MODES OF ENTRY INTO FOREIGN MARKETS (foreign mkt entry strategies)

Selecting the mode of entry into a foreign market is a task of critical importance. It has
major implications concerning the firms entire marketing mix and the firms own control over
it. In broad terms, a company has three types of entry possibilities.
1.
2.
3.

Indirect export sales to domestic intermediaries who resell the product to

customers overseas.
Direct export sales to a customer overseas who may be a reseller or an end-user.
Overseas Manufacturer either independently or in some form of joint venture.

CRITERIA FOR SELECTING MODE OF ENTRY

The appropriateness of particular modes of entry varies both among firms and for any
individual firm across markets and time. In choosing an entry method for a particular market
a firm should evaluate the following criteria.
1.

COMPANY OBJECTIVES in relation to volume timescale and segmental coverage.

Thus, for small or short-term volumes overseas production is probably inappropriate.

COMPANY SIZE. Small firms are unlikely to possess sufficient resources to facilitate
production abroad.

3.

MODE AVAILABLILITY. Different markets require different modes. India, for

example is generally hostile toward foreign producers wishing to locate there.

MODE QUALITY. It may be that all modes are possible for a particular market but
some are of questionable quality. Thus an absence of suitably qualified
intermediaries would preclude indirect or direct exporting of say, high technology
goods.

5.

INVESTMENT REQUIREMENTS. These will be highest for overseas production

which may thus be precluded. Even so, investment may be required to finance say
overseas intermediaries stocks.

6.

OPERATING COSTS. The recurring costs of entry must be evaluated. Notably, the
manufacturers incremental marketing costs rise in the sequence running from
indirect, through direct exporting to overseas production.

7.

ADMINISTRATIVE DUTIES. These are costly and inconvenient and they vary across
entry modes. Thus, administrative tasks are far fewer for indirect exporters than for
direct exporters.

8.

PERSONNEL REQUIREMNTS. These vary across entry modes. Thus when IM

staff are in short supply it may be better to opt for indirect exporting.

10.

EXPERIENCE REQUIREMENTS. Firms become better at IM the more experienced

they are at it. This argues against the mode of indirect exporting.

11.

RISKS. Some risks favour indirect exporting (for example) political risks of
expropriations. Other risks favour direct exporting or foreign production (for example)
risk of losing touch with customers.

12.

CONTROL. Control over the distribution channel varies enormously by mode

of entry. For example, overseas production by a wholly owned subsidiary provides
absolute control while indirect exporting gives little or no control.

13.

Firms IM orientation whether domestic market extension orientation, multidomestic

orientation or global orientation.

EXPORTING
Exporting is the easiest and most common means for entering a new foreign market and it is
a low risk strategy. Many firms drift into unplanned exporting by accepting chance orders.
However, systematically planned exporting to selected target markets is also common and it
gives rise to several advantages.
1.
2.
3.
4.
5.

It enables firms to develop and test their marketing plans and strategies before
risking substantial investments in overseas plant.
It facilitates small-scale IM
It allows firms to engage in IM despite them lacking the know-how and experience to
go it alone.
It avoids many types of risk and allows firms to limit operating costs, administrative
duties and personnel needs.
Perhaps the principal benefit, however, is that exporters are able to concentrate
production in a single location and this facilitates important economies of scale, other
cost savings and product quality advantages.

A common but fallacious view is that exporting is a low-investment option. It does not, of
course, require investment in foreign production. However, effective exporting does require
significant investment in marketing resource, in strategy formulation and implementing the
marketing mix. For example, the initial success of the Japanese entry into the USA and
other countries car markets was based on very extensive and expensive research and
planning.
INDIRECT EXPORT
With indirect export the firms goods are sold abroad without the firm conducting any
particular actions for the purpose thereof. The firms outputs are exported by other
organizations. Although it is exporting, the company does not behave like a true
international marketing firm. Indirect export is made possible in four man ways: through
export houses; via a specialist export manager; through UK buying offices of foreign stores;
and through complementary exporting.

EXPORT HOUSES
These are firms which facilitate exporting on behalf of the producer. They fall into three main
groups:
(a)
(b)
(c)

Exporting Merchants these act as export principals, buying and selling the goods
they export.
Confirming Houses also act as principals and their main functions to provide credit
for foreign customers when the producer is unwilling to do so.
Export Agents sell abroad for the producer in his own name or the producers.
Usually cover a particular group of related products (for example) tableware.
Remuneration by commission.

Advantages of trading via these three are similar to each other

1.

The producer gains the benefit of the merchants market knowledge and contracts.

2.

He is relieved of the need to finance the export transaction and of the credit risk,
export documentation, shipping and insurance. Etc. This does not apply though
when an export agent is used.

3.

The manufacturer does not bear the overhead costs of export marketing. Hence, he
does not need to lay out investment funds.

4.

Many merchants and agents have specialist skills required for counter trade, switch
trading and so on.

5.

In some cases merchants receive preferential treatment from institutional and

organizational customers.

6.

In the case of export agents, the manufacturer retains much control over the market
when the sale is made in his own name.

Disadvantages of exporting via export houses:

1.
2.
3.
4.

Generally and critically, the producer has little or no control over his market (except
regarding export agents) and his product may be dropped whenever the merchant
decides.
Any goodwill created in the market is usually the merchants and not the
manufacturers.
There are problems in securing the merchants effort and loyalty vis--vis other items
in his product line.
Merchants and agents are best suited to short-term arrangements they tend not to
be motivated toward long-term relationships.

SEPCIALIST EXPORT MANAGERS

These firms, known as Combination Export Managers, in the USA, offer a full export
management service. In essence, they become the producers export department, acting in
his name and using his letterhead. His remuneration is normally by way of commission on
sales.
Advantages of using a specialist export manager are the same as for export
merchants plus:
1.
2.
3.

The producer immediately gains his own export department without incurring the
overheads.
The producer retains full market control.
He can expect a continuing long-term relationship.

Disadvantages:
1.
2.
3.

Being independent, the specialist export manager can drop the producer at will.
The producer does not build his own export experience and this affects his future
strategy choices.
The specialist export manager may not have sufficient knowledge of all the
producers target markets.

BUYING OFFICES OF FOREIGN STORES

Many of the leading departmental stores in the advanced nations maintain buying offices in
London. For example, the top ten Japanese department stores are so represented in
London as are two of the top four German ones.
In addition, buyers from similar stores around the world regularly visit Britain to buy.
COMPLEMENTARY EXPORTING
Often called piggy-back exporting, this occurs when one producer (the carrier) uses his own
established IM channels to market the outputs of another producer (the rider) alongside his
own. The carrier may:
(a)
(b)
(c)

Merely transport the riders goods using his own spare capacity.
Sell the carriers goods for a commission.
Buy and sell the riders goods.

The carriers advantages are:

1
2.

Increased profits from further spreading overheads.

A more attractive product range.

The riders advantage is that he obtains simple, established, low-cost and low-risk market
entry.

DIRECT EXPORT
In direct exporting, the producer himself performs the export task rather than delegating it to
others. The manufacturer sells directly to customers overseas who may be final users or
resellers. Direct exporting is facilitated by selling; directly to the final user; through agencies;
to distributors and stockists; through branch offices.
SALES TO FINAL USER
Here, the manufacturer cuts out any kind of intermediary and goes direct to customers.
These might be: industrial users; government or reached by mail order, consumers. In
these cases marketing is much the same as in the home market, although there are of
course the added difficulties ensuing from foreignness, distance, time, etc.
AGENCIES
An overseas export agent is a person or firm hired to facilitate as sales contact between his
principal and a customer. Formally, agents do not take title and their remuneration is
normally a commission on sales. Sometimes in practice, however, the term agent is used
loosely and then it includes distributors. Some agents do more than merely arrange sales.
Some, for example, hold stocks for the principal or carry out servicing on his behalf.
Advantages of overseas agents include the following:
1.
2.
3.
4.
5.

They provide extensive knowledge and experience of local needs, customers and
environment.
Their existing product lines are usually complementary to the principals goods and
this helps with market penetration.
The exporter is involved in little or no investment outlay.
Agents can be a highly effective means of market penetration.
There is little or no political risk.

There are some disadvantages of hiring agents:

1.
2.
3.
4.

There are problems in obtaining the agents full commitment since he carriers other
products too.
Agents often want immediate results and will not actively promote slow-selling goods
even if they do not drop them.
Many agents are too small to fully exploit a major market many serve only limited
geographical segments.
If the market grows to a large size it is more economic to use a branch office of a
subsidiary due to the scale economies associated with these.

DISTRIBUTORS AND STOCKISTS

DISTRIBUTORS are customers with preferential rights to buy and resell a range of a firms
goods in a specific geographical area. Distributors then, earn profits, they are not paid
commission. They perform the usual distribution functions and they differ from ordinary
wholesalers only in the matter of their geographical exclusivity.

STOCKISTS are simply distributors that receive more favourable financial rewards for
carrying a certain minimum level of stock level of stock.
Despite the differences in terms of the methods of their remuneration the advantages and
disadvantages of distributors are very like those associated with overseas agents.
COMPANY BRANCH OFFICE
This is merely and extension of the firm into the foreign market for the purpose of conducting
marketing and distribution.
Advantages are:
1.
2.
3.
4.
5.

When volume has reached an efficient level they are less costly than using a local
intermediary. This is why, and often it is when, many branch offices are opened.
Sales performance should increase since marketing effort will be focused exclusively
on the firms own products.
The firm retains absolute marketing control
The firm should acquire more and better market information.
Customer Service should improve since intermediaries are notoriously bad at this.

Disadvantages of a branch office are:

1.
2.
3.

Investment requirements and on-going overheads.

Risk of (modest) losses due to expropriation.
Often there are legal requirements concerning the minimum number of local staff that
must be employed, how these can be dismissed, trade union membership etc.

OVERSEAS PRODUCTION
Firms that are strongly committed to IM are often drawn into overseas manufacture. This
gives rise to some major benefits:
1.
2.
3.
4.
5.
6.
7.

Location abroad allows firms to better understand customer needs.

Some markets, particularly regional markets such as North America, are large
enough to support manufacture a minimum efficient scale.
Production costs are lower in some foreign countries.
Firms are sometimes forced to produce locally since exporting heavy or bulky goods
can be prohibitive in terms of transportation costs.
Tariff and non-tariff import barriers may preclude exploration into target countries.
In cases where governments are customers their supplier selection decisions
sometimes discriminate against non-local producers.
For laggards entering a foreign market, the only way in may be by takeover of, or cooperation with a local company.

METHODS FOR OVERSEAS PRODUCTION

Producing overseas does not necessarily require full-scale wholly owned production. This is
only one of several alternative strategies.
LICENSING
A licensing agreement is a commercial contract whereby the licensor (the international
marketer) gives something of value to the licensee (the national target market firm.) in
exchange for certain performances and payments. The licensor may provide any of the
following:
1.
2.
3.
4.
5.
6.

Rights to produce a patented product.

Rights to use a patented production process.
Unpatented manufacturing know-how.
Technical advice and assistance including the supply of essential materials,
components or plant.
Marketing advice and assistance.
Rights to use a trademark, bank or similar.

Licensing is a rapid growing phenomenon among firms worldwide. It is a common entry

mode among small and medium firms and it is used by large companies. For example,
Schweppes have granted licenses allowing USA firms to manufacture it soft drinks and to
market them there under Schweppes brand name.
Advantages of licensing:
1.
2.
3.

4.
5.
6.
7.

It requires no investment and the only costs are those of signing and policing the
agreement.
Due to 1, it avoids many IM risks, such as that of expropriation.
It allows entry into markets that would otherwise be closed by say domestic
competitiveness, tariffs or other government policies. For example, Phillip Morris the
USA tobacco giant uses licensing agreements with the governments of 10 European
countries with nationalized tobacco industries.
It is a quick and easy mode of entry.
The licensor gains access to knowledge of the local environment.
Owning to the very low investment requirements, licensing allows firms to introduce
new products to many countries quickly.
It provides all the usual benefits of overseas production concerning transport costs,
import barriers, etc.

Despite the gains of licensing there are some important disadvantages that may even be
more powerful. The disadvantages include the following:
1.
2.
3.
4.
5.

The revenues from licenses are very modest, usually amounting to only 2% to 7% of
turnover.
A major danger is that the licensee may become the licensors competitor. During the
license period, the former may gain enough know-how from the latter as to be able to
operate independently.
Although the contract may specify a minimum sales volume there is some danger
that the licensee will not fully exploit the market.
There is some risk that product quality will deteriorate when the licensee is less
conscientious than the licensor.
Governments often impose conditions on the payment of royalties or on the supply of
components.

6.

A major problem with licensing is the difficulty of effectively controlling the licensee.
His objectives often conflict with those of the licensor and disagreements are
common.

Astute management of the license agreement is essential for the licensor. The licensor
should conduct extensive search and apply good selection criteria when choosing licensees;
design contracts that protect both parties; control the licensee, by say, having an equity
interest in his business or by retaining exclusivity of key inputs; and take action to motivate
the licensee.

FRANCHINSING
This is a type of licensing although franchising does more formally specify what is expected
of the franchisee (the national target market firm.). In a franchise arrangement the
franchiser supplies a standard package of goods, components or ingredients along with
management and marketing services or advice. The franchiser supplies capital, personal
involvement and local market knowledge. Common franchisers in many countries include,
Holiday Inn, Pepsi Cola, and Kentucky Fried Chicken.
The advantages and disadvantages are largely the same as for licensing. An extra benefit,
however, is that since it involves the franchisers supply of ingredients or components it does
provide some leverage for controlling the franchisees activities. An additional disadvantage
of franchising is that many franchisees are used for each country and the search for
competent candidates is both costly and time consuming.
CONTRACT MANUFACTURING
This involves a long-term contract whereby a firm in a foreign country undertakes to
manufacture or assemble a product on behalf of another firm located outside the country.
The latter company retains full control over marketing and distribution while having
manufacture done by proxy. This type of entry procedure is used by such firms as Colgate,
and Procter and Gamble.
Advantages include the following:
1.
2.
3.
4.
5.
6.

No need to invest in plant overseas.

Avoidance of risks associated with currency, expropriation etc.
Retention of market control
A locally made image which enhances marketing success, especially to government
customers.
Entry into market otherwise closed by import barriers.
Lower transport costs and sometimes lower production costs.

Contract manufacture is perhaps best suited to countries where market smallness prohibits
plant investment or to firms whose main strengths are in marketing vis--vis production.
Disadvantages of Contract manufacture:
1.
2.
3.
4.

It is only feasible when reliable and capable manufacturers can be identified which
is not always the case.
Sometimes substantial technical training has to be provided for he manufacturers
personnel.
The manufacturer may eventually become a rival
Quality control problems in manufacturing may arise.

JOINT VENTURES
A JV is an arrangement whereby two firms in different countries join forces for manufacturing
financial and marketing purposes and where each has a share in the equity and in the
management of business. JVs are very common and fast becoming more so. Firms
involved include Xerox, Massey Ferguson, ICI and Philips.
Licensing, franchising and contract manufacture are loose forms of JV. However, the ties
these involve are less strong than formal JV.
JVs are usually evaluated as an alternative to a fully owned manufacturing set-up abroad.
Accordingly and for other reasons a JV offers various advantages:
1.

Some governments prohibit independent operation or encourage JV since their own

countries get more profit and technological gains from the latter. E.G. Japan, Nigeria,
India.
JV requires smaller capital outlays and is thus especially attractive to smaller or riskaverse firms.
When funds are limited JV permits coverage of a larger spread of countries since
each one requires less investment.
JV reduces the risk of expropriation since a local firm is involved. E.G. Club
Mediteranee pays much attention to this factor.
JV facilitates profits on manufacturing which licensing and franchising does not.
It can provide for close control over marketing and other operations.
Facilitates good feedback.
JV provides local knowledge, quickly.

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

The major disadvantage of JVs is that the different parties often have a conflict of interest.
Disagreements may arise over the parties respective shares in equity, profits and effort or
over their ideas concerning marketing strategy. For these reasons firms such as IBM are
reluctant to engage in JVs.
The potential for conflict requires firms to either:
1.

Minimise its extent by careful selection of partners, formulation of jointly beneficial

contracts, pre-arranging for arbitration to resolve any clashes that occur.

2.

Ensure it is the international marketer that retains effective control by the terms of
the contract, by retaining private ownership of a key input, retaining the right to
appoint key executives and so on.

CONSORTIA
These are similar to joint ventures but they have two unique characteristics:
(a) They typically involve a large number of participants.
(b) They frequently operate in a country or market in which none of the participants
is currently active.
Consortia are developed for pooling financial and managerial resources and to lessen risks.

WHOLLY OWNED OVERSEAS PRODUCTION (WHOLLY OWNED SUBSIDIARIES) -!

00% foreign ownership or - FDI
This involves the fullest commitment to market or markets. It can be achieved through the
creation of capacity(setting up shop) or by acquisition of an existing firm.
Acquisition is a mode of rapid entry and offers the benefits of an existing management team,
market knowledge and all the other trappings of a going concern. For example, General
Motors enjoyed these gains when entering the UK market through the acquisition of Vauxhall
Motors.
Entry by creating new capacity is beneficial if there are no likely candidates to take-over or
if acquisition is prohibited by the government.
More positively, this entry mode allows for the use of the newest production technology and
it often generates among staff the feelings of optimism, high expectations and motivations.
These were major benefits for Datsun when they created new capacity in Sunderland and
Tennessee.
Advantages of wholly-owned overseas manufacture are several:
1.
2.
3.
4.
5.
6.

The firm does not have to share the profit with a partner of any kind
The firm has complete control over all decisions and so none of the efficiency drains
arising in inter-firm conflict as with JVs.
There are none of the problems of inter-firms mis-communication that arise in JVs,
license agreements etc.
The firm is able to operate a completely integrated and synergistic international
system.
The firm gains close contact with the market.
The firm gains a more complete feel for IM and more varied experience.

Despite these strong benefits there are also major disadvantages:

1.
2.
3.

4.
5.

Complete ownership requires substantial investment funding and this might preclude
some firms.
There may be an insufficient supply of suitable managers either in the target country
or to be posted abroad from the home country.
Some overseas governments discourage 100% foreign ownership and sometimes
they prohibit it. Their reasoning is that host country profits and/or development is not
helped sufficiently when it merely profits and/or development is not helped sufficiently
when it merely provides materials and/or unskilled labour.
Partly due to 3, but also because equity is not shared, 100% ownership involves
bigger consequences in the face of expropriation.
This mode foregoes the benefits of a partners market knowledge, distribution set-up
and so on.

10

TURNKEY PROJECTS
In a turnkey project, the contractor agrees to handle all details of the project for a foreign
client, including the training of operating personnel.
At completion of the contract, the foreign client is handed the key to a plant that is ready for
full operation hence the term turnkey. This is actually a means of exporting process
technology to other countries. In a sense it is just a very specialized kind of exporting.
Turnkey projects are common the chemical, pharmaceutical, petroleum refining and metal
refining industries, all of which use complex, expensive production-process technologies.
Advantages of turnkey projects:
(a) A way of earning great economic returns from the firms know-how.
(b) Useful in cases where FDI is limited by host government regulations. For example,
the governments of some oil-rich countries have set out to build their own petroleum
refining industries, and as a step toward that goal, have restricted FDI in their oil and
refining sector. Since many of these countries lacked petroleum- refining technology,
they had to gain it by entering into turnkey projects with foreign firms that had the
technology.
(c) Such turnkey deals are attractive to the selling firm because they would probably
have no other way to earn a return on their valuable know-how in that country.
(d) A turnkey strategy, as opposed to a more conventional type of FDI, enables a firm to
operate in a country where the political and economic risks are high (e.g. risk of
nationalization or economic collapse.
Disadvantages of Turnkey:
(a) Firm that enters into a turnkey project with a foreign enterprise may inadvertently
create a competitor.
(b) If the firms technology is a source of competitive advantage, then selling this
technology through a turnkey project is also selling competitive advantage to
potential and actual competitors.
(c) The firm that enters into a turnkey deal will have no long-tern interest in the foreign
country. This can be a disadvantage if that country subsequently proves to be a
major market for the output of the process that has been exported.
One way around this is to take a minority equity interest in the operation set up by the
turnkey project.

11

STRATEGIC INTERNATIONAL ALLIANCES (SIA)

An SIA is a business relationship established by two or more companies(actual or potential
competitors) to cooperate out of mutual need to share risk in achieving a common objective.
Example: A co-operative arrangement between Boeing and a consortium of Japanese firms
to produce the 767 wide-bodied aircraft.
A strategic international alliance implies:
i)
ii)
iii)
iv)

Common objective
That one partners weaknesses will be offset by the others strength.
That there are synergistic benefits to be had.
That reaching the objective alone would be too costly, take too much time
and be too risky.

SIAs can be joint ventures, licensing, franchising.

Advantages of SIAs for a firm:

Acquires needed market share.

Acquires technology
Utilises excess manufacturing capacity
Reduces new market risk and entry costs.
Produces economies of scale.
Overcomes legal and trade barriers.(easy foreign entry method).
Accelerates product introductions demanded by shorter PLCs.

Not all SIAs are successful. Some fail. Others are disbanded after reaching their goals.
Major reason for failure can be lack of perceived benefits to one or more of the partners.
Disadvantages:

Conflict
You can give away more than you receive.

12

PRODUCT DECISIONS IN INTERNATIONAL MARKETS

What is a product?
1.1

A product is anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or need. It includes physical objects, services,
places, organizations, ideas, people.

1.2

In marketing terms a product is the total utility or satisfaction that a buyer receives as
a result of a purchase. It exists at three levels.

Augmented
Formal
Core

Core product
1.3

The core product is the need which is being satisfied or the problem which is being
solved by the product. This is a vital concept in international marketing, e.g. the
core product varies between Third World countries and industrial developed
countries. In the case of a bicycle:

(a)
(b)

in the Third world used as a means of transport;

in the developed world used for recreation, sport.

Marketers must always view a product in terms of its ability to satisfy needs or solve
problems, i.e. perceived benefits which may vary between countries.
Formal product
1.4

This is what the market recognizes as the tangible offer. It comprises the features,
styling, quality, packaging and brand name. Again this may have important
implications for international marketing. Variations in quality, size, colour etc. may
have to be used from country to country.

Augmented product
1.5

These are the additional services and benefits which surround a product. They may
offer:

(a)
(b)

reputation;
delivery;

13

(c)
(d)
(e)
(f)
(g)

before and after sales services;

installation and maintenance;
guarantee;
finance;
credit

According to many marketers (for example Levitt,) it is at this level of the product that the
new competition is taking place. Customers may value reliable delivery, credit or after sales
service more than quality or price. So it is vital for the international marketer to be aware of
needs and expectations and the extent to which they vary between different countries when
making product decisions.
2.

IM PRODUCT STRATEGIES: STANDARDISATION VS ADAPTATION

2.1

This topic was introduced in Chapter 1. There are four areas whose decision must
be made. The first two can be considered together.
(a)
(b)
(c)
(d)

Sell products unmodified/standardize.

Modify or adapt products where necessary.
develop new products for a specific market or group of markets.
Eliminate old/weak products.

Standardisation vs adaptation
2.2

The question of whether or not to adapt the product is often considered in

conjunction with the promotion/communication issue. This gives us four possible
product-communication strategies (see next chapter for a more detailed analysis of
communication decision).

Communications
Standardised
Communications adapted

Product standarised

Product adapted

Standardisation worldwide
of both product and
communication
Adaptation of
communications only

Adaptation of product only

Both product and
communications adapted.

Standardised product and communications

2.3

This is the obvious strategy for the occasional exporter but also some major
international companies seeking economies of scale.

2.4

Coca Cola and Pepsi Co have been successful with this strategy. Polaroid also
failed in France with their instant picture camera because of failure to modify their
product and communications activities from the successful USA version. This failure
was due to the fact that the product was at a different stage in its product life cycle in
France and the United States.

Standardised product/adapted communication

2.5

This strategy is used where a product meets different needs in different countries.
Take bicycles for example:

14

(a)
(b)
(c)

France/Belgium
UK
Third World

sport-recreation
- recreation
- means of transport

Adaptation product/standardized communication

2.6

This strategy is relevant where the product satisfies the same need (or solves the
same problem) in many markets but conditions of use vary.
(a)
(b)

Petrol companies adapt their fuel to climatic conditions but standardize their
advertising and other promotional activities.
Car manufacturers need different tires and temperature control systems in
Saudi Arabia than they do in the UK.

Adaptation of both product and communications

2.7

This strategy is the most costly one but may be necessary to exploit a market fully.
For example, take these two stereotypes.
(a)
(b)

US product can be made or packaged in plastic and be disposable.

German product must be made or packaged in metal and must be durable
and repairable because of German concern for environmental issues.
Promotional activities must reflect these products attributes.

15

3.

OTHER ASPECTS OF PRODUCT DECISIONS

3.1

Other aspects of the product decision principally concern packaging, labeling and
after sales service.

Packaging
3.2

Again, standardization vs. adaptation is the major question. There are two aspects of
packaging.
(a)
(b)

3.3

Protection. Packaging may have to be adapted/modified if climates, handling

facilities, time spent in distribution chain or usage rate vary.
Promotion. Packaging will be adapted if package size, cost of packaging,
colour preference, legal constrains, literacy, reputation/recognition varies from
market to market.

A problem might be the different size required in different countries.

Labelling
3.4

Labelling is often an example of mandatory modification required by government

regulations. For IM, this issues usually concerns listing contents or use of
appropriate language or languages.

Servicing
3.5

This is an increasingly important part of the augmented product (particularly in the

developed economies) and is of great importance in international marketing. If the
availability or quality of servicing is doubtful, consumers may choose to buy domestic
products.

3.6

The service problem is a complex one of the exporter. It involves decisions about
facilities, personnel and training. Should they use distributors which would involve
training foreign staff and sending out HQ personnel to monitor or should they operate
direct servicing policy in which case they would fly out maintenance staff when
required? The appropriate decision varies with the technical sophistication and value
of the product.

4.

STANDARDISATION VS ADAPTATION FACTORS

Factors encouraging products standardization

4.1

(a)

Economies of scale in:

(i)
(ii)
(iii)
(iv)

(b)
(c)
(d)

production;
marketing/communications;
research and development;
stock holding.

Easier management and control, i.e. familiarity.

Homogeneity of markets, in other words world markets available without
adaptation (e.g. denim jeans).
Cultural insensitivity, e.g. industrial and agricultural products.

16

(e)

Consumer mobility for travelers/tourists, for example standardization is

expected in certain products:
(i)
(ii)

(f)
(g)

camera film;
hotel chains

Where made in image is important to a products perceived value (e.g.

France for perfume, Sheffield for stainless steel).
For a firm selling a small proportion of its output overseas, the incremental
costs of adaptation may exceed the incremental sales value.

Factors encouraging adaptation/modification

4.2

Mandatory modification

Mandatory product modification normally involves either adaptation to comply with

government requirements or unavoidable technical changes. Using car manufacture as an
example it may concern:
(a)

Legal requirements such as:

(i)
(ii)

(b)

Technical requirements such as:

(i)
(ii)

4.3

specified exhaust emission levels (health and safety law)

local components (economic law);

modification of heating/cooling systems for different climates;

engine modification to use locally available fuels.

Discretionary modification
(a)

Discretionary modification is called for only to make the product more

appealing in different markets. It results from differing customer needs,
preferences and tastes. These differences become apparent from market
research and analysis, intermediary and customer feedback etc.

(b)

Levels of customer purchasing power. Low incomes may make a cheap

version of the product more attractive in some less developed economies.

(c)

Levels of education and technical sophistication. Ease of use may be a

crucial factor in decision-making.

(d)

Standards of maintenance/repair facilities. Simpler, more robust versions

may be needed.

17

5.

NEW PRODUCT DEVELOPMENT FOR OVERSEAS MARKETS

5.1

Sometimes international marketing managers may need to develop new products for
a specific overseas market or group of markets. There is no need to analyse new
product development in depth here since the new product development process is
the same for international marketing as for domestic marketing:
(a)
(b)
(c)
(d)
(e)
(f)
(g)

idea generation;
idea screening;
concept testing;
business analysis;
product development and testing;
test marketing;
commercialization.

Success of new products

5.2

The success of new products in an international environment depends on a number

of factors.
(a)

It is important to have an appropriate organizational structure.

An
international division, responsive to international rather than purely domestic
marketing concerns, is far more likely to introduce new products overseas
successfully (Davidson and Harrigan)

(b)

There should be a commitment to market research. As we have seen,

international market research is more complex than domestic market
research.

(c)

Sources of idea generation should be as wide as possible: customers,

intermediaries, competitors, research and development, sales staff etc.

(d)

The new product development process should be implemented for each

country, i.e. Screening, business analysis, test marketing, etc.

6.

PRODUCT ELIMINATION

6.1

For companies that have been involved in international marketing for some time, and
who produce a range of products, analysis of their product portfolio is vital. Again the
principles and concepts are the same as in domestic marketing and need not be
discussed here in depth. Analytical models such as the Boston Consulting Groups
growth-share matrix or the General Electric approach are useful in this context.

6.2

Strategic models allow managers to identify those products (or strategic business
units) which should be strengthened, maintained, harvested or divested. This
analysis will need to be undertaken in all markets in which the company is operating
since a cash cow in one country may be a dog in another.

18

Figure 5.1
(a)

Boston consulting groups growth-share matrix

Market
Growth
rate

High Stars

Question marks

Strengthen
Low Cash cows

Strengthen or divest
Dogs

Maintain or harvest
High

Divest
Low

Relative market share

(b)

General Electric approach

Competitive position

Model
attractivenes
s
High
Medium
Low

6.3

Strong

Medium

Weak

Protect
position
Build
selectively

Invest to build

Build selectively

Selectively/
manage for
earnings
Manage for
earnings

Limited
expansion or
harvest
Divest

Protect and
refocus

Many organizations, in both domestic and international markets, do not manage

obsolete and marginal products. They are kept in the product range, with little or no
contribution to profits, with a high opportunity cost in that the resources used to
produce them and particularly to market them could be much more profitably used
elsewhere (in managing products regarded as stars or question marks).
Other problems associated with marginal products are that:
(a)
(b)
(c)
(d)

as sales fall, short production runs become increasingly expensive;

an excessive amount of management and sales force time is used in trying to
extend the life cycle of the product;
they may detrimentally affect the image and reputation of the company;
they may mean that not enough resources can be allocated to the
development of new products.

19

Production elimination
6.4

Elimination (divestment) should be part of a procedure for product portfolio analysis,

where for each country a periodic review of product range is undertaken. Factors to
be taken into consideration during this review would include:
(a)
(b)
(c)
(d)
(e)

current profitability;
effects of elimination on the sale of other (complementary) products;
after sales service implications;
alternative product opportunities in each country;
the effect on sales/profits of product life extension / rejuvenation.

6.5

all these factors become much more complex for the multinational company with
overseas operations than with the mere exporter. The multinational company may be
producing the product under consideration in a number of countries, under a number
of different market conditions.

6.6

However, the multinational companys range of alternatives to product elimination for

a marginal product is greater than for an exporter. A multinational company can
export or license or arrange for contract manufacturing as an alternative to direct
manufacturing abroad.

7.

PRODUCT LIFE CYCLE AND INTERNATIONAL MARKETING MIX DECISIONS

7.1

Many marketing mistakes have been made because firms have failed to take into
account the fat that in different countries a product may be at different stages in its
product life cycle.
Marketing principles tell us that products, prices, marketing communications and
channels of distribution need to be adapted as a product ages during its life cycle.
The marketing mix programmed for a new product should be fundamentally different
from the mix programme for a mature product.

8.

THE PRODUCT LIFE CYCLE IN INTERNATIONAL MARKETING

8.1

Micro analysis, product life cycle and the individual firm

The concept of the product life cycle is well known among marketing scholars and
practitioners. It postulates that products are born, pass through some, or all, of
various stages and that typically they ultimately die. The important consequences of
the concept are that industry, sales and competitive conditions differ in the various
stages of the life cycle and that these differences have major implications for
marketing strategy. Figure 5.2 is a presentation of the generalized product life cycle
model, showing the four usual stages of sales growth. It is assumed that students
are familiar with the product life cycle, its implications and appropriate strategies in
the domestic context.

8.3

This approach was very convenient. Firms were simply able to classify markets
according to their economic development and launch declining products in rapid
succession into countries with progressively less market development.
Nowadays, however, this type of strategy is far less feasible, although not entirely
impossible. The revolution in communications among countries during recent years
has narrowed the time gap between when saturation occurs in the home market and

20

the last overseas market entered. Hence, the total duration of the profit life cycle
pattern is exactly the same for home sales as for some/most/all overseas markets.
8.4

The new situation is shown below. As a result of these developments, international

marketing must consider many markets simultaneously, with a view to implementing
a global introduction.

8.5

This is necessary to ensure that the product is launched in all potential markets
before rivals have time to pre-empt the firm and to ensure that introduction
everywhere coincides with the most appropriate demand conditions.

Product life cycle and the market/country

8.6

The International Trade Product Life Cycle (ITPLC) is used in developing long-term
product strategy. It postulates that many products pass through a cycle during which
high income, mass consumption countries:
(a)
(b)
(c)

8.7

are initially exporters;

subsequently lose their export markets;
ultimately become importers of the product.

Corresponding to these shifts, other developed countries shift from being importers of
the product to being self-sufficient, to exporters of it, as do eventually, less developed
countries. The shifts referred to correspond to the three stages in the produce life
cycle:
(a)
(b)
(c)

introduction;
growth and maturity; and
decline.

21

8.2

The product life cycle is relevant to international marketing management. Traditionally

many firms have tended only to operate at home as long as performance there was
satisfactory. Then, when domestic performance declined, they tried to close the gap by
exporting. But this is possible only if there are different product life cycle patterns in
different countries (Figure 5.2) here the product is in the decline stage in the home
market, in the growth stage in country X, in the introduction stage in country Y while the
product is not known by customers in country Z. Figure 5.3 illustrate the gap between
these extremes.

22

To brand or not to brand?

9.3

The advantages of branding include the following:

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)

9.4

Branding facilitates memory recall, thus contributing to self-selection and

improving customer loyalty.
In many cultures branding is preferred, particularly in the distribution channel.
Branding is a way of obtaining legal protection for product features.
IT helps with market segmentation. (Take toothpaste for example: Crest is
marketed to a health conscious segment, Ultrabrite is marketed for its
cosmetic qualities.)
It helps build a strong and positive corporate image, especially if the brand
name used is the company name (e.g. Kelloggs, Heinz). It is not so important
if the company name is not used (e.g. Procter and Gamble).
Branding makes it easier to link advertising to other marketing
communications programmes.
Display space is more easily obtained and point-of-sale promotions are more
practicable.
If branding is successful, other associated products can be introduced.
The need for expensive personal selling/persuasion may be reduced.

Branding is not relevant to all products, only those:

(a)
(b)

that can achieve mass sales because of the high cost of branding and the
subsequent advertising. This is particularly important if global branding is
sought; and
whose attributes can be evaluated by consumers.

Thus chocolate bars can be branded, but not concrete slabs, whisky can be branded
but not coal.
9.5

The most successful examples of worldwide branding occur where the brand has
become synonymous with the generic product, Hoover, Cellophane, Sellotape,
Aspirin, Kleenex, Filofax, Xerox. This can eventually, however, carry its own dangers.
When the brand name has been adopted as the description of the generic product
(such as Thermos for a vacuum flask) the manufacturer of the brand can be find it
difficult to convey the specific product advantages of the brand.

Type of brand
9.6

There are four choices of brand.

(a)

Individual brand name: This is the option chosen by Procter and Gamble for
example, who even have different brand names within the same product line,
e.g. Bold, Tide. The main advantage of individual product branding is that an
unsuccessful brand (e.g. Strand cigarettes) does not adversely affect the
firms other products, nor the firms reputation generally.

(b)

Blank family brand name for all products, e.g. Hoover, Heinz (originally Heinz
57 varieties). This has the advantage of enabling the global organization to
introduce new products quickly and successfully. Also the cost of introducing
the new product in terms of name research and awareness advertising will be
reduced (e.g. Honda lawn mowers).

23

(c)

Separate family names for different product divisions e.g. The US based
company Sears, sells electrical appliances under the name Kenmore, and
womens clothing under the Kerrybrook brand.
This is obviously the option for the global organization with inconsistent
product lines where the family brand name above is not appropriate. But
within each family the advantages identified in (b) still apply.

(d)
The company trade name combined with an individual product name. E.g.
Kellogg's Corn Flakes, Rice Crispies etc.). This option both legitimizes (because of
the company name) and individualises (the individual product name). As in (b) above
it allows new names to be introduced quickly and relatively cheaply.
Success criteria for branding
9.7

Branding should be a central and strategic part of both product and promotional
`planning. It should not be a casual afterthought. It therefore requires research in all
the markets in which the brand is planned to be marketed. For international
companies name research can avoid possible faux pas because of cultural and
language differences, e.g. Body Mist when translated into German means manure!
Worldwide research suggests that the beneficial qualities of a brand name are that
they should:
(a)
(b)
(c)
(d)
(e)
(f)

suggest benefits, e.g. Ultrabrite toothpaste, Slimline tonic;

suggest qualities such as action or colour, (e.g Shake n Vac);
be easy to pronounce, recognize and remember (i.e. short and punchy);
be acceptable in all markets both linguistically and culturally (e.g. see Body
Mist above);
be distinctive, e.g. Kodak;
be meaningful. When Procter and Gamble wished to launch Crest Tartar
Control into South American countries, research found that there was no
recognized Spanish translation for dental tartar. A similar word implied
sorrow. The brand name was successfully changed to crest Anti-Sorro.

Global brand decisions

9.8

For the international company marketing products which can be branded are two
further policy decisions to be made. These are:
(a)
(b)

9.9

the problem of deciding if and how to protect the companys brands (and
associated trademarks); and
whether there should be one global brand or many different national brands
for a given product.

The major argument in favour of a single global brand is the economies of scale that
it produces, both in production and promotion. But whether a global brand is the best
policy or even possible depends on a number of factors, which address the two basic
policy decisions above.

Legal considerations for branding

9.10

(a)

Legal constraints may limit the possibilities for a global brand, for instance
where the brand name has already been registered in a foreign country.

24

(b)

Protection of the brand name will often be needed, but internationally is hard
to achieve because:
(i)
(ii)

in some countries registration is difficult;

brand imitation and piracy are rife in certain parts of the world.

There are many examples of imitation in international branding, with products such
as cigarettes (USA), and denim jeans.
Worse still is the problem of piracy where a well known brand name is counterfeited.
It is illegal in most parts of the parts of the world but in many countries there is little if
any enforcement of the law. (Levis is one of the most pirated brand names.).
Cultural aspects of branding
9.11

Even if a firm has no legal difficulties with branding globally, there may be cultural
problems, e.g unpronounceable names, names with other meanings (undesirable or
even obscene).
There are many examples of problems in global branding, for example Maxwell
House is Maxwell Kaffee in Germany, Legal in France and Monkey in Spain. But
sometimes a minor spelling change is all that is needed, such as Wrigley Speermint
in Germany.
Other marketing considerations

9.12

Many other influences affect the global branding decision, including:

(a)

Differences between the firms major brand and its secondary brands. The
major brand is more likely to be branded globally than secondary brands.

(b)

The importance of brand to the product sale. Where price for example, is a
more important factor, then it may not be worth the heavy expenditure needed
to establish and maintain a global brand in each country : a series of national
brands may be more effective.
The problem of how to brand a product arising from acquisition or joint
venture. Should the multinational company keep the name it has acquired?

(c)

PRICING DECISION IN INTERNATIONAL MARKETING

1.

THE ROLE OF PRICING

1.1

The principles involved in making decisions on price are the same for both domestic
and international marketing. They will be briefly discussed here with particular
reference to their application to the international context before covering in detail the
particular concerns that marketers have regarding IM pricing.

1.2

Pricing is the only mix decision that produces revenue; the other elements involve
costs. For many products it is the major decision determinant, particularly during
times of economic recession, yet its importance can often be overstated. For many
products, other mix aspects are more important, e.g. product quality, augmented
product features.

25

1.3.

Many companies do not handle pricing well. Common mistakes include:

(a)
(b)
(c)
(d)

1.4

pricing is too cost orientated (see below);

pricing is not revised often enough to reflect changing market conditions;
pricing is decided in isolation rather than as part of an integrated marketing
plan; and
pricing is not flexible or varied enough to meet the differing requirements of
the different market segments (or countries).

Price setting is not a once and for all decision. Flexible pricing is necessary to
cover the following situations (see BPPs CIM study text for Marketing Planning and
Control).
(a)

When a new product is launched.

(b)

When the company wants to initiate a price change, as a response to:

(i)
(ii)
(iii)
(iv)
(v)
(vi)

costs increases;
a decision to sell as a loss leader;
a sales promotion;
a change in the product life cycle stage;
a change in discount policy;
a decision to reposition the produce.

(c)
(d)
1.5

As a response to price change by competitors.

When the company wants to decide on a price policy for an entire product
line.
The key to successful domestic pricing is flexibility. In International marketing this
means a return to the standardisation vs adaptation issue. Successful international
marketing involves an analysis of the extent to which prices should be adapted to
meet the different environmental and competitive situations in the companys
markets.

2.

APPROACHES TO PRICING

2.1

Firms or strategic business units (SBUs) within firms can be classified with regard to
pricing policies according to the strongest influence on the pricing decision. In the
international context the need for flexibility in pricing arises because different
conditions may exist in different markets and firms may adopt different marketing
objectives (See Section 3 below).

Cost based pricing

2.2

Here, total cost is the basis for pricing with market demand having little or no effect.
This is a sensible policy in markets where price is the only or more important factor in
the purchase decisions and where there is little differentiation among product
offerings, both at a formal and augmented level, (e.g. industrial nuts, bolts and
screws).

2.3

However, research tends to suggest that too many firms adopt cost based pricing for
all their products and in all their markets when other approaches would be more
effective in achieving their objectives. For example, even in industrial product
markets demand intensities can vary between countries, which gives opportunities
for price differentiation.

26

Demand based pricing

2.4

This enables marketers to set prices according to demand conditions (i.e. the
customers ability and willingness to pay). These demand levels may vary from one
country to another, within the same country among different segments, or even within
the same segment over time.

2.5

This is the true marketing based approach and puts customers needs and
preferences at the heart of the pricing decision. Price setting is flexible to meet
changing marketing environments.
Demand based prices are most prevalent in branded consumer goods but are
increasingly possible in many industrial goods markets.

Competition based pricing

2.6
There are two aspects of competition based pricing relevant to the international
context.
(a)

Where there is almost perfect competition individual suppliers of a product

have no control over the price they charge. This is the case with commodity
prices such as those for tea and coffee. Here current world market prices are
known to customers and any change is established as a result of interaction
among a large number of buyers and sellers. Thus, in these markets, there is
no pricing decision to make.

(b)

Where a firm can base its price levels in relation to its competitors in order to
achieve certain objectives the price charged must be consistent with those
objectives. The price/quality diagram below illustrates the competitive price
strategies open to an international firm.

Figure 7.1
Relative price
High
Relative
Product
Quality

Medium
Low

High
1. Premium
pricing
strategy
4. Over
pricing
strategy
7. Hit & run
pricing
strategy

Medium
2. Penetration
pricing
strategy
5. Average
pricing
strategy
8. Shoddy
goods
pricing
strategy

Low
3. Super
bargain
strategy
6. Bargain
pricing
strategy
9. Cheap
goods
strategy

A full analysis of this model can be found in many textbooks concerned with
marketing principles.

27

2.7

Some examples of the models application in the international context would be as

follows.
(a) A firm might adopt Strategy 3 (at least in the short term) in one country in order
to penetrate a difficult competitive market while adopting Strategy 1 in another
where it already has a good reputation and fewer real competitors. (see
marginal cost pricing is discussed in section 5 o this chapter)
(b) A firm might adopt Strategy 9 (cheap goods strategy) in a less developed
country because of low disposable income levels while producing a better
quality product at a higher price in a market where disposable incomes are
higher (Strategies 5 or 1)
(c)

Any of strategies 4, 7 or 8 (over pricing, hit and run pricing or shoddy goods
pricing) might be adopted in markets where customers are relatively ignorant,
i.e. unaware that they could obtain the same quality at a lower price or a higher
quality at the same price, while in another, more knowledgeable market, a
cheap goods strategy (9) might be used.
Kotler states that strategies 4, 7 and 8 should be avoided by professional
marketers. This self-denying ordnance can be justified on ethical grounds, and
also on commercial ones. Selling shoddy goods devalues the brand name, and
will discourage repeat purchases.

3.

THE FACTS INFLUENCING INTERNATIONAL MARKETING PRICING DECISIONS

3.1

Pricing is affected both by a companys own objectives and a variety of external

factors. The principal ones are as follows.
(a) The companys marketing pricing objectives. These are as follows:
(i)
(ii)

Financial
Marketing

(iii)

Competitive

(iv)

Product differentiation

- cash generation, profit, return on investment

- maintain/improve market share
- skim/penetrate depending on stage in product
life cycle
- prevent new entry
- follow competition
- market stabilization (tacit agreements)
high price aids perception of product
differences.

A company may have different objectives in different markets and thus need to adopt
different pricing policies. For example, in one market early cash recovery may be the
objective leading to premium pricing in a small niche market. In another, larger
market the objective might be longer term market share, suggesting a more
penetrative pricing strategy.
(b)

Level of demand. This is influenced by the markets state of economic

development, stage in the product life cycle and cultural attitudes. Relatively
low prices would be suitable in the following circumstances:
(i)
(ii)

in markets of low economic development;

in the maturity/saturation stags of the produce life cycle; and

28

(iii)
(c)
(d)
(e)
(f)
(g)

where the product is perceived as a basic one (in that it satisfies

physiological needs in Maslows hierarchy).

The intensity of competition, both domestic and international.

Costs
Government restrictions and controls. Many governments have both
maximum and minimum permitted prices for certain products.
The number and type of intermediaries in the distribution channel.
Pricing in foreign currency. A sales value in a companys home currency is
uncertain due to exchange rate fluctuations.

4.

EXPORT PRICING

4.1

Export pricing involves all the complexities of the domestic pricing decision plus
some major additional complications. Consequently, export pricing is both more
challenging and more risky. Export pricing is made more complex by:
(a)
(b)
(c)
(d)
(e)
(f)
(g)

greater difficulties of acquiring reliable market information;

problems in reacting to frequent changes in demand in multiple markets;
greater complexities in accurately allocating costs;
problems of responding to exchange rate fluctuations;
additional difficulties in deciding on payment terms;
barter trading (or countertrade) which may sometimes be an unfamiliar
practice; and
other complications, such as legal and cultural factors, which vary between
export markets.

Export pricing procedure

4.2

As in any other pricing exercise, export pricing should be based on an integrative

approach. A thorough pricing procedure developed by Monroe is shown in Table 1
on the next page.
While the guidelines prescribed in Table 1 constitute a sound basis for price decisionmaking, they are incomplete in the particular context of export pricing. For sales
overseas price determination must incorporate additional considerations in relation to
individual markets. A comprehensive set of export criteria are set out below.
(a)

Pricing discretion
(i)

What, if any, product factors give us pricing discretion? (For example,

product differentiation, parents, cross elasticity, specialization?)
(ii) What, if any, market factors give us pricing discretion? (For example,
market share, number and size of rivals, number and size of customers,
market segmentation?)
(iii) What, if any, customer factors give us pricing discretion? (For example,
loyalty, degree of knowledge?)
(iv) What, if any, company factors give us pricing discretion? (For example,
dependence on exports, attitudes concerning exporting, objectives?)
(v) Overall, in this particular market, are we a price taker or a price
maker?

29

(b)

costs and export pricing

(i)

(ii)
(iii)

Which costs are most suitable for exporting pricing? Are these full
costs or marginal costs? For example, does exporting form a major
part of our business or is it subsidiary or even marginal? Are we
adopting a long term or short term view?
What are the true incremental costs of exporting? For example, what
extra packaging, transportation, insurance, tariffs etc are involved.
What contribute to overheads and profits do we require from export
sales?
TABLE 1
Integrated pricing guidelines

1.

Set consistent objectives.

(a) Make sure that objectives are clearly stated, operational and mutually
consistent.
(b) When there are several objectives, develop priorities, or otherwise clarify the
relationships between the objectives.
(c) Make sure that everyone concerned with a pricing decision, at any level in the
firm, understands the relevant objectives.

2.

Identify alternative.
(a) Identify enough alternatives to permit a sensible choice between choice between
course of action.
(b) Avoid traditional thinking, encourage creativity.

3.

Acquire relevant information

(a) Be sure that information about buyers and competitors are current and reflects
their current and future situations.
(b) Make sure information is for the future, not just a report of the past.
(c) Involve market research people in the pricing problem.
(d) Make sure cost information identifies which costs will be affected by a particular
pricing alternative.
(e) Communicate with and involve accounting with the cost aspects of a pricing
decision.
(f) Analyse the effect a particular alternative will have on scare resources,
inventories, production, cash flows, market share, volume and profits.

4.

Making the pricing decision

(a) Make full use of the information available.
(b) Correctly relate all the relevant variables in the problem.
(c) Use sensitively analysis to determine which elements in the decision are not
important.
(d) Consider all human and organizational problems which could occur with a given
pricing decision.
(e) Consider the long-run effects of the pricing decision.
(f) Base the pricing decision on the life cycle of each product.
(g) Consider the effect of experience in reducing costs as the cumulative production

30

5.

volume increases.
Maintain feedback and control
(a) Develop procedures to ensure that pricing decisions fit into the firms overall
marketing strategy.
(b) Provide for a feedback mechanism to ensure that all who should know the
results of individual price decisions are fully informed.
To summarise, pricing decisions should be logically made and should involve
rigorous thinking, with minimum difficulty from human and organizational factors.
Further, it should be recognized that judgement and prediction are needed about he
future, not the past, Finally, pricing decisions should be made within a dynamic, longrun marketing strategy.
(c)

(d)

Buyer behaviour and export pricing

(i)

What level of buyer awareness prevails in the particular market? Do

customers know how competing prices compare? Do they try to
compare prices? Should we try to strengthen or reduce buyer
awareness?

(ii)

What degree of price awareness (elasticity) prevails? Are buyers more

responsive to price or other variables? Are there segmental
differences? Are there any important psychological influences on priceinduced behaviour? How does our price compare to the going rate?
Should we try to strengthen price elasticity or to dilute it?

(iii)

What evidence is there concerning price interpretation? Are prices

used to judge quality? Is price compatible with our brand image? Is
there a market stereotype influence on price perceptions?

Marketing factors and export pricing

(i)

Is our marketing mix designed to emphasize price or non-price

elements? Is our price consistent with other mix factors like quality,
advertising and channels? Are the various components of price
consistent (e.g. list price, discounts, credit).

(ii)

If price is used as a promotional tool, is this effective and are there any
significant side-effects?

(iii) At what stage is the product in its life cycle? Does this vary across
markets and segments? Is price compatible with the life cycle stage?

(iv) Is there scope for viable differential pricing? Should prices be equal to,
above or below domestic prices? How should prices vary across export
markets?
(f)

Currencies for export pricing

(i)

Do we have a general policy concerning currencies for export pricing?

31

(ii)

What currencies do we quote and price in form export sales? Could

we improve exporting performance by changing.

(iii)

Is our export currency policy consistent with the role of price in our
marketing/competitive strategy?

(iv)

How do we monitor and respond to currency fluctuations? How

should we do this?

5.

MARGINAL COST PRICING

5.1

When a company reaches a level of output which generates enough revenue to

cover all the costs of producing that output (fixed and variable) then it is said to be at
break even point. Any output above break even point yields a profit, provided the
price charged exceeds the variable cost, since fixed costs have already been
covered.

5.2

Clearly any company has to sell well above marginal cost price (price at which only
variable costs are covered) in most of its markets. If, however, an isolated market
can be found where conditions for marginal cost pricing apply (see below) without
jeopardizing price levels in established markets, total profit (though not percentage
profit) will be increased by selling below market price but above variable cost.

Conditions for marginal cost pricing

5.3

In order to penetrate a difficult competitive market, it is worth marginal cost pricing in

the following four situations.
(a)

Where there is little possibility of speedy intervention by the foreign

government. If the government of the importing wishes to protect firms in a
domestic industry it may try to impose dumping duties. GATT allows such
imposition so long as a government can demonstrate that the product is being
sold in its country at below normal value. The concept of normal value is
central to the definition of dumping by GATT. Dumping takes place if the price
of the product exported from one country to another is less than the
comparable price, in the ordinary course of trade, for the like product when
destined for consumption I the exporting country.
It is a lengthy complex procedure to investigate claim of dumpling. Hence,
anti-dumping legislation is not a serious threat to the occasional or short term
marginal cost price.

(b)

Where the output being sold at marginal cost price forms only a small
proportion of total output. Decisions on such marginal business should be
made witin an overall sales and marketing and profit plan.

(c)

Where the resources used to produce the marginal output cannot be used
more profitably elsewhere in the company, i.e. if the opportunity cost is not too
high.

(d)

Where is will not jeopardize prices in domestic or principal export markets not
protected by tariffs.

32

If a company has surplus stock (i.e. stock that is otherwise unsaleable) it is justified in
selling it even below marginal cost. Provided that the costs of distribution and sale
are covered it is worth selling the stock rather than scrapping it.
6.

TRANSFER PRICING

6.1

When a multinational firm adopts a decentralized organizational structure, each of its

manufacturing units becomes a profit centre. Components, semi-finished or finished
products may have to be transferred between these manufacturing or assembly
units. It is in this context that the question of transfer pricing arises. If these
components or products are sold on the open market they will be sold at arms length
price (market price). Multinational firms must decide whether the transfer price
between units of the same organization should be equal to, higher than or lower than
the open market arms length price. The overall objective of transfer pricing should
be to provide sufficient profit and motivation to the decentralized units while at the
same time meeting corporate profit targets.

Once again, problems associated with transfer pricing in a domestic marketing situation
become more complex in an international context.
Setting the transfer price
6.2

(a)

(b)

Transfer price less than open market price

A multinational organization will find it beneficial to set its transfer price below
the open market price in the following situations.
(i)

If the importing country has a lower rate of profits than the exporting
country. In this situation, for the ethnocentric organization, dividend
repatriation is easy. The problem here is that operating revenues and
profits are distorted and problems of managerial motivation and
appraisal arise.

(ii)

IF the importing country has high tariff barriers, the impact of those
barriers maybe lessened by charging a price below open market price
and thus improve overall corporate profits.

(iii)

As a competitive pricing strategy, it may be possible to penetrate a

new, competitive market more quickly by adopting a low initial transfer
price (provided the market has high price elasticity).

(iv)

If inflation is high in the exporting country it may be possible to transfer

funds by high transfer pricing to an economically safe country.

Transfer price greater then open market price

In the following circumstances it may be beneficial to the organization to set
the transfer price above open market price.
(i)

If the importing country taxes profits at a higher rate of tax than the
exporting country.

(ii)

If dividend repatriation is restricted.

(iii)

If tariffs are at a relatively low level in the importing country.

33

(iv)

If there is a fear of expropriation of assets the organization will wish to

hold its cash assets in the most politically stable country.

Problems of transfer pricing

6.3

As already mentioned, the problem of managerial motivation and evaluation may

override a transfer price that has the best economic justification.

6.4

Tax avoidance strategies are increasingly attracting the attention of governments and
their tax authorities. IN the UK the Inland Revenue (for profit tax effects) the
Department of Customs and Excise (for tariff effects) and the Monopolies Commission
(for the effects on fair competition and trading) are all concerned with transfer pricing
practices of multinational organizations.
Because of this public surveillance international companies increasingly feel the need
to be seen to be playing fair to both domestic and host countries and to unions and
other groups.

6.5

Finally, transfer pricing might, indirectly, be the subject and anti-dumpling actions

7.

EXPORT QUATIONS

7.1

Here we are concerned with the make up of the export price. There are two
important aspects of quoting export prices.
(a)
(b)

The currency of the quotation.

The terms

Foreign currency pricing

7.2

About 70% of UK imports are paid for in foreign currency. However about 90% of UK
exports are invoiced in sterling. Since sterling has been in decline in recent years
there are advantages to UK exporters to change towards invoicing in selected foreign
currencies (or indeed notional units of account, such as ECUs).

Foreign exchange risk

7.3

In international trade, the exporter must invoice the buyer in a foreign currency (e.g.
the currency of the buyers country) or the buyer must pay in foreign currency (e.g.
the currency of the exporters country). It is also possible that the currency of
payment will be the currency of a third country; for example, a UK firm might sell
goods to a buyer in Brazil and ask for payment in US dollars. One problem for
importers is therefore the need to obtain foreign currency to make a payment, and for
exporters there can be the problem of exchanging foreign currency received for
currency of their own country. Banks provide the service to importers and exporters
of buying and selling foreign currency.

7.4

The cost of imports t the buyer or the value of exports to the seller might be
increased or reduced by movements in foreign exchange rates. For example, if a UK
importer buys goods from a US supplier for $15,000 when the exchange rate
between the US dollar and sterling is $1.60 to 1, the importer would expect to pay
9,375 for the goods. However, if by the time the date of payment arrives, the rate of
exchange is $1.50 to 1 (i.e. sterling has fallen in value against the US dollar) the
cost to the importer would by 10,000, or 625 more than originally anticipated.

34

7.5 The US exporter would receive $15,000, and would not be affected by the exchange
rate movement. However, in the same example, if the invoice had been in sterling
(e.g. for 9,375 rather than US $15,000) the UK importer would not have had any
foreign exchange risk. Instead the US exporter would have incurred a loss from the
exchange rate movement from $1.60 to $1.50, receiving (9,375 x 1.50) only
$14,062,50 instead of the $15,000 originally expected.
The firm paying in a foreign currency or earning revenue in a foreign currency
therefore has a potential exchange risk form adverse movements in foreign
exchange rates.

7.6 There is also a change of making a profit out of favourable movements in exchange
rates but, although gains as well as losses can be made, movements in foreign
exchange rates which occur continually in the foreign exchange markets
introduce a serious element of risk (gambling of a lottery on the way exchange
rates move) which might deter firms from entering international sales or purchase
agreements.

7.7 The foreign exchange risk does not arise from a business that makes payments and
earns receipts in the same foreign currency, because payments in the currency can
be made out of cash income in the same currency. For example, if a UK company
buys goods from supplier X costing US $10,000, and at the same time the UK
company sells goods abroad to customer Y for US @10,000 (in dollars), the
company can use the US $10,000 it receives from customer Y to pay the US
$10,000 dollars to supplier X If matching receipts and payments is carried out in
this way, the exchange rate between the foreign currency and the companys
domestic currency would be irrelevant and exchange risk would be avoided.

7.8 Matching receipts and payments is made easier by the ability of organizations or
individuals in the UK to hold a foreign currency account. For example, a company
that earns receipts and makes payments in US dollars can choose to hold a US
dollar account with its UK bank, and to maintain as much of its dollar receipts as it
chooses in this account, until the time comes to use the currency to make dollar
payments.

7.9 Matching currency receipts and payments (or currency receipts and the repayment of
currency loans) is only feasible if the international trader has receipts and payments
in the same currency to match. Many traders are not so lucky, and must either
a) make a (net) payment in a foreign currency; or
b) earn (net) receipts in a foreign currency.

7.9.1 Foreign currency exposure refers to this situation, and so any trader who has
foreign currency exposure incurs a foreign exchange risk ie a risk of losses from
adverse movements in exchange rates. It is possible to set up hedging
arrangements to reduce the risk of losses.
Quotation in own currency advantages
It is administratively convenient. This is an important factor for the small firm or the
firm where export revenue is a small proportion of total revenue.

7.10

The risk of variation in the exchange rate is born by the foreign customer.

35

Quotation in foreign currency

7.13

Here the exporter accepts any exchange risk of fluctuating values. This risk can be
covered in the forward exchange market. The exporter however can accept
exchange risks (profits or losses) if he wishes, but in this role exporters are acting as
currency speculators. Is this part of their mission? These risks become even
greater the softer a currency is (i.e. the less easy to convert into other currencies).
The exporter might be made vulnerable to a severe risk of loss.

Advantages of foreign currency pricing

7.14

Were a forward market exists for a currency and where dealing is at a premium to
sterling, receivables may be sold forward (up to five years in some cases) from the
date of a contract to increase their sterling revenue or lower the effective cost of
sterling export finance (while at the same time minimizing exchange risk).

7.15

Also, thanks to any forward premium the exporter could increase volume by offering a
lower currency price than the spot rate of exchange would indicate, i.e. foreign
currency pricing can help to secure contracts in the first place.

7.16

An exporter can gain a competitive edge by quoting in a foreign currency if the

importer would prefer his own currency, either to avoid exposure to currency
fluctuation or because of exchange control regulations. Foreign currency pricing also
makes it easy to relate to retail prices overseas. In addition, constant adjustment to a
sterling price list is avoided.

7.17

Foreign currency invoicing can sometimes help exporters to borrow at lower rates of
interest than at homes.

Resolving differences between exporter and importer

7.18

Despite the advantages of foreign currency pricing note above. UK exporters

frequently prefer to quote prices in sterling. It makes calculation of profits, cash flows
and possibly costs easier and avoids exposure to exchange rate risks. But foreign
customers normally prefer to receive price quotations in their own currency since it
places the risk of exchange rate fluctuation on the exporter and facilitates comparison
of prices from a number of foreign sources.

7.19

Resolution of this potential conflict depends to a large extend on:

(a)
(b)
(c)

the relative strengths of the two parties;

the importance of the contract to either party; and
occasionally the economic situation in both countries (such as the balance of
payments position).

36

7.20

Whichever currency is need there are a number of ways of minimizing problems

caused by foreign currencies.
(a) The simplest way is to have an appropriate clause in the contract to adjust the
price if it fluctuates within agreed limits or to renegotiate if these are exceeded.
(b) To purchase (or sell) forward as appropriate (see above) whereby a fixed rate is
agreed for the given sum at a specified date in the future by a bank. The net
sum (after commission) received or paid at the end of the period is at least
guaranteed.
(c) In a situation where either or both currencies are unstable a third currency can be
quoted, e.g. the US dollar. A strengthening or weakening in one partys
currency would be felt in relation to the dollar and the other party would not be
affected. Each party to the transaction thus takes on the risk associated with
its own currency. If the dollar changed value, it would be likely to be relative to
both currencies and the risk (or benefits) would be shared. The one
disadvantage is that there is a double exchange transaction involved.
However, this may be more acceptable than other alternatives.

Terms of a price quotation

7.21

Whatever the pricing objectives or the basis for pricing of an organization, cost
aspects are of vital importance as a guide.
In more ethnocentric export companies, overseas prices are based on domestic
prices plus additional costs of freight etc. Often however the domestic price will
include costs not relevant to the export situation, e.g. domestic advertising, selling,
distribution etc.
One of the key tasks of the international marketer involved in pricing decisions is to
take into account all the relevant costs in order that exports achieve the defined level
of profitability or market share.

Shipping terms
7.22

In addition to the obvious manufacturing costs of he exporter they are be significant

extra costs in getting the goods to a foreign buyer. Generally, the costs of Physical
movements are as follows:
a)
b)
c)
d)
e)
f)

transport from the manufacturers premises to the docks;

loading aboard ship;
freight charges;
unloading
customs duties; and
transport from the docks to the customers warehouse

7.23

As well as these costs of physical movement there are also insurance charges and
possibly additional costs for any delays.

7.24

There are a number of internationally accepted standard forms of dividing these costs
between buyer and seller. Who pays what, and who is responsible for arranging for
the transport, has to be confirmed when the sale contract is agreed.

37

7.25

The standard forms are known as INCOTERMS and have been designated by the
International Chamber of Commerce. You will note that many of the descriptions
contain the term free. This indicated the time at which legal title passes from seller
to buyer (and thus risk of loss in case of damage, theft and so forth).

7.26

Among the more common forms of quotation are the following:

(a)

EXW: Ex-works

The buyer must take delivery at the exporters factory and pay all the costs of freight,
insurance and other expense items to get the goods transported from the supplier
factory to their destination. This represents the minimum obligations for the seller.
(b)

FAS: Free Alongside Ship

(i)

The seller arranges to:

(1) deliver the goods alongside the named ship at the port of loading
named in the contract; and
(2) pay all the charges up to delivery of the goods alongside ship,
including freight and insurance charges to that point.

(ii)

The buyer is responsible for:

(1) choosing the carrier to transport the goods abroad and paying the
cost of freight from the port of shipment including the cost of
loading the goods on board ship (if loading costs are separate from
freight charges):
(2) arranging insurance and paying insurance from arrival at the
dockside onwards; and
(3) arranging and paying for any export license and export taxes.

The point of delivery of the goods from the seller to the buyer is alongside the ship.
7.27

7.28

For example FAS Felixstowe for the export of goods by a UK firm to an overseas
buyer would mean that the exporter must:
(a)

deliver the goods free alongside ship at Felixstowe; and

(b)

pay all the costs, including freight and insurance, to bring the goods alongside
the ship at Felixstowe.

The overseas buyer must nominate the carrier(s) to take the goods from Felixstowe to
their destination and (a) pay freight from Felixstowe, (b0 pay export charges (if any),
(c9 pay for loading the goods on board ship (if separate from freight charges), and (d)
pay for insurance of the goods from their time/point of delivery at Felixstowe.

38

FOB: Free on Board

7.29

7.30

7.31

FOB means that the buyer does not have to pay for transporting or insuring the goods
from the place where they are originally dispatched up to the point when they are
taken on board ship. The costs up to this point are borne by the seller/exporter. The
place of delivery is the ships rail.
The seller/exporter must:
(a)

pay for transportation, freight and insurance charges to the named port of
shipment (e.g. FOB LOS Angles would mean that an American supplier would
be responsible for sending goods for shipment on board at Los Angeles, and
to pay cost sup to that point);

(b)

provide and pay for the export license;

(c)

pay export taxes

(d)

deliver the goods on board the ship (or airline flight etc) that the buyer has
specified;

(e)

pay for the cost of loading the goods on board ship (if loading costs are
separate from freight charges);

The buyer must:

(a)

nominate the carrier to transport the goods (e.g. if the shipping terms for an
export consignment from the UK are FOB Stranraer, it is the buyer who
specifies the shipping company, sailing date and time);

(b)

give the seller the details of the ship and sailing time;

pay for the carriage from this point (ie freight from that point, including costs of
unloading at the place of destination);

(d)

arrange and pay for insurance of the goods from this point.

CFR: Cost and Freight

7.32

With Cost and Freight, the exporter/seller must nominate the carrier to ship the goods
abroad, arrange the contract of carriage and pay freight charges. In these respects,
CFR differs from FOB.

7.33

The seller must:

(a)

nominate the carrier and so make the contract of carriage;

(b)

pay for transportation of the goods to the place of shipment and insure the
goods up to this point;

(c)

provide and pay for the export license;

(d)

pay export taxes;

(e)

deliver the goods on board;

39

(f)
(g)
(h)

pay for the cost of loading the goods if the loading charge is separate from the
freight charge;
provide the buyer with a clean on board bill of lading;
pay the cost freight charges to the named port of destination (eg, CFR
Rotterdam would mean that the UK exporter must pay freight charges for
delivery to the port of Rotterdam);

(i)

send to the buyer advice of the carrier and the shipment date.

7.34

Though the supplier pays the freight charges to the ort of destination, the place of
delivery of the goods is the ships rail when the goods are taken on board,. When
they are on board, they are the responsibility of the buyer. In a CFR contract, the
supplier is paying freight charges for goods that have already been delivered to the
buyer.

7.35

The buyer must:

(a)

pay for the insurance of the goods from the time they are taken on board, and
so the buyer henceforward bears the risk of loss or damage to the goods;

(b)

pay for unloading costs at the port of destination if these costs are separate
from the freight charges.

(c)

Pay for any import license required;

(d)

Accept delivery of the goods, when the appropriate documents (eg bill of
lading, invoice) have been presented, an obligation of great practical
importance because the supplier does not want the buyer to refuse the goods
after they have been shipped to the buyers country, the seller already having
paid freight charges to get them thee;

(e)

Arrange and pay for transportation and insurance from the port of destination
to their final destination in the buyers country.

CIF: Cost, Insurance and Freight.

7.36

Cost, insurance and freight is similar to CFR, with the exception that it is the seller, not
the buyer, who must arrange and pay for the insurance of the goods to the port of
destination.

7.37

The obligations of the seller are therefore the same as for CFR, except that
additionally the seller must:

7.38

(a)

arrange for insurance of he goods from the port of shipment to the port of
destination (the amount of insurance cover is often the CIF value of the goods
plus 10%);

(b)

pay the insurance premium;

(c)

provide the buyer with the insurance policy or certificate.

With CIF, the place of delivery by the seller is still the ships rail when the goods are
taken on board so that the insurance taken out by the seller will be in favour of the
buyer in the event of loss or damage etc to the goods during shipment.

40

7.39

The buyers obligations are the same as for CFR, with the exception that he does not
have to pay for the insurance of the goods between the port of shipment and the port
of destination.

7.40

The terms of shipment might therefore by CIF Hong Kong meaning that the exporter
undertakes to pay for the freight charges and insurance of the goods to the port of
destination, which is Hong Kong.

7.41

If terms for an import of goods from Taiwan are CIF UK port this means that the
exporter in Taiwan can deliver the goods to any UK port. The UK importer would
obviously be well advised to have the port of delivery specified to avoid unnecessary
transport costs in the UK.

DDP: Delivered duty paid

7.42

The seller must pay the costs of delivering the goods to the named destination, having
paid import duties on the goods. The seller must therefore pay the import duties or
taxes, arrange and pay insurance and provide documents that will enable the buyer to
take delivery. The buyers responsibility is to take delivery of the goods at the named
destination. This represents the maximum obligation for the seller.

8.

METHODS OF PAYMENT

8.1

In the context of international marketing there are three essential elements in taking
pricing decisions:
(a)

determining the basis of calculating the price (eg cost plus, transfer price, local
market price and so forth);

(b)

agreeing with the seller the basis of shipping, insurance etc; and

(c)

agreeing with the seller the method of payment.

The first two of these have been considered above and this section is devoted to the
third.
8.2

There are any number of variations in the method of payment that may be agreed
between the exporting company and its customer but the following provide a series of
yardsticks. They are listed in order of increasing risk for the exporter.
(a)
(b)
(c)
(d)
(e)

Payment in advance.
Letters of credit (documentary credits).
Payment on shipment.
Documentary collections.
Open account trading.

Payment in advance
8.3

The most secure method of payment for an exporter is to obtain payment in full in
advance of shipping the goods. He will then not have any risk that the foreign buyer
will refuse the pay or be unable to pay for goods that have already been shipped to
him. Payment in advance also means that the exporter, by not giving the buyer any
credit, does not have to finance the sale himself for a credit period, and so does not
tie up working capital for exports (foreign debtors).

41

8.4

However, when payment is made in advance, the exporter should make sure that the
funds are cleared first before making the shipment.

8.5

Particular care should be taken when the cheque, draft or other payment order calls
for payment in the buyers own country, or in another country other than the
exporters own. In such circumstances, it is possible that the exporters bank will
insist on either.
(a)

negotiating the cheque etc. with recourse, which means that if the foreign
buyer stops the cheque or is unable to pay because he lacks the funds etc,
the bank will have recourse to the exporter for a return of the payment; or

(b)

a collection arrangement for obtaining the funds from abroad.

8.6.

Payment in advance gives security to the exporter. The obvious drawback to

payment in advance is the risk for the buyer that the exporter will not actually
dispatch the goods, or if he does dispatch them, that they will not arrive in the
required condition or to the right specification. It also means that he buyer is
financing the sale for some time before he takes physical possession of the goods.

8.7

As you may imagine, 100% cash with order is not a common form of payment.
However, it is quite common for the overseas buyer to pay a cash deposit in
advance, and then to pay the balance by another method.

Letters of credit (documentary credits)

8.8

The documentary credit system is a method of payment in international trade which

gives a guarantee of payment to the exporter provided that it complies with various
terms and conditions (such as providing specified documents to a bank for checking
after shipment of the goods and shipping the goods within a certain time).

8.9
Documentary credits require international cooperation through the banking system.
The interests of promoting international trade are helped by international agreed standard
procedures and these have been formulated by the International Chamber of Commerce.
8.10.

In brief, the documentary credit system works as follows:

Stage 1

The buyer and seller (exporter) agree a sales contract that

includes payment by a documentary credit

Stage 2

The foreign buyer requests his own (foreign) bank to issue a

letter of credit in favour of the buyer.

Stage 3

The foreign bank issues a letter of credit in favour of the buyer.

By doing so it is guaranteeing payment to the exporter provided
that the latter complies with the terms and conditions

Stage 4

The foreign bank asks a bank in the exporters country to advise

the credit to the exporter. This does not necessarily involve the
latter in making any commitment to the exporter to add its own
guarantee of payment but if it does so it is then known as a
confirmed letter of credit.

42

8.11

Stage 5

After shipping the goods the exporter has to present the

documents specified by the letter of credit. These normally
include a commercial invoice, bill of lading and insurance
certificate.

Stage 6

Provided the documents are in order the exporter arranges for

payment to be made (either immediately or on deferred terms)
by the buyers bank.

Not surprisingly, all this international activity costs money. The cost of issuing a letter
of credit is usually borne by the buyer, although the buyer may be able to persuade
the exporter to bear some or all of the costs and charges. Who pays what costs
depends of the relative bargaining strength of the two parties.

Revocable and irrevocable letters of credit

8.12

These are the two basic types of documentary credit.

(a)

A revocable credit allows the foreign buyer to amend the credit (or even
cancel it) without giving prior notice to the exporter. The right to amend or
cancel can be exercised by the buyer at any time up to payments begin made
to the exporter. Consequently there is a risk that the credit (i.e. bank
guarantee) will be withdrawn after the exporter had made, and even shipped,
the goods.
Due to their insecurity, revocable credits are similar in their risk profile to
trading on open account and therefore rare.

(b)

8.13

An irrevocable credit can be amended or cancelled only with the agreement

of all parties to the credit (i.e. buyer, issuing bank, advising bank and
exporter). It therefore gives greater security to the exporter because the
issuing banks guarantee remains in force, even if the buyer changes his
mind.

Although the irrevocable letter of credit gives the exporter the guarantee of a foreign
bank, the exporter may not be entirely happy relying on a bank about which the
exporter has little information in a country that might, for example, impose exchange
controls. This can be overcome by confirmation (or additional guarantee of payment)
by a bank in the exporters own country. In the UK an exporter might ask for a credit
to be confirmed by a first-class London bank (e.g. one of the clearers).
A confirmed irrevocable letter of credit thus gives greater security to the exporter
because the guarantee is given by a bank in the exporters own country. It makes
little difference to the buyer whether it is confirmed or unconfirmed because the buyer
eventually pays the issuing bank (the buyers own bank) which guarantees payment
to the exporter whether the irrevocable credit is confirmed or not. There are, of
course, extra bank charges for a confirmed letter of credit but the buyer may be able
to persuade the exporter to pay for he additional security.

43

Payment upon shipment of the goods

8.12

The exporter and overseas buyer might agree an arrangement whereby the buyer
pays for the goods as soon as they are shipped. The exporter would have to cable
or telex the buyer to notify him of the shipment, giving full details of the shipment, and
then expect the buyer to make an immediate payment. The goods will therefore be
in transit or at their point of destination when the payment is received.

8.15

Security is provided to the exporter because there are documents of title to the
shipped goods, and the exporter can arrange to keep these documents until payment
has been received.

8.16

If the buyer does not make the payment on shipment, or if the funds are not cleared,
the exporter will still have title to the goods, because he holds the documents of tile.
However, the goods would now be in transit and so he would have the problem of
deciding what to do with them when they arrive at their destination.

Documentary collections
8.17

Documentary collections involve the exporter asking his bank to help with the
arrangements for payment, by handling shipping documents as well as a bill of
exchange or a cheque. They provide some security of payment for the exporter
because the banks involved in a collection should act in accordance with the
internationally accepted rules that apply to collections. The system works as shown
in Figure 7.2. below.
Figure 7.2
CLEAN COLLECTION
Exporter

Commercial documents
(sent direct
to buyer)

Financial documents

Remitting bank

Collecting/presenting bank

Buyer

44

8.18

8.19

A significant feature of a documentary collection is that if a bank is instructed to

handle commercial documents which include a bill of lading, the exporter can keep
control over the goods until the buyer has either paid for them or accepted a bill of
exchange. This is because:
(a)

the bill of lading is a document of title; and

(b)

a full set of the signed originals of this document can be kept by the bank until
the foreign buyer:
(i)

pays for the goods which may have arrived at their port of destination
but which the buyer cannot take possession of without the bill or
lading; or

(ii)

accepts a bill of exchange and gives it to the collecting bank; or

(iii)

issues a promissory note.

The bank therefore has constructive control over title to the goods and must only
release this title when the buyer complies with the requirements of the exporter, as
set out in the collection order.

Open account trading

8.20

Open account trading is the most risky method of trading for exporters, although it
accounts for some 70% of UK exports. However, when trading relations between an
exporter and buyer are well-established, and sovereign and country risk are
considered low or non-existent, then open account trading might be perfectly
acceptable without excessive risk for the exporter. Open account trading has
developed quite extensively between countries in the EC for these reasons. A further
point to bear in mind is that a vast amount of world trade occurs between fellow
members of multinational groups (e.g. a vehicle manufacturer assembling cars in
country A with engines and gearboxes bought from its sister companies in countries
B and C).

8.21

It is fair to ask why an exporter, who is worried about the risk of non-payment, does
not insist on payment in advance, payment on shipment or a letter of credit every
time he or she exports importer. The exporter is often unable to get payment terms,
which would be desirable in an ideal world, because of the fierce competition in
international trade. If the importer does not lie the payment terms, another supplier
who might offer more favaourable terms.

Bills of Exchange
8.22 The methods of payment described above have focused on the degree of risk
incurred by the exporter. AS the final item in this chapter we look at the technique of
payment known as a Bill of Exchange. This can be coupled with a number of different
payment methods but is such an important and established means of payment in
international trade that it is worthy of consideration in its own right.

45

8.23

A bill of exchange is defined as:

(a)
(a)
(c)
(d)
(e)
(f)
(g)
(h)
(i)

an unconditional order in writing;

addressed by one person (the drawer);
to another (the drawee);
signed by the person giving it;
requiring the person to whom it is addressed;
to pay;
on demand, or at a fixed or determinable future time;
a sum certain in money;
to, or to the order of, a specified person, or to bearer.

8.24

Thus it is basically a request for payment, normally from the supplier (exporter) to the
customer. A bill known as a term bill allows the recipient a period of credit before
payment. When such a bill is sent to the customer he is expected to sign it as the
acceptor and the bill becomes an accepted bill.

9.

FOREIGN MARKET PRICING

9.1

Here we are concerned with pricing strategies for products that are both produced
and marketed in an overseas country. The extent of pricing control exercised from
outside that country will depend on the organisations structure.
(a)
(b)
(c)

9.2

Ethnocentric approach: group headquarters dictates its subsidiarys pricing

decisions totally.
Polycentric approach: the subsidiaries are autonomous.
Geocentric approach: control varies depending on the situation, perhaps the
best of both worlds.

In most cases pricing decisions in foreign markets are based on the same principles
as domestic pricing. However foreign governments influence pricing decisions to a
greater or lesser extent. An international company must be aware of the price
legislation in each of the countries in which it operates. There are broadly two of
government influences in pricing decisions:
(a)
(b)

price controls;
restrictive practices control

Price controls
9.3

These tend to become widespread when inflation takes hold. Governments either
forbid or lay down certain conditions for price increases. Price controls still feature in
some countries for basic commodities (e.g. bread in Egyp).
Governments may also take the view that setting minimum prices is in the public
interest by maintaining competition. They may also set maximum prices,

usually for certain basic products, (e.g. food) and in some instances lay down
profit restrictions which will affect price levels.
Restrictive practices controls

46

9.4

A restrictive practice is an agreement or practice which prevents, restricts or distorts

competition. The government control of such practices will have effects on foreign
market pricing. Many countries have a government agency whose main task is to
protect the national or public interest by controlling such practices (in the UK, the
Office of Fair Trading).

47

COMMUNICATIONS DECISIONS IN INTERNATIONAL MARKETS

1.

PROBLEMS IN INTERNATIONAL PROMOTION

1.1

Effective communications are particularly important in international marketing, due to

the geographical and psychological separation of the producer and its market.
Consequently, the international marketer has to rely more on intermediaries and
impersonal communication for a major part of the communication process.

1.2

The methods of promotion in any one market will be affected by:

(a)
(b)
(c)
(d)
(e)
(f)
(g)

1.3

the promotional objectives for that market;

cultural and other social constraints;
facilities available for promotional effort in the market;
economic development;
distribution infrastructure;
media availability; and
competition

Although in some circumstances it is possible broadly to standardize promotional

messages, as for Coca Cola, generally the language, media and other elements
need to be altered. Standardised promotion refers essentially to the themes and
messages portrayed in the promotion rather than identical media and audiences.
Standardisation is rare and can only occur when the product and its cultural meaning
are more or less identical across a number of countries and cultures. The more
normal state of affairs is that of adaptation of promotional effort to match the different
communication requirements of the market in question.

Promotional objectives
1.4

In new or developing markets the promotional objectives may be to create

awareness and encourage trial. In mature markets the objectives will be to
encourage repeat purchase and remind the customer. The objectives chosen will
thus influence the promotional campaign for a market. Thus in a new market the use
of samples may be used to encourage trial but in a mature market the use of price
off next purchase coupons (if allowed) might be more appropriate.

Cultural and other social constraints in promotion

1.5

Language often presents a problem. Literal translation rarely works: there is a story
that come alive with Pepsi when translated into one language means raising the
dead to life. Similarly brands may run into problems; one only has to mention Pschitt,
a French lemonade, to make the point. Language problems can be overcome by
translation and back translation to ensure meaning is conveyed properly. More
fundamental are:
(a)
(b)
(c)

gender roles;
context in which the product is used;
who will use the product

48

1.6

Thus in the relatively liberated gender climate of the UK, an advertisement showing a
man cooking for the family does not cause comment (New Zealand lamb TV
advertisement), but in countries with more rigid gender codes, this may well be found
to be absurd or offensive.
Similarly the use of ground coffee in the UK is still largely on special occasions where
visitors or celebratory meals are involved. In France it is an everyday product. The
promotion should reflect these differences.

Legal constraints in promotion

1.7

The international marketer faces a legal minefield when considering promotional

methods. In the UK, although considerable tightening up is in progress, the attitude
towards promotional claims is relatively liberal, as is the attitude to what is promoted,
when and where. Reaching the parts that other beers cannot reach could only be
claimed in the UK, where the diversity of the English language allows irony,
overstatement and puns. Legal constraints may exist covering:
(a)
(b)
(c)
(d)
(e)

1.8

what can be claimed;

what products may be promoted;
what media may be used;
when they may be promoted; and
how much may be spent on promotion.

The UK has fallen in line with the rest of the EU in banning tobacco advertisements
on TV (including the loss of the irony-laden Hamlet advertisements). France is
amongst a host of countries that regulate what can be said in an advertisement, and
most Scandinavian countries prohibit TV advertising of tobacco in any form. This
legal minefield usually means that some local professional advice is necessary
before a promotion is considered in a foreign country. This may be the distributor
(who may have promotional responsibility anyway) or a local advertising agency.

Facilities available in the market

1.9

The UK is peculiar in having largely national media (newspapers, TV, radio,

billboards and cinema for example), which not only allow full market coverage but
also provide a multi-media option to the promoter. Coverage by the various media
may be limited by:
(a)
(b)
(c)

1.10

the media organization being localized;

circulation / audience limitations; and
real restrictions.

In countries with low literacy, newspaper and magazines will only be read by the
educated elite. Radio, TV or posters could be better solutions. In some countries the
media is regionalized rather than nationwide, causing problems in coordination of
promotional campaigns.

Economic development
1.11

The level of economic development will affect the amount and way in which a product
is used, affecting the message. It may also be connected with educational and
literacy levels, affecting the choice of media.

49

Distribution infrastructure
1.12

The nature of the trading channels in the market will determine their ability to provide
all or even part of the promotional effort in a market. Thus, a distribution system
which consists mainly of small scale market traders cannot be expected to promote
the product to any significant degree, but a major distributor such as CadburySchweppes in the UK could be expected to promote Coco Cola as part of the
dealership.

Media availability
1.13

Not all media are available in a market due to economic, educational and legal
considerations (discussed above) and hence the international marketer may need to
adapt the promotion to more unusual media in order to gain adequate coverage of
the market. Sometimes, the appropriate media may not exist and the promoter may
have to sponsor the media (e.g. a free advertising sheet, or a radio station).

Competition
1.14

The level of competition will of course, affect the promotional programme in a

country. The entry of a foreign competitor into a market will normally provoke a
response from local operators, be they indigenous or existing international
companies. Thus, the entrant will have to consider not only the promotional
programme but his response to competition.

1.15

The above discussion suggests that promotion in international markets:

(a)
(b)

usually needs adaptation; and

usually needs expert advice.

2.

THE INTERNATIONAL PROMOTIONAL MIX

2.1

Possible media for promotion are:

(a)
(b)
(c)
(d)
(e)
(f)

trade and professional journals;

consumer media (magazines, newspapers, TV, radio, posters, etc);
direct mail;
trade fairs and missions;
personal selling; and
telemarketing.

Trade and professional journals

2.2

Where they are available, these publications have the advantage of providing a
targeted audience with little wastage. Due to the nature of the journals, literacy
levels and technical expertise will be high. They provide excellent business- tobusiness contact but are unsuitable for consumer marketing because of their
restricted circulation and technical content. Many UK professional and trade journals
have significant foreign readership. Details of foreign publications can be found in
such publications as Standard Rate ad Data Services business publications for most
major countries. Because of the high cost of advertising it is usual to limit advertising
to a few key markets where the market turnover justifies such investment.

50

Consumer media
2.3

Here the directed nature and coverage of the media are open to question. Major
media groups with international connections provide reports on readership and
reader profiles. In many countries however, the data on consumer media are sparse
and the international marketer has to rely heavily on local knowledge. Issues to
consider include:
(a)
(b)
(c)
(d)
(e)
(f)

2.4

extent of target market coverage;

image carried by the medium;
literacy levels;
ownership/relationship;
ability to convey the message;
the cost of contact (usually expressed as cost per 1,000 audience).

In underdeveloped countries where literacy and low incomes combine to provide low
market coverage for newspapers, magazines, TV and radio, the use of posters and
handbills (usually handed out in key trading centers) should be considered as an
alternative.

Direct mail
2.5

In most developed countries suitable listings based on company or consumer

segmentation profiles are widely available.
For trade contacts, the use of
international buyers guides (Kellys or Dunn and Bradstreet, for example) provide
adequate contacts. In developing or lesser developed countries the international
marketer may find that such information is harder to come by.

2.6

The major problem with using direct mail in an international context is the inability to
follow up enquiries generated. Thus it is important that the local sales office, agent
or distributor in that country is provided with leads as quickly as possible. In
developed markets direct mail can be used in several ways:
(a)
(b)
(c)

direct response promotion, that is buying off the peg;

to generate enquiries for more personal contact; and
to provide an introduction for personal contact

Generally direct mail tends to be more expensive than advertising in terms of contact
costs, and has only slightly more response. However, it can have the advantage of
providing more targeted audience, which can save money significantly.
Trade fairs and missions
2.7

Trade fairs are probably one of the most effective methods of initial business -to
-business contact, providing an opportunity for producers, distributors and customers
to meet. They allow not only communication with a targeted audience but also the
ability to demonstrate and provide trial of the product or service. Although fairs exist
in the consumer markets, they are less attractive and effective to the international
marketer.

51

2.8

For smaller companies, the high cost of a presence at some of the major fairs, and
the possibility of being ignored in the presence of major international competitors has
led to the development of fringe venues, such as a local hotel, where the company
may display its offers without competitor presence. The client is often encouraged to
attend by direct mail invitations and the provision of refreshments. Advantages of
trade fairs include the following.
(a)
(b)
(c)
(d)
(e)

2.9.

The ability to let potential customers see demonstrations and trial.

The ability to make personal contact with existing and potential customers to
maintain and develop relationships.
Allowing direct contact with major decision makers and influencers at a time
when they are interested in the product.
Providing an opportunity for market research, such as competitor activity and
buyer response.
Contacting a large number of potential customers in one place.

The principal disadvantage of trade fairs is cost, especially for smaller companies
forced to compete with large multinational exhibitors.
Most trade fairs are, by their nature, specific to a particular trade, such as
engineering or toys. Where internationally renowned trade fairs are held in your
own country, attendance should be considered both from the domestic and
international perspective.

Personal selling
2.10

In international marketing personal selling will be required one or more times in the
trading channel. Personal selling is expensive but effective. Given the right support
a good salesman can convert about one in three prospects. This compares to about
one in 50 with direct mail and advertising as a maximum. Thus advertising and direct
mail can be used to generate enquiries, and the expensive resource, the salesman,
can be used to convert the lead to an order.

2.11

The international salesman cannot work in isolation. If the salesperson is to be

efficient and effective, support must include:
(a)
(b)
(c)

2.12

The international salesperson will require several attributes:

(a)
(b)
(c)
(d)
(e)
(f)
(g)

2.13

generation of enquiries;
product literature and samples where relevant; and
information on price, delivery and terms.

knowledge of the product and market;

language and cultural knowledge specific to the country;
technical knowledge where necessary;
contacts, preferably from experience in the market;
suitable personality;
selling skills; and
motivation to succeed.

Personal selling can only be justified where the contribution, that is that combined
effect of margin and order size, is sufficient to justify the costs involved. Thus, it is
ideal in business- to- business marketing and might be essential in dealing with
government purchasing agencies.

52

Telemarketing
2.14

Telemarketing, that is the use of telephone to sell, is often used domestically:

(a)
(b)
(c)

to prospect potential customers for personal selling;

to handle repeat purchases not requiring personal visits;
to deal with customer enquiries or complaints.

2.15

Whilst widely accepted in business-to-business trading, the acceptance of

telemarketing in consumer markets, especially in prospecting customers, is not so
widely accepted. Thus, in the UK there is more resistance to telemarketing than in
the USA. In France the existence of MINITEL has allowed the growth of telephone
ordering to a considerable degree, one source claims that 30% of retail sales are
now via telephone.

2.16

In the international context, the lack of a telecommunications infrastructure and

cultural inhibitions to telephone selling may limit the attraction of this medium.
Telephone ownership varies considerably. In most developed countries there is at
least one telephone for every two people, showing widespread telephone access. In
the former Eastern block it is one telephone per ten people, in Burma one per 750
people and in Democratic Republic of Congo, one per 2,100 people.

2.17

A further consideration is the ability to follow up calls. Telemarketing requires the

ability to react accordingly and thus probably works best from within a market rather
than on a country-to-country basis.
International directories are widely available and both BT and Yellow Pages offer list
broking services to the international telemarketer.

2.18

Generally, the impersonal methods of communication are less expensive in terms of

cost per contact, but less effective than personal communication in getting the
order. The order size and potential contribution may well dictate the appropriate
medium. Thus high value, high volume sales on a business to business warrant
trade fair visits, and foreign sales representations, whereas consumer
communications are better suited to indirect methods such as advertisement

3.

PLANNING THE INTERNATIONAL PROMOTIONAL CAMPAIGN

3.1

In planning an international promotional campaign the international marketer needs

to make decisions concerning:
(a)
(b)
(c)
(d)
(e)
(f)
(g)

professional assistance;
the message;
the media;
the promotional budget;
monitoring and control;
organization; and
independent or cooperative promotion

53

Professional assistance
3.2

The normal form of assistance is to hire an advertising agency either:

(a)
(b)

3.3

international agency with local offices;

local agencies in each market

In making the decision the international marketing manager should consider:

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)

knowledge and coverage of the relevant market;

quality and reputation within each market;
additional services provided (for example, market research, public relations,
etc.)
ability of international marketeers own organization;
ability to liaise with agency easily;
whether the campaign is to be standardized or not;
value of promotional budget;
attitude in market to international vs local image;
organization of international marketeers company; and
degree to which marketer is responsible for promotion.

The criteria to use in selecting an advertising agency were explored in Chapter 3.

3.4

Thus a small firm exporting to one market and wishing to perhaps ,organize a stand
at a trade fair, would probably be best to use a UK based agency with local
connections because it may well have language and communication problems and
lacks experience in the foreign market.
On the other hand, a large international company such as Xerox would prefer to use
an international agency with local offices because of he standardized nature of their
promotional campaign.

Selecting the message

3.5

Whilst commonality of needs is largely recognized worldwide, the way in which these
needs are satisfied varies, as does the frequency with which these needs occur in
any society. Social and cultural values will almost inevitably mean that selecting the
message will require a local office or a local distributor. Further considerations
concern:
(a)
(b)
(c)

3.6

localized or standardized campaigns;

market conditions; and
market segments sought

The degree to which promotion should be standardized is a difficult decision. Where

the product or service is perceived or used in a significantly different way, the
message has to be adapted. Thus, McDonalds in Moscow is a relatively expensive
purchase, not able to be consumed quickly (a two hour queue), and is regarded more
as a special treat rather than an everyday quick, convenient snack. Where the
media availability and market coverage is significantly different from the home
market, a new and different media campaign will be required. Finally, legal
restrictions may force both message and media adaptation.

54

Selection media
3.7

As suggested in the discussion above, the availability, cost and effectiveness of

media may not be the same as in domestic markets. In considering the use of any
media one needs to take into account:
(a)
(b)
(c)
(d)
(e)
(f)

3.8

the target market you wish to contact;

degree of market coverage;
legal restraints on using the medium;
physical constraints of medium (e.g. ability to show colour etc.);
degree of customer response to the medium; and
cost per enquiry generated.

Generally, unless you are a multinational company operating in a particular country,

such information will be difficult to obtain. The advice of either your local distributor
or advertising agency should be sought.

Deciding on the promotional budget

3.9

As in domestic markets there are several methods used to decide on international

promotional(advertisisng) budget:
(a)
(b)
(c)
(d)
(e)

3.10

what can be afforded;

percentage of sales
competitor parity;
historical precedent; and
objective funding.

The first two are the most common. Unfortunately, they do not take into account
either competition or the requirements to achieve sales objectives. In fact, all the first
four though used, are flawed in their logic.
Objective funding is based on the assumption that:
(a)
(b)
(c)

3.11

sales objectives in a particular market can be quantified;

the appropriate level of promotion determined; and
the funding necessary will be provided

This is a more appropriate method of deciding on promotional budgets, and has the
advantage that when sales are hard to obtain, a case can be made for an appropriate
budget.
In practice promotion is often regarded as an optional cost and
considerable diplomacy is required by the international marketer to justify an
increased budget at a time of financial stringency.

55

Monitoring and control

3.12

Investment of any kind should be related to the return that the investment
generates, and this applies equally to promotional campaigns. Costs are usually
easy to obtain from the international records. The response generated is often
ignored. Typical monitoring measures could include:
(a)
(b)
(c)

coding advertisements so that enquiries can be related to a particular medium

or advertisement;
comparing response rates between media; and
comparing against other salesforce, calls and orders per call to establish the
costs of contact and order generation.

Organising international promotion

3.13

Unless the company is large and experienced internationally, centralized promotion is

not advisable. Thus in most cases the company will rely on the advice and help of
both the local distributors and agency in a particular market for operational and
administrative decisions.
Strategic decisions will always be the domain of the company. Promotional
campaigns and support are often discussed as part of the annual review with agents
and distributors and form part of the total incentive to such.

Independent or cooperative promotion

3.14

Part of the task of a channel of distribution is that of promoting the product. The
problem is deciding who does the promotion. Trade promotion is usually undertaken
by the producer in most markets with enquiries being direct to the distributor or
agent. Where consumer markets are involved the main distributor in any country is
usually required to provide the promotion. Smaller distributors such as retailers may
well be tempted to promote the product locally to the end users, if an incentive is
offered in the form of shared cost of promotion. Thus a foreign department store may
be tempted to put a special promotion on for a product if the costs can be shared
between it, the distributor and the producer.

56