable oil business for almost a decade in his guidance and leadership. However a decision to venture into computers hardware in 1981 and into software in the year 1984 changed the entire direction of the business Wipro had to handle in future. This, infact, was the time when international computer giant IBM had been asked to move out of India. The soft drink giant Coca Cola, too had been virtually forced to move lock, stock and barrel from the country. The Wipro logo of the rainbow flower stands for the four basic values of integrity, innovative solutions, human values and value for money. It distinctly stands out as the brand identity of the corporation. The inscription below the flower “Applying Thought”, represents a promise by the company the essence of Wipro personality. Milestones in Wipro’s Journey to a Global Mega Corp.: Wipro has traveled a long distance to reach the stage of an international leadership position. • • • • • • • • • • • • • •

1945: Incorporation of Western India Products Limited 1947: An oil mill and hydrogenated cooking medium plant set up 1966: Azim Premji takes over the leadership of Wipro at the age of 21 1975: Wipro Fluid Power set up to manufacture hydraulic and pneumatic cylinders 1977: Name of the company changed to Wipro Products Limited 1980: Information technology services for domestic market started 1981: Hardware Company launched 1982: Name of the company changed to Wipro Limited 1990: Incorporation of Wipro G E Medical Systems. 1992: Wipro Goes Global with IT Services Division. 1993: Business Innovation Award for Offshore Development 1995: Wipro Gets ISO 9001 Quality Certification, Recertified Twice for Mature Processes 1997: Wipro Gets SEI CMM Level 3 Certification 1998: Landmark Achievement: Wipro First Software Services Company in the World to get SEI CMM Level 5 Certification.

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1999: Wipro’s Market Capitalisation in India beats every other company. 2000: Listing of Wipro Ltd.’s ADRs on New York Stock Exchange 2000: Six Sigma initiatives begun 2001: Bags $70-mn SI order, largest ever till overtaken by TCS 2001: First Indian company to achieve the “TL 9000 Certification” for Industry Specific Quality Standards. 2001: World’s First PCMM Level 5 Company and ranked 87 amongst 100 Best Performing Technology Companies Globally. (Business Week 2001 June) 2004 Crossed the $1 Billion Mark in Annualised Revenues 2006: Wins a Global Service Award with GM 2006: Wipro sees net profit for the three months to September rise 48% to $152m (£81m)

Wipro as it Stands Today Wipro Technologies is a global services provider delivering technology-driven business solutions that meet the strategic objectives of its clients. Wipro has 40+ ‘Centers of Excellence’ that create solutions around specific needs of industries. It delivers unmatched business value to customers through a combination of process excellence, quality frameworks and service delivery innovation. Wipro is the world’s first PCMM level 5 and SEI CMM level certified IT Services Company and the first company outside USA to receive the IEEE Software Process Award. It provides comprehensive IT Solutions and Services, including System Integration, Information System Outsourcing, Package Implementation, Software Application and Development, and Research and Development Services to corporations globally. Wipro is also a leader in the Indian market in providing IT solutions and services for the corporate within the country. In India it offers system integration, network integration, software solutions, and IT services. The company’s ADRs are listed on the New York stock exchange, and the equity shares are listed on the Bombay Stock Exchange, and the National Stock Exchange in India in addition to many others. Wipro’s major competitors include an impressive list of international mega corporations e.g. Accenture, CA, Capgemini, EDS, KPIT Cummins, IBM, Infosys, TCS, Satyam, S2 Technical Strategies, Patni and HCL.

WIPRO’S BUSINESS DIVISIONS: GLOBAL BUSINESS DIVIDED INTO FIVE MAIN DIVISIONS 1. Consulting Services True value from technology requires an in-depth understanding of business strategy. Today’s businesses need partners who can talk about strategy and technology in the same conversation. Wipro believes that true value from technology requires an in-depth understanding of business strategy. Its cross-industry consulting services help its clients craft a vision for their organisation and then provide a specific, practical business and technology framework that makes their vision a reality. Its consulting competencies are spread across business, process, quality and technology consulting.

2. IT Services Wipro’s complete range of IT Services addresses the needs of both technology and business requirements to help organisations leverage leading-edge technologies for business improvement. Wipro takes charge of the

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IT needs of the entire enterprise. The range of its services extends from Enterprise Application Development and Maintenance, Architecture Consulting, Business Process Management, Content Management, etc. These services stretch across sectors like finance and banking, insurance, to health, utilities, government and hospitality.

3. Product Engineering Services The product manufacturers and the platform vendors across the world are keen to reduce the gestation period of product innovation, by bringing down the development cycles of new products and eventually reduce the cost of new innovations. For this such firms have to depend on the solution providers in their search for better and innovative ways of product life cycle management. Wipro technologies act as a solution partner to provide comprehensive and 360 degrees solutions in product life cycle management and product realisation. The company has developed a model called extended engineering “that allows leveraging of synergies across the value chain and swift progress from concept to market. It is now one of the largest contracts R&D houses in the world for telecom, auto, and electronics aerospace defense and satellite, computing systems, industrial automation, medical devices, printing and digital imaging, semi conductors, software products and storage.

4. Business Process Outsourcing Wipro provides a large number of services that include customer relationship management-back office transaction processing to industry specific solutions. The key element of services delivery is an integrated approach towards providing increasing value over the entire course of client relationship. This involves a phased approach towards process standardisation, process optimisation, and process reengineering. With over 16,000 people, operating out of nine different locations (India and Eastern Europe), Wipro BPO has been a critical partner to all its customers in achieving their business goals. It services customers in various industries including banking & capital markets, insurance, travel & hospitality, hi-tech manufacturing, telecom & healthcare sectors. Wipro BPO also has deep expertise in delivering process specific solutions in areas like finance & accounting, procurement, HR services, loyalty services and knowledge services.

5. Technology Infrastructure Services Wipro’s Technology Infrastructure Services (TIS) is the largest Indian IT infrastructure service provider in terms of revenue, people and customers with more than 200 customers in US, Europe, Japan and over 650 customers in India. It is powered by the expert skills of over 6,500 technical specialists and state-of-the-art BS 15000 certified infrastructure for operations support.

WIPRO’S GLOBAL OPERATIONS Wipro Technologies has over 300 customers across USA, Europe and Japan including 50 of the Fortune 500 companies. Some of its customers are Boeing, Cisco, Ericsson, IBM, Microsoft, Prudential, Seagate, Sony, Sun Microsystems and Toshiba. It is listed on the New York Stock Exchange and is part of its TMT (technology media telecom) index. With revenue in the excess of US$ 3 billion, Wipro is one of India’s major information technology companies. It has dedicated development centers and offices across India, Europe, North America and Asia Pacific. Wipro is ranked globally amongst the top five software companies. The company operates through almost double the number of locations in United States as compared to its locational strength in India. In addition, it

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Europe

Canada & USA

Asia pacific Middle East

also has a strong presence in Melbourne, in Shanghai, in Tokyo, and in Taiwan. Its location in Dubai provides it with a strategic benefit of growing substantially as and when the trade barriers in Middle East fall. Wipro has won a global service contract with GM which is designed to integrate the company’s Middleware Systems and Information Systems and Services Software Tools around the world. The five-year agreement calls for Wipro to sustain, define and develop new middleware systems and IS&S tools globally. The remote managed infrastructure delivery solution of Wipro Technologies, the Global Services Division of Wipro Limited, The Global Command Centre, has been awarded NASSCOM’s IT innovation award for 2005. NASSCOM’s IT innovation is a quest for the most imaginative “out of the box” product, service and framework ideas in the Indian IT and BPO industry and aims to catalyse the process of technology advancement and development of original information processing in the management services.

WIPRO’S PAST THREE YEARS ANNUALS REPORTS (HIGHLIGHTS) March 2003 Wipro calls it a journey in leadership–the journey that is as much about people as it is about business. The report emphasises values and integrity while calling for innovativeness and quality. Revenues for the year up by 16% at Rs. 40,327 millions. Profit after tax down by three percent netting Rs. 8,395 millions. Foreign exchange earnings go up by 23 percent at Rs. 28,866 millions. March 2004 Focus on innovation “Innovation Is Wipro, Wipro Is Innovation”. The company crossed one billion mark in annualised revenues. Revenues of foreign exchange Rs. 38,357 millions, a jump of 33% over last year. March 2005 Company highlights the social responsibility of a corporate. “Practicing Values to Create Values” is the theme of the year; revenues for the year Rs. 73,267 millions, a growth of 39 percent and gives a profit after tax of Rs. 14,948 millions, a steep jump of 63 percent over last year. Impressive foreign exchange earnings additional growth of 40% over last year added Rs. 53,736 millions to the company’s earnings.

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REFERENCES 1. Wipro Annual Reports for 2003, 2004, and 2005. 2. Business India Magazine. 3. Business Standard, Ahmedabad.

WEBSITES VISITED 1. 2. 3. 4. 5. 6.

http://en.wikipedia.org/wiki/Wipro http://www.wipro.com/webpages/itservi http://qualityconsulting.wipro.com/continuousimprovement.php http://www.ciol.com/content/news/ http://www.indiadaily.com/editoria http://cities.expressindia.com/fullstory

REVIEW QUESTIONS 1. Do you agree that Wipro technologies can be truly called an international organisation? Substantiate your answer with examples. 2. What in your opinion have been the major achievements of Wipro technologies over past 20 years in the field of information technology? Elaborate your answer with examples from the above case study. 3. Visit the website of any of the competitors of Wipro technologies e.g. Accenture, Infosys, TCS, or Satyam and construct similar case study for discussion in your class room.

Objective Type Questions

Section I: True/False State if the following sentences are true or false. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

The major objectives of WTO agreement on agriculture is to make policies more market oriented (T/F). The agreement on TRIMs applies only to measures that affect trade in goods (T/F). Foreign Institutional Investors (FIIs) are allowed to invest in non-listed companies (T/F). Quantitative Restrictions (QRs) refer to limits set to curb imports (or exports) (T/F). High Uncertainty Avoidance ranking indicates that the country has high tolerance for uncertainty and ambiguity (T/F). Women may not wait for a man to offer his hand first in a Muslim country, if a Western handshake is going to be used (T/F). According to Porter, a nation does not attain a competitive advantage just because its firms are competitive (T/F). Countries with a short-run outlook and strategy will tend to be less competitive in industries where investment is short term (T/F). An international acquisition makes the acquired local firm a subsidiary business within its global portfolio (T/F). In the right circumstances, the presence of foreign firms reduces market concentration and promotes a more competitive market structure (T/F). The term “core competencies” refers to the processes within the firm that competitors cannot easily match or imitate (T/F). McDonald’s is a good example of a firm that has grown by using licensing strategy (T/F). A joint venture (JV) is a strategic alliance between two or more parties to undertake economic activity together (T/F). A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of its own (T/F). Formation of export consortia type of cooperative marketing groups disables the individual firms to take advantage of joint marketing efforts, joint marketing research and joint shipments (T/F). In the cost and freight (C&F) type of pricing system, any insurance of the goods up to the point of unloading or discharge is the responsibility of the exporter/seller (T/F). Proforma invoice is a proforma of the invoice prepared by an exporter and sent to the importer for necessary acceptance (T/F). The consular invoice is an important document, which needs to be submitted for certification to the embassy of concerned country, and is applicable to all the countries (T/F). Globalisation is a reversal phenomenon (T/F).

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Globalisation has an adverse effect on customer (T/F). Merchants exporters manufacture the goods and then exports (T/F). Indirect exporting is done through an agent (T/F). Exporting is less expensive than establishing subsidiary (T/F). Franchising is less expensive made of global market entry than joint venture (T/F). India has complied with WTO, TRIPS obligation in pharma industry (T/F). Cultural differences can affect the success or failure of international firms (T/F). Trade mark does not guarantee products quality (T/F). An importer can send a purchase order without waiting for proforma invoice (T/F).

Section II: Multiple Choice Questions 1. There are many important reasons why we are better off with the WTO system than we would be without it. Which of the following argument is not for WTO? (a) The system helps promote peace. (b) Disputes are handled constructively. (c) Rules make life difficult for all. (d) Free trade cuts the cost of living. (e) Trade raises income. 2. In WTO’s agreement on agriculture, four countries used “special treatment” provisions to restrict imports of particularly sensitive products during the implementation period, but subject to strictly defined conditioned, including minimum access for overseas suppliers. In this context, which of the following countries used special treatment? (a) Japan. (b) Republic of Korea. (c) Philippines. (d) Israel. (e) All of the above. 3. The newly committed tariffs and tariff quotas, covering all agriculture products, took effect in 1995. The Uruguay Round participants agreed that developed countries would cut the tariffs by an average of the percentage and the period as under: (a) 36% in equal steps over four years (b) 36% in equal steps over six years (c) 24% in equal steps over four years (d) 24% in equal steps over six years (e) None of the above 4. Consequent to the trade liberalisation and globalisation during the later half of 1990s, many items under the Special Import License were shifted to Open General License (OGL). The Indian economy has become fully integrated with the world economy, with the removal of Quantitative Restrictions (QR), in two phases i.e. on 01 April 2000 and 01 April 2001, in respect of the following number of items: (a) 1249 (b) 1429 (c) 1924 (d) 2149 (e) None of the above. 5. In relation to balance of payment purposes, India had to maintain some quantitative restrictions on imports, which are included in (a) restricted list (b) special import license (c) canalised items (d) all of the above (e) none of the above

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6. India has been instrumental in setting up SAARC, whose major achievement in 1995 was the conclusion of the negotiations on trade preferences within the framework of the SAPTA. SAPTA is an abbreviation for (a) South Asian Preferential Trading Agreement (b) South Asian Preferential Trading Arrangement (c) SAARC Preferential Trading Arrangement (d) SAARC Preferential Trading Agreement (e) None of the above 7. Dr Geert Hofstede conducted perhaps the most comprehensive study of how values in the work place are influenced by culture. The study initially was done to develop a model, which comprised of four primary dimensions. Later he added a fifth dimension i.e. long term orientation (LTO). LTO explains us the extent to which a society exhibits a pragmatic future oriented perspective rather than a conventional historic or short-term point of view. Countries scoring high on this dimension are (a) Western Countries (b) North European Countries (c) America (d) Asian Countries (e) None of the above 8. Non-verbal communication can be called the Silent language. It has following dimensions: (a) space (b) friendship (c) time (d) business agreements (e) all above 9. Handshake is an important mode of greetings. The style of handshaking however, differs from country to country. A firm handshake has been traditionally used as mutual exchange of greetings, in the following country/countries: (a) US and Europe (b) Japan (c) None of the above 10. The doctrine of one of the theories of 16th and 17th centuries of international trade advocates that countries should simultaneously encourage exports and discourage imports. Which theory are we talking about? (a) Theory of Absolute Advantage (b) Theory of Comparative Advantage (c) Heckscher-Ohlin Theory (d) Theory of Mercantilism (e) None of the above 11. Porters Diamond Model for the Competitive Advantage of Nations, talks about four attributes. Identify as to which of the following attributes does not form part of the Porter’s Model. (a) factor conditions (b) supply conditions (c) demand conditions (d) firm strategy, structure and rivalry (e) related and supporting industries 12. FDI occurs when a company invests in real state in a foreign country to produce or to market a product. According to US department of Commerce, foreign investment is considered as FDI whenever an organisation takes an interest of (a) 5% or more in a foreign company (b) 10% or more in a foreign company (c) 15% or more in a foreign company (d) 20% or more in a foreign company (e) Any percentage

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13. The factor that determines whether a company has to invest abroad in the form of FDI is (a) Cost of transportation (b) Strategic rivalry (c) Product Life Cycle (d) Location (e) All above 14. The product Life Cycle Theory was developed by (a) John Dunning (b) Raymond Vernon (c) F.T. Knicker Bocker (d) Michael Porter (e) None of the above 15. The FDI investments in developing countries are governed by various factors, which can very well be called determinants of FDI. These determinants are related to (a) laws and regulations of the country (b) general business environment and administrative procedures (c) resource cost structure (d) cultural ties between two-party countries (e) all above 16. FDI helps the host country in (a) building or expanding procurement network (b) building or expanding marketing network (c) increasing foreign exchange earnings (d) reducing the risk sharing in comparison to foreign debt (e) all above 17. Transnational Strategy for competing in the international market, has a distinct disadvantage that (a) It does not exploit experience curve location economies effects (b) It is not customised to local responsiveness (c) It does not reap the benefits of global learning (d) It is difficult to implement due to organisational problems (e) None of the above 18. The firms that pursue transnational strategy for entry maintain the following in respect of flow of offerings pertaining to skills and product (a) flow of competencies from home to foreign subsidiaries (b) flow of competencies from foreign subsidiary to home country (c) flow of competencies from foreign subsidiary to foreign subsidiary (d) all above (e) non of the above 19. Strategic Planning for relating to the future is conducted at the highest levels of management and deals with the following (a) product (b) capital (c) research (d) long and short term goals. (e) all above 20. The major problems in going global for business are: (a) non-exploitation of economies of scale in production due to labor and transportation of raw materials and finished goods

Objective Type Questions

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(b) unifying of product development, purchasing and supply activities across countries will result in varied quality due to cultural differences (c) problems of coordination and integrating marketing activities and transfer of experience and know-how due to variations in the local rules and policies (d) diversity of markets due to variations in the tastes and preferences (e) none of the above The major difference between licensing and franchising is that (a) licensing is explicitly applicable to manufacturing firms and franchising to service sector firms (b) licensing involves large capital outlays while franchising does not involve capital at all (c) licensing relates to rights pertaining to trade mark, patent, use of technological designs, etc. while franchising provides no rights at all (d) licensing gives total freedom of management to licensee, while franchiser retains the control over operations of the franchisee (e) none of the above Which of the following is not a disadvantage in respect of turnkey projects be? (a) no long-term interest in the foreign country (b) may create a competitor (c) selling process technology may be selling competitive advantage as well (d) amount of risk in relation to FDI (e) none of the above The following is the common reason for companies having foreign subsidiaries: (a) risk management (b) as a result of acquisition (c) regulation or licensing (d) taxation (e) none of the above The following is not a form of direct exporting: (a) domestic based export department (b) domestic based export merchant (c) overseas sales branch (d) traveling export sales representative (e) foreign based distributors The following is a form of joint venturing: (a) licensing (b) international franchising (c) contract manufacturing (d) joint ownership (e) all above The following is not true in respect of IEC number: (a) IEC number is the first and a must for the exporters and importers (b) It is a permanent number and has no expiry date (c) It is valid for both export and import (d) It is valid for all products (e) IEC is of 10 digits and a letter suffix Which of the following is not a correct definition? (a) Issuing bank is one that issues the credit i.e. LC. (b) Advising bank is the one which advises the credit to the beneficiary. (c) Nominate bank is the bank nominated by the applicant to receive the payment.

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37.

International Marketing–Text and Cases

(d) Confirming bank adds guarantee to the credit opened by another bank. (e) Reimbursing bank authorises to honor the reimbursement claim in settlement of negotiation/ acceptance/payment lodged with it. Globalisation in today’s scenario means (a) removal of restrictions on foreign trade (b) benefits to a country in terms of capital, technology and skilled labor (c) Small industries can trade internationally (d) All the above The outcome of globalisation is (a) price hike (b) quality of product and services declines (c) Customers enjoy competitive price (d) Methodology of reaching the customer becomes difficult India’s approach towards FDI is (a) optimistic (b) liberal (c) pessimistic (d) stringent WTO stands for (a) commanding prices of goods at its’ own choice (b) lobbying commercial interests (c) free trade and fair trade (d) dictating its’ own vested policies Dumping refers to (a) exporting products that no one in the producing countries wants (b) exporting products at a price below the domestic price (c) exporting only the lowest quality products (d) tossing unwanted cargo into the ocean Decrease in import tariff will result in (a) increase in imports and decrease in domestic products price (b) decrease in imports and increase in domestic products (c) increase in price but decrease in quantity produced (d) decrease in price and decrease in quantity produced GATS deals with most favored service sector. TRIMS encourage discrimination against foreign products (T/F). Decisions in WTO are taken by (important) (a) individual countries (b) ministerial conference (c) members of trade association (d) the chairman of WTO QR refers to (a) not allowing entities to import specific materials (b) limits set by countries to curb imports administered through licensing (c) provisions for controlling imports through tariffs or customs duties (d) block entry of all foreign goods

Objective Type Questions

375

38. Removal of QR will (a) have disadvantage to the consumers (b) increase imports (c) increase domestic prices (d) Have no effect on domestic market 39. Lifting of QR on imports will be of advantage to consumers. 40. QR can be imposed whenever the BoP position deteriorates (as per WTO special provision). 41. Maximum imports of the QR removal is on (in India-outcome of 2000 and 2001 QR Removal) (a) agro sector (b) FMCG sector (c) IT sector (d) poultry & dairy 42. Highest customs duty rates is on (a) sugar confectionary (b) alchohol (c) coffee & tea (d) chocolate with cocoa 43. A tariff is (a) a tax on imports (b) a limit on quantity of a good which can be imported (c) the difference of prices of product in the country it is produced and the price sold in another country. (d) a government payment to domestic firms to encourage exports 44. TRIPS recognised as an agreement covering (a) patents (b) copyrights (c) trade marks (d) all the above 45. IPR guards against (a) doing free trade globally (b) misuse of trademarks (c) supply of domestic goods outside (d) import of goods 46. TRIPS provide protection against (a) infringement of patents (b) technological development (c) printing, music, communication, computer s/w (d) all the above 47. Duration of patents is (a) 5 years (b) 20 years (c) 14 years (d) 7 years 48. FDI causes (a) restriction inflow of technology (b) a boost to economic growth (c) retards competition among developing economies (d) political instability 49. JV is strategy (a) that involves transfer of technology (b) relationship established between two or more companies to cooperate mutual need and to share risk for achieving common objective

376

International Marketing–Text and Cases

(c) in which parties agree to create a new entity by contributing equity and share revenue, expenses and control of the enterprise (d) a company controlled by another 50. Letter of credit is (a) arrangement of making payments against cash/cheque (b) undertaking of customer (c) undertaking of bank to make payment on behalf of an importer (d) undertaking of third party for payment 51. ______ is document issued by shipping company which acknowledges receipts of goods mentioned in the bill for shipment: (a) bill of exchange (b) airway bill (c) shipping bill (d) bill of lading

Index

A Acquisitions 62, 174 Adaptation 8, 9, 21, 97, 100, 102, 111, 116, 195, 197, 199, 200, 218 Advertising and marketing budgets 344 Airway Bill 316 Arbitration 78, 150, 156, 157 Assertiveness 106

Cultural Adiophora 104 Cultural norms 89, 121, 288, 297 Cultural sensitivity 99 Cultural Values 102, 120 Culture 19, 22, 99, 100, 107, 115, 117, 118, 119, 121, 163, 169, 188, 207, 211, 217, 273, 292 Customer Perception 209 Customs Clearance 326

B

D

Bill of Exchange 316, 317 Bill of lading 316, 329, 331, 332 Body Language 110 Bureau of Quality Standards 210 Business process outsourcing 11

Data Interchange 265 Direct Marketing 13, 16, 272, 275 Distance Selling Directive 278 Documents 313, 316, 329 Domestication 137, 143, 144 Dumping 30, 34, 234, 245, 247 Duties and tariffs 239

C Casteism 101, 102 Certificate of Origin 314 Civil Law 147, 157 Code law 147, 157 Collective programming 100 Collectivism 108 Commercial Documents 313 Commercial Launching 207 Common Law 147, 157, 158 Communism 101, 129, 130 Conciliation 157 Consignment 325 Consumerism 101 Contract Law 148 Corporations 128, 176, 252 Cost-based Pricing 224 Counter trade 242, 247, 248 Countervailing duties 247 Country of origin 218

E E-Commerce 63, 265, 342, 343, 344, 347, 348 English common law 147 Enterprise Resource Planning 265 Exchange Rates 240 Excise Clearance 326 Expatriate 5, 99, 124, 279, 285, 286, 290, 292, 293, 294, 295, 296, 297, 298, 307 Expatriates 121, 290, 291, 295, 303 Export Houses 252

F Femininity 108 Franchisees 255 Free trade zones 307

G Generalised System of Preference 314

378

Index

Generation X 48, 337 Global competition 2, 116, 126 Global Products 195, 212, 215 Global Sourcing 216, 259, 260 Globalisation 19, 24, 25, 27, 31, 97, 98, 115, 116, 117, 118, 188, 189, 196, 197, 264, 267, 292, 306 Greenpeace campaigners 139 Grey Market 233 Grey marketing 234

H High context 73, 111, 291

I Individualism 108, 120, 121 Intellectual property 153 Intellectual Property 29, 40, 153, 154, 155, 160 International Franchising 161 International Laws 146, 157 Invoice 314, 326, 332

J Joint ventures 173 Joint Ventures 46, 174, 175, 240, 245

L Language 62, 109, 120, 268 Legal Framework 167 Letter of Credit 318, 319 Licensing 32, 42, 43, 47, 160, 161, 174 Limited Liability Companies 176 Local content 137, 143 Logistics 71, 246, 258, 345, 347, 360 Low-context 111, 211, 212

M Marginal Cost Pricing 227 Marginal Revenue 228 Market Entry Modes 160, 162 Market Testing 205 Marketing and advertising strategies 80, 100 Masculinity 108, 120, 121 Materialism 106 Mega mergers 98 Merchandising 252

Mergers 25, 174, 194

N Non-verbal Language 110

O Online exchange 345, 347 Optimal mix 276

P Packing list 326, 332 Partnerships 176 Personal selling 286, 287, 298 Political Environment 146 Political expediency 124 Political Stability 132 Power Distance 107 Power equation 107, 108, 121 Preapproach 288, 296, 297 Preshipment Inspection 325, 326 Price 20, 22, 27, 29, 35, 59, 60, 61, 72, 153, 156, 214, 216, 225, 228, 229, 246 Private infrastructure 307 Process of socialisation 100 Product 11, 14, 27, 29, 33, 35, 54, 56, 58, 59, 61, 70, 71, 156, 161, 168, 169, 193, 196, 197, 198, 199, 200, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 213, 215, 216, 217, 218, 220, 229, 338, 366 Product Adaptation 197, 199 Product positioning 196, 205, 218 Product Positioning 208, 216, 229 Production Location 231 Prospecting 288, 296 Public Relations 272, 276, 277, 296 Religion 111, 112, 121, 302 Repatriation Expense 294 Repatriation of funds 138, 143

S Sales promotion 272 Sanctions 24, 107, 126, 127, 131, 135, 138, 139, 236 Segregation of women 103 Skimming the Cream 224, 248 Social behavioural norms 103 Social democracy 130

379

Index

Totalitarianism 142 Transfer Pricing 237, 238, 239, 240, 245, 246

Social stratification 104, 105 Socialism 129, 141 Spending patterns 100, 107, 108 Standardised 222, 272 Strategic Alliances 174, 184, 240, 245 Subsidiaries 46, 170, 173, 174, 186

U

T

Value for Money 208 Variable Costs 225

Theocratic Law 148, 157, 158 Total Cost 225 Total Revenue 41, 225

Uncertainty Avoidance 108, 120, 121

V

W World Wide Web 336, 340, 341, 342, 347