International Marketing PDF

INTERNATIONAL MARKETING
www.eiilmuniversity.ac.in
Subject: INTERNATIONAL MARKETING
Credits: 4
SYLLABUS
Introduction to International Marketing

Strategic concept of Marketing, Market needs and wants, guiding principles of the Marketing Company.
Global Marketing Environment
Introduction, Economic Environment-The World economy, International Trade Theory, Legal Environment,
Social and cultural Environment.
Targeting Global Opportunities
Global market Segmentation, Targeting and global product Positioning,
Global Marketing Strategy
Entry and Expansion Strategies- Marketing and sourcing, Planning process and entry strategies, Cooperative
strategies and global strategic partnerships, Competitive analysis and strategy, Strategic Positioning and Intent,
Global Marketing Programs
Product decisions, International product strategies, Moving toward world product.
Branding
Branding and packaging decisions, marketing industrial products, International marketing of services, Basic
pricing concepts.
Advertising
Global promotion, Channels of Distribution, Physical distribution and documentation.
Suggested Readings:
1.
2.
3.
4.
International Marketing, Warren Keegan, Pearson Education Asia Ltd and Tsinghua University Press.
Strategic Planning for Export Marketing, Franklin R Root Scranton, International Textbook Co.
International Trade and Investment, Franklin R Root Scranton, International Textbook Co.
International Marketing Management, Philip Kotler Prentice-Hall International, Inc Prentice-Hall
International, Inc
5. International Marketing, Philip R Cateora and John L Graham Irwin/McGraw-Hill, Boston
6. International Marketing (Analysis and strategy): Sak Onkvisit & John J Shaw, Pearson Education Asia
Ltd and Tsinghua University Press.
7. International Marketing, Vern Terpstra and Ravi Sarathy New York Holt, Rinehart and Winston Inc
INTERNATIONAL MARKETING (MBA)
COURSE OVERVIEW
Today the corporate world cannot survive with restricting
international perspective is maintained throughout the text. The
themselves within the domestic boundaries. As the consumers
objective of the problems is to enhance the students under-
across countries become more universal in nature, the need to
standing of analytical techniques- more emphasis on policy and
look at the whole world as a market is growing. The aim of this
managerial implications of International Marketing. The
unit is to introduce the students to International Marketing,
module focuses on International skills required to be an
which explains how International Markets operate in an
effective manager. It will develop the students ability to identify
International Environment. An elementary approach is used in
and appreciate effective ways of getting the objective fulfilled. It
the module, which emphasizes the reasons for undertaking
also develops practical applications ability and knowledge and
International Market analysis and their interpretation. An
how these can be used in the decision-making process.
Reference Books
1. International Marketing: Warren Keegan
2. Strategic Planning for Export Marketing: Warnklin R. Root
3. International Trade And Investment: Framklin R. Root
4. International Marketing Management: Philip Kotler
5. International Marketing: Philip R.Cateora & John L. Graham
6. International Marketing, Analysis & Strategy: Sak Onkvisit & John J. Shaw
7. International Marketing: Vern Terpstra & Ravi Sarathy
CONTENT
Unit No.
Lesson No.
Lesson 1
Lesson 2
Lesson 3
Topic
Page No.
Introduction to International Marketing
Introduction to International Marketing-2
Economic Environment-The World Economy
15
Lesson 4
Economic Environment- Foreign Economies
21
Lesson 5
International Trade Theory
27
Lesson 6
Political Environment
33
Lesson 7
Legal Environment
40
Lesson 8
Social & Cultural Environment
48
Lesson 9
Business Customs in Global Marketing
57
Lesson 10
Business Ethics and Bribery
66
Tutorial A
73
Trade Distortions and Marketing Barriers
77
Case 1 : Selling U.s. Ice Cream In Korea
83
Case 2 : Unilever And Nestle-an Analysis
85
Case 3 : Nestle-the Infant Formula Incident
86
Euro Disney (A)
90
Euro Disney (B)
95
Lesson 11
Global Marketing Information Systems and Research
99
Lesson 12
International Marketing Intelligence
109
Lesson 13
Segmentation, Targeting and Positioning
119
Tutorial C : Swatch Watch U.s.a.: Creative Marketing Strategy
126
Oriflame
131
Lesson 14
Entry and Expansion Strategies: Marketing and Sourcing
140
Lesson 15
Planning Process & Entry Strategies
148
Lesson 16
Cooperative Strategies and Global Strategic Partnerships
158
Lesson 17
Competitive Analysis and Strategy
165
Lesson 18
Strategic Positioning and Intent
174
Case 1 : Metro Corporation : Technology Licensing Negotiation
178
Case 2: Ascom Hasler Mailing Systems Inc. :

Competing in the Shadow of a Giant
Case Study : Kodak Versus Fuji
182
187
v
CONTENT
Lesson No.
Page No.
Lesson 19
Product Decisions
193
Lesson 20
International Product Strategies
201
Lesson 21
Moving Toward World Product
210
Lesson 22
Branding Decisions
218
Lesson 23
Branding and Packaging Decisions
226
Lesson 24
Marketing Industrial Products
234
Lesson 25
Nternational Marketing of Services
239
Lesson 26
Basic Pricing Concepts
247
Lesson 27
Dumping & Countertrade
255
Lesson 28
Transfer Pricing and Other Pricing Approaches
264
Lesson 29
Global Advertising
271
Lesson 30
Advertising School of Thoughts
278
Lesson 31
Global Promotion
285
Lesson 32
Channels of Distribution
292
Lesson 33
Channel Development & Adaptation
302
Lesson 34
A Guide for Developing a Marketing Plan
309
Lesson 35
Physical Distribution & Documentation
315
Lesson 36
Global E-Marketing
326
Case Study 1 : Baseball : The Japanese Game
341
Case Study 2 : Sony Corp
343
Case Study 3 : Sony in 1996
345
Case Study 4 : Enron: supplying Electric Power in India
348
Lesson 37
Sources of Financing and International Money Markets
351
Lesson 38
Negotiating with International Customers,

Partners and Regulators
361
Lesson 39
Implication of Negotiations Differences for Managers
366
Lesson 40
Leading, Organizing, and Monitoring the
Lesson 41
vi
Topic
Global Marketing Effort
374
The Future of Global Marketing
383
Case Study : Parker Pen Co. (A)
388
Parker Pen Co. (B)
391
Parker Pen Co. (C)
394
CEAC-China
395
Nokia and the Cellular Phone Industry
408
LESSON 1:
INTRODUCTION TO INTERNATIONAL
MARKETING
1. Understanding of international marketing.
2. Distinguish between international and domestic marketing.
3. The various management orientations.
4. Why is international marketing required?
5. Benefits of international marketing.
We live in a global marketplace. As you read this chapter, you
may be sitting in a chair imported from Brazil or at a desk
imported from Denmark. You may have purchased these items
form IKEA, the Swedish global furniture retailer. The computer on your desk could be a sleek new IBM ThinkPad
designed and marketed worldwide by IBM and manufactured in
Taiwan by Acer, Inc., or perhaps a Macintosh designed and
marketed worldwide by Apple and manufactured in Ireland.
Your shoes are likely to be from Italy, and the coffee you are
sipping is form Latin America or Africa.
Marketing: A Universal Discipline

The foundation for a successful global marketing program is a
sound understating of the marketing discipline. Marketing is
the process of focusing the resources and objectives of an
organization on environmental opportunities and needs. The
first and most fundamental fact about marketing is that it is
universal discipline. Marketing is a set of concepts, tools,
theories, practices and procedures, and experience. Together,
these elements constitute a teachable and learnable body of
knowledge. Although marketing is universal, marketing practice,
of course, varies form country to country. Each person is
unique, and each country is unique. This reality of differences
means that we cannot always directly apply experience form one
country to another. If the customers, competitors, channels of
distribution, and available media are different, it may be
necessary to change our marketing plan.
The Strategic Concept of Marketing

By the 1990s, it was clear that the new concept of marketing
was outdated and that the times demanded a strategic concept
the strategic concept of marketing, a major evolution in the
history of marketing thought, shifted the focus of marketing
from the customer or the product to the customer in the
context of the broader external environment. Knowing
everything there is to know about the customer is not enough.
To succeed, marketers must know the customer in a contact
including the competition, government policy and regulation,
and the broader economic, social, and political macro forces that
shape the evolution of markets. In global marketing this may
mean working closely with home country government trade
negotiators and other officials and industry competitors to gain
access to a target country market.
A revolutionary development in the shift to the strategic
concept of marketing is in the marketing objective : from profit
to stakeholder benefits. Stakeholders are individuals or groups

who have an interest in the activity of a company. They include
the employees and management, customers, society, and
government, to mention only the most prominent. There is a
growing recognition that profits are a reward for performance
(defined as satisfying customers in a socially responsible or
acceptable way). To compete in todays market, it is necessary to
have an employee team committed to continuing innovation
and to producing quality products. In other words, marketing
must focus on the customer in context and deliver value by
creating stakeholder benefits for both customers in context and
deliver value by creating stakeholder benefits for both customers
and employees. This change is a revolutionary idea that is
accepted today by a vanguard minority of marketing practitioners.
Profitability is not forgotten in the strategic concept. Indeed, it
is a critical means to the end of creating stakeholder benefits.
The means of the strategic marketing concept is strategic
management, which integrates marketing with the other
management functions. One of the tasks of strategic management is to make a profit, which can be a source of funds for
investing in the business and for rewarding shareholders and
management. Thus, profit is still a critical objective and measure
of marketing success, but it is not an end in itself. The aim of
marketing is to create value for stakeholders and the key
stakeholder is the customer. If your customer can get greater
value for stakeholders, and the key stakeholder is the customer.
If your customer can get greater value form your competitor
because your competitor is willing to accept a lower level of
profit reward for investors and management, the customer will
choose your competitor, and you will be out of business. The
spectacular inroads of the clones into IBMs PC market
illustrate that even the largest and most powerful companies can
be challenged by competitors who are more efficient or who are
willing to accept lower profit returns.
Finally, the strategic concept of marketing has shifted the focus
of marketing form a microeconomics maximization paradigm
to a focus of managing strategic partnerships and positioning
the firm between vendors and customers in the value chain with
the aim and purpose of creating value foe customers. This
expanded concept of marketing was termed boundary less
marketing by Jack Welch, chairperson and chief executive officer
(CEO) of General Electric. Marketing, in addition to being a
concept and philosophy is a set of activities and a business
process. The marketing activities are called the four Ps; product,
price, place (distribution), and promotion (or communications).
These four Ps can be expanded to five Ps by adding probe
(research). The marketing management process is the task of
focusing the resources and objectives of the organization on
opportunities in the environment. The three basic principles
that underlie marketing are discussed next.
Learning Objectives from the lesson:
UNIT I
INTRODUCTION
UNIT 1
The Three Principles of Marketing

The essence of marketing can be summarized in three great
principles. The first identifies the purpose and task of marketing, the second the completive reality of marketing, and the
third the principal for achieving the first two.
a. Customer Value And The Value Equation

The task of marketing to create customer value that is greater
than the value created by competitors. Expanding or improving
product and / or service benefits, by reducing the price, or by a
combination of these elements, can increase value for the
customer. Companies with a cost advantage can use price as a
competitive weapon. Knowledge of the customer combined
with innovation and creativity can lead to a total offering that
offers superior customer value. If the benefits are strong
enough and valued enough by customers, a company does not
need to be the low-price competitor to win customer.
b. Competitive or Differential Advantage
The second great principle of marketing is competitive advantage. A competitive advantage is a total offer, vis--vis relevant
competition that is more attractive to customers. The advantage
can exist in any element of the companys offer; the product, the
where
V= value
B= perceived benefits perceived costs (for example, switching
costs)
P= price
Price, the advertising and point of sale promotion, or the
distribution of the product. One of the most powerful
strategies for penetrating a new national market is to offer a
superior product at a lower price. The price advantage will get
immediate customer attention, and, of those customers who
purchase the product, the superior quality will make an impression.
c. Focus
The third marketing principle is focus, or the concentration of
attention. Focus is required to succeed in the task of creating
customer value at a competitive advantage. All great enterprise,
large and small, is successful because they have understood and
applied this great principle. IBM succeeded and became a great
company because it was more clearly focused on customer needs
and wants than any other company in the emerging dataprocessing industry.
One of the reasons IBM found itself in crisis in the early 1990s
was that its competitors had become much more clearly focused
on customer needs and wants. Dell and Compaq, for example,
focused on giving customers computing power at low prices;
IBM was offering the same computing power at higher prices.
A clear focus on customer needs and wants and on the competitive offer is required to mobilize the effort needed to maintain a
differential advantage. This can be accomplished only by
focusing or concentrating resources and efforts on customer
needs and wants and on how to deliver a product that will meet
those needs and wants.
Global Marketing: What It is and What It

is Not
The foundation for a successful global marketing program is a
sound understanding of the marketing discipline. Marketing is
the process of focusing the resources and objectives of an
organization on environmental opportunities and needs. The
first and most fundamental fact about marketing is that it is a
universal discipline. Marketing is a set of concepts, tools,
theories, practices and procedures, and experience. Together
these elements constitute a teachable and learnable body of
knowledge.
Although the marketing discipline is universal, markets and
customers are quite differentiated. This means that marketing
practice must vary from country to country. Each person in
unique, and each country are unique. This reality of differences
means that we cannot always directly apply experience form one
country to another. If the customers, competitors, channels of
distribution, and available media are different, it may be
necessary to change our marketing plan.
Companies who dont appreciate this fact will soon learn about
it if they transfer irrelevant experience form one country or
region to another. Nestle, for example, sought to transfer its
great success with a four flavor coffee line from Europe to the
United States. Its U.S competitors were delighted. The transfer
led to a decline of 1 percent in U.S. market share! An important
task in global marketing is learning to recognize the extent to
which marketing plans and programs can be extended worldwide, as well as the extent to which they must be adapted.
Much of the controversy about marketing dates to professor
Theodore Levitts 1983 seminal article in the Harvard Business
Review, The Globalization of Markets. Professor Levitt
argued that marketers were confronted with a homogenous
global village. Levitt advised organizations to develop
standardized, high-quality world products and market them
around the globe using standardized advertising, pricing, and
distribution. Some well-publicized failures by parker pen and
other companies seeking to follow Levitts advice brought his
proposals into question. The business press frequently quoted
industry observers who disputed Levitts views. For example,
Carl Spielvogel, chairman and CEO of the Backer spiel Vogel
Bates Worldwide advertising agency, tale The wall street Journal,
Theodore Levitts comment about the world becoming
homogenized is bunk. There are about two products that lend
themselves to global marketingand one of them is CocaCola.
Indeed, it was global marketing that made Coke a worldwide
success. However, that success was not based on a total
standardization of marketing mix elements. In his book, The
Borderless world, kenichi Ohmae explains that Cokes success in
Japan could be achieved only by spending a great deal of time
and money becoming an insider. That is, the company built a
complete local infrastructure with its sales force and vending
machine operations. Cokes success in Japan, according to
Ohmae, was a function of its ability to achieve global localization, the ability to be as much of an insider as local company
nut still reaping the benefits that result form world-scale
operations.
As the Coca-Cola Company has demonstrated, the ability to

think globally and act locally can be a source of competitive
advantage. By adapting sales promotion, distribution, and
customer service efforts to local needs. Coke established such
strong brand preference that the company claims a 78 percent
share of the soft drink market in Japan. At first, Coca Cola
managers did not understand the Japanese distribution system.
However, with considerable investment of time and money,
they succeeded in establishing a sales force that was as effective
in Japan is it was in the United States. To complement Coke
sales, the Japanese unit has created products such as Georgia
brand canned coffee and Lactia, a lactic, no carbonated soft drink
that promotes healthy digestion and quick refreshment
expressly for the Japanese market.
Coke is a product embodying marketing mix elements that are
both global and local in nature. In this book, we do not
propose that global marketing is a knee-jerk attempt to
impose a totally standardized approach to marketing around
the world. A central issue in global marketing is how tailors the
global marketing concept to fit a particular product or business.
Finally it is necessary to understand that global marketing does
not mean entering every country in the world. Global marketing
does mean widening business horizons to encompass the
worlds when scanning for opportunity and threat. The decision
to enter markets outside the home country depends on a
companys resources, managerial mind set, and the nature of
opportunity and threat. The Coca-Cola Companys soft-drink
products are distributed in almost 200 countries in fact, the
theme vice. Coke is the best known, strongest brand in the
world its enviable global position has resulted in part form the
Coca-cola symbol is available globally, the company also
produces over 200 other nonalcoholic beverages to suit local
beverage preferences.
A number of other companies have successfully pursued global
marketing by creating strong global brands. Philip Morris, for
example, has example, has made Marlboro the number one
cigarette brand in the world. In automobiles, Daimler Chrysler
has gained global recognition for its Mercedes nameplate BMM
automobiles and motorcycles.
Global marketing strategies can also be based on product or
system design, product positioning, packaging, distribution,
customer service, and sourcing considerations. For example, Mc
Donalds has designed a restaurant system that can be set up
virtually anywhere in the world. Like Coca-cola, McDonalds also
customizes its menu offerings in accordance with local eating
customs. In Jakarta. Indonesia, for example, McDonalds is
upscale dinning. It is the place to be and to be seen in Jakarta.
Cisco systems, which makes local area network routers that

allow computers to communicate with each other, designs new
products that can be programmed to operate under virtually any
conditions in the world.
Unilever uses a teddy bear in various world markets to communicate the benefits of the companys fabric softener.
Harley-Davidsons motorcycles are positioned around the world
as the all American bike. Gillette uses the same packaging for
its flagship sensor razor everywhere in the world. Italys
Benetton utilizes a sophisticated distribution system to quickly
deliver the latest fashions to its worldwide network of stores.
The backbone of Caterpillars global success is a network of
dealers that supports a promise of 24 hour parts and service
anywhere in the world. The success of Honda and Toyota in
world markets was initially based on exporting cars form
factories in Japan. Now, both companies have invested in
manufacturing facilities in the United States and other countries
form, which they export. In 1994, Honda earned the distinction
of being the number one exporter of cars form the United
States by shipping more than 100,000 accords and civics to
Japan and 35 other countries. Gap focuses its marketing effort
on
TABLE 1.1
Examples of Global Marketing
Global Marketing
Company/ Home Country
Strategy
Brand Name
Coca-Cola (U.S.), Philip Morris (U.S.), Daimler Chrysler (Germany)
McDonalds (U.S), Toyota (Japan), Ford (U.S.), Cisco systems (U.S.)
Product Design
Unilever (Great Britain / Netherlands), Harley-Davidson (U.S)
Gillette (U.S.)
Product
Benetton (Italy)
positioning
Caterpillar (U.S.)
Toyota (Japan), Honda (Japan), Gap (U.S.)
Packaging
Distribution
Customer service
Sourcing
The United States but relies on apparel factories in low-wage

countries to supply most of its clothing.
The particular approach to global marketing that a company
adopts will depend on industry conditions and its source or
source or sources of competitive advantage. Should Harley
Davidson start manufacturing motorcycles in a low wage
country such as Mexico or china? Will U.S. consumers continue
to snap up U.S. built Toyotas? The answer to these questions
is it all depends, because Harleys competitive advantage is
based in part on its made in the U.S.A. positioning, shifting
production outside the united states is not advisable at this
time. Toyotas success in the United States is partly attributable
to its ability to transfer world class-manufacturing skills to the
united states while using advertising to stress that its Camry is
built by American, with many components purchased in the
united states.
Toyota has positioned itself as a global brand independent of
any country of origin link. A Toyota wherever it is made. The
same thing is true for thousands of companies that have
successfully positioned their brand independent of country of
origin. A Harley- Davidson motorcycle made China would
shock Harley buyers; the brand at this stage of its development
is linked to a single country of origin, the United States.
What does the phrase global localization really mean? In a

nutshell, it means a successful global marketer must have the
ability to think globally and act locally. As we will see many
times in this book, global marketing may include a combination of standard (e.g., the actual product itself) and
nonstandard (e.g., distribution or packaging) approaches. A
global product may be the same product everywhere and
yet different. Global marketing requires marketers to behave
in a way that is global and local at the same time by responding
to similarities and differences in world markets.
The Process of Internationalization

For certain firms, they may have started at the outset as
international firms in the sense that their mission is to be
involved in international business activities. For many others,
however they may have begun as domestic firms concentrating
on their own domestic markets before shifting or expanding
the focus to also cover international markets. It is thus useful to
investigate the stages of internationalization.
Based on his review of a number of the internationalization
models, which specify the various stages of internationalization
models, which specify the various stages of internationalization,
Andersen has proposed his own U model which ahs received
mixed empirical support. According to this model, there are
four stages: (1) no regular export activities, (2) Export via
independent representatives (agent) (3) establishment of an
overseas sales subsidiary, and (4) overseas production/ manufacturing. The development is supposed to take place first
within a specific country before being repeated across countries.
Another study found evidence to support the hypothesis that
there are four identifiable stages in a firms internationalization.
The four stages are: (1) nonexporters, (2) export intenders. (3)
Sporadic exporters, and (4) regular exporters. The process
shows how firm were initially constrained by resource limitations and a lack of expert commitment and how they can
become more and more internationalized as more resources are
allocated to international activity.
At present, there is no conclusive evidence to show that
domestic firms have generally indeed progressed from one stage
to another as prescribed on their way to become more internationally oriented. Likewise, no empirical evidence has been
provided so far to support a competing hypothesis that some
firms are born global in the sense that their mission from the
outset is to become MNCs.
Management Orientations
The form and substance of a companys response to global
market opportunities depend greatly on managements
assumptions or beliefs both conscious and unconscious
about the nature of the world. The worldview of a companys
personnel can be described as ethnocentric, polycentric, egocentric, and geocentric. Management at a company with a prevailing
ethnocentric orientation may consciously make a decision to
move in the direction of geocentricism. The orientations are
collectively known as the EPRG framework.
a. Ethnocentric Orientation
A person who assumes his or her home country is superior
compared to the rest of the world is said to have an ethnocentric orientation. The ethnocentric orientation means company
personnel see only similarities in markets and assume the
products and practices that succeeded in the home country will,
due to their demonstrated superiority, be successful anywhere.
At some companies, the ethnocentric orientation means that
opportunities outside the home country are ignored. Such
companies are sometimes called domestic companies. Ethnocentric companies that do conduct business outside the home
country can be described as international companies; they adhere
to the notion that the products that succeed in the home
country are superior and, therefore, can be sold everywhere

without adaptation.
In the ethnocentric international company, foreign operations
are viewed as being secondary or subordinate to domestic ones.
An ethnocentric company operates under the assumption that
tried and true headquarters knowledge and organizational
capabilities can be applied in other parts of the world. Although
this can sometimes work to a companys advantage, valuable
managerial knowledge and experience in local markets may go
unnoticed. For a manufacturing firm, ethnocentrism means
foreign markets are viewed as a means of disposing of surplus
domestic production. Plans for overseas markets are developed
utilizing policies and procedures identical to those employed at
home. No systematic marketing research is conducted outside
the home country, and no major modifications are made to
products. Even if consumer needs or wants in international
markets differ form these in the home country, those differences
are ignored at headquarters.
Nissans ethnocentric orientation was quite apparent during its
first few years of exporting cars and trucks to the united state.
Designed for mild Japanese winters, the vehicles were difficult
to start in many parts of the United States during the cold
winter cars. Nissans assumption was that Americans would do
the same thing. Until the 1980s, Eli Lilly and company operated
as an ethnocentric company in which activity outside the United
States was tightly controlled by headquarters and focused on
selling products originally developed for the U.S market.
Fifty years ago, most business enterprise- and specially those
located in a large country such as the United States could operate
quite successfully with an ethnocentric orientation. Today,
however, ethnocentrism is one of the biggest internal threats a
company faces.
b. Polycentric Orientation
The polycentric orientation is the opposite of ethnocentrism.
The term polycentric describes managements often-unconscious belief or assumption that each country in which a
company does business is unique. This assumption lays the
ground work for each subsidiary to develop its own unique
business and marketing strategies in order to subsidiary to
develop its own unique business and marketing strategies in
order to succeed; the term multinational company is often used
to describe such a structure. Until recently, Citicorps financial
services around the world operated on a polycentric basis. James
Bailey, a Citicorp executive, offered this description of the
company; we were like a medieval state. There was the king
and his court and they were in charge, right? No. It was the land
barons went and did their thing. Realizing that the financial
services industry is global zing; CEO John Reed is attempting
to achieve a higher degree of integration between Citicorps
operating units. Like Jack Welch at GE, Reed is moving to
instill a geocentric orientation throughout his company.
c. Regiocentric and Geocentric Orintatons
In a company with a regiocentric orientation, management
views regions as unique and seeks to deep an integrated strategy.
For example, a U.S. company that focuses on the countries
included in the North American Free Trade Agreement
Philips and Matsushita: How Global

Companies Win
Until recently, Philips Electronics, headquartered in Eindhoven, the
Netherlands, was a classic example of a company with a polycentric
orientation. Philips relied on relatively autonomous national organizations
(called Nos in company parlance) in each country. Each No developed its
own strategy. This approach worked quite well until Philips faced
competition form matsushita and other Japanese consumer electronics
companies in which managements orientation was geocentric. The
difference in competitive advantage between Philips and its Japanese
competition was dramatic.
For example, Matsushita adopted global strategy that focused its resources
on serving a world market for home entertainment products. In television
receivers, matsushita offered European customers tow models based on a
single chassis. In contrast, Philipss European cos offered customers seven
different models based on four different chassis. If customers had
demanded this variety, Philips would have been the stronger competitor.
Unfortunately, the product designs created by the Nos were not based on
customer preferences. Customers wanted value in the form of quality,
features, design and price. Philipss decision to offer greater design
variety was based not on what customers were asking for but, rather, on
Philipss structure and strategy. Watch major country organization had its
won engineering and manufacturing group. Each country unit had its own
design and manufacturing operations. This polycentric, multinational
approach was part of Phillipss heritage and was attractive to Nos that
had grown accustomed to functioning independently. However, the
polycentric orientation was irrelevant to consumers, who were looking for
value. They were getting more value from matsushitas global strategy than
from Philipss multinational strategy. Why? Matsushitas global strategy
created value for consumers by lowering costs and, in turn, prices.
As a multinational company, Philips squandered resources in a
duplication of effort that led to greater product variety. Variety entailed
higher costs, which were passed on to consumer with no offsetting increase
in consumer benefit. It is easy to understand how the right strategy resulted
in matsushitas success in the global consumer electronics industry.
Because the matsushita strategy offered greater customer value, Philips
executives consciously abandoned the polycentric multinational approach
and adopted a more geocentric orientation. A first step in this is direction
was to create industry groups in the Netherlands responsible for developing
global strategies for research and development (R&D), marketing, and
manufacturing.
The geocentric orientation represents a synthesis of ethnocentrism and polycentrism; it is a worldview that sees similarities
and differences in markets and countries and seeks to create a
global strategy that is fully responsive to local needs and wants.
A regiocentric manager might be said to have a worldview on a
regional scale; the world outside the region of interest will be

viewed with an ethnocentric or a polycentric orientation, or a
combination of the two. Jack Welchs quote at the beginning of
this chapter that globalization must be taken for granted
implies that at least some company managers must have a
geocentric orientation. However, some research suggests that
many companies are seeking to strengthen their regional
competitiveness rather than moving directly to develop global
responses to changes in the competitive environment.
The ethnocentric company is centralized in its marketing
management, the polycentric company is decentralized, and the
regiocentric and geocentric companies are integrated on a
regional and global scale, respectively. A crucial difference
between the orientations is the underlying assumption for each.
The ethnocentric orientation is based on a belief in home
country superiority. The underlying assumption of the
polycentric approach is that there are so many differences in
cultural, economic, and marketing conditions in the world that
it is impossible and futile to attempt to transfer experience
across national boundaries.
Benefits of International Marketing

International marketing daily affects consumers in many ways,
though its importance is neither well understood nor appreciated. Government officials and other observers seem always to
point to the negative aspects of international business. Many of
their charges are more imaginary than real. The benefits of
international marketing must be explicitly discussed in order to
dispel such notions.
Survival
Because most countries are not as fortunate as the United States
in terms of market size, resources, and opportunities, they
must trade with others to survive. Hong Kong has historically
underscored this point well, for without food and water form
China proper, and The British colony would not have survived
long. The countries of Europe have had similar experience,
since most European nations are relatively small in size.
Without foreign markets, European firms would not have
sufficient economies of scale to allow them to be competitive
with U.S. firms. Nestle mentions in one of its advertisements
that its own country, Switzerland, lacks natural resources, forcing
it to depend on trade and adopt the geocentric perspective.
International competition may not be a matter of choice when
survival is at stake. A study of five medical sector industries
found that international expansion was necessary when foreign
firms entered a domestic market. However, only firms with
previously substantial market share and international experience
could expand successfully. Moreover firms that retrenched after
an international expansion disappeared.
Growth of Overseas Markets
Developing countries, in spite of economic and marketing
problems, are excellent markets. According to a report prepared
for U.S. Congress by the U.S. Trade Representative. Latin
America and Asia / Pacific are experiencing the strongest
economic growth.
The conference Board is a business information service that
assists senior executives and other leaders in arriving at sound
(NAFTA)the United States, Canada, and Mexico has a

regiocentric orientation. Similarly, a European company that
focuses its attention on the EU or Europe is regiocentric. A
company with a geocentric orientation views the entire world as
a potential market and strives to develop integrated world
market strategies. A company whose management has a
regiocentric or geocentric orientation is sometimes known as a
global or transnational company.
decisions, and more than 3,000 organizations in over fifty

nations participate as Associates. The conference Boards study
of some 1500 companies found that U.S manufactures with
factories or sales subsidiaries overseas outperformed their
domestic counterparts during the 1980s in terms of growth in
nineteen out of twenty major industry groups and higher
earnings in seventeen out of twenty groups.
American marketers cannot ignore the vast potential of
international markets. The world market is more than four
times larger than the U.S market. In the case of Amway Corp, a
privately held U.S manufactures of cosmetics, soaps, and
vitamins, Japan represents a larger market than the United
States.
A slowing of the growth of the U.S population and changing
lifestyles explain why the growth of other markets should be
viewed with a critical eye. The fitness craze has contributed
mightily to the leveling of U.S. sales of cigarettes and liquor.
However, sales of cigarettes in the former Soviet Union are still
going strong. Some 575 billion cigarettes were sold there in 1994
as compared to 490 billion cigarettes sold in the United States.
Russian smokers apparently show no concern about the health
risks. Not surprisingly, international giants Philip Morris Co.,
R.J. Reynolds tobacco international SA, And British American
Tobacco Co. have entered the market aggressively. Without
outside markets, executives of U.S. distillers and tobacco firms
probably would be driven to drink and smoke to forget their
troubles.
Sales and Profits

Foreign markets constitute a large share of the total business
of many firms that have wisely cultivated markets abroad. Many
large U.S companies have done very well because of other
overseas customers. IBM and Compaq, for example, sell more
computers abroad than at home. According to the U.S Department of Commerce, foreign profit of American firms rose at a
compound annual rate of 10.8 percent between 1982 and 1991,
almost twice as fast as domestic profits of the same companies.
The case of Coca Cola clearly emphasizes the importance of
overseas markets and (marketing strategy 1 2) international
sales account for more than 80 percent of the firms operating

profits. In terms of operating profit margins, they are less than
15 percent at home but twice that amount overseas. For every
gallon of soda that Coca Cola sells, it earns thirty seven
cents in Japan a market difference form the mere seven cents
per gallon earned in the United States. The Japanese market
contributes about $ 350 million in operating income to Coca
Cola (vs. $324 million in the U.S. market). Making Japan the
companys most profitable market. With consumption of Coca
Colas soft drinks averaging 296 eight ounce servings per
person per year in the United States, the U.S market is clearly
saturated. Non U.S. consumption, on the other hand, averages
only about forty servings and offers great potential for future
growth.
Diversification
Demand for most products is affected by such cyclical factors as
recession and such seasonal factors as climate. The unfortunate
consequence of these variables is sales fluctuations, which can
frequently be substantial enough to cause layoffs of personnel.
One way to diversify a companys risk is to consider foreign
markets as a solution for variable demand. Such markets even
out fluctuations by providing outlets for excess production
capacity. Cold weather, for instance, may depress soft drink
consumption. Yet not all countries enter the winter season at
same time, and some countries are relatively warm year round.
Bird, USA Inc., a Nebraska manufacturer of go carts and
minicars for promotional purpose, has found that global selling
has enabled the company to have year round production. It
may be winter in Nebraska but its summer in the Southern
Hemisphere somewhere theres a demand and that stabilizes
our business.
A similar situation pertains to business cycle: Europes business
cycle often lags behind that of the United States. That domestic
and foreign sales operate in differing economic cycles works in
the favor of General Motors and Ford because overseas
operations help smooth out the business cycles of the North
American market.
Marketing Strategy 1-2

The Real Thing vs. The Pepsi Generation
A global market can balance good market with bad ones while there is no
question that the U.S cola market is the biggest one in the world, it is a
highly mature market, and the profit potential is limited, cola has shrunk
form 63.3 percent of soft drink sales in the United state in 1984 to
58.8 percent in 1993 a loss of $2.4 billion in potential retail sales.
The united states leads the world in coca cola consumption. Averaging
296 eight ounce serving per person per year. The comparable figures for
other markets are: Mexico (275 servings), Germany (189), Canada
(169), Japan (124), Great Britain (89), France (56) Egypt (18) Russia
(2) and china (1) in the case of Indias 890 million people, each person
only consumes an average of three servings in a year, well below the levels
found in Pakistan (9) and Thailand (75). In addition to being the worlds
most populous nations, china and India are two of the worlds fastest
growing economies, and Japanese, European, and American firms are all
quite excited about doing business with and in china and India.
Undoubtedly, china and India have plenty of room to grow as a market.

If the Chinese and Indians can be persuaded to drink just one more
serving per person a year, coca cola and Pepsi can derive additional sales
of more than two billion cans. Coca cola has been particularly aggressive
in East Europe, Asia, and South America. It has opened plant in
Romania, Norway, and India while planning several more in china,
Hungary, Lithuania, and Thailand. When the Soviet Union Collapsed,
PepsiCo held on to its network of state run bottlers so as to utilize their
ties to old-line management. Coca cola on the other hand, quickly got rid
of the government link and spent more than $ 1.5 billion in former East
bloc countries to build a new business form scratch. As a result, Pepsis
lead due to its early distribution deals evaporated. Coke now leads in
market share in every Eastern European country. In addition it also has
a wide lead in Latin America.
Employment
Trade restrictions, such as the high tariffs caused by the 1930
Smoot Hawley Bill, which forced the average tariff rates across
the board to climb above 60 percent, contributed significantly to
the greater Depression and have the potential to cause wide
spread unemployment again. Unrestricted trade. On the other
hand, improves the worlds GNP and enhances employment
generally for all nations.
Importing products and foreign ownership can provide
benefits to a nation. According to the institute for International
Economics a private, nonprofit research institute the
growth of foreign ownership has not resulted in a loss of jobs
for Americans, and foreign firms have paid their American
workers the same, as have domestic firms.
Business week found that, unlike those who are employed in
the import competing and domestic sectors. Those working in
an exporting industry are more likely to be college educated to
earn higher wages, and to be in a good position to benefit form
worldwide growth.
U.S. Trade Facts

The United States is the worlds largest economy
and the largest market. In 1995 the United States
retained its position as the worlds largest
exporter.
Goods Trade
United states two-way trade totaled $ 1324.3 billion in 1995 with
exports of $ 574.9 billion ad imports of $749.4 billion.
The 1995 U.S. merchandise trade deficit was $ 174.6 billion larger than
in 1994.
U.S. goods exports increased to 8.0 percent of the nations gross domestic
product in 1995, up form 7.3 percent in 1994. That compares with
1994 shares of GDP for Germany of 24.2 percent and for Japan of
8.6 percent.
In 1995 the United States accounted for an estimated 11.6 percent of
worlds goods exports.
Total U.S. goods imports in 1995 were comprised of 84 percent
manufactured goods; 8 percent mineral fuels; and 8 percent agricultural
and other goods.
In 1995 jobs supported by goods and services experts reached a record
11million. On average, the wages of workers in jobs supported by goods
experts are 13 percent higher than the national average.
From 1891 through 1970, the United States had an unbroken string of
trade surpluses. After 1970, it had deficits in every year except 1973
and 1975.
Canada was the United States, leading foreign market for export in
1995. followed by Japan, Mexico, the United Kingdom, South Korea, and
Germany, Canada was also the United States leading supplier followed by
Japan, Mexico, China, and Germany.
Capital goods, including aircraft, are the largest category of U.S. exports,
followed by industrial supplies and materials, than non-automotive
consumer goods, automotive products, and collectively goods, feeds, and
beverages.
The commerce department estimates that over 37000 U.S. manufacturing
companies exports, slightly more than one third of the approximately
104600 U.S. companies that export.
Approximately two thirds of U.S. goods exports are by U.S. owned
multinational corporations, with over one third of these exports by the
U.S. parent corporation shipped to foreign affiliates.
Business Services Exports

Exports of U.S. services are over one third as large as U.S. exports of
goods.
Exports and imports of services totaled $ 208.8 billion and $ 145.8
billion, respectively in 1995.
In 1995 U.S. exports of services accounted for about 3.1 percent of the
nations GDP. Travel service receipts and passenger fares accounted for
over 38 percent of the total.
The United States is the worlds largest exporter of business services by
far, with 16.5 percent of the worlds total in 1994. France was second
with 8.3 percent.
Inflation and Price Moderation

The benefits of export are readily self evident. Imports can
also be highly beneficial to a country because they constitute
reserve capacity for the local economy. Without imports (or with
severely restricted imports), there is no incentive for domestic
firms to moderate their prices. The lack of imported product
alternatives forces consumers to pay more, resulting in inflation
and excessive profits for local firms. This development usually
acts as a prelude to workers demand for higher wages, further
exacerbating the problem of inflation. Import quotas imposed
on Japanese automobiles in the 1980 saved 46200 U.S production jobs but at a cost of $ 160,000 per job per year. This huge
cost was a result of the addition of $400 to the prices of U.S
cars and $1000 to the prices of Japanese imports. This windfall
for Detroit resulted in record high profits for U.S automakers.
The short-term gain derived from artificial controls on the
supply of imports can in the long run return to haunt domestic
firms. Not only do trade restrictions depress prices competition
in the short run, but also they can also adversely affect demand
for years to come. In Europe, when prices of orange juice were
driven upward, consumers switched to apple juice and other
fruit drinks. Likewise, Florida orange growers found to their
dismay that sharply higher prices turned consumers to other
products. After the 1962 freeze, it took the citrus industry ten
years to win back these consumers. United states orange
growers finally learned to live with imports because they found
that imported Brazilian juice, by minimizing price increases, is
able to keep consumers.
Unfortunately there is no question that globalization is bound

to hurt some workers whose employers are not cost competitive. Some employers may also have to move certain jobs
overseas so as to reduce costs. As a consequence, some workers
will inevitably by unemployed. As in the case of the state of
Connecticut, some 200000 jobs were lost, while United
Technologies Corp. (the states largest employer) has reduced the
number of jobs from 51,000 to fewer than 32,000. It is
extremely difficult to explain to those who must bear the brunt
of unemployment due to trade that there is a net benefit for the
country.
Standards of Living
Trade affords countries and their citizens higher standards of
living than otherwise possible. Without trade, product shortages force people to pay more for less. Products taken for
granted. such as coffee and bananas, may become unavailable
overnight. Life in most countries would be much more difficult
were it not for the many strategic metals that must be imported.
Trade also makes it easier for industries to specialize and gain
access to raw materials. While at the same time fostering
competition and efficiency. A diffusion of innovations across
national boundaries is a useful by product of international
trade. A lack of such trade would inhibit the flow of innovative
ideas.
Understanding of Marketing Process
International marketing should not be considered a subject or
special case of domestic marketing. As commented by the
chairman of the supervisory board of N.V. Philips
Gloeilampen fabrieken.
American managers should really understand, not just say they
understand, that there are other parts of the world beside the
United States. If Americans started doing business with other
countries, they would develop greater understanding as well as
more trade. And that is the most important thing. After all
that society be open to each other. To close yourself off is the
worth thing that can happen.
Marketing Strategy 1 3
It is OK to Be Un-American
The Economist is a news and business weekly publication. Wanting
American readers to subscribe to its publication, It makes the following
points:
The Japanese drink more U.S. bourbon than American. New York City
is merely the world third largest urban center an only two American cities
rank among the top twenty.
When it comes to foreign aid, Denmark is the most generous nation on
earth : Nearly seven times as giving as America.
Read only the U.S. press and your might end up
with a wholly one sided dangerously inaccurate
view of the entire world. Because its un
American, the Economist is so popular among
the ranks of those in the know. The economist is
the news and business weekly whose beat is the
whole world including Americas prominent
place in it.
When an executive is required to observe marketing in other

cultures, the benefit derived is not so much the understanding
of a foreign culture. Instead, the real benefit is that the executive
actually develops a better understanding of a foreign culture.
Instead, the real benefit is that the executive actually develops a
better understanding of marketing in ones own culture. For
example, Coca Cola Co. has applied the lessons learned in
Japan to U.S. and European markets. The study of international marketing thus can prove to be valuable in providing
insights for the understanding of behavioral patterns often
taken for granted at home. Ultimately, marketing as a discipline
of study is more effectively studied.
Driving and Restraining Forces Affecting

Global Integration and Global Marketing
The remarkable growth of the global economy over the past 50
years has been shaped by the dynamic interplay of various
driving and restraining forces. During most of those decades,
companies from different parts of the world in different
industries achieved great success by pursuing international,
multinational, or global strategies. During the 1990s, changes in
the business. Today, the growing importance of global
marketing stems form the fact that driving farces have more
momentum than the restraining forces.
Driving Forces
Converging market needs and wants, technology advances,
pressure to cut costs, pressure to improve quality, improve
quality, improvements in communication and transportation
technology, global economic growth, and opportunities for
leverage all represent important driving forces; any industry
subject to these forces is a candidate for globalization.
Technology
Technology is a universal factor that crosses national and cultural
boundaries. Technology is truly stateless, there are no cultural
boundaries limiting its application. Once a technology is
developed, it soon becomes available everywhere in the world.
This phenomenon support Levitts prediction concerning the
emergence of global markets for standardized products. In his
landmark Harvard Business Review article, Levitt anticipated the
communication revolution that has, in fact, become driving
force behind global marketing. Satellite dishes. Globe-spanning
television networks such as CNN and MTV, and the Internet
are just a few of the technological factors underlying the
emergence of a true global village. In regional markets such as
Europe, the increasing overlap of advertising across national
boundaries and the mobility of consumers have created
opportunities for marketers to pursue pan- European product
positioning.
Regional Economic Agreements
A number of multilateral trade agreements have accelerated the
pace of global integration. NAFTA is already expanding trade
among the United States, Canada, and Mexico. The General
Agreement on Tariffs and Trade (GATT), which was ratified by
more than 120 nations in 1994, has been replaced by the world
Trade Organization to promote and protect free trade, but it has
come under attack by developing countries. In Europe, the
expanding membership of the European Union is lowering
barriers to trade within the region.
Market Needs and Wants
A person studying markets around the world will discover
cultural universals as well as cultural differences. The common
elements in human nature provide an underlying basis for the
opportunity to create and serve global markets. The word create
is deliberate. Most global markets do not exist in nature: They

must be created by marketing effort. For example, no one needs
soft drinks, and yet today in some countries per capita soft
drink consumption exceeds the consumption of water.
Marketing has driven this change in, behavior, and today the
soft-drink industry is a truly global one. Evidence is mounting
that consumer needs and wants around the world are converging today as never before. This creates an opportunity for global
marketing. Multinational companies pursuing strategies of
product adaptation run the risk of being overtaken by global
competitors that have recognized opportunities to serve global
customers.
Marlboro is an example of a successful global brand. Targeted at
urban smokers around the world, the brand appeals to the
spirit of freedom, independence, and open space symbolized by
the image of the cowboy in beautiful, open western settings.
The need addressed by Marlboro is universal, and, therefore, the
basic appeal and execution of its advertising and positioning are
global. Philip Morris, which markets Marlboro, is a global
company that discovered years ago how the same basic market
need can be met with a global approach.
Transportation and Communication

Improvements
The time and cost barriers associated with distance have fallen
tremendously over the past 100 years. The jet airplane revolutionized communication by making it possible for people to
travel around the world in less than 48 hours. Tourism enables
people from many countries to see and experience the newest
products being sold abroad. One essential characteristic of the
effective global business is face-to-face communication among
employees and between the company and its customers.
Without modern jet travel, such communication would be
difficult to sustain. In the 1990s, new communication technologies such as e-mail, fax, and teleconferencing and
videoconferencing allowed managers, executives, and customers
to link up electronically from virtually any part of the world for
a fraction of the cost of air travel.
A similar revolution has occurred in transportation technology.
Physical distribution has declined in terms of cost; the time
required for shipment has been greatly reduced as well. A letter
from China to New York is now delivered in eight days faster
than domestic mail is delivered within many countries. The perunit cost of shipping automobiles from Japan and Korea to
the United States by specially designed auto-transport ships is
less than the cost of overland shipping from Detroit to either
U.S. coast.
Product Development Costs

The pressure for globalization is intense when new products
require major investments and long periods of development
time. The pharmaceuticals industry provides a striking illustration of this driving force. According to the Pharmaceutical
9
LESSON 2:
INTRODUCTION TO INTERNATIONAL MARKETING-2
Manufacturers Association (PMA), the cost of developing a

new drug in 1976 was $54 million; by 1982, the cost had
increased to $87 million. By 1993, the cost of developing a new
drug had reached $359 million.13 Such costs must be recovered
in. the global marketplace, as no single national market is likely
to be -large enough to support investments of this size. As
noted earlier, global marketing does not necessarily mean
operating everywhere; in the $200 billion pharmaceutical
industry, for example, seven countries account for 75Percent of
sales.
Quality
Global marketing strategies can generate greater revenue and
greater operating margins, which, in turn, support design and
manufacturing quality. A global and a domestic company may
each spend 5 percent of sales on research and development, but
the global company. May have many. Times the total revenue of
the domestic because it serves the world market. It is easy to
understand how Nissan, Matsushita, Caterpillar, and other
global companies can achieve world-class quality. Global
companies raise the bar for all competitors in an industry.
When a global company establishes a benchmark in quality,
competitors must quickly make their own improvements and
come up to par. Global competition has forced all companies to
improve quality. For truly global products, uniformity can drive
down research, engineering, design, and production costs across
business functions. Quality, uniformity, and cost reduction were
all driving forces behind Fords development of its World
Car, which is sold in the United States as the Ford Contour
and Mercury Mystique and in Europe as the Mondeo.
World Economic Trends
There are three reasons why economic growth has been a
driving force in the expansion of the international economy and
the growth of global marketing. First, growth has created
market opportunities that provide a major incentive for
companies to expand globally. At the same time, slow growth
in a companys domestic market can signal the need to look
abroad for opportunities in nations or regions with high rates
of growth.
Second, economic growth has reduced resistance that might
otherwise have developed in response to the entry of foreign
firms into domestic economies. When a country is growing
rapidly, policy makers are likely to look favorably on outsiders. A
growing country means growing markets; there is often plenty
of opportunity for everyone. It is possible for a foreign
company to enter a domestic economy and to establish itself
without taking business away from local firms. Without
economic growth, global enterprises may take business away
from domestic ones. Domestic businesses are more likely to
seek governmental intervention to protect their local position if
markets are not growing. Predictably, the worldwide recession
of the ea.r1y 1990s created pressure in most countries. to limit
access by foreigners to domestic markets.
The worldwide movement toward deregulation and
privatization is another driving force. The trend toward
privatization is opening up formerly closed markets significantly; tremendous opportunities are being created as a result.
For example, when a nations telephone company is a state
10
monopoly, it is much easier to require it to buy only from

national companies. An independent, private company will be
more inclined to look-for the best offer, regardless of the
nationality of the supplier. Privatization of telephone systems
around the world is creating opportunities and threats for every
company in the industry.
Leverage
A global company possesses the unique opportunity to develop
leverage. Leverage is simply some type of advantage that a
company enjoys by virtue of the fact that it conducts business
in more than one country. Four important types of leverage are
experience transfers, scale economies, resource utilization, and
global strategy.
Experience Transfers
A global company can leverage its experience in any market in

the world. It can draw on management practices, strategies,
products, advertising appeals, or sales or promotional ideas that
have been tested in actual markets and apply them in other
comparable markets.
For example, Asea Brown Boveri (ABB), a company with 1,300
operating subsidiaries in 140 countries, has considerable
experience with a well-tested management model that it
transfers across national boundaries. The Zurich-based
company knows that a companys headquarters can be run with
a lean staff. When ABB acquired a Furnish company, it reduced
the headquarters staff from 880 to 2Sbetween 1986 and 1989.
Headquarters staff at a German unit was reduced from 1,600 to
100 between 1988 and 1989; after acquiring Combustion
Engineering (a U.S. company producing power plant boilers),
ABB knew from experience that the headquarters staff of8oo
could be drastically reduced, in spite of the fact that Combustion Engineering. had a justification for every one of the
headquarters staff positions.
Scale Economies
The global company can take advantage of its greater manufacturing volume to obtain traditional scale advantages within a
single factory. Also, finished products can be produced by
combining components manufactured in scale-efficient plants in
different countries. Japans giant Matsushita Electric Company
is a classic example of global marketing; it achieved scale
economies by exporting videocassette recorders (VCRs),
televisions, and other consumer electronics products throughout the world from world-scale factories in Japan. The
importance of manufacturing scale has diminished somewhat
as companies implement flexible manufacturing techniques and
invest in factories outside the home country. However, scale
economies were a cornerstone of Japanese success in the 19708
and 1980s.
Leverage from scale economies is not limited to manufacturing.
Just as a domestic company can achieve economies in staffing by
eliminating duplicate positions after an acquisition, a global
company can achieve the same economies on a global scale by
centralizing functional activities. The larger scale of the global
company also creates opportunities to improve corporate staff
competence and quality.
A major strength of the global company is its ability to scan the

entire world to identify people, money, and raw materials that
will enable it to compete most effectively in world markets. This
is equally true for established companies and start-ups. For
example, British Biotechnology Group, founded in 1986, raised
$60 million from investors in the United States, Japan, and
Great Britain. For a global company, it is not problematic if the
value of the home currency rises or falls dramatically, because
for this company there really is no such thing as a home
currency. The world is full of currencies, and a global company
seeks financial resources on the best available terms. In turn, it
uses them where there is the greatest opportunity to serve a
need at a profit.
Global Strategy
The global companys greatest single advantage can be its global

strategy. A global strategys built on an information system that
scans the world business environment to identify opportunities,
trends, threats, and resources. When opportunities are identified, the global company adheres to the three principles
identified earlier: It leverages its skills and focuses its resources to
create superior perceived value for customers and achieve
competitive advantage. The global strategy is a design to create a
winning offering on a global scale. This takes great discipline,
much creativity, and constant effort. The reward is not just
success-it is survival.
The Global/Transnational Corporation

The Global/transnational Corporation, or any business
enterprise that pursues global business objectives by linking
world resources to world market opportunity, is the organization that has responded to the driving, restraining, and
underlying forces in the world. Within the international financial
framework and under the umbrella of global peace, the global
corporation has taken advantage of the expanding communications technologies to pursue market opportunities and serve
needs and wants on a global scale. The global enterprise has
both responded to market opportunity and competitive threat
by going global and at the same time has been one of the forces
driving the world toward greater globalization.
Restraining Forces
Despite the impact of the driving forces identified earlier, several
restraining forces may slow a companys efforts to engage in
global marketing. Three important restraining forces are
management myopia, organizational culture, and national
controls. As we have noted, however, in todays world the
driving forces predominate. over the restraining forces. That is
why the importance of global marketing is steadily growing.
Management Myopia and Organizational Culture

In many cases, management simply ignores opportunities to
pursue global marketing. A company that is nearsighted and
ethnocentric will not expand geographically. Myopia is also a
recipe for market disaster .if headquarters attempts to dictate
when it should listen. Global marketing does not work without
a strong local term that can provide information about local
market conditions. Executives at Parker Pen once attempted to
implement a top-down marketing strategy that ignored
experience gained by local market representatives. Costly market

failures resulted in Parkers buyout by managers of the former
U.K. subsidiaries eventually: the. Gillette Company. Acquired
Parker.
In companies in which subsidiary management knows it all,
there is no room for vision from the top. In companies in
which headquarters management is all knowing, there is no
room for local initiative or an in-depth knowledge of local
needs and conditions. Executives and managers at successful
global companies have learned how to integrate global vision
and perspective with local market initiative and input A striking
theme emerged during interviews conducted by the author with
executives of successful global companies. That theme was the
respect for local initiative and input by headquarters executives,
and the corresponding respect for headquarters vision by local
executives. .
National Controls and Barriers

Every country protects local enterprise and interests by maintaining control over market access and entry in both low-and
high-tech-tech industries and advertising. Such control ranges
from a monopoly controlling access to tobacco markets to
national government control of broadcast, equipment transmission markets. Today, tariff barriers have been largely
removed in the high-income countries, thanks to the World
Trade Organization WTO) NAFTA, and other economic
agreements. However, non tariff barriers (NTBs) still make it
more difficult for outside companies to succeed in foreign
markets. The only way Global companies -can overcome these
barriers is to become insiders in every country in which they
do business. For example, utility companies in France are
notorious for accepting bids from foreign equipment suppliers
but in the end, favoring national suppliers when awarding
contracts. When a global company such as ABB acquires or
establishes a subsidiary in France, it can receive the same
treatment as other local companies. It becomes an insider.
Global advertising and promotion are also hampered by
government regulations. It is illegal in some countries to use
comparative advertising. In some countries, such as
Germany, premiums and sweepstakes are illegal. Also working
against global advertising is the use of different technical
standards around the world. Videotape players in the Americans and Japan use the NTSC standard, whereas in Europe
(except for France, which uses SECAM), the PAL system is uses.
Arizona Sunray, Inc.
Buy American or Look Abroad?
Jeffrey A. Fadiman
San Jose State University

Arizona Sunray is one of the pioneering companies in solar
energy within that state. Its founding generation consisted of
third-generation Arizonans, descendants of the states earliest
pioneers. The founders took great pride in that pioneering
heritage, often boasting that the familys rise to relative prosperity was a result of thinking Arizona. To them, the phrase
meant a ceaseless search for business opportunities within the
state.
11
Resource Utilization
In the late I 950s, one member of this generation emerged as a

new type of pioneer-one of a cluster of scientists and businessmen who hoped to develop the first practical applications of
solar energy on a scale available to home owners. In the early
1960s, he pioneered the use of solar energy in offices and
homes, incorporating, with other members of his family, into
what proved to be a surprisingly successful firm, eventually
named Arizona Sunray. After some experimentation, the firm
chose the slogan Follow the Sun: Its Arizonas Way. Reasoning that the way to acquire new business was to follow the sun,
the firm expanded into every area of Arizona, and then into
Nevada and New Mexico.
The next generation took control of the business in 1965. As a
result, a decision was made to redirect expansion away from the
relatively unpopulated states of the Southwest and move due,
west into the larger urban population centers of coastal
California. The Los Angeles/Orange County area was considered particularly favorable for potential expansion, with relatively
affluent target populations that might show considerable
interest in the use of solar energy within their homes. Several
aspects of the marketing program were reshaped to appeal
more directly to coastal Californians, including a change in the
firms slogan, which became Catch the Rays: Its Californias
Way. The concept proved quite successful, and the firm
continued to expand.
By 1995 members of the next generation were just beginning to
reach positions of influence and authority within the firm.
Their relative affluence, however, had permitted them to acquire
both travel experience and education abroad. As a consequence,
they proposed a further expansion, seeking to follow the sun
on a scale undreamed of by their elders. They argued that
Arizona Sunray should spread around the entire Pacific Rim,
taking appropriate advantage of new techniques in miniaturization to fulfill an entire range of solar-powered needs-from
solar-powered calculators to rural solar cookers-permitting
Arizona Sunray (to be renamed Pacific Sunray) to take maximum advantage of both current opportunity and long-range
planning for expansion.
Surviving members of the founding generation instantly
rejected the proposal, refusing to contemplate such radical ideas.
Why even bother? the firms first president asked. Were
doing fine right in America. We know our product, we know
our clientele, and we know the West. This markets huge! Were
making steady profits. Every member of this family and every
worker in this firm is doing fine. Why would we want to
dissipate our capital in marketing to places we know next to
nothing about? The moneys in America; why look abroad?
Members of all three generations met to thrash out the issue.
The oldest, though now retired held considerable influence. The
youngest, though lacking power, felt they held a wider and
more flexible perspective. The middle generation, though
holding formal decision-making powers, felt pulled both ways
and wondered if there might be ways to satisfy both sides.
Questions
1. As a member of the youngest generation, present your case.
What advantages could Arizona Sunray derive from an
attempt to expand its goods and services abroad?
12
2. As a member of the oldest generation, present your case.

Why should the firm remain within America? What hard
questions could you ask of members of the youngest
generation that might suggest weaknesses in their proposal?
3. As a member of the middle generation, what compromise
can you propose that might prove acceptable to both sides?
Can Mac Fight Back?

LEAD STORY-DATELINE: Marketing, 17 October 2002.
McDonalds is the worlds biggest restaurant chain, and

according to Interbrand, the 8th most valuable brand. It seems
everyone recognizes the golden arches. The company is extremely successful despite being a symbol of American
imperialism, and being hated by animal rights activists, groups
promoting healthy diets, and anti-capitalists. There are signs
that McDonalds is having difficulty keeping up with the trends
in the restaurant industry, maintaining its positive brand image,
and getting the message out about its products. The companys
share price stands at a seven-year low, and in September 2002;
Salomon Smith Barney forecasted McDonalds stock would
under perform.
McDonalds is experimenting with new restaurant designs,
diversifying its menu offerings to include healthier choices or
touches of cuisines favored in the local area, and lowering prices
on various items to try to appeal to more people, keep its image
fresh, and increase sales. Yet Mark Kalinowski of Salomon
Smith Barney says those things do not make up for rude
McDonalds workers, order mistakes, or sluggish service. And
Kalinowski is not the only one to have noticed. Many people
around the world are questioning McDonalds ability to meet its
commitment of quality and service in its restaurants. Even the
role of Ronald McDonald in the companys communications
may be faltering. Leaked internal memos suggest company
executives are questioning his relevance for todays children.
The companys commercials in the UK have taken a turn for the
worse lately, lacking a cohesive message. The company has been
beleaguered by bad press - vegetarians suing over eating its beefbased cooking oil, teenagers accusing the restaurant of making
them fat, popular books criticizing the fast food industry, and
fears of mad cow disease. The company seems to be responding by supporting more community programs and increasing
its sponsorship of charitable causes, such as funding Unicef s
World Childrens Day. Whether McDonalds strategy to stay
ahead of the competition will be effective remains to be seen.
Questions
1. In general, where do you think McDonalds stands on the
range from standardization to adaptation in terms of its
global marketing?
2. What are some of the issues in having a mascot like Ronald
McDonald in another culture besides the U.S.? How can it be
effective in other national settings?
3. The text discussion refers primarily to manufactured
products. However, do you think that it applies to the
problems that McDonalds has in the restaurant business?
Globalization
Reasons for Global Marketing
Globalization is the inexorable integration of

markets, nation-states, and technologies to a
degree never witnessed before - in a way that
is enabling individuals, corporations, and
nation-states to reach around the world
farther, faster, deeper and cheaper than ever
before, and in a way that is enabling the world
to reach into individuals, corporations, and
nation-states farther, faster, deeper, and
cheaper than ever before.
Growth
Access to new markets
Access to resources
Survival
Against competitors with lower costs (due to
increased access to resources)
Thomas Friedman
Keegan and
Green, Chapter 1
Keegan and
Green, Chapter 1
What is a Global Industry?

Global Marketing Vs. Marketing
An industry is global to the extent that a

companys industry position in one country is
interdependent with its industry position in
another country
Indicators of globalization:
Ratio of cross-border trade to total
worldwide production
Ratio of cross-border investment to total
capital investment
Proportion of industry revenue generated by
companies that compete in key world regions
Marketing is the process of planning and

executing the conception, pricing,
promotion, and distribution of goods, ideas,
and services to create exchanges that satisfy
individual and organizational goals.
Global marketing focuses on global market
opportunities and threats.
Keegan and
Green, Chapter 1
Keegan and
Green, Chapter 1
13
Globalization or Global Localization?
What is the marketing company? As you will soon explore the characters
of the company in the following pages, it is not just a marketing-oriented
company. The Marketing Company is an organization that adopts the 18
Guiding Principles of the Marketing Company as its credo-as its guiding
values, its principles to compete in the new marketplace. It endures
external and internal change drivers, more demanding customers, and even
fiercer competitors. After all, a new competition needs a different kind of
rules and principles to survive and win the race. Be ready to rewrite your
credo or your company will die.
Globalization
Developing standardized products marketed
worldwide with a standardized marketing mix
Essence of mass marketing
Global localization
Mixing standardization and customization in
a way that minimizes costs while maximizing
satisfaction
Essence of segmentation
Think globally, act locally
Keegan and
Green, Chapter 1
The 18 Guiding Principles of The Marketing

Company
Principle no. 1: The principle of the company: Marketing is a strategic

business concept.
11
Principle no. 2: The principle of the community: Marketing is everyones

business
Principle no. 3: The principle of competition: Marketing war is about
value war
Principle no. 4: The principle of retention: Concentrate on loyalty, not just
on satisfaction
Principle no. 5: The principle of integration: Concentrate on differences,
not just on averages
Principle no. 6: The principle of anticipation: Concentrate on proactivity,
not just on reactivity
Principle no. 7: The principle of brand: Avoid the commodity-like trap
Principle no. 8: The principle of service: Avoid the business-category trap
Principle no. 9: The principle of process: Avoid the function-orientation
trap
Principle no. 10: The principle of segmentation: View your market
creatively
Examples of Global Marketers
Coca-Cola
Philip Morris
Daimler-Chrysler
McDonalds
Toyota
Ford
Unilever
Gillette
IBM
Keegan and
Green, Chapter 1
Principle no. 11: The principle of targeting: Allocate your resources

effectively
USA
USA
Germany
USA
Japan
USA
UK/ Netherlands
USA
USA
Principle no. 12: The principle of positioning: Lead your customers

credibly
Principle no. 13: The principle of differentiation: Integrate your content,
context and infrastructure
Principle no. 14: The principle of marketing mix: Integrate your offer,
logistics and communications
Principle no. 15: The principle of selling: Integrate your company,
customers and relationships
13
Principle no. 16: The principle of totality: Balance your strategy, tactics
and value
Principle no. 17: The principle of agility: Integrate your what, why and
how
Principle no. 18: The principle of utility: Integrate your present, future
and gap
14
UNIT II
GLOBAL MARKETING ENVIRONMENT
LESSON 3:
UNIT 2
ECONOMIC ENVIRONMENT-THE WORLD
ECONOMY
Today, in contrast to any previous time in the history of the

world, there is global economic growth. For the first time in the
history of global marketing, markets in every region of the
world are potential targets for almost every company from high
tech to low tech, across the spectrum of products from basic to
luxury. Indeed, the fastest-growing markets, as we shall see, are
in countries at earlier stages of development. The economic
dimensions of this world market environment are of vital
importance. This chapter examines the characteristics of the
world economic environment from a marketing perspective
The global marketer is fortunate in having a substantial body of
data available that charts the nature of the environment on a
country-by-country basis. Each country has national accounts
data, indicating estimates of gross national product, gross
domestic product, consumption, investment, government
expenditures, and price levels. Also available on a global basis
are demographic data indicating the number of people, their
distribution by age category, and rates of population growth.
National accounts and demographic data do not exhaust the
types of economic data available.
The World Economy-An Overview

The world economy has changed profoundly since World War
II. Perhaps the most fundamental change is the emergence of
global markets; responding to new opportunities, global
competitors. have steadily displaced local ones. Concurrently, the
integration of the world economy has increased significantly.
Economic integration stood at 10 percent at the beginning of
the 20th century; today, it is approximately 50 percent. Integration is particularly striking in two regions, the European
Union (formerly the European Community) and the North
American Free Trade Area.
Within the past decade, there have been several remarkable
changes in the world economy that hold important implications for business. The likelihood of business success is much
greater when plans and strategies are based on the new reality of
the changed world economy:
Capital movements rather than trade have become the

driving force of the world economy.
Production has become uncoupled from employment.
The growth of commerce via the Internet diminishes the

importance of national
The world economy dominates the scene. The

macroeconomics of individual countries no longer control
economic outcomes.
Barriers. The first change : is the increased volume of capital

movements. The dollar value of world trade is greater than ever
before. Trade in goods and services is running at roughly $4
trillion per year, but the London Eurodollar market turns over
$400 billion each working day. That totals to $100 trillion per
year-25 times the dollar value of world trade. In addition,
foreign exchange transactions are running at approximately $1
trillion per day worldwide, which is $250 trillion per year-40
times the volume of world trade in goods and services. There is
an inescapable conclusion in these data: Global capital movements far exceed the volume of global merchandise and services
trade. This explains the bizarre combination of U.S. trade
deficits and a continually rising dollar during the first half pf the
1980s. Previously, when a country ran a deficit on its trade
accounts, its currency would depreciate in value. Today, it is
capital movements and trade that determine currency value.
The second change : concerns the relationship between productivity and employment. Although employment in
manufacturing remains steady or has declined, productivity
continues to grow. The pattern is especially clear in American
agriculture, where fewer farm employees produce more output.
In the United States, manufacturing holds a steady 23 to 24
percent of gross national product (GNP). This is true of all the
other major industrial economies as well. Manufacturing is not
in decline-it is employment in manufacturing that is in decline.
Countries such as the United Kingdom, which have tried to
maintain blue-collar employment in manufacturing, have lost
both production and jobs for their efforts.
The third major change : is the emergence of the world
economy as the dominant economic unit. Company executives
and national leaders who recognize this have the greatest chance
of success. Those who do not recognize this fact will suffer
decline and bankruptcy (in business) or overthrow (in politics).
The real secret of the economic success of Germany and Japan
is the fact that business leaders and policy makers focus on the
world economy and world markets; a top priority for government and business in both Japan and Germany has been their
competitive position in the world. In contrast, many other
countries, including the United States, have focused on
domestic objectives and priorities to the exclusion of their
global competitive position.
In the 1990s the greatest economic change was the end of the
Cold War. The success of the capitalist market system had
caused the overthrow of communism as an economic and
15
The macro dimensions of the environment is economic, social

and cultural, political and legal and technological. Each is
important, but perhaps the single most immortal characteristic
of the global market environment is the economic dimension.
With money, all things (well, almost all!) are possible. Without
money, many things are impossible for the marketer. Luxury
products, for example, cannot be sold to low-income consumers. Hypermarkets for food, furniture, or durables require a
large base of consumers with the ability to make large purchases
of goods and the ability to drive away with those purchases.
Sophisticated industrial products require sophisticated industries as buyers.
political system. The overwhelmingly superior performance of

the worlds market economies has led socialist countries to
renounce their ideology. A key policy change in such countries
has been the abandonment of futile attempts to manage
national economies with a sentential plan. The different types
of economic systems are contrasted in the next section.
Economic Systems
There are three types of economic systems capitalist, socialist,
and mixed. This classification is based on the dominant
method of resource allocation market allocation, command or
central plan allocation, and mixed allocation, respectively.
a. Market Allocation
A market allocation system is one that relies on consumers to
allocate resources. Consumers write the economic plan by
deciding what will be produced by whom. The market system is
an economic democracycitizens have the right to vote with
their pocketbooks for the goods of their choice. The role of the
state in a market economy is to promote competition and
ensure consumer protection. The United States, most Western
European countries, and Japan-the triad countries that account
for three quarters of gross world product-are examples of
predominantly market economies. The clear superiority of the
market allocation system in delivering the goods and services
that people need and want has led to its adoption in many
formerly social.
b. Command Allocation
In a command allocation system, the state has broad powers to
serve the public interest. These include deciding which products
to make and how to make them. Consumers are free to spend
their money on what is available, but decisions about what is
produced and, therefore, what is available are made by state
planners. Because demand exceeds supply, the elements of the
marketing mix are not used as strategic variables. There is little
reliance on product differentiation, advertising, and promotion;
distribution is handled by the government to cut out exploitation by intermediaries. Three of the most populous countries
in the world-China, the former USSR, and India-relied on
command allocation systems for decades. All three countries are
now engaged in economic reforms directed at shifting to market
allocation system.
By contrast, Cuba stands as one of the last bastions of the
command allocation approach.
c. Mixed System
There are, in reality, no pure market or command allocation
systems among the worlds economies. All market systems have
a command sector, and all command systems have a market
sector; in other words, they are mixed. In a market economy,
the command allocation sector is the proportion of gross
domestic product (GDP) that is taxed and spent by government. For the 24 member countries of the Organization for
Economic Cooperation and Development (OECD), this
proportion ranges from 32.percent of GDP in the United States
to 64 percent in Sweden.3 In Sweden, therefore, where 64
percent of all expenditures are controlled by government, the
economic system is more command than market. The
reverse is true in the United States. Similarly, farmers in most
16
socialist countries were traditionally permitted to offer part of

their production in a free market. China has given considerable
freedom to businesses and individuals in the Guangdong
province to operate within a market system. Still, Chinas private
sector constitutes only 1 to 2 percent of national output.
Global country markets are at different stages of development.
GNP per capita provides a very useful way of grouping these
countries. Using GNP as a base, we have divided global markets
into four categories. Although the income definition for each of
the stages is arbitrary, countries in each of the four categories
have similar characteristics. Thus, the stages provide a useful
basis for global market segmentation and target market
Stages of Market Development

a. Low-Income Countries
Low-income countries, also known as preindustrial countries,
are those with incomes of less than $786 per capita. They
constitute 37 percent of the world population but less than 3
percent of world GNP. The following characteristics are shared
by countries at this -income level:
1. Limited industrialization and a high percentage of the
population engaged in agriculture and subsistence farming
2. High birthrates
3. Low literacy rates
4. Heavy reliance on foreign aid
5. Political instability and unrest
6. Concentration in Africa, south of the Sahara
In general, these countries represent limited markets for all
products and are not significant locations for competitive
threats. Still, there are exceptions; for example, in Bangladesh,
where GNP per capita is $366, a growing garment industry has
enjoyed burgeoning exports.
b. Lower-middle-income Countries
Lower-middle-income countries (also known as less developed
countries or LDCs) are those with a GNP per capita of more
than $786 and less than $3,125. These countries constitute 39
percentof the world population but only 11 percent of world
GNP. These countries are at the early stages of industrialization.
Factories supply a growing domestic market with such items as
clothing, batteries, tires, building materials, and package foods.
These countries are also locations for the production of
standardized or mature products such as clothing for export
markets.
Income Group by per capita GNP
High income countries (GNP per

capita >$ 9,656)
Upper-middle-income countries
(GNP per capita >$ 3,126 but
<$9,655)
Lower- middle income countries
(GNP per capita >$785 but <$ 3.125)
Low income countries
GNP per capita >$ 785)
2000 GNP
($
millions)
2000 GNP
per capita
($)
% of
world
GNP
2000
population
(million)
24,259
24,755
81
981
2,031
4,503
451
3,148
1,302
10
2,418
812
356
2,284
c. Upper-middle-income Countries
Upper middle-income countries, also known as industrializing
countries, are those with GNP per capita between $3,126 and
$9,6$5. These countries account for 7 percent of world population and almost 7 percent of world GNP In these countries, the
percentage of population engage4 in agriculture drops sharply
as people move to the industrial sector and the degree of
urbanization increases. Many of the Countries in this stageMalaysia, for example-are rapidly industrializing. They have
rising wages and high rates of literacy and advanced education,
but they still have significantly lower wage costs than the
advanced countries. Countries hi this stage of development
Frequently become formidable competitors and experience
rapid, export-driven economic growth.
d. High-income Countries
High countries, also known as advanced, industrialized,
postindustrial, or Fire world countries, are those with GNP per
capita above $9,655. With the exception of a few oil-rich
nations, the countries in this category reached their present
income level through a process of sustained economic growth.
These countries account for only 16 percent of world population but 82 percent of world GNP.
The phrase postindustrial countries was first used by Daniel
Bell of Harvard to describe the United States, Sweden, and
Japan and other advanced, high-income societies. Bell suggests
that there is a difference between the industrial and the
postindustrial societies that goes beyond mere measures of
income. Bells thesis is that the sources of innovation in
postindustrial societies are derived increasingly from the
codification of theoretical knowledge rather than from random inventions. Other characteristics are the importance of
the service sector (more than 50 percent of GNP); the crucial
importance of information processing and exchange; and the
ascendancy of knowledge over capital as the key strategic
resource, of intellectual technology over machine technology,
and of scientists and professionals over engineers and semiskilled workers. Other aspects of the postindustrial society are
an orientation toward the future and the importance of
interpersonal relationships in the functioning of society.
Product and market opportunities in a postindustrial society are
more heavily dependent on new products and innovations than
in industrial societies. Ownership levels for basic products are
extremely high in most households. Organizations seeking to
grow often face a difficult task if they attempt to expand share
of existing markets. Alternatively, they can endeavor to create
new markets. For example, in the 1990s, global companies in a
range of communication-related industries were seeking create

new markets for multimedia, interactive forms of electronic
communication.
e. Basket Cases
A basket case is a country with economic, social, and political
problems that are so serious they make the country unattractive
for investment and operations. Some basket cases are lowincome, no-growth countries, such as Ethiopia and
Mozambique, that lurch from one disaster to the next. Others
are once growing and successful countries that have become
divided by political struggles. The result is civil strife, declining
income, and, often, considerable danger to residents. Basket
cases embroiled in civil wars are dangerous areas; most companies find it prudent to avoid these countries during active
conflict. most marketers tend to stay away from these countries
or do business on a limited basis.
The Stages of Economic Development

The stages of market development based on GNP per capita
correspond with the stages of economic developments. Low
and lower-middle income countries are also referred to as less
developed countries or LDCs. The upper middle-income
countries. are also called industrializing countries, and highincome countries are referred to as advanced, industrialized, and
postindustrial. Note that the shares of world GNP and the
GNP per capita data. Are based on income in national currency
translated into U.S dollars at year-end exchange rates. They do
not reflect the actual purchasing power and standard of living in
the different countries.
Income and Purchasing Power Parity

Around The Golbe
When a company charts a plan for global market expansion, it
often finds that, for most products, income is the single most
valuable economic variable. After all, a market can be defined as
a group of people willing and able to buy a particular product.
For some products, particularly those that have a very low unit
costcigarettes, for example population is a more valuable
predictor of market potential than income. Nevertheless, for the
vast range of industrial and consumer products in international
markets today, the single most valuable and important indicator
of potential is income.
Ideally, GNP and other measures of national income converted
to U.S. dollars should be calculated on the basis of purchasing
power parities (i.e., what the currency will buy il1 the country of
issue) or through direct comparisons of actual prices for a given
product. This would provide an actual comparison of the
standards of living in the countries of the world. Unfortunately, these data are not available ill regular statistical reports.
The reader must remember that exchange rates equate, at best,
the prices of internationally traded goods and services. They
often bear little relationship to the prices of those goods and
services not traded internationally, which form the bulk of the
national product in most countries.
The per capita GNP for Brazil and Chile are similar, $4,986 and
$5,822, respectively. However, the PPP per capita GNP is quite
different, $5,536 and $12,035, respectively. The typical consumer in Chile has more than twice the purchasing power than
the Brazilian consumer.
17
Consumer markets in these countries are expanding. LDCs

represent an increasingly) competitive threat as they mobilize
their relatively cheap-and often highly motivated labor to serve
target markets in the rest of the world. LDCs have a major
competitive advantage in mature, standardized, labor-intensive
products such as athletic shoes. Indonesia, the largest country in
Southeast Asia, is a good example of an LDC on the move:
Despite political problems GNP per capita has risen from $250 in
1985 to $1,176 in 2000. Several factories there produce athletic
shoes under contract for Nike.
Top 10 nations ranked by per capita income and purchasing

power parity
2000 GNP Per Capita Income

1. Luxembourg
2. Norway
3. Singapore
4. Switzerland
5. Kuwait
6. Japan
7. Denmark
8. United States
9. Hong Kong
10. Austria
$38,587
38,010
36,484
36,479
35,242
34,796
33,894
20,953
27,463
25,854
2000 GNP Income Adjusted

for Purchasing Power Parity
(PPP)
1.Luxembourg $35,708
2.United States 29,953
28,648
3.Singapore
25,807
4. Norway
24,602
5. Hong Kong
24,222
6. Switzerland
23,555
7. Denmark'
23,353
8. Japan
22,765
9. Belgium
21,787
10. Austria
A visit to a mud house in Tanzania will reveal many of the

things that money can buy: radios, an iron bed frame, a
corrugated metal roof, beer and soft drinks, bicycles; shoes,
photographs, and razor blades. What Tanzanias per capita
income of $244 does not-reflect is the fact that instead of utility
bills, Tanzanians pave the local well and the sun. Instead of
nursing homes, tradition and custom ensure that families will
take care of the elderly at home. Instead of expensive doctors
and hospitals, villagers can turn to witch doctors and healers. In
industrialized countries, a significant portion of national
income is generated by taking goods and services that would be
free in a poor country and putting a price on them. Thus, the
standard of1iving in many countries is often higher than
income data might suggest.
One researcher has calculated that India, one of the poorest
countries in the world, could reach U.S. income levels by
growing at an average rate of 5 to 6 percent in real terms for 40
to 50 years. This is no more than the lifetime of an average
Indian, and about half the lifetime of an average American.
Japan was the first country with a non-European heritage to
achieve high-income status. This was the result of sustained
high growth and the ability to acquire knowledge and knowhow, first by making copies of products and then by making
improvements. As Japan has dramatically demonstrated, this is
a potent formula for catching up and achieving. economic
leadership.
Today, much more than was true 1,000 years ago, wealth and
income are concentrated regionally, nationally, and within
nations. The implications of this reality. are crucial for the global
marketer. A company that decides to diversify geographically can
accomplish this objective by establishing operations in a
handful of national markets.
The Location of Population

We have already noted the concentration of 72 percent of world
income in the Triad(North America, the EU, and Japan) but
only 13 percent of the world population. As shown in the table
below, in 2000, the 10 most populous countries in the world
accounted for 59 percent of world income, and the 5 largest
accounted for 48 percent. The concentration of income in the
18
high-income and large-population countries means that a

company can be global-derive a significant proportion of its
income from countries at different stages of development-while
operating in 10 or fewer countries.
For products whose price is low enough, population is a more
important variable than income in determining market potential. Although population is not s concentrated as income,
there is, in terms of size of nations, a pattern of considerable
concentration. The 10 most populous countries in the world
account for roughly 0 percent of the worlds population today.
The 10 most populous countries in the world accounted for
TABLE 2.7 The 10 most populous countries: 2000 with
projection to 2020
Global income
and Population
2000
%of
Projected 2000
Population World
Population GNP
(Thousands) Population 2020
(Millions)
Per
%01
Capita. World
GNP GNP
World Total
1. China
2 India
3. United States
4. Indonesia
5, Brazil
6. Russian federation
7. Pakistan
8. Bangladesh
9. Nigeria
10. Japan
6;134,466
1,268,121
1,15,287
275,746
210,785
170,661
146,866
138,334
129,663
128,454
127,229
930
424
29,953
1,176
5,535
2,329
479
1,501
299
34,796
100.0
20.7
16.6
4.5
3.4
2.8
2.4
2.3
2.1
2.1
2.1
8,504,642
1,609,796
1,464,902
326,601
286,706
232,130
157,495
242,669
190,792
255,338
137,804
30,578,246
1,179,345
430,09
8,259,358
247,846
850,852
342,008
66,219
47,489
38,416
4,427,104
100.0
3.9
1.4
27.3
0.7
2.8
1.1
0.2
0.2
0.1
14.6
People have inhabited the earth for over 2.5 million years. The
number of human beings has been small during most of this
period. In Christs lifetime. There were approximately 300
million people on earth, or roughly one quarter of the number
of people on mainland China today. World population
increased tremendously during the 18th and 19th centuries,
reaching 1 billion by 1850. Between 1850 and 1925, global
population had doubled, to 2 billion, and from 1925 to 1960 it
had increased to 3 billion. World population is now over 6
billion; at the present rate of growth it will reach 10 billion by
the middle of this century. Projections on whether this growth
rate will continue or not will have has a dramatic effect on the
total future population. Also to consider is that the population
is not expanding equally across the globe. Developing countries
are expanding much faster than developed countries but the
birthrate even in developing countries can vary widely as
attitudes toward the number of children, economic development, and diseases change. Simply put, global population
will probably double during the lifetime of many students
using this textbook.
Generally, there is a negative correlation- between population
growth rate and income per capita. The lower the income per
capita, the higher the rate of population growth and vice versa.
In countries such as the United States, Germany, and Japan, the
growth rate from 1990 to 1996 was 1 percent or under. Recently,
however, some countries in the low-middle and lower-income
categories have negative rates of population. These are concentrated in the former republics of the Soviet Union.
U.S.balance of Payments(1994-1997)
An important concern in marketing is whether it has any

relevance to the process of economic development. Some
people believe the field of marketing is relevant only to the
conditions that apply in affluent, industrialized countries where
the major problem is one of directing societys resources into
ever-changing output or production to satisfy a dynamic
marketplace. In the less developed country, the argument goes,
the major problem is the allocation of scarce resources toward
obvious production needs. Efforts should focus on production
and how to increase output, not on customer needs and wants.
A. Current Account
1. Goods: Exports FOB
2. Goods: Imports FOB
3. Balance on Goods
4. Services: Credit
5. Services: Debit
6. Balance on Goods and Services
B. Capital Account
Total A + B
Conversely, it can be argued that the marketing process of

focusing an organizations resources on environmental
opportunities is a process of universal relevance. The role of
marketing-to identify people8 needs and wants, and to focus
individual and organizational efforts to respond to these needs
and wants : is the same in both low : and high-income
countries.
Economic Risk
Economic development does not always follow a straight
upward path. Even in countries with established governments,
radical political change often goes hand in hand with drastic
economic change. This has a tremendous effect on consumer
purchases and how marketers adapt their efforts in these
countries. Depending on the gravity of the economic disorder,
stagflation to depression, consumers buy fewer, less expensive
but more functional products. This is a signal to marketers to
adjust pricing and product design accordingly. Recent examples
of cases in which marketers had to implement such changes are
the countries affected by the Asian Flu. In Southeast Asia in the
late 1990s, the Indonesian rupiah fell more than 70 percent
against the U.S. dollar, the Thai .baht and Korean won depreciated by 40 to 50 percent, the Malaysian ringgit and Philippine
peso lost 40 percent of their value, and the currency in
Singapore and Taiwan lost 20 percent as. well. Global market in
the region had to adapt their marketing strategies on a countryby-country basis.
Balance of Payments
The balance of payments. is a record of all of the economic
transactions between residents of a country and the rest of the
world.
The balance of payments is divided into a so-called current
and capital account. The current account is a record of all of
the recurring trade in merchandise and service, private gifts, and
public aid transactions between countries. The capital account is
a record of all long-term direct investment, portfolio investment, and other short- and long-term capital flows. The minus
signs signify outflows of cash; for example, in Table 2-8, line
A2 shows an outflow of $877 billion that represents payment
for U.S. merchandise imports. In general, a country accumulates
reserves when the net of its current and capital account transactions shows a surplus; it gives up reserves when the net shows
a deficit. The important fact to recognize about the overall
balance of payments is that it is always in Balance. Imbalances
occur in subsets of the overall balance.
1994
-123.21
504.45
-668.59
-164.14
199.25
-132.45
-97.34
-.60
-123.81
1995
-115.22
577.69
-749.57
-171.88
217.80
-141.98
-96.06
.10
-115.12
1996
-135.44
613.89
-803.32
-189.43
236.71
-152.00
-104.72
.52
-134.91
1997
-155.38
681.27
-877.28
-196.01
256.06
-166.09
-106.04
.16
-155.22
Source: Adapted from Balance of Payments Statistics Yearbook

(Washington, DC: The International Monetary Fund, 1998), p. 852.
Japan Balance of Payments (1994-1997)
1994
A. Current Account
131.64
1. Goods: Exports FOB
385.70
2. Goods: Imports FOB
-241.51
3. Balance on Goods
144.19
4. Services: Credit
58.30
5. Services: Debit
-106.36
6. Balance on goods and Services 96.13
B. Capital Account
-1.85
Total A + B
128.41
1995
111.04
428.72
-296.93
131.79
65.27
-122.63
74.43
-2.23
108.82
1996
65.88
400.28
-316.72
83.56
67.72
-129.96
21.32
-3.29
62.59
1997
94.35
409.24
-307.64
101.60
69.30
-123.45
47.45
-4.05
90.30
Source: Adapted from Balance of Payments Statistics Yearbook

(Washington, DC: The International Monetary Fund, 1998), p. 405.
Trade Patterns
Since the end of World War II, world merchandise trade has
grown faster than world production. In other words, import
and export growth has outpaced the rate of increase in GNP.
Moreover, since 1983, foreign direct investment has grown five
times faster than world trade and 10 times faster than GNP.
The importance of Europe and Central Eurasia-is quite
pronounced: They accounted for approximately 60 percent of
world exports and imports. Industrialized nations have
increased their share of world trade by trading more among
themselves and less with the rest of the World.
a. Merchandise Trade
In 1994, the dollar value of world trade was approximately $4.1
trillion. Seventy-five percent of world exports were generated by
industrialized countries, and 25 percent by developing countries.
The European Union accounted for 40 percent, the United
States and Canada for 18 percent, and Japan for 9 percent. If the
EU were considered a single country, its share of world export
would be slightly less than that of the United States. Trade
growth outside industrialized countries has been slow.
19
Marketing and Economic Development
Key U.S. Trade Information

1998 $ Volume
Canada
Partners
Western Europe
Japan
Mexico
Exports: $ Billion
Imports: $ 912 Billion
19%
Canada
22%
18%
Western Europe
21%
14%
Japan
10%
10%
Mexico
10%
7%
China
68%
Total
63%
Total
Oil and petroleum products
Commodities Capital goods
Machinery
Automobiles
Automobiles
Industrial supplies
Consumer goods
Consumer goods
Industrial raw materials
Agricultural products
Food and beverages
b. Servicestrade
Probably the fastest-growing sector of world trade is trade in
services. Services include trade and entertainment; education;
business services such as engineering, accounting, and legal
services; and payments of royalties and license fees. Unfortunately, the statistics and data on trade in services are not as
comprehensive as those for merchandise trade. For example,
many countries (especially low-income countries) are lax in
enforcing international copyrights, protecting intellectual
property, and patent laws. As a result, countries that export
service products such as software and Video entertainment
suffer a loss of service. According to the software publishers
association, annual worldwide losses due to software piracy
amount to$8 billion. In china and the countries of the former
Soviet Union, more than 95 percent of the personal computer
software in use in believed to be pirated.
20 Leading Exporters and Importers in World Merchandise
Trade-1997
Percent Change
Percent Change
Leading
Leading Exporters 1997 '97/'96
1997 '97/'96
Importers
1. United States
762.8 9.0
1. United States 867.0 8.9
2. Germany
482.4 -2.2
2. Germany
438.9 -1.6
3. Japan
464.4 3.6
3. Japan
304.9 -3.1
4. United
4. China, P. R
287.6 12.9
297.5 6.7
Kingdom
5. France
280.9 -1.0
5. France
270.4 3.5
6. United Kingdom 265.2 6.3
6. Netherlands
204.7 2.5
7. Italy
222.4 -1.8
7. Canada
195.2 13.0
8. Canada
220.1 5.8
8. Italy
190.4 3.8
9. Netherlands
171.3 -.005
9. Hong Kong
186.6 11.0
10.Belgium143.3 1.1
10. China, P. R. 164.6 5.2
Luxembourg
11. Belgium11. Taiwan
135.2 3.6
155.2 0.2
Luxembourg
12. South Korea
125.0 7.5
12. South Korea 123.2 -4.0
13. Malaysia
115.0 24.0
13. Spain
119.9 3.5
14. Mexico
108.7 16.2
14. Taiwan
103.9 11.3
15. Spain
99.5 3.9
15. Mexico
92.5 25.8
16. Singapore
98.9 1.8
16. Switzerland 87.9 -2.7
17. Switzerland
90.8 -3.9
17. Malaysia
79.3 4.6
18. Sweden
79.1 -1.5
18. Russia
63.6 9.6
19. Russia
82.9 -2.7
19. Brazil
61.2 15.0
20. Saudi Arabia:
67.2 7.3
20. Austria
60.6 -3.5
Source: Adapted from International Monetary Fund, Direction afTrade
Statistics (Washington, DC: IMF, 1998), pp. 2-3.
20
Since World War II, there has been a tremendous interest

among nations in economic cooperation. This interest has been
stimulated by the success of the European Community, which
was itself inspired by the U.S. economy. There are many degrees
of economic cooperation, ranging from agreement between two
or more nations to reductions of barriers to trade, to the fullscale economic integration of two or more national economies.
The best-known preferential arrangement of the early 20th
century was the British Commonwealth preference system. This
system provided a foundation for trade among the United
Kingdom, Canada, Australia, New Zealand, India, and Certain
other former British colonies in Africa, Asia, and the Middle
East. The decision by the United Kingdom to join the European Economic Community resulted in the demise of this
system and illustrates the constantly evolving nature of
international economic cooperation.
The marketing implications of trade alliances may include
harmonization of business requirements such as packaging
requirements, a common currency that allows consumers to
more easily compare pricing across countries, and economic
development that leads to more consumers who can afford to
buy more products
LESSON 4:
ECONOMIC ENVIRONMENT- FOREIGN ECONOMIES
Measuring The Russian Economy
In todays Russia, average citizens are not the only ones
struggling to keep pace with rapid and revolutionary economic
change; government statisticians cannot even keep up. The
result is that economic information and statistics coming form
Russia are inaccurate, inadequate, distorted, and biased.
Russias main source of economic statistics is an agency called
Goskomstat, or the Russian state statistical committee. The
inherent problem with the statistics generated by Goskomstat is
one of original intent; Historically, Goskomstat measured the
state economy of the soviet union the purpose of the statistics
that are still used for economic measurement today does not
exist anymore because of the change form a planned economy
to a market economy.
Goskomstat continues to collect data and measure production
in the least productive sectors, namely, industries that have not
been privatized and farms still owned by the state. If those
statistics were somewhat balanced by equivalent numbers from
the private sector, Russian GNP might not be so severely
underestimated. However, Goskomstat is not at all aggressive
about counting the growing private sector in the Russian
economy. The growth in Russian joint ventures, retail and
service trade, and private banking has been well documented in
the press but not by Goskomstat.
The problem of gathering data form start up businesses in the
emerging private sector is compounded by the fact that those
enterprises are reluctant to be included because of potential tax
implications. Also, because of inadequate survey techniques,
thousands of sole proprietorships, entrepreneurial and barter
trade enterprises, as well as informal, black and gray markets are
all outside to inflate production numbers to reach goals set by
state planners.
Even the data generated from the fading state sector are
inadequate because organizations on the government dole are
not motivated to report any increased production. That
enterprise could stand to lose government subsidies if production goes up. Ironically, in the soviet era, managers of state
owned businesses were inclined to inflate production numbers
to reach goals set by state planners.
So what is the impact of the skewed numbers put forth by
Goskomstat? The faulty numbers create a ripple effect worldwide. Other agencies that rely on this imperfect source for
economic data include the world bank, international monetary
fund, US. Department of commerce, the central intelligence
Agency (CIA), plus countless banks and 8ndustrial and
investment analysis. At the very least, statistics severely understate production, especially in the growing private economy. The
estimated amount of underreported production ranges from
25 percent to 60 prevent, with most experts estimating a 45
prevent undercount to be closest to reality. One consequence for
the Russian economy is slowed growth because nervous
investors may be reluctant to enter a market depicted by such

bleak numbers.
Degrees of Economic Cooperation

There are four degrees of economic cooperation and integration, as illustrated in table below
Free Trade Area

A free trade area (FTA) is a group of countries that have agreed
to abolish all internal barriers to trade among themselves.
Countries that belong to a free trade area can and do trade
policies with third countries. A system of certificates of origin is
used to avoid trade diversion in favor of low tariff members.
The system discourages importing goods in the member
country with the lowest tariff for shipment to countries within
the area with higher external tariffs. Customs inspectors police
the borders between members. The European Economic Area
is an FTA that includes the 15nation European Union and
Norway, Liechtenstein, and Iceland. The Canada-U.S. Free Trade
Area formally came into existence in 1989. In 1992, representatives from the United States, Canada, and Mexico concluded
negotiations for the North American Free trade Agreement
(NAFTA). The agreement approved by both houses of the U.S.
Congress and became effective on January 1, 1994.
In the 1960s, the Latin Americans responded to European
integration moves by forming regional groupings of their own.
In Central America, they formed the Central American Common Market; in South America, they formed the Latin
American Free Trade Area; the Andean countries broke away
from LAFTA to form the Andean Common Market. Unfortunately, none of these groups has made rapid progress. In the
early 1990s, the Southern Cone countries (Argentina, Brazil,
Paraguay, Uruguay) formed .Mercosur, which has made rapid
progress. It is now the most successful and promising regional
grouping apart from the EU.
During the Vietnam War, a: number of; Southeast Asian
nations formed ASEAN (Association of Southeast Asian
Nations). ASEAN had political overtones as well as economic
goals, but it made only modest progress at economic integration over the next two decades. In 1998, however, the leaders
reaffirmed their commitment to achieve an Asian Free Trade
Area (AFT A) by 2003. The Asian troubles may affect this. The
United States is a member of two free-trade areas, one with
Israel and one with Canada and Mexico in NAFTA. NAFTA is
very important because it creates a free-trade area of 360 million
consumers-as large as the EU-EFTA grouping. As with any
regional grouping, NAFTA has encountered some rough spots,
but its importance can be seen in the fact that the three member
countries are each others largest customers and suppliers.
There was discussion during the Clinton administration of
forming a free trade area of all the Americas, North and South.
21
Though there is interest from most countries in the Americas, it

is still just an idea on the horizon.
Stage of
integration
Abolition
of Tariffs
and
Quotas
Common
Tariff and
Quota
System
Removal of
Restrictions
on Factor
Movements
Free trade area
Yes
No
Yes
Yes
Yes
No
No
Yes
Yes
Customer union Yes

Common market Yes
Economic union Yes
Harmonizati
on of
Economic,
Social, and
Regulatory
Policies
No
No
No
Yes
Customs Union
Though similar -to a free-trade area in that it has no tariffs on
trade among members, a customs union has the more ambitious requirement that members also have a uniform tariff on
trade with nonmembers. Thus, a customs union is like a single
nation, not only in internal trade, but also in presenting a
united front to the rest of the world with its common external
tariff. A customs union is more difficult to achieve than a freetrade area because each member must yield its sovereignty in
commercial policy matters, not just with member nations but
also with the whole world. Its advantage lies in making the
economic integration stronger and avoiding the administrative
problems of a free-trade area. For example; in a free-trade area,
imports of a particular good would always enter the member
country with the lowest tariff on that good, regardless of the
country of destination. To avoid this perversion of trade
patterns, special regulations are necessary.
The leading example of a customs union is the EU. Although
the EU is often referred to as the Common Market, it is more
accurately described as a customs union. In July 1968, the EU
achieved a full customs union, a goal toward which member
nations had been working since January 1, 1958. Though this is
a slower timetable than that of EFTA, it represents a much
more ambitious endeavor because it includes not only a freetrade area among members but also a common external tariff.
In addition, it covers agricultural products, which were omitted
by EFTA.
A customs union represents the logical evolution of an FTA.
In addition to eliminating the internal barriers to trade,
members of a customs. union agree to the establishment of
common external barriers. The Central American Common
Market, Southern Cone Common Market (Mercosur), and the
Andean Group are all examples of customs unions.
Common Market
A common market goes beyond the removal of internal
barriers to trade and the establishment of common external
barriers to the important next stage of eliminating the barriers
to the flow of factors (labor and capital) within the market. A
common area builds on the elimination of the internal tariff
barriers and the establishment of common external barriers. It
seeks to coordinate economic and social policy within the
market to allow free flow of capital and labor from country to
country. Thus, a common market creates an open market not
only for goods but also for services and capital.
22
A true common market includes a customs union but goes

significantly beyond it because it seeks to standardize or
harmonize all government regulations affecting trade. These
include all aspects of government policy that pertain to
business-for example, corporation and excise taxes, labor laws,
fringe benefits and social security programs, incorporation laws,
and antitrust laws. In such an economic union, business and
trade decisions would be unaffected by the national laws of
different members because they would be uniform. The United
States is the closest example of a common market. Even here,
however, the example is not perfect, because different states do
have different laws and taxes pertaining to business. U.S.
business decisions, therefore, are solve what influenced by
differing state laws.
The EU is the best contemporary example of a common
market in formation. It always had the goal of achieving such
status, but what it achieved earlier was actually a customs union
with a few extra dimensions. What was exciting about 1992 was
the member states undertaking 300 new directives to reach a
true common market by harmonizing the different national
regulations in 12 member countries. Even though this goal was
not reached fully by 1992, great strides. toward market integration were made. The fact that 300 directives were still necessary
30 years after forming the EU shows how difficult and complex
it is to form a true common market.
The Single Market continues in Europe with two major new
steps. One is the monetary union with the Euro as the new
single currency for most member countries. The second is the
coming addition of five new members front Central Europe.
However, given the fact that the EU members have multiple
languages, as well as diverse cultures, histories, and legal
systems, it is not surprising that they continue to have trouble
emulating common market environment of the much more
homogeneous United States.
Economic Union
The full evolution of an economic union would involve the
creation of a unified central bank; the use of a single currency;
and common policies on agriculture, social services and welfare,
regional development, transport, taxation, competition and
mergers, construction and building, and so on. A fully developed economic union requires extensive political unity, which
makes it similar to a nation. The further integration of nations
that were members of fully developed economic unions would
be the formation of a central government that would bring
together independent political states into a single political
framework.
The European Union (EU) is approaching its target of
completing most of the steps required to create a full economic
union, but major hurdles remain.
The World Trade Organization and Gatt

The year 1997 marked the 50th anniversary of the GAIT, a
treaty among 123 nations whose governments agreed, at least in
principle, to promote trade among members. GAIT was
intended to be a multilateral, global initiative, and GAIT
negotiators did, indeed, succeed in liberalizing world merchandise trade. It was also an organization that had handled 300
trade disputes-many involving food - during its half century of
The successor to GATT, the World Trade Organization (WTO),

came into existence on January 1,1995. From its base in Geneva,
the WTO provides a forum for trade-related negotiations. The
WTOs staff of neutral trade experts will also serve as mediators in global trade disputes. The WTO had a Dispute
Settlement Body (DSB) that mediates complaints about unfair
trade barriers and other issues between WTO member countries. During a 60-day consultation period, parties to a
complaint are expected to engage in good-faith negotiations and
reach an amicable resolution. Failing that, the complainant can
ask the DSB to appoint a three-member panel of trade experts
to hear the case behind closed doors. After convening, the panel
has 9 months within which to issue its ruling. The DSB is
empowered to action the panels recommendations. The losing
party has the option of turning to a seven-member appellate
body. If, after due process, trade policies are found to violate
WTO rules, the country is expected to change those policies if
changes are not forthcoming, the WTO can authorize trade
sanctions against the loser.
One of the WTOs first major tasks was hosting negotiationson the General Agreement on Trade in Services, in which 76
signatories made binding market access commitments in
banking, securities, and insurance. The WTO faced its first real
test when representatives from the United States and Japan met
in 1995 to try to resolve a dispute over Washingtons claims that
Japan engaged in unfair trade practices that limited imports of
U.S. car parts. The Clinton administration was responding to
the fact that one third of the U.S. merchandise trade deficit-$66
billion in 1994 alone-is with Japan. Moreover, cars and auto
parts accounted for approximately two thirds of that $66
billion. In the spring of 1995, the United States threatened to
slap 100 percent tariffs on 13 models of cars imported from
Japan. Japan formally filed a complaint with the WTO to object
to the tariffs; although a trade war was narrowly averted at the
last moment, trade-related tensions between- the two countries
continue to simmer. Trade tensions flared up again in 1"998 as
the United States threatened to slap 100 percent tariffs on
European imports such as Italian hams and bed linens. The
United States was acting in response to Europes banana import
quota system.
Still, it remains to be seen whether the WTO will live up to
expectations regarding additional major policy initiatives on
such issues as competition of foreign investment. One
problem IS that politicians in many countries are resisting the
WTOs plans to move swiftly in removing trade barriers. A
Norwegian trade group told reporters that the WTOs motto
should be, If you can decide it tomorrow, why decide it
today? Still, as Director General Renato Ruggiero said recently,
Free trade is a process that cannot be stopped.
Regional Economic Organizations

In addition to the multilateral initiatives of the World Trade
Organization (WTO), countries in each of the worlds regions
are seeking to lower barriers to trade within their regions. The

following section describes the major regional economic
cooperation agreements. The trade groups listed next are
divided geographically into the European, North American,
Asian, South and Latin American, and African and Middle
Eastern trade groups.
1. European Trade Groups

The European Union (formerly known as the European
Community [EC]) was established by the Treaty of Rame in
1958. The six original members were Belgium, France, Holland,
Italy, Luxembourg, and West Germany. In 1973, Britain,
Denmark, and Ireland were admitted, followed by Greece in
1981 and Spain and Portugal in 1986. The three newest
members, Finland, Sweden, and Austria joined in 1995. (In
1994, voters in Norway rejected a membership proposal.) today,
the 15 nations of the EU represent 378 million people, a
combined GNP of $8.3 trillion, and 28 percent of world GNP.
Beginning in 1987, the 12 countries that were EC members at
that time set about the difficult task of creating a genuine single
market in goods, services, and capital. Completing the singlemarket program by year-end 1992 was a major EC achievement;
the Council of Ministers adopted 282 pieces of legislation and
regulations to make the single market a reality. Now, citizens of
the 15 countries are able to freely cross borders within the EU.
How have companies responded to the movement in the EU
toward a single market? In a series of surveys carried out in
1973,1983, and 1993, Boddewyn and Grosse found that there
was a growing standardization of marketing policies by U.S.
firms in the EU from its inception in 1958 to the early 1980s
followed by a return to greater adaptation. The obstacles to
standardization mentioned by respondents include differences
in tastes and habits and national government regulations for
consumer products, as well as nationalistic feelings and
government regulations for industrial goods. These findings
suggest that the EU effort to achieve greater harmonization has
some distance to go.
Under provisions of the Maastricht Treaty, the EU is working
to create an economic and monetary union (EMU) that will
include a European Central Bank and a single European
currency. Implementation of the EMU will require working out
the extent to which countries sharing a currency need to
coordinate taxes and budgets. A single currency would eliminate
costs associated with currency conversion and exchange rate
uncertainty. It would also make it easier for consumers in the
various participating countries to compare pricing of goods and
services. Member countries recognize that the use of multiple
currencies in the EU is a source, of economic drag on their
economy, but they also realize that the adoption, of a single
currency would expose the member countries to economic risks
that the countries do not face when operating with separate
currencies. There is also the realization that having a currency is a
key element of national control and in the end is what distinguishes a nation from a sub national unit of political
organization. Countries have currencies, and states or provinces
do not. Since the EU members adopted a single currency, they
no longer can control the inflation and interest rates, the two
key levers of monetary policy, which are key tools of any
23
existence. GAIT itself had no enforcement power (the losing

party in a dispute was entitled to ignore the ruling), and the
process of dealing with disputes sometime stretched on for
years. Little wonder, then, that some critics referred to GATT as
the general agreement to talk and talk.
sovereign for controlling its economic destiny. Britain, Denmark, Greece, and Sweden, are not currently participating in the
single currency, which will not assume a cash form until 2002.
Further EU enlargement has become a major issue with 12
countries having been accepted as applicants. The list of
2. North American Trade Group

North American, Free Trade Agreement
In 1988, the United States signed a free trade agreement with

Canada (U.S.-Canada
Free Trade Agreement, or CFTA), the scope of which was
applicants is divided into several categories. The Economist enlarged in 1993 to include Mexico. The resulting free trade area
estimates that Hungary, Poland, and Cyprus may become full

members by 2003; Estonia, Malta, Czech Republic, and Latvia
in 2004; Slovenia, Lithuania, and Slovakia in 2005; Bulgaria and
Romania in 2008; and Turkey in 2011.16 In theory, economic
development should be the main criteria for entry; however,
many political issues are also involved in making the decision
for admission into the EU.
The Lome Convention
The EU maintains an accord with 70 countries in Africa, the

Caribbean, and the Pacific (ACP). The Lome Convention was
designed to promote trade and provide poor countries with
financial assistance from the European Development Fund.
Recently, budget pressures at home have prompted some EU
nations to push for cuts in Lome aid.
European Economic Area
In 1991, after 14 months of negotiations, the European

Economic Community and the seven nations European free
Trade Association (EFTA) reached agreement on the creation of
the European Economic Area (EEA) beginning January 1993.
Although the goal was to achieve the free movement of goods,
services, capital, and labor between the two groups, the EEA is
a free trade area, not a customs union with common external
tariffs. With Austria, Finland, and Sweden now members of
the EU, Norway, Iceland, and Liechtenstein are the sole
remnants of the EFTA that are not EU members (Switzerland
voted-not to be part of the EEA). The EEA is the worlds
largest trading bloc, with 383 million consumers and $8.5
trillion combined GNP. )
Central European Free Trade Association
The transition in Central and Eastern Europe from command

to market economies led
To the demise, in 1991, of the Council for Mutual Economic
Assistance. COMECON (or CMEA, -as it was also known) was
a group of communist bloc countries allied with the Soviet
Union.
In 1992, Hungary, Poland and Czechoslovakia signed an
agreement creating the Central European Free Trade Association
(CEFTA). The signatories, pledged cooperation in a number of
areas, including infrastructure and telecommunications, sub
regional projects, interenterprise cooperation, and tourism and
retail trade.17 Romania, Slovenia, and the two countries created
by the division of Czechoslovakia- Czech Republic and Slovakia
are also CEFTA members.
Meanwhile, within the Commonwealth of Independent States,
formal economic integration between the former Soviet
republics is proceeding slowly. In 1995, the governments of
Russia and Belarus agreed to form a customs union and
remove border posts between their two countries.
24
had a 2000 population of 406.7 million and a gross

National product of $9.3 trillion.
All three governments will promote economic growth through
expanded trade and investment. The benefits of continental
free trade will enable all three countries to meet the economic
challenges of the decades to come. The gradual elimination of
barriers to the flow of goods, services, and investment, coupled
with strong intellectual property rights protection (patents,
trademarks, and copyrights), will benefit businesses, workers,
farmers, and consumer.
3. Asian Trade Groups

Asia -Pacific Economic Cooperation
Each member of each year representatives of 18 countries that

border on the Pacific Ocean meet formally to discuss prospects
for liberalizing trade. Collectively, the countries that make up the
Asia-Pacific Economic Cooperation (APEC) forum account for
38 percent of world population and 52 percent of world GNP.
APEC provides a chance for annual discussions by people at
various levels: academics and business executives, ministers, and
heads of state.
Much debate among APEC members has centered on whether
all trade barriers in Asia can be eliminated, without exception, by
the year 2020. In 1997, the APEC meeting in Vancouver, British
Columbia, faced a surprising challenge: the so-called Asian Flu
financial crisis that began in Thailand and quickly spread to
Malaysia, Indonesia, Korea, and even Japan. This crisis, caused
by careless lending and borrowing practices in the private sectors
of these countries, led to a crisis in investor confidence in
security values, which led to a collapse in prices in equity
markets, a major decline in currency values, and a massive
increase in exports from countries in the region to the United
States. The entire world was caught off guard by this crisis,
which underlined the fact that lending and banking practices in
the region had become quite loose and sloppy. The world
realized that the Asian miracle had some major deficiencies
that needed to be repaired. These repairs presented a challenge
to the world economy: how to fix the problems in Asia
without spreading the flu to the rest of the world. It was
clear to economists that as long as the economic leaders of the
high-income countries of the world did not allow aggregate
demand in their markets to collapse or trade barriers to be
imposed it would be possible for the countries in the Asian
region to clean house. This would require ending the traditional
close relationship that had existed in many countries between
business and government and the establishment of a more
rigorous system of private sector responsibility for investment
decision.
The Association of Southeast Asian Nations (ASEAN) is an

organization for economic, political, social, and cultural
cooperation among its 10 member countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, MyaI1mar, the Philippines,
Singapore, Thailand, and Vietnam. ASEAN (pronounced
OZZIE-on) was established in 1967 with the signing of the
Bangkok Declaration. Vietnam became the first communist
nation in the group when it was admitted in 1995. Cambodia and Laos were admitted to ASEAN in Myanmar joined in
1998.The countries have agreed to eliminate most tariffs by
2010). The ASEAN group has 495 million people and a GNP
of $700 billion. A constant problem is the strict need for
Consensus among all members before proceeding with any
form of cooperative effort. Although the 10 countries of
ASEAN are geographically close, they have historically been
divided in many respects.
4. South And Central American Trade Groups

Andean Group
The Andean Group was formed in 1969 to accelerate development of its member states-Bolivia, Colombia, Ecuador, Peru,
and Venezuela-through economic and social integration.
Members agreed to lower tariffs on intragroup trade and work
together to decide what products each country should produce.
At the same time, foreign goods and companies were kept out
as much as possible.
In 1988, the group members decided to get a fresh start.
Beginning in 1992, the Andean Pact signatories agreed to form
Latin Americas first operating sub regional free trade zone.
More than 100 million consumers would be affected by the
pact, which abolished all foreign exchange, financial and fiscal
incentives, and export subsidies at the end of 1992. Common
external tariffs were established, marking the transition to a true
customs union. A high-level commission was created to look
into any alleged unfair trade practices among countries.
Southern Cone Common Market
Argentina, Brazil, Paraguay, and Uruguay (Figure 2-8)-with a

combined population of 32 million people, a GNP of $1,332
billion or a per capita GNP of $5,741 in 2000 : agreed in 1991 to
form a customs union known as the Southern Cone Common
Market (in Spanish, Mercado del Sur, or Mercosur). In 1996,
while became an associate member. Chile chose not to become a
full member because it already had lower external tariffs than the
rest of Mercosur; full membership would have required raising
them. Presently, Chile has been negotiating for membership in
NAFTA.
Caribbean Community and Common Market
The Caribbean Community and Common Market (CARICOM)

were formed in 1973 as a movement toward unity in the
Caribbean. It replaced the Caribbean Free Trade association
(CARIFTA) founded in 1965. The members are Antigua and
Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada,
Guyana, Haiti, Jamaica, Monterrey, Saint Kitts and Nevis, Saint
Lucia, Saint Vincent and the Grenadines, Surinam, and Trinidad
and Tobago. The population of the entire IS-member Carib-
bean Community is 14 million. The total population is 112,000

and has a GNP of $209 million or per capita GNP of $1,866.
The Caribbean Communitys main activity is economic integration by means of a Caribbean Common Market. CARlCOM
has created a customs union with common tariffs on imports
from third countries, cross-listed stocks on the various changes,
created a Caribbean Court of Justice to deal with economic
issues and trade disputes, and is working toward a common
currency.
Central American Integration System (SICA)
Central America is trying to revive its common market, which

was set up in the 1960s. It collapsed in 1969 when war broke
out between Honduras and EI Salvador after a riot at a soccer
match betweet1 teams from the two countries. The five
members-EI Salvador, Honduras, Guatemala, Nicaragua, and
Costa Rica-decided in 1991 to reestablish the common market
by 1994. Efforts to improve regional integration gained
momentum with the granting of observer status to Panama.
In 1997, with Panama as a member, the groups name was
changed to Central American Integration System.
Free Trade Area of the Americas
One of the biggest issues pertaining to trade in the Western

Hemisphere is the Free Trade Area of the Americas (FTAA).
The idea was formally proposed in 1994 by U.S. President Bill
Clinton during a summit of heads of state in Miami. Meeting
in Brazil in May 1997, trade ministers from the 34 participating
countries agreed to create preparatory committees in anticipation of formal talks that would begin in 1998. The Clinton
administration was keen to open the regions fast-growing big
emerging markets (BEM) countries to U.S. companies. In
particular, the president wanted talks to focus immediately on
tariffs and early harvest agreements on individual industry
sectors, such as information technology.
When the second Summit of the Americas was held in
Santiago, Chile, in April 1998, the FTAA was formally launched.
However, it was also clear that fast track authority would be
essential to successfully concluding the negotiations. Mean.
While, Mercosur, CARlCOM, SICA, and the Andean Community intend to pursue further integration among themselves, as
well as with Europe.
5. African and Middle Eastern Trade Groups

The Treaty of Lagos establishing the Economic Community of
West African States {ECOWAS) was signed in May 1975 by 16
states, with the object of promoting trade, cooperation, and
self-reliance in West Africa. The members are Benin, Burkina
Faso, Cape Verde, the Gambia, Ghana, Guinea, Guinea-Bissau,
the Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria,
Senegal, Sierra Leone, and Togo. The total population of
ECOWAS is 300 million and total GNP is $254 million for a
per capita GNP of $846.
In 1980, the member countries agreed to establish a free trade
area for unprocessed agricultural products and handicrafts.
Tariffs on industrial goods were also to be abolished; however,
there were implementation delays. By January 1990, tariffs on 25
items manufactured in ECOWAS member states had been
eliminated. The organization installed a computer system to
25
Association of Southeast Asian Nations
process customs and trade statistics and to calculate the loss of

revenue resulting from the liberalization of intercommunity
trade. In a move to a common currency, which is unlikely before
2005, an ECOWAS travelers check was initiated in 1999 for
purchase by citizens of the member countries.
East African Cooperation Treaty
During the 1960s and 1970s, efforts to organize the countries

of East Africa failed for several reasons. Given the trend toward
gloating, a new attempt has been made and the result is that
Kenya, Tanzania, and Uganda have signed an agreement
forming the East African Cooperation Treaty. Modeled after the
EU, it already has a common passport and is working toward a
common currency, a regional stock market, and harmonization
of laws.
The south African Development Coordination Conference
(SADCC) was set up in 1980 by the regions black-ruled states
to promote trade and cooperation. The members are Angola,
Botswana, Congo, Lesotho, Malawi, Mauritius, Mozambique,
Namibia, Seychelles, South Africa, Swaziland, Tanzania,
Zambia, and Zimbabwe. The real impediment to trade has
been SADCCs poverty. The World Bank indicates that combined 2000 gross national product (GNP) for the 14 member
nations amounted to $174 million, a figure that is even lower
than the GNP of Denmark. The total population of SADCC is
216 million for a per capita GNP of $805.
Cooperation Council for the Arab States of the Gulf
The organization generally known as the Gulf Cooperation

Council (GCC) was established in 1981 by six Arab statesBahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab
Emirates. It is difficult to provide GNP numbers for the GCC
as economic data are not provided for several of the countries.
The organization provides a means of realizing coordination,
integration, and cooperation in all economic, social, and cultural
affairs. Gulf finance ministers drew up an economic cooperation agreement covering investment, petroleum, the abolition
of customs duties, harmonization of banking regulations, and
financial and monetary coordination. GCC committees
coordinate trade development in the region, industrial strategy,
agricultural policy, and uniform petroleum policies and prices.
Arab Maghreb Union and Arab Cooperation Council
In 1989, two other organizations were established. Today, the

Arab Maghreb Union (AMU) consists of Morocco, Algeria,
Mauritania, Tunisia, and Libya, and the Arab Cooperation
Council (ACC) consists of Egypt, Iraq, Jordan, and Yemen.
Many Arabs see their regional groups-the GCC, ACC, and
AMU-as embryonic economic communities that will foster the
development of inter-Arab trade and investment. The newer
organizations are more promising than the Arab League, which
consists of 21 member states and a constitution that requires
unanimous decisions.
AFTA (ASEAN Free Trade Area): ASEAN members
Andean Group (the Cartagena Agreement): Bolivia, Colombia, Ecuador,
Peru, and Venezuela
ANZCERTA (Australia-New Zealand Closer Economic Relations
Trade Agreement): Australia and New Zealand
26
APEC (Asia Pacific Economic Cooperation): Australia, Brunei,

Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia;
Mexico, New Zealand, Papua New Guinea, the Philippines, Singapore,
Chinese Taipei (Taiwan), Thailand, and the United States Arab Middle
East Arab Common Market: UAR, Iraq, Jordan, Sudan, Syria, and
Yemen
ASEAN (Association of Southeast Asian Nations): Brunei, Indonesia,
Malaysia, the
Philippines, Singapore, Thailand, and Vietnam. Benelux Customs
Union: Belgium, the Netherlands, and Luxembourg
CAEMC (Central African Economic and Monetary Community):
Cameroon, the Cen-tral African Republic, Chad, the Congo, Equatorial
Guinea, and Gabon
CARICOM (Caribbean Common Market): Antigua and Barbuda,
Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica,
Montserrat, Saint Christopher-Nevis,
. Saint Lucia, Saint Vincent and the Grenadines, and Trinidad and
Tobago
Central American Community: Costa Rica, EI Salvador, Guatemala,
Honduras, Nicaragua, and Panama.
CFA Franc Zone: the Comoros, members of the WAEMU, and
members of the CAEMC
CIS (Commonwealth of Independent States): Armenia, Azerbaijan,
Belarus, Georgia, Kazakhstan, Kirgizstan, Moldova, Russia, Tajikistan,
Turkmenistan, Ukraine, and
Uzbekistan East Africa Customs Union: Ethiopia, Kenya, Zimbabwe,
Sudan, Tanzania, and Uganda
ECOWAS (Economic Community of West African States): Benin,
Cape Verde, Da-homey, Gambia, Ghana, Guinea, Guinea-Bissau,
Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierrg
Leone, Togo, and Upper Volta
EU (European Union): Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, Sweden, and the United Kingdom
EEA (European Economic Area): Iceland, Norway, and EU members
EFTA (European Free Trade Association): Austria, Finland, Iceland,
Liechtenstein, Nor-way, Sweden, and Switzerland Group of Three:
Colombia, Mexico, and Venezuela
LAIA (Latin American Integration Association): Argentina, Bolivia,
Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay,
and Venezuela
Mahgreb Economic Community: Algeria, Libya, Tunisia, and Morocco
Mercosur (Southern Common Market): Argentina, Brazil, Paraguay, and
Uruguay NAFTA (North American Free Trade Agreement): Canada,
Mexico, and the United States
OECD (Organization for Economic Cooperation and Development): EU
members, Australia, Canada, Iceland, Japan, New Zealand, Norway,
Switzerland, Turkey, and the United States.
RCD (Regional Cooperation for Development): Iran, Pakistan, and
Turkey
SICA: EI Salvador, Guatemala, Honduras, and Nicaragua
WAEMU (West African Economic and Monetary Union): Benin,
Burkina Faso, Ivory Coast, Mali, Niger, Senegal, and Togo.
The learning objective of this lesson are:
manufacturers than if it specialized in manufacturers. In fact,

Smiths major conclusion was that the wealth of nations
derived from the division of labor and specialization. Applied
to the international picture, this means trade rather than selfsufficiency.
1. An overview of the world trade

2. Usefulness of data on balance of payments.
3. International monetary financial systems.
Nation Trades With Nation

Although our primary concern is international marketing rather
than international trade, a brief survey of international trade
will prove useful. Trading between groups has been going on
since the beginning of recorded history. Much early trade was
economically motivated and conducted through barter or
commercial transactions. However, a large part of the exchange
of goods historically occurred through military conquest: To
the victor belong the spoils. The predominant pattern of
international trade is the voluntary exchange of goods and
services.
The International Environment of

Marketing
Foreign
Market A
Home Country
Firm
Foreign
Market B
Foreign
Market C
International Trade Theory

In domestic marketing, much emphasis is placed on the analysis
of buyer behavior and motivation. For the international
marketer, knowledge of the basic causes and nature of international trade is important. It is easier for a firm to work with the
underlying economic forces than against them. To work with
them, however, the firm must understand them.
Essentially, international trade theory seeks the answers to a few
basic questions: Why do nations trade? What goods do they
trade? Nations trade for economic, political, and cultural
reasons, but the principal economic basis for international trade
is difference in price; that is, a nation can buy some goods more
cheaply from other nations than it can make them itself. In a
sense, the nation faces .the same make or buy decision, as
does the firm. Just as most firms do not go for complete
vertical integration but buy many materials and supplies from
outside firms, so most nations decide against complete selfsufficiency (or autarky) in favor of buying cheaper goods from
other countries.
An example given by Adam Smith helps illustrate this: In
discussing the advantages to England in trading manufactured
goods for Portugals wine, he noted that grapes could be grown
under glass (in greenhouses) in England but that to do so
would lead to Englands having both less wine and fewer
Comparative Advantage
It has been said that price differences are the immediate basis of
international trade. The firm that decides whether to make or
buy also considers price as a principal variable. But why do
nations have different prices on goods? Prices differ because
countries producing these goods have different costs. And why
do countries have different costs? The Swedish economist Bertil
Ohlin came up with an explanation generally held to be valid:
Different countries have dissimilar prices and costs on goods
because different goods require a different mix of factors in
their production and because countries differ in their supply of
these factors. Thus, in Smiths example, Portugals wine would
be cheaper than wine made in England because Portugal has a
relatively better endowment of winemaking factors (for
example, land and climate) than does England.
What we have been discussing is the principle of comparative
advantage, namely, that a country tends to produce and export
those goods in which it has the greater comparative advantage
(or the least comparative disadvantage) and import those goods
in which it has the least comparative advantage (or the greatest
comparative disadvantage). On this basis, it is possible to
predict what goods a nation will export and import. As Smith
suggested, the nation maximizes its supply of goods by
concentrating production where it is most efficient, and trading
some of these products for imported products where it is least
efficient. An examination of the exports and imports of most
nations tends to support this theory.
Product Life Cycle
A recent refinement in trade theory is related to the product life
cycle, which in marketing refers to the consumption pattern for
a product. When applied to international trade theory, it refers
primarily to international trade and production patterns.
According to this concept, many products go through a trade
cycle wherein one nation is initially an exporter, then loses its
export markets, and finally may become an importer of the
product. Empirical studies have demonstrated the validity of
the model for some kinds of manufactured goods.
Outlined below are the four phases in the production and trade
cycle, with the United States as an example. Well assume a U.S.
firm has come up with a high-tech product.
Phase 1. U.S. export strength is evident.
Phase 2. Foreign production starts.
Phase 3. Foreign production becomes competitive in export
markets.
27
LESSON 5:
INTERNATIONAL TRADE THEORY
Phase 4.Import competition begins.
In Phase 1, product innovation is likely to be related to the

needs of the home market. The firm usually serves its home
market first. The new product is produce in the home market
because, as the firm moves down the production learning
curve, it needs to communicate with both suppliers and
customers. As it begins to fill home-market needs, the firm
begins to export the new product, seizing on its first-mover
advantages. (We assume the U.S. firm is exporting to Europe.)
In Phase 2, importing countries gain familiarity with the new
product. Gradually, producers in wealthy countries begin
producing the product for their own markets. (Most product
innovations begin in one rich country and then move to other:
rich countries.) Foreign production will reduce the exports of
the innovating firm. (We assume that the U.S. firms exports to
Europe are replaced by production within, Europe.)
In Phase 3, foreign firms gain production experience and move
down the cost curve. If they have lower costs than the innovating firm, which is frequently the case, they export to
third-country markets, replacing the innovators exports there.
(We assume that European firms are now exporting to Latin
America, taking away the U.S. firms export markets there.)
In Phase 4, the foreign producers now have sufficient production experience and economies of scale to allow them to export
back to the innovators home country. (We will assume the
European producers have now taken away the home market of
the original U.S. innovator.)
In Phase 1 the product is new. In Phase 2 it is maturing. In
Phases 3 and 4 it is standardized. The product may become
so standardized by Phase 4 that it almost becomes commodity.
Textiles in general are an example of a product in Phase 4.
Products. in Phase 4 may be produced in less developed
countries for export to the developed countries. This modification of the theory of comparative advantage provides further
insight into patterns of international trade and production and
helps the international company plan logistics, such as when it
will need to produceor source abroad.
Balance of Payments
In the study of international trade, the principal source of
information is the balance of-payments statement of the
trading nations. These are summary statements of all the
economic transactions between one country and all other
countries over a period of time, usually one year.
In governmental reporting, the balance of payments is often
broken down into a current account and one or more capital
accounts. The current account is a record of all the goods and
services the nation exchanged with other nations. The capital
account includes international financial transactions, such as
private foreign investment and government borrowing,
lending, or payments. The international marketer usually is
more interested in the details of current account transactions,
that is, the nature of the goods being traded and their origin
and destination.
Marketing Decisions
The balance of payments is an indicator of the international
economic health of a country. Its data help government
28
policymakers plan monetary, fiscal, foreign exchange, and

commercial policies. Such data can also provide information for
decisions in international marketing. Two important decisions
for a firm are the choice of location of supply for foreign
markets and the selection of markets to sell to. Balance-ofpayments analysis can show which nations are importers and
exporters of the products in question. The firm can thus
identify its own best import and export targets that are,
countries to sell to and countries to supply from. Longitudinal
analysis of the balance of payments can help to track the
international product life cycle.
When the firm is considering foreign market opportunities, it
finds a countrys import statistics for its products to be a
preliminary indicator of market potential. Furthermore, the
firm can get an indication of the competition in these countries
by noting the nations supplying the products in question. The
statistics sometimes even permit identification of low-price
supplying nations and high-price (high- /quality?) suppliers.
Please note, though, that the use of balance- of-payments data
requires that a period of several years be considered to get an
idea of trends.
Financial Considerations
Up to now, we have considered primarily the current account in
the balance of payments, especially the movement of goods
reflected in that account. A look at the capital account is also
useful. A nations international solvency can be evaluated by
checking its capital account over several years. If the nation is
steadily losing its gold and foreign exchange reserves, there is a
strong-likelihood of a currency devaluation or some kind of
exchange control, meaning that the government - restricts the
amount of money sent out of the country as well as the uses to
which it can be, put. With exchange Control, the firm may have
difficulty getting foreign exchange to repatriate profits-or even
to import its products. If the firm is importing products that
are not considered necessary, the scarce foreign exchange will go
instead to goods on which the nation places a higher priority.
The firms pricing policies, too, are affected by the balance ofpayments problems of the host country. If the firm cannot
repatriate profits from a country, it tries to use its transfer
pricing to minimize the profits earned in that country, gaining
its profits elsewhere where it can repatriate them. If the
exporting firm fears devaluation of a currency, it hesitates to
quote prices in that currency, preferring to give terms in its home
currency or another safe currency. Thus, for both international
marketing and international finance, the balance of payments is
an important information source.
Commercial Policy
One reason international trade is different from domestic trade
is that it is carried on between different political units, each one a
sovereign nation exercising control over its own trade. Although all nations control their foreign trade, they vary in the
degree of such control each nation invariably establishes laws
that favor its nationals and discriminate against traders from
other countries. This means, for example, that a U.S. firm trying
to sell in the French market faces certain handicaps deriving
from the French governments control over its trade. These
handicaps to the U.S. firm are in addition to any disadvantages
Commercial policy is the term used to refer to government

regulations bearing on foreign trade. The principal tools of
commercial policy are tariffs, quotas, exchange control, and
administrative regulation (the invisible tariff ). Each of these
will be discussed in turn as it relates to the task of the international marketer.
Tariffs
A tariff is a tax on products imported from other countries.
The tax may be levied on the quantity-such as 1 0 cents per
pound, gallon, or yard-or on the value of the imported goodssuch as 1 0 or 20 percent ad valorem. A tariff levied on quantity is
called a specific duty and is used especially for primary commodities. Ad valorem duties are generally levied on manufactured
products.
Governments may have two purposes in imposing tariffs: They
may wish to earn revenue and/or make foreign goods more
expensive in order to protect national producers. When the
United States was a new nation, most government revenues
came from tariffs. Many less developed countries today earn a
large amount of their revenue from tariffs because they are
among the easiest taxes to collect. Today, however, the protective purpose generally prevails. One could argue that with a
tariff, a country penalizes its consumers by making them pay
higher prices on imported goods; it penalizes its producers that
import raw materials or components. The rationale is that a
policy that is too liberal with imports may hurt employment in
that countries own industries.
Tariffs affect pricing, product, and distribution policies of the
international marketer as well, as foreign investment decisions.
If the firm is supplying a market -by -exports, the tariff
increases the price of its product and reduces competitiveness in
that market. This necessitates a price structure that minimizes
the tariff barrier. A greater emphasis on marginal cost pricing
could result. This examination of price is accompanied by a
review of other aspects of the firms approach to the market.
The product may be modified or stripped down to lower that
price or to get a more favorable tariff classification. For example,
watches could be taxed either as timepieces at one rate or as
jewelry at a higher rate. The manufacturer might be able to adapt
its product to meet the lower tariff.
Another way the manufacturer can minimize their tariff burden
is to ship products completely knocked down (CKD) for
assembly in the local market. The tariff on unassembled
products or ingredients is usually lower than that on completely
finished goods. The importing country employs a tariff
differential to promote local employment. This establishment
of local assembly operations is a form of the phenomenon
known as a tariff factory; the term used when the primary
reason a local plant exists is to get behind the tariff barrier to
protect markets that a firm can no longer serve with direct
exports. Taken to the extreme, the phenomenon would result
in complete local production rather than just assembly.
In some circumstances, the firm may seek to turn the tariff to

its own advantage. Assume that the host country is exerting
pressure for local manufacture that will be noncompetitive with
existing sources. The firm might acquiesce on the condition that
the plant it sets up be protected by tariffs imposed against more
efficient outside suppliers. It would seek this protection as an
infant industry against mature companies abroad. Thus, if
the firm becomes a local con1pany it may benefit from the tariff
protection.
Quotas
Quantitative restrictions, or quotas, are barriers to imports.
They set absolute limits on the amount of goods that may
enter the country. An import quota can be a more serious
restriction than a tariff because the firm has less flexibility in
responding to it. Price or product modifications do not get
around quotas the way they might get around tariffs. The
governments goal in establishing quotas on imports is
obviously not revenue. It gets none. Its goal is rather the
conservation of scarce foreign exchange and/or the protection
of local production in the product lines affected. About the
only response the firm can take to a quota is to assure itself a
share of the quota or to set up local production if the market
size warrants it. Since the latter is in accord with the wishes of
government the firm might be regarded favorably for taking
such action.
The Japanese auto companies in the United States illustrate
problems firms have with quotas. For many years, the United
States had a voluntary quota on Japanese car imports.
Japanese producers responded in two ways: ((1) They exported
more expensive cars with higher margins, thereby earning high
profits. (2) They also built assembly plants in the United States
as the long-run solution to, quota constraints.
In 1989, the U.S. Customs Service ruled that the Suzuki
Samurai and most small vans would be classified as trucks
subject to a 25 percent tariff rather than as cars, subject to a
2.5 percent duty. The positive side of the ruling was that this
would allow more car imports by the Japanese (to replace the
vehicles reclassified as trucks). American auto firms applauded
the decision but the Japanese (and European) producers
complained.
Exchange Control
The most complete tool for regulation of foreign trade is
exchange control, a government monopoly of all dealings in
foreign exchange. Exchange control means that foreign
exchange is scarce and that the government is rationing it out
according to its own priorities. A national company earning
foreign exchange from its exports must sell this foreign
exchange to the control agency, usually the central bank. In turn,
a company wishing to buy goods from abroad must buy its
foreign exchange from the control agency.
Firms in the country have to be on the governments favored
list to get ex-change for imported supplies. Alternatively, they
may try to develop local suppliers, running the risk of higher
costs and indifferent quality control. The firms exporting to that
nation must also be on the governments favored list. Otherwise they will lose their market if importers can get no foreign
29
resulting from distance or cultural differences. By the same

token, the French firm trying to sell in the United States faces
similar restrictions when competing with U.S. firms selling in
their home market.
exchange to pay them. Generally, exchange-control countries

favor the import of capital goods and necessary consumer
goods but not luxuries. While the definition of luxuries
varies from country to country, it usually includes cars, appliances, and cosmetics. If the exporter does lose its market
through exchange control, about the only option is to produce
within the country if the market is large enough for this to be
profitable.
Another implication for the firm when foreign exchange is
limited is that the government is unlikely to give priority to a
companys profit remittances as a way of using the countrys
scarce foreign earnings. In this situation, the firm tries to use
transfer pricing to get earnings out of the host country or to
avoid accumulating earnings there. It accomplishes this by
charging high transfer prices on supplies sold to the subsidiary
and low transfer prices on goods sold by that subsidiary to
affiliates of the company in other markets. The firms ability to
do this depends on the plans acceptance by tax officials of the
country.
For international executives in exchange-control countries,
dealing with the government exchange authorities is a major
preoccupation and problem-and never n10re so than in
Venezuela, where, in 1989, the government issued arrest
warrants for 47 executives of multinational companies for
abuses in dealing with the government foreign exchange office.
All charged professed innocence, and many left the country.
Invisible Tariff and Other Government Barriers

There are other government barriers to international trade that
are hard to classify-for example, administrative protection, the
invisible tariff, or no tariff barriers (NTBs). As traditional trade
barriers have declined since World War II, the NTBs have taken
on added significance. They include such things as customs
documentation requirements, marks of origin, food and drug
laws, labeling laws, anti-dumping laws, buy national policies,
and so on. Because these barriers are so diverse, their impact
cannot be covered in a brief discussion.
Other Dimensions and Institutions in the

World Economy
UNCTAD
Although GATT-WTO has been an important force in worldtrade expansion, benefits have not been distributed equally. The
less developed countries have been dissatisfied with trade
arrangements because their share of world trade has been
declining, and the prices of their raw material exports compare
unfavorably with the prices of their manufactured goods
imports. Though In any of these countries are members of
WTO, they felt that GATT did more to further trade in goods
of industrialized nations than it did to promote their own
primary products. It is true that tariff reductions have been far
more important to manufactured goods than to primary
products. The result of these countries dissatisfaction was the
formation of the United Nations. Conference on Trade and
Development (UNCTAD)- in 1964. UNCTAD is a permanent
organ of the United Nations General Assen1bly and counts
over 160 member countries. The goal of UNCTAD is-to
furthers the development of emerging nations-by trade as well
30
as by other means. Under GATT trade expanded, especially in

manufactured goods, creating a growing trade gap between
industrial and developing countries. UNCTAD seeks to
improve the prices of primary goods exports through commodity agreements. If the commodity-producing countries
could get together to control supply, this would mean higher
prices and higher returns.
UNCTAD also worked to establish a tariff preference system
favoring the export of manufactured goods from less developed countries. Since these countries have not been able to
export commodities in a quantity sufficient to maintain their
share of trade, they want to expand in the growth area of world
trade: industrial exports. They believe they might achieve this if
manufactured goods coming from developing countries faced
lower tariffs than the same goods coming from developed
countries.
UNCTAD has made modest progress. One achievement is its
own formation, a new club for world trade matters that is a
lobbying group for developing-country interests. Tanzanian
leader Julius Nyerere called it the labor union of the developing countries. Through UNCTAD, developing countries have
also received preferential tariff treatment from the EU, Japan,
and the United States, as they requested. Overall, UNCTAD has
focused world attention on the trade needs of developing
countries and has given them a more coherent voice.
UNCTADs committees and studies have also made for a more
informed dialog.
WTO, UNCTAD, and the Firm

WTOs success in reducing barriers to trade has meant that a
firms global logistics can be more efficient. Further the firm,
through its subsidiaries in various markets, can help protect its
interest in trade matters through discussions with governments in advance -of trade negotiations. In the United States,
for example, a committee holds hearings at which business
representatives can present their international trading problems.
These problems are noted for consideration in WHO negotiations. Firms in the EU usually work with trade associations that
channel industry views to the EU negotiators. Brazil also looks
to trade associations for industry views.
UNCTAD can have a more direct impact on the firm than
WTO. International firms can playa major role relating to the
tariff preferences granted by the industrialized nations. Developing countries have limited experience in exporting
manufactured goods. Elimination of tariffs by itself is not
sufficient to help them. Here the multinational firm can be a
decisive factor. If the firm combines its know-how and
resources with those of the host country, it could offer competitive exports. Included in the firms resources is its global
distribution network, which could be the critical factor in
gaining foreign market access. Also, the firm supplies the
foreign marketing know-how lacked by most developingcountry producers. For example, if Ford had the choice of
importing engines from its plant in Britain or its plant in Brazil,
it might choose Brazil if engines from Brazil had a zero tariff
and engines from Europe faced a 15 percent duty.
A complementarity of interest may exist between the less
developed countries and international firms in the question of
The Big Emerging Markets (BEMs)

The U.S. government has traditionally focused its international
economic policy on Europe and Japan. These industrial nations
will probably continue to be the largest U.S. exports markets for
the next few decades. About three-quarters of all world trade
growth in the next two decades, however, is expected to come
from the developing countries. In fact, 10 markets are expected
to account for 30 percent of total world imports over the next
20 years.
These so-called Big Emerging Markets- are Argentina,
ASEAN, Brazil, Chinese Economic Area (China, Hong Kong,
Taiwan), India, Mexico, Poland, South Africa, South Korea, and
Turkey.
Given the perceived importance of the BEMs, the U.S. government is realigning its export strategy to deal with these
opportunities, just as the BISNIS program has been established
for Eastern Europe. For every BEM, the government wants to
develop a bilateral forum to discuss trade cooperation and to
build a U.S. Commercial Center. Cabinet and sub-Cabinet
officials are traveling to the BEMs to develop stronger commercial ties. The government has also identified an initial list of
strategic industries for special consideration for U.S. exporters.
They are environmental technologies; information technologies,
health technologies, transportation technologies (including
space, automotive, and transportation infrastructure), and
energy technologies.
International Financial System

A major goal of business is to make a profit, so firms pay close
attention to financial matters. International companies must be
even more concerned with financial matters than national firms
are because they must deal with many currencies and many
national financial markets where conditions differ from one to
the other. Marketing across national boundaries involves
financial considerations, which we will discuss here.
Exchange Rate Instability

The international payments system is the financial side of
international trade. A special dimension is the fact that transactions occur in many different currencies. Dealing with multiple
currencies is not a serious problem in itself. The difficulty arises
because currencies frequently challenge in value vis--vis each
other, and in unpredictable ways. Since 1973 the major currencies have been floating, often in a volatile manner.
The exchange rate is the domestic price of a foreign currency. For
the United States, this means that there is a dollar rate, or price,
for the British pound, the Swiss franc, and the Brazilian real, as
well as every other currency. If one country changes the value of
its currency, firms selling to or from that country may find that
the altered exchange rate is sufficient to wipe out their profit, or,
on the brighter side, give them a windfall gain. In any case, they
must be alert for currency variations in order to optimize their

financial performance.
In the days of the gold standard, exchange rates did not change
in value. The stability and certainty of the international gold
standard came to an end, however, with the advent of World
War 1. The international financial system of the 1930s had no
certainty, stability, or accepted rules. Instead, there were frequent
and arbitrary changes in exchange rates. This chaotic and
uncertain situation contributed to the decline in international
trade during that period. The world wide Depression of the 30s
was reinforced by the added risks in international finance. In
1944, some of the allied nations met at Bretton Woods to
design a better international economic system for the postwar
world. One element of this system dealt with international
trade and left us with WTO. Another element, concerned with
the need for international capital, led to the formation of the
World Bank. A third aspect involving the international monetary system resulted in the establishment of the International
Monetary Fund (IMF).
International Monetary Fund (lMF)

The Bretton Woods international monetary system was an
attempt to avoid the uncertainty of the 1930s and to regain
some of the stability of exchange rates that existed under the
gold standard. Countries that joined the International Monetary
Fund (IMF) were required to establish a par value for their
currency (in terms of the U.S. dollar) and maintain it within
plus or minus 1 percent of that value. Up to 1970, the Bretton
Woods system of stable pegged rates worked reasonably
well, although numerous devaluations occurred during that
period. The increased confidence in the international monetary
system contributed to the great surge in international trade since
World War II.
In the late 1960s and early 1970s, there existed very large funds
in the hands of corporations, banks, and others with international dealings. This made it increasingly difficult for central
banks to defend the par value of their currency. The holders of
funds tended to move them out of currencies they considered
weak, and into currencies they considered strong.
Those who were moving funds called the action prudent
management because they were protecting their assets. Others
called the same activity speculation. In any case, the results were
the same. Central banks had fewer resources than those who
were moving funds and had to give up the struggle to maintain
the par value of their currencies. As a result, since 1973, the
major industrialized countries have let their currencies float,
that is, fluctuate daily according to the forces of supply and
demand. Thus, the international marketer today must contend
with exchange rates that are continually moving targets, a
complication for international pricing and logistics.
The Bretton Woods system of pegged exchange rates is dead.
However, the IMF did not die, nor did it fade away. It now has
a more nebulous role, however, in a world of floating exchange
rates. Even so, the IMF is a help to international marketing. It
still lends money to countries with problems, enabling them to
continue their international trade-and making them better
customers. The IMF also continues to provide a forum for
international monetary cooperation that lessens the chances of
31
preferences. On the one hand, the marriage of these interests

could help nations achieve their industrialization and balanceof-payments goals; on the other, multinational companies
could expand their international markets and participate more
actively in the group of the less developed nations, which have a
majority of the worlds population.
nations taking arbitrary actions against others, as occurred in the

1930s. More recently, the IMF played a critical role in solving
Mexicos problems in 1994, and in the Asian and Russian crises
of the late 1990s.
World Bank
The International Bank for Reconstruction and Development
(IBRD or World Bank) is another institution conceived at
Bretton Woods. It also has an impact on the world economy in
which international business operates. Whereas the IMF is
concerned with the provision of short-term liquidity, the World
Bank supplies long term capital to aid economic development.
The World Bank is parent to the International Development
Ass9ciation (IDA), created for the purpose of giving soft
loans to the least developed countries, that is, long-term loans
at very low interest rates. Lending by these two groups supports
all aspects of development, including infrastructure, industrial,
agricultural, educational, tourist, and population-control
projects.
World Bank activities have improved the international economic
environment and aided international business. The supply of
capital has meant a higher level of economic activity and,
therefore, better markets. For example, many firms are suppliers
to projects in developing countries for which the World Bank
and IDA lend billions of dollars. This often opens up new
import markets that might have been impossible to enter had
the World Bank not given assistance to the country. Many firms
find profitable contracts in projects financed by the World Bank.
32
While governing in many countries are studying environmental

issues, particularly recycling, Germany already has a packing
ordinance that has shifted the cost burden for waste material
disposal onto industry. The German government hopes the
law, known as verpackungerordung, will create a closed loop
economy, the goal is to force manufacturers to eliminate
nonessential materials that cannot be recycled and adopt other
innovative approaches to producing and packaging products.
Despite the costs associated with compliance, industry appears
to be making significant progress toward creating the closed
loop economy. Companies are developing new packaging that
uses less material and includes more recycled content. More than
1,900 non- German companies are currently participating in the
program.
The German packaging law is one example of the impact that
political, legal, and regulatory environments can have on
marketing activities. Each of the worlds national governments
regulates trade and commerce with other countries and attempts
to control the access of outside enterprises to national resources
every country has its own unique legal and regulatory system
that impacts the operations and activities of the global enterprise, including the global marketers ability to address market
opportunities. Laws and regulations constrain the cross border
movement of products, services, people, money, and know
how. The global marketer must attempt to comply with each set
of nationaland in some instances, regional constraints.
These efforts are hampered by the fact that laws and regulations
are frequently ambiguous and continually changing.
The Political Environment

Global marketing activities take place within the political
environmental of governmental institutions, political parties,
and organisations through which a countrys people and rulers
exercise power. Any company doing business outside its home
country should carefully study the government structure in the
target country and analyze salient issues arising from the
political environment. These include the governing partys
attitude toward sovereignty, political risk, the threat of equity
dilution, and expropriation.
National States and Sovereignty

Sovereignty can be defined as supreme and independent
political authority. A century ago, U.s. supreme court chief
Justice fuller said every sovereign state is bound to respect the
independence of every other sovereign state, and the courts in
one country will not sit in judgment on the acts of government
of another done within its territory, more recently, Richard
Stanley offered the following concise description.
A sovereign state was considered free and independent. It
regulated trade, managed the flow of people into and out of its
boundaries, and exercised undivided jurisdiction over all
persons and property within its territory. It has the right,
authority, and ability to conduct its domestic affairs without
outside interference and to use it international power and

influence with full discretion. 1
Government actions taken in the name of sovereignty occur in
the context of two important criteria a countrys state of
development and the political and economic system in place in
the country.
Many governments in developing countries exercise control over
their nations economic development by passing protectionist
laws and regulations. Their objective is to encourage economic
development by protecting emerging or strategic industries.
Conversely, when many nations reach advanced stages of
economic development, their governments declare that (in
theory, at least) any practice or policy that restrains free trade is
illegal. Antitrust laws and regulations are established to
promote fair competition. Advanced country laws often define
and preserve a nations social order; laws may extend to political,
cultural, and even intellectual activities and social conduct. In
France, for example, laws forbid the use of foreign words such
as i.e marketing in official documents.
Political risk the risk of a change in government policy that
would adversely impact a companys ability to operate effectively
and profitablycan deter a company from investing abroad.
When the perceived level of political risk is lower, a country is
more likely to attract investment. The level of political risk is
inversely proportional to a countrys stage of economic
development all other things being equal, the less developed a
country, the greater the political risk. The political risk of the
triad countries, for example, is quite limited as compared to a
country in an earlier stage of development in Africa, Latin
America, or Asia.
National Controls Create Bariers for Global

Marketing
Many countries attempt to exercise control over the transfers of goods,
services, money, people technology, and rights across their borders.
Historically and important control motive was economic. The goal was to
generate revenue by levying tariffs and duties. Today, policymakers have
additional motives for controlling cross border flows, including protection
of local industry and fostering the development of local enterprise. Such
policies are known as protectionism or economic nationalism.
Differing economic and political goals and different value systems are the
primary reasons for protectionism. The barriers that exist between the
United States and Cuba, for example exist because of major differences
between the values and objectives of the two countries. Many barriers
based and different political systems have come down with the end of the
cold war. However, barriers based on different value systems continue. The
worlds farmersbe they Japanese, European, or American are
committed to getting as much protection as possible form their respective
governments. Because of the political influence of the farm lobby in every
country, and in spite of the efforts of trade negotiators to open up
33
LESSON 6:
POLITICAL ENVIRONMENT
agricultural markets, controls on trade in agricultural products continue to

distort economic efficiency. Such controls work against the driving forces of
economic integration.
The price of protection can be very high for two basic reasons. The first is
the cost to consumers: when foreign producers are present4ed with barriers
rather than free access to a market, the result is higher prices for domestic
consumers and a reduction in their standard of living. The second cost is
the impact on the competitive ness for domestic companies. Companies
that are procreated and sustain world class competitive advantage. One of
the greatest stimuli to competitiveness is the open market. When a
company faces world competition, it must figure out how to serve a clich
market better than any company in the world, or it must figure out how to
compete in face to face competition.
Taxes
It is not uncommon for accompany to be incorporated in one
place, do business in another, and maintain its corporate
headquarters in a third. This type of diverse geographical activity
requires special attention to tax laws. Many companies make
efforts to minimize their tax liability by shifting the location of
income. For example, it has been estimated that tax avoidance
by foreign companies doing business in the United States costs
the US government several billion dollars each year in lost
revenue. In one approach, called earning stripping, foreign
companies reduce earnings by making loans to us. Affiliates
rather than using direct investment to finance US activities. The
U.S subsidiary can deduct the interest it pays on such loans.
There by reducing it tax burden.
There are no universal international laws governing the levy of
taxes on companies that do business across national boundaries. To provide fair treatment, many governments have
negotiated bilateral tax treaties to provide tax credits for taxes
paid abroad. The United States has dozens of such agreements
in place. Un 1977, the organisation for economic cooperation
and Development (OECD) passed the model Double taxation
convention of income and capital to help guide countries in
bilateral negotiations. Generally, foreign companies are taxed by
the host nation up to the level imposed in the home country,
an approach that does not increase the total tax burden to the
company.
Dilution of Equity Control
Political pressure for national control of foreign owned
companies is a part of the environment of global business in
lower- income countries. The foremost goal of national
governance is to protect the right of national sovereignty,
especially in all aspects of domestic business activity. Host
nation governments sometimes attempt to control ownership
of foreign owned companies operating within their borders. In
underdeveloped countries, political pressures frequently cause
companies to take in local partners.
1. First, look at the range of possibilities. There is no single
best solution, and each company should look at itself and
tat the country situation to decide on strategy.
2. Companies should use the law to achieve their own
objectives. The experiences of many companies demonstrate
that by satisfying government demands, it is possible to take
34
advantage of government concessions, subsidies, and market

protection.
3. Anticipate government policy changes. Create a win-win
situation. Companies that take initiatives are prepared to act
when the opportunity arises. It takes time to implement
changes; the sooner a company identifies possible
government directions and initiatives, the sooner it will be in
a position to propose its own plan to help the country
achieve its objectives.
4. Listen to country managers. Country managers should be
encouraged to anticipate government initiative and to
propose company strategy for taking advantage of
opportunities created by the government policy. Local
mangers often have the best understanding of the political
environment. Experience suggests that they are in the best
position to know when issues are arising and how to turn
potential adversity into opportunity through creative
responses.
Expropriation
The ultimate threat a government can pose toward a company is
expropriation. Expropriation refers to governmental action to
dispossess a company or investor. Compensation is generally
provided to foreign investors, although not often in the
prompt, effective, and adequate manner provided for by
international standard. Nationalization occurs if ownership of
the property for by international standard. Nationalization
occurs if ownership of the property or assets in question is
referred to as confiscation.
Short of outright expropriation or nationalization, the phrase
creeping expropriation has been applied to severe limitations on
economic activities of foreign forms in certain developing
countries. These have included limitations on repatriation of
profits, arrangements. Other issues are increased local content
requirements, quotas for hiring local nationals, price controls,
and other restrictions affecting return on investment. Global
companies have also suffered discriminatory tariffs and no tariff
barriers that limit market entry of certain industrial and
consumer goods, as well as discriminatory laws on patents and
trademarks. Intellectual property restrictions have had the
practical effect of eliminating or drastically reducing protection
of pharmaceutical products.
Types of Government: Political Systems

A knowledge of the form governments can take can be useful
in appraising the political climate. One way to classify governments is to consider them as either parliamentary (open) or
absolutist (-closed). Parliamentary governments consult with
citizens from time to time for the purpose of learning about
opinions and preferences. Government policies are thus
intended to reflect the desire of the majority segment of the
society. Most industrialized nations and all democratic nations
can be classified as parliamentary.
At the other end of the spectrum are absolutist governments,
which include monarchies and dictatorships. In an absolutist
system, the ruling regime dictates government policy without
considering citizens needs or opinion. Frequently, absolutist
countries are newly formed nations onose undergoing some
Many countries political systems do not fall neatly into one of

these two categories. Some monarchies and dictatorships (e.g.,
Saudi Arabia and North Korea) have parliamentary; elections.
The former Soviet Union had elections and mandatory voting
but was not classified as parliamentary because the ruling party
never allowed an alternative on the ballot. Countries such as the
Philippines under Marcos and Nicoragua under somoza held
elections, but the results were suspect because of government
involvement in voting fraud.
Another way to classify governments is by number of political
parties. This classification results in four types of governments:
two-party, multiparty, single-party, and dominated one-party. In
a two-party system, there are typically two strong parties that
take turns controlling the government, although other parties
are allowed. The United States and the United Kingdom are
prime examples. The two parties generally have different
philosophies, resulting in a change in government policy when
one party succeeds the other. In the United States, the Republican party is often viewed as representing business interests,
whereas the Democratic party is often viewed as representing
labor interests, as well as the poor and disaffected.
In a multiparty system, there are several political parties, none
of which is strong enough to gain control of the government.
Even though some parties may be large, their elected representatives ran smart of a majority. A government must then be
formed through coalitions between the various parties, each of
which wants to protect its own interests. The longevity of the
coalition depends largely on the cooperation of party partners.
Usually, the coalition is continuously challenged by various
opposing parties. A change in a few votes may be sufficient to
bring the coalition government down. If the government does
not survive a vote of no confidence (i.e., does not have the
support of the majority of the representatives), the government is disbanded and a new election is called. Countries
operating with this system include Germany, France, and Israel.
In the 1991 elections in Poland, twenty-nine parties (including
the Polish Beer Lovers Party) won seats, and no party got more
than 13 percent of the vote.
In a single-party system, there may be several parties, but one
party is so dominant that there is little- opportunity for others
to elect representatives to govern the country. Egypt has
operated under single-party rule for more than three decades.
This form of government is often used by countries in the early
stages of the development of a true parliamentary system.
Because the ruling party holds support from the - vast majority,
the system is not necessarily a poor one, especially when it can
provide the stability and continuity necessary for rapid growth.
But when serious economic problems persist, citizens
dissatisfaction~ and frustration may create an explosive
situation. For example, Mexico has been ruled since its revolution by the Institutional Revolutionary Party (PRI), but
economic problems caused dissatisfaction with the PRI in the
1980s. The National Action Party (PAN), Mexicos main
opposition party, began gaining strength, possibly foreshadowing a transition away from a single-party system.
In a dominated one-party system, the dominant party does not
allow any opposition, resulting in no alternative for the people.
In contrast, a single-party system does a How some opposition
party. The former Soviet Union, Cuba, and Libya are good
examples of dominated one-party systems. Such a system may
easily transform itself into a dictatorship. The party, to maintain
its power, is prepared to use force or any necessary means to
eliminate the introduction and growth of other parties. For
example the Soviet Union had repeatedly shown a willingness
to quell any opposition within its satellite countries.
One should not be hasty in making generalizations about the
ideal form of government in terms of political stability. It may
be tempting to believe that stability is a function of economic
development in the sense that a more developed nation should
also have more political stability. South Africa, a developed
nation, has been beset with internal and external problems. Italy
is another politically unstable developed country. Its political
atmosphere is marred by a weak economy, recurring labor
unrest, and internal dissension. In contrast, it can be argued that
Vietnam, despite being a developing economy, is politically
more stable than Italy. This stability is due in part to Vietnams
relatively closed society.
It may be just as tempting to conclude that a democratic
political system is a prerequisite for political stability. India, the
largest democracy in the world, possesses a solid political
infrastructure and political institutions that have with stood
many crises over time. The democratic system is strongly
established in India, and it is most inconceivable that the
Indians would choose any other system. Yet Indias political
stability is hampered by regional, ethnic, language, religious, and
economic problems. Unlike such other democratic nations as
Australia, where such problems have largely been resolved,
Indias difficulties remain. These geographic, ideological, and
ethnic problems inhibit the governments ability to respond to
one sectors demands without alienating others.
Dictatorial systems, monarchies, and oligarchies may be able to
provide great stability for a country, especially one with a
relatively closed society, high exists in many communist
countries and Arab nations. If a countrys ruler and military are
strong, any instability that may occur can be kept under control.
The problem, however, is that such systems frequently exist in a
divided society where dissident groups are waiting for an
opportunity to challenge the regime. When a ruler suddenly
dies, the risk of widespread disruption and revolution can be
quite high.
Political Risks
There are a number of political risks with which marketers must
contend. Hazards based on a host governments actions include
confiscation, expropriation, nationalization, domestication, and
creeping expropriation. Such actions are more likely to be levied
against foreign investments, though local firms properties are
not totally immune. Charles de Gaulle, for example, nationalized Frances three largest banks in 1945, and more
nationalization occurred in 1982 under the French Socialists.
35
kind of political transition. Absolute monarchies are now

relatively rare. The United Kingdom is a good example of a
constitutional hereditary monarchy; despite the monarch, the
government is classified as parliamentary.
1. Confiscation is the process of a governments taking

ownership of a property without compensation. An example
of confiscation is the Chinese governments seizure of American property after the Chinese Communists took power in
1949. A more recent example involves Occidental Petroleum,
which wanted the United States to review Venezuelas GSP
eligibility after the country confiscated the firms assets without
compensation.
2. Expropriation differs somewhat from confiscation in that
there is some compensation, though not necessarily just
compensation. More often than not, a company whose
property is being expropriated agrees to sell its operations-not
by choice but rather because of some explicit or implied
coercion.
After property has been confiscated or expropriated, ii can be
either nationalized or domesticated. Nationalization involves
government ownership, and it is the government that operates
the business being taken over. Burmas foreign trade, for
example, is completely nationalized. Generally, this action affects
a whole industry rather than just a single company. For
example, when Mexico attempted to control its debt problem;
President Jose Lopez Portillo nationalized the countrys
banking system. In another case of nationalization, Libyas
Colonel Gadhafis vision of Islamic socialism led him to
nationalize all private business in 1981. Unlike Communists in
Hungary and Poland, Czech Communists nationalized 100
percent of their economy. As a result, rebuilding private markets
in Czechoslovakia will be both slow and difficult.
In the case of domestication, foreign companies relinquish
control and ownership, either completely or partially, to the
nationals. The result is that private entities are/allowed to
operate the confiscated or expropriated property. The French
government, after finding out that the state was not sufficiently
proficient to run the banking business, developed a plan to sell
thirty-six French banks.
Domestication may sometimes be a voluntary act that takes
place in the absence of confiscation or nationalization. Usually,
the causes of this action are either poor economic performance
or social pressures. When situations worsened in South Africa
and political pressures mounted at home, Pepsi sold its South
African bottling operation to local investors, and Coca-Cola
signaled that it would give control to a local company. General
Motors followed suit by selling its operations to local South
African management in 1986. Shortly thereafter, Barclays Bank
made similar moves.
Another classification system of political risks is the one used
by Root IS Based on this classification, four sets of political
risks can be identified: general instability risk, ownership/
control risk, operation risk, and transfer risk.
3. General instability risk is related to the uncertainty absolute
future viability of a host countrys political system. The Iranian
revolution that overthrew the Shah is an example of this kind
of risk. In contrast, ownership/control risk is related to the
possibility that a host government might take actions (e.g,
expropriation) to restrict an investors ownership and control of
a subsidiary in that host country.
36
4. Operation risk proceeds from the uncertainty that a host

government might constrain the investors business operations
in all areas, including production, marketing, and finance.
Finally, transfer risk applies to any future acts by a host government that ,might constrain the ability of a subsidiary transfer
payments, capital, or profit out of the host country back to the
parent firm
Although the threat of direct confiscation or expropriation has
become remote, and of threat has appeared. MNCs have
generally been concerned with coups, revolutions, and confiscation, but they now have to pay attention to so-called creeping
expropriation. The Overseas Private Investment Corporation
(OPIC) defines creeping expropriation as a set of actions
whose cumulative effect is to deprive investors of their
fundamental rights in the investment. Laws that affect
corporate ownership, control, profit, and reinvestment (e.g.,
currency inconvertibility or cancellation of import license) can be
easily enacted. Because countries can change the rules in the
middle of the game, companies must adopt adequate safeguards. Various defensive and protective measures will be
discussed later.
Indicators of Political Instability

To assess a potential marketing environment, a company
should identify and, evaluate the relevant indicators of political
difficulty. Potential sources of political complication include
social unrest, the attitudes of nationals, and the policies of the
host government.
Social Unrest
Social disorder is caused by such underlying conditions as
economic hardship, internal dissension and insurgency, and
ideological, religious, racial, and cultural differences. Lebanon
has experienced conflict among the Christians, Muslims, and
other religious groups. The Hindu-Muslim conflict in India
continues unabated. A company may not be directly involved in
local disputes, but its business can still be severely disrupted by
such conflicts.
The breakup of the Soviet Union should not come as a
surprise. Human nature involves monastery (the urge to stand
alone) as well as systems (the urge to stand together), and the
two concepts provide alternative ways of utilizing resources to
meet a societys needs. Monastery encourages competition, but
systems emphasizes cooperation. As explained by Alderson, a
cooperative society tends to be a closed society. Closure is
essential if the group is in some sense to act as one. Not
surprisingly China, although wanting to modernize its
economy, does not fully embrace an open economy, which is
likely to encourage dissension among the various groups. For
the sake of its own survival, a cooperative society may have to
obstruct the dissemination of new ideas and neutralize an
external group that poses a threat. China apparent has learned a
lesson from the Soviet Unions experience.
Attitudes of Nationals
An assessment of the political climate is not complete without
an investigation of the attitudes of the citizens and government of the host country. The nationals attitude toward
foreign enterprises and citizens can be quite inhospitable.
Policies of the Host Government

Unlike citizens inherent hostility, a governments attitude
toward foreigners is often relatively short-lived. The mood can
change either with time or change in leadership, and it can
change for either the better or the worse. The impact of a
change in mood can be quite dramatic, especially in the short
run. Government policy formulation can affect business
operations either internally or externally. The effect is internal
when the policy regulates the firms operations within the home
country. The effect is external when the policy regulates the
firms activities in another county.
Marketing Strategy 4-1
A Primer on Privatization
After the 1989 Velvet Revolution which began the tran-sition to
democratic rule, the Czech and Slovak Re-publics faced a policy
dilemma. There were numerous problems. First, they had to quickly
privatize over some 7,000 medium- and large-scale enterprises, but they
did not know what these enterprises might be worth. Sec-ond, the former
Czechoslovakia was one of the most extreme cases of a centrally planned
economy because the state controlled 98 percent of property. The pri-vate
sector was responsible for less than one percent of production. Third, this
formerly communist country had low household savings rates, and there
were no domestic capitalists who could buy these enterprises. To simply
auction assets might result in foreigners cheap acquisitions while failing to
cultivate a culture of capitalism among citizens. If you were a
policy-maker, what would you do?
Conventional privatization methods include: restitution to original owners;
small-scale privatization through public auctions; transfer of state
property to municipalities; transformation of cooperatives; and us-ing
direct sales, public tenders, joint ventures and mass privatization to
privatize medium- and large-scale en-terprises. These methods were used
when they would result in a rapid transfer of ownership.
For the vast majority of medium- and large-scale firms, the conventional
methods were not feasible be-cause they would have resulted in long delays
while benefiting only foreigners or a few rich nationals. The Republics thus
came up with a very innovative, albeit controversial, solution: mass
privatization. They took care of the absence of domestic savings by giving
away shares to citizens. All citizens over the age of eighteen received
coupons which could be used to bid for shares in enterprises. Government officials solved the valuation problem by using a system of sequential
auc-tions which generate information about enterprises market values.
Measures to Minimize Political Risk

Political risk, though impossible to eliminate, can at the very
least be minimized. there are several measures that MNCs can
implement in order to discourage a host country from taking
control of MNC assets.
Stimulation of the Local Economy

One defensive investment strategy calls for a company to link
its business activities with the host countrys national economic
interests. Brazil expelled Mellon Bank be cause of the banks
refusal to cooperate in renegotiating the countrys massive
foreign debt.
A local economy can be stimulate in a number of different
ways. One strategy may involve the companys porches local
products and raw material for its production and operations. By
assisting local firms, it can develop local allies who can provide
valuable political contacts. A modification of this strategy
would be to use subcontractors. For example, some military
tank manufacturers tried to secure tank contracts from the
Netherlands by agreeing to subcontract part of the work on the
new tanks to Dutch companies.
Sometimes local sourcing is compulsory. Governments may
require products to contain locally manufactured components
because local content improves the economy in two ways: (1) it
stimulates demand for domestic components; and (2) it saves
the necessity of a foreign exchange transaction. Further investment in local production facilities by the company will please the
government that much more. IBM is, the only foreign company
allowed to sell switchboards in France because the firms PBXs
are made there.
Employment of Nationals
Frequently, foreigners make the simple but costly mistake of
assuming that citizens of LDCs are poor by choice. It serves no,
useful purpose for a company to assume, that local people are
lazy, unintelligent, unmotivated, or uneducated. Such an
attitude may become a self-fulfilling prophecy. Thus, the hiring
of local workers should go beyond the filling of labor positions. United Brands policy, for example, is to hire only locals as
managers
Sharing Ownership
Instead of keeping complete ownership for itself, a company
should try to share ownership with others, especially with local
companies. One method is to convert from a private company
to a public one or from a foreign company to a local one.
Dragon Airline, claiming that it is a real Chinese company,
charged that Cathay Pacific Airways Hong Kong landing rights
should be curtailed because Cathay Pacific was more British than
Chinese. The threat forced Cathay Pacific to sell a new public
issue to allow Chinese investors to have minority interests in
the company. The move was made to convince Hong Kong and
china that the company had Chinese roots.
Being Civic Minded
MNCs whose home country is the United States often encounter the ugly American label abroad, and this image should be
avoided. It is not sufficient that the company simply does
business in a foreign country; it should also be a good corporate
citizen there. To shed the undesirable perception, multinationals
should combine investment projects with civic projects.
Corporations rarely undertake civic projects out of total
generosity, but such projects make economic sense in the long
run. It is highly desirable to provide basic assistance because
many civic entities exist in areas with slight or nonexistent
37
Nationals are often concerned with foreigners intentions in

regard to exploitation and colonialism, and these concerns are
often linked to concerns over foreign governments actions that
may be seen as improper. Such attitudes may arise out of local
socialist or nationalist philosophies, which may be in conflict
with the policy of the companys home country government.
municipal infrastructures that would normally provide these

facilities. A good idea is to assist in building schools, hospitals,
roads, and water systems because such projects benefit the host
country as well as company, especially in terms of the valuable
goodwill generated in the long run.
Political Neutrality
For the best long-term interests of the company, it is not wise
to become involved in political disputes among local groups or
between countries. A company should clearly but discretely state
that it is not in the political business and that its primary
concerns are economic in nature. Brazilian fins employ this
strategy and keep a low profile in. matters related to Central
American revolutions and Cuban troops in foreign countries.
Brazilian arms are thus attractive to the Third World because
those arms are free of ideological ties. In such a case, a purchasing country does not feel obligated to become politically aligned
with a seller, as when buying from the United States or China.
Behind-the-Scenes Lobby
Much like the variables affecting business, political risks can be
reasonably managed. Companies as well as special interest
groups have varying interest, and each party will want to make
its own opinion- known. When the U.S. mushroom industry
asked for a quota against imports from China, Pizza Hut came
to Chinas rescue by claiming that most domestic and other
foreign suppliers could not meet its specifications. Pizza Hut
has a great deal at stake because it is one of Chinas largest
customers as well as a user of half of some nine million
pounds of mushrooms for pizzas-not to mention the desires
of Pepsi Co, its parent, to open a factory in southern China.
Subsequently, the petition of the U.S. mushroom industry was
dented.
Even though a firms operation is affected by the political
environment, the direction the influence does not have to flow
in one direction only. Lobbying activities can be undertaken, and
it is wise to lobby quietly behind the scenes in order not to
cause unnecessary political clamor. In explaining the intensity of
foreign corporate representation in Washington, the level of
U.S. imports from the home country of the MNC is the most
important variable, as it outranks U.S. exports to the home
country and foreign direct investment in the United States from
the home country.
Importers must let their government know why imports are
critical to them and their consumers. For example, many U.S.
clothing retailers complained vigorously when trade barriers
were erected against the importation of clothes. U.S. computer
makers, likewise, voiced their objection to. a government action
designed to protect the prices of U.S.-made semiconductors
because those firms would have to absorb any price increase.
Companies may not only have to lop by in their own country,
but they also may, have to lobby in the host country. Companies may want to do the lobbying themselves, or they may let
their government do it on their behalf. Their government can
be requested to apply pressure against foreign government.
38
Observation of Political Mood and Reduction of

Exposure
Marketers should be sensitive to changes in political mood. A
contingency plan should he in readiness. When the political
climate turns hostile, when measures are necessary to reduce
exposure. Some major banks arid MNCs. took measures to
reduce their exposure in France in response to a fear that a
Socialist: Communist coalition might gain control of the
legislature in the elections of 1978. Their concern was understandable, as-most of these companies were on the lefts
nationalization list. Their defensive strategy occluded the
outflow of capital, the transfer of patents and other assets to
foreign subsidiaries, and the sale of equity holdings at foreigners and French nationals living abroad. Such activities once
concluded made it difficult for the Socialist government to
nationalize the companies properties. Prudence enquired that
these transactions be kept quiet so as to avoid reprisals. As
events developed, the fears were partially realized. Although the
coalition did win, the new government was pragmatic and did
not actively pursue expropriation in a broad sense. Nevertheless,
in a time of uncertainty and under such circumstances, what
these companies did was local.
Other Measures
There are a few other steps that MNCs can undertake to
minimize political risk. One strategy could involve keeping a
low profile because it is difficult to please all the people all the
time, it may be desirable for company to be relatively inconspicuous. For example, in the 1980s Texas Instruments
removed identifying logos and signs in EI Salvador.
Another tactic could involve -trying to adopt a local personality.
A practical approach may require that the company blend in with
the environment. There is not much to be grainy a company
being ethnocentric and trying to westernize the host countrys
citizen
Multinational firms, due to their presence in a large number of
countries, must be mindful of terrorist threats. A survey of
U.S.-based MNCs found that less than 50 percent had formal
programs to deal with a terrorist attack. Most of the MNCs
with antiterrorist programs focus on security equipment rather
than on training executives and their families. Some of the
activities included in antiterrorist training are: defensive driving,
self-defense, kidnapping avoidance, behavior after/during
kidnapping, negotiating skills, weapon handling, collecting
information from local sources on terrorists, and protection of
assets.
Big Brother
Supercomputers are the fastest computers which are used
mainly by scientists. A supercomputer can cost upward of $30
million. Cray Research Inc. is the undisputed leader in this
market segment, and it has 67 percent of the world market.
Fujitsu Ltd., in second place, holds 20 percent. The third-place
NEC Corp. has 6 percent.In 1987, the Massachusetts Institute
of Technology (M.I.T.) planned to buy or rent a
supercomputer and solicited bids former $7.5 million contract.
Among those submitting proposals were Cray Research, IBM,
E.T.A. System, Amdahl (46 percent owned by Fujitsu), and
Honeywell-NEC (SO percent-owned b} Nippon Electric
Questions
1. Is it appropriate for the U.S. government to pressure M.I.T.
to reject Japanese supercomputers in spite of lower prices?
Note that the M. I.T. research projects that would use the
supercomputers were federally funded.
BRIBERY
A Matter of National Perspective
JEFFREY A. FADIMAN

U.S. executives may feel unsure, for example, of how to cope
with foreign payoffs, especially when requests for gifts take on
a form that most Americans consider bribes. Although payoffs
obviously exist in the United States, they are detested in our
culture. In consequence, this type of solicitation may suggest to
even the most overseas-oriented executives that U.S. business
values are morally superior to those used abroad. This conviction, if sensed by foreign colleagues, can shatter the most
carefully planned-commercial venture. My own initial experience
with Third World forms of bribery may serve as an example. It
occurred in East Africa during the I 970s and began with this
request Oh, and, Bwana I would ,like [a sum of currency was
specified] as Zawadi, my gift. And, as we are now friends, for
Chai, -my tea; an eight band-radio, to bring to my home when
you visit.Both Chai (tea) and Zawadi (gift) can be Swahili terms
for bribe. These particular suggestions were delivered in, tones
of respect. They came almost as an, afterthought at the
conclusion of negotiations in which details of a projected
business venture had been sided one by one by one. I had
looked forward to buying my counterpart a final drink to
symbolically complete the deal in American fashion. Instead,
after every commercial aspect had been settled, he expected
money.The amount he suggested seemed huge at the time, but
it was his specific request for a radio that angered me. Somehow,
it added Insult to my injury. Outwardly, I simply kept smiling.
Inside, my stomach boiled. I was being asked for a bribe, a
request my own culture would condemn. I didnt do it and
didnt expect it of others. Beyond that, like most Americas, I
expect all monetary discussion to precede the signing of
contracts. In this instance, although negotiations were complete,
I had been asked to pay once more Once? How often? What
were the rules? Where would it stop? My reaction took only
moments to formulate. I am American, I declared. I dont
pay bribes. Then, I walked away.That walk was not the longest
in my life. It was, however, one of the least commercially
productive. For in deciding to conduct international business by
American rules, I terminated more than a commercial venture. I
also closed a gate that opened into a foreign culture. Beyond it
lay the opportunity to do business in a wholly local fashion, as
well as an interpersonal relationship that could have anchored
my commercial prospects in that region for years to come.
Questions
1. Do you agree with the authors rejection of the request for
gifts?
2. If you were in a similar situation, how would you handle the
situation while considering-your own business needs?
2. Did MI.T. React properly in canceling its procurement plan?

3. Is it appropriate for the United States to try to close off its
supercomputer market to Japan while, at the same time,
trying to pressure the Japanese government to purchase
American supercomputers?
39
Corp.).Learning of M.I.T.s preference for Japanese-made

machines, the U.S. government intervened. The acting Secretary
of Commerce formally informed M.I.T.s president that
imported products may be subject to U.s. antidumping duty
proceedings informally, despite a denial of the Commerce
Department of the governments threat, it was made clear to
M.I.T. that, in light of Japans barriers preventing U.S.
supercomputer firms from entering the Japanese market, it
would not be in the interest of the United States to purchase
Japanese units.M.I.T reacted to the U.S. governments intervention by canceling its procurement and announcing that it
planned to apply for federal funds for a research center- that
would use several U.S.-made supercomputers.The 1990
supercomputer trade accord has helped Cray Research to increase
its market share in commercial installation is in Japan to 25
percent. However, Cray Research has been unable to further
penetrate the public sector, and its market share-in this sector
remains at 8per cent. The public sector includes government
funded universities and research labs. Although Japanese firms
have long been Crays customers. The Japanese government
(Japans biggest buyer) has never bought from Cray.As an
example of how difficult it is to penetrate Japans public sector,
the National Institute for Fusion Research chose to lease NECs
SX-3 system for $625,000 a month. However, according to four
pages of benchmark test results, Crays C90 system surpassed all
but one of the Fusion Institutes speed requirements. Still
Japanese officials insisted that the extra power available from
Crays machine was irrelevant since the fusion scientists did not
need it. Furthermore, they pointed out that the bid required the
machine to work with specialized storage devices. Cray, on the
other hand, argued that the requirement in question was bogus
since it was included solely to favor NECs machine.Washington, while accusing Japan of being unfair, has done
exactly the same thing. The U.S. government has done its best
to discourage sales of Japanese supercomputers in the United
State. U.S. government labs, the biggest supercomputer users in
the world, have not yet bought a Japanese machine. Whenever
an American university or government agency ha5 expressed an
interest in buying a Japanese unit, Cray has quietly but effectively
lobbied to block the move.In 1991, due to political pressure,
Fujitsu was prevented from donating a $17 million
supercomputer to a Colorado consortium of environmental
scientists. Congressional critics did not like the idea of a
Japanese giveaway. They did not object, however, when Cray
donated in the same year an X-MP system to the Energy
Department in support of a national high-school
supercomputer program.
LESSON 7:
LEGAL ENVIRONMENT
Legal Systems
To understand and appreciate the varying legal philosophies
among countries, it is useful to distinguish between the two
major legal systems: common law and statute law.
There are some twenty-five common law or British law
countries. A common law system is a legal system that relies
heavily on precedents and conventions. Judges decisions are
guided not so much by statutes as by previous court decisions
and interpretations of what certain laws are or should be. As a
result, these countries laws are tradition-oriented. Countries
with such a system include the United States, Great Britain,
Canada, India, and other British colonies.
Countries employing a statute law system, also known as code
or civil law, include most continental European countries and
Japan. Most countries over seventy are guided by a statute law
legal system. As the name implies, the main rules of the law are
embodied in legislative codes. Every circumstance is clearly
spelled out to indicate what is legal and what is not. There is
also a strict and literal interpretation of the law under this
system.
International law may be defined as the rules and principles that
nation-states consider binding upon themselves. There are to
categories of international law; public law, or the law of nations;
and international commercial law, which is evolving. International law pertains to trade and other areas that have
traditionally been under the jurisdiction of individual nations.
Early international law was concerned with waging war,
establishing peace, and other political issues such as diplomatic
recognition of new national entities and governments. Elaborate international rules gradually emerged covering, for example,
the status of neutral nations. The creation of laws governing
commerce developed on a state by state basis, evolving into
what is termed the law of the merchant. International law still
has the function of upholding order, although in a boarder
sense than dealing with problems arising from war. At first
international law as essentially an amalgam of treaties, covenants, codes, and agreements. As trade grew among nations,
order in commercial affairs assumed increasing importance.
Whereas the law had originally dealt only with nations as
entities, a entities, a growing body of law rejected the idea that
only states can be subject to international law.
Common Versus Code Law

Private international law is the body of law that applies to
interpretations of and disputes arising from commercial
transactions between companies of different nations. As noted,
laws governing commerce emerged gradually.
Today, the majority of countries have legal systems based on
civil code traditions, although an increasing number of
countries are blending concepts, and hybrid systems are
merging. Despite the differences in systems, three distinct forms
40
of laws are common to all nations. Statutory law is codified at

the national, federal, or state level; administrative law originates
in regulatory bodies and local communities; and case law is the
product of the court system.
Under civil or code law, the judicial system is divided into civil,
commercial, and criminal law. Thus, commercial law has its own
administrative structure. Property rights, for example, are
established by a formal registration of the property in commercial courts. Code law uses codified, written norms, which are
complemented by court decisions. Common law, on the other
hand, is established by tradition and precedents, which are
rulings from previous cases; until recently, commercial law was
not recognized as a special entity.
In code law counties, intellectual property rights must be
registered, whereas in common law counties, some : such as
trade marks but not patents : are established by prior use.
The host countrys legal system : that is, common or civil law :
directly affects the form a legal business entity will take. In
common law countries, companies are formed by contract
between two or more parties who are fully liable for the actions
of the company.
Corruption: In the Eye of the Beholder?

On January 25, 1992, the Economist reviewed a paper by Prakash
Reddy, an Indian social anthropologist who, reversing the
common pattern of Western scholars going to study developing countries social behavior, obtained a research grant to study
a village in Denmark. He spent a few months in this village and
registered his impressions of the relations among its inhabitants. Professor Reddy was amazed to observe that the villagers
hardly knew one another. They rarely exchanged visits and had
few other social contacts. They had little information on what
other villagers, including their neighbors, were doing and
apparently little interest in finding out. According to Professor
Reddy, even relationships between parents and children were
not very close. When the children reached adulthood, they
moved out, and after that, they visited their parents only
occasionally.Professor Reddy contrasted this behavior with that
prevailing in a typical Indian village of comparable size. In the
latter, daily house visits would be common. . Everyone would
be interested and involved in the business of the others. Family
contacts would be very frequent and the members of the
extended families would support one another in many ways:
Relations with neighbors would also be close.This story has
implications for the concept of arms-length and, in turn, for
the role of corruption. Arms-length relationships in economic
exchanges would be much more likely to prevail in the Danish
village than in the Indian village. In the latter, the concept of
arm strength relationships would seem strange and alien. It
would even seem immoral. The idea that, economically
speaking, one should treat relatives and friends in the same way
Sidestepping Legal Problems : Important

Business Issues
Clearly, the global legal environment is very dynamic and
complex. Therefore, the best course to follow is to get legal
help. However, the astute, proactive marketer can do a great deal
to prevent conflicts from arising in the first place, especially
concerning issues such as establishment, jurisdiction, patents
and trademarks, antitrust, licensing and trade secrets, and
bribery.
The services of counsel are essential for addressing these and
other legal issues. The importance of international law firms is
growing as national firms realize that to properly serve their
clients, they must have a presence in overseas jurisdictions.
Establishment
Under what conditions can trade be established? To transact
business, citizens of one country must be assured that they will
be treated fairly in another country. In western Europe, for
example, the creation of the single market now assures that
citizens from member nations get fair treatment with regard to
business and economic activities carried out within the Common Market. The formulation of the governance rules for
trade, business, and economic activities in the EU will provide
additional substance to international law.
Jurisdiction
Company personnel working abroad should understand the
extent to which they are subject to the jurisdiction of hostcountry courts. Employees of foreign companies working in
the United States must understand that courts have jurisdiction
to the extent that the company can be demonstrated to be
doing business in the state in which the court sits. The court
may examine whether the foreign company maintains an office,
solicits business, maintains bank accounts or other property, or
has agents or other employees in the state in question.
Normally, all economic activity within a nation is governed by
that nations laws. When transaction crosses boundaries, which
nations laws apply? If the national laws of country Q pertaining to a simple export transaction differ from those of country
P, which countrys laws apply to the export contract? Which
apply to the letter of credit opened to finance the export
transaction? The parties involved must reach agreement on such
issues, and the nation whose laws apply should be specified in a
jurisdictional clause. There are several alternatives from which to
choose: the laws of the domicile or principal place of businesss
of one of the parties, the place where the contract was entered,
or the
The Multilateral Agreement on Investment

In 1995, the GECD began talks on a new initiative known as the
Multilateral Agreement on Investment (MAI) that will set rules for
foreign investment and provide a forum for dispute settlement. In some
countries, so-called per-formance requirements favor local investors over
for-eigners. For example, foreign companies may be required to obtain
some goods and services from local companies rather than the home office
Performance requirements can also take the form of stipulations that a
certain number of senior managers must be local nationals or that the
foreign company must export a set percentage of its production:
The existence of the MAI negotiations remained largely unknown to the
general public until a Canadian consumer rights group obtained the text
of MAI and posted it on the Internet. In fact, a large number of
consumer and environmentalist action groups have joined in opposition to
the agreement. As Mark A. Vallianatos, an international policy analyst
at Friends of the Earth, explained:
Our fear is that MAI will give multinational corporations the opportunity
to treat the whole world as their raw pool of natural resources and labor
and consumer markets. It may allow them to do everything based on profit
motives with-out environmental considerations providing sensible limits on
how they operate. MAI gives new rights to corporations without addressing
their responsibilities to workers and the environment. . An MAI that is
worth doing should deal with how investments will affect sustainable
development, how they will affect workers rights, and how they will affect
excessive resource extraction-those kinds of issues.
Some industry experts downplay MAIs potential to contribute to
environmental degradation. R. Garrity Baker, senior director at the
Chemical Manufacturers Association, says, When foreign companies
that have better It environmental performance come in and invest in a
market bring that know-how with them, then over time that know-how
kind of trickles down to other companies. Foreign companies set an
example that others can learn from. MAI supporters also point out that
the agreement If(allows countries to adopt any measure deemed appropriate
41
as strangers - would appear bizarre. Relatives-and friends would

simply expect preferential treatment whether- they were dealing
with- individuals in the private or public sector.If a government
were established in each of the two villages, with each having a
bureaucracy charged with carrying out its functions through the
instruments described earlier, it would be far easier for the
Danish bureaucrats to approximate in their behavior the Weber
Ian ideal than for the Indian bureaucrats. In the lndian village,
the attempt to create an impersonal bureaucracy that would
operate according to principles in which there is no place for
personalize, cronyism, etc., would conflict -with the accepted
social norm that family and friends come first. In this society,
the government employee, just like any other individual, would
be expected to help relatives and friends with special treatment
or favors even if, occasionally, this behavior might require
bending, or even breaking, administrative rules and departing
from universal principles. The person who refused to provide
this help would be seen as breaking the prevailing moral code
and would be ostracized.The Indian and Danish villages
represent polar or extreme cases of how individuals may interact
within a community. Whether Professor Reddys description of
them is accurate or not, they provide convenient polar cases.
Most societies probably fall somewhere between these two
extremes, with Northern . European and Anglo-Saxon
countries closer to the Danish-village-model, and many other
countries closer to the Indian village model. The Anglo-Saxon
concept of privacy is probably just a manifestation of arms
length relationships. Many developing countries would
probably be clos9r to the model represented by the Indian
village. Sadly, the very features that make a country a less cold
and indifferent-place are the same ones that increase the
difficulty of enforcing arms-length rules that a-re so essential
for modern, efficient markets and governments.
to ensure investment is undertaken in a manner that reflects sensitivity to

environmental issues. As of mid- 1998, prospects for MAI approval in
the United States were clouded. by disagreements between key Washington
agencies that might be affected by the agreements provi-sions. The U.S.
State Department and Commerce Department are generally supportive,
but the Environmental Protection Agency, the U.S. Agency for International Development, and the Justice Department are concerned that MAI
will lead to a rash of lawsuits against the United States. At the state
level, a number of governors felt that MAI would impinge on state
sovereignty.
place of performance of the contract. If a dispute arises under

such a contract, it must be heard and determined by a neutral
party such as a court or an arbitration panel. If the parties fail to
specify which nations laws apply, a fairly complex set of rules
governing the conflict of laws will be applied by the court or
arbitration tribunal. Sometimes, the result will be determined
with the help the scales of justice, with each partys criteria
stacked on different sides of the scale.
Intellectual Property: Patents and Trademarks

Patents and trademarks that are protected in one country are not
necessarily protected in another; so global marketers must
ensure that patents and trademarks are registered in each country
where business is conducted. In the United States, where
patents, trademarks, and copyrights are registered with the
Federal Patent Office, the patent holder retains all rights for the
life of the patent even if the product is not produced or sold.
Patent and trademark protection in the United States is very
good and American law relies on the precedent of previously
decided court cases for guidance.
Companies sometimes find ways to exploit loopholes or other
unique opportunities offered by patent and trademark laws in
individual nations.
Trademark and copyright infringement is a critical problem in
global marketing and one that can take a variety of forms.
Counterfeiting is the unauthorized copying and production of
a product. An associative counterfeit, or imitation, uses a
product name that differs slightly from a well-known brand but
is close enough that consumers will associate it with the genuine
product. A third type of counterfeiting is piracy, the unauthorized publication or reproduction of copyrighted work. Piracy is
particularly damaging to the entertainment and software
industries; computer Programs, videotapes, cassettes, and
compact discs are particularly easy to duplicate illegally.
Individuals and firms have the freedom to own and control the
rights to- intellectual property (i.e., inventions and creative
works). The terms patent, trademark, copy right, and trade
secret are often use~ interchangeably.
A trademark is a symbol, word, or thing used to identify a
product made or marketed by a particular firm. It becomes a
registered trademark when the mark is accepted for registration
by the Trademark Office.
A copyright, which is the responsibility of the Copyright Office,
offers protection against unauthorized copying by others to an
author or artist for his or her literary, musical, dramatic, and
artistic works. A copyright protects the form of expression
42
rather than the object matter. A copyright bas now been

extended to computer software as well.
A patent protects an invention of a scientific or technical nature.
It is a statutory t from the government (the Patent Office) to an
inventor in exchange for public disclosure giving the patent
holder exclusive right to the functional and design inventions
patented and excluding others from using those inventions for
a certain period of time.
The term trade secret refers to know-how (e.g., manufacturing
methods, for mulas, plans, and so on) that is kept secret within
a particular business. This know how generally unknown in the
industry, may offer the firm a competitive advantage.
Infringement occurs when there is commercial use (i.e., copying
or imitating) without owners consent, with the intent of
confusing or deceiving the public.
Counterfeiting
Counterfeiting is the practice of unauthorized and illegal
copying of a product. In essence, it involves an infringement on
a patent or trademark or both. According to the U.S. Lanham
Act, a counterfeit trademark is a spurious trademark which is
identical with, or substantially indistinguishable from, a
registered trademark. Section 42 of the U.S. Trademark Act
prohibits imports of counterfeit goods into the United States.
Counterfeiting is a serious business problem. In addition to the
direct monetary loss, companies face indirect losses as well.
Counterfeit goods injure the reputation of companies whose
brand names are placed on low quality products.
A true counterfeit product uses the name and design of the
original so as to look exactly like the original. On the other
hand, some counterfeit partially duplicate the originals design
and/or trademark in order to mislead or confuse buyers.
Products affected by counterfeiting cover a wide range. At one
end of the spectrum are prestigious and highly advertised
consumer products, such as Hennessy brandy, Dior and Pierre
Cardin fashion apparel, Samsomite luggage, Levis jeans and
Cartier watches. At the other end of the spectrum are industrial
products, such as Pfizer animal feed supplement, medical
vaccines, heart pacemakers, and helicopter parts. Counterfeits
include such fashionable products as Gucci and Louis Vuitton
handbags, as well as such mundane products as Farm oil Filters
and caterpillar tractor parts. Although faces are more likely to be
premium priced consumer products, low init value predicts
have not escaped the attention of the counterfeiter. Even Coke
is not always the real thing as it very easy for counterfeiters in
LDCs to put something else that looks and tastes like Coke
into genuine Coke bottles.
Controlling the counterfeit trade is difficult is part because
counterfeiting is a low- risk, high profit venture. It is difficult
and time consuming to obtain a search warrant. Low prosecution rates and minimal penalties in terms of jail terms and fines
do not make a good deterrent. Walt Disney and Microsoft, in
winning two trademark infringement cases in china, were
awarded only $91 and $2,600 respectively. More over, there are
many small time counterfeiters who could just pack up and go
to a new location to escape police.
It is not sufficient for a company to fight counterfeiting only in

its home country. The battle must be carried to the counterfeiters own country and to other major markets. Apple has filed
suits against imitators in Taiwan, Hong Kong, and New
Zealand and has planned further legal action in Singapore,
Japan, Australia, and Western Europe. The overall idea is to
prevent bogus goods from entering the industrialized nations
that make up the major markets. To make the tactic effective, it
is necessary to go after the distributors and importers in
addition to the manufacturers of counterfeit goods.
Finally, the company must invest in and establish its own
monitoring. system. Its best defense is to strike back rather than
relying solely on government enforcement. One computer firm
in Taiwan allows consumers to bring in fakes that it then
exchanges for the purchase of genuine computers at a discount.
When the cost of surveillance is high, it may be more desirable
to form an association for the purpose of gathering information and evidence. Apple, Lotus, Ashton-Tate, Microsoft,
AutoDesk, and Word Perfect formed the Business Software
Association as an investigative team. The team was successful in
providing information to authorities for the arrest of pirates.
This strategy reduces costs while increasing cooperation and
effectiveness.
Definitions
1. Intellectual Property is a general term that describes
Inventions or other discoveries that have been registered
with government authorities for the sale or use by their
owner. Such terms as patent, trademark, copyright, or unfair
competition fall into the category of intellectual property.
2. A patent is a government grant of certain rights given to an
inventor for a limited time in exchange for the disclosure of
the invention. The most important of these rights is the
one under which the patented invention tan be made, used,
or sold only with the authorization of the patent owner.
3. A trademark relates to any work, name, or symbol which is
used in trade to distinguish a product from other similar
goods (e.g., Coke). Trademark laws are used to prevent
others from making a produced with a confusingly similar
mark. Similar rights may be acquired in marks used in the
sale of advertising of services (service marks).
4. A copyright protects the writings of an author against
copying literary, dramatic, musical, and artistic-and more
recently computer software-works are included within the

protection of copyright laws.
5. A mask work is a new type of intellectual property, protected
by the Semiconductor Chip Protection Act of 1984. It is, in
essence, the design of an electrical circuit, the pattern of
which is transferred and fixed in a semiconductor chip
during the manufacturing process.
6. Unfair competition is a very broad term defining legal
standards of business conduct. It provides protection
against such things as simulation of trade packaging, using
similar corporate and professional names, misappropriation
of trade secrets, and palming off one persons goods as
those of another.
Antitrust
Antitrust laws are designed to combat restrictive business
practices and to encourage competition. American antitrust laws
are a legacy of the 19th-century U.S. Trust-busting era and are
intended to maintain free competition by limiting the concentration of economic power. The Sherman Act of 1890 prohibits
certain restrictive business practices, including fixing prices,
limiting production, allocating markets, or any other scheme
designed to limit or avoid competition. The law applies to
foreign companies conducting business in the United States and
extends to the activities of U.S. Companies outside U.S.
Boundaries as well if the company conduct is deemed to have
an effect on US. Commerce contrary to law similar laws are
taking on increasing importance outside the United States as
well.
The European Commission prohibits agreements and practices
that prevent, restrict, and distort competition.
In some instances, individual country laws Europe apply to
specific marketing mix elements. For example, some countries
permit selective or exclusive product distribution. However,
community law can take precedence.
Licensing and Trade Secrets
Licensing is a contractual agreement, in which a licensor allows a
licensee to use patents, trademarks, trade secrets, technology, or
other intangible assets in return for royalty payments or other
forms of compensation (see Chapter 8 for a discussion of
licensing as a marketing strategy). In the United States, laws do
not regulate the licensing process per se as do technology
transfer laws in the EU, Australia, Japan, and many developing
countries. The duration of the licensing agreement and the
amount of royalties a company can receive are considered a
matter of commercial negotiation between licensor and licensee,
and there are no government restrictions on remittances of
royalties abroad. In many countries, these elements of licensing
are regulated by government agencies.
Important considerations in licensing include analysis of what
assets a firm may offer for license, how to price the assets,
whether to grant only the right to make the product or to
grant the rights to use and to sell the product as well. The
right to sublicense is another important issue. As with distribution agreements, decisions must also be made regarding
exclusive or nonexclusive arrangements and the size of the
licensees territory.
43
Just as critical, if not more so, is the attitude of law enforcement agencies and consumers. Many consumers understand
neither the seriousness of the violation nor the need to respect
trademark rights. Law enforcement agencies often believe that
the crime does not warrant special effort. The problem is severe
in Taiwan, because so many local manufacturers pay no
attention to copyrights and patents. The strong export potential
for bogus merchandise makes the: government there look the
other way. In Mexico, one counterfeiter openly operated several
Cartier stores in American owned hotels. After many years in
Mexican courts and at least forty-nine legal decisions against the
retailer, Cartier was still unable to gain the cooperation of
Mexican officials to close down the counterfeit.
To prevent the licensee from using the licensed technology to

compete directly with the licensor, the hitter may try to limit the
licensee to selling only in its home country. The licensor may
also seek to contractually bind the licensee to discontinue use of
the technology after the contract has expired. In practice, host
government laws, including U.S. and EU antitrust laws, may
make such agreements impossible to obtain. Licensing is a
potentially dangerous action: It may be instrumental in creating
a competitor. Therefore, licensors should be careful to ensure
that their own competitive position remains advantageous.
This requires constant innovation. There is a simple rule: If you
are licensing technology and know-how that are going to remain
unchanged, it is only a matter of time before your licensee will
become your competitor not merely with your technology and
know-how but with improvements on that technology and
know-how. When this happens, you are history.
Branch Versus Subsidiary

One legal decision that an MNC must make is whether to use
branches or subsidiaries to carry out its plans and to manage its
operations in a foreign country. A branch is the companys
extension or outpost at another location. Although physically
detached, it is not legally separated from its parent. A subsidiary,
in contrast, is both physically and legally independent. It is
considered a separate legal entity in spite of its ownership by
another corporation.
A subsidiary may be either wholly owned (i.e., 100 percent
owned) or partially owned. GE receives some $1 billion in
revenues from its wholly owned and partially owned subsidiaries in Europe. The usual practice of Pillsbury, Coca-Cola, and
IBM is to have wholly owned subsidiaries. Although a parent
company has total control when its subsidiary is wholly owned,
it is difficult to generalize about the superiority of one approach
over the other.
As a rule, multinationals prefer subsidiaries to branches. Fiat
has 432 subsidiaries and minority interests within 130
companies in sixty countries. The question that must be asked
is why Fiat, like other MNCs, would go -through the trouble
and, expense of forming hundreds of foreign companies
elsewhere. When compared to the use of branches, the use of
subsidiaries adds complexity to the corporate structure. They are
also expensive, requiring substantial sales volume to justify their
expense.
There are several reasons why a subsidiary is the preferred
structure. One reason has to do with recruitment of management.
Titles mean a great deal in virtually all parts of the world. A top
administrator of an overseas operation wants a prestigious title
of president chief executive, or managing director rather than
being merely, a branch manager.
Gray Market
Gray market exists when a manufacturer ends up with an
unintended channel of distribution that performs activities
similar to the planned channel-hence the term parallel distribution. Through this extra channel, gray market goods move,
internationally as well as domestically. In an international,
context, a gray market product is one imported by an unauthorized party. Products notably affected by this method of
operation include watches, cameras, automobiles, perfumes,
44
and electronic goods. The problem is particularly acute for Seiko,

because one out of every four Seiko watches imported into the
U.S. market is unauthorized.
A gray marketer can acquire goods in two principal ways. One
method is to place an order directly with a manufacture by going
through an intermediary, in order, to conceal identity and
purpose. Another method is to buy the merchandise for
immediate shipment on the open market overseas. Asian
countries in general and Hong Kong in particular are favorite
targets because the wholesale prices there are usually much lower
than elsewhere. The importance of the gray market even gets
some countries to specialize in handling such goods for the
third country, primarily the United States.
Gray marketing of a product within a market often takes place
because of the channel structure and margins. A manufacturer
who wants to eliminate the potentially profitable gray marketing
activity should restructure its pricing and discount policies.
Parallel importation of trademarked products occurs for several
reasons: (1) gray marketers can easily locate sources of supply
because many trademarked products are available in markets
throughout the world, (2) price differences among these sources
of supply are great enough, and (3) the legal and other barriers
to moving goods are low.
Although there are several causes, price differential is the only
true reason for the gray market to exist. There is no justification
for the existence of the gray market unless prices in at least two
domestic markets differ to the extent that even with extra
transportation costs reasonable profits can be -made. This is a
good example of the economic force at work. Gray market
goods can be purchased, imported, and resold by an unauthorized distributor at prices lower than those charged by
manufacturer-authorized importers/distributors. As a result,
identical items can carry two different retail prices.
At one time, whether gray market goods are illegal or not could
not be answered with a great degree of certainty. Unlike the
black market, which is clearly illegal the gray market, as its name
implies, is neither black nor white-legality is in doubt.
At one time, certain exclusive sales territories were supported by
nontariff barriers between member states of the European
Union. However, the EUs elimination of non-tariff barriers
and border controls has made it possible for parallel imports to
move freely across the EU, resulting in price competition. Under
the ED concept of parallel imports, suppliers and distributors
of products in one member state cannot use exclusive sales
arrangements to conspire to block parallel imports of identical
products from dealers in other member states. Such actions are
a violation of EU antitrust laws.
To manufacturers and authorized dealers, parallel distributors
are nothing but freeloaders or parasites who take advantage of
the legitimate owners investment and goodwill. Manufacturers
also feel that these discounters deceive buyers by implying that
gray market have the same quality and warranties as items sold
through authorized channels.
Gray marketers naturally see the situation differently. They feel
that manufacturers try to have it both ways tolerating gray
marketing when they need to get rid of surplus merchandise
With regard to the charge that gray market goods are inferior,
manufacturers and authorized dealers refuse to service such
goods by pointing out that gray market good are not for U.S.
consumption. Therefore, such goods are adulterated, secondrate, or discontinued articles, and consumers may be misled into
believing that they receive identical products with U.S. warranties. Gray marketers, however, do not buy this argument.
According to them, there is really no proof that the products
they handle are inferior. It is inconceivable that a manufacturer
would stop a production line just to make another product
version for the non U.S. market. As such, gray market goods are
genuine products subject to the same stringent product control.
Concerning the inferior warranty and the manufacturers refusal
to service gray market goods under warranty terms, parallel
distributors show no concern because they have their own
warranty service centers that can provide the same, if not better,
service. Their service offers are often closer to the market being
served. Gray marketers also point out that they would not
survive in the long run if they did not provide service and
quality assurance.
The arguments used by both sides are legitimate and nave
merits. Only one thing is certain: authorized suppliers are
adversely affected by parallel distribution. They lose market.
share as well as control over price. They may have to service
goods sold by parallel competitors, and the loss of goodwill
follows when consumers are unable to get proper repair.
Manufacturers and authorized suppliers definitely see the need
to discourage gray marketing. There are several strategies for this
purpose, and each strategy has both merits and problems.
Although tracking down offenders costs money, disenfranchisement of offenders is a stock response. This move
sends loud signals of commitment to distributors who abide
by the terms of the franchise agreement. A one price-for-all
policy can eliminate an important source of arbitrage, but it
ignores transaction costs and forecloses valid price discrimination opportunities among classes of customers who are buying
very different benefits in the same product. Another strategy is
to add distributors (perhaps former gray market distributors to
the network, but this approach may create disputes among
current distributors.
Conflict Resolution, Dispute Settlement,

And Litigation
Countries vary in their approach toward conflict resolution. The
United states ha more lawyers than any other country in the
world and is arguably the most litigious nation on worth. In
part, this is a refection of the low context nature of American

culture, a spirit of confrontational competitiveness, and the
absence of tone important principle of code law the loser pays
all court costs for all parties. The degree of legal cooperation and
harmony in the EU is unique and stems in part form the
existence of code law as a common bond. Other regional
organisations have made for less progress toward harmonization.
Conflicts will inevitably arise in business anywhere, especially
when different cultures come together to buy, sell, establish
joint ventures, compete, and cooperate in global markets for
American companies, the dispute with a foreign party is
frequently in the home country jurisdiction. The issue can be
litigated in the united states, where a company and its attorneys
might be said to enjoy home court advantage. Litigation in
foreign courts, however, becomes vastly more complex. This is
due in part to differences in language, legal systems, currencies,
and traditional business customs and patterns. In addition,
Country
United states
Australia
United kingdom
France
Germany
Hungary
Japan
Korea
Lawyers per 100,000 people

290
242
141
80
79
79
11
3
Problems arise from differences in procedures relating to

discovery. In essence, discovery is the process of obtaining
evidence to prove claims and determining which evidence may
be admissible in which countries under which conditions. A
further complication is the fact that judgments handed down in
courts in another country may not be enforceable in the home
country. For all these reasons, many companies prefer to pursue
arbitration before proceeding to litigate.
The World Trade Organisation and Its

Role in International Trade
In 1948 when 23 countries underlined in the General Agreement on Tariffs and Trade (GATT) their determination to
reduce import tariffs, this was considered a milestone n
international trade relations. GATT is based on three principles.
The first concerns nondiscrimination, each member country
must treat the trade of all other member countries equally. The
second principle is open markets, which are encouraged by the
GATT through a prohibition of all forms of protection except
customs tariff air trade is the third principle, which prohibits
export subsidies on manufactured products and limits the third
principle, which prohibits export subsidies on manufactured
products and limits the use of export subsidies on primary
products. In reality, none of these principles is fully realized as
yet, although much progress as made during the Uruguay
Round on issues such as no tariff barriers, protection of
intellectual property rights, and government subsidies.
45
and condemning gray marketers when that need subsides. Gray

marketers also accuse manufacturers of not wanting to be price
competitive and view manufacturers distribution restrictions as
a smokescreen for absolute price control. Parallel distributors
claim to align themselves more with consumers by providing an
alternative and legal means of distribution, a means capable of
delivering the same goods to consumers at a lower but fair price
under the free enterprise system. Some parallel distributors have
even sued Mercedes-Benz for restraint of trade, which is a
violation of the Sherman and Clayton Acts. As pointed out by
them; trademarks are designed to counter fraud rather than
limit distribution.
Italy GreeceFinlandSwedenNetherlands Bans all forms of

tobacco advertising Bans all advertising of toysBans speed as a
feature in car advertisingBans television advertising directed at
children under age 12Bans claims about automobile fuel
consumption
Another major breakthrough at the Uruguay Round was the
establishment of the world Trade Organisation (WTO) in 1995,
which replaced GATT. In contrast to GATT, which was more
loosely organised, WTO as a permanent institution is endowed
with much more decision making power in undecided cases.
These extended competencies have become manifest in visible
consequences. During its 50 years of existence, only 300
complaints in international trade disputes were filed with
GATT, since its installation in 1995, the WTO has already dealt
with 200 cases.
Ethical Issues
Ethics, just as the legal environment, vary around the world.
What is acceptable in one country may be considered unethical
in another. In addition to the obvious moral questions,
companies may suffer when negative publicity is generated. A
case in point it the use of child labor or allegations of its use.
Nike is well aware of this problem. Nike sources its goods in
countries with low wages and poor labor regulations. Although
Nike does not directly employ children in its overseas manufacturing the sourcing agent may. A program has been established
by Nike to monitor its suppliers but it is difficult when some
locals may argue in favor of child labor. Regarding child labor in
Pakistan, trade bands on goods produced by child labor could
have the unintended effect of forcing the children into other
paid work at a lower wage and/ or prostitution. The US
Department of Labor has many publications on this specific
issue.
In order to do the right thing but also generate good
publicity, companies can take an active approach to ethical issues.
Reebok and Levi Strauss have done this by establishing
standards that their contractors must follow, and they actively
monitor results to ensure that standards are met.
An increasing number of companies are addressing ethical
issues. A recent survey of companies in 22 countries found that
78 percent of boards of directors were establishing ethical
standards. This is up significantly from 21 percent in 1987. The
study also warns that regional differences can hinder effective
implementation of any efforts.
U.s. Laws and Exports

Assistance or Hindrance?
The United States has many laws that have made exports
difficult. These laws have been a contributing factor to the trade
deficit of the United States.
Nuclear Nonproliferation Treaty

Section 378.1 of the U.S. Export Administration Regulations
applies to nuclear weapons and explosive devices. A concern
over the use of nuclear weapons prompts the United States to
limit exports of nuclear reactors and material to any countries
that may produce a nuclear bomb. Israel, despite refusing to
sign the Nuclear Nonproliferation Treaty, is able to substantially
secure much of what it needs anyway. India, on the other hand,
46
is unable to get the needed materials and technology from the

United States in spite of its willingness to sign the treaty. Critics
of the law believe that if a country wants nuclear materials it will
find a source, and it is naive to believe that leaders would not
consider using nuclear weapons just because a treaty has been
signed. It is difficult to believe that a country would prefer to
lose a war with dignity rather than winning ugly. What is
most bothersome to many Third World critics is the idea that
only the superpowers or developed nations know how to use
nuclear weapons responsibly.
Human Rights Policy

The human rights policy of the United States at times interferes
with America firms business activities. For protection of
human rights, there are regulations for export of crime control
and detection instruments and data to all countries except
NATO members, Japan, Australia and new Zealand. The
strictest adherence to this policy occurred during the carter years,
which led to severe restrictions on trade with countries that
violated the human rights code. Loans were withheld from
South Africa, Uruguay, EI Salvador, and Chile.
Critics charge that the United States has been arbitrary in the
application of its sanctions. While criticizing in the rights abuses
in Cuba. Czechoslovakia Nicaragua and the former Soviet
Union, the- United States as at times ignored or tolerated
similar abuses in Haiti, {Honduras, Kenya, South Africa, and
Turkey. According to two private groups (Human Rights Watch
and the Lawyers Committee for Human Rights), the Reagan
administration [applied] human rights standards inconsistently between perceived allies and foes.
Other questions related to the restrictions involve whether the
end justifies the means and whether the restrictions are effective.
Repeated pressures on EI Salvador, for example; yielded few
concrete results. Even when the sanctions are effective, they may
not result in the accomplishment of the desired goal. There was
overwhelming evidence of human rights violations in Iran and
Nicaragua during the administrations of the Shah and President
Somoza, respectively. Yet it has been widely debatable whether
the new regimes, after overthrowing those dictators, have
provided desirable alternatives. Nevertheless, the U.S. human
rights policy has served a useful purpose in some instances.
Antiboycott Regulations
The U.S. Export Administration Act of 1977 has anti boycott
provisions that establish a U.S. policy of opposing restrictive
trade practices imposed by foreign countries against other
countries friendly to the United States. The purpose of the law
is not to challenge any countrys sovereign right to boycott
products from another nation, but rather to prevent U.S.
citizens from being used as tools of another nations foreign
policy. American firms are urged to refuse any request to
support such boycotts and are required to report such a request
to the Office of Ant boycott Compliance (OAC). which
administers-the law.
The anti boycotts provisions specially prohibit U.S. persons
from :
Discriminating against other U.S. persons on the basis of race,

religion, sex, or national origin to comply with a foreign
boycott.Furnishing information about another persons race,
religion sex or national origin where such information is sought
for boycott enforcement purposes.
good intentions, their appropriations depends on the criteria

used to judge them. They may make sense-from the standpoint
of foreign policy. The trade is the criterion, h9wever, these laws
are -clearly disadvantageous to American firms. Do you agree
with the rationale of these laws from the perspectives of
national security, foreign policies, and trade?
Furnishing information about their business relationships with

boycotted countries or blacklisted companies.
In response to the Arab nations boycott of Israeli-made
goods, the United States has adopted anti-Arab boycott rules,
which require U.S. exporters to forego Arab contracts that
prohibit the inclusion of goods from Israel. Safeway Stores Inc.
provides technical and management assistance to Arab-owned
stores in Saudi Arabia and Kuwait, which refused to do
business with companies on the anti-Israeli blacklist. As a
result, Safeway managers told customers and suppliers not to
do business with Israel or with blacklisted companies. Safeway
also furnisher information about its dealings with Israel to the
Israel Boycott Office of Kuwait. To settle the charges that
Safeway had illegally complied with the Arab boycott, Safeway
paid the Department of Commerce $995,000. The previous
largest ant boycott penalty was a $323,000 fine paid, by- Citicorp.
Foreign Corrupt Practicess Act (FCPA)

This act greatly limits corporate payments of fees to obtain a
foreign contract, and a violation-of the act is punishable by fines
and jail terms. But the law is ambiguous. And it increases delays
as well as the cost of doing-business. For example, a person
associated with a company must certify that there is no bribe of
immoral act practically every time business is transacted. The
companys agent must get an expense account validated by the
American consular authority before receiving a payment for
expenses as routine as a taxicab ride.
Health, Safety And Environmental Regulations
These regulations are based on the assumption that what is
good for the United States is good for other nations. The
health, safety, and environment rules thus enforce strict U.S.
standards over American firms overseas operations. The
problem that some businesses see is that U.S. standards may
make certain products either unavailable or too expensive for
foreign consumers. Critics of the regulations contend that the
United States should not make health, safety, and environmental decisions for citizens of other countries.
Antitrust Laws
U.S. antitrust regulations result in a reluctance on the part of
American firms to form joint trading companies or to bid
jointly on major overseas projects. In the 1980s, with a trend
toward mega mergers, the antitrust restrictions appeared to be
relaxing. A 1982 Jaw- allowed exporters to form export trading
companies so that they could pool resources under antitrust
exemptions. Despite new rules, exporters must deal with
varying-definitions and-interpretations of- the law among the
Treasury, Commerce, and Justice departments.
The U.S. laws cited above, in one way or another, impede U.S.
exports. Although these laws may have been enacted with
47
Refusing to do business with black listed firms and boycotted

countries friendly to the United States pursuant to foreign
boycott demands.
LESSON 8:
SOCIAL & CULTURAL ENVIRONMENT
Marketing has always been recognized as an economic activity
involving the exchange of goods and services. Only in recent
years, however, have sociocultural influences been identified as
determinants of marketing behaviour, revealing marketing as a
cultural as well as economic phenomenon. Because our
understanding of marketing is culture bound, we must acquire
a knowledge of diverse cultural environments in order to
achieve successful international marketing. We must, so to
speak, remove our culturally tinted glasses to study foreign
markets.
The growing use of anthropology, sociology and psychology in
marketing is explicit recognition of the noneconomic bases of
marketing behaviour. We now know that it is not enough to
say that consumption is a function of income. Consumption is
a function of many other cultural influences as well. Furthermore, only non economic factors can explain the different
patterns of consumption of two individuals with identical
incomes-or by analogy, of two different countries with similar
per capita incomes.
A review of consumer durables ownership in EU countries
with similar income levels shows the importance of nonincome
factors in determining consumption behaviour. For automatic
washing machines the range is from 72 percent in Sweden to 96
percent in Italy; for dishwashers, from 11 percent in the
Netherlands and Spain to 34 percent in Germany; for clothes
dryers, from 5 percent in Spain to 39 percent in Belgium; for
microwave ovens, from 6 percent in Italy to 37 percent in
Sweden; for vacuum cleaners, from 56 percent in Italy to 98
percent in the Netherlands. It is remarkable that the same
countries(Italy, Netherlands, Sweden) can be at the highpenetration level for some appliances and at the low-penetration
level for others. Only cultural difference can account for these
variables.
Basic Aspects of Society and Culture

Anthropologists and sociologists define culture as Ways of
Living , built up by a group of human beings, which are
transmitted from one generation to another. A culture acts out
its ways of living in the context of social institutions, including
family, educational, religious, governmental, and business
institutions. Culture includes both conscious and unconscious
values, ideas, attitudes, and symbols that shape human
behavior and that are transmitted from one generation to the next. In
this sense, culture does not include one-time solutions to
unique problems, or passing fads and styles. As defined by
organizational anthropologist Geert Hofstede, culture is the
collective programming of the mind that distinguishes the
members of one category of people from those of another.
In addition to agreeing that culture is learned, not innate, most
anthropologists share two additional views. First, all facets of
culture are interrelated: Influence or change one aspect of a
culture and everything else is affected. Second, because it is
48
shared by the members of a group, culture defines the boundaries between different groups.
Culture consists of learned responses to recurring situations.
The earlier these responses, are learned, the more difficult they
are to change. Taste and preferences for food and drink, for
example, represent learned responses that are highly variable
from culture to culture and can have a major impact on
consumer behavior. Preference for color is culturally influenced
as well. For example, although green is a highly regarded color
in Moslem countries, it is associated with disease in some Asian
countries. White, usually associated with purity and cleanliness
in the West, can signify death in Asian countries. Red is a
popular color in most parts of the world (often associated with
full flavor, passion, or virility); however, it is poorly received in
some African countries. Of course, there is no inherent attribute
to any color of the spectrum; all associations and perceptions
regarding color arise from culture.
Culture and Its Characteristics

1. Culture is prescriptive. It prescribes the kinds of behaviour
considered acceptable in the society. The prescriptive
characteristics of culture simplifies a consumers decisionmaking process by limiting product choices to those which
are socially acceptable.
2. Culture is socially shared. Culture, out of necessity, must be
based on social interaction and creation. It cannot exist by
itself. It must be shared by members of a society, thus acting
to reinforce cultures prescriptive nature.
3. Culture facilitates communication. One useful function
provided by culture is to facilitate communication. Culture
usually imposes common habits of thought and feeling
among people. Thus, within a given group culture makes it
easier for people to communicate with one another. But
culture may also impede communication across groups
because of a lack of shared common cultural values.
4. Culture is learned. Culture is not inherited genetically-it must
be learned and acquired. Socialization or enculturation occurs
when a person absorbs or learns the culture in which he or
she is raised. In contrast, if a person learns the culture of a
society other than the one in which he or she was raised, the
process of acculturation occurs. The ability to learn culture
makes it possible to absorb new cultural trends.
5. Culture is subjective. People in different cultures often have
different ideas about the same object. What is acceptable in
one culture may not necessarily be so in another. In this
regard, culture is both unique and arbitrary.
6. Culture is enduring. Because culture is shared and passed
along from generation to generation, it is relatively stable and
somewhat permanent. Old habits are hard to break, and
people tend to maintain its own heritage in spite of a
continuously changing world. This explains why India and
7. Culture is cumulative. Culture is based on hundreds or even

thousands of years of accumulated circumstances. Each
generation adds something of its own to the culture before
passing the heritage on to the next generation.
8. Culture is dynamic. Culture is passed along from generation
to generation, but one should not assume that culture is
static and immune to change. Far from being the case, culture
is constantly changing-it adapts itself to new situations and
new sources of knowledge.
Cultural Dimension-1
Meaning of Time
The work week in many Middle Eastern regions runs from
Saturday to Thursday. In many countries, it is customary to
have lunch hours of two to four hours. Culture also affects
attitudes toward punctuality. Latin Americans have a relaxed
attitude toward time. In Guatemala, a person may choose to
arrive anytime from ten minutes to forty-five minutes late for a
luncheon appointment. On the other hand, Romanians,
Germans, and Japanese are very punctual. However, punctuality
is a function of occasion. Although it is rude for a Japanese to
be late for a business meeting, it is acceptable(and perhaps even
fashionable) to be late for a social occasion.
The Language of Friendship
In India, it is an honor to be invited to have dinner at a private
home-a sign of real friendship. Thus, any business discussion
at dinner would be inappropriate. In Italy, Egypt and China,
dinner is a social event in itself, making it an all-evening affair, as
exemplified by the ten-course meal in China. In the United
States, people finish their meals in a hurry, as if eating were a
mere necessity, and then quickly get on to the purpose or
objective for having had the dinner.
Pillsbury is one company that owes its success in Japan to an
ability to adjust to the radically different style of doing business
there. The Oriental values of old friends, long courtship, trust,
and sincerity were all understood by Pillsburys management,
and those values were kept in mind when Pillsbury decided to
conduct business in Japan. Pillsbury saw its joint venture as like
a marriage in a society where a divorce is frowned upon, and
thus took great pains to learn the accepted way of doing
business there.
for Allah. The tread was designed by computer to maximize

driving safety. The company soon stopped making these tires
and offered to replace the tires free of charge. The tire maker
apologized for its lack of knowledge of Islam and stated that
the tread was not meant to blaspheme Allah.
The Art Of Gift Giving

Businesspeople need to understand customs of gift giving. In
certain countries, it is offensive to offer a gift. Exchanging gifts
is rare and inappropriate in Germany. Gift giving is also not a
normal custom in Belgium or Britain, but flowers are a suitable
gift when invited to someones home.
In some countries, it is insulting when gifts are not presented
since they are expected. Businesspeople should attempt to find
out how to present gifts. When should it be presented-on the
initial visit or afterwards? Where should a gift be presented-in
public or private? What is the type of gift to give, what should
its color be, and how many people should receive gifts? In
Japan, gift giving is an important part of doing business, and
gifts are usually exchanged at the first meeting.
The Search For Cultural Universals

An important quest for the global marketer is to discover
cultural universals. A universal is a mode of behavior existing in
all cultures. Universal aspects of the cultural environment
represent opportunities for global marketers to standardize
some or all elements of a marketing program. A partial list of
cultural universals, taken from cultural anthropologist George P.
Murdocks classic study, includes the following: athletic sports,
body adornment, cooking, courtship, dancing, decorative art,
education, ethics, etiquette, family feasting, food taboos,
language, marriage, mealtime, medicine, mourning, music,
property rights, religious rituals, residence rules, status differentiation, and trade.The astute global marketer often discovers
that much of the apparent cultural diversity in the world turns
out to be different ways of accomplishing the same thing.
Music provides one example of how these universals apply to
marketing. Music is part of all cultures, accepted as a form of
artistic expression and source of entertainment. However,
music is also an art form characterized by widely varying styles.
Therefore, al. though background music can be used effectively
in broadcast commercials, the type of music appropriate for a
commercial in one part of the world may not be acceptable or
effective in another part. A jingle might utilize a bossa nova
rhythm for Latin America, a rock rhythm for North America,
and high life for Africa. Music, then, is a cultural universal that
global marketers can adapt to cultural preferences in different
countries or regions.
Cultural Dimension-2
The Language Of Religion
A government itself can also make a religious mistake. As soon
as Indonesia announced its plan to introduce state lottery, the
controversy erupted. Religious leaders and students called the
lottery immoral and corrupt. After weeks of growing Muslim
demonstrations, the government decided to drop the lottery
idea.
Muslims launched a protest because Yokohama Rubber Co
automobile tires had a tread pattern resembling the Arabic word
TRUE EUROPEANS
Consumer demands vary widely from one European country to another.
The French cook their food at high temperatures and thus splatter grease
onto oven walls. Understandably, most French consumers want selfcleaning ovens. The Germans, in contrast, do their cooking at lower
temperatures and do not have much demand for this feature.
After acquiring Phillipss European appliance business. Whirlpool moved
to transform sales and distribution systems in thirteen countries into two
pan-European operations. On the manufacturing side, Whirlpool cut costs
49
China, despite severe overcrowding, have a great difficulty

with birth control. The Chinese view a large family as a
blessing and assume that children will take care of parents
when growth old.
by standardizing parts and materials which account for 55 percent of an

appliances total cost. Before the move, the washing machine made in
Germany and the one made in Italy did not contain any common parts;
they did not even share one screw.
It has long been argued that national tastes dictate the kind of washing
machine to be sold in a certain market. As a result, French consumers
would not accept front loaders because French kitchens have only enough
space for the narrow, top-loading machines. Whirlpool Corp however,
found that many of the differences in countries had less to do with
consumer tastes but more to do with the fact that French manufacturers
have always made only top loaders.
Whirlpools study of laundry habits revealed that consumers across
Europe want a washing machine that get clothes clean, is easy to use and
trouble free, and does not use too much electricity, water, or detergent. If a
machine can meet these significant criteria, consumer taste can change
because such features as where the machine opens and its size are less
important. Therefore, Whirlpool has treated Germans, British and
Italians like true Europeans due to their similarities, which overshadow
their differences.
The global marketers in the business are always alert toward the
potential of extending a successful act across national boundaries. For example, the success of Robyn, a Swedish vocalist
who sings in English, first in Sweden and northern Europe
established her potential to go beyond these markets. Kadja
Nin, a vocalist from Burundi who sings in Swahili and French,
has been positioned as a new sound, sensous, and
international.Many feel that she has great potential for global
markets.
Increasing travel and improving communications mean that
many national attitudes toward style in clothing, color, music,
food and drink are converging. The globalization of culture has
been capitalized upon, and even significantly accelerated, by
companies that have seized opportunities to find customers
around the world. Coca-Cola, Pepsi, Levi Strauss, McDonalds,
IBM, Heineken and BMG Entertainment are some of the
companies breaking down cultural barriers as they expand into
new markets with their products. Similarly, new laws and
changing attitudes toward the use of credit are providing huge
global opportunities for financial service providers such as
American Express, Visa and Master Card International.
According to one estimate, the volume of global credit card
sales surpassed $2 trillion in the year 2000. the credit card
companies and on-line marketers has to chose communication
efforts to persuade large numbers of people to use the cards.
There is great variation in the world in the use of credit and
debit cards and cash. Japan is a cash and debit card culture,
Europe is more of a check and debit card culture, and the
United States is a credit card culture.
Culture Shapes Foreign Marketing

International marketers all have stories to tell of their adventures-and
misadventures-in foreign market cultures. These cultural constraints can
affect all aspects of the marketing program. A couple of examples:
1. Cosmetics : Maybelline and Max Factor add brighter colors to their
lipstick and makeup for Latin America. Vidal Sassiin adds more
conditioner and a pine aroma to some shampoos in the Far East. Amways
50
skin care line in Japan has less lather and Amway removes the pork
proteins found in some of its products for Muslim markets, such as
Malaysia.
2. Promotion : Hollywood has found the best way to promote its movies
in Asia is to use popular local musicians. When Warner Bros released
Lethal Weapon 4 in Hong Kong, its major promotion was a music video
with a very popular heavy-metal band. Though music didnt relate to the
film, scenes from the film were interspersed on the video. The song became
the movies Asian theme song.
In Taiwan, a leading female singer made a music video based on The
English Patient. The studios usually dont even have to pay the local
artists because both parties benefit.
Elements of Culture
The anthropologist studying culture as a science must investigate every aspect of a culture is an accurate, total picture is to
emerge. To implement this goal, there has evolved a culture
scheme that defines the parts of culture. For the marketer, the
same thoroughness is necessary if the marketing consequences
of cultural differences within foreign market are to be accurately
assessed.
Culture includes every part of life. The scope of the term culture
to the anthropologist is illustrated by the elements included
within the meaning of the term. They are:
Material Culture : Technology, Economics

Material Culture is divided into two parts, technology and
economics. Technology includes the techniques used in the
creation of material goods; it is the technical know-how
possessed by the people of a society. For example, the vast
majority of U.S. citizens understand the simple concepts
involved in reading gauges, but in many countries of the world
this seemingly simple concept is not part of their common
culture and is, therefore, a major technical limitation.
Economics is the manner in which people employ their
capabilities and the resulting benefits. Included in the subject of
economics is the production of goods and services, their
distribution, consumption, means of exchange, and the income
derived from the creation of utilities.
Material culture affects the level of demand, the quality and
types of products demanded, and their functional features, as
well as the means of production of these goods and their
distribution. The marketing implications of the material culture
of a country are many. For example, electrical appliances sell in
England and France but have few buyers in countries where less
than 1 percent of the homes have electricity. Even with electrification, economic characteristics represented by the level and
distribution of income may limit the desirability of products.
Electric can openers and electric juicers are acceptable in the
United States, but in less-affluent countries not only are they
unattainable and probably unwanted, they would be a spectacular waste because disposable income could be spent more
meaningfully on better houses, clothing or food.
Social Institutions : Social organizations, Education,
Political Structures
Social Institutions include social organization, education, and
political structures that are concerned with the ways in which
people relate to one another, organize their activities to live in
Education, one of the most important social institutions,

affects all aspects of the culture from economic development to
consumer behaviour. The literacy rate of a country is a potent
force in economic development. Numerous studies indicate a
direct link between the literacy rate of a country and its ability for
rapid economic growth. According to the World Bank no
country has been successful economically with less than 50
percent literacy, but when countries have invested in education
the economic rewards have been substantial. Literacy has a
profound affect on marketing. It is much easier to communicate
with a literate market than to one where the marketer has to
depend on symbols and pictures to communicate. Each of the
social institutions has an effect on marketing because each
influences behaviour, values and the overall patterns of life.
Humans and the Universe-belief Systems

Within this category are religion (belief systems), superstitions,
and their related power structures. The impact of religion
on the value systems of a society and the effect of value
systems on marketing must not be underestimated. Religion
impacts peoples habits, their outlook on life, the products they
buy, the way they buy them, even the newspapers they read.
Acceptance of certain types of food, clothing, and behaviour are
frequently affected by religion, and such influence can extend to
the acceptance or rejection of promotional messages as well. In
some countries, focusing too much attention on bodily
functions in advertisements would be judged immoral or
improper and the products would be rejected. What might
seem innocent and acceptable in one culture could be considered
too personal or vulgar in another. Such was the case when Saudi
Arabian customs officials impounded a shipment of French
perfume because the bottle stopper was in the shape of a nude
female. Religion is one of the most sensitive elements of a
culture. When the marketer has little or no understanding of a
religion, it is easy to offend, albeit unintentionally.
Superstition plays a much larger role in a societys belief system
in some parts of the world than it does in the United States.
What an American might consider as mere superstition can be a
critical aspect of a belief system in another culture. For example,
in parts of Asia, ghosts, fortune telling, palmistry, head-bump
reading, phases of the moon, demons, and soothsayers are all
integral parts of certain cultures. Astrologers are routinely called
on in Thailand to determine the best location.
Aesthetics : Graphic and Plastic Arts, Folklore,

Music, Drama and Dance
Closely interwoven with the effect of people and the universe
on a culture are its aesthetics, that is, its arts, folklore, music,
drama, and dance. Aesthetics are of particular interest to the
marketer because of their role in interpreting the symbolic
meanings of various methods of artistic expression, color, and
standards of beauty in each culture. Customers everywhere
respond to images, myths, and metaphors that help them
define their personal and national identities and relationships
within a context of culture and product benefits. The uniqueness of a culture can be spotted quickly in symbols having
distinct meanings.
Without a culturally correct interpretation of a countrys
aesthetic values, a whole host of marketing problems can arise.
Product styling must be aesthetically pleasing to be successful, as
must advertisements and package designs. Insensitivity to
aesthetic values can offend, create a negative impression, and, in
general, render marketing efforts ineffective. Strong symbolic
meanings may be overlooked if one is not familiar with a
cultures aesthetic values. The Japanese, for example, revere the
crane as being very lucky for it is said to live a thousand years,
however, the use of the number four should be avoided
completely because the word four, shi, is also the Japanese word
for death.
Language
The importance of understanding the language of a country
cannot be overestimated. The successful marketer must achieve
expert communication, and this requires a thorough understanding of the language as well as the ability to speak it.
Advertising copywriters should be concerned less with obvious
differences between languages and more with the idiomatic
meanings expressed. It is not sufficient to say you want to
translate into Spanish, for instance, because, in Spanishspeaking Latin America the language vocabulary varies widely.
Tambo, for example, means a roadside inn in Bolivia, Colombia, Ecuador, and Peru; in Argentina and Uruguay, it means a
dairy farm; and in Chile, a tambo is a brothel. If that gives you a
problem, consider communicating with the people of Papua,
New Guinea. Some 750 languages, each distinct and mutually
unintelligible, are spoken there.
Carelessly translated advertising statements not only lose their
intended meaning but can suggest something very different,
obscene, offensive, or just plain ridiculous. Language may be
one of the most difficult cultural elements to master, but it is
the most important to study in an effort to acquire some degree
of empathy. Many believe that to appreciate the true meaning
of a language it is necessary to live with the language for years.
Whether or not this is the case, foreign marketers should never
take it for granted that they are communicating effectively in
another language. Until a marketer can master the vernacular, the
aid of a national within the foreign country should be enlisted;
even then, the problem of effective communications may still
exist. One authority suggests that we look for a cultural
translator, that is, a person who translates not only among
languages but also among different ways of thinking and
among different cultures.
51
harmony with one another, teach acceptable behaviour to

succeeding generations, and govern themselves. The positions
of men and women in society, the family, social classes, group
behaviour, age groups and how societies define decency and
civility are interpreted differently within every culture. In cultures
where the social organizations result in close-knit family units,
for example, it is more effective to aim a promotion campaign
at the family unit than at individual family members. Travel
advertising in culturally divided Canada pictures a wife alone for
the English audience but a man and wife together for the
French segments of the population because the French are
traditionally more closely bound by family ties.
Its Not The Gift That Counts, But How

You Present It
Giving a gift in another country requires careful attention if it to
be done properly. Here are a few suggestions:
Japan
Do not open gift in front of a Japanese counterpart unless
asked and do not expect the Japanese to open your gift.
Avoid ribbons and bows as part of gift-wrapping. Bows as we
know them are considered unattractive and ribbon colors can
have different meanings. Do not offer a gift depicting a fox or
badger. The fox is the symbol of fertility, the badger, cunning.
Europe
Avoid red roses and white flowers, even numbers, and the
number 13. Do not wrap flowers in paper. Do not risk the
impression of bribery by spending too much on a gift.
Arab World
Do not give a gift when you first meet someone. It may be
interpreted as a bribe. Do not let it appear that you contrived to
present the gift when the recipient is alone. It looks bad unless
you know the person well. Give the gift in front of others in
less personal relationships.
Latin America
Do not give a gift until after a somewhat personal relationship
has developed unless it is given to express appreciation for
hospitality. Gifts should be given during social encounters, not
in the course of business. Avoid the colors black and purple;
both are associated with the Catholic Lenten season.
China
Never make an issue of a gift presentation-publicly or privately.
Gifts should be presented privately, with the exception of
collective ceremonial gifts at banquets.
Analytical Approaches to Cultural

Factors
The reason cultural factors are a challenge to global marketers is
that they are hidden from view. Because culture is learned
behaviour passed on from generation to generation, it is
difficult for the inexperienced or untrained outsider to fathom.
Becoming a global manager means learning how to let go of
cultural assumptions. Failure to do so will hinder accurate
understanding of the meaning and significance of the statements and behaviours of business associates from a different
culture.
For example, a person from a culture that encourages responsibility and initiative could experience misunderstandings with a
client or boss from a culture that encourages bosses to remain
in personal control of all activities. Such a boss would expect to
be kept advised of a subordinates actions; the subordinate
might be taking initiative on the mistaken assumption that the
boss would appreciate a willingness to assume responsibility.
Maslows Hierarchy of Needs

The late A. H. Maslow developed an extremely useful theory of
human motivation that helps explain cultural universals. He
hypothesized that peoples desires can be arranged into a
hierarchy of five needs. As an individual fulfills needs at each
level, he or she progresses to higher levels. Once physiological,
52
safety, and social needs have been satisfied, two higher needs
become dominant. First is a need for esteem. This is the desire
for self-respect, self-esteem, and the esteem of others and is a
power-ful drive creating demand for status-improving goods.
The final stage in the need hierarchy is self-actualization. When
all the needs for food, safety, security, friendship, and the esteem
of others are satisfied, discontent and restlessness will develop
unless one is doing what one is fit for. A musician must make
music, an artist must create, a poet must write, a builder must
build, and so on. Maslows hierarchy of needs is, of course, a
simplification of complex human behavior. Other researchers
have shown that a persons needs do not progress neatly from
one stage of a hierarchy to another. For example, an irony of
modern times is the emergence of the need for safety in the
United States, one of the richest countries in the world. Indeed,
the high incidence of violence in the United States may leave
Americans with a lower level of satisfaction of this need than in
many so-called poor countries. Nevertheless, the hierarchy
does suggest a way for relating consumption patterns and levels
to basic human need-fulfilling behavior. Maslows model
implies that, as countries progress through the stages of
economic development, more and more members of society
operate at the esteem need level and higher, having satisfied
physiological, safety, and social needs. It appears that selfactualization needs begin to affect consumer behavior as well.
SELF-ACTUALIZATION
ESTEEM
SOCIAL
SAFETY
PHYSIOLOGICAL
Maslows Hierarchy of Needs
For example, there is a tendency among some consumers in

high-income countries to reject material objects as status
symbols. The automobile is not quite the classic American
status symbol it once was, and some consumers are turning
away from material possessions. This trend toward rejection of
materialism is not, of course, limited to high-income countries.
In India, for example, there is a long tradition of the pursuit of
consciousness or self-actualization as a first rather than a final
goal in life. And yet, each culture is different. For example, in
Germany today, the automobile remains a supreme status
symbol. Germans give their automobiles loving care, even
going so far as to travel to distant locations on weekends to
wash their cars in pure spring water.
Helmut Schutte has proposed a modified hierarchy to explain
the needs and wants of Asian consumers. While the two lowerlevel needs are the same as in the traditional hierarchy, the three
highest levels emphasize the intricacy and importance of social
needs. Affiliation needs are satisfied when an individual in Asia
has been accepted by a group. Conformity with group norms
becomes a driving force of consumer behavior. For example,
STATUS
ADMIRATION
AFFILIATION
SAFETY
PHYSIOLOGICAL
Maslows Hierarchy: The Asian Equivalent
The Self-refernce Criterion And Perception

As we have shown, a persons perception of market needs is
framed by his or her own cultural experience. A framework for
systematically reducing perceptual blockage and distortion was
developed by James Lee. Lee termed the unconscious reference
to ones own cultural values the self-reference criterion, or SRC.
To address this problem and eliminate or reduce cultural
myopia, he proposed a systematic four-step framework.
Step 1: Define the problem or goal in terms of home-country
cultural traits, habits and norms.
Step 2: Define the problem or goal in terms of the host culture,
traits, habits and norms. Make no value judgments.
Step 3: Isolate the SRC influence and examine it carefully to see
how it complicates the problem.
Step 4: Redefine the problem without the SRC influence and
solve for the host-country market situation.
The lesson that SRC teaches is that a vital, critical skill of the
global marketer is unbiased perception, the ability to see what is
so in a culture. Although this skill is as valuable at home as it is
abroad, it is critical to the global marketer because of the
widespread tendency toward ethnocentrism and use of the selfreference criterion. The SRC can be a powerfully negative force in
global business and forgetting to check for it can lead to
misunderstanding and failure. While planning Euro Disney,
chairman Michael Eisner and other company executives were
blindsided by a lethal combination of their own prior success

and ethnocentrism. Avoiding the SRC requires a person to
suspend assumptions based on prior experience and success
and be prepared to acquire new knowledge about human
behaviour and motivation.
Environmental Sensitivity
Environmental Sensitivity is the extent to which products must
be adapted to the culture-specific needs of different national
markets. A useful approach is to view products on a continuum
of environment sensitivity. At one end of the continuum are
environmentally insensitive products that do not require
significant adaptation to the environments of various world
markets. At the other end of the continuum are products that
are highly sensitive to different environmental factors. A
company with environmentally insensitive products will spend
relatively less time determining the specific and unique conditions of local markets because the product is basically universal.
The greater a products environmental sensitivity, the greater the
need for managers to address country-specific economic,
regulatory, technological, social and cultural environmental
conditions.
The sensitivity of products can be represented on a twodimensional scale as shown in the figure. The horizontal axis
shows environmental sensitivity, the vertical axis the degree for
product adaptation needed. Any product exhibiting low levels
of environmental sensitivity-highly technical products, for
example-belongs in the lower left of the figure. Intel was sold
over 100 million microprocessors, because a chip is a chip
anywhere around the world. Moving to the right on the
horizontal axis, the level of sensitivity increases, as does the
amount of adaptation. Computers are characterized by low
levels of environmental sensitivity but variations in country
voltage requirements require some adaptation. In addition, the
computers software documentation should be in the local
language. At the upper right of the figure are products with
high environmental sensitivity. Food, especially food consumed
in the home, falls into the category because it is sensitive to
climate and culture. McDonalds has achieved great success
outside the United States by adapting its menu items to local
tastes. Particular food items such as chocolate, however must be
modified for various differences in taste and climate. The
consumers in some countries prefer a milk chocolate; others
prefer a darker chocolate while other countries in the Tropics
have to adjust the formula for their chocolate products to with
stand high temperatures.
HIGH
FOOD
PRODUCT
ADAPTATION
LOW
COMPUTERS
INTEGRATED
CIRCUITS
LOW
HIGH
Environmental Sensitivity
53
when Tamagotchis and other brands of electronic pets were the

in toy in Japan, every teenager who wanted to fit in bought
one (or more). Knowing this, Japanese companies develop local
products specifically designed to appeal to teens. The next level
is admiration, a higher-level need that can be satisfied through
acts within a group that command respect. At the top of the
Asian hierarchy is status, the esteem of society as a whole. In
part, attainment of high status is character driven. However, the
quest for status also leads to luxury badging, a phrase that
describes consumers who engage in conspicuous consumption
and buy products and brands that others will notice. Support
for Schuttes contention that status is the highest-ranking need
in the Asian hierarchy can be seen in the geographic breakdown
of the $35 billion global luxury goods market. Fully 20 percent
of industry sales are to Japan alone, with another 22 percent of
sales occurring in the rest of the Asia-Pacific region. Nearly half
of all sales revenues of Italys Gucci Group are generated in
Asia.
Influence of Culture on Consumption

Consumption patterns, living styles, and the priority of needs
are all dictated by culture. Culture prescribes the manner in
which people satisfy their desires. Not surprisingly, consumption habits vary greatly. The consumption of beef provides a
good illustration. Some Thai and Chinese do not consume
beef at all, believing that it is improper to eat cattle that work on
farms, thus helping to provide foods such as rice and vegetables. In Japan, the per capita annual consumption of beef
has increased to eleven pounds, still a very small amount when
compared to the more than 100 pounds consumed per capita in
the United States and Argentina.
The eating habits of many people seem exotic to Americans.
The Chinese eat such things as fish stomachs and birds nest
soup(made from birds saliva). The Japanese eat uncooked
seafood, and the Iraqis eat dried, salted locusts as snacks while
drinking. Although such eating habits may seem repulsive to
Americans and Europeans, consumption habits in the West are
just as strange to foreigners. The French eat snails. Americans
and Europeans use honey (bee expectorate, or bee spit) and
blue cheese or Roquefort salad dressing, which is made with a
strong cheese with bluish mold. No society has a monopoly on
unusual eating habits when comparisons are made among
various societies.
Food preparation methods are also dictated by culture preferences. Asian consumers prefer their chicken broiled or boiled
rather than fried. Consequently, the Chinese in Hong Kong
found American-style fried chicken foreign and distasteful.
Not only does culture influence what is to be consumed, but it
also affects what should not be purchased. Muslims do not
purchase chickens unless they have been halalled, and like Jews,
no consumption of pork is allowed. They also do not smoke
or use alcoholic beverages, a habit shared by some strict
Protestants. Although these restrictions exist in Islamic
countries, the situation is not entirely without market possibilities. The marketing challenge is to create a product that fits the
needs of a particular culture. Moussy, a nonalcoholic beer from
Switzerland, is a product that was seen as being able to overcome the religious restriction of consuming alcoholic beverages.
By conforming to the religious beliefs of Islam, Moussy has
become so successful in Saudi Arabia that half of its worldwide
sales are accounted for in that country.
Influence of Culture on Thinking

Processes
In addition to consumption habits, thinking processes are also
affected y culture. When traveling overseas, it is virtually
impossible for a person to observe foreign cultures without
making references, perhaps unconsciously, back to personal
cultural values. This phenomenon is known as the self-reference
criterion. Because of the effect of the SRC, the individual tends
to be bound by his or her own cultural assumptions. It is thus
important for the traveler to recognize how perception of
overseas events can be distorted by the effects of the SRC.
Influence of Culture on Communication

Processes
A country may be classified as either a high-context culture or a
low-context culture. The context of a culture is either high or
54
low in terms of in-depth background information. This

classification provides an understanding of various cultural
orientations and explains how communication is conveyed and
perceived. North America and northern Europe(e.g. Germany,
Switzerland and Scandinavian countries) are examples of lowcontext cultures. In these types of society, messages are explicit
and clear in the sense that actual words are used to convey the
main part of information in communication. The words and
their meanings, being independent entities, can be separated
from the context in which they occur. What is important, then,
is what is said, not how it is said and not the environment
within which it is said.
Japan, France, Spain, Italy, Asia, Africa and the Middle Eastern
Arab nations in contrast, are high-context culture. In such
cultures, the communication may be indirect, and expressive
manner in which the message is delivered becomes critical.
Because the verbal part(i.e. words) does not carry most of the
information, much of the information is contained in the non
verbal part of the message to be communicated. The context of
communication is high because it includes a great deal of
additional information, such as the message senders values,
position, background, and associations in the society. As such,
the message cannot be understood without its context. Ones
individual environment(i.e. physical setting and social circumstances) determines what one says and how one is interpreted
by others. This type of communication emphasizes ones
character and words as determinants of ones integrity, making
it possible for businesspersons to come to terms without
detailed legal paperwork.
Cultures also vary in the manner by which information
processing occurs. Some cultures handle information in a direct,
linear fashion and are thus monochromic in nature. Schedules,
punctuality, and a sense that time forms a purposeful straight
line are indicators of such cultures. Being monochromic,
however, is a matter of degree. Although the Germans, Swiss
and Americans are all monochromic cultures, the Americans are
generally more monochromic than most other societies, and
their fast tempo and demand for instant responses are often
viewed as pushy and impatient.
Other cultures are relatively polychronic in the sense that people
work on several fronts simultaneously instead of pursuing a
single task. Both Japanese and Hispanic cultures are good
examples of a polychronic culture. The Japanese are often
misunderstood and accused by Westerners of not volunteering
detailed information. The truth of the matter is that the
Japanese do not want to be too direct because by saying things
directly they may be perceived as being insensitive and offensive.
The Japanese are also not comfortable in getting right down to
substantive business without first becoming familiar with the
other business party. For them it is premature to discuss
business matters seriously without first establishing a personal
relationship. Furthermore, American businesspersons consider
the failure of the Japanese to make eye contact as a sign of
rudeness, whereas the Japanese do not want to look each other
in the eye because eye contact is an act of confrontation and
aggression.
Subculture
Because of differing cultures, worldwide consumer homogeneity does not exist. Neither does it exist in the United States.
Differences in consumer groups are everywhere. There are white,
black, Jewish, Catholic, farmer, truckdriver, young, old, eastern,
and western consumers, among other numerous groups.
Communication problems between speakers of different
languages are apparent to all, but people who presumably speak
the same language may also encounter serious communication
problems. Subgroups within societies utilize specialized
vocabularies.
In order to understand these diverse groups of consumers,
particular cultures must be examined. As the focus is on a
subgroup within a society, the more appropriate area for
investigation is not culture itself but rather subculture, culture
on a smaller and more specific level.
A subculture is a distinct and identifiable cultural group that has
values in common with the overall society but also has certain
characteristics that are unique to itself. Thus, subcultures are
groups of people within a larger society. Although the various
subcultures share some basic traits of the wider culture, they
also preserve their own customs and lifestyles, making them
significantly different from other groups within the larger
culture of which they are a part. Indonesia, for instance, has
more than 300 ethnic groups, with lifestyles and cultures that
seem thousands of years apart.
There are many different ways to classify subcultures. Although
race or ethnic origin is one obvious way, it is not the only one.
Other demographic and social variables can be just as suitable
for establishing subcultures within a nation.
The degree of intracountry homogeneity varies from one
country to another. In the case of Japan, the society as a whole
is remarkably homogenous. Although some found, the
differentials are not pronounced. There are several reasons why
Japan is a relatively homogenous country. It is a small country
in terms of area, making its population geographically concentrated. National pride and management philosophy also help to
forge a high degree of unity. As a result, people work hard
together harmoniously to achieve the same common goals. The
need to work hard together was initially fostered by the need to
repair the economy after World War II, and the lessons learned
from this experience have not been forgotten.
Canada, in contrast, is a large country in terms of geography. Its
population, though much smaller than that of Japan, is much
more geographically dispersed, and regional differences exist
among the provinces, each having its own unique characteristics.
Furthermore, ethnic differences are clearly visible to anyone who

travels across Canada.
Given the fact that each subcultural group is a part of the larger
culture while possessing its own unique cultural, demographic,
and consumption characteristics, a marketing question is the
language that should be used so as to effectively appeal to a
particular subculture. According to one study, Spanish language
advertising positively affected Hispanic consumers in the United
States by signaling solidarity with the Hispanic community.
However, exclusive use of Spanish in advertising also had a
negative effect since it appeared to arouse Hispanic insecurities
about language usage. Therefore, language choice requires more
research.
Culture Values
Underlying the cultural diversity that exists among countries are
fundamental differences in cultural values. The most useful
information on how cultural values influence various types of
business and market behaviour comes from a seminal work by
Geert Hofstede. Studying over 90,000 people in 66 countries, he
found that the cultures of the nations studied differed along
four primary dimensions and that various business and
consumer behaviour patterns can be closely linked to these four
primary dimensions. Hofstedes approach has been widely and
successfully applied to international marketing and research by
others has reaffirmed these linkages. Research evidence indicates
that the four cultural dimensions can be used to classify
countries into groups that will respond in a similar way in
business and market contexts. The four dimensions are:
1. The Individualism/Collective Index(IDV), which focuses on
self-orientation.
2. The Power Distance Index(PDI), which focuses on authority
orientation.
3. The Uncertainty Avoidance Index(UAI), which focuses on
risk orientation.
4. The Masculinity/Femininity Index(MAS), which focuses on
achievement orientation.
Individualism/Collective Index(IDV)
The Individualism/Collective Index refers to the preference of
behaviour that promotes one self-interest. Cultures that are
high in IDV reflect an Imentality and tend to reward and
accept individual initiative, while those low in individualism
reflect a we mentality and generally subjugate the individual to
the group. This does not mean that individuals fail to identify
with groups when a culture scores high on IDV, but rather that
personal initiative is accepted and endorsed. Individualism
pertains to societies in which the ties between individuals are
loose; everyone is expected to look after himself or herself and
his or her immediate family. Collectivism as its opposite
pertains to societies in which people from birth onward are
integrated into strong, cohesive groups, which throughout
peoples lifetime continue to protect them in exchange for
unquestioning loyalty.
Power Distance Index(PDI)
The power distance index measures the tolerance of social
inequality, that is, power inequality between superiors and
subordinates within a social system. Cultures with high PDI
55
The cultural context and the manner in which the processing of

information occurs can be combined to develop a more precise
description of how communication takes place in a particular
country. Germany, for example, is a monochromic and low
context culture. France, in comparison, is a polychronic and high
context culture. A low context German may insult a high
context French counterpart by giving too much information
about what is already known. Or a low context German
becomes upset when he feels that he does not get enough
details from the high context Frenchman.
scores tend to be hierarchical, with members citing force,

manipulation and inheritance as sources of power. Those with
low scores, on the other hand, tend to value equality and cite
knowledge and respect as sources of power. Thus, cultures with
high PDI scores are more apt to have a general distrust of
others since power is seen to rest with individuals and is
coercive rather than legitimate. High power scores tend to
indicate a perception of differences between superior and
subordinate and a belief that those who hold power are entitled
to privileges. A low score reflects the opposite attitude.
Uncertainty Avoidance Index(UAI)

The uncertainty avoidance index explains the intolerance of
ambiguity and uncertainty among members of a society.
Cultures with high UAI scores are highly intolerant of ambiguity, and as a result tend to be distrustful of new ideas or
behaviours. They tend to have a high level of anxiety and stress
and a concern with security and rule following. Accordingly, they
dogmatically stick to historically tested patterns of behaviour,
which in the extreme become inviolable rules. Those with very
high level of UAI thus accord a high level of authority to rules
as a means of avoiding risk. Cultures scoring low in uncertainty
avoidance are associated with a low level of anxiety and stress, a
tolerance of deviance and dissent, and a willingness to take
risks. Thus, those cultures low in UAI take a more empirical
approach to understanding and knowledge while those high in
UAI seek a more absolute truth.
Masculinity/Femininity (MAS)
The masculinity/femininity index refers to ones desire for
achievement and entrepreneurial tendencies, and the extent to
which the dominant values in society are masculine.
Assertiveness, the acquisition of money and not caring for
others, and the quality of life or people are all cultural traits in
countries with high MAS scores. Low-scoring cultures are
associated with fluid sex roles, equality between the sexes, and
an emphasis on service, interdependence, and people. Some
cultures allow men and women to take on many different roles,
while others make sharp divisions between what men should
do and what women should do. In societies that make a sharp
division, men are supposed to have dominant, assertive roles
and women more service-oriented, caring roles. An interesting
study showed that tipping appeared to be less prevalent in
countries with feminine values (low MAS scores) that emphasized social relationships compared with countries with
masculine values (high MAS scores) that emphasized achievement and economic relationships.
56
Business customs are as much a cultural element of a society as

is the language. Culture not only establishes the criteria for dayto-day business behavior but also forms general patterns of
attitude and motivation. Executives are to some extent captives
of their cultural heritages and cannot totally escape language,
heritage, political and family ties, or religious backgrounds. One
report notes that Japanese culture, permeated by Shinto
precepts, is not something apart from business but determines
its very essence. Although international business managers may
take on the trappings and appearances of the business behavior
of another country, their basic frame of references is most likely
to be that of their own people.
In the United States, for example, the historical perspective of
individualism and winning the West seems to be manifest in
individual wealth or corporate profit being dominant measures
of success. Japans lack of frontiers and natural resources and its
dependence on trade have focused individual and corporate
success criteria on uniformity, subordination to the group, and
societys ability to maintain high levels of employment. The
feudal background of southern Europe tends to emphasize
maintenance of both individual and corporate power and
authority while blending those feudal traits with paternalistic
concern for minimal welfare for workers and other members of
society. Various studies identify North Americans as individualists, Japanese as consensus-oriented and committed to the
group, and central and southern Europeans as elitists and rank
conscious. While these descriptions are stereotypical, they
illustrate cultural differences that are often manifest in business
behavior and practices.
A lack of empathy for and knowledge of foreign business
practices can create insurmountable barriers to successful
business relations. Some businesses plot their strategies with
the idea that counterparts of other business cultures are similar
to their own and are moved by similar interests, motivations,
and goals-that they are just like us. Even though they may be
just like us in some respects, enough differences exist to cause
frustration, miscommunication, and, ultimately, failed business
opportunities if they are not understood and responded to
properly.
Knowledge of the business culture, management attitudes, and
business methods existing in a country and a willingness to
accommodate the differences are important to success in an
international market. Unless marketers remain flexible in their
own attitudes by accepting differences in basic patterns of
thinking, local business tempo, religious practices, political
structure, and family loyalty, they are hampered, if not prevented, from reaching satisfactory conclusions to business
transactions. In such situations, obstacles take many forms, but
it is not unusual to have one negotiators business proposition
accepted over anothers simply because that one understands
us.
UNIT 3
This chapter focuses on matters specifically related to the

business-environment. Besides an analysis of the need for
adaptation, it will review the structural elements, attitudes, and
behavior of international business processes, concluding with a
discussion of ethics and socially responsible decisions.
Required Adaptation
Adaptation is a key concept in international marketing and
willingness to adapt is a crucial attitude. Adaptation, or at least
accommodation, is required on small matters as well as large
ones. In fact, the small, seemingly insignificant situations are
often the most crucial. More than tolerance of an alien culture is
required. There is a need for affirmative acceptance, that is, open
tolerance of the concept different but equal Through such
affirmative acceptance, adaptation becomes easier because
empathy for anothers point of view naturally leads to ideas for
meeting cultural differences.
As a guide to adaptation, there are ten basic criteria that all who
wish to deal with individuals, firms, or authorities in foreign
countries should be able to meet. They are: (1) open tolerance,
(2) flexibility, (3) humility, (4) justice/fairness, (5) ability to
adjust to varying tempos, (6) curiosity/interest, (7) knowledge
of the country, (8) liking for others, (9) ability to command
respect, and (10) ability to integrate oneself into the environment. In short, add the quality of adaptability to the qualities
of a good executive for a composite of the perfect international
marketer. It is difficult to argue with these ten items. As one
critic commented, They border on the 12 Boy Scout laws.
However, as we complete this chapter we see that it is the
obvious that we sometimes overlook.
Degree of Adaptation
Adaptation does not require business executives to forsake their
ways and change to conform to local customs; rather, executives
must be aware of local customs and be willing to accommodate
those differences that can cause misunderstanding. Essential to
effective adaptation is awareness of ones own culture and the
recognition that differences in others can cause anxiety, frustration, and misunderstanding of the hosts intentions. The
self-reference criterion (SRC) is especially operative in business
customs. If we do not understand our foreign counterparts
customs, we are more likely to evaluate that persons behavior in
terms of what is acceptable to us.
The key to adaptation is to remain American but to develop an
understanding and willingness to accommodate differences that
exist. A successful marketer knows that in China it is important
to make points without winning arguments; criticism, even if
asked for, can cause a host to lose face. In Germany, it is
considered discourteous to use first names unless specifically
invited to do so; always address a person as Hen; Frau, or
Fraulein with the last name. In Brazil, do not be offended by
the Brazilian inclination to touch during conversation. Such a
57
LESSON 9:
BUSINESS CUSTOMS IN GLOBAL MARKETING
custom is not a violation of your personal space but rather the

Brazilian way of greeting, emphasizing a point or as a gesture
of goodwill and friendship.
A Chinese, German, or Brazilian does not expect you to act like
one of them. After all, you are not Chinese, German, or
Brazilian, but American, and it would be foolish for an
American to give up the ways that have contributed so notably
to American success. It would be equally foolish for others to
give up their ways. When different cultures meet, open tolerance
and a willingness to accommodate each others differences are
necessary. Once a marketer is aware of the possibility of cultural
differences and the probable consequences of failure to adapt or
accommodate, the seemingly endless variety of customs must
be assessed. Where does one begin? Which customs should be
absolutely adhered to? Which others can be ignored? Fortunately, among the many obvious differences that exist between
cultures, only a few are troubling.
Imperatives, Adiaphora and Exclusives

Business customs can be grouped into imperatives, customs that
must be recognized and accommodated; adiaphora, customs to
which adaptation is optional; and exclusives, customs in which
an outsider must not participate. An international marketer
must appreciate the nuances of cultural imperatives, cultural
adiaphora, and cultural exclusives.
Cultural Imperatives
Cultural imperatives refer to the business customs and expectations that must be met and conformed to or avoided if
relationships are to be successful. Successful businesspeople
know the Chinese word guan-xi, the Japanese ningen kankei, or
the Latin American compadre. All refer to friendship, human
relations, or at taining a level of trust. They also know there is
no substitute for establishing friendship in some cultures
before effective business negotiations can begin.
Informal discussions, entertaining, mutual friends, contacts,
and just spending time with others are ways guan-xi, ningen
kankei, compadre, and other trusting relationships are developed. In those cultures where friendships are a key to success,
the businessperson should not slight the time required for their
development. Friendship motivates local agents to make more
sales and friendship helps establish the right relationship with
end users, leading to more sales over a longer period. Naturally,
after-sales service, price, and the product must be competitive,
but the marketer who has established guan-xi, ningen kankei, or
compadre has the edge. Establishing friendship is an imperative
in many cultures.3 If friendship is not established, the marketer
risks not earning trust and acceptance, the basic cultural prerequisites for developing and retaining effective business
relationships.
In some cultures a persons demeanor is more critical than in
other cultures. For example, it is probably never acceptable to
lose your patience, raise your voice, or correct someone in public
however frustrating the situation. In some cultures such
behavior would only cast you as boorish, but in others it could
end a business deal. In China, Japan, and other Asian cultures it
is imperative to avoid causing your counterpart to lose face.
In China to raise your voice, to shout at a Chinese person in
58
public, or to correct them in front of their peers will cause them

to lose face.
A complicating factor in cultural awareness is that what may be
an imperative to avoid in one culture is an imperative to do in
another. For example, in Japan prolonged eye contact is
considered offensive and it is imperative that it be avoid.
However, with Arab and Latin American executives it is
important to make strong eye contact or you run the risk of
being seen as evasive and untrustworthy.
Cultural Adiaphora
Cultural adiaphora relates to areas of behavior or to customs

that cultural aliens may wish to conform to or participate in but
that are not required; in other words, it is not particularly
important but permissible to follow the custom in question.
The majority of customs fit into this category. One need not
greet another man with a kiss (a custom in some countries), eat
foods that disagree with the digestive system (so long as the
refusal is gracious), or drink alcoholic beverages (if for health,
personal, or religious reasons). On the other hand, a symbolic
attempt to participate in adiaphora is not only acceptable but
also may help to establish rapport. It demonstrates that the
marketer has studied the culture. Japanese do not expect a
Westerner to bow and to understand the ritual of bowing
among Japanese, yet a symbolic bow indicates interest and
some sensitivity to their culture that is acknowledged as a
gesture of goodwill. It may help pave the way to a strong,
trusting relationship.
For the most part adiaphora are customs that are optional,
although adiaphora in one culture may be perceived as imperative in another. In some cultures one can accept or tactfully and
politely reject an offer of a beverage, while in other cases the
offer of a beverage is a ritual and not to accept is to insult. In
the Czech Republic an aperitif or other liqueur offered at the
beginning of a business meeting, even in the morning, is a way
to establish good will and trust. It is a sign that you are being
welcomed as a friend. It is imperative that you accept unless you
make it clear to your Czech counterpart that the refusal is
because of health or religion.7 Chinese business negotiations
often include banquets at which large quantities of alcohol are
consumed in an endless series of toasts. It is imperative that
you participate in the toasts with a raised glass of the offered
beverage but to drink is optional. Your Arab business associates
will offer coffee as part of the important ritual of establishing a
level of friendship and trust; you should accept even if you only
take a ceremonial sip.S Cultural adiaphora are the most visibly
different customs and thus more obvious. Often, it is compliance with the less obvious imperatives and exclusives that is
more critical.
Cultural Exclusives
Cultural exclusives are those customs or behavior patterns

reserved exclusively for the locals and from which the foreigner
is excluded. For example, a Christian attempting to act like a
Muslim would be repugnant to a follower of Mohammed.
Equally offensive is a foreigner criticizing a countrys politics,
mores, and peculiarities (that is, peculiar to the foreigner) even
though locals may, among themselves, criticize such issues.
There is truth in the old adage, Ill curse my brother but, if
Foreign managers need to be perceptive enough to know when

they are dealing with an imperative, an adiaphora, or an
exclusive and have the adaptability to respond to each. There are
not many imperatives or exclusives, but most offensive
behavior results from not recognizing them. It is not necessary
to obsess over committing a faux pas. Most sensible
businesspeople will make allowances for the occasional misstep.
But the fewer you make the smoother the relationship will be,
When in doubt, rely on good manners and respect for those
with whom you are associating.
Crossing Borders 1
Jokes Dont Travel Well
Cross-cultural humor has its pitfalls. What is funny to you may not be
funny to others. Humor is culturally specific and thus rooted in peoples
shared experiences. Here are examples:
President Jimmy Carter was in Mexico to build bridges and mend fences.
On live television President Carter and President Jose Lopez Portillo were
giving speeches. In response to a comment by President Portillo, Carter
said, We both have beautiful and interesting wives, and we both run
several kilometers every day. In fact, I first acquired my habit of running
here in Mexico City. My first running course was from the Palace of Fine
Arts to the Majestic Hotel where my family and I were staying. In the
midst of the Folklorico performance) I discovered that I was afflicted with
Montezumas Re-venge; Among Americans this may have been an
amusing comment but it was not funny to the Mexican. Editorials in
Mexico and U.S. newspapers commented on the in- appropriateness of the
remark.
Most jokes; even though well intended, dont translate well. Sometimes a
translator can help you out. One speaker, in describing his experience,
said,1 began my speech with a joke that took me about, two minutes to
tell. Then my interpreter translated my story. About thirty second later
the Japanese, audience laughed loudly. I continued with my talk which
seemed well received, he said, but at the end, just to make sure, I
asked the, interpreter, How did you translate my joke so quickly? The
interpreter replied, Oh I did not translate your story at all. I did not
understand it. I simply said our foreign speaker has just told a joke so
would you all please laugh.
Who can say with certainty that anything is funny? Laughter, more often
than not, symbolizes embarrassment, nervousness, or even scorn. Hold
your humor until you are comfortable with the culture.
Methods of Doing Business

Because of the diverse structures, management attitudes, and
behaviors encountered in international business, there is
considerable latitude in ways business is conducted. No matter
how thoroughly prepared a marketer may be when approaching
a foreign market, a certain amount of cultural shock occurs
when differences in contact level, communications emphasis,
tempo, and formality of foreign businesses are encountered.
Ethical standards are likely to differ, as will the negotiation
emphasis. In most countries, the foreign trader is also likely to
encounter a fairly high degree of government involvement.

Among the four dimensions of Hofstedes cultural values
discussed in Chapter 4 Individualism/Collectivism (IDV) and
Power Distance (PDI) are especially relevant in examining
methods of doing business among countries.
Sources and Level of Authority

Business size, ownership, public accountability, and cultural
values that determine the prominence of status and position
(PDI) combine to influence the authority structure of business.
In high PDI countries like Mexico and Malaysia, understanding
the rank and status of clients and business partners is muchmore important than in more egalitarian (low PDI) societies like
Denmark and Israel. In high PDI countries subordinates are
not likely to contradict bosses, but in low PDI countries they
often do. Although the international businessperson is
confronted with a variety of authority patterns, most are a
variation of three typical patterns: top-level management
decisions; decentralized decisions; and committee or group
decisions.
Top-level management decision making is generally found in
those situations where family or close ownership gives absolute
control to owners and where businesses are small enough to
make such centralized decision making possible. In many
European businesses, such as in France, decision-making
authority is guarded jealously by a few at the top who exercise
tight control. In other countries, such as Mexico and Venezuela,
where a semi-feudal, land-equals-power heritage exists, management styles are characterized as autocratic and paternalistic.
Decision-making participation by middle management tends to
be de-emphasized; dominant family members make decisions
that tend to please the family members more than to increase
productivity. This is also true for government-owned companies where professional managers have to follow decisions
made by politicians, who generally lack any working knowledge
about management. In Middle Eastern countries, the top man
makes all decisions and prefers to deal only with other executives with decision-making powers. There, one always does
business with an individual per se rather than an office or title.
Crossing Borders 2
Meishi Presenting Business Card in Japan
In Japan the business card, or Meishi, is the executives trademark. It is
both a mini re-sume and a friendly deity that draws people together. No
matter how many times you have talked with a businessperson by phone
before you actually meet, business cannot really begin until you formally
exchange cards.
The value of a Meishi cannot be overemphasized; up to 12 million are
exchanged daily and a staggering4. 4 billion annually. For a
businessperson to make a call or re-ceive a visitor without and is like a
Samurai going off to battle without his sword. There are a variety of ways
to present a card, depending on the givers personality and style:
Crab style : Held out between the index and middle fingers.
Pincer : Clamped between the thumb and index finger.
Pointer : Offered with the index finger pressed along the edge.
Upside down : The name is facing away from the recipient
59
you curse him, youll have a fight. There are few cultural traits
reserved exclusively for locals, but a foreigner must carefully
refrain from participating in those that are reserved.
Platter fashion : Served in the palm of the hand.

The card should be presented during the earliest stages of introduction, so
the Japanese recipient will be able to determine your position and rank and
know how to respond to you. The normal procedure is for the Japanese to
hand you their name card and accept yours at the same time. They read
your card and then formally greet you either by bowing of shaking hands or
both.
Not only is there a way to present a card, there is also a way of received a
car. It makes a good impression to receive a card in both hands, especially
when the other party is senior in age or status. Do not put the card away
before reading or your will insult the other person, and write on a persons
card in their presence as this may cause offenses.
As businesses grow and professional management develops,

there is a shift toward decentralized management decision
making. Decentralized decision making allows executives at
different levels of management authority over their own
functions. This is typical of large-scale businesses with highly
developed management systems such as those found in the
United States. A trader in the United States is likely to be dealing
with middle management, and title or position generally takes
precedence over the individual holding the job.
Committee decision making is by group or consensus. Committees may operate on a centralized or decentralized basis, but
the concept of committee management implies something
quite different from the individualized functioning of the top
management and decentralized decision-making arrangements
just discussed. Because Asian cultures and religions tend to
emphasize harmony and collectivism, it is not surprising that
group decision-making predominates there. Despite the
emphasis on rank and hierarchy in Japanese social structure,
business emphasizes group participation, group harmony, and
group decision making-but at top management level.
The demands of these three types of authority systems on a
marketers ingenuity and adaptability are evident. In the case of
the authoritative and delegated societies, the chief problem
would be to identify the individual with authority. In the
committee decision setup, it is necessary that every committee
member be convinced of the merits of the proposition or
product in question. The marketing approach to each of these
situations differs.
Crossing Borders 3
The Engle : An Exclusive in Mexico
According to legend, the site of the Aztec city of tenochtitlan, now
Mexico city, was revealed to its founders by an eagle bearing a snake in
its claws and alighting on a cactus. This image is now the official seal of
the country and appears on its flag. Thus, Mexican authorities were
furious to discover their beloved eagle splattered with catsup by an
interloper from north of the border: McDonalds.
To commemorate Mexicos Flag Day, two golden Arches outlets in
Mexico City papered their trays with placemats embossed with a
representation of the national emblem. Eagle eyed government agents
swooped down and confiscated the disrespectful placemats. A senior
60
partner in McDonalds of Mexico explained, Our intention was never to

give offense. It was to help Mexicans learn about their culture.
It is not always clear what symbols or what behavior patterns in a country
are reserved exclusively for locals. In McDonaldss case there is no
question that the use of the eagle was considered among. Mexicans as an
exclusive for Mexicans only.
Management Objectives and Aspirations

The training and background (i.e., cultural environment) of
managers significantly affect their personal and business
outlooks. Society as a whole establishes the social rank or status
of management, and cultural background dictates patterns of
aspirations and objectives among businesspeople. These
cultural influences affect the attitude of managers toward
innovation, new products, and conducting business with
foreigners. To fully understand anothers management style,
one must appreciate an individuals objectives and aspirations
that are usually reflected in the goals of the business organization and in the practices that prevail within the company. In
dealing with foreign business, a marketer must be particularly
aware of the varying objectives and aspirations of management.
Personal Goals
In the United States, we emphasize profit or high wages while

in other countries security, good personal life, acceptance, status,
advancement, or power may be emphasized. Individual goals
are highly personal in any country, so it is hard to generalize to
the extent of saying that managers in anyone country always
have a specific orientation. For example, studies have shown
that Kuwaiti managers are more likely than American managers
to make business decisions consistent with their own personal
goals. Swedish managers were found to express little reluctance
in bypassing the hierarchical line, while Italian managers believed
that bypassing the hierarchical line was a serious offense.
Security and Mobility
Personal security and job mobility relate directly to basic human

motivation and therefore have widespread economic and social
implications. The word security is somewhat ambiguous and
this very ambiguity provides some clues to managerial variation.
To some, security means good wages and the training and
ability required for moving from company to company within
the business hierarchy; for others, it means the security of
lifetime positions with their companies; to still others, it means
adequate retirement plans and other welfare benefits. In
European companies, particularly in the countries late in
industrializing such as France and Italy, there is a strong
paternalistic orientation, and it is assumed that individuals will
work for one company for the majority of their lives. For
example, in Britain managers place great importance on
individual achievement and autonomy, whereas French
managers place great importance on competent supervision,
sound company policies, fringe benefits, security, and comfortable working conditions. There is much less mobility among
French managers than British.
Personal Life
For many individuals, a good personal life takes priority over

profit, security, or any other goal. In his worldwide study of
To the Japanese, personal life is company life. Many Japanese

workers regard their work as the most important part of their
overall lives. Metaphorically speaking, such workers may even
find themselves working in a dream. The Japanese work ethic
maintenance of a sense of purpose-derives from company
loyalty and frequently results in the Japanese employee maintaining identity with the corporation.
Social Acceptance
In some countries, acceptance by neighbors and fellow workers

appears to be a predominant goal within business. The Asian
outlook is reflected in the group decision-making so important
in Japan, and the Japanese place high importance on fitting in
with their group. Group identification is so strong in Japan that
when a worker is asked what he does for a living, he generally
answers by telling you he works for Sumitomo or Mitsubishi or
Matsushita, rather than that he is a chauffeur, an engineer, or a
chemist.
Power
Although there is some power-seeking by business managers

throughout the world, power-seems to be a more important
motivating force in South American countries. In these
countries, many business leaders are not only profit-oriented
but also use their business positions to become social and
political leaders.
Crossing Borders 4
Business : Protocol in a Unified Europe
Now that 1992 has come and gone and the European community is now a
single market, does it mean that all differences have been wiped away? For
some of the legal differences, yes! For cultural differences, not!
There is always the issue of language and meaning even when you both
speak English. English and American English are often miles apart. If
you tell someone his presentation was quite good. An American will
beam with pleasure. A brat will ask you what was working with it your
have just told him politely that he barely scraped by. Then there is the
matter of humor. The anecdote you open a meeting with may fly well with
your American audience; however, the French will smile the Belgians will
laugh, the Dutch will be Puzzled, and the Germans will take you
literally. Humor doesnt travel well.
And then there are the French, Who are very attentive to hierarchy and
ceremony. When first meeting with a French speaking business person.
Stick with monsieur, Madame, or mademoiselle; the use of first names is
disrespectful to the French. If you dont speak French fluently, apologize.
Such apology shows general respect for the language and dismisses any
stigma of American arrogance.
The formality of dress can vary with each county also. The Brit and the
Dutchman will take off their jackets and literally roll up their sleeves;
they mean to get down to business. The Spaniard will loosen his tie. While
the German disapproves he thinks they look sloppy and un-business like
and he keeps his coat on throughout the meeting. So does the Italian, but
that was because he dressed especially for the look of the meeting.
With all that, did the meeting decide anything? It was, after all a first
meeting. The Brits were just exploring the terrain, checking out the broad
perimeters and all that. The French were assessing the other payers
strength and weaknesses and deciding what position to take at the next
meting. The Italian also wont have taken it too seriously. For them it was
a meeting to arrange the meeting agenda for the real meeting. Only the
Germans will have assumed it was what it seemed and be surprised when
the next meeting starts open ended.
Communications Emphasis
Probably no language readily translates into another because the
meanings of words differ widely among languages. Even
though it is the basic communication tool of marketers trading
in foreign lands, managers, particularly from the United States,
often fail to develop even a basic understanding of a foreign
language, much less master the linguistic nuances that reveal
unspoken attitudes and information. One writer comments
even a good interpreter doesnt solve the language problem.
Seemingly similar business terms in English and Japanese often
have different meanings. In fact, the Japanese language is so
inherently vague that even the well educated have difficulty
communicating clearly among them-selves. A communications
authority on the Japanese language estimates that the Japanese
are able to fully understand each other only about 85 percent of
the time. The Japanese often prefer English-language contracts
where words have specific meanings.
The translation and interpretation of clearly worded statements
and common usage is difficult enough, but when slang is
added the task is almost impossible. In an exchange between an
American and a Chinese official, the American answered
affirmatively to a Chinese proposal with, Its a great idea, Mr.
Li, but whos going to put wheels on it? The interpreter, not
wanting to lose face but not understanding, turned to the
Chinese official and said, And now the American has made a
proposal regarding the automobile industry; the entire
conversation was disrupted by a misunderstanding of a slang
expression.
The best policy when dealing in other languages, even with a
skilled interpreter, is to stick to formal language patterns. The
use of slang phrases puts the interpreter in the uncomfortable
position of guessing at meanings. Foreign language skills are
critical in all negotiations, so it is imperative to seek the best
possible personnel. Even then, especially in translations
involving Asian languages, misunderstandings occur.
Linguistic communication, no matter how imprecise, is explicit,
but much business communication depends on implicit
messages that are not verbalized. E. T. Hall, professor of
anthropology and, for decades, consultant to business and
government on intercultural relations, says, In some cultures,
messages are explicit; the words carry most of the information.
61
individual aspirations, David McClelland discovered that the

culture of some countries stressed the virtue of a good
personal life as being far more important than profit or
achievement. The hedonistic outlook of ancient Greece explicitly
included work as an undesirable factor that got in the way of
the search for pleasure or a good personal life. Perhaps at least
part of the standard of living that we enjoy in the United States
today can be attributed to the hardworking Protestant ethic
from which we derive much of our business heritage.
In other cultures . . . less information is contained in the verbal

part of the message since more is in the context.
Hall divides cultures into high-context and low-context cultures.
Communication in a high-context culture depends heavily on
the context or nonverbal aspects of communication, whereas
the low-context culture depends more on explicit, verbally
expressed Communications.
Recent studies have identified a strong relationship between
Halls high/low context and Hofstedes individualism/
collectivism (IDY) and power distance (PDI) indices. For
example, low context American culture scores relatively low on
power distance and high on individuaIisnr,-whilehigh;context:Arab-cultures-scoreirigh-on:power distance and
low on individualism. Managers in general probably function
best at a low context level because they are accustomed to
reports, contracts, and other written communications.
In a low-context culture one-gets down to business quickly. In a
high-context culture it takes considerably longer to conduct
business because of the need to know more about a
businessperson before a relationship develops. High-context
businesspeople simply do not know how to handle a lowcontext relationship with other people. Hall suggests that, in
the Middle East, if you arent willing to take the time to sit
down and have coffee with people, you have a problem. You
must learn to wait and not be too eager to talk business. You
can ask about the family or ask, How are you feeling? but
avoid too many personal questions about wives because people
are apt to get suspicious. Learn to make what we call chitchat. If
you dont, you cant go to the next step. Its a little bit like a
courtship. Even in low-context cultures, our communication is
heavily dependent on our cultural context. Most of us are not
aware of how dependent we are on the context, and, as Hall
suggests, Since much of our culture operates outside our
awareness, frequently we dont even know what we know.
As an example of this phenomenon, one study discusses
hinting, a common trait among Chinese, which the researcher
describes as somewhere between verbal and nonverbal
communications. In China, comments such as, I agree,
might mean I agree with 15 percent of what you say; we
might be able to could mean not a chance; or we will
consider might really mean we will, but the real decision
maker will not. The Chinese speaker often feels that such
statements are very blunt with a clear hint; unfortunately, the
U.S. listener often does not get the point at all. Prior experience,
the context within which a statement is made, and who is
making the comment are all - important in modifying meaning.
Probably every businessperson from America or other relatively
low-context countries who has had dealings with counterparts
in high-context countries can tell stories about the confusion on
both sides because of the different perceptual frameworks of
the communication process. It is not enough to master the
basic language of a country; the astute marketer must have a
mastery over the language of business and the silent languages
of nuance and implication. Communication mastery, then, is
not only the mastery of a language but also a mastery of
customs and culture. Such mastery develops only through long
association.
62
Crossing Borders 5
You Dont Have to be a Hollywood Star to Wear
Dark Glasses
Arabs may watch the pupils of your eyes to judge your responses to
different topics.
A psychologist at the university of Chicago discovered that the pupil is a
very sensitive indicator of how people responds to a situation. When you
are interested in some thing, your pupils dilate; if your hear something
your dont like, your eyes tend to contract, the Arabs have known about the
pupil response for hundreds if not thousand s of years, and because people
cant controls the response of their eyes, many Arabs wear dark glasses,
even indoors.
These are people reading the personal interaction on a second to second
basis. By watching the pupils, they can respond rapidly to mood changes,
that one of the reasons why they use a close conversations distance than
Americans do. At about five feet, the normal distance between two
Americans who are talking, we have a hard time following, eye movement.
But if your use an Arab distance, about two feet, you can watch the pupil
of the eye.
Direct eye contact for an American is difficult to achieve because we are
taught in the United States not to star, not to look at the eyes that
carefully. If you stare at some one, it is too intense, too sexy, or too
hostile. It also may mean that we are not totally tuned in to the situation.
May be we should all wear dark glasses.
Formality and Tempo

The breezy informality and haste that seem to characterize the
American business relationship appear to be American
exclusives that businesspeople from other countries not only
fail to share but also fail to appreciate. This apparent informality,
however, does not indicate a lack of commitment to the job.
Comparing British and American business managers, an
English executive commented about the American managers
compelling involvement in business, At a cocktail party or a
dinner, the American is still on duty.
Even though Northern Europeans seem to have picked up
some American attitudes in recent years, do not count on them
being Americanized. As one writer says, While using first
names in business encounters is regarded as an American vice in
many countries, nowhere is it found more offensive than in
France, where formality still reigns. Those who work side by
side for years still address one another with formal pronouns.
France ranks fairly high on the power distance value orientation
(PDI) scale while the United States ranks much lower, and such
differences can lead to cultural misunderstandings. For-example,
the-formalities-of-French-business practices as opposed to
Americans casual manners are symbols of the French need to
show rank and Americans tendency to downplay it. Thus, the
French are dubbed snobbish by Americans, while the French
consider Americans Philistines.
Haste and impatience are probably the most common mistakes
of North Americans attempting to trade in the Middle East.
Most Arabs do not like to embark on serious business
discussions until after two or three opportunities to meet the
individual they are dealing with; negotiations are likely to be
Crossing Borders 6
You Say You Speak English?
The English speak English and North Americans speak English, but can
the two com-municate? It is difficult unless you understand that in
England:
Newspapers are sold at bookstalls.
The ground floor is the main floor, while the first floor is what we call the
second, and so on up the building.
An apartment house is a block of flats.
You will be putting your clothes not in a closet, but in a cupboard.
A closet usually refers to the W.C. or water closet, which is the toilet.
When one of your British friends says she is going to spend a penny, she
is going to the ladies room.
A bathing dress or bathing costume is what the British call a bathing suit,
and for those who want to, go shopping, it is essential to know that a tunic
is a blouse; a stud is a collar button, nothing more; and garters are
suspenders.
Suspenders are braces;
If you want to buy a sweater, you should ask for a jumper or a jersey as
the recognizable item will be marked in British clothing stores.
A ladder is not used for climbing but refers to a run in a stocking.
If you called up someone, it means to-your British-friend1hatyou have
drafted the personprobably for military service. To ring someone up is
to telephone them.
You put your packages in the boot of your car not the trunk.
When you table something, you mean you want to discuss it, not postpone it
as in the United States.
Any reference by you to an M.D. will probably not bring a doctor. The
term means mental deficient in Britain.
When the desk clerk asks what time you want to be knocked up in the
morning, he is only referring to your wake up call.
A billion means a million (1000000000000) and not a thousand
millions as in the United States.
Marketers who expect maximum success have to deal with

foreign executives in ways that are acceptable to the foreigner.
Latin Americans depend greatly on friendships but establish
these friendships only in the South American way: slowly, over a
considerable period of time. A typical Latin American is highly
formal until a genuine relationship of respect and friendship is
established. Even then the Latin American is slow to get down
to business and will not be pushed. In keeping with the culture,
manana (tomorrow) is good enough. How people perceive time
helps to explain some of the differences between U.S. managers

and those from other cultures.
P-Time Versus M-Time

North Americans are a more time-bound culture than Middle
Eastern and Latin cultures. Our stereotype of those cultures is
they are always late, and their view of us is you are always
prompt. Neither statement is completely true though both
contain some truth. What is true, however, is that we are a very
time-oriented society-time is money to us-whereas in other
cultures time is to be savored, not spent.
Edward Hall defines two time systems in the world: monochromic and polyphonic time. M-time, or monochromic time,
typifies most North Americans, Swiss, Germans, and Scandinavians. These Western cultures tend to concentrate on one thing
at a time. They divide time into small units and are concerned
with promptness. M-time is used in a linear way and it is
experienced as being almost tangible in that we save time, waste
time, bide time, spend time, and lose time. Most low-context
cultures operate on M-time. P-time, or polychronic time, is
more dominant in high-context cultures where the completion
of a human transaction is emphasized more than holding to
schedules. P-time is characterized by the simultaneous occurrence of many things and by a great involvement with
people. P-time allows for relationships to build and context to
be absorbed as parts of high-context cultures.
One study comparing perceptions of punctuality in the United
States and Brazil found that Brazilian timepieces were less
reliable and public clocks less available than in the United States.
Researchers also found that Brazilians more often described
themselves as late arrivers, allowed greater flexibility in defining
early and late, were less concerned about being late, and were
more likely to blame external factors for their lateness than were
Americans.
The American desire to get straight to the point, to get down to
business, and other indications of directness are all manifestations of M-time cultures. The P-time system gives rise to looser
time schedules, deeper involvement with individuals, and a
wait-and see-what-develops attitude. For example, two Latins
conversing would likely opt to be late for their next appointments rather than abruptly terminate the conversation before it
came to a natural conclusion. P-time is characterized by a much
looser notion of on time or late. Interruptions are routine;
delays to be expected. It is not so much putting things off until
manana but the concept that human activity is not expected to
proceed like clockwork.
Most cultures offer a mix of P-time and M-time behavior, but
have a tendency to be either more P-time or M-time in regard to
the role time plays. Some are similar to Japan, where appointments are adhered to with the greatest M-time precision but
P-time is followed once a meeting begins. The Japanese see U.S.
businesspeople as too time bound and driven by schedules and
deadlines, which thwart the easy development of friendships.
The differences between M-time and P-time are reflected in a
variety of ways throughout a culture.
When businesspeople from M-time and P-time meet, adjustments need to be made for a harmonious relationship. Often
63
prolonged. Arabs may make rapid decisions once they are

prepared to do so, but they do not like to be rushed and they
do not like deadlines. The managing partner of the Kuwait
office of KMPG Peat Marwick LLP says of the flying-visit
approach of many American businesspeople, What in the
West might be regarded as dynamic activity-the Ive only got a
day here approach-may well be regarded here as merely rude.
clarity can be gained by specifying tactfully, for example, whether

a meeting is to be on Mexican time or American time. An
American who has been working successfully with the Saudis
for many years says he has learned to take plenty of things to do
when he travels. Others schedule appointments in their offices
so they can work until their P-time friend arrives. The important
thing for the U.S. manager to learn is adjustment to P-time in
order to avoid the anxiety and frustration that comes from
being out of synchronization with local time. As global markets
expand, however, more businesspeople from P-time cultures
are adapting to M-time.
Crossing Borders 7
When Yes Means No, or May be or
I Dont Know, or?
Once my youngest child asked if we could go to the circus and my reply
was, may be. My older child asked the younger sibling, what did he
say? The prompt reply, he said NO!
All cultures have ways to avoid saying no when they really mean no. After
all, arguments can be avoided. Hurt feelings postponed, and so on. In some
cultures, saying no is to be avoided at all costs to say no is rude,
offensive, and disrupts harmony. When the maintenance of long lasting
stable personal relationships is of utmost importance, as in Japan to say
no is to be avoided because of the possible damage to a relationship. As a
result the Japanese have developed numerous euphemisms and
paralinguistic behavior to express negation. To the unknowing American,
who has been taught not to take no for an answer, the unwillingness tosay
no is often misinterpreted to mean that there is hope the right argument
or more forceful persuasions is all that is needed to get a yes. But dont be
misled the Japanese listen politely and , when the American if finished,
respond with hai. Literally it means yes, but usually it only means, I
hear you. When a Japanese avoids saying yes of no clearly, it most likely
means that he or she wishes to say no. one example at the highest levels of
government occurred in negotiations between the Prime Minister of Japan
and the President of the United States. The prime minister responded
with, well deal with it, to a request by the president. It was only later
that the U.S. side discovered that such a response generally means no to
the frustration of all concerned. Other euphemistic, decorative nos
sometimes used by Japanese: its very difficult. We will think about it.
Im not sure. Well give this some more thought. Or they leave the room
with an apology.
Americans generally respond directly with a yes or no and then give their
reasons why. The Japanese tend to embark on long explanation first, and
then leave the conclusion extremely ambiguous, Etiquette dictates that
Japanese may tell you what you want to hear, may not respond at all, or are
evasive. This ambiguity often leads to misunderstanding and cultural
friction.
Negotiations Emphasis
All the just-discussed differences in business customs and
culture come into play more frequently and are more obvious in
the negotiating process than any other aspect of business. The
basic elements of business negotiations are the same in any
country; they relate to the product, its price and terms, services
associated with the product, and finally, friendship between
vendors and customers. But it is important to remember that
the negotiating process is complicated and the risk of misun64
derstanding increases when negotiating with someone from

another culture. This is especially true if the cultures score
differently on Hofstedes PDI and IDV value dimensions.
Attitudes brought to the negotiating table by each individual are
affected by many cultural factors and customs often unknown
to the other individuals and perhaps unrecognized by the
individuals themselves. Each negotiators understanding and
interpretation of what transpires in negotiating sessions is
conditioned by his or her cultural background the possibility of
offending one another or misinterpreting each others motives
is especially high when ones SRC is the basis for assessing a
situation. One standard rule in negotiating is know thyself
first, and second, know your opponent. The SRCs of both
parties can come into play here if care is not taken.
Gender Bias in International Business

The gender bias toward women managers that exists in many
countries creates hesitancy among U.S. multinational companies
to offer women international assignments. Questions such as,
Are there opportunities for women in international business?
And should women represent U.S. firms abroad? Frequently
arise as U.S. companies become more international. As women
move up in domestic management ranks and seek career-related
international assignments, companies need to examine their
positions on women managers in international business.
In many cultures-Asian, Arab, Latin American, and even some
European women are not typically found in upper levels of
management. Traditional roles in male-dominated societies
often are translated into minimal business opportunities for
women. This cultural bias raises questions about the effectiveness of women in establishing successful relationships with
host country associates. An often-asked question is whether it is
appropriate to send women to conduct business with foreign
customers. To some it appears logical that if women are not
accepted in managerial roles within their own cultures, a foreign
woman will not be any more acceptable. This is but one of the
myths used to support decisions to exclude women from
foreign assignments.
It is a fact that men and women are treated very differently in
some cultures. In Saudi Arabia, for example, women are
segregated, expected to wear veils, and forbidden even to drive.
Evidence suggests, however, that prejudice toward foreign
women executives may be exaggerated and that the treatment
local women receive in their own cultures is not necessarily an
indicator of how a foreign businesswoman is treated.
When a company gives management responsibility and
authority to someone, a large measure of the respect initially
shown that person is the result of respect for the firm. When a
woman manager receives training and the strong backing of her
firm, she usually receives the respect commensurate with the
position she holds and the firm she represents. Thus, resistance
to her as a female either does not materialize or is less severe
than anticipated. Even in those cultures where a female would
not ordinarily be a manager, foreign female executives benefit, at
least initially, from the status, respect, and importance attributed
to the firms they represent. In Japan, where Japanese women
rarely achieve even lower-level management positions, represen-
tatives of U.S. firms are seen first as Americans, second as

representatives of firms, and then as males or females.
Similarly, women in China are seen as foreigners first and
women second. Being foreign is such a major difference that
being a woman is relatively minor. As one researcher notes, in
China businesswomen from the West are almost like honorary men Once business negotiations begin, the willingness of
a business host to engage in business transactions and the
respect shown to a foreign businessperson grow or diminish
depending on the business skills he or she demonstrates,
regardless of gender. As world markets become more international and as international competition intensifies, U.S.
companies need to be represented by the most capable personnel available; it seems shortsighted to limit the talent pool
simply because of gender.
65
LESSON 10:
BUSINESS ETHICS AND BRIBERY
Business Ethics
The moral question of what is right and/or appropriate poses
many dilemmas for domestic marketers. Even within a country,
ethical standards are frequently not defined or always clear. The
problem of business ethics is infinitely more complex in the
international marketplace because value judgments differ widely
among culturally diverse groups. What is commonly accepted,
as right in one country may be completely unacceptable in
another Giving business gifts of high value, for example, is
generally condemned in the United States, but in many
countries of the world gifts are not only accepted but also
expected.
For U.S. businesses, bribery became a national issue during the
mid-1970s with public disclosure of political payoffs to foreign
recipients by U.S. firms. At the time, there were no U.S. laws
against paying bribes in foreign countries, but for publicly held
corporations the Securities and Exchange Commissions (SEC)
rules required accurate public reporting of all expenditures.
Because the payoffs were not properly disclosed, many executives were faced with charges of violating SEC regulations.
The issue took on proportions greater than that of nondisclosure because it focused national attention on the basic question
of ethics. The business communitys defense was that payoffs
were a way of life throughout the world: if you didnt pay
bribes, you didnt do business. Consider this situation:
Suppose your company makes large, high-priced generators for
power plants and a foreign official promises you a big order if
you slip a million dollars into his Swiss bank account. If you are
an American and you agree, you have committed a felony and
face up to five years in prison. If you are German, Dutch,
French, or Japanese, among others, you have merely booked
another corporate tax deduction-the value of the bribe-and you
have the contract as well. In fact, French tax authorities actually
have a sliding scale of acceptable commissions paid to win
business in different countries. The Asian deduction is 15
percent, although that drops to between 8 percent and 11
percent in India, where apparently it costs less to buy officials. It
is important to note that bribes usually violate the laws in the
countries where the bribery takes place, and that in countries
where bribes can be deducted as a business expense the laws
clearly state they apply only to transactions outside that country.
The decision to pay a bribe creates a major conflict between what
is ethical and proper and what is profitable and sometimes
necessary for business. Payoffs are perceived by many global
competitors as a necessary means of accomplishing business
goals. A major complaint of U.S. businesses is that other
countries do not have legislation as restrictive as does the
United States. The United States advocacy of global ant bribery
laws has led to an accord by the 29 member nations of the
Organization for Economic Cooperation and Development
(OECD) to force their companies to follow rules similar to
66
those that bind U.S. firms. It may be some time before the
accord becomes binding, however, since each of the member
countries will have to ratify the treaty individually.
In Latin America, the-organization-of American States (OAS)
has -taken a global lead in being the first to ratify an agreement
against corruption. Long considered almost a way of business
life, bribery and other forms of-corruption now have been
criminalized. Leaders of the region realize that democracy
depends on the confidence the people have in the integrity of
their government, and that corruption undermines economic
liberalization. The actions of the GAS coupled with those of
the GECD will obligate a majority of the worlds trading
nations to maintain a higher standard of ethical behavior than
has existed before. Unfortunately, India, China, and other Asian
and African countries are not members of either organization.
Exhibit 5-2
Transparency Intemational1997 Corruption Perception Index*

(Selected Countries 1997 & 1996)
Country
CPI 1997 CPI 1996 Country
CPI 1997 CPI1996
Denmark (1)
Finland (2)
Norway (7)
Singapore (9)
Switzerland (11)
U.S. A(16)
France (20)
Czech Rep. (27)
9.94:1:
9.48
8.92
8.66
8.61
7.61
6.66
5.20
5.03
4.29
3.56
2.88
2.75
2.66
2.27
1.76
9.33
9.05
8.87
8.80
8.76
7.66
6.96
5.37
Italy (30)
S Korea (34)
Brazil (36)
China (41)
India (45)
Mexico (47)
Russia (49)
Nigeria (52)
3.42
2.96
2.96
2.43
2.63
550
2.58
0.69
The actions of the GECD and GAS also reflect the growing
concern among most trading countries of the need to bring
corruption under control. International businesspeople often
justify their actions in paying bribes and corrupting officials as
necessary because corruption is part of their culture, failing to
appreciate that it takes two to tango -a bribe giver and a bribe
taker.
Since 1993 an international organization called Transparency
International (TI) has been dedicated to curb[ing] corruption
through international and national coalition encouraging
governments to establish and implement effective laws, policies
and anti-corruption programmes. Among its various activities,
TI conducts an international survey of businesspeople, political
analysts, and the general public to determine their perception of
corruption in various countries. In the 1997 Corruption
Perception Index (CPI), shown in Exhibit 5-2, Denmark, with a
score of 9.94 out of a maximum of 1-0, was perceived to be
the least corrupt and Nigeria, with a score of 1.76, as the most
corrupt. TI is very emphatic that its intent is not to expose
villains and cast blame, but to raise public awareness that will
lead to constructive action. As one would expect, those
countries receiving low scores are not pleased; however, the
Bribery: Variations on a Theme

While bribery is a legal issue, it is also important to see bribery
in a cultural context in order to understand different attitudes
toward bribery. Culturally, attitudes are significantly different
among different peoples. Some cultures seem to be more open
about taking bribes, while others, like the United States, are
publicly contemptuous of such practices but are far from
virtuous. Regardless of where the line of acceptable conduct is
drawn, there is no country where the people consider it proper
for those in position of political power to enrich themselves
through illicit agreements at the expense of the best interests of
the nation. A first step in understanding the culture of bribery
is to appreciate the limitless variations that are often grouped
under the word bribery. The activities under this umbrella term
range from extortion through subornation to lubrication.
Bribery and Extortion : The distinction between bribery and
extortion depends on whether the activity resulted from an
offer or from a demand for payment. Voluntarily offered
payments by someone seeking unlawful advantage is bribery.
For example, it is bribery if an executive of a company offers a
government official payment if the official will incorrectly classify
imported goods so the shipment will be taxed at a lower rate
than correct classification would require. On the other hand, it is
extortion if payments are extracted under duress by someone in
authority from a person seeking only what they are lawfully
entitled to. An example of extortion would be a finance
minister of a country demanding heavy payments under the
threat that a contract for millions of dollars would be voided.
On the surface, extortion may seem to be less morally wrong
because the excuse can be made that if we dont pay we dont
get the contract or the official (devil) made me do it. But
even if it is not legally wrong, it is morally wrong-and in the
United States it is legally and morally wrong.
Subornation and Lubrication : Another variation of bribery is
the difference between lubrication and subornation.37 Lubrication involves a relatively small sum of cash, a gift, or a service
given to a low-ranking official in a country where such offerings
are not prohibited by law. The purpose of such a gift is to
facilitate or expedite the normal, lawful performance of a duty
by that official. This is a practice common in many countries of
the world. A small payment made to dock workers to speed up
their pace so un-loading a truck take few-hours rather than all
day is an example of lubrication.
Subornation, on the other hand, generally involves giving large
sums of money, frequently not properly accounted for,
designed to entice an official to commit an illegal act on behalf
of the one offering the bribe. Lubrication payments accompany
requests for a person to do a job more rapidly or more efficiently; subornation is a request for officials to turn their heads,
to do their jobs more quickly, to not do their jobs, or to break
the law.
A third type of payment that can appear to be a bribe but may
not be is an agents fee. When a businessperson) is uncertain of
a countrys rules and regulations, an agent may be hired to
represent the company in that country. For example, an attorney
may be hired to file an appeal for a variance in a building code

on the basis that the attorney will do a more efficient and
thorough job than someone unfamiliar with such procedures.
While this is often a legal and useful procedure, if a part of that
agents fees is used to pay bribes, the intermediarys fees are
being used unlawfully. Under U.s. law, an official who knows of
an agents intention to bribe may risk penalties of up to five
years in jail. The Foreign Corrupt Practices Act (FCPA) prohibits
U.S. businesses from paying bribes openly or using middlemen
as conduits for a bribe when the U.S. official knows that part of
the middlemans payment will be used as a bribe. There are
many middlemen (attorneys, agents, distributors, and so forth)
who function simply as conduits for illegal payments. The
process is further complicated by legal codes that vary from
country to country; what is illegal in one country may be winked
at in another and legal in a third.
The answer to the question of bribery is not an unqualified
one. It is easy to generalize about the ethics of political payoffs
and other types of payments; it is much more difficult to make
the decision to withhold payment of money when the consequences of not making the payment may affect the companys
ability to do business profitably or at all. With the variety of
ethical standards and levels of morality that exist in different
cultures, the dilemma of ethics and pragmatism that faces
international business cannot be resolved until the anticorruption accords among the OECD and OAS members are fully
implemented and multinational businesses refuse to pay
extortion or offer bribes.
The Foreign Corrupt Practices Act has had a positive effect. The
Secretary of Commerce has stated that bribery and corruption
cost U.S. firms $64 billion in lost business in just one year, the
implication being that had there been no FCPA there would
have been no lost business.39 Even though there are numerous
reports indicating a definite reduction in U.S. firms paying
bribes, however, the lure of contracts is too strong for some
companies. Lockheed Corporation made $22 million in
questionable foreign payments during the 1970s. For example,
the company pled guilty in 1995 to paying $1.8 million in bribes
to Dr. Leila Takla, a member of the Egyptian national parliament, in exchange for Dr. Takla to lobby successfully for three
air cargo planes worth $79 million to be sold to the military.
Lockheed was caught, fined $25 million, and cargo plane
exports by the company were banned for three years. Lockheeds
actions during the 1970s were a major influence on the passing
of the FCPA. The company now maintains one of the most
comprehensive ethics and legal training programs of any major
corporation in the United States.
It would be naive to assume that laws and the resulting
penalties alone will put an end to corruption. Change will come
only from more ethically and socially responsible decisions by
both buyers and sellers and governments willing to take a
stand.
67
effect has been to raise public ire and debates in parliaments

around the world-exactly the goal of TI.
Crossing Borders 9
Time : A Many Cultured Thing
Time is cultural, subjective, and variable. One of the most serious causes
of frustration and friction in cross cultural business dealings occurs when
counterparts are out of sync with each other. Differences often appear with
respect to the pace of time, its perceived nature, and its function. Insights
into a cultures view of time may be found in its sayings and proverbs. For
example:
Time is money. United States
Those who rush arrive first at the grave. Spain
the clock did not invent man. Nigeria
if you wait ling enough, even an egg will walk. Ethiopia
mum required by law or controlling legal authority. In fact,

laws are the markers of past behavior that society has deemed
unethical or socially irresponsible.
There are three ethical principles that provide a framework to
help the marketer distinguish between right and wrong,
determine what ought to be done, and properly justify his or
her actions. Simply stated they are:
Principle
Question
Utilitarian ethics
Does the action optimize the common

good or benefits of all constituencies?
Rights of the parties
Does the action respect the rights of the

individuals involved?
Justice or fairness
Does the action respect the canons of

justice or fairness to all parties involved?
Before the time, it is not yet the time; after the time, its too late. France
The precision of clocks also tells a lot about a culture. In a study on how
cultures keep time, the researcher found:
Clock are slow of fast by an average of just 19 seconds in Switzerland.
When a man in brazil was queried about the time, he was more than three
hours off when he said it was exactly 2:14.
When the researcher ask the time in Jakarta, he was told by a postal
employees in the central post office that he didnt know the time but to go
outside and ask a street vendor.
Ethical and Socially Responsible Decisions

To behave in an ethically and socially responsible way should be
the hallmark of every businesspersons behavior, domestic or
international. It requires little thought for most of us to know
the socially responsible or ethically correct response to questions
about knowingly breaking the law, harming the environment,
denying someone his or her rights, taking unfair advantage, or
behaving in a manner that would bring bodily harm or damage.
Unfortunately, the difficult issues are not the obvious and
simple right or wrong ones. In many countries- the international marketer faces the dilemma of responding to sundry
situations where-there is no local law, where local practices
appear to-condone a certain-behavior, or where the company
willing to do what is necessary is favored over the company
that refuses to engage in certain practices. In short, being socially
responsible and ethically correct is not a simple task for the
international marketer operating in countries whose cultural and
social values, and/or economic needs are different from those
of the marketer.
In normal business operations there are five broad areas where
difficulties arise in making decisions, establishing policies, and
engaging in business operations: (1) employment practices and
policies; (2) consumer protection; (3) environmental protection;
(4) political payments and involvement in political affairs of the
country; and (5) basic human rights and fundamental freedoms.
In many countries, the law may help define the borders of
minimum ethical or social responsibility, but the law is only the
floor above which ones social and personal morality is tested.
The statement that there is no controlling legal authority may
mean that the behavior is not illegal but it does not mean that
the behavior is morally correct or ethical. Ethical business
conduct should normally exist at a level well above the mini68
Answers to these questions can help the marketer ascertain the

degree to which decisions are beneficial or harmful, right or
wrong, or whether the consequences of actions are ethical or
socially responsible. Perhaps the best framework to work within
is defined by asking: Is it legal? Is it right? Can it withstand
disclosure to stockholders, to company officials, to the public?
One researcher suggests that regardless how corrupt a society
might be there are core human values that serve as the underpinning of life, no matter where a person lives. Participants in
43 countries and more than 50 faiths were given 17 values and
asked to rate each as a core value. Five values-compassion,
fairness, honesty, responsibility, and respect for others-were the
most often selected regardless of cuIture.49 The researcher
suggests that an action should only be taken if the answer is no
to the question, Is the action a violation of a core human
value? When people are clear about their own values and can
identify the principles and core values that make up ethical
behavior, they have the tools for looking at potential decisions
and deciding whether or not a decision is ethical.
Cultural Considerations In International

Marketing:
A Classroom Simulation
James B. Stull
San Jose state University

With the constant increase of multinational companies
(MNCs), foreign investments, and international negotiations,
the need for smooth interpersonal transactions and business
strategies also grows. Practices taken for granted in one country
face varying degrees of probability of achieving desirable results
in another. For example, if a Saudi Arabian host offers an
American visitor a cup of coffee, the American stands a better
chance of preserving friendly relations if he accepts the Saudis
offer. Politely refusing-a cup of coffee may be acceptable
behavior in the United. States, but to a Saudi it may be an
insult, as the offer of a cup of coffee is an expression of Saudi
hospitality and a symbol of ones honor. An American visiting
a Latin American country may arrive at his host executives office
for a 10 A.M. appointment at 9:55 A.M. However, the host may
not appear until 11 A.M. While the American may be fuming at
having to wait over an hour, his host may feel no need to
apologize to the American as this is normal practice in this
Components Of Culture
Culture is a complex pattern of consistent behaviors which can
be broken into components for the purposes this exercise, lets
consider those proposed by Vern Terpstra in his first edition of
the cultural entities and values, social organization, education,
technology, political systems, and legal systems.
Language
Language reflects the philosophy and lifestyle of a group of

people. It also conditions people to think and behave in certain
ways. Eskimos have more than twenty five words for snow
but no word for war. Arabs have over 6,000 words for camel,
its parts and equipment. The Arabic word for citizen
translates roughly as one who performs Allahs will. Nearly
one-half of English is made up of scientific and technological
terms. A clock runs in the United States, while it walks in
some Spanish-speaking countries. People who study languages
learn much more about other people than merely how they
speak. Language may be the most reliable indicators of other
components of a culture; it can tell us a great deal about how
other people live and think as well.
Religion
If religion provides people with a sense of why they are on this

earth, it may consciously and subconsciously dictate how they
conduct their lives. Attitudes, values, and behavior can often be
traced to religious philosophies. Although numerous religions
existent of the world fits into six basic religious categories:
animism (primitive religions), Hinduism, Buddhism, Islam
and Christianity. Judaism is found primarily in Israel.
Attitudes and Values
A peoples attitudes and values about certain topic are important to that societys economic development and its peoples
behavior. Of particular concern are attitudes and values about
time, work-and achievement, wealth and material gain. Religions plays major role in their development. The tenets and
canons followed by most religions often contain prescriptions
and proscriptions about greed and the attainment of wealth
and material items.
Social Organisation
People organize activities and role relationships consistent with

other cultural values and expectations. Important considerations include a cultures origin and history, family relationships,
friendships, class structure, governmental powers, social and
reference groups (including labor unions,) gender roles,
supervisor subordinate relationships, and more.
Education
Educational systems are culture-specific, promulgating norms as

a vein of cultural existence. Studies show a high correlation
between educational enrollments in secondary and higher levels
of education and a countrys economic development. Diffusion
of innovations into a culture depends heavily on literacy, which
typically leads to better communication systems, new ideas, new
ways to solve problems, increased technological development,

improved labor forces, and more.
Technology
The artifacts, material symbols, problem-solving techniques,

quantitative systems, managerial styles, and other intellectual
tools reflect the educational and technological development of a
culture. Studies show high positive relationships between per
capita incomes and per capita energy consumption; high gross
domestic products and manufacturing; and low gross domestic
products and agriculture. Also characteristic of technologically
developed cultures are more urban dwellers; high per capita
expenditures on education; more cars, radios, televisions, and
telephones; more scientists, engineers, and, technicians; and
higher expenditures for research and development. Technology
determines how a country uses its land, labor, capital, and
education. It also leads to further technologic innovation.
Political Systems
Political-environments both within and between countries are

major considerations when conducting international business.
Politicians exercise controls over resources and how people use
them. Religious groups, labor unions, and multinational
companies are also clearly political. Multinational corporations
(MNCs) are always at risk politically when they enter a foreign
arena to conduct business. The MNC may be forced to take
severe action because of sudden changes in a host countrys
environment, including competing political philosophies, social
unrest, lobbying independence, war, and new international
alliances
Legal Systems
Laws are rules of a culture established by authority, society, or

custom. They reflect the attitudes of the culture; they may be
written or unwritten. Most of the world fits into one of the
following legal systems: common, civil, communism, Islam, or
indigenous. Some of the legalities an MNC must consider
include location, structure, finances, money, taxes, property,
antitrust, and transportation. Additional considerations might
involve controls over importing, exporting, patents, trademarks, competition, and controls over the host country
imposed by still other nations.
Economic forces such as employment, income, gross national
product, foreign exchange risk, balance of payments, and
commodity agreements also affect international business. One
must also look at the countrys population, climate, geography,
natural resources, ecological systems, and plant and animal life.
You may wish to add these variables to the simulation, but they
are not discussed in detail here.
Simulating International Business
This simulation was originally designed for a fifteen-week, two

seventy-five-minute sessions-per week marketing class, with
approximately forty students per section. It can easily be
adapted to fit the needs of any group.
Simulation are a popular, widely used method of teaching and
training people in the development of various skills. Discoveries about aircraft in flight have been made in wind tunnels.
Astronauts train for space flight through simulations. Airplane
pilots and automobile drivers learn on simulators. Law
69
hosts business environment. .This simulation is designed to

illustrate how the sensitive businessperson may be the one
who approaches another culture by attempting to adopt the
viewpoint of that particular culture.
students experience trial conditions through moot courts. First

aid personnel practice cardiopulmonary resuscitation on
inflatable dummies. Security, safety, and medical personnel train
to deal with various hazards and obstacles through fire, lifeboat,
and air raid drills, disaster training, and other forms of simulation. Simulations are also used widely in management training
machine and interpersonal simulations have given trainees ideas
about what to expect and how to react to probable leadership
situations.
A simulation is an operating model of real life in which
participants a can experience much of what would happen
without suffering many of the negative consequences.
Here is one way to successfully experience the benefits of this
simulation.
Week 1 : you will be assigned to a research group to find out as
much as you can about one of the following variables: language, religion, attitudes and values, social organization,
education, technology, political systems, and legal systems. An
excellent source of information for this phase of the simulation
is Vern Terpstra, The Cultural Environment Of international
Business, Cincinnati: South-Western, 1978.
Weeks 1-5: Your group should pace itself and prepare to
present your research findings to the class sometime during
weeks six through nine. You should develop ways for your
audience to actually experience your concept or component as it is
experienced in other cultures.
Weeks 6- 9: Your group will present your findings daringness
class period. Plan for one concept to be presented each class
period. Be sure to take notes and participate in this phase, as the
information will be used during the next module, weeks 10-1 5.
Weeks 10-15: On the first day of this phase you will be assigned
to a new group. One-member from each of the research groups
from the first nine weeks will be assigned to a culture group, so
that each culture group and an expert on each of the separate components making up that culture. Each new group will
function as a business organization representing one-of the
following five -cultures: Bwana, Feliz, Leung, Koran, and
Dharma.
Bwana : This African republic is slowly beginning to trade with
the rest of the world. Its level of technology is far-behind
countries such as Japan, Germany, Great Britain, and the United
States. Bwana is rich with gems, ivory, and precious metals, but
its primary language is Swahili, although some English is
spoken in the capital city, Zulu. Organised religion has made
little impact on this tiny nation. Most of the people are
animistic, believing that spirits inhabit everything; people
worship volcanoes, the moon, rubber trees, and waterfalls. A
very traditional slowly emerging country, Bwana still relies on
tribal laws that have been handed down through generations.
Children can get a formal education in ht capital city, but most
of the people live in rural villages where tribal leaders determine
what needs to be learned.
villages. Catholicism is the primary religion: however, some preCatholic animism still exists as the local brufo or shaman is
frequently seen waving incense pots and chanting at village
churches. Some technological advancements have been made in
the capital and two other large cities. Exports include rum,
sugar, rice, lumber, and motor vehicles. Tourism is strong on
the Caribbean coast, where fishing is extremely popular and
politics seem not to exist. In the cities, many children complete
their secondary education. Village children typically receive no
formal education. Civil law is followed in Feliz.
Leung : Leung is located in Asia. Cantonese is spoken
throughout the country. The Lounges people revere education
and encourage their children to learn as much as they can, but
the countrys economy makes it, virtually impossible for the
education to be put to use. Most of the children receive a solid
education, but formal training is limited to trade schools and
technology centers. The average citizens believes in the country,
but many lounges leave to seek opportunities elsewhere; A
significant number of those who have been educated and
trained in Western countries are beginning to return to help
develop their native land. Leung exports rice, wheat, corn,
cotton, and textiles. It produces steel, iron; coal, and some
machinery. Recent ventures have resulted in foreign-owned high
technology computer assembly plants being set up and
operated near the port cities. The people follow the teachings of
Confucius, Buddha, and Tao Communism has been the main
form of government since the 1920s, but the younger generation want to see change soon. Some free trade zones have,
emerged in the past few years allowing merchants to experience
other coun tries ways of doing business.
Koran : Koran is situated in the middle east, in a very dry
desert region. The country has produc4ed and exported oil since
1938, and is also abundant with fertilizer, petrochemicals, and
cement. Koran enjoys a strong fishing industry. Desalinization
plants have helped Koran provide water for agriculture and
industry. Because of its success with oil the per capita income is
one of the highest in the world. However, other levels of
technology are low. Some areas of the country are run down
and the people are extremely poor. Koran imports a great deal
from the rest of the world. The primary language is Arabic.
Islam is the only religion with Muslims following the word
from the holy book, The Koran. The oil industry has modernized part of the country, but Islam dictates that Muslims adhere
to tradition.
Feliz : This Central American country is constantly in the world

news. Guerrilla warfare leaves
Dharma: Dharma, a former British colony, is located on the

Indian subcontinent. The people speak Hindi, through some
200 different dialects may be heard. Most Dharmese practice
Hinduism. Education is very important to the Dharmese
people, and they make great sacrifices to be sure that their
children go to school. The economy is historically poor. The
main exports are rice, legumes, tea, and tapioca. Children often
leave Dharma to study in England, Canada, or the United
States, and they tend not to return to their homelands except to
visit their families. The government is primarily socialist, with
strong ties to the English common law system.
Feliz politically unstable : Although the official language is

Spanish, dozens of pre-Columbian dialects are spoken in rural
Although these cultures are, obviously fictitious, they are

intentionally similar to real cultures so that you can make
70
Procedure for Weeks 10-15 You will need to go through the

following steps to complete the phase of the simulation:
1. Each culture must consult, its own specialists to develop
a clear understanding of its own identity regarding each
component. Focus on developing specific verbal and
nonverbal language norms which will be observed during
negotiations with other cultures. This may take a few class
days.
2. Study the other cultures to gain some familiarity with their
cultural components. Research real cultures that you perceive
as similar so that you can make reasonable inferences about
life in the fictitious culture.
3. Your overall goal is to market a product, product line,
service, or idea to the other culture. Your success will depend
on how well you know the other culture and how well you
adapt your business and marketing strategies to each.
4. You must identify a product, service, or idea that you believe
is compatible with your own culture and that you could
market successfully to the other culture. You dont have to
invent something.
5. Develop business and marketing strategies that you believe
will be sensitive to the idiosyncrasies of each, other culture.
6. You will negotiate with each other culture persisting-until a
contract has been settled or until you perceive that a stalemate
has been reached.
7. Discuss the simulation, focusing on bow you felt and what
you learned while you were simulating international
business.
8. Your instructor may modify this simulation to meet theneeds of your particular class.
Nissan Micra, Denmark

Deborah Fain
New York University
Introduction
In 1992 the Micro, Nissans smallest car, cost $20,000 U.S.
dollars in Denmark. That made it the most expensive car in its
class. The price of the new model was up 20 percent from one
year ago. Historically, only 35.4 percent of Micra owners buy
another Micra. The reason usually given is price.
Moreover, due to the continuing recession, car sales in Denmark
were at their lowest level in thirty years. Only 9,000 small cars are
sold each year, in a good year, in Denmark.
To make the problem even more difficult, marketing costs had
increased by at least 10 percent in each of the past five years.
Nissan Denmark addressed this situation by developing and
executing a truly innovative database marketing program. They
were able to do this because they had very little to lose and
much to gain:
First given the economic situation described above, no one

inside or outside the company expected success, so a loss would
not cause great concern.
Second, even a small success would be greeted with great
satisfaction.
Third, management was willing to take a chance on a really bold
program because the situation was becoming quite critical.
Working with their advertising agency, management decided
that the only way to reverse the trend was to develop and
execute an ongoing relationship building campaign, specifically
targeting currently satisfied customers.
This new program was in addition to the ongoing print
campaign, the objective of which had been awareness of the
Nissan Micra product. This campaign had been running in
Denmark for several years. The advertising agency brought in a
research firm and a direct marketing agency to assist in development and execution of the new relationship-building campaign.
Objectives
Nissan Denmark had several objectives, some short-term and
others long-term. The key was using a test drive to motivate
previous or current Micra owners to purchase a new Micra.
Short-Term Objectives
The first short-term objective was to sell 200 Nissan Micras
through a test drive program. The second was to reduce the
average marketing cost below the current $400 per car.Obviously, both of these objectives were important to
demonstrate that the Micra remained a practical choice for Danes
purchasing a new car. However, Nissan Denmark and the agency
were also looking ahead to the, longer term, since any innovative program was certain to be expensive relative to staying with
the current program. The long-term objectives were set to
guarantee Nissan Micras future, and even Nissans overall
future, in Denmark.
Long Term objectives
The first long-term objective was to develop an ongoing
communications/ relationship maintenance program for
current micro owners. The second was to develop ongoing
methodology to target the highest sales potential customers.
By accomplishing these long term objectives, Nissan could
develop targeted mailings to get potential buyers to test drive a
new Micra, or other Nissan models, as part of an ongoing
promotional program.
Nissan actually accomplished all of its objectives, both short
and long term, by the following steps, which were carefully
organized and managed.
Organising The Team

By hiring both a direct marketing agency and a respected market
research firm, Nissan and its general advertising agency ensured
that whatever program was developed would be based on a
higher level of expertise than the ad agency alone would have
been able to provide to the client.Together all four team
members-client, general agency, direct marketing agency and
research firm-developed marketing questions hypotheses, and
an initial approach to the problem.
71
reasonable inferences that will help you succeed in this

simulation.
Assignments
1. Generate list of marketing questions and hypotheses
2. Develop a strategy outline and a mailing plan.
3. Prioritize the mailing and develop a data-driven plan.
This case was prepared as a basis for classroom discussion rather
than to illustrate effective or ineffective handling of a business
situation.
Beneath Hijab
Marketing to the Veiled Women of Iran
Jeffrey A. Fadiman
San Jose state University

Hijab means modest dress, and that is how Muslim women
cover themselves. To Muslim women wearing hijab, one of the
most annoying questions asked by Western women is; Why?
In defense of the practice, Mahjubah: The Magazine for
Moslem, Women (an English-language journal published in
Iran for foreign distribution) ran an article examining hijab
from the perspective of Muslim women. According to the
article, men and women are physically and psychologically
different. Muslim women are equal to men but not the same as
men. Each sex has its own rights and place in society. Women
wear hijab to because they weak but because of the high status
given to them by Allah and because of their desire to adhere to
Islamic morality such, hijab means more than an outer
garment; the heart must be modest as well.
Muslim women, on the other hand, often-wonder why Western
women wear skimpy, skin-tight dresses that are impractical arid
uncomfortable. Why must western women be slaves to
appearance, forever listening to the media about how to be
glamorous? Why must they have to look beautiful for strangers
to ogle them in public places? Why do western feminist groups
want to turn women into men? Muslim women wonder
whether such questioning of gender roles is a sign of strength
or actually a sign of weakness.
Questions
Assume that Irans new leaders now welcome U.S. businesses,
requiring only that the members of each firm respect the
religious, ethical, and moral beliefs of the nations. Consider
that before the Ayatollah Khomeinis revolution, Irans respect
revolution, Irans women showed enormous and increasing
interest in a wide range of U.S. goods often wearing them
beneath the hijab, in deference to the opinions of Iranian
men. Then came Khomeini, labeling the United States the
Great Satan. As a consequence, Western goods became equated
with religious evil. Now the market has opened once more, after
a drought of years.
How can you reawaken that demand? How can you stimulate
the demand for Western goods (or. services) among Iranian
women without generating anxiety on the part of Irans (all
male) religious and secular authorities?
Your, responses to this question should take the form of an
essay, suggesting a number of specific measures that might be
72
taken. The essay should include your responses to the

following:
1. Product selection : What type of product (goods or service)
could you, as marketing director of a small U.S. firm,
attempt to test, market to the female population of Irans
Describe in detail. Justify your choice of product.
2. Segment market : Which segment of the market should you
target as an initial clientele describe in detail, including sex,
age, social class, residential pattern (rural, suburban, urban),
and so on. Justify your choice of segment.
3. Product modification : In what ways should the product (or
service) be modified to stimulate demand by women,
particularly those who continue to wear the black chadur,
thereby conforming to hijab either by preference or in
deference to male authority? Justify your modifications.
4. Product image : In what ways must the product image be
modified to conform to Iranian religious, ethical, and moral
norms, considering that these are entirely imposed by men.
Justify your modifications (note: although upper- and
middle class women often do their own shopping, lower
class and more traditional middle class women do not. Their
husbands, fathers, and other men shop for them, and the
man involved selects what seems appropriate to him. The
problem is how to market products or services that entice
women, without thereby alienating their men.) Also consider
media selection, potential distribution outlets, point-ofpurchase strategies, and so on.
5. On-site project head : Considering both the legacy-of
hostility that Iranians feel toward America and their longrange fascination with Western goods, what type of
individual would you select to launch this first-time effort
within the country? Assume his or her professional
qualifications to be adequate, but describe those personal
characteristics (sex, age, appearance, temperament, language
potential, special skills, etc.) that the ideal candidate should
possess to deal with Iranians. Once you have described your
ideal candidates, consider this question: based on the data
available to you at this moment, who among your classmates
would appear to be the best selection Justify your choice.
As you write your essay, you should consider specifics about
Iranian distribution out lets. Irans cities, like many in the
Middle East, can be described as three communities in one:
Modern core Department stores, specialty shops; luxury goods
(pre-Khomeini) elitist, Western oriented -clientele; also patronized by middle class.
Traditional core Middle Eastern marketing patterns : open
bazaars, with separate sections for specialists (e.g., street of the
silversmiths, etc.), family go-downs, (small general stores)
clustered along tiny street; lower-middle-class, traditional, and
urban worker clientele.
Worker zones Concentric circles around both cores, each less
wealthy than its predecessor, extending outward until they
blef1d into the rural villages, from which the cities draw their
food.
The second dimension of the economic environment of

international marketing includes the domestic economy of every
nation in which the firm is selling. Thus, the international
marketer faces the traditional task of economic analysis, but in a
context that may include 100 countries or more. This chapter
addresses the economic dimensions of individual world
markets. The investigation will, be di-rected toward answering
two broad questions: (1) How big is the market? and (2) What
is the market like? Answers to the first question help determine
the firms market potential and priorities abroad. Answers to
the second question help deter-mine the nature of the marketing task.
Size of The Market

The firms concern in examining world markets is the potential
they offer for its products. The international marketer must
determine market size not only for present markets but also for
potential markets. This helps allocate effort among present
markets and determine which markets to enter next. Market size
for any given product is a function of particular variables, and
its determination requires an ad hoc analysis. However, certain
general indicators are relevant for many goods. We will see how
world markets are described by the following general indicator
(1) population growth rates and distribute and (2) incomedistribution, Income per casita, and gross national product.
Possible markets are numerous. The United Nations Statistical
Yearbook lists data for over 200 political entities. Of course,
many of these are very small. UN mem-bership itself counts
about 185 countries. On a more practical level, the World Bank
counts 133 countries with a population of over 1 million. The
number of these nations that are worthwhile markets varies
according to the firms situation. However, many companies sell
in over 100 markets. Singer and Komatsu, for exam-ple, sell in
over 150 countries.
Population
It takes people to make a market and, other things being equal,
the larger the pop-ulation in a country, the better the market. Of
course, other things are never equal, so population figures in
himself or herself are not usually a sufficient guide to market
size. Nevertheless, the consumption of many products is
correlated with population fig-ures. For many necessary
goods, such as ethical drugs, health care items, some food
products, and educational supplies, population figures may be a
good first indicator of market potential. For other products
that are low in price or meet particular needs, population also
may be a useful market indicator. Products in these latter
categories include soft drinks, ballpoint pens, bicycles, and
sewing machines.
Population figures are one of the first considerations in
analyzing foreign economies. One striking fact is the tremendous differences in size of the nations of the world. The largest
nation in the world has about 10,000 times the population of

the smallest countries. Well over half the people of the world
live in the ten coun-tries that have populations of more than
100 million. On the other hand, two-thirds of the countries
have populations of less than 10 million, and about 60 have
fewer than 1 million people.
The marketer concerned primarily with individual markets, but
regional pat-terns can also be important for regional logistics.
For example, Asia contains six of the ten most populous
markets. By contrast, Africa, the Middle East, and Latin America
are rather thinly populated. Nigeria is the only populous African
nation, with 115 million people. Turkey is the largest market
with 63 million people. Latin America has only two relatively
populous countries: Brazil with 161 million and Mex-ico with
93 million. Europe, much smaller in land area but more densely
populated, has four countries with populations over 57 million.
Population Growth Rates
The international marketer must be concerned with population
trends as well as the current population in a market. This is
because many marketing decisions will be af-fected by future
developments. Although most countries experience some
population many countries. in Western Europe have reached a
stationary population.
The World Bank projects the high-income countries population will grow at 0 y .3 percent annually to 2010. At the other
extreme, the low-income countries are expected to grow at 2.2
percent yearly. China and India are expected to grow at a slower
rate but will still add over 300 million to their combined
populations. Of a total world population of about~ billion in
2010, the high-income countries will account for less than 1
billions.
Distribution of Population
Understanding population figures involves more than counting
heads. It makes a lot of difference what kind of heads one is
counting. The population figures should be classified-by age
group, sex, education or occupation, for example-in ways that
show the relevant segments of the market.
a. Age- People in different stages of life have different needs
and present different marketing opportunities. In the U.S.
market, many firms recognize different mar-ket segments
related to age groupings. Each country has a somewhat
different pro-file as to age groupings. Generally, however,
there are two major patterns, one for the developing
countries and one for the industrialized countries.
The developing countries are experiencing population growth
and have relatively short life ex-pectancies. This means that
about 40 percent of their population is in the in active,
dependent 0-14 age group adjust over half in the productive
15-64 age group. Contrast that with the rich industrialized
countries, which have only 20 percent in the dependent 0-14
73
TUTORIAL A
group versus two-thirds in the 15-64 groups and over oneeighth in the over-65 category. This senior category is a very
important market in the high-income countries, but also in
China, which has well over 100 million citi-zens in that group.
b. Density. The concentration population is important to the
marketer in evaluat-ing distribution and communication
problems. The United States, for example, had a population
density of 29 persons per square kilometer in 1998. This is
only about one-fifteenth of the population density of the
Netherlands. Even with a mod-ern transportation network,
distribution costs in the United States are likely to be higher
than in the Netherlands. Promotion is also facilitated where
population is concentrated.
Other things being equal, the marketer prefers to operate in
markets with con-centrated populations. There is a great
difference in population density among na-tions and regions
of the world. On a regional basis, population densities
range, from less than reasons per square kilometer in Oceania
to about 120 per square kilometer in Asia.
Income
Markets require not only people but also people with money.
Therefore, it is necessary to examine various income measures in
a country to go along with a population analysis. We will look at
three aspects of income in foreign markets: the distribu-tion of
income among the population, the usefulness of per capita
income figures, and gross national product.
Distribution of Income
Some way of understanding the size of a market is to look at
the distribution of in-come within it. Per capita income figures
are averages and are meaningful, espe-cially. if most people of
the country are near the average. Frequently, however, this is not
the case. Few nations have a very equal distribution of income
among their people, but the high-income economies are
somewhat better than the other coun-try categories. In the
United States, of course, marketers are very attentive to differences in income levels if their product is at all income
sensitive:
Per Capita Income

The statistic most frequently used to describe a country
economically is its per capita income. This figure is used as a
shorthand expression for a countrys level of economic
development. Partial justification for using this figure in
evaluating a for-eign economy lies in the fact that it is commonly available and widely accepted. A more pertinent
justification is that it is, in fact, a good indicator of the size or
qual-ity of a market.
The per capita income figures vary widely among the countries
of the world. Figures for 1998 show Mozambique at $90 per
capita and Switzerland at $44,320 as the extreme cases. The
World Bank finds over50 percent of the worlds popula-tion
living in countries with an average per capita income of only
$490. That is less than 2 percent of the $25,870 average for the
high-income countries. If mar-kets are people with money,
these figures show a grim picture of many world mar-kets.
Five-sixths of-the worlds population has less than one-fourth
of the worlds GNP.
74
The bank reports provide a good starting point for foreign

market studies. Because per capita income figures are relied on
so ex-tensively, however, the following words of caution are in
order.
1. Purchasing Power Not Reflected. Per capita income
comparisons are expressed in a common currency-usually
U.S. dollars-through an exchange-rate conversion. The dollar
figure for a country is derived by dividing its per capita
income figure in national currency by its rate of exchange
against the dollar. The resulting dollar statistic for a countrys
per capita income is accurate only if the exchange rate re-flects
the relative domestic purchasing power of the two currencies.
There is often reason for doubting that it does.
The exchange rate is the price of one currency in terms of
another. The supply and demand determinants of that price
are the demand for and supply of foreign exchange, or a
countrys imports and exports plus speculative demand. A
coun-trys external supply and demand have quite a different
character from supply and demand within the country. Thus,
it is not surprising that the external value of a currency (the
exchange rate) may be different from the domestic value of
that cur-rency. Furthermore, speculation can further pull a
currency away form its true value.
2 Lack of Comparability. Another limitation to the use of
per capita income figures is that there is a twofold lack of
comparability. First, many goods entering into the national
income totals of the developed economies are only partially
in the money economy in less developed countries. A large
part of a North Americans budget, for example, goes for
food, clothing, and shelter. In many less developed nations,
these items may be largely self-provided and therefore not
reflected in national in-come totals.
Second, many goods that figure in the national income of
developed nations does not figure in the national incomes
of poorer countries. For example, a signifi-cant amount of
U.S. national income is derived from such items as snow
removal, heating buildings and homes, pollution control,
military and space expenditures, agricultural support
programs, and winter-vacations in Florida or other warmer
states.
3. Sales Not Related to Per Capita Income. A third
limitation to using per capita income figures to indicate
market potential is that the sales of many goods show little
correlation with per capita income. Many consumer goods
sales correlate more closely with population or household
figures than with per capita income. Some examples might
be Coca-Cola, ballpoint pens, bicycles, sewing machines, and
tran-sistor radios. Industrial goods and capital equipment
sales generally correlate bet-ter with the industrial structure or
total national income than with per capita income.
4. Uneven Income Distribution. Finally, per capita figures are
less meaningful if there is great unevenness of income
distribution in the country.
Gross National Product (GNP)

Another useful way to evaluate foreign markets is to compare
their gross national products. Gross national product (GNP)
Nature of The Economy

In addition to their size and market potential, foreign economies have other characteristics that affect a marketing program,
including those produced by the nations physical endowment,
the nature of its economic activity, its infrastructure, and its
degree of urbanization.
Physical Endowment
Natural Resources
A nations natural resources include its actual and potential
forms of wealth sup-plied by nature-for example, minerals and
waterpower-as well as its land area, topography, and climate.
The international marketer needs to understand the eco-nomic
geography of a nation in relation to the marketing task there.
Land area as such is not very important, except as it figures in
population density and distribution -problems. However, local
natural resources can be important to the international marketer
in evaluating a country as a source of raw materials for local
production.
Topography
The surface features of a countrys land, including rivers, lakes,
forests, deserts, and mountains are its topography. These
features interest the international marketer for they indicate
possible physical distribution problems.
Flat country generally means easy transportation by road or rail.
Mountains are always a barrier that raises transportation costs.
Mountains also may divide a nation into two or more distinct
markets. For example, the Andes Mountains divide many
South American countries into entirely separate areas. Although
these areas are united politically, the marketer often finds that
culturally and economically they are separate markets. Deserts
and tropical forests also separate markets and make transportation difficult. The international marketer analyzes the
topography, population and transportation situation to
anticipate marketing and logistical problems.
Climate
Another dimension of a nations physical endowment is its
climate, which includes riot only the temperature range, but
also wind, rain, snow, dryness, and humidity. The United States
is very large and has great climatic variations within its borders.
Most nations are smaller and have more uniform climatic
patterns. Climate is an important determinant of the firms
product offerings. An obvious example is the heater or air
conditioner in an automobile. However, climate also affects a
whole range of consumer goods from food to clothing and
from hous-ing to recreational supplies. Even medical needs in
the tropics are different from those in temperate zones.
Nature of Economic Activity

Rostows View
The stages of economic growth described by economist Walt
Rostow provide a use-ful description of foreign economies.5
According to Rostow, all the nations of the world are in one of

the following levels of economic development: (1) the traditional society, (2) the preconditions for takeoff, (3) the takeoff,
(4) the drive to maturity, and (5) the age of high mass consumption. Each level represents a dif-ferent type of economy,
that is, differing production and marketing systems. The
marketing opportunities and problems encountered by the
International firm vary according to the host countrys stage of
economic growth.
Farm or Factory?
One way to determine the kind of market a country offers is to
look at the origin of its national product. Is the economy
agricultural or industrial? What is the na-ture of its agricultural,
manufacturing, and service industries? Such an analysis is
especially useful to industrial marketers. However, even
consumer goods marketers find that consumer demands and
mentality are related to the nature of economic activities in the
country. For example, there are invariably differences in the
consumption patterns of the farmer compared with those of a
factory worker.
Input-Output Tables
If the firm can construct input-output tables for its industry
for relevant mar-kets, it can gain a better idea of how its
supplies or equipment fit in with the indus-trial structure in
given markets. Such tables are often used in U.S. marketing, and
their use is increasing in international marketing. Although their
construction can be difficult; the technique is worth mastering.
As our data improve, economic analysis through input-output
tables is becoming more common.
Infrastructure of the Nation
A manufacturing firm generally divides its activities into two
major categories: production and marketing. These operations
depend on supporting facilities and services outside the firm.
These external facilities and services are called the infrastructure
of an economy. They include paved roads, railroads, energy supplies, and other communication and transport services. The
commercial and financial infrastructure includes such things as
advertising agencies and media, distributive organizations,
marketing research companies, and credit and bank-ing facilities.
The more adequate these services in a country, the better the
firm can perform its production and marketing tasks there.
Where these facilities and services are not adequate, the firm
must adapt its operations, or perhaps avoid the market
altogether.
Energy
The statistics on energy production per capita serve as a guide to
both market po-tential and the adequacy of the local infrastructure. Marketers of electrical ma-chinery and equipment and
consumer durables are concerned about the extent of electrification throughout the market. In. countries with low energy
consump-tion, the marketer will find that power is available
only in the cities, not in the villages or countryside, where most
of the population may live. Energy production is also closely
inflated to the overall industrialization of an economy and thus
is cor-related to the market for industrial goods there. Finally,
75
measures the total domestic and foreign value added claimed by

residents. Gross domestic product (GDP) is GNP less net
factor income from abroad. For certain goods, total GNP is a
better indicator of market potential than is per capita income.
Where this is true, it is useful to rank countries by GNP.
energy production per capita is probable best single indicator as

to the adequacy of a countrys over-all infrastructure.
Transportation
The importance of transportation for business operations
needs no elaboration. Transportation capabilities, infrastructure,
and modes vary significantly from coun-try to country depending on the topography and level of economic development.
The share of road, rail, river, and air transport varies by country
but the World Bank has no good comparable data. For
information here the firm needs local sources in the market. It
can also consult with transportation companies. One good
example is given in Global Marketing Avon in the Amazon.
Communications
In addition to being able to move its goods, a firm must be
able to communicate with its various audiences, especially
workers, suppliers and customers. Communi-cations with
those outside the firm depend on the communications
infrastructure of the country. Intra company communications
between subsidiaries or with head-quarters depend equally on
local facilities.
Commercial Infrastructure
Equally as important to the firm as the transportation, communication, and energy- capabilities of a nation is its commercial
infrastructure. By this is meant the avail-ability and quality of
such supporting services as banks and financial institutions,
advertising agencies, distribution channels, and marketing
research organizations. Firms accustomed to strong supporting
services at home often find great differ-ences in foreign markets.
Wherever the commercial infrastructure is weak, the firm must
make adjustments in its operations, which affect costs and
effectiveness.
Urbanization
One of the most significant characteristics of an economy is the
extent to which it is Urbanized the degree of urbanization.
Numerous cultural and economic differences exist between
people in cities and those in villages or rural areas. These
differences are reflected in the attitudes of the people. Modern
transportation and communica-tion have greatly reduced the
differences between urban and rural populations in the United
States, but in much of the world the urban-rural differences
persist. Because these differences are important determinants of
consumer behavior, the international marketer needs to be
aware of the situation particular to each market.
Other Characteristics of Foreign Economies
Our survey or foreign economies has been introductory rather
than exhaustive. It should be helpful, in giving the market
analyst a feel for the relevant dimensions of national economies. Before concluding this chapter, we look briefly at a few
other characteristics of foreign economics that can be important
in operations there.
Inflation
Each country has its own monetary system and monetary
policyexcept for the 11 European countries in the Euro
group. The result is differing financial environments and rates
of inflation among countries. Of all the nations analyzed by the
world Bank, less than one half had single digit annual
76
inflation rates for the period 1990- 1996. That means the others
had more serious challenges with double-or triple- digit rates, or
worse.
Role of Government
The business environment and the nature of business operations in an economy are very dependent on the role government
plays in that economy. If government has strong Socialist
leanings, it may restrict the sectors of the economy where
private companies may be engaged. Where international
companies are allowed to operate, governments have regulations restricting their operations.
In a number of countries, international companies may have
the government as a partner in a joint venture. This is especially
true in less developed countries that lack a strong private sector
to provide the capital. Such a partnership provides its own
constraints on the international company.
Foreign Investment in the Economy
When contemplating operations in a foreign economy, the
international marketer is interested to know what other
international firms are operating there. This information gives
clues as to the governments attitude toward foreign companies.
It helps to determine something about the competitive
environment the firm will encounter.
That a country has few or no international companies operating
in it could indicate a good opportunity for one to enter-or it
could indicate that the environment is inhospitable. Conversely,
an economy that has many international companies operating in
it indicates an open market but one that may be very competitive. A distinction must be made, of course, between extractive
industries and manufacturing or marketing subsidiaries.
Extractive industries go into a country for raw-material supply
rather than for marketing reasons.
Free trade makes a great deal of sense theoretically because it

increases efficiency and economic welfare for all involved nations
and their citizens. South Koreas trade barriers, however, do not
represent an insolated case. In practice, free trade is woefully
ignored by virtually all countries. Despite the advantages,
nations are inclined to discourage free trade.
The National Estimate Report on Foreign Trade Barriers, issued
by the U.S. Trade Representative, defines trade barriers as
government laws, regulations, policies, or proactive that either
protect domestic producers from foreign competition or
artificially stimulate exports of particular domestic products.
Restrictive businesses practices and government regulations
designed to protect public health and national security are not
considered as trade barriers. The report classifies the trade
barriers into eight categories. (1) Import policies (e.g., tariffs,
quotas, licensing, and customs barriers); (2) standards, testing,
labeling, and certification; (3) government procurement; (4)
export subsidies; (5) lack of intellectual property protection; (6)
services barriers (e.g., restrictions on the use of foreign data
processing); (7) investment barriers; and (8) other barriers.
Protection of Local Industries

Why do nations impede free trade when the inhibition is
irrational? One reason why governments interfere with free
marketing is to protect local industries, often at the expense of
local consumers as well as consumers worldwide. Regulations
are created to keep out or hamper the entry of foreign made
products. Arguments for the protection of local industries
usually take one of the following forms: (1) keeping money at
home, (2) reducing unemployment, (3) equalizing cost and
price, (4) enhancing national security, and (5) protecting infant
industry.
Keeping money at Home

Trade unions and protectionists often argue that international
trade will lead to an outflow of money, making foreigners richer
and local people poorer this argument is based on the fallacy of
regarding money as the sole indicator of wealth. Other assets,
even products, can also be indicators of wealth.
Reducing Unemployment
It is a standard practice for trade unions and politicians to attack
imports and international trade in the name of job protection.
The argument is based on the assumption that import
reduction will create more demand for local product and
subsequently create more jobs.
Another problem with protectionism is that it may lead to
inflation. Instead of using protective relief to gain or regain
market share and for competitive investment, local manufactures often cannot resist the temptation of increasing their
prices for quick profits.
Equalizing Cost and Price

Some protectionists attempt to justify their actions by invoking
economic theory. They argue that foreign goods have lower
prices because of lower production costs. Therefore, trade
barriers are needed to make prices of imported products less
competitive and local items more competitive. This argument is
not persuasive to most analysts for several reasons. First, to
determine the cause of price differential is unusually difficult. Is
it caused by labor, raw materials, efficiency, or subsidy? Furthermore, costs and objectives vary greatly among countries, making
it impossible to determine just what cost need to be equalized.
Second, even if the causes of price differentials can be isolated
and determined, it is hard to understand why price and cost
have to be artificially equalized in the first place. Trade between
nations takes place because of price differentials; otherwise,
there is no incentive to trade at all.
Enhancing National Security

Protectionists often present themselves as patriots. They usually
claim that a nation should be self sufficient and willing to pay
for inefficiency in order to enhance national security.
Opponents of protectionism dismiss appeals to national
security. A nation can never be completely self - sufficient
because raw materials are not found in the same proportion in
all areas of the world.
Protecting Infant Industry

The necessity to protect an infant industry is perhaps the most
credible argument for protectionist measures. Some industries
need to be protected until they become viable. South Korea
serves as a good example. It has performed well by selectively
protecting infant industries for export purpose.
In practice it is not an easy task to protect industries. First, the
government must identify deserving industries. Next, appropriate incentives must be created to encourage productivity. Finally,
the government has to make sure that the resultant protection
is only temporary. 2 there is a question of how long an infant
needs to grow up to bean adult .
Marketing Barriers Tariffs

Tariff, derived from a French word-meaning rate, price, or list
of charges, is a customs duty or a tax on products that move
across borders. Tariffs can be classified in several ways. The
classification scheme used here is based on direction, purpose,
length, rate, and distributions point. These classifications are
not necessarily mutually exclusive.
1. Direction: import and Export Tariffs
Tariffs are often imposed on the basis of the direction of
product movement that is, on imports or exports or
exports, with the latter being the less common one. When
export tariffs are levied, they usually apply to an exporting
countrys scarce resources or raw materials (rather than
finished manufactured products.)
77
TUTORIAL B:
TRADE DISTORTIONS AND MARKETING BARRIERS
2. Purpose: protective and Revenue Tariffs

Tariffs can be classified as protective tariffs and revenue
tariffs. The distinction is based on purpose. The purpose of
a protective tariff is to protect home industry, agriculture,
and labor against foreign competitors by trying to keep
foreign goods out of the country. The South American
markets, for instance, have high import duties that hinder
the import of fully built cars. Brazil has a 50 percent import
tax on imported flyaway plans.
The purpose of a revenue tariff, in contrast, is to generate
tax revenues for the government. Compared to a protective
tariff, a revenue tariff is relatively low. When Japanese and
other foreign cars are imported into the United States, there
is a 3 percent duty. On the other hand, American cars
exported to Japan are subject to variety of import taxes.
3. Length: Tariff Surcharge versus Countervailing Duty
Protective tariffs can be further classified according to length
of time. A tariff surcharge is a temporary action, whereas a
countervailing duty is permanent surcharge. When Harley
Davidson claimed that it needed time to adjust to Japanese
imports. President Reagan felt that it was in the national
interest to provide import relief. To protect the local industry,
a tariff surcharge was used. The tariff on heavy motorcycles
jumped from 4.4 percent to 45 percent for one year and then
declined to 35 percent, 20 percent, 15 percent, and finally 10
percent in subsequent years.
Countervailing duties are imposed on certain imports when
foreign governments subsidize products. These duties are
thus assessed to offset a special advantage or discount
allowed by an exporters government. Usually, a government
provides an export subsidy by rebating certain taxes if goods
are exported.
4. Rates: specific, ad Valorem, and Combined
How are tax rates applied? To understand the computation,
three kinds of tax rates must be distinguished specific, ad
valorem, and combined.
Specific duties are a fixed or specified amount of money per
unit of weight, gauge, or other measure of quantity. Based on
a standard physical unit of a product, they are specific rates of
so many dollars or cents for a given unit of measure (e.g., $1/
gallon, 25/ square yard, $2/ton, etc.) product casts or prices
are irrelevant in this case. Because the duties are constant for
low- and high priced products of the same kind, this method
is discriminatory and effective for protection against cheap
products because of their lower unit value.
Ad valorem duties are duties according to value They are
stated as a fixed percentage of the invoice value and are
applied as a percentage to the dutiable value of the imported
goods. Japans ad valorem tariffs on beef and processed
cheese are 25 percent and 35 percent, respectively.
Based on this method, there is a direct relationship between
the total duties collected and the prices of products. That is,
the absolute amount of total duties collected will increase or
decrease with the prices of imported products.
Combined rates (or compound duty) are a combination of
the specific and ad valorem duties on a single product. They
78
are duties based on both the specific rate and the ad valorem
rate that are applied to an imported product. For example,
the tariff may be 10 per pound plus 5 percent ad valorem.
Under this system, both rates are used together, though in
some countries only the rate producing more revenue may
apply.
5. Distribution point: Distribution and consumption taxes
Some taxes are collected at a particular point of distribution
or when purchases and consumption occur. These indirect
taxes, frequently adjusted at the border, are of four kinds:
single stage, value added, cascade, and excise.
Single stage sales tax is a tax only at one point in the
manufacturing and distribution chain.
A value added tax (VAT) Is a multistage, noncullative tax on
consumption. It is a national sales tax levied at each stage of
the production and distribution system, though only on the
value added at that stage. In other words, each time a
product changes hands, even between middlemen, a tax
must be paid. But the tax collected at that point. Sellers in
the chain collect the VAT from a buyer, deduct the amount
of VAT they have already paid on their purchase of the
product, and remit the balance to the government.
Cascade taxes are collected at each point in the manufacturing
and distribution chain and are levied on the total value of a
product, including taxes borne by the product at earlier stages.
An excise tax is a one time charge levied on the sales of
specified products. Alcoholic beverages and cigarettes are good
examples. In lower process of exports. Prices of imports are
raised by charging imported goods with (in addition to
customs duties) a tax usually borne by domestic products. For
exported products, their export prices become more competitive
(i.e., lower) when such products are relieved of the same tax
that they are subject to when produced, sold, and consumed
domestically. The rebate of this tax when the goods are
exported, in effect, lowers their export prices.
Many countries have a turnover or equalization tax. This tax
is intended to compensate for similar taxes levied on domestic
products. Any critical examination of this would demonstrate
that the tax does not domestic products; any critical examination of this would demonstrate that the tax rate is applied to
the imported and domestic products, the effect is uneven. There
is a greater impact on the import because the tax is usually levied
on the full CIF, duty-paid value, rather than on the invoice value
alone.
Marketing Barriers: Nontariff Barriers

Tariffs, though generally undesirable, are at least straightforward
and obvious. Non-tariff barriers, in comparison, are more
elusive or nontransparent. Tariffs have declined in importance,
while no tariff barriers have become more prominent. Often
disguised, the impact of no tariff barriers can be just as
devastating, if not more, as the impact of tariffs.
Government Participation in Trade

The degree of government involvement in trade varies form
passive to active. The types of participation include administrative guidance, state trading, and subsidies.
2. Government procurement and state trading state trading

is the ultimate in government participation, because the
government itself is now the customer or buyer who
determines what, when where, how and how much to buy.
In this practice the state engages in commercial operations,
either directly or indirectly, through the agencies under its
control, such business activities are either in place of or in
addition to private firms.
3. Subsidies According to GATT, subsidy is a financial
contribution provided directly or indirectly by a
government and which confers a benefit subsidies can take
many forms- including cash, interest rate, value added tax,
corporate income tax, sales tax, freight, insurance, and
budgetary subsidies are among the various subsidy policies
of several Asian countries.
Customs and Entry Procedures

Customs and entry procedures can be employed as no tariff
barriers. These restrictions involve classification, valuation,
documentation, license, inspection, and health and safety
regulations.
1. Classification- How a product is classified can be arbitrary
and inconsistent and is often based on a customs officer
2& #1& s judgment, at least at the time of entry. The U.S
customs reclassified Nissan 2& #1& s imported truck
cabs and chassis from parts with 4 percent duty to
assembled vehicles subject to 25 levies instead.
through customs. At the very least, such complicated and

lengthy documents serve to slow down product clearance.
4. License or permit not all products can be freely imported;
controlled imports require licenses or permits. For example,
importations of distilled spirits, wines, malt beverages,
arms, ammunition, and explosives into the United States
require a license issued by the Bureau of Alcohol, Tobacco,
and Firearms. India requires license fro all imported goods.18
an article is considered prohibited if not accompanied by
license. It is not always easy to obtain an import license, since
many c untried will issue one only if goods can be certified as
being necessary.
5. Inspection is an integral part of product clearance. Goods
must be examined to determine quality and quantity. This
step is highly related to other customs and entry procedures.
First, inspection classifies and values products for tariff
purposes. Second, inspection reveals whether imported
items are consistent with those specified in the accompanying
documents and whether such items require any licenses.
Third, inspection determines whether products meet health
and safety regulations in order to make certain that food
products are fit for human consumption or that the
products can be operated safely. Fourth, inspection prevents
the importation of prohibited articles.
Marketers should be careful in stating the amount and
quality of products, a from the United states, for instance,
have a potential for selling very will in the Japanese market.
But a major obstacle is that every single bat must carry a
stamp of consumer safety, and this must be ascertained
only after expensive on dock inspection, more delay, and
more expenses.
6. Health & Safety Regulations - many products are subject to
health and safety regulations, which are necessary to protect
the public health and environment. Health and safety
regulations are not restricted to agricultural products. The
regulations also apply to TV receivers, microwave ovens, Xray devices, cosmetics, chemical substances, and wearing
apparel.
Product Requirements
2. Valuation- Regardless of how products are classified, each

product must still be valued. The value affects the amount
of tariffs levied. A customs appraiser is the one who
determines the value. The process can be highly subjective,
and the valuation of a product can be interpreted in different
ways, depending on what value is used (e.g., foreign, export,
import, or manufacturing costs) and how this value is
constructed.
For goods to enter a country, product requirements set by that

country must be met. Requirements may apply to product
standards and product specifications as well as to packaging,
labeling, and marketing.
3. Documentation - Documentation can another problem at

entry because many documents and forms are often
necessary, and the documents required can be complicated.
2. Packaging, Labeling, and marking packaging, labeling, and

marketing are considered together because they are highly
interrelated. Many products must be packaged in a certain
way for safety and other reasons.
Documentation requirements vary from country to country.

Usually, the following shipping documents are either
required or requested commercial invoice, Performa invoice,
certificate of origin, bill of landing, pacing list, incurrence
certificate, import license, and shippers export declarations.
Without proper documentation, goods may not be cleared
1. Product standards each country determines its own product

standards to protect the health and safety of its consumers.
Such standards may also be erected as barriers to prevent or
to slow down importation of foreign goods.
3. Product Testing Many products must be tested to

determine their safety and suitability before they can be
marketed. This is another area in which the United States has
some troubles in Japan. Although products may have won
approval everywhere else for safety and effectiveness, such
79
1. Administrative Guidance many governments routinely

provide trade consultation to private companies. Japan has
been doing this on a regular basis to help implement its
industrial policies. This systematic cooperation between the
government and business is labeled Japan, Inc. to get
private firms to conform to the Japanese government 2&
#1& s guidance, the government uses a carrot and stick
approach by exerting the influence through regulations,
recommendations, encouragement, discouragement, or
prohibition. Japans government agencies administrative
councils are influential enough to make importers restrict
their purchases to an amount not exceeding a certain
percentage of local demand.
products as medical equipment and pharmaceuticals must go

through elaborate standards testing that can take a few
years 2& #1& just long enough for Japanese companies
to develop competing products.
4. Product specifications -product specifications, though
appearing to be an innocent process, can wreak havoc on
imports. Specifications can be written in such a way as to
favor local bidders and to keep out foreign suppliers. For
example, specifications can be extremely detailed, or they can
be written to closely resemble domestic products. Thus, they
can be used against foreign suppliers who cannot satisfy the
specifications without expensive or lengthy modification.
Quotas
1. Quotas are a quantity control on imported goods. Generally,
they are specific provisions limiting the amount of foreign
products imported in order to protect local firms and to
conserve foreign currency. Quotas can be used for export
control as well. An export quota is sometimes required by
national planning to preserve scarce resources. From policy
standpoint, a quota is not as desirable as a tariff since a quota
generates no revenues for a country. There are three kinds of
quotas: absolute, tariff, and voluntary.
2. Absolute Quotas- An absolute quota is the most restrictive
of all. It limits in absolute terms the amount imported
during a quota period. Once filled, further entries are
prohibited. Some quotas are global, but others are allocated
to specific foreign countries.
3. Tariff Quotas- A tariff quota permits the entry of a limited
quantity of the quota product at a reduced rate of duty.
Quantities in excess of the quota can be imported but are
subject to a higher duty rate. Through the use of tariff
quotas, a combination of tariffs and quotas is applied with
the primary purpose of importing what is needed and
discouraging excessive quantities through higher tariffs.
4. Voluntary Quotas- a voluntary quota differs from the
other two kinds of quotas, which are unilaterally imposed. A
voluntary quota is a formal agreement between nations or
between a nation and an industry. This agreement usually
specifies the limit of supply by product, country, and
volume.
Financial Control
Financial regulations can also function to restrict international
trade. These restrictive monetary policies are designed to control
flow so that currencies can be defended or imports controlled.
For example, to defend the weal Italian lira, Italy imposed a 7
percent tax on the purchase of foreign currencies. There are
several forms that financial restrictions can take.
1. Exchange control -An exchange control is a technique that
limits the amount of the currency that can be taken abroad.
The reason exchange controls are usually applied is that the
local currency is overvalued, thus causing imports to be paid
for in smaller amounts of currency. Purchasers then try to
use the relatively cheap foreign exchange to obtain items
either unavailable or more expensive in the local currency.
80
Exchange controls also limit the length of time and amount

of money an exporter can hold for the goods sold.
2. Multiple exchange Rates multiple rates a form of exchange
regulation or barrier. The objectives of multiple exchange
rates are twofold: to encourage exports and imports of
certain goods and to discourage exports and imports of
certain goods and to discourage exports and imports of
others. This means that there is no single rate for all
products or industries. But with the application of multiple
exchange rates, some products and industries will benefit
and some will not.
3. Prior import Deposits and credit Restrictions. Financial
barriers can also include specific limitations or import
restraints, such as prior import deposits and credit
restrictions. Both of these barriers operate by imposing
certain financial restrictions on importers. A government can
require prior import deposits (forced deposits) that make
imports difficult by tying up an importer 2& #1& s
capital. In effect the importer is paying interest for money
borrowed without being able to use the money or get
interest earnings on the money from the government.
Credit restrictions apply only to imports; that is, exporters
may be able to get loans from the government, usually at
very favorable rates, but importers will not be able to receive
any credit or financing from the government. Importers
must look for loans in the private sector-=- very likely at
significantly higher rates, if such loans are available at all.
4. Profit Remittance Restrictions another form of exchange
barrier is the profit remittance restriction. ASEAN countries
share a common philosophy in allowing unrestricted
repatriation of profits earned by foreign companies.
Singapore, in particular, allows the unrestricted movement
of capital. But many countries regulate the remittance of
profits earned in local operations and sent to a parent
organisation located abroad.
Partner or Enemy?
By Philip R. Agress And Krysten B. Jenci
Office of Japan Trade Policy U.S. Department of Commerce
There is no telling how different our streets and high-ways
would look had Japanese car companies not been able to sell
their cars in the U.S. market when they first came to the United
States in the 1960s and 1970s. Since the days of the ultracompact Honda Civics which could barely make it up the hilly
roads in California, U.S. consumers have had the opportunity to
choose from a wide variety of high-quality Japanese cars and
parts. In fact, in the last twenty-five years, Japan has sent 40
million cars to the United States.
This competition from Japan has helped ensure that U.S. auto
and auto parts companies remain top-notch, world-class
competitors. Is the U.S. auto and auto parts companys fierce
competitors in the United States, they also compete aggressively
all over the world.
In Japan the U.S. companies have taken specific steps to tailor
their products specifically to Japanese consumers. Today,
American auto manufacturers sell 101 products in the Japanese
In the recently concluded automobile negotia-tions with Japan,

all the United States asked was that Japan provides the same
free access to its market that we provide to their companies here.
Denial of this ac-cess has cost substantial loss bf jobs and
business op-portunities in the. United States and other
countries.
Ford, GM, Chrysler, and U.S. parts manufactur-ers have had
great success in markets all over the world from Europe to
other Asian markets. But when they have tried to sell their
products in Japan, they con-fronted a web of unnecessary and
burdensome regu-lations, informal and artificial barriers, and
business practices that made it extremely difficult to sell their
products in Japan.
After a significant investment of time and re-sources trying to
crack the Japanese market, these companies turned to the U.S.
Government for help in trying to weed through some of the
burdensome reg-ulations, break up some of the exclusive
business re-lationships, and create an environment which
would al-low them to sell their autos and auto parts in Japan.
The Clinton Administration was eager to take on the challenge.
After all, autos and auto parts represent nearly 60 percent of our
trade deficit with Japan. These industries support about 2.5
million U.S. jobs in sec-tors from semiconductors to rubber
and glass.
The Agreement
After twenty-two months of intensive negotiations with Japan,
a negotiating team led by Under Secretary, of Commerce for
International Trade Jeffrey E. Garten, and Ambassador Ira
Shapiro from USTR, reached an historic, market-opening
agreement on autos and auto parts on June 28, 1995.
This agreement will increase access to Japanese dealerships for U.S.
auto manufacturers, help deregu-late Japans repair parts market,
and lead to increased Japanese purchases of U.S. parts both here
and in Japan. Accomplishments in these three areas should go a
long way in helping U.S. auto and auto parts companies substantially increase their sales to Japanese companies.
Dealerships
One key problem for U.S. auto companies trying to sell their
products in Japan is that they were effectively blocked from
getting their cars to Japanese show-rooms. This was because
Japanese dealers were afraid that their primary Japanese
suppliers would retaliate against them if they entered into
independent franchise agreements with foreign vehicle manufacturers. As a result of the agreement, the Japanese Government
has promised to vigorously enforce its antitrust laws, and to
take actions to assure Japanese dealers that they are free to carry
foreign cars, without risking business re-lationships with their
primary suppliers.
As a result of this agreement, we expect U.S. auto companies to
open an additional 200 outlets in Japan by 1996, and 1,000 new
outlets by the year 2000.
Deregulation of Aftermarket For Parts

U.S. parts suppliers also faced great difficulties trying to sell their
replacement parts in the Japanese aftermar-ket. To deal with this
problem, the United States sought to substantially reduce the
number of Japanese regulations that greatly constrain consumer
choice and the ability of foreign suppliers to have their products
reach the end-user. The multi-billion-dollar Japanese market
for replacement auto parts is restricted by a complex system of
regulations that go well beyond what is needed for safety or
environmental protection. These regulations involve a complex
car inspection system that forces Japanese consumers to have
their cars repaired in certified garage_ that tend to only carry
Japanese parts. The regulations also stipulate that any repair to
critical parts must be done at special garages, and that any
modifications made to cars must be reinspected.
One American expert on this system recently said in a Japan
Digest article, Its a no-brainer to say that $1 U.S.-made spark
plugs should have long since captured 100 percent of a market
in which Japanese plugs sell for $8 apiece. They havent because
inspection laws com-pel drivers to use authorized parts.
Toyotas can only use pure Toyota parts, Nissans pure Nissan
parts, etc.
Spark plugs are just one example. Because of Japans closed
market and the lack of competition, prices for auto parts far
exceed prices in the United States. An alternator which sells for
$120 in the United States sells for $600 in Japan. Shock
absorbers that sell in the United States for $228 sell for $605 in
Japan. As a result of the automotive agreement, Japanese consumers should now be able to save over $300 when they need
new shocks for their cars by purchasing high- quality U.S.
products.
The agreement cuts through some of the bur-densome
aftermarket regulations, and allows market forces a greater
chance to work properly in ensuring that the best quality and
lowest-priced products reach the Japanese consumer. The
agreement specifically re-duces the number of parts on the
critical parts list, reduces the number of modifications subject
to in-spection, and makes it easier to establish garages that can
sell foreign auto parts.
Original Equipment Parts Purchases

In the area of original equipment parts sales to Japan-ese
manufacturers in Japan as well as the. United States, the U.S.
addressed a very real problem: the: closed keiretsu purchasing
relationships between Japanese manufacturers and their key
suppliers. Despite the world-class competitiveness and strong
price advan-tages of U.S. parts suppliers, Japanese manufacturers have simply not been responding to market forces.
To help address this situation, the five major Japanese auto
manufacturers have released business plans which will lead to
increased parts purchases by Japanese transplants in the United
States, increased auto production in the United States, and
increased im-ports of foreign auto parts into Japan. We expect
that the transplants wilt purchase $6.75 billion more in parts
from U.S. suppliers by 1998, Japanese car makers will increase
auto production in the U.S. to 2.65 million in 1998, and Japan
will import $6 billion worth of foreign parts by 1997.
81
market, sixty of which are right-hand drive vehicles. These

include the Jeep Cherokee, Ford Probe and Mondeo, and GM
Opel. More are, on the way. But in .the last/twenty-five years,
the United States has only shipped 400,000 cars to Japan.
Many agencies in the U.S. Government con-tributed to bringing

about an agreement in this sector so critical to our nations
economy. The Commerce De-partment, which played a key role
throughout the nearly 2 years of talks, succeeded in working
with other gov-ernmental agencies and industry groups to
avoid a seri-ous trade conflict with Japan, and in reaching a
mean-ingful agreement. International Economic Policys Office
of Japan led die negotiations within the Department, along
with Trade Developments Office of Automotive Affairs.
Ambassador Mickey Kantor, the United States Trade Representative, acknowledged this fact when he stressed in a recent letter
to Senator Bob Dole, . . . the Commerce Department
provides essential analytic sup-port and in-depth knowledge of
foreign trade practices that have been invaluable to USTR and
other agencies involved in negotiation and implementing trade
agree-ments . . . the Commerce Departments detailed knowledge or-the Japanese automotive sector has been essential to
our efforts to open the Japanese auto and auto parts markets to
foreign competition.
Of course, an international trade agreement is only as good as
its implementation. The Commerce Department will be
responsible for carefully monitoring and implementing this
agreement. Martina Bradford, Vice President for government
affairs at A T& T Corp., recently said in a Washington Post article,
trade agree-ments only yield results through vigorous monitoring, enforcement and measurement of results. The
De-partment of Commerce will implement this agreement with
the vigor and energy it demonstrated in helping to negotiate it.
As former Secretary of Commerce Ron Brown noted, The
Commerce Department is proud to have played such a critical
role in negotiating an agreement which deals with many of the
very real and specific problems U.S. businesses face in trying to
penetrate the Japanese market. The level of cooperation
demon-strated by the Department of Commerce, USTR, and
the U.S. auto and auto parts industries in developing an
agreement which deals with such complex and tech-nical barriers
and regulations in Japan should set a new standard for future
negotiations in other areas.
U.S.-Japan Auto and Auto Parts

Agreement Fact Sheet
The United States and Japan on June 28 reached an his-toric
agreement, which will result in significantly in-creased market
access for autos and auto parts, and structural change in the
Japanese automotive sector.
This is the sixteenth trade agreement the Clin-ton Administration has completed with Japan in the past twenty-eight
months-an unprecedented rate of success. These agreements
have opened major trade sectors.
The missing piece has been the autos and auto parts sector.
This area represents $37 billion of our $66 billion trade deficit
with Japan, nearly 60 percent of our Japan deficit and 25 percent
of our overall trade deficit.
Since auto negotiations began in October 1993, the Administration has emphasized three overriding goals for opening the
auto and auto parts sector. This agreement meets our goals in
each area:
82
Deregulation of the Replacement Parts Mar-ket in

Japan: A thicket of bureaucratic regulations have blocked
competitive U.s. auto parts from Japans multibillion-dollar
market for replacement parts. This agreement clears away
layers of need-less regulations, introducing new competition
and opening a market previously reserved for Japanese
suppliers.
Access to Dealerships: This agreement will give U.s. auto

companies increased access to Japanese dealership networks.
U.S. auto companies will be able to sell through more
dealerships in Japan. Japanese consumers will have the
option to buy our reasonably priced, high-quality cars. We
expect U.S. auto companies to open an additional 200 outlets
by 1996 and 1,000 new outlets by 2000, to support the U.S.
industrys objective of exporting 300,000 vehicles by the year
2000.
Increased Purchases of Original Equipment Parts: In

Japanese companies, the original equip-ment auto parts
market is dominated by keiretsu-unique, interlocking
relationships be-tween manufacturers, suppliers,
distributors, and fi-nancial institutions. The keiretsu act
unfairly to block foreign access to the market
Japans five largest auto companies are an-nouncing plans to

increase their parts purchases in North America, including
diversification into high-value components such as transmissions and engines; to increase their vehicle production in North
America by $6.7 billion; and to purchase $6 billion of foreign
parts by 1998 for production use in Japan.
Questions
1. Does Japans trade success owe more to its man-ufacturing
superiority or to its mercantilistic trad-ing philosophy (i.e.
import barriers)? Does the Japanese government use nontariff barriers unrea-sonably to restrict imports?
2. Given the huge trade deficit the United States has with
Japan, should the United States continue to trade with
Japan?
3. Some claim that U.S. trade deficits are caused by U.S.
adoption of a free-trade philosophy. Do you think that the
United States has fewer import bar-riers than its trading
partners?
4. Will protectionist measures adopted by the U.S. government
be effective in increasing employment in the United States?
Do you think that the U.S. governments use of OMAs
against Japanese auto imports benefits the United States?
5. What can U.S. firms (including auto makers) do to overcome
Japanese trade barriers and improve their performance?
Effect of Controllable and Uncontrollable

Factors
The call from Hong Kong was intriguing: Go to South Korea
and be the franchisee of an American premium ice cream to
capitalize on the Koreans new disposable income and their
growing appetite for Western fast-food products.
Within six months of my application, the government granted
me permission to bring the ice cream, Hobsons, to Seoul with
only two non-tariff trade conditions: Make my ice cream in
Korea after a year of operation and at the same time take on a
Korean partner who had at least a 25 percent stake in the
company.
I agreed, and chose Itaewon for my site, figuring that between
the Korean bar girls and the U.S. Army up the road it would
give me a good cross-section of East and West.
The Early Years-Getting Started. Almost a half-year after
start-up, I still thought it was a timely idea but it certainly hadnt
been easy pickings. The Korean bar girls, for instance, thought
my ice cream was too expensive, and Koreans in general are
highly suspicious of new products. Government red tape has
always been horrendous and foreigners are not welcome.
But because internationalization and economic progress are
hard to separate, Seoul had been coming to accept foreigners
and their products as a necessary ingredient for their own
growth.
The irony, however, is that Korean intransigence was not the
only problem a Yankee entrepreneur faced here: Washington
trade- bashing can take its toll as well. In the mid-1990s the U.S.
govern-ment had been pressuring this country to raise the value
of the won, to make Korean exports more expensive and U.S.
imports less. On top of this was Congresss omnibus trade bill,
which forces Korea to open its markets or face punitive
sanctions on its own exports to the United States. Although
these efforts were de-signed to help American traders like me, I
have seen all too often how the best-laid political plans can
actually make it more diffi-cult for us to maintain a foothold in
these countries.
In fairness, it also must be said that some American companies
often bring this on themselves. Evidence indicates that
American companies are badly outclassed by their failure to take
Asian mar-kets seriously and a tendency to follow the laws of
least resistance by concentrating on selling within the borders of
the United States.
American companies have tried to cheat by getting Congress to
force not only Korea, but also Japan, Hong Kong, Singapore,
and other countries to raise the value of their currency. Those
forces drove the won to a value of 590 to 600 won for one dollar
by the end of 1994, when just two years earlier $1 would buy 890
won. I thus found myself importing more dollars just to stay
even with my original projections when it was 800 won to the
dollar. In other words, it cost me 16 percent more dollars just to

get started operating, and that was the margin I was hoping I
could apply toward profits. Any price increase to recoup losses
risked pricing my ice cream out of the Korean market.
Another result of exchange rate jiggling was inflation. This was
a by-product of the wons strengthening against the dollar, reflected in the many outside investment dollars trying to find a
home in Koreas currency and stock market.
Consequently, everything came with a price tag that equaled or
exceeded what one could buy in the United States. On top of this
were import taxes, tariffs, and non-tariff barriers on imported
capi-tal goods and, in my case, finished ice cream. Duties, for
example, ranged from 20-38 percent additional money.
U.S. trade bullying also fans the flames of anti-Americanism here,
and American business pays for that. Even though Washing-ton
had some legitimate gripes about closed Korean markets, Koreans felt that they were being pushed around and that the
United States didnt recognize the great strides they had made.
For me this resentment translated into vandalism of my
storefront prop-erty, such as knocked-down signs, broken patio
tables and chairs, pane-glass windows smeared with soda and
dirt, and even human feces left on my doorstep. It also manifested itself by Koreans staying away from buying my ice cream.
The Korean bureaucracy seemed to share the suspicion of foreigners trying to do business here. When I made arrangements
for the arrival of my first ice cream shipment into Pusan a
month be-fore the scheduled opening of my store, the
authorities informed me that they couldnt care less about my
ice cream and that I was illegally in the country. The upshot was
my lawyers spent three weeks trying to persuade some secondechelon bureaucrat that I was here under valid reasons, to no
avail. Desperate, and a day away from packing my bags and
buying a one-way ticket to Cali-fornia, I called the one friend I
had in the government. By a one--in-a-thousand chance, he
knew the second-echelon bureaucrat and was able to clear away
his mental block about me.
But this was a fluke. I have no doubt that the mental block was
the Korean dairy farmers complaining about foreign imports of
ice cream, which in turn was part of the bigger picture of
pressure that Korean agriculture was receiving from U.S. trade
negotiators to open its market.
Finally, coinciding with the Olympic games in Seoul the Ko-rean
economy really began to take off. By the mid-1990s South
Koreans were buying more products from all over the world.
The efforts of our trade negotiators and trade policies apparently were finally having some effect. A few American
companies like mine were at last enjoying moderate successes in
South Korea, but some were still not.
The question was whether all American companies could take
advantage of the much broader access into the Korean
83
CASE 1:
SELLING U.S. ICE CREAM IN KOREA
market. Some Korean business leaders criticized the level of

effort of some American managers. Woo Choong Kim,
founder of the Dae-woo business empire, said: In the old
days, Americans worked hard to challenge new frontiers. But as
their economy got mature, they became more interested in nice
houses, jogging, and having a good time than in doing
business. How can you compete without dedication? It is not
the management system that is not working in American
companies, it is the people not working hard.
Indeed, one U.S. Commerce Secretary lamented at the time that
although Americans are great at coming up with new inventions, they are not good at getting them into products to be
sold.
Establishing a Beachhead. For example, in the early 1990s
Korean executives were almost throwing machine-tool and
welding-machine orders at American companies-with the U.S.
con-cerns dropping the ball almost every time. The reasons
given by Koreans were various: inflexibility about the terms of
a contract, poor service, or just plain not trying hard enough
(e.g., not work-ing on Saturdays). The one American company
that did measure up was Varian Associates. Its management
team had projected that the bulk of world manufacturing
would be done in Asia in the next few decades and that U.S.
companies were missing out on Asias rush to outfit the
factories building more and more of the worlds cars, computers, and fast-food plants.
Varian installed 18 Korean nationals and several expatriates in a
Seoul office to market its equipment and match Japanese service. Unlike many other American companies, Varian had
ac-commodated the Korean culture and way of doing business
by establishing a beachhead presence in one of the worlds
fastest- growing markets.
Surviving the New Disasters. For almost 10 years now the
business partnership in South Korea has been rewarding. Yes,
there have been ups and downs, but I myself have learned that it
is important to be here and to learn their ways. In doing so, we
have helped each other. The Korean company I chose to do
business with, for example, is learning from me an ice creammaking tech-nology and formula that enhances its
competitiveness in that in-dustry at home and abroad. I, in turn,
am learning from my partner how to be competitive in Korea.
Despite what we have gained from our South Korean adventure two new problems challenge us now. First is the meltdown
of the Korean won during the winter of 1997-98. In that time
period the wons, value halved from 860 to the dollar to 1710 to
the dol-lar. This has proven to be a disaster for our imports of
ice cream, and for our fellow American competitors as well. We
are some-what more competitive because part of our production is local, thank goodness. But the general consumers
reaction against im-ports in a time of financial crisis has made
the whole ice cream category less appealing.
Then throw on top of that the contamination scare and our
sales really tanked. This last problem got started in October
1997 when E. coil bacteria were discovered on the surface of
some imported American beef here in South Korea. When
Hong Kong authorities found bacteria contaminating American
ice cream shipments there, Korean authorities began to check
84
here as well. Sure enough, they found a different form of

dangerous bac-teria in one American brand. Now all brands are
receiving more scrutiny from government health officials and
concerned con-sumers alike.
Questions
1. Identify each of the domestic and foreign uncontrollable
elements that this U.S. ice cream franchisee encountered in
Korea.
2. Describe how problems encountered with each
uncontrollable element may have been avoided or
compensated for had the element been recognized in the
planning stage.
3. Identify other problems the franchisee may encounter in the
future.
CASE 2 :
UNILEVER AND NESTLE-AN ANALYSIS
While Unilever and Nestle have engaged in international
market-ing their entire corporate existence, they are very different
compa-nies in their approaches to international marketing and
corporate philosophies. Both companies maintain very
extensive Web sites. Your challenge in this case is to visit both
Web sites, carefully read the information presented, and write a
report comparing the two companies on the points that follow.
1.
Philosophies on international marketing.
2.
Corporate objectives.
3.
Global coverage, that is, number of countries in which they

do business.
4.
Production facilities.
5.
Number of product categories and number of brands

within each category.
6.
Number of standardized versus global brands for each.
7.
Product categories and brands where the two companies

compete.
8.
Brands that are standardized, that is, what is standardized

in each brand and what are localized in each brand.
9.
Product research centers.
10. Organization.
11. Environmental concerns.
12. Research and development.
After completing your analysis, write a brief statement about
the area(s) where Uni-lever is stronger than Nestle and vice
versa, and where Uni-lever is weaker than Nestle and vice versa.
85
CASE 3:
NESTLE-THE INFANT FORMULA INCIDENT
Nestle Alimentana of Vevey, Switzerland, one of the worlds
largest food-processing companies with worldwide sales of
over $8 billion, has been the subject of an international boycott.
For over 20 years, beginning with a Pan American Health
Organiza-tion allegation, Nestle has been directly or indirectly
charged with involvement in the death of Third World infants.
The charges re-volve around the sale of infant feeding formula,
which allegedly is the cause for mass deaths of babies in the
Third World.
In 1974 a British journalist published a report that suggested
that powdered-formula manufacturers contributed to the death
of Third World infants by hard-selling their products to people
inca-pable of using them properly. The 28-page report accused
the industry of encouraging mothers to give up breast-feeding
and use powdered milk formulas. The report was later published by the Third World Working Group a lobby in support
of less-developed countries. The pamphlet was entitled,
Nestle Kills Babies, and accused Nestle of unethical and
immoral behavior.
Although there are several companies that market infant baby
formula internationally, Nestle received most of the attention.
This incident raises several issues important to all multinational
com-panies. Before addressing these issues, lets look more
closely at the charges by the Infant Formula Action Coalition
(INFACT) and others and the defense by Nestle.
The Charges. Most of the charges against infant formulas focus on the issue of whether advertising and marketing of such
products have discouraged breast feeding among Third World
mothers and have led to misuse of the products, thus contributing to infant malnutrition and death. Following are some of
the charges made:
A Peruvian nurse reported that formula had found its way to

Amazon tribes deep in the jungles of northern Peru. There,
where the only water comes from a highly contaminated
river-that also serves as the local laundry and toilet -formulafed babies came down with recurring attacks of diarrhea and
vomiting.
Throughout the Third World, many parents dilute the

formula to stretch their supply. Some even believe the bottle
itself has nutrient qualities and merely fill it with water. The
result is extreme malnutrition.
One doctor reported that in a rural area, one newborn male

weighed 7 pounds. At four months of age, he weighed 5
pounds. His sister, aged 18 months, weighed 12 pounds,
what one would expect a 4-month-old baby to weigh. She
later weighed only 8 pounds. The children had never been
breast-fed, and since birth their diets were basically bottlefeeding. For a four-month baby, one tin of formula should
have lasted just under three days. The mother said that one
tin lasted two weeks to feed both children.
86
In rural Mexico, the Philippines, Central America, and the

whole of Africa, there has been a dramatic decrease in the
incidence of breast feeding. Critics blame the decline largely
on the intensive advertising and promotion of infant
formula. Clever radio jingles extol the wonders of the white
mans powder that will make baby grow and glow. Milk
nurses visit nursing mothers in hospitals and their homes
and provide samples of formula. These activities encourage
mothers to give up breast feeding and resort to bottle
feeding because it is the fashionable thing to do or because
people are putting it to them that this is the thing to do.
The Defense. The following points are made in defense of the

marketing of baby formula in Third World countries:
First, Nestle argues that the company has never advocated

bottle-feeding instead of breast-feeding. All its products carry
a statement that breast-feeding is best. The company states
that it believes that breast milk is the best food for infants
and encourages breast feeding around the world as it has
done for decades. The company offers as support of this
statement one of Nestles oldest educational booklets on
Infant Feeding and Hygiene, which dates from 1913 and
encourages breast feeding.
However, the company does believe that infant formula has

a vital role in proper infant nutrition as (1) a supplement,
when the infant needs nutritionally adequate and appropriate
foods in addition to breast milk and, (2) a substitute for
breast milk when a mother cannot or chooses not to breast
feed. One doctor reports, Economically deprived and thus
dietarily deprived mothers who give their children only breast
milk are raising infants whose growth rates begin to slow
noticeably at about the age of three months. These mothers
then turn to supplemental feedings that are often harmful to
children. These include herbal teas and concoctions of rice
water or corn water and sweetened, condensed milk. These
feedings can also be prepared with contaminated water and
are served in unsanitary conditions.
Mothers in developing nations often have dietary

deficiencies. In the Philippines, a mother in a poor family
who is nursing a child produces about a pint of milk daily.
Mothers in the United States usually produce about a quart
of milk each day. For both the Philippine and U.S. mothers,
the milk produced is equally nutritious. The problem is that
there is less of it for the Philippine baby. If the Philippine
mother doesnt augment the childs diet, malnutrition
develops.
Many poor women in the Third World bottle-feed because

their work schedules in fields or factories will not permit
breast-feeding. The infant feeding controversy has largely to
do with the gradual introduction of weaning foods during
the period between three months and two years. The average
Weaning foods can be classified as either native cereal gruels

of millet or rice, or commercial manufactured milk formula.
Traditional native weaning foods are usually made by mixing
maize, rice, or millet flours with water and then cooking the
mixture. Other weaning foods found in use are crushed
crackers, sugar and water, and mashed bananas.
There are two basic dangers to the use of native weaning foods.
First, the nutritional quality of the native gruels is low. Second,
microbiological contamination of the traditional weaning foods
is a certainty in many Third World settings. The millet or the
flour is likely to be contaminated, the water used in cooking will
most certainly be contaminated, the cooking containers will be
contaminated, and therefore, the native gruel, even after it is
cooked, is frequently contaminated with colon bacilli, staph, and
other dangerous bacteria. Moreover, large batches of gruel are
often made and allowed to sit, inviting further contamination.
Scientists recently compared the microbiological

contamination of a local native gruel with ordinary
reconstituted milk formula prepared under primitive
conditions. They found both were contaminated to similar
dangerous levels.
The real nutritional problem in the Third World is not
whether to give infants breast milk or formula; it is how to
supplement mothers milk with nutritionally adequate foods
when they are needed. Finding adequate locally produced,
nutritionally sound supplements to mothers milk and
teaching people how to prepare and use them safely is the
issue. Only effective nutrition education along with improved
sanitation and good food that people can afford will win the
fight against dietary deficiencies in the Third World.
The Resolution. In 1974, Nestle, aware of changing social pat-terns

in the developing world and the increased access to radio and
television there, reviewed its marketing practices on a region--byregion basis. As a result, mass media advertising of infant for-mula
began to be phased out immediately in certain markets and, by
1978, was banned worldwide by the company. Nestle then undertook to carry out more comprehensive health education
pro-grams to ensure that an understanding of the proper use of
their products reached mothers, particularly in rural areas.
Nestle fully supports the WHO (World Health Organization)
Code. Nestle will continue to promote breast-feeding and ensure
that its marketing practices do not discourage breast-feeding anywhere. Our company intends to maintain a constructive dialogue
with governments and health professionals in all the countries it
serves with the sole purpose of servicing mothers and the health
of babies. -this quote is from Nestle Discusses the Recommended WHO Infant Formula Code.
In 1977, the Interfaith Center on Corporate Responsibility in
New York compiled a case against formula feeding in developing
nations, and the Third World Institute launched a boycott against

many Nestle products. Its aim was to halt promotion of infant
for-mulas in the Third World. The Infant Formula Action
Coalition (IN-FACT, successor to the Third World Institute),
along with several other world organizations, successfully lobbied
the World Health Organization (WHO) to draft a code to
regulate the advertising and marketing of infant formula in the
Third World. In 1981, by a vote of 114-1 (three countries
abstained and the United States was the only dissenting vote),
118-member nations of WHO endorsed a vol-untary code? The
eight-page code urged a worldwide ban on promo-tion and
advertising of baby formula and called for a halt to distrib-ution
of free product samples and/or gifts to physicians who promoted the use of the formula as a substitute for breast milk.
In May 1981 Nestle announced it would support the code and
waited for individual countries to pass national codes that
would then be put into effect. Unfortunately, very few such
codes were forthcoming. By the end of 1983, only 25 of the 157
member na-tions of the WHO had established national codes.
Accordingly, Nestle management determined it would have to
apply the code in the absence of national legislation, and in
Febru-ary 1982 issued instructions to marketing personnel,
delineating the companys best understanding of the code and
what would have to be done to follow it.
In addition, in May 1982 Nestle formed the Nestle Infant Formula Audit Commission (NIFAC), chaired by former Senator
Ed-mund J. Muskie, and asked the commission to review the
com-panys instructions to field personnel to determine if they
could be improved to better implement the code. At the same
time, Nestle continued its meetings with WHO and UNICEF
(United Nations Childrens Fund) to try to obtain the most
accurate interpretation of the code.
NIFAC recommended several clarifications for the instructions
that it believed would better interpret ambiguous - areas of the
code; in October 1982, Nestle accepted those recommendations
and issued revised instructions to field personnel.
Other issues within the code, such as the question of a warning
statement, were still open to debate. Nestle consulted extensively with WHO before issuing its label warning statement in
October 1983, but there was still not universal agreement with
it. Acting on WHO recommendations, Nestle consulted with
firms experienced and expert in developing and field-testing
educational materials, so that it could ensure that those
materials met the code.
When the International Nestle Boycott Committee (INBC)
listed its four points of difference with Nestle, it again became a
matter of interpretation of the requirements of the code. Here,
meetings held by UNICEF proved invaluable, in that -UNICEF
agreed to define areas of differing interpretation-in some cases
providing definitions contrary to both Nestles and INBCs
inter-pretations.
It was the meetings with UNICEF in early 1984 that finally led
to a joint statement by Nestle and INBC on January 25. At that
time, INBC announced its suspension of boycott activities, and
Nestle pledged its continued support of the WHO code.
87
well-nourished Western woman, weighing 20 to 30 pounds

more than most women in less-developed countries, cannot
feed only breast milk beyond five or six months. The claim
that Third World women can breast feed exclusively for one
or two years and have healthy, well-developed children is
outrageous. Thus, all children beyond the ages of five to six
months require supplemental feeding.
Nestle Supports WHO Code. The company has a strong

record of progress and support in implementing the WHO
Code, including:
Immediate support for the WHO Code, May 1981; and

testimony to this effect before the U.S. Congress, June 1981.
Issuance of instructions to all employees, agents, and

distributors in February 1982 to implement the code in all
Third World countries where Nestle markets infant formula.
Establishment of an audit commission, in accordance with

Article 11.3 of the WHO Code, to ensure the companys
compliance with the code. The commission, headed by
Edmund S. Muskie, was composed of eminent clergy and
scientists.
Willingness to meet with concerned church leaders,

international bodies, and organization leaders seriously
concerned with Nestles application of the code.
Issuance of revised instructions to Nestle personnel,

October 1982, as recommended by the Muskie committee to
clarify and give further effect to the code.
Consultation with WHO, UNICEF, and NIFAC on how to

interpret the code and how best to implement specific
provisions including clarification by WHO/UNICEF of the
definition of children who need to be fed breast milk
substitutes, to aid in determining the need for supplies in
hospitals.
Nestle Policies. In the early 1970s Nestle began to review its

infant formula marketing practices on a region-by-region basis.
By 1978 the company had stopped all consumer advertising and
direct sampling to mothers. Instructions to the field issued in
Feb-ruary 1982 and clarified in the revised instructions of
October 1982 to adopt articles of the WHO Code as Nestle
policy include:
No advertising to the general public.
No sampling to mothers.
No mother-craft workers.
No use of commission/bonus for sales.
No use of infant pictures on labels.
No point-of-sale advertising.
No financial or material inducements to promote products.
No samples to physicians except in three specific situations:
A new product, a new product formulation, or a new

graduate physician; limited to one or two cans of product.
Limitation of supplies to those requested in writing and

fulfilling genuine needs for breast milk substitutes.
A statement of the superiority of breast-feeding on all

labels/materials.
Labels and educational materials clearly stating the hazards

involved in incorrect usage of infant formula, developed in
consultation with WHO/UNICEF.
Even though Nestle stopped consumer advertising, it was able

to maintain its share of the Third World infant formula market.
By 1988 a call to resume the seven-year boycott was called for by
a group of consumer activist members of the Action for
88
Corporate Accountability. The group claimed that Nestle was

distributing free formula through maternity wards as a promotional tactic that undermines the practice of breast-feeding. The
group claims that Nestle and others including American Home
Products, have continued to dump formula in hospitals and
maternity wards and that, as a result, babies are dying as the
companies are violating the WHO resolution. As late as 1997
the Interagency Group on Breastfeeding Monitoring (IGBM)
claims Nestle continues to sys-tematically violate the WHO
code. Nestles response to these ac-cusations is included on their
Web site (see www.nestHi.com for details).
The boycott focus is Tasters Choice Instant Coffee, Coffeemate Nondairy Coffee Creamer, Anacin aspirin, and Advil.
Representatives of Nestle and American Home Products re-jected

the accusations and said they were complying with World Health
Organization and individual national codes on the subject.
The New Twist. A new environmental factor has made the entire case more complex: Circa 1998 it was believed that some 3.8
million children around the world have contracted HIV at their
mothers breasts. In affluent countries mothers can be told to
bottle feed their children. However, 90 percent of the child
infections occur in developing countries. There the problems of
bottle-feed-ing remain. Further, in even the most infected areas,
70 percent of the mothers do not carry the virus, and breastfeeding is by far the best option. And the vast majority of
pregnant women in the de-veloping countries have no idea
whether they are infected or not. One concern is that large
numbers of healthy women will switch to the bottle just to be
safe. Alternatively, if bottle-feeding be-comes a badge of HIV
infection, mothers may continue breast-feeding just to avoid
being stigmatized. In Thailand, pregnant women are offered
testing, and if found HIV positive, are given free milk powder.
But in some African countries where women get pregnant at
three times the Thai rate and HIV infection rates are 25 percent
compared to the 2 percent in Thailand, that solution is much
less feasible.
The Issues. Many issues are raised by this incident and the ongoing swirl of cultural change. How can a company deal with a
worldwide boycott of its products? Why did the United States
de-cide not to support the WHO Code? Who is correct, WHO
or Nestle? A more important issue concerns the responsibility
of MNC marketing in developing nations. Setting aside the
issues for a moment, consider the notion that, whether
intentional or not, Nestles marketing activities have had an
impact on the behavior of many people. In other words, Nestle
is a cultural change agent. And, when it or any other company
successfully introduces new ideas into a culture, the culture
changes and those changes can be functional or dysfunctional to
established patterns of behavior. The key issue is what responsibility does the MNC have to the culture when, as a result of
its marketing activities, it causes change in that culture? Finally,
how might Nestle now participate in the battle against the
spread of MV and AIDS in developing countries?
Questions
1. What are the responsibilities of companies in this or similar
situations?
2. What could Nestle have done to have avoided the accusations

of killing Third World babies and still market its product?
3. After Nestles experience, how do you suggest it, or any other
company, can protect itself in the future?
4. Assume you are the one who had to make the final decision
on whether or not to promote and market Nestles baby
formula in Third World countries. Read the section titled
Ethical and Socially Responsible Decisions in Chapter 5
(pp. 138-39) as a guide to examine the social responsibility
and ethical issues with the marketing approach and the
promotion used. Were the decisions socially responsible?
Were they ethical?
5. What advice would you give to Nestle now in light of the
new problem of HIV infection being spread via mothers
milk?
89
EURO DISNEY(A)
Michael Eisner, chairperson of Walt Disney Company, was

sitting in his Los Angeles office. It was New Years Eve 1993,
and Eisner had one meeting left before he could go home to
celebrate a quiet holiday. The meeting was with yet another
group of high-powered consultants from one of the worlds
most prestigious general management and strategy consulting
companies. The consultants had assembled a multidisciplinary
team include financial, marketing, and strategic planning experts
from the New York and Paris of-fices. The meeting couldnt
wait until after the holidays -the topic, what to do about Euro
Disney, was that critical. The consultants were asked by the
consortium of bank lenders to provide an additional perspective on the prob-lems of Euro Disney and to make
recommendations to Eisner and Disney management on what
should be done.
In the 10 years since Eisner and his senior manage-ment team
had arrived, they had turned Disney into a com-pany with
annual revenues of $8.5 billion, compared with $1 billion in
1984. For Eisner, his track record was impec-cable. From the
time they came in, they had never made a single misstep, never a
mistake, never a failure, according to a former Disney executive.
There was a tendency to be-lieve that everything they touched
would be perfect. Eisner was particularly proud of the success
of the im-mensely profitable Tokyo Disneyland, which had
more vis-itors in 1993 than even the two parks in California and
Florida. Based on the companys success in the United States
and Japan, Eisner had vowed to make Euro Disney, located
outside of Paris, the most lavish project that Disney had ever
built. Eisner was obsessed with maintaining Disneys reputation for quality and he listened carefully to the designers who
convinced them that Euro Disney would have to brim with
detail to compete with the great monu-ments and cathedrals of
Europe. Eisner believed that Euro-peans, unlike the Japanese,
would not accept carbon copies. Construction of the park alone
(excluding the hotels) was approaching $2.8 billion. In developing Euro Disney, Eisner had learned from some of the
mistakes made on other pro-jects. For example, in Southern
California, Disney let other companies build the hotels to house
visitors and in Japan; Disney merely collected royalties from the
park rather than having an equity ownership stake.
In preparing for the meeting with the consultants, Eisner was
shuffling through some of the papers on his desk. An article in
that weeks French news magazine Le Point quoted Eisner as
saying that Euro Disney might be shut down if Disney failed
to reach an agreement with its creditor banks on a financial
rescue plan by March 31. The companys annual report for 1993
said that Euro Disney was the companys first real financial
disappointment since Eisner had taken over in 1984. Eisners
defense had been to publicly blame the performance on external
factors including the severe European recession, high interest
rates, and the strong French franc. Eisner picked up the
90
financials from the comparable periods from the initial two

years operations of Euro Disney (Exhibit 1) and then quickly,
after reviewing the numbers, put them down. The situation
was deteriorating quickly, he thought. Eisner then turned to the
attendance figures, which were also trending downward
(Exhibit 2).
Review Of Projections/The Initial Plan

Eisner walked to his bookshelf from which he took down a
bound copy of the initial 30-year business plan for Euro
Disney. The plan was done in the typical detailed and methodical Disney fashion. The table of contents was exhaustive,
appearing to cover virtually every detail. Over 200 locations in
Europe were examined before selecting the site just outside
Paris, with Paris being Europes biggest magnet for tourism. A
huge potential population could get to Euro Disney quickly (see
Exhibit 3).
European vacation habits were also studied. Whereas Americans average 2 to 3 weeks vacation, French and Ger-mans
typically have 5 weeks vacation. Longer vacations.
1992-1993
Six Months Ending Sept 30
EXHIBIT 1
1993
1992
Revenues (Frencll francs)
1.8 billion
3.1 billion
Profit/(Loss)
(1.1 billion)
0.7 billion
Years Ending April
(Initial Opening in April 1991)

EXHIBIT 2
Attendance
1993
1992
9.5 million
10.5 million
EXHIBIT 3 European population proximity to euro

Disney
Population (Mil/ions)
Time .to Euro Disney
17
2-hour drive
41
4-hour drive
109
6-hour drive
310
2-hour flights
should translate into being able to spend more time at Euro

Disney.
The French government was spending hundreds of millions of
dollars to provide rail access and other infra-structure improvements. Within 35 minutes, potential visi-tors could get to the
While the weather in France was not as warm as that in

California or Florida, waiting areas and moving side-walks
would be covered to protect visitors from wind, rain, and cold.
Tokyo Disney had been built in a climate similar to Euro
Disney and the company had learned a lot about how to build
and run a park in a climate that was colder and wetter than those
of Florida and California.
The attractions themselves would be similar to those found in
the American parks, with some modifications to increase their
appeal to Europeans. Discoveryland, for ex-ample, would have
attractions based on Frenchman Jules Vernes science fiction; a
theater with a 360-degree screen would feature a movie on
European history. The park would have two official languages,
English and French; a multilingual staff would be on hand to
assist Dutch, German, Italian, and Spanish visitors. Basically,
however, Euro Disneys strategy was to transplant the American
park. Robert Fitzpatrick, a U.S. citizen with extensive ties to
France and the chairperson of Euro Disney, felt it would have
been silly to take Mickey Mouse and try to do surgery to create a
transmogrified hybrid, half French and half American.
Other aspects of the American parks would also be transferred
to France. These include Main Street U.S.A. and Frontier land, as
well as Michael Jacksons Captain EO 3-D movie. Like the
American parks, wine and other alco-holic beverages would not
be served.
Fitzpatricks greatest fear was that we will be too successful and
that too many people would come at peak times, forcing the
park to shut its gates.
Eisner turned to the financing plan, which had been prepared
by chief financial officer (CFO) Gary Wilson, a man known as a
tough negotiator with a knack for creating complex, highly
leveraged financing packages that placed the risk for many
projects outside of Disney while keeping Much of the upside
potential for the company Wilson had subsequently left Disney
to become chief executive officer (CEO) of the parent company
of Northwest Airlines.
The plan had set up a finance company to own the park and
lease it back to an operating company. Under the plan, Disney
held a 17 percent stake in the company, which was to provide
tax losses and borrow capital at relatively low rates. Disney was
to manage the resort for large fees and royalties, while owning
49 percent of the equity in the oper-ating company, Euro
Disney SCA. The remaining shares were sold to the public,
largely to small individual European investors. A total of $3.5
billion in construction loans was raised from dozens of banks
eager to finance the project.
Euro Disney was just the cornerstone of a huge real estate
development planned by Disney in the area. Ini-tially, the area
was to have 5,200 hotel rooms, more than are available in the
entire city of Cannes. The number of rooms was expected to
triple after a second theme park opened in the area. Subsequent
phases of the plan also included office space that would rival
the size of Frances largest office complex, La Defense, in Paris.
Other plans showed shopping malls, golf courses, apartments,

and vacation homes. Key to the plans financial success was that
Euro Disney would tightly control the design and build almost
everything itself and then sell off the completed properties at a
large profit.
The Japanese Experience

Eisner put the book down and picked up another file that
contained an assessment of the incredible success of Tokyo
Disneyland. Seeking to determine if there were any paral-lels
between the Japanese and European experiences, he had
commissioned a study of why the Japanese venture was doing
so well.
Tokyo Disneyland had been open about 11 years and had been
drawing larger crowds than the U.S. parks. Located less than 10
miles from Tokyo, the park drew over 16 million visitors from
throughout Asia in 1993. Tokyo Disneyland is a near replica of
the American original. Most of the signs are in English, with
only occasional Japanese; the Japanese flag is never seen but
variations on the Stars and Stripes appear throughout the park.
In the file, Eisner found a study writ-ten by Masako Notoji, a
Tokyo University professor, who studied the hold that Tokyo
Disneyland has over Japanese people. Notoji wrote that the
Japanese who visit Tokyo Dis-neyland are enjoying their own
Japanese dream, not the American dream. In part, this is
because the, park is so san-itized and precise in how it depicts an
unthreatening, fantasy America that it has become totally
Japanese, just the way that Japanese want it to be. It has been
compared to the Japanese garden, which is a controlled and
confined version of nature that becomes more satisfying and
perfect than nature itself. The Japanese Disneyland, some say,
outdoes the American parks because it is probably cleaner due
to the Japanese obsession with cleanliness.
Notojis report also noted that Tokyo Disneyland opened in
1983. a period in which the Japanese economy was especially
strong. During that time period, the United States was perceived
as a model of an affluent society. At the same time, as a result
of its growing affluenc,e, Japan was starting to feel part of
world culture. Tokyo Disneyland became a symbol for many
people of Japans entry into world culture.
In commenting on the differences between Tokyo and France,
Notojis research hypothesized that . . . the fake-ness of
(Tokyo) Disneyland is not evident because (the Japanese) only
had fantasy images of these things before while Europeans
see the fakeness because they have their own real castles and
many of the Disney characters come from European folk tales.
Eisners secretary announced that the consulting team had
arrived and that the meeting would be held in his con-ference
room. The meeting started with Eisner explaining the assignment and the short time frames in which solu-tions had to be
developed.
Euro Disney Problems

In early February, a team of consultants returned to Eisners
office with the first phase of their study com-pleted. Given the
size and complexity of the problems that they expected to find,
the study had been divided into three phases. The first phase
was a top-level assessment of the problems that they had
91
park from downtown Paris. The opening of the Channel

Tunnels in 1993 would make the trip from London 3 hours
and 10 minutes.
uncovered in the initial month of the study, without any

recommendations as to what should be, done. The second
phase was to identify the most critical problems that needed to
be addressed immediately and to develop, action plans. The
third phase was to identify the re-maining, less critical problems,
and develop recommended plans of action.
by some American as well as French executives. Management,

unfamiliar with the French con-struction industry, had made a
number of critical mistakes including selecting the wrong local
contractors, some of whom went bankrupt. Fortunately,
Fitzpatrick had already been replaced with a French native.
The consultants report identified six critical major problem

areas that they felt had contributed to the prob-lems. The team
felt that, even though not all of the problems could be rectified,
it was critical that Disney management understand the fundamental problems so that they could fix the problems at Euro
Disney and not repeat the same mistakes again should they
expand to other countries. The six critical problem areas were
The firms senior marketing strategist presented the second part

of the report, which focused on cultural and marketing
differences between the U.S. and European markets.
1. Management hubris
2. Cultural differences
3. Environmental and location factors
4. French labor issues
5. Financing and the initial business plan
6. Competition from U.S. Disney parks
Management Hubris
The first issue addressing the way in which Disney management had approached the development of the project and
tactical errors made by members of the management team was
the most sensitive. Because of the sensitivity of this subject, the
consulting firm had brought in the head of their European
practice, based in Paris, to analyze the problem and make the
presentation, Extensive interviews had been conduced with
members of the Disney manage-ment teams, both in the
United States; and in France: aca-demicians who have studied
French and American culture; and executives of the European
banks that had made many of the construction loans as well as
workers at the park.
The initial premise of Euro Disney in the mid-1980s was that
there was no limit to the European publics appetite for
American imports given the success of Big Macs, Coke, and
Hollywood movies, the presentation started off. That initial
assumption totally failed to take into consideration the fact that
the French flatter themselves that they are more resistant to
American cultural imperialism. The her-metically scaled world
of the theme park did not give the French an ability to put their
own mark on the park. Disney was exporting the Am6rican
management system, experi-ence and values with a management style that was brash. Frequently insensitive, and often
overbearing, The Ameri-cans were overly ambitious and always
sure that it would work because they were Disney, and it had
always worked in the past. By starting off on this premise,
Euro Disney quickly became known as a cultural Chernobyl
and it cre-ated hostility from the French people. The initial
arrogance of American management further demoralized the
work-force, creating a spiraling effect that cut down on the
number of French visitors.
Much of this arrogance, the report continued, created tension
and hostility among the management team, The first general
manager, Robert Fitzpatrick, an American, spoke French and
was married to a French woman; how-ever, he was distrusted
92
Cultural Differences/Marketing Issues
The first phase of the analysis had uncovered a number of

obvious problems, some of which had already been recti-fied.
The purpose in identifying these problems, the consul-tants
said, was to be able to be sensitive and to identify other,
possibly more subtle cultural and marketing problems.
While attendance was initially strong at the park, the length of
the average stay was considerably different than at the U.S. parks.
European,s stayed in Euro Disney an average of 2 days and 1
night, arri ving early in the morning of the first day and
checking out early the next day. By comparison, the average
length of the visit in the United States was 4 days. In large part,
this was because the American parks in Florida and California
had multiple parks in the immediate areas while there was only
one park at Euro Disney.
Attendance at the park was also highly seasonal, with peaks
during the summer months when European children had
school vacations and troughs during non-vacation pe-riods,
Unlike American parents who would take their chil-dren out of
school for vacations, European parents were reluctant to do
this. Europeans were also accustomed to taking one or more
longer vacations, while Americans fa-vored short minivacations.
Revenues from food were also significantly lower at Euro
Disney compared with the other parks, the report found. Three
of the reasons that had been identified just after the park had
opened were related to misunderstand-ings about European
lifestyles. The initial thinking was that Europeans did not
generally eat a big breakfast and, as a result, restaurants were
planned to seat only a small number of breakfast guests. This
proved incorrect, with large num-bers of people showing up
for fairly substantial breakfasts. This problem was corrected by
changing the menus as well as providing expanded seating for
breakfast through the expansion of cafeteria facilities. While the
park offered fast-food meals, they were priced too high,
restraining the demand. This problem, too, had been taken care
of by re-ducing the prices at the fast-food restaurants. At the
U.S. parks, alcohol was not served, in keeping with the family
oriented values. The decision not to serve alcohol at Euro
Disney failed to account for the fact that alcohol is viewed as a
normal part of daily life and a regular beverage with meals. This
error, too, was rectified after it was discovered.
Revenues from souvenir shop sales were also consid-erably
below those in the other parks, particularly Tokyo Disneyland.
In Japan, great value was placed on purchas-ing a souvenir from
the park and giving the souvenir as a gift to friends and family
upon ones return home. Euro-peans were far less interested in
purchasing souvenirs.
In the initial design of the project, it was assumed that

Europeans would be like Americans in terms of transportation
around the park and from the hotels to the park attractions. In
the United States, a variety of trains, boats, and tramways
carried visitors from the hotels to the park. Although it was
possible to walk, most Americans chose to ride. Europeans, on
the other hand, chose to walk rather than ride, leaving the
vehicles significantly underutilized. While not directly affecting
revenue, the capital as well as ongoing costs for this transportation were considerable.
It was also assumed, given the automobile ownership statistics
in Europe, that the majority of visitors would drive their own
cars to Euro Disney and that a relatively small number of
tourists would arrive by bus. Parking facilities were built
accordingly, as were facilities for bus drivers who would
transport passengers to the park. Once again, the ini-tial
planning vastly underestimated the proportion of visi-tors who
would arrive by bus as part of school, community, or other
groups. Facilities for bus drivers to park their buses and rest
were also inadequate. This, too, was a problem that was initially
solved.
The consultant concluded this portion of the presen-tation by
saying that these were just a few examples of problems that
resulted from a misunderstanding of the difference between the
U.S. and Japanese parks that had al-ready been identified. Most
likely, he said, there were a number of other similar problems
that needed to be iden-tified and fixed.
be rectified. It was reported that this was again related to

overconfidence on the part of the initial planning team, which
thought that even though most Parisians who would visit the
park currently live west of the city, the longer-term population
growth would be in the east. Consequently, it was felt that the
park should be built in the east. Again, they noted, Disney
executives disre-garded the initial advice of the French.
French Labor Issues

Next to speak was a European labor economist. This prob-lem,
which stemmed from differences in-the United-States and
Europe, could potentially be solved. Disney did not understand
the differences in U.S. versus European labor laws, he said. In
the United States, given the cyclicality and seasonality of the
attendance at the parks, U.S. workers were scheduled based on
the day of the week and time of year. This provided U.S.
management with a high degree of flexibility and economy in
staffing the park to meet peak visitor demand. French labor
laws, however, did not pro-vide this kind of flexibility and, as a
result, management could not operate Euro Disney as efficiently
and labor costs were significantly higher than the U.S. parks.
Financing and the Initial Business Plan

The consulting team had hired a major global investment
banking concern to review the plan, identify the problems, and
develop a restructuring plan.
The firms senior managing director spoke: Financing and the
assumptions of the initial business plan is the area that has
created the greatest problems for the park; its re-structuring is
most critical to the ability of the venture to continue operating
and become profitable and, as a result, is the most important
problem that needed to be addressed short term.
His presentation identified the following problem areas:
Environmental and Location Factors
1. The initial plan was highly optimistic and extraordi-narily

complex. There was little room for error in this plan, which
was based on over leveraged finan-cial scenarios that
depended on the office parks and hotels surrounding the
park to payoff, rather than the park itself.
Next to speak was a team that included experts from an environmental planning firm. This presentation would be brief,
since the problems that they identified were virtually impossible
to correct at this stage in the project.
In addition to the plan being highly leveraged, significant cost

overruns in the construction of the park further increased the
start-up costs, making the achievement of the promised returns
even more unlikely.
They initially noted that given the location in middle to

northern Europe and the fact that there were only about six
months of temperate weather when it was truly pleas-ant to be
outside, the park was clearly sited in a location that did not
encourage visitors on a year-round basis. Al-though accommodations were made (including the covered sidewalks), the fact
that off-season visits had to be heavily discounted and promoted to groups to get even reasonable attendance still
represented a major problem that needed to be corrected.
Whether through pricing changes or the de-velopment of other
attractions or other marketing and pro-motional vehicles,
attendance in the off-peak months had to be increased.
Disney itself had imposed on arbitrary deadline of March 31 to

develop a refinancing package with the creditor banks, further
putting pressure on de-veloping a credible and viable restructuring plan. A separate team was already at work to develop such a
restructuring plan.
The second problem that they identified, the location east of

Paris rather than to the west, was also something that could not
3. A severe European recession, a drop in the French real estate

market, and revaluation of European cur-rencies against the
2. The initial plan was presented as financially low risk; shares

were largely sold to individual investors with little tolerance
for risk.
The plan was constructed in the mid-1980s, a period of
high-flying free-market financing in the United States.
European investors did not under-stand these kinds of
deals and propositions.
93
In the initial design of the project, it was assumed that

Europeans would be like Americans in terms of transportation around the park and from the hotels to the park
attractions. In the United States, a variety of trains, boats, and
tramways carried visitors from the hotels to the park. Although
it was possible to walk, most Americans chose to ride. Europeans, on the other hand, chose to walk rather than ride, leaving
the vehicles significantly underutilized. While not directly
affecting revenue, the capital as well as ongoing costs for this
transportation were considerable.
French franc severely undercut all of the assumptions on

which the plan was de-pending in order to succeed.
4. Euro Disney management, faced with the problem of trying
to achieve an unrealistic plan, had made se-rious errors in
pricing.
Among the mistakes were charging $42.25/day for
admission to the park compared with a $30 daily fee for the
U.S. and Tokyo parks. Hotel prices were set similarly, with a
room costing $340, equivalent to a top hotel room in Paris.
Inside the park, food prices were also too high.
Competition from U.S. Disney Parks

Finally, given the strengthening of the European currencies
against the French franc and U.S. dollar, it was often less expensive for Europeans to travel to the United States, espe-cially
Florida. Not only did their currencies buy more, but there were
other attractions surrounding Orlando and the weather was
warm and sunny year around. In addition, the U.S. Park
provided the real experience compared with the European
simulation.
WHAT to Do?
The consultants phase-one report was concluded. As these
problems were identified, teams had already been formed to
develop potential solutions to the problems that could be
solved. The investment bankers were already examining restructuring options. While it was critical to enable the park to
remain open beyond the March 31 deadline, the long-term
issues appeared to be in the area of marketing. In par-ticular,
park attendance and revenues per visitor needed to be increased
while providing value and meeting Euro-peans expectations
about the EURO Disney experience.
The meeting adjourned after the group had agreed that phase
two of the consultants report, identifying action plans for the
most critical issues, would be presented on March 15.
Discussion Questions
1. What did Disney do wrong in its planning for Euro Disney?
2. What recommendations would you make to Disney to deal
with the problems of Euro Disney?
3. What lessons can we learn from Disneys problems with
Euro Disney?
94
The First Biennium: Meltdown At The

Cultural Chernobyl
Tunnel, combined with the 50th anniversary of the Normandy

Invasion, augured well for the tourist season of 1994.
In the 24 months since it first opened in 1992, the Euro Disney theme park suffered from the confluence of a number of
environmental and internal problems. On the one hand, Euro
Disney was adversely affected by an untimely Euro-pean
recession and a strong French franc, which, when com-bined
with the parks high admission prices, conspired to keep
European tourists from visiting the park and from spending
money once they got there. Also, the financial performance of
the park was greatly restrained by a mas-sive debt burden. This
debt was largely due to the cost overruns incurred in building
the park combined with a slump in the French property market,
which had left Euro Disney with a number of hotels-each built
with borrowed money-that it had originally hoped to sell once
the park became operational. In all, the interest charges for fiscal
year (FY) 1993 came to around US$1 million per day.
Yet, despite these measures and environmental changes, Euro

Disneys future was never darker. Atten-dance figures recorded
for FY 1994 were only 8.8 million, the lowest since the park had
opened, while total revenue from the park and the five hotels
fell 21 percent to FFr1.16 billion. As one French analyst
observed with perspicacity and clarity: Theyre getting fewer
visitors at a lower price; thats definitely no good at all.
Although the parent company, Walt Disney Company, was

quick to blame the poor performance of its French subsidiary
on the adverse conditions in the European en-vironment, in
reality these uncontrollable problems were exacerbated by the
arrogant attitude and cultural naivet of the American management. Inspired by their record fi-nancial performance during the
1980s, the Disney team had led itself to believe that it had
perfected the recipe for success. In striving to apply this formula
in the European market, however, Disney succeeded only in
alienating its French stakeholders, namely the creditor banks, the
mi-nority shareholders, the labor unions, and, most importantly, the general public.
To its credit, Disney responded proactively and deci-sively once
its mistakes had been recognized. To counter the perception of
management hubris, Walt Disney actively pro-moted Europeans into the top management team. Robert Fitzpatrick, the
French-speaking American chairman of Euro Disney SCA, was
replaced by Philippe Bourguignon, a Frenchman who had spent
10 years working in the United States. The new chairman
initiated a number of measures aimed at repositioning the
theme park as a less expensive and more efficiently run resort.
The admission price charged to locals was lowered and the
parks stores had the number of lines of merchandise reduced
from 30,000 to 17,000. In the Euro Disney hotels, labor-saving
magnetic cards replaced meal vouchers, and the number of food
items. offered was slashed from 5,400 to 2,000. Moreover, a
central purchasing department replaced the separate arrangements each hotel had had with its own suppliers. Finally, staff
in 950 adminis-trative posts, equivalent to 8.6 percent of the
total workforce, were laid off in late 1993.
At the same time, environmental conditions in the Eu-ropean
market were improving. Not only was the Euro-pean economy
coming out of recession, but the opening of the Channel
Why had the number of visitors fallen? Largely be-cause of

circulating rumors that Euro Disney was about to be closed
down. As far back as the end of 1993, Euro Disneys financial
situation had deteriorated so much that the usually upbeat
Michael Eisner, who had earlier labeled Euro Disney probably
the best thing we ever built, dis-tanced himself from the
prodigal subsidiary by stating in his annual report to Walt
Disney shareholders:
We certainly are interested in aiding Euro Disney SCA, the
public company that bears our name and rep-utation. We will
deal in good faith. . . . But in doing so, I promise all shareholders of the Walt Disney company that we will take no action to
endanger the health of Disney itself.
Statements such as these were no doubt intended to communicate Walt Disneys reluctance to bear the brunt of the growing
financial burden of the theme park! By dis-tancing itself from
its subsidiary, Disney hoped to counter the widespread
perception among Euro Disneys other stakeholders that it had
cut a sweet deal in structuring its relationship with the theme
park. Back in 1989, when Euro Disney SCA had been floated,
Walt Disney had purchased 49 percent of the new companys
shares for FFr10 each. In contrast, pubic shareholders paid
FFr72 and later, when the theme park had opened in 1992,
share prices had soared to FFr164.
In all, Walt Disney had arranged US$4 billion to fi-nance the
park, of which they had contributed only US$170 million (for a
49 percent equity stake) while the public had paid $1 billion (for
the remaining 51 percent). The rest of the start-up capital (nearly
$3 billion) had been borrowed. Also included in the initial deal
was a management fee of 3 percent of gross revenues, an
increasing incentive man-agement fee of 30 to 50 percent of
pretax cash flow, and royalties of 5 percent and 10 percent on
food and admis-sion, respectively. This meant that the parent
company could make money even while Euro Disney was
running at a loss. Indeed, analysts predicted that the profit per
visitor to Euro Disney would actually decrease as attendance
went up due to the proportion of fees that was to be repatriated to Walt Disney.
However; when Euro Disneys debt-reachedcFFr20 bil-lion, this
no-loss &deal for Walt Disney meant that banks would no
longer lend money to the French subsidiary with-out a guaran-
95
EURO DISNEY(B)
tee from the parent company. Thus, Euro Disney became an

Achilles heel to the parent company giving Walt Disney its first
quarterly net loss (in September 1993) since Michael Eisner had
become chairman in 1984.
which had begun purchasing Euro Disney debt at around 60

percent of face value. These secondary debt -market transactions
reflected growing speculation that the debt would eventually be
worth substantially more than what it was being purchased for.
In the end, things had come to a head as Euro Disney simply

ran out of cash. Walt Disney provided emergency funds, but
also imposed a deadline for a restructuring of the subsidiarys
financial arrangements: Walt Disney had no intention of
injecting further funds beyond the end of March 1994. Euro
Disneys fate was sealed, and its stakeholders were compelled to
come up with a rescue plan that either eliminated some of the
crippling interest burden, converted debt into equity, or raised
funds by some other means. The question was, who would pay
how much and when?
Finally, 2 weeks ahead of schedule, a rescue plan was announced: In essence, the plan contained two elements. First, the
plan comprised a deferment of interest and roy-alty payments.
Specifically, the creditor banks forgave 18 months of interest
payments and postponed principal pay-ments for a period of 3
years. This reflected a saving to Euro Disney of FFr1.9 billion.
Conversely, Walt Disney said it would eliminate management
fees (worth FFr450 million per year) and royalties on sales of
tickets and mer-chandise for a period of 5 years. It would,
however, still re-ceive an incentive fee based on Euro Disney
profits. Finally, Disney agreed to purchase some of the parks
underuti-lized assets for FFr1.4 billion and lease them back on
terms favorable to Euro Disney.
The Rescue Plan

A number of issues affected the restructuring activities and
influenced the bargaining power of the major stakeholders. On
one side of the equation, Euro Disneys 63 creditor banks and
bondholders agreed that Walt Disney should carry much of the
burden for the bailout, reflecting its re-lationship with the
French company. However, Walt Dis-neys legal relationship was
with Euro Disney SCA, the operating company, and not with
the beleaguered theme park itself, which was owned by a finance
company that leased the park back to the operating company.
(Disney had just a 17 percent stake in the finance company.)
Neverthe-less, the banks argued that the park was Disneys
creation and responsibility-after all, Euro Disneys top
manage-ment had been put in place by Walt Disney-and, consequently, called for an asymmetrical sharing of the pain.
On the other side of the equation, Walt Disney wanted the
banks to write down some of their debt or to convert the debt
into equity. Although it appeared that Disney was not bargaining from a position of strength, the parent com-pany did have
the option of putting Euro Disney into bankruptcy, a position
from which it could dictate the terms of the restructuring.
However, although Michael Eisner had hinted at clos-ing the
park, there were a number of good reasons why Disney
probably would not exercise this option, not the least of which
would be the impact on Disneys already tar-nished corporate
image in France. Conversely, some of the French banks,
including the recently privatized Banque National de Paris, were
concerned about the risk of sub-stantial losses and the consequent effect-on their credit rat-ings. Similarly, other stakeholders
(such as the French government) also stood to lose if the
theme park closed and the 40,000 jobs that were indirectly
related to the park were eliminated. Thus, there was some
speculation that the state-owned Caisse de Depots and
Consignations, which was Euro Disneys largest creditor with
FFr4.4 billion in loans, might be compelled to lower its interest
rates. How-ever, despite the common interest in keeping Euro
Disney afloat (Exhibit 1), drafting a rescue plan that would
satisfy all the stakeholders seemed problematic.
Just prior to the March 31 deadline, Euro Disney was at its
lowest point financially, with debts now approaching FFr24
billion. Curiously, a glimmer of hope was to be found across
the Atlantic in the growing interest of U.S. vulture funds,
96
The second part of the plan called for a rights issue to raise
funds, which would be used to eliminate debt. This issue
worked by giving existing shareholders the right to purchase a
number of shares at below-market prices (FFrl0) in the same
proportion as their present equity stake. In this case, shareholders were to be permitted to subscribe to seven new shares for
every two shares held. This meant that Disney would end up
paying just under FFr3 billion for 49 percent of the offering.
The rights issue was approved by a meeting of share-holders
on 8 June 1994. (Getting shareholder approval was a mere
formality given the size of Walt Disneys holdings.) Euro
Disneys share price immediately fell, reflecting the dilative
nature of the issue. Nevertheless, the rights issue succeeded in
raising a total of FFr5.95 billion, which en-abled Euro Disney
to reduce its debt burden by 23 percent to FFr16.1 billion.
In evaluating the efficacy of the rescue plan, it is worth noting
how the major stakeholders fared in the exercise. First, who
were the winners? Although the plan called for the parent
company to substantially increase its financial stake in Euro
Disney-an additional US$750 million on top of the $350
million already spent-Walt Disney bene-fited from the plan
because the fees it deferred would have been lost if the park had
closed down. Moreover, the con-cessions they, made served to
improve their tarnished cor-P9rate image in the French market.
The banks were pleased with the deal because they did not end
up owning or managing the parks assets; while Euro Disneys
bond-holders were happy just to be excluded from the plan. Finally, it is safe to assume that the labor unions and the French
government also benefited from the bailout.
Exhibit 1 Euro Disneys Stakeholders and
Their Financial Interests
Walt Disney Co.
Total outlay of US$350 million (-FFr2.1 billion): based

on initial outlay of $170 million for 49% equity and
the subsequent injection of emergency funds
Public shareholders
Initial outlay of US$1 billion (-FFr6.4 billion) for

subscribed shares
63 Creditor banks
FFr14 billion in loans
French government
Provided US$750 million (-FFr4.4 billion) in lowinterest loans built road and rail links to the park, and
sold Disneyland at low prices
Bondholders
FFr4 billion of convertible bonds
Despite the drop in its share price; the magnitude of the

devaluation of Euro Disneys market capitalization was minimized by the timely appearance of a new player in the market. In
the spring of 1994, Prince Al- Waleed bin Talal bin Abdulaziz Al
Saud, the 37-year-old nephew of Saudi Arabias King Fahd,
announced his intention to pur-chase a significant equity stake in
the company. By mid--October, the prince had acquired 74.6
million shares, reflecting a 24.6 percent equity stake (acquired for
around US$350 million). Some of these shares had been
purchased from Walt Disney, whose stake in the company had
conse-quently been reduced from 49 percent to 39 percent.
The Second Biennium: Euro Disney Gets

A Reprieve
The rescue plan effectively gave Euro Disney a 3- to 5-year reprieve
from its interest and royalty charges. However, im-plicit in this
reprieve was the mandate to make Euro Disney a profitable
company as soon as possible, and Philippe Bourguignon and his
staff wasted little time in enacting a revamped marketing strategy
geared to this objective.
Perhaps the most significant marketing change made was the
renaming of the theme park itself. The name Euro Disney
had been chosen in a period of pre-1992 unifica-tion hype.
However, events in the past few years had seen some commentators come to equate Euro Disney with Euro Disaster.
Consequently, and to reflect the new lease on life that had been
given to it by the rescue plan, Euro Disney renamed the theme
park Disneyland Paris to capitalize on its proximity to the
French capital, the worlds top tourist destination. (Euro Disney
SCA would remain the name of the operating company.) By a
fortuitous twist of fate, the newly renamed park received some
timely pub-licity when Michael Jackson and Lisa Marie Presley
visited Disneyland Paris on their honeymoon.
At the end of 1994 a 22 percent reduction in admission prices
for the 1995 peak season was announced (Exhibit 3). Simultaneously, further efficiency measures were intro-duced. The parks
total workforce had now been reduced to 12,000 from 17,000,
of which 4,000 staff were employed on a seasonal basis.
Moreover, new trainees were now re-quired to undergo 6 to 12
months of training. Previously, new staff had received only one
day of training. Also, ne-gotiations with labor unions were
under way to make staffing arrangements more flexible, in line
with fluctuat-ing attendance patterns. This meant that staff
would now work longer hours on weekends and during the
summer months when demand was greatest.
Other changes included the decentralization of deci-sionmaking authority to small world up its consisting of 30 to 50
staff, with each unit given responsibility for achiev-ing management targets and improving visitor satisfac-tion. Managers of
these autonomous units would received performance-based

bonuses whereas other staff, or cast members, would receive
non-financial rewards, such as better promotion prospects.
At the end of FY 1995 the cumulative effect of these changes in
strategy and the rescue plan were evident. Not only did the park
receive a record attendance of 10.7 million visitors (Exhibit 4)
but Euro Disney SCA also recorded its
Exhibit 3 Admission Price Changes
Adult price (FFr)
Peak (1 April 1 October) off peak
Old price
250
175 225
1995 price
195
150
Exhibit 4 Annual Attendance Figures

(FY ending 30 September)
1993
9.8 billion
1994
8.8 million
1995
10.7 million
first-ever profit (Exhibit 5). However, it is sobering to note that

the reported profit of FFr114 million is overstated be-cause of
the deferred royalty and interest payments and Euro Disneys
buyback of 2.7 million convertible bonds. Profit before
exceptional items was only FFr2 million.
Although the figures for 1995 indicated that Euro Disney SCA
had turned the corner, much remained to be done in the next
few years before the long-term viability of the venture could be
established. Although Disneyland Paris has become Europes
number one paid tourist desti-nation, there is a clear need to
increase attendance even further. Philippe Bourguignon
estimated that the park needs 12.5 million visitors per year to
break even once roy-alty demands and interest payments resume
in 1998. This figure, which before 1995 seemed an impossible
target, even-now appears-highly optimistic.
Such an attendance target seems even more unlikely when the
rapidly rising level of competition within the Eu-ropean
amusement. Park industry is taken into considera-tion. While
U.S. Disney parks posed a competitive threat in the early 1990s,
the appearance of a number of new theme parks in Europe,
such as Spains Port Ventura, which opened in May 1995, and
Germanys Warner Broth-ers Movie World, is likely to present a
greater threat in the late 19908. Despite high barriers to entry,
many new parks are being built while established parks are
investing in new attractions. Much of this demand-driven
investment activ-ity has been stimulated directly by the marketing appeals of
Exhibit 5 Euro Disney profit and loss
(FY Ending 30 September)
Revenue
Profit (Loss)
1993
4.9 billion
(5.3 billion)
1994
4.1 billion
(1.8 billion)
1995
4.8 billion
114 million)
97
The only clear losers in the rescue plan were the mi-nority
shareholders. With 770 million shares now in the market-about
four times the original number-Euro Dis-neys earnings per
share inevitably fell, as did the companys share price. On the day
the rights issue was announced, Euro Disneys market capitalization dipped 8 percent to FFr34 per share, and by the end of
the month, shares were worth just FFr12.9. However, things
were about to get worse before they got better, and within 2
months Euro Disneys share price had dropped to just FFr7.55.
Euro Disney. In 1993, an estimated 58 million people spent

around US$1.5 billion on Europes theme parks. As the
managing director of the United Kingdoms Thorpe Park
observed, We enjoyed 1993 on the back of Disneys promotional budget, but its a tough and competitive business.
Indeed, with around 30 to 40 amusement parks, West-ern
Europe is fast coming to resemble the North American market
where Disney is the dominant player among a crowd of
competitors (including Six Flags, Universal Stu-dios, and Sea
World). However, unlike North America, where there typically
are clusters of parks in close proxim-ity in places such as
Orlando and Southern California (thus creating an incentive for
visitors to stay a week or more in each locale), in Europe the
amusement parks are scattered across the continent.
In addition to the direct competition from parks such as Alton
Towers, the United Kingdoms largest theme park, Disneyland
Paris also competes indirectly with other en-tertainment-based
attractions such as roller-coaster parks, including Blackpools
Pleasure Beach and Goteborgs Liseberg. Furthermore, a new
competitive threat is also emerging in the form of computerbased interactive enter-tainment, which l)as led to the
establishment of a number of tourist attractions such as Segas
new Virtual World Center, located in Londons popular
Trocadero complex.
Competition in the amusement park industry is per-haps most
evident in the introduction of new rides and at-tractions. For
example, Euro Disneys record-breaking attendance figures for
1995 were positively influenced by the opening of Space
Mountain, a roller coaster ride based on Jules Vernes book,
From the Earth to the Moon. Across the Channel, Alton Towers
also enjoyed record atten-dances in 1995 based largely on the
crowd-pulling power of two newly-opened rides, Nemesis and
Energiser, while in Barcelona the Tussauds -owned Port
Aventura promotes its Dragon Khan roller coaster as being the
first to turn thrill seekers upside down eight times.
The Third Biennium: What To Do?

In seeking to increase the attendance of Disneyland Paris and
ensure the sustained profitability of the company beyond 1998,
Philippe Bourguignon must deal with a number of issues.
1. How should the park differentiate itself from the
competitive threat posed by the growing number of
European amusement parks?
2. What target marketing strategy should be pursued in the face
of the changing competitive environment?
3. What branding-strategy decisions are relevant?
4. What can be done to make better use of underuti-lized
resources (such as the hotels) while increasing the
profitability of well-patronized facilities?
98
UNIT III
ANALYZING AND TARGETING GLOBAL
LESSON 11
UNIT 4
OPPORTUNITIES
GLOBAL MARKETING INFORMATION
SYSTEMS AND RESEARCH
James Wogsland
Vice Chairman, Caterpiller
Nothing changes more constantly than the past; for the past
that influences our lives does not consist of what happened,
but of what men believe happened.
Gerald W. Johnsonston
The objective of the chapter is to make the student understand
the importance of market research in international marketing.
After the lesson the student would be able to appreciate the
following:
1. Overview of Global Marketing Information Systems
2. Sources of Market Information
3. Formal Marketing Research
4. Current Issues in Global Marketing Research
5. An Integrated Approach to Information Collection
Information, or useful data, is the material of executive action
the global marketer is faced with a dual problem in acquiring the
information needed for decision making. In high-income
countries, the an10unt of information available far exceeds the
absorptive capacity of an individual or an organization. The in
formation problem is superabundance, not scarcity. Although
advanced countries all over the world are in the middle of an
information explosion, there is a lack of information available
on the market characteristics of less developed countries.
Thus, the global marketer is faced with the problem of
information abundance an information scarcity. The global
marketer must know where to go to obtain information the
subject areas that should be covered and the different ways that
information can bi acquired acquired information must be
processed in an efficient and useful way. The technical term for
the process of information acquisition is scanning. This chapter
presents an information acquisition model for global marketing
as well as an outline 0 the global n1arketing research process.
Once acquired, information must be processed in an efficient
and effective way. The chapter concludes with a discussion of
how to manage the marketing information collection system
and the marketing research effort.
For example, K.M.S. Titoo Ahuwalia is the president of
ORG-MARG, the largest marketing research company in India.
His client list reads like a Whos Who of global companies:
Avon Products, Gillette, Coca-Cola, and Unilever. And, as Titoo
is fond of telling them, they are finding that India is different. India is the second most populous nation on earth, with
a middle class comprised of more than 200 million people.
Despite increasing affluence, however, centuries-old cultural

traditions and customs still prevail. As a result, consumer
behavior sometimes confounds Western expectations. Despite
the fact that summer temperatures frequently reach triple digits;
only 2 percent of urban dwellers use deodorant. Instead,
Indians bathe twice daily. Only l percent of households have air
conditioners, and a recent Gallup survey revealed that only 1
percent intended to buy an air conditioner in the near future.
The virtues of frugality once preached by Gandhi remain
uppermost in the minds of many; smokers refill disposable
lighters, and women recycle old sheets instead of spending
money on sanitary napkins. Likewise, in a country where food is
believed to shape personality and mood and hot breakfasts are
thought to be a source of energy, Kellogg has had little luck
winning converts to cold cereal.
For marketers hoping to achieve success in India and other
emerging n1arkets, information about buyer behavior and the
overall business environment is vital to ef1ective managerial
decision making. When researching any market, marketers n1ust
know where to go to obtain information, what subject areas to
investigate and information to look for, the different ways
information can be acquired, and the various analytical approaches that will yield important insights and understanding.
Obviously, Indias 16 languages, 200 dialects, and low level of
urbanization create special research challenges. However, similar
challenges are likely to present themselves wherever the marketer
goes.
It is the marketers good fortune that, since the n1id-1990s, a
veritable cornucopia of market information has become
available on the Internet. A few keystrokes can yield literally
hundreds of articles, research findings, and Web sites that offer
a wealth of information about particular country markets. Even
so, marketers need to study several important .topics in order to
make the most of modern information technology. First. they
need to understand the importance of information technology
and marketing information systems as strategic assets. Second,
they need a framework for information scanning and opportunity identification. Third, they should have a general
understanding of the formal market research process. Finally,
they should know how to manage the marketing information
collection system and the marketing research effort. These topics
are the focus of this chapter.
Benettons Information System

In the fashion business, the company that gets preferred styles and colors to
market in the shortest time gains an edge over competitors. Lucuano
Benetton, founder of the Italian company that bears his name, notes,
Benettons market is, for reasons of product and target, very dynamic,
evolving rapidly the companys information system includes relational
databases and a network for electronic data interchange. Benetoon
99
To survive in this new globally competitive world, we had to

modernize. Information technology is the glue for everything
we do.
manager a rely heavily on inbound data generated at the point of purchase;

data about each sales transaction are instantly transmitted via satellite to
headquarters from cash registers at the companys 7,000 stores around the
world. Analysts sift through the data to identify treads, which are conveyed
to manufacturing.
Most of Benettons Knitwear is produced as under grey goods garments
are dyed in batches in accordance with the fashion trends identified by the
MIS. Benettons system helps cut inventory carrying costs and reduce the
= number of slow selling items that must be marked down. The
companys staff of field agents uses a tracking system to follow the
movement of outbound merchandise. Te system shows whether a particular
item is in production, in a warehouse, or in transit. In Benettons state of
the art, $57 million distribution center, computer controlled robots sort,
store, and retrieve up to 12,000 bar coded boxes of merchandise each
day.
The MIS even helps the designer team work more efficiently. Before the
MIS was installed, designers had to personally visit the warehouse to
review samples of clothing from previous seasons. With the new system,
all clothing items are photographed and the images digitized and sorted on
a laser disc connected to a personal computer. A designer sitting at the
computer can request any item from seasonal collections dating back
several years, and it will be displayed on screen.
Taken as a whole, Benettons MIS has slashed the amount of time
required to design and ship Knitwear from 6 months to a matter of weeks.
Reorders from any ciano Benetton is not satisfied. He hopes to go beyond
data processing and use information technology as a tool Zuccaro, he says
its not enough to know what we sold, but we need to know what we should
have sold and that we lost X dollars by not realizing our potential.
Information Subject Agenda

A starting point for a global MIS is a list of subjects about
which information is desired.
The resulting subject agenda should be tailored to the specific
needs and objectives of the company. The general framework
suggested in Table 6-1 consists of six broad information areas.
The framework satisfies two essential criteria. First, it comprises
all the information subject areas relevant to a company with
global operations. Second, the categories in the framework are
mutually exclusive Any kind of information encompassed by
the framework can be correctly placed in one and only one
category. The basic elements of the external environmenteconomic, social and cultural, legal and regulatory, and financial
factors-will undoubtedly-be- on- the information agenda of
most companies, as shown in the table.
Six Subject Agenda Categories For A Global Business

Category
Coverage
1. Markets
Demand estimates, consumer
behaviour, products, channels,
communication media availability
and cost, and market responsiveness.
2. Competition
Corporate, business, and
functional strategies and plans
100
3. Foreign Exchange
Balance of payments, interest

rates, attractiveness of country
currency, expectations of analysts.
4. Prescriptive Information
Laws, regulations, rulings

concerning taxes, earnings,
dividends in both host countries
and home country.
5. Resource Information
Availability of human, financial,

information, and physical
resources.
6. General conditions
Overall review of socio-cultural,

political, technological environments.
Scanning Modes: Surveillance and Search

Once the subject agenda has been determined, the next step is
the actual collection of information. This can be accomplished
using surveillance and search.
In the surveillance mode, the marketer engages in informal
information gathering. Globally oriented marketers are constantly on the lookout for information about potential
opportunities and threats in various parts of the world. They
want to know everything about the industry, the business, the
marketplace, and consumers. This passion shows up in _he way
they keep their ears and eyes tuned for clues, rumors, nuggets
of information, and insights from other peoples experiences.
Browsing through newspapers and magazines and surfing the
Internet are ways to unsafe exposure to information on a
regular basis. Global marketers may also develop a habit of
watching news programs and commercials from around the
world via satellite. This type of general exposure to information
is known a_ viewing. If a particular news story has special
relevance for a company-for example, entry of a new player into
a global industry, say, Samsung into automobiles-marketers in
the automobile and related industries and all competitors of
Samsung will pay special attention, tracking the story as it
develops. This is known as monitoring.
The search mode is characterized by more formal activity. Search
is characterized by the deliberate seeking out of specific information. Search often involves investigation, a relatively limited arid
informal type of search. Investigation often involves seeking
out books or articles in trade publications or searching the
Internet on a particular topic or issue. Search may also consist of
research, a formally organized effort to acquire specific information for a specific purpose.
One study found that nearly 75 percent of the information
acquired by headquarters executives at U.S. global companies
comes from surveillance as opposed to search. However, the
viewing mode generated only 13 percent of important external
information, whereas monitoring generated 60 percent. Two
factors contribute to the paucity of information generated by
viewing. One is the limited extent to which executives are
exposed to information that is not included in a clearly defined
subject agenda. The other is the limited receptivity of the typical
executive to information outside this agenda. Every executive
limits his or her exposure to information that will not have a
Of all the changes in recent years affecting the availability of

information, perhaps none is more apparent than the explosion
of documentary and electronic information. An overabundance
of information has created a major problem for anyone
attempting to stay abreast of key developments in multiple
national markets. Today, executives are overwhelmed with
documentary information. However, too few companies
employ a formal system for coordinating scanning activities.
This situation results in considerable duplication of effort. for
example, it is not uncommon for members of an entire
management group to read a single publication covering a
particular subject area despite the fact that several other excellent
publications covering the same area may be available.
Wherever you are located, you can benefit from reading foreign
publications. The Economist, The Financial Times, and The
Wall-Street Journals regional editions are good broad based
sources. Also, review the Web site recommendations throughout and at the end of the chapter.
The best way to identify unnecessary duplication is to carry out
an audit of reading activity by asking each person involved to
list the publications he or she reads regularly. A consolidation
of the lists will reveal the surveillance coverage. Often the scope
of the group will be limited to a handful of publications to the
exclusion of other worthwhile ones. A good remedy for this
situation is consultation with outside experts regarding the
availability and quality of publications in relevant fields or
subject areas.
Over all, then, the global organization is faced with the following needs:
An efficient, effective system that will scan and digest

published sources and technical journals in the headquarters
country as well as all countries in which the company has
operations or customers.
Daily scanning, translating; digesting, abstracting, and

electronic input of information into a market intelligence
system. Despite the advances in global information, its
translation and electronic input are mostly manual. This will
continue for the next few years, particularly in developing

countries.
Expanding information coverage to other regions of the

World.
Sources of Market Information

Human Sources
Although scanning is a vital source of information, research has
shown that headquarters executives of global companies obtain
as much as two thirds of the information they need from
personal sources. A great deal of external information comes
from executives based abroad in company. subsidiaries,
affiliates, and branches. These executives are likely to have
established communication with distributors, consumers,
customers, suppliers, and government officials. Indeed, a
striking feature of the global corporation-and a major source of
competitive strength-is the role executives abroad play in
acquiring and disseminating information about the world
environment. Headquarters executives generally acknowledge
that company executives overseas are the people who know best
what is going on in their areas. The following is a typical
comment of headquarters executives:
Our principal sources are internal. We have a very well informed
and able overseas group. The local people have a double
advantage. They know the local scene and they know our
business. Therefore, they are an excellent source. They know
what we are interested in learning, and because of their local
knowledge they are able to effectively cover available information
from all sources.
The information issue exposes one of the key weaknesses of a
domestic company: Although more attractive opportunities
may be present outside existing areas of operation, they will
likely go unnoticed by inside sources in a domestic company
because the scanning horizon tends to end at the home-country
border. Similarly, a company with only limited geographical
operations may be at risk because internal sources abroad tend
to scan only information about their own countries or region.
Other important information sources are friends, acquaintances,
professional colleagues, consultants, and prospective new
employees. The latter are particularly in1portant if they have
worked for competitors. Sometimes, information-related ethical
and legal issues arise when a person changes jobs. When Ignacio
Lopez de Arriortua, head of purchasing at General Motors
(GM), accepted a job as production chief with Volkswagen
(VW), GM charged that Mr. Lopez had taken important
documents and computer files when he moved to VW.
Although he was acquitted by a German court, the resulting
publicity was a source of embarrassment to Volkswagen.
It is hard to overstate the importance of travel and contact for
building rapport and personal relationships. Moreover, one
study found that three quarters of the information acquired
from human sources is gained in face-to-face conversation.
Why? Some information is too sensitive to transmit in any other
way. For example, highly placed government employees could
find their careers. compromised if they are identified as
information sources. In such cases, the most secure way of
transmitting information is face-to-face rather than in writing.
101
high probability of being relevant to the job or-company. This

is rational: A person can absorb only a minute fraction of the
data available to him or her Exposure to and retention of
information stimuli must be selective. Nevertheless, it is vital
that the organization as a whole be receptive to -information
not explicitly recognized as important. Some organizations
suffer from a variation of the NIH (not invented here)
syndrome. If the information they are viewing has not been
generated by their company, it is summarily missed. To be
effective, a scanning system must ensure that the organization is
viewing areas where developments that could be important to
the company might occur. Innovations in information technology have increased the speed with which information is
transmitted and simultaneously shortened the life of its
usefulness to the company. Advances in technology have also
placed new demands on the global firm in tenus of shrinking
reaction times to acquired information. In some instances, the
creation of a full-time scanning unit with responsibility for
guiding and stimulating the process of acquiring and disseminating strategic information may be advisable.
Information that includes estimates of future developments or

even appraisals of the significance of current happenings is
often considered too uncertain to commit to writing. Commenting on this point, one executive said:
People are reluctant to commit themselves in writing to highly
iffy things. They are not cowards or overly cautious; they
simply know ,that you are bound to be wrong in trying to
predict the future, and they prefer to not have their names
associated with documents that will someday Look foolish.
The great importance of face-to-face communication lies also in
the dynamics of personal interaction. Personal contact provides
an occasion for executives to get together for a long enough
time to permit communication in some depth. Face-to-face
discussion also exposes highly significant forms of nonverbal
communication, as discussed in-Chapter 3. One executive
described the value of face-to-face contact in these terms:
If you really want to find .out about an area, you must see
people personally.
There is no comparison between written reports and actually
sitting down with someone and talking. A personal meeting is
worth a- thousand written reports. .
Documentary Sources
One of the most important developments in global marketing
research is the extraordinary expansion in the quantity and
quality of documentary sources of information. The information explosion is an explosion in the availability of
documentary information not only in print but increasingly online and on the Internet and the intra net for company-restricted
information. The two broad categories of documentary
information are published public information and unpublished
private documents. The former is available on the Internet, and
the latter is available on the intranet or company passwordrestricted-access networks created by organizations for their own
employees.
The vast quantities of published documentary information that
are available create a unique challenge: how to find the exact
information you want. One of the fast-growing industries in
the world are companies that gather, analyze, and organize data
from multiple sources, which they then make available to
clients.
Internet Sources
The range and depth of information available on the Internet
are vast and growing every day. Companies, governments,
nongovernmental organizations, market research companies,
data assemblers and packagers, security analysts, news gathering
organizations, universities, and university faculty to mention
just a few are all sources that can be accessed on-line. The
Internet is a unique information source: It combines the three
basic information source types: human, documentary (published and private), and direct perception.
An e-mail communication may be personal or impersonal. A
document may be text only, or it may include pictures and
music. The pictures may be still or full-motion video or
animation. The document may be combined with music.
102
With the ever expanding bandwidth of transmission media,

the ever increasing speed of processors that organize and
transmit information, and the ever expanding universe of
senders and receivers of information, the Internet is clearly a
revolutionary development in global marketing research..
A number of electronic resources have been developed in recent
years. The so include the National Trade Data Base, which is
available on CD-ROM from the Department of Commerce.
The GateWaze company in Manchester, Massachusetts, has
developed PC software called The World Trader to help small
firms find opportunities in. export markets. Similarly, the Port
Authority of New York developed a program called Export to
win to help small business owners learn about exporting. In
addition, the Internet and offer interactive information services
feature bulletin boards where a great deal of information about
various world markets is exchanged. Another on-line source is
the EIU (Economist Intelligence Unit), which is maintained by
The Economist.
Yet, some things never change. The information explosion is a
Janus-faced monster. There is more and more information, but
the sheer quantity of information makes it more and more
difficult to find what you are looking for. The challenge is to
develop search strategies and skills that ensure that you-get the
information you need to better understand global markets,
customers, and competition.
Direct Perception
Direct sensory perception provides a vital background for the
information that comes from human and documentary sources.
Direct perception gets all the senses involved. It means seeing,
feeling, hearing, smelling, or tasting for oneself to find out
what is going on in a particular country rather than getting
secondhand information by hearing or reading about a
particular issue. Some information is easily available from other
sources but requires sensory experience to sink in.
Often, the background information or context one gets from
observing a situation can help fill in the big picture. For
example, Niall Fitzgerald, cochairman of Unilever, relates a story
about the disastrous rollout in the United Kingdom of Persil
Power, a laundry powder with an extra scrubbing chemical.
Unfortunately, the chemical worked too well and ate through
clothing. When trying to determine a solution for the problem,
Fitz Gerald asked the 30 Unilever executives how many did their
own laundry. No one responded. There we were, trying to
figure out why customers wouldnt buy our soap and we didnt
even know the first thing about how it was used. The lesson he
learned from this scenario was to never lose sight of your
customer. Company recruits at Hindustan Lever are asked to
spend six weeks living with a family in a remote Indian village.
The chief executive of a small U.S. company that manufactures
an electronic device for controlling corrosion had a similar
experience. After spending much time in Japan, the executive
managed to book several orders for the device. Following an
initial burst of success, Japanese orders dropped off; for one
thing, the executive was told the packaging was too plain. We
couldnt understand why we needed a five-color label and a
custom-made box for this device, which- goes under the hood
of a car or in the boiler room of a utility company, the
Toyota relied heavily on direct perception when redesigning its

flagship luxury car, the Lexus LS 400, for the 1995 model year.
The chief engineer of Lexus and a five-person team came to the
United States to get firsthand direct observation data on the
market. They stayed in luxury hotels to gain an understanding
of the level of service Lexus customers demanded. Design
team members visited customers homes and took notes on
preferences for such things as furniture, paintings, and even
briefcases. As Ron Brown, a ITS based product planning
manager for Lexus, recalled, Its like if you just bought a new
washer-dryer, and the Kenmore people called and said they
wanted to bring a bunch of people out to watch you wash your
clothes. One thing the team discovered was that the cost
hooks in the first generation LS 400 were too small. The
Japanese thought a coat hook was, literally, for hanging a coat.
In reality, Lexus owners regularly hang their dry cleaning in the
car. The hook was redesigned. You can get five coat hangers on
it. But now its big enough that you wouldnt want it out all the
time, so it retracts, says Brown.
Euro Disney had been experiencing marketing and financial
difficulties. Consumers were not flocking to the site and the
consumers who visited were not very satisfied. One issue was
the sale of alcohol with in the park. Disney had a no-alcohol
policy but it wasnt until a vice president who was sent to France
to solve-the problem realized, after living in France for several
months, that wine with meals is the norm in, France. Not
serving, wine was an affront to local customers. Based on his
experience of living in the country, he worked diligently to have
the policy changed?
As these examples show, cultural and language differences
require firsthand visits to important markets to get the lay of
the land. Travel should be seen not only as a tool for management control of existing operations but also as a vital and
indispensable tool in information scanning.
Formal Marketing Research

Information is a critical ingredient in formulating and implementing a successful marketing strategy. As described earlier, a
MIS should produce a continuous flow of information.1vlarketing research, on the other hand, is the
project-specific, systematic gathering of data in the search
scanning mode. There are two ways to conduct marketing
research. One is to design and implement a study with in-house
staff. The other is to use an outside firm specializing in
marketing research. The importance of the global market to
research firms has increased considerably in recent years. For
example, ACNielsen Companys 1998 revenues from non-U.S.
research totaled $1.4 billion, over 70 percent of total revenue.
(Marketing research companies are ranked in Table 6-2 according

to revenues generated outside the United States.) ACNielsen
with a combination of wholly owned subsidiaries and affiliates
has offices in 80 countries and customers in more than 100
countries. If your company is in need of a research company in
another country, the Green Book published by the New York
Chapter of the American tv1arketing Association lists hundreds
of companies around the world.
The process of collecting data and converting it into useful
information can be divided into five basic steps: identifying the
research problem, developing a research plan, collecting data,
analyzing data, and presenting the research findings. Each step
is discussed below.
Step 1: Identifying the Research Problem

The following story illustrates the first step in the formal
marketing research process.
The vice presidents of finance and marketing of a shoe
company were traveling around the world to estimate the
market potential for their products. They arrived in a very poor
country and both immediately noticed that none of the local
citizens were wearing shoes. The finance vice president said, We
might as well get back on the plane. There is no market for
shoes in this country. The vice president of marketing replied,
What an opportunity! Everyone in this country is a potential
customer!
The potential market for shoes was enormous in the eyes of
the marketing executive. To formally confirm his instinct, some
research would be required. As this story shows, research is
often undertaken after a problem or opportunity has presented
itself. Perhaps a competitor is making inroads in one or more
important markets around the world, or, as in the story just
recounted, a company may wish to determine whether a
particular country- or regional market provides good growth
potential. It is a truism of market research-that a-problem
well-defined is a problem half solved. Thus, regardless of
what situation sets the research effort in motion, the first two
questions a marketer should ask are, What information do I
need? and Why do I need this information?
The research problem often involve assessing the nature of the
market opportunity, a phase that is also known as research.
This, in turn, depends in part on whether the market that is the
focus of the research effort can be classified as existing or
potential. Existing markets ate those in which client needs for
secondary information are already being served. In many
countries, data about the size of existing markets-in terms of
dollar volume and unit sales-are readily available. In countries in
which such data are not available, such as Cuba, a company
must first estimate the market size, the level of demand, or the
rate of product purchase or consumption. A second research
objective in existing markets may be assessment of the
companys overall competitiveness in terms of product appeal,
price, distribution, and promotional coverage and effectiveness.
Researchers may be able to pinpoint a weakness in the
competitors product or identify an unserved market segment.
Potential markets can be further subdivided into latent and
incipient markets. A latent market is, in essence, an undiscov-
103
executive said. While waiting for the bullet train in Japan one
day, the executives local distributor purchased a cheap watch at
the station and had it elegantly wrapped. The distributor asked
the American executive to guess the value of the watch, based
on the packaging. Despite everything he had heard and read
about the Japanese obsession with quality, it was the first time
the American understood that in Japan, a book is judged by
the cover. As a result, the company revamped its packaging,
seeing to such details as ensuring that strips of tape used to seal
the boxes were cut to precisely the same length.
ered segment. It is a market in which demand would materialize

if an appropriate product were made available. In a latent
market, demand is zero before the product is offered. In the
case of existing markets, the main research challenge is to
understand the extent to which competition fully meets
customer needs. With latent markets, initial success is not based
on a companys competitiveness; Rather, it depends on the
prime mover advantage-a companys ability to uncover the
opportunity and launch a marketing program that taps the
latent demand. Sometimes traditional marketing research is not
an effective means for doing this. As Peter Drucker has pointed
out, the failure of American companies to successfully commercialize fax machines-an American innovation-can be traced to
research that indicated no potential demand for such a product.
The problem, in Druckers view, stems from the typical survey
question for a product targeted at a latent market. Suppose a
researcher asks, Would you buy a telephone accessory that costs
upward of $1,500 and enables you to send, for $1 a page, the
same letter the post office delivers for 25 cents? On the basis
of economics alone, the respondent most likely will answer,
No.
In some instances, a company may pursue the same course of

action no matter what the research reveals. Even when more
information is needed to ensure a high-quality.
Drucker explains that the reason Japanese companies are-the

leading sellers of fax machines today is that their understanding
of the market was not based on survey research. Instead, they
reviewed the early days of mainframe computers, photocopy
machines, cellular telephones, and other information and
communications products. The Japanese realized that, judging
only by the initial economics of buying and using these new
products, the prospects of market acceptance were low. Yet, each
of these products had become a huge success after people began
to use them. This realization prompted the Japanese to focus
on the market for the benefits provided by fax machines rather
than the market for the machines themselves. By looking at the
success of courier services such as Federal Express, the Japanese
realized that, in essence, the fax machine market already existed.
Secondary Data
Incipient demand is demand that will emerge if a particular

economic, technological, political, or sociocultural trend
continues. If a company offers a product to meet incipient
demand before the trends have taken root, it will have little
market response. After the trends have had a chance to unfold,
the incipient demand will become latent, and later, existing
demand. This can be illustrated by the impact of rising income
on demand for automobiles and other expensive consumer
durables. As per capita income rises in a country, the demand
for automobiles will also rise. Therefore, if a company can
predict a countrys future rate of income growth, it can also
predict the growth rate of its automobile market.
Step 2: Developing a Research Plan

After defining the problem to be studied or the question to be
answered, the marketer must address a new set of questions.
What is this information worth to me in dollars (or yen, etc.)?
What will we gain by collecting these data? What would be the
cost of not getting the data that could be converted into useful
information? Research requires the investment of both money
and managerial time, and it is necessary to perform a cost
benefit analysis before proceeding further.
104
Decision, a realistic estimate of a formal study may reveal that

the cost to perform research is simply too high. As. discussed
the next section, a great deal of potentially useful data already
exists; utilizing such data instead of commissioning a. major
study can result in significant savings. In. any event, during the
planning step, methodologies, budgets, and time parameter are
all spelled out. Only when the plan is completed should the
next step be undertaken.
Step 3: Collecting Data

Are data available in company files, a library, industry or trade
journals, or on-line? When is the information needed? Marketers must address these issues as they proceed to the-data
collection step of the research. Using readily available data saves
both money and time. A formal market study can cost hundreds of thousands of dollars and take many months to
complete with no guarantee that the same conditions are still
relevant.
A low-cost approach to marketing research and data collection
begins with desk research. Personal files, company or public
libraries, on-line databases, government records, and trade
associations are just a few of the data sources that can be tapped
with minimal effort and often at no cost. Data from these
sources already exist. Table 6-4 shows how specific free data
based on U.S. Customs data can be. Such data are known as
secondary data because they were not gathered for the specific.
project at hand. Syndicated studies published by research
companies are another source of secondary data and information. The Cambridge. Information Group publishes Findex, a
directory of more than 13,000 reports and studies covering 90
industries. The Economist Intelligence Units EIU Country
Data is another valuable source of information both in print
and on-line. Another on-line example is the Global Market
Information Database (GMID). It contains information on 330
consumer products in 49 countries such as the market for
alcohol beverages in China. The cost of this report is contingent
upon the various modules that are purchased and costs several
thousands of dollars. It is available in many university libraries.
Primary Data and Survey Research
When data are not available through published statistics or

studies, direct collection is necessary. Primary data pertain to the
particular problem identified in step 1. Survey research, interviews, and focus groups are some of the tools used to collect
primary market data. Personal interviews with individuals or
groups allow researchers to ask why and then explore
answers. A focus group is a group interview led by a trained
moderator who facilitates discussion of a product concept,
advertisement, social trend, or other topic. For example, the
Coca-Cola Company convened focus groups in Japan, England,
and the United States to explore potential consumer reaction to
a prototype 12 ounce contoured aluminum soft-drink can. Coke
was particularly anxious to counteract competition from privatelabel colas in key -markets. In England, for example, Simsburys
store-brand cola had an 18 percent market share9 and Virgin
In some instances, product characteristics dictate a particular

country location for primary data collection. For- example, Case
Corporation recently needed input from farmers about cab
design on a new generation of tractors. Case markets tractors in
North America, Europe, and Australia, but the prototypes it
had developed were too expensive and fragile to ship. Working
in conjunction with an Iowa-based marketing research company,
Case invited 40 farmers to an engineering facility near Chicago
for interviews and reactions to instrument and control
mockups. The visiting fanners were also asked to examine
tractors made by Cases competitors and evaluate them on more
than 100 different -design elements. Case personnel from
France and Germany were on hand to assist as interpreters.
Survey research often involves obtaining data from customers
or some other designated group by means of a questionnaire.
Surveys can be designed to generate quantitative data (How
often would you buy?), qualitative data (Why would you
buy?), or both. Survey research generally involves administering a questionnaire by mail, by telephone, or in person. Many
good marketing research textbooks provide details on questionnaire design and administration. A good questionnaire has
three main characteristics:
1. It is simple.
2. It is easy for respondents to answer and for the interviewer
to record.
3. It keeps the interview to the point and obtains desired
information.
An important survey issue in global marketing is potential bias
due to the cultural background of the persons designing the
questionnaire. For example, a survey designed and administered
in the United States may be inappropriate in non-Western
cultures, even if it is carefully translated.12 Sometimes bias is
introduced when a survey is sponsored by a company that has a
financial stake in the outcome and plans to publicize the results.
For example, American Express joined with the French tourist
bureau in producing a study that, among other things, covered
the personality of the French people. The report ostensibly
showed. that, contrary to a long-standing stereotype, the French
are not unfriendly to foreigners. However, the survey
respondents were people who already had traveled to France on
pleasure trips in the previous two years-a fact that likely biased
the result.
Sampling
Sampling is the selection of a subset or group from a population that is representative of the entire population. The two
basic sampling procedures are probability sampling and nonprobability sampling. In a probability sample,. each unit chosen
has a known chance of being included in the sample. There are
five types of probability sampling: random, stratified_systematic, -cluster, and-multistage. -In a-non-probability
sample, the chance that any unit will be included in the sample
is unknown. The four types of no probability sampling are:
convenience, judgmental, quota, and snowball.
Four considerations for using a -probability sample are: the
target population must be specified; the method of selection
must be determined; the sample size must be determined; and
non-responses must be addressed.
Step 4: Analyzing Research Data

Demand Pattern Analysis
Industrial growth patterns provide an insight into market

demand. Because they generally reveal consumption patterns,
production patterns are helpful in assessing market opportunities. Additionally, trends in manufacturing production indicate
potential markets for companies that supply manufacturing
inputs. At the early stages of growth in a country, when per
capita incomes are low, manufacturing centers on such necessities as food and beverages, textiles, and other forms of light
industry. As incomes rise, the relative importance of these
industries declines as heavy industry begins to develop. As
incomes continue to rise, service industries rise to overtake
manufacturing in importance.
Income Elasticity Measurements
Income elasticity describes the relationship between demand for

a good and changes in income. Income elasticity studies of
consumer products show that necessities such as food and
clothing are characterized by inelastic demand. Stated differently,
expenditures on products in these categories increase but at a
slower percentage rate than do increases in income. This is the
corollary of Engels law, which states that as incomes rise,
smaller proportions of total income are spent on food.
Demand for durable consumer goods such as furniture and
appliances tends to be income elastic, increasing relatively faster
than increases in income.
Market Estimation by Analogy
Estimating market size with available data presents challenging

analytic tasks. When data are unavailable, as is frequently the case
in both less developed and industrialized countries, resourceful
techniques are required. One resourceful technique is estimation
by analogy. There are two ways to use this technique. One way is
to make cross-sectional comparisons, and the other is to
displace a time series in time. The first method, cross-sectional
comparisons, amounts simply to positing the assumption that
there is an analogy between the relationship of a factor and
demand for a particular product or commodity in two countries.
Cluster Analysis
The objective of cluster analysis is to group variables into

clusters that maximize within group similarities and betweengroup differences. Cluster analysis is well suited to global
marketing research because similarities and differences can be
established between local, national, and regional markets of the
world.
Analyzing Results
Because there are numerous analysis techniques and different

assumptions may be used, the net conclusions that may be
105
Cola was a major competitor. There are, however, cultural

differences that must be considered when using focus groups.
In Asia, young people tend to defer to elders, and lower-level
executives to higher-level executives when they are in the same
group. In Latin America, respondents tend to overstate their
enthusiasm and Asians tend to show diffidence.
drawn from market research may vary significantly. Two

companies studying the same country or market segment can
and often do reach different decisions accordingly. For example,
the estimates of on-line shopping revenue for 1999 varied from
$3.9 billion by the Direct Marketing Association to $36 billion
by the Boston Consulting Group.
Step 5: Presenting The Findings

The report based on the marketing research must be useful to
managers as input to the decision-making process. Whether the
report is presented in written form, orally, or electronically via
videotape, it must relate clearly to the problem or opportunity
identified in step 1. Many managers are uncomfortable with
research jargon and complex quantitative analysis. Results
should be clearly stated and -provide a basis for managerial
action. Otherwise, the report may end up on the shelf where it
will gather dust and serve as a reminder of wasted time and
money. As the data provided by a corporate information system
and marketing research become increasingly available on a
worldwide basis, it becomes possible to analyze marketing
expenditure effectiveness across national
boundaries. Managers can then decide where they are- achieving
the greatest marginal effectiveness for their marketing expenditures and can adjust expenditures accordingly.
Current Issues in Global Marketing

Research
Marketers engaged in global research face special problems and
conditions that differentiate their task from that of the
domestic market researcher. First, instead of analyzing a single
national market, the global market researcher must analyze
many national markets, each of which has unique characteristics
that must be recognized in analysis. As noted earlier, for many
countries, the availability of data is limited.
Second, the small markets around the world pose a special
problem for the researcher. The relatively low profit potential in
smaller markets permits only a modest marketing research
expenditure. Therefore, the global researcher must devise
techniques and methods that keep expenditures in line with the
markets profit potentially smaller markets, there is pressure-on
the researcher to discover economic and demographic relationships that permit estimates of demand based on a minimum
of information. It may also be necessary to use inexpensive
survey research that sacrifices some elegance or statistical rigor to
achieve results within the constraints of the smaller marketing
research budget.
Another frequently encountered problem in developing
countries is that data may be inflated or deflated, either inadvertently or for political expediency. For example, c Middle Eastern
country deliberately revised its balance of trade in a chemical
production
Marketing Research in Developing Countries

Nestle demonstrates how understanding the market can lead to success. It
successfully positioned its maggi brand noodles as a between meal snack
food rather than pasta meal item. Nestle also caters to the Indian
preference for local brands; although Nescafe is the companys flagship
global coffee brand in may countries, Nestle created chicory flavored
sunrise especially for the Indian market. Nestle managers have also
106
learned that the 20 million wealthy households in its core target market
exhibit a value orientation traditionally associated with mass markets.
Nestle has responded by keeping prices down more than half of the
predicts it sells in India cost less than 25 rupees about 70 cents.
The tobacco industry is also learning about India. Sixty percent of Indian
men smoke, although many prefer the native bidi, which is hand rolled
with a leaf outer wrapper rather than paper. As Darry Jayson, economist
at the Tobacco Merchants Association (TMA), noted recently, many
companies, local and international, are hoping that these bidi-smokers
move up to cigarettes as India becomes more affluent. Although western
brands enjoy high levels of awareness, the government taxes make up 70
percent of the retail price of a single pack. As a result, premium
European brands such as Dunhgill cost $4 per pack, whereas Indian
brands from Indian Tobacco company and other local manufactures sell
for 50 to $1.50. taste is an issue facing America tobaccos, while the
typical American smoke uses oriental and burley blends. The TMAs
Jayson says, Indian smokers perceive U.S. cigarettes as roasted and
harsh. I think it is very difficult to change the smoking habits of the
Indians. It may take up to 20 years to bring about the change.
by adding 1,000 tons to its consumption statistics in an

attempt to encourage foreign investors to install domestic,
production facilities. In Russia; Goskomstat, the state agency
that measures the economy, generates mountains of misleading
statistics. Real GDP may be 40 percent higher than the official
numbers because much of the economic activity in Russias
transitional economy is off the books due to high taxes and
confusing -laws.15although market research in developing
countries may have its challenges, the results-are often well
worth the effort as the examples in the box Market Research in
Developing Countries demonstrate.
Another problem is that the comparability of international
statistics varies greatly. An absence of standard data-gathering
techniques contributes to the problem. In Germany, for
example, consumer expenditures are-estimated largely on the
basis of turnover tax receipts, whereas in the United Kingdom,
data from tax receipts are used in conjunction with data from
household surveys and production sources.
Even with standard data-gathering techniques, definitions differ
around the world. In some cases, these differences are minor; in
others, they are quite significant. Germany, for example,
classifies television set purchases as expenditures for recreation
and entertainment, whereas the same expenditure falls into the
furniture, furnishings, and household equipment classification in the United States.
Marketing Information System

A Marketing Information System (MIS) is an integrated
network of information designed to provide marketing
managers with relevant and useful information at the right time
and place for planning, decision making, and control. As such,
the MIS helps management identify opportunities, become
aware of potential problems, and develop marketing plans. The
marketing information system is an integral part of the broader
management information system. For example, Benettons
stores around the world are linked by computer. When an item
is sold, its color is noted. The data collected make it possible for
In spite of computer and other advanced technologies, dark

age; methods of data collection and maintenance are still
prevalent. In many parts of the world, a knowledge and
application of modern management systems is nonexistent. In
many offices, scores of desks are crammed together in the same
room. Each employee may have his or her own unique ad
disorganized system for filing documents and information.
New employees inherit these filing and accounting systems and
modify their to fit their needs. The unindexed filing system, a
long-honored custom, makes each employee practically indispensable since no one knows how to find a document that has
been filed by someone else.
Such problems are not just confined to LDCs. Advanced
nations, such as some European countries and Japan, are still
struggling with the automation of their information systems.
U.S. firms are also not immune to this problem.
There is often a misconception that an MIS must be-automated
or computerized. Although many firms systems are computerized, it is possible for a company to set up and utilize a manual
system that can later be computerized if desired. With modern
technology and the availability of affordable computers, it
seems quite worthwhile for an international firm to install a
computer based information system. Yet no one should
assume that the computer is a panacea for all system problems,
especially if flaws are designed into the MIS. A poorly designed
system, whether computerized or not, will never-perform
satisfactorily.
For the MIS to achieve its desired purpose, the system must be
carefully designed and developed. Development involves the
three steps of system analysis, design: and implementation;
System analysis involves the investigation of all users information needs. The relevant parties must be contactedtodetermine the kinds of information they need, when it is
needed, and the suitable format through which the information
is made available. Because information is not free, it may not be
feasible to satisfy all kinds of information needs. The benefit of
the information provided must be compared with the cost of
obtaining and maintaining it. Only when the benefit is greater
than the cost can a- particular information need- be accommodated.
System design should be the next major consideration. System
design transforms the various information requirements into
one or more plans that clearly specify the procedures and
programs in obtaining, recording, and analyzing marketing data.
Alternative or competing plans are developed and compared,
and the most suitable one is ultimately selected.
The last step comprises system implementation. The chosen
system is installed and checked to make certain that it functions
as planned. Both those who operate the system and those who
use it must be trained, and their comments should be evaluated
to ensure the smooth operation of the system. Even after
implementation, the system should continue to be monitored
and audited. In this way, management can make certain that the
system serves the needs of all users properly while preventing
unqualified persons from gaining access to the system. Security

Pacific Bank, for example, lost $10.3 million when a consultant
was able to obtain an electronics fund transfer code and use it to
deposit money into his Swiss bank account.
For the MIS to be effective and efficient, it should possess
certain characteristics. According to Sweeney and Boswell, the
system should be user-oriented, expandable, comprehensive,
flexible, integrated, efficient, cost-effective, reliable, timely, and
controllable. The MIS should also be systematic and selfperpetuating. Marketing and environmental information should
be routinely received, evaluated, and continuously updated.
As implied above, certain characteristics are universal in the sense
that all information systems, whether large or small and
whether domestic or global, should possess them. But unlike a
domestic MIS, an international marketing information system
(IMIS) needs to satisfy additional criteria in order to ensure that
the system can effectively serve a companys international
marketing strategy. Some of these criteria are time independence, location independence, cultural and linguistic
compatibility, legal compatibility, standardization/uniformity,
flexibility, and integration. An IMIS should be time independent by providing around-the-clock services. Being location
independent means that the system must be capable of
allowing submission and usage of data at the various strategic
points globally. Cultural knowledge and linguistic capability,
whenever possible, should be built into the software and
system. Naturally, the implementation of an IMIS must
conform to local laws. To assure uniformity, certain kinds of
information need to be standardized. Yet some degree of
flexibility is required as well since a good information system
should be useroriented. Finally, given the number of users,
countries, and locations involved, an IMIS must be designed to
allow data integration.
Database and Some Format

Considerations
A firms database should be flexible enough to accommodate each
countrys preferred style in maintaining names and addresses. Concerning
addresses, in France, Germany and Italy, the postcode usually precedes
the town on a single line. In Britain, the postcode should follow the country
name. If the country name is omitted, the postcode follows the town or city.
In France and the United Kingdom, the house number precedes the street
name. In Germany, Italy, and other European countries, it is the opposite.
Regarding address windows, the window should go on the left-hand side in
the case of Britain, the Netherlands, and Ireland. But in France,
Sweden, Belgium, and Germany, the right-hand side is the norm.
Regarding field sizes, flexibility is a necessity. The German language
may require up to one-third more characters than the English-language
equivalent.
A. C. Nielsen is the worlds largest consumer market research

company with operations in twenty-seven countries. Nielsen
Europe has synchronized its continent wide reporting periods
and implemented pan-European databases. The databases, as
defined by international standards, should enable marketers to
efficiently access and compare data on their - own products and
those of their competitors. Although many key influencing
107
Benetton to determine the shade and amount of fabric to be

dyed each day, enabling the firm to respond to color trends very
quickly.
factors such as language, consumption habits, retail trade

structure, and TV advertising will continue to have distinct local
character, the uniform methods allow for a quick examination
of market situations across the entire continent.
law requires marketers to notify customers that a file is being

created on them and to explain why a database record has been
set up. Consumers must be given a reasonable opportunity
to get their names off mailing list.
The MIS consists of several subsystems: internal reporting,

marketing research, and marketing intelligence. The internal
reporting subsystem is vital to the system-because a company
handles a great deal of information on a daily basis. The
marketing department has sales reports. The consumer service
department receives consumers praises and complaints. The
accounting department routinely generates and collects such
information as sales orders, shipments, inventory levels,
promotional costs, and soon. All- of these types of internally
generated information should be kept and made available to all
concerned and affected parties.
The MIS should be designed to do more than data collection

and maintenance. It should go beyond data collection by adding
value to the data so that the information will be of most use to
users. The MIS thus requires an ana1ytical component that is
responsible for conceptually and statistically analyzing the data.
This component may even go a step further by offering
conclusions and recommendations based on the analysis of the
data.
DATABASE MARKETING
Some 750,000 babies are born in France each year. The stable birth rate
has forced marketers to try to increase sales at the expense of the
competitors. In the early 1990s, grocery stores distributors began to focus
on market leaders Bledina and Nestle which have 50 percent and 25
percent of the market, respectively, thus edging out Gerber.
To capture market share, Gerber began to build a database of young
mothers through mailings to rented lists, hospital samplings, maternityroom videos, print advertisements, and materials placed in waiting rooms
(e.g. literature about a program through which young mothers earned items
from a gift catalog). The efforts yielded names, addresses, and telephone
numbers as well as childrens ages for follow-up contacts. Gerber has used
the database to mail special packets of natural instant cereals to some
150,000 young French mothers whose infants have reached eighteen
months. After the first eighteen months, children switch from jarred baby
foods to cereals or other foods. The direct mail packages provide
nutritional information as well as price-off and two-for-one coupons for the
product. It is important to influence a mothers brand selection at the
outset. Once she chooses a brand, she does not change it often
For externally generated information, the MIS should consist

of two subsystems. One of these is the marketing research
subsystem. The activities of this subsystem have already been
discussed extensively. The other subsystem is the marketing
intelligence or environmental scanning subsystem. The
responsibility of this subsystem is 10 track environmental
changes or trends. This subsystem collects data from salespersons, distributors, syndicated research services, government
agencies, and from publications about technology, social and
cultural norms, the legal and political climate, economic
conditions, and competitors activities.
The implementation of the MIS must conform to local laws.
Many countries, concerned with citizens privacy, have laws that
restrict free flow of information. In England data users are
required by the Data Protection Act to register with the Office
of Data Protection Registrar; otherwise, heavy fines are levied.
Computer users must state how personal information was
obtained and how it will be used. Furthermore, British
residents have the right to see personal data about themselves.
Similarly, Quebecs privacy legislation restricts the activities of
direct marketers who target the French-speaking province. The
108
Levis/Benelux has maintained a retail database of fourteen: to

twenty-three year olds in the three Benelux countries. The
database relies exclusively on company owned stores and Comer
department via a questionnaire. The questionnaire is a self
mailer that asks a customers name, address, age, and gender.
Levis has two free magazines: Tab and Corner. The magazines
feature the full range of Levis products on a larger poster and
such assorted features as film and music profiles sprinkled
among full-page fashion photos of young people wearing
Levis items. Since most young people ignore TV spots, direct
mail is the best way to reach Levis target groups. Not receiving
much direct mail, young people are happy to receive Levis,
magazine. Unfortunately {or these young people, when they
reach age thirty, they will be automatically cut off. It is a waste
of money to use direct mail to reach the thirty-plus age group. )
Keep it Private
Because there is no pan-European law, each countrys law must be
analyzed. In France, it is illegal to collect data having to do-directly or
indirectly-with membership of trade unions.
In Germany, as a consequence of the Nazis use of personal information
to identify enemies, the countrys data-protection laws may be the most
restrictive in the European Union. Germany prohibits virtually all
activities regarding collecting, storing, and processing personal data. In
general, all storage, communication, and erasure of personal data are not
allowed unless expressly permitted by the data-protection act. Data
processing is prohibited unless a person has given his or her written
consent.
In England, data collection laws are similar to those in France. Great
Britains Direct Marketing Association Code of Practice requires list
owners to warrant that the data have been fairly and lawfully obtained
and all private individuals whose data are included have been given an
opportunity to object to the use of their data by persons other than the list
owner and that the data of those who have objected have either have been
deleted from or so marked in the list.
What Information Is Needed?

We assume that the firm has already decided to go international.
Its next decision, then, is which world markets to enter. Since
the firm cannot usually sell to all world markets, it must find a
way of ranking them according to their attractiveness. This
requires an investigation of their market potential and the local
competitive situation. Once the firm has identified desirable
target markets, it must decide how to serve those markets-by
exporting, licensing, or local production, for example.
Once a decision has been made to market in a particular country,
standard marketing questions arise, such as product decisions,
pricing decisions, or channel decisions. These decisions can be
further broken down until eventually a very specific local issue is
reached-the kind of package and label that should be used for
the firms floor wax in the Philippines, for example. The
information needed to make these decisions is frequently
provided by marketing research.
Information for Marketing Decisions

Marketing Decision
1. Go international or
remain a domestic marketer
2. Which markets to enter
3. How to enter
target markets
4. How to market in
target markets
Intelligence Needed
Assessment of global market

demand and firms potential
share in it, in view of local and
international competition and
compared to domestic opportunities.
A ranking of world markets
according to market potential,
local competition, and the
political situation.
Size of market, international
trade barriers, transport costs,
local competition, government
requirements, and political
stability.
For each market: buyer
behaviour, competitive practice,
distribution channels, promotional media and practice,
company experience there and in
other markets.
The Information Provided by Marketing

Research
What information should international marketing research
provide? Obtaining information about consumer behavior and
product-related information come to mind as typical marketing
research objectives, but the objectives of international marketing
research should be broader.
The fact of being in a global market means that the firm must
seek information to help it to understand the country and
regional environment, as well as the consumer and the product.
The firm must assess the global competitors that it will face in
order to compete better with them. Only then does information about the industry and the product make sense, and better
research and decisions on the marketing mix can result.
Marketing Environment
Research should emphasize gathering information about the
country and region of interest and evaluating comparative
information across countries. Both political and economic
information are relevant. The political dimension of information gathering includes data on the following:
1. Political structure and ideology : What does the political
leadership of the country seek? What roles do major
institutions such as business, labor, the educational sector,
and religion play in shaping national goals?
2. National objectives : What are the countrys goals for the
defense sector, its fiscal, monetary, and investment policy;
and the foreign trade sector? What are its industrial and
technology policies for sunrise or burgeoning industries and
its social policy (for example, how do they affect income
distribution and conspicuous consumption)? Is autonomy a
goal, does the nation seek to reduce import dependence, and
is developing national champions in industries considered
critical?
3. The economic dimension of information gathering is more
familiar. It includes obtaining data on economic
performance, covering indicators such as GNP, per capita
income levels and growth rates, stage of the business cycle,
balance of trade and balance of payments, productivity, labor
costs and capital availability, capacity utilization, inflation
rates, savings and investment, employment levels,
educational attainment, population demographics, age
distribution, public health, and income distribution.
Marketing infrastructure is also of interest, including the
structure of wholesaling and retailing, laws concerning
pricing and promotion, the physical distribution
infrastructure, and the extent of development. It of
consumer protection. All of these help determine the
attractiveness of the market, as well as obstacles to entry and
marketing of goods and services as well-as the long-term
profit potential.
4. Government regulation is another area for market research,
particularly with regard to product and safety standards,
barriers to entry (affecting foreign companies and their
products), and controls over managerial and marketing
autonomy. Does the government implement industrial
policies that benefit domestic companies and industries at
the expense of foreign firms?
109
LESSON 12:
INTERNATIONAL MARKETING INTELLIGENCE
Competition
Assessing foreign competitors involves developing additional
levels of understanding since foreign competitors may have
distinct and different objectives that shape their strategy and
tactics. They may also possess hidden resources and strengths
that are culture specific and not apparent to the outside firm.
For example, close family and other ties may exist between a
competitors top management and influential individuals in
government and the political arena. In conducting such
assessment, the firm must first investigate the assumptions it
holds about its foreign competitors regarding their objectives
and capabilities; then it can assess potential strategies and make
plans in terms of which new markets to enter, what modes of
entry to take, how vulnerable it will be, and the expected
strength of reaction by competition to its moves in that market.
Essentially, the firm must be able to anticipate how its foreign
competitors might act or react and to use such information to
prepare contingency plans for quick response as appropriate.
Users of the Product
The firm must understand users, both of its product and those
of its competitors. A paramount consideration is documenting
and understanding cultural differences as they affect customer
needs, products demanded, and purchasing behavior. Analysis
and market research can focus on end-user industry categories
and, if relevant, on unique characteristics of consumers.
Information to help in segmentation should be gathered, using
parameters such as age, sex, size, income levels, growth rates of
consumption, regional differences, purchasing power, influence
over purchasing and purchasing intentions, and the role of
credit granting in purchasing behavior. Another major area of
research is product benchmarking or quality comparisons, which
makes objective comparisons of a firms products and its
competitors products; this can be used to understand product
positioning issues by competitors within an industry, as well as
positioning across countries, customer response to new product
introductions, and the potential for customers purchasing the
firms own brands instead of competitors brands. Finally,
research should identify market trends for the medium and
long term, rather than solely providing information .for
decision making on immediate marketing plans and actions.
Marketing Mix
As we shall see later, a company can standardize or adapt its
product as well as its marketing mix to different country
markets. Hence, it is also necessary to research marketing mix
choice in international markets. The following are areas that
should be investigated:
1. Distribution Channels : Their evolution and the firms
comparative performance in different channels and those of
its competitors.
2. Comparative pricing strategies and tactics : The price
positioning by all competitors, price elasticitys, and customer
response to differential pricing behavior.
3. Advertising and promotion : The range of choices available,
the differences in the allocation of promotion expenditures,
the delineation of the advertising response function in
different markets, and the comparison of competitor choices
in advertising and promotion.
110
4. Media research : Useful in determining where to advertise in

order to reach target audiences. Major market research firms
such as A C. Nielsen and the Kantar Group (part of WPP)
provide media research and media measurement services.
5. Service quality issues : Relative to positioning by competitors
and customers reactions to higher levels of service.
6. Logistic of network capabilities : Delivery and stock out
performance and the use of information systems to
improves delivery and customer service. This relatively new
area of marketing concern results from increased emphasis
on just-in-time inventory systems and customer-direct
delivery, bypassing retail inventories. Other key research
issues are comparative performance of competitors and
customer requirements.
Firm-specific Historical Data

Forgotten in marketing research is the role of a firms internal
information system in providing data for marketing decisions.
Marketing research often can be facilitated by setting up the
required database outline and implementing internal data
collection; this is particularly necessary for international markets
since much information that could be generated within the firm
is ignored or lost. Useful data could include sales history by
product and product line, by customer and sales force, by
distribution channel, within a country and across countries;
analysis of such historic data for trends across countries and
regions; derivation and analysis of contribution by product,
product line, customer, and region; and development of market
response functions across countries to permit comparison of
past marketing mix decisions and to suggest future mix
decisions that may differ from country to country, within a
country, or across regions.
Once marketing research has been completed, the information
that it generates must be analyzed so that questions about
future marketing plans and actions can be answered. Major
questions that are relevant in international marketing fall into
two categories: market and competition decisions and product
and marketing mix decisions. In regard to market and competition, the firm should mainly be concerned with three issues:
1. Understanding how customers rate it in comparison to the
competition.
2. Determining its chances to attract customers.
3. Deciding whether to compete or cooperate with the
competition.
As to product and marketing mix, the firm should look at
several factors:
1. Choosing which products to introduce, which distribution
channels to use, and how to advertise and promote the
product.
2. Identifying barriers to attractive markets and finding ways to
overcome them.
Marketing research can also playa role in helping formulate
global strategy. While strategy sets a path for how a firm should
interact with its customers, competition, and environment,
market research can help by providing information and analyses
on environmental trends; changes in competitive behavior and
1. Determining the firms mission, scope, and long-range

objectives.
2. Anticipating environmental changes and their effects, and the
resulting opportunities and threats they pose.
3. Understanding the firms capabilities versus the strengths and
weaknesses of competitors.
The above ideas are a far cry from information gathering about
consumer responses to new products, prices, and advertising.
Yet just as good information is necessary for tactical marketing,
so, too, is good information needed to develop and assess
long-range plans.
Problems in International Marketing

Research
Because of its complexity, international marketing may encounter difficulties that are uncommon in domestic marketing
research. One problem is that intelligence must be gathered for
many markets-over 100 countries in some cases-and each
country poses a unique challenge. A second problem is the
frequent absence of secondary data (data from published and
third-party sources). A third problem is the frequent difficulty in
gathering primary data (data gathered firsthand through
interviews and field research).
Problem of Numerous Market

Multiplying the number of countries in a research project
multiplies the costs and problems involved, although not in a
linear manner. Because markets are not identical Tom one
country to another, the research manager must be alert to the
various errors that can arise in replicating a study
multinationally. Mayer identifies five kinds of errors to look for
in multinational research:
1. Definition error : caused by the way the problem is defined in
each country.
2. Instrument error : which arises from the questionnaire and
the interviewer.
3. Frame error : which occurs when sampling frames are
available from different sources in different countries.
4. Selection error : which results from the way the actual sample
is selected from the frame.
5. Non response error : which results when different cultural
patterns of non-response are obtained. For example, in one
five-country study, the response rate ranged- from 17 percent
to 41 percent. Further more, in one country, women
composed 64 percent of the respondents, but in another
countrymen represented 80 percent of the respondents.
Problems with Secondary Data

Secondary data for market analysis are less available and less
reliable for many foreign markets and low per capita income
countries tend to have weaker statistical sources than those with
higher per capita income. Secondary sources of information are

relatively cheap to acquire, however, and can help prevent a inn
from making major mistakes in its international marketing.
Major steps in using secondary data include:
1. Determining research objectives.
2. Clarifying what information is needed.
3. Identifying where such secondary information can be found.
4. Deciding whether the information source is reliable (who put
out the information and whether there is a hidden agenda).
5. Assessing the quality of data (accuracy, timeliness,
representativeness) and the compatibility of data from
different sources.
6. Interpreting and analyzing the information.
7. Drawing conclusions and then relating them to the marketing
problem at hand to see if conclusions suggest courses of
action or backup planned decisions or actions.
The use of probability sampling is necessarily limited where the
nature of the relevant universe cannot be reliably determined.
Quota sampling is limited for the same reason, so the most
frequently employed technique is the convenience sample. This
is defensible primarily because of a lack of alternatives.
Comparing Several Markets. When data for several markets are
compiled, the researcher may find that many gaps exist for
example, current data on number of automobile registrations
may only be available for a few countries in the group of
interest. Data quality may vary and the estimates may not be
reliable. The underlying definitions may not be the same, with
some countries excluding light trucks from automobile
registrations while others include them. Many countries lack
specialized firms that develop industry data for specific industries such as automobiles or air conditioners.
Problems with Primary Data

Much of marketing research involves getting information from
people about their perceptions concerning a companys products, brands, prices, or promotion. People differ from country
to country in their income levels, culture, attitudes, and
understanding of business issues, including specific items on
surveys and questionnaires. Hence, personal interviews require
skilled interviewers. Telephone surveys may work poorly and
give biased results in countries with low rates of telephone
penetration, such as in most of Africa and in countries such as
China and India. The use of mall-intercept techniques to obtain
personal interviews may give erroneous results because malls are
not as widespread in many countries even in Europe, and then
subgroup of people visiting a mall may be unrepresentative of
the broader audience. Mail surveys require a developed postal
system, good mailing lists, and an educated population.
Accurate and complete street addresses are necessary to give
representative samples for mail questionnaires. If mail and
telephone surveys are not practical, the researcher is left with
personal interviewing as an alternative. With a largely rural
population in the poorer countries, the problem then becomes
one of physically reaching the people. Poor roads and lack of
regular public transportation may make interviewing them
economically unfeasible. In tropical areas, many roads are
111
government regulation; and shifting consumer tastes. In other

words, market research can provide strategic information by
focusing on futures research and scenario development. Market
researchers who pride themselves on quantitative modeling and
statistical rigor might disdain this soft world, leaving it to
mega trend vision Aries such as Naisbitt. However, market
research can resolve strategic planning is such as:
impassable during the rainy season. Surveys may be limited

primarily to urban areas.
In addition, the environment may favor distinct research
methodologies; such as instruments with a diversity of
questions; the use of physical stimuli, such as the product, an
advertisement, or a jingle; the control of the data-collection
environment; including using simulations or, tests of products
in use; other criteria such as the perceived anonymity of the
respondent. The sensitivity of the information requested, the
experience of personnel conducting the survey and the quality
of the, data desired will also suggest specific research approaches. Respondents may feel social pressure to respond with
answers they perceive to be socially correct Speed cost, and
Controlling for bias also affect the choice of technique
Languages
Language, is the initial cultural difference that comes to mind
when one thinks of foreign markets. At the minimum, the
language difference poses problems of communication;
solutions to these problems may be expensive. First, the
research design and specifications must be translated twice, first
(in the, case of a U.S. firm) from English into the language of
each country where the study is to be conducted, Then, on
completion of the study, the results must be translated back
into English. More important than translation expense is the
communication problem, also discussed in Chapter 4. Even
business respondents-may have difficulty if they are asked in
their native language about stock turnover or other business
concepts that they are unaccustomed to using.
Social Organization
Much of marketing research involves gaining insights into the
buyers decision process. Such research is predicated on the
assumption that the decision makers and influencers have been
identified. In foreign markets, the researcher usually finds that
the social organization is different enough that it is necessary to
identify anew the decision makers and influencers. (This subject,
including the varying roles of women, is discussed in Chapter
4.) Differences in social organization affect the industrial market
as well as the consumer market. The nature of the decision
making structure in foreign companies is possibly different
Tom that in U.S. companies, due to the greater importance of
family business in other countries and a greater general stress on
relationships.
Obtaining Responses
Respondents and businesspeople may be reluctant to participate
in marketing research for various reasons. Respondents may
suspect the questioner of being a government tax representative
rather than a legitimate market researcher, or they may be
reluctant to respond for fear of giving information to competitors. The idea of business people giving information to
anyone, whether the government or an individual, is not well
accepted in many countries. In addition, one of the researchers
greatest problems is trying to demonstrate the value of the
research to the respondent personally. Unless this can be done,
little will be accomplished with many business respondents.
Consumers, too, may be reluctant to respond to marketing
research inquiries.
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This may be in part the result of a general unwillingness to talk

to strangers. Foreign respondents are often more reluctant to
discuss personal consumption habits and preferences than are
Americans. In contrast to the reluctant respondent is the
cooperative respondent who feels obliged to give responses that
will please the interviewer rather than state true opinions or
feelings. In some cultures this is a form of politeness, but it
obviously does not contribute to effective research.
Reluctant or polite responses are not the only barriers. Occasionally, the respondent is not able to answer meaningfully. For
example, illiteracy is a barrier when written materials used. This
problem can be avoided by using oral interviews. Even when
the interview is oral, however, a communication problem that
could be called technical illiteracy may arise; that is, the terms
or concepts used might be unfamiliar to respondents even
though phrased in their native language They may not understand the questions and thus be unable to answer. Or they may
answer without understanding giving a useless response.
Quite apart from the terms used; respondents may be unable to
cooperate effectively because they are asked to think in a way
foreign to their normal though: patterns. They are being, asked
to react analytically rather than intuitively. What ever the
particular cause of the inability to Spend, it is basically a
translation problem. The research designer must be able to
translate not only the words but also the concepts. The cultural
gap must be bridged by the research designer.
Researching Hispanic Consumers

International marketing research invariably comes up against cultural differences that affect the use and efficacy of standard!
Western methods and may lead to erroneous interpretation of
findings because cultural misunderstandings. Professionals
must then turn for help to experts who can help bridge cultural
gaps. These issues are addressed in a recent book on doing
research on Hispanic populations in the United States and
elsewhere.5 The book first addresses the question of who
Hispanics in the United States are, summarizing demographic
census results, describing their various countries of origin and
identifying basic Hispanic values such as the importance of
family, the importance of feeling empathy for others, views of
prescribed gender roles, and time orientation.
While Hispanics may be broadly alike, researchers need to bear
in mind differences among Hispanic subgroups of Cuban,
Mexican, Puerto Rican, and Central American origin, and how
these differences affect how they are identified in conducting
research. Misidentification and mislabeling can affect response
rate and willingness to participate, reliability, and the
generalizability of studies. Other pertinent issues include how
to gain access to survey participants, how to enhance completion of survey instruments, and how to get beyond socially
desirable responses. Such cultural differences require that
standard, culturally appropriate instruments be adapted.
Questionnaire translation is equally important because often
there is no one correct way to translate an English word into
Spanish or some other language, and multiple attempts at
validation with different native speakers may be necessary. .
Another study of Hispanic consumer behavior asserts that
immigrant Mexicans have to learn to consume, and in doing so,
The international marketers job is made easier when concepts

and measurement instruments have been developed and
validated across several cultures. While anthropologists have a
long history of instrument adaptation, similar efforts are at a
rudimentary stage in marketing. An example of such a direction
is the concept of consumer ethnocentrism and an associated
scale, CETSCALE. Tested and proven to be reliable across four
countries, which are one anothers major trading partners,
CETSCALE may be expected to be applied to other countries
in the future.
Convergence of Consumer Behavior Across

Countries
Just as one might expect significant divergence among consumers because of cultural and religious differences, a growing
convergence of consumer behavior is occurring across countries
caused by multinational media and the standardized global
marketing strategies of multinationals. For example, a 1995
study from Roper Starch Worldwide suggests that four broad
types of consumers exist-types generable to 1.97 billion
consumers worldwide. In the same vein, a Gallup poll conducted in the major cities of Argentina, Brazil, Chile, Colombia,
and Mexico divides consumers into eight segments across
countries, based on questions about income, education
occupation, type of home, and ownership of automobiles and
durable goods.9 The survey excluded low-income workers
(about 17percent of the working-population) and ignored rural
markets. Based on its sample of I7,564 people call up divided
Latin American consumers into eight categories:
Emerging professional elite:14%
Progressive upper-middle class: 13%
Traditional elite: 11 %
Self-made middle class: 11 %
Skilled middle class: 9%
Industrial working class: 14%
Self-skilled lower middle class: 13%
Struggling working class: 15%
Improvisation
Some improvisation is probably used in all marketing research,
but a higher degree is needed in international markets. Improvisation may be loosely defined as unconventional ways of
getting the desired market information and or finding proxy
variables when data are not available on the primary variables.
One such approach is the use of national consumption
statistics, by volume or units, for various items. Such statistics
filter out exchange-rate anomalies that arise in the use of
currency-based economic indicators. Examples of such information include the number, in units, of radios, televisions, and
VCRs used; life expectancy at age one; the number of hospital
beds available and doctors per 100,000 people; consumption of
various food items on a per capita basis; the per capita availability of goods such as telephones, cars, and motorcycles; the
number of airline and train revenue passenger miles sold per
year; the consumption of electricity and steel; and the average
number of years of schooling completed by the population. All
such indicators are generally available for a variety of countries
and can be used to group countries and can be correlated with
market-size information.
New Services to Aid the International Firm

As international business continues to grow, more and more
international marketing research services are available to aid
firms. Existing international marketing research organizations
are expanding into more countries with more services, and new
organizations are entering the field. It is not possible to catalog
all of these but an example is International Information
Services Ltd. (IIS), a global product pickup service for consumer
packaged goods manufacturers. It has 400 clients in over 30
countries, including Coca-Cola, General Foods, J. Walter
Thompson, and Unilever. Each day supermarkets in 120
countries are raided by IIS shoppers buying products or
searching for information needed by clients. They provide
samples of competitive products, client products for monitoring of quality, and/or information on competing brands
(ingredients, varieties, sizes, prices, etc.).
Learning by Doing
If the costs of primary marketing research are too great, another
way to evaluate a market is by becoming an exporter. After a year
or two of export experience, the firm will know more about
actual market behavior than could be learned from a preliminary
market study. If the market proves difficult or unprofitable, the
firm can withdraw without major losses. If the market proves
attractive, the firm might consider a heavier commitment in the
country.
Other Research Techniques to Use in

Developing Countries
Moyer has suggested four techniques that are relevant for
researching small, lower income markets: analysis of demand
patterns, multiple-factor indexes, estimation by analogy, and
regression analysis.
Analysis of Demand Patterns

Countries at different levels of per capita income have diverse
patterns of consumption and production. This commonplace
observation is illustrated in Figure 7-1.) The importance of this
statement lies in the fact that the researcher can usually get data
at this macro level for most countries. This simple technique,
known as the multiple-factor index approach, thus allows
insights into the consumption production profiles of many
countries. Though relatively crude, it gives a clue both to a
countrys present position and the direction it is going. This in
turn helps the firm identify possibilities for export or local
production in that market.
Multiple-Factor Indexes
A multiple-factor index measures market potential indirectly,
using as proxies a number of variables that intuition or
statistical analysis reveal to be closely correlated with the
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combine consumption patterns learned from being Mexican

with consumption patterns learned Tom American society.
Eventual consumption patterns, therefore, are likely to be a
hybrid of Mexican and U.S. consumption vahies.6 As an
example, the study cites the initial unwillingness of Mexicans to
buy frozen produce or meat, based on the custom of buying it
fresh and on a daily basis.
potential market for the product in question. For example, a

manufacturer of modular housing may look at these factors:
1. The rate of household formation.
2. Population demographics to gauge the percentage of the
population in the age bracket from 20 to 30 years, a prime
household forming segment.
3. Income-level segments with some minimum per capital
household income such as $2,000 per year being used to
gauge purchasing power.
Smoothing out these numbers over several time periods and
relating them to historic house sales and new housing construction may provide useful estimates of potential market size.
Estimation by Analogy
For countries with limited data, estimating market potential can
be a precarious exercise. Given the absence of hard data, one
technique-estimation by analogy can be helpful in getting a
better feel for market potential in such countries. This estimation is done in two ways: (1) through cross-section
comparisons and (2) through the displacement of a time series
in time.
The cross-section comparison approach involves taking the
known market size of a product in one country and relating it
to some economic indicator, such as disposable personal
income, to derive a ratio. This ratio (of product consumption
to disposable personal income in our illustration) is then
applied to another country where disposable personal income is
known in order to derive the market potential for the product
in that country.
The time-series approach estimates the demand in the second
country by assuming that it has the same level of consumption
that the first country had at the same level of development (or
per capita income). This technique assumes that product usage
moves through a cycle, with the product being consumed in
small quantities (or not at all) when countries are underdeveloped and in increasing amounts with economic growth. Thus,
looking at meat and egg consumption in Taiwan in the late 60s
and early 70s can allow a rough estimation of demand for meat
and eggs in mainland China in the 90s, with Chinese incomes
being at about the levels prevalent in Taiwan in the early 70s.
Both approaches have limitations. The cross-section method
assumes a linear consumption function. Both assume comparable consumption patterns among countries. When these
assumptions are not true, the comparisons are misleading.
When more sophisticated techniques are not feasible, however,
estimation by analogy is a useful first step.
.
Using Long-Term Trend Data to Estimate Market Size
The parcel tanker industry provides an example of how longterm trend data can be used to estimate market size. Parcel
tankers (as distinct from oil tankers) are used to transport bulk
liquids such as chemicals. Freight rates can vary depending on
demand and supply. In 1995, rates were about $60 per ton,
compared to around $48 per ton in 1994 Operating leverage is
high in the industry. A $1 increase in the freight rate, for
example, can mean an additional $11 million in operating profit
for a major parcel tanker company such as Stolt-Nielsen, a
Norwegian tanker company that transports, stores, and
114
distributes bulk liquids. Such tankers are usually chartered for

long periods, and as charters end and new charter periods are
negotiated, charter rates can be increased depending on the
prevailing demand supply patterns.
For a company such as Stolt, forecasting demand and supply is
important in determining both what charter rates might be like
in the future, as well as whether to order new tankers to be
built. This decision is important because, depending on
shipyard backlog, tankers must be ordered to precise design
specifications and then built, with delivery from time of order
stretching out to as long as two years. Several factors go into
compiling such data, especially the forecasts for the near-term
future period, 1995 to 2000. Demand figures are derived from
estimating the rate at which worldwide transportation of
chemicals is growing, which in turn is related to GDP growth,
particularly in Southeast Asia; demand is growing at 5 to 7
percent a year. Then, on the supply side, the existing number of
tankers available is known, and to that is added the number of
new tankers being built and the rate of scrap page. That is, old,
obsolete tankers nearing the end of their seaworthy days and
posing environmental hazards because of leakage problems will
be taken out of service, thus reducing the total supply.
As can be seen, demand will outstrip supply over the next few
years by almost one million metric tons, suggesting that freight
rates will rise sharply and that several new tanker orders will be
placed. To the extent that a company such as Stolt Nielsen is
armed with such information earlier than its-competitors, it can
charge higher rates and lease its tankers on spot rates rather than
on long-term charters, thus increasing its profits. It can also
order new tankers earlier, thus being able to increase its capacity
in a timely fashion, taking advantage of healthy demand
conditions. By placing orders early, it can also be more sure of
getting its tankers delivered on time (a latecomer may find that
the shipyards are too busy, that delivery is far off, and that by
the time delivery occurs, demand and supply may once more
have moved into balance, reducing rates once again.)
Based on the demand and supply projections, Stolt-Nielsen has
ordered 10 new parcel tankers for delivery over the next three
years. It took delivery of a 37,000ton, alt-stainless-steel chemical
tanker from Danyard in Denmark, and will be getting six more
from the same yard, as well as three others of similar design
from a shipyard in France. Stolt might scrap some older tankers
during the same time frame. In addition, the company is
expanding into Asia by establishing special tank container
cleaning and repair facilities and developing bulk chemical
storage locations in Japan, Korea, Taiwan, Mainland China, and
Singapore. 13 The researcher should however, keep in mind that
as global economic conditions change, such forecasts need to be
updated. For example, during the 1997-913 period, the Asian
economies fell into a recession, and their demand for basic
products such as chemicals dropped sharply, affecting world
demand for tankers to transport chemicals. At the same time,
shipyards in countries such as Korea, China, and Japan
attempted to preserve jobs by cutting ship prices, leading to a
shift of demand for ships to these countries and creating the
possibility of overbuying currently-in essence borrowing
Regression Analysis
Regression analysis provides a quantitative technique to sharpen
estimates derived by the estimation-by-analogy method just
discussed. Cross-section studies using regression analysis
benefit from existing predictable demand patterns for many
products in countries at different stages of growth. The
researcher studies the relationship between gross economic
indicators and demand for a specific product for countries with
both kinds of data. The relationship derived can then be
transferred to those countries that have only the gross economic
data but not the product-consumption data.
The equation used here was the simple regression y = a + bx,
where y is the amount of product in use per thousand of
population and x is per capita GNP.
GNP would result, on the average, in an increase of 10 automobiles, 10 refrigerators, 9 washing machines, 7 TV sets, and 27
radios per 1,000 populations. Construction of such a table
relevant to the products of a specific firm can be very useful.
The model can use additional independent variables beyond
GNP per capita. For example, airlines forecast air traffic growth
with two factors, per capita GNP growth and the yield in cents
per mile (yield is the air fare for a route divided into the
distance, or number of miles on that route). Over long periods,
this regression model has proved reasonably accurate, with air
traffic growing as incomes grow and dropping as fares rise.
There are limitations to using regression, however. For
example, as a product approaches saturation levels, the rate of
consumption declines, requiring a different equation to explain
the relationship. Nevertheless, regression analysis can provide
useful insights.
Comparative Analysis
Comparative analysis is an attempt to organize information and
experience to maximize their usefulness. In international
marketing, this means that the company gathers and organizes
its intelligence from all its global operations to see what new
insights can be gained.
Grouping or classifying objects is an important step in understanding markets. Competing products can be grouped
together to understand the different segments that are being
targeted. Consumers can be grouped to assess customer
segments. And countries can be grouped to determine which
markets are similar to 1 one another. In this way, a generic
strategy can be prepared for the countries belonging to a group
rather than approaching each country individually. Moreover,
groups of countries can be compared in evaluating market
performance. One of the difficulties of comparative market
performance assessment is that markets are different so the
comparison may be unfair. Performing comparisons only on
countries that are similar enough to belong to a group mitigates
this problem.
Cluster Analysis
The approaches used to develop a short list of potential
markets include comparative analysis of countries using
macroeconomic and consumption data. Cluster analysis is a
favored technique of identifying similar markets. The goal here

is to ensure that the countries with the greatest potential make it
to the short list for further investigation.
The mathematical techniques of cluster analysis were used by
Sethi to develop seven distinct groups of countries. To develop
these distinct groups, Sethi first used four sets of variables for
each of the countries to be analyzed:
1. Production and transportation variables : measured by items
such as air passenger and cargo traffic, electricity usage,
number of large cities, and population.
2. Consumption variables : based on income and GNP per
capita, the number of cars, televisions, hospital beds, radios,
and telephones per capita, and educational levels of the
population.
3. Trade data : derived from import and export figures.
4. Health and education variables : using data such as life
expectancy, school enrollment, and doctors per capita.
Once scores for these four variables are developed for each
country, the countries themselves are grouped into seven
distinct groups. The implication is that if similarity of countries
within the groups is sufficiently strong that similar marketing
strategies can be used for all countries within a group.
Similar cluster analysis techniques are used by Economist
Intelligence Unit (EIU) to group markets based on the
opportunities they offer. EIUs indexes cover market size,
market growth rates, and market intensity (which measures the
relative concentration of wealth and purchasing power in those
countries). For example, the market-size index is derived from
data on population, consumption statistics, steel consumption,
cement and electricity production, and ownership of telephones, cars, and televisions. Note the similarity of the
variables used at EIU to those used by Sethi in his analysis.
Clustering Countries by Product Diffusion Patterns
A problem with clustering countries on the basis of macroeconomic variables is that the resulting segments may not be
helpful to international marketers because acceptance and
diffusion of new products may vary within the proposed
segments. An alternative is to segment countries based on how
similar they are in the rate at which new products are adopted
(the product diffusion rate). If such segments could be derived,
managers could use information from the lead market, about
variables such as growth in market size, when sales reach a peak,
to make inferences on the same variables for lagging markets.
This allows a country to belong to more than one segment at
the same time. For example, the United States could be in the
leading market segment for a product such as advanced personal
computers, while lagging in the use of products such as smart
cards or high-speed trains.
Macroeconomic data such as the standard of living are, of
course, important in explaining the readiness of a country
market to accept innovation; in addition, a diffusion-based
segmentation approach uses data about factors such as lifestyle
(use of phones per capita, for example), and cosmopolitanism
(tourist expenditures and receipts). A recent research study
looked at the relationship between such country-level variables
and sales growth over a 14-year period for three consumer
115
from future demand, with the possibility of limiting future

demand.
durablescolor TV sets, VCRs, and CD players-for 12

advanced industrial nations from Europe, as well as Japan and
the United States.
The study showed that segments based on product adoption
rates did not agree with segments derived from broad macroeconomic data alone, suggesting that countries that look similar
from a broad macroeconomic perspective may differ in the rate
at which they are willing to adopt and buy new products.
Cultural factors such as language and religion, which were not
specifically included in the study, may play an important role in
explaining differences in the product diffusion rate. In addition,
other recent studies have noted the importance of culture,
mobility, and sex roles as important factors in explaining
differences in product adoption rates.
Screening Potential International Markets

Another marketing research screening technique useful to derive
a short list of key country markets is described here, as applied
to the market for kidney dialysis equipment. 18 The first step is
to determine which countries can afford such medical equipment. The high cost of kidney dialysis equipment and necessary
supplies and personnel limits the market to wealthy countries.
Hence, a first screen might be based on the wealth of a country,
measured by the following:
1. A total GDP of over $15 billion.
2. GDP per capita of at least $1,500.
This screen alone reduces the number of potential markets to
28 countries outside North America.
Next, the markets must have specialized hospitals and doctors
who can competently administer dialysis treatment. In addition,
the treatment is expensive and requires a certain level of
government support and subsidy, or the market for private
patients alone would be too small to justify attempts at market
penetration. Thus, a second screen would include other criteria:
1. No more than 200 people per hospital bed.
2. No more than 1,000 people per doctor.
3. Government health care expenditures of at least $100
million.
4. Government health care expenditures of at least $20 per
capita.
This calculation then results in a set of 19 countries as potential
markets.
A third screen analyzes the markets in terms of the current
market for dialysis equipment Two factors are used:
1. At least 1,000 deaths per year, due to kidney-related causes. A
lower number might indicate that the market for dialysis
equipment is already being well served by competition:
2. At least 40 percent growth in the number of patients being
treated with dialysis equipment.
This results in just three markets being considered: Italy, Greece,
and Spain.
A fourth screen consists of carefully evaluating the three
countries in terms of existing competition, political risk, and
other factors. Management subjectivity can enter here because
some managerial judgment is required in evaluating the
116
strength of competition and political risk. Management may

well decide to enter more than one of the three markets
identified thus far. It may also go back to the third screening
step and reduce the required rate of growth to, say, 30 percent,
in 1 order to add some additional potential markets.
Once a short list of potential markets has been made up,
individual markets must be studied more carefully. At this
point, information can be obtained from the Department of
Commerces Comparison Shopping Service (CSS). A CSS survey
covers a product in a particular country market, indicating the
products overall marketability, chief competitors, comparative
prices, customary entry, distribution, and promotion practices,
trade barriers, and the degree to which the companys product
competes. About 50 key countries are covered by this low-cost
and timely service
Gap Analysis
The goal of gap analysis is to analyze the difference (gap)
between estimated total market potential and a companys sales.
The gap can be divided into four categories:
1. Usage gap : The usage gap refers to total industry sales being
less than the estimated total market potential. Such gaps may
have their explanation either in estimation errors or in
unpredictable changes in consumer tastes and behavior, such
as, for example, eggs being less in demand than expected. In
the United States, such a usage gap would probably be
traced. to health-related concerns.
2. Competitive gap : Competitive gap refers to existing market
share compared with expected market share; analysis is
needed to indicate why market share shifts have taken place
and what is needed to regain market share from competitors.
3. Product-line gap : Product-line gap arises because a company
does not have a full product line compared to its
competitors; thus, it loses sales. All example might be in the
computer industry, where a part of the product line is small,
portable laptop computers. To the extent that Dell was late
in marketing or did not have a laptop computer available, its
market share was less than it would have been if it had
fielded a full product line. . Toshiba faced the opposite
problem, offering only laptops in the U.S. market and losing
corporate sales because the clients wanted to buy both
laptops and PC servers an? desktops from the same
company.
4. Distribution gap : A company with a distribution gap is
failing to target part of the market because of a lack of
distribution facilities or agents. Closing such a gap would
require that the firm extend distribution and product
availability to cover all regions and segments of the market.
Input-Output Tables
Input-output tables, provide an analytical tool of great value in
studying demand in foreign markets. They are becoming
increasingly available, for many more countries, particularly for
the advanced industrialized nations and: the newly industrializing countries such as Brazil, Taiwan, and India. They are useful
both for industrial product analysis and for the analysis of
market demand for intermediate components and materials.
Input-output tables give specific attention to how production
Marketing Research Models

Modeling Consumer Behavior
Why U.S. Buyers Buy Japanese Cars?
Market research professionals often seek to model consumer

behavior in the international marketplace. One model attempts
to explain why U.S. households buy
Japanese cars. Developed by Dardis and Soberon-Ferrer, it
hypothesizes that buying Japanese cars is affected by household
characteristics that, in turn, determine the weight given to
different product attributes, leading eventually to the decision to
buy or not buy a Japanese car. Specifically, the variables used to
profile household characteristics include income, age, sex,
marital status, race, education of the head of the household,
geographic location within the United States, and a variable
labeled the origin of disposed stock, meaning, whether a
previous car sold (if any) was of Japanese or other origin (i.e.,
whether that household had previously owned a Japanese car).
In a similar fashion, product attributes modeled included
variables that primarily capture automobile quality: cost of
repair, frequency of repair, operating efficiency (miles per gallon),
weight (a means of gauging comfort and safety), the depreciation rate (a reflection of the resale value of the car), and finally,
the purchase price of the car, which is held constant to isolate
the effect of the quality variables.
It is important to marketers to develop a model on which to
base their data collection and analysis efforts. The model can be
modified to include additional variables such as social class,
religion, and occupation. The bottom line is that an explicit
model allows a directed research effort to gather and analyze
data, which permits validation and modification of the model.
For example, the Dardis and Soberon-Ferrer model showed
that lowering the depreciation rate of the car by percent a year
increased the probability of buying a Japanese car from 22 to 26
percent. Similarly, lowering the fuel economy (miles per gallon)
by 10 percent dropped the probability of buying a Japanese car
from 22 percent to 14 percent.
The implications for marketing strategy are clear. For a U.S.
company trying to catch up to the perception of Japanese cars,
several methods exist to lower the probability that a household
will buy a Japanese car: Rather than rely on vague appeals to buy
American, companies should improve U.S. cars so that they
depreciate slower, cost less to own and operate, and require
repair less frequently. Significantly, the proposed model, when
applied to past car-purchasing decisions, was able to correctly
predict whether households would buy a Japanese or nonJapanese car 96 percent of the time.
Household Buying Behavior

A Study from Saudi Arabia
For many products, buying decisions are made jointly, by

households, by husbands and wives, and in some cases, by
children. Products such as houses, automobiles, furniture, and
consumer durables such as refrigerators and stoves would fall in
this category. Understanding whether households in different

countries approach major purchasing decisions differently is
critical in making international marketing decisions about
product positioning, advertising appeals, direct-mail and
telemarketing campaigns, and building loyalty. Marketers are
interested in who makes the buying decisions in a family, and
the relative influence during critical steps such as whether to buy,
when to buy, where to buy, and how much to pay. Several
competing theories exist to explain family purchasing behavior:
1. Culture-defined behavior : whereby cultural norms prescribe
which spouse has more power in influencing purchase
decisions.
2. Resource contribution-based power : whereby the spouse
who contributes more resources (e.g., income, status,
education, etc.) is more powerful in influencing decisions.
3. Relative involvement : whereby the spouse who has the
greater interest and involvement in a product or service will
have more influence over its purchase. Countries and
societies can be categorized26 as: (1) patriarchies; (2) modified
patriarchies, consisting of modernizing nations that were
patriarchies in the recent past; (3) transitional egalitarian, with
movement toward equality of influence within the family,
and greater weight being given to education, occupation, and
income; and (4) egalitarian, with strong norms about equality
of husbands and wives and power sharing. Household
purchasing behavior can be expected to differ across these
different kinds of societies.
A study on family purchasing behavior in Saudi Arabia showed
how role behaviors of husbands and wives can significantly
differ across countries.27 Limited to a sample of 249 upscale,
married Saudi women, the study is interesting as a study of
family purchasing behavior in a developing country. It found
that (1) husbands dominate consumer decision making in
Saudi Arabia, as is the case in many developing countries; (2)
husbands are dominant in deciding on buying a car and on
where to buy, except in the case of womens clothing; (3) in
many cases, Saudi wives who work and/or are more educated,
have more influence over purchasing decisions. Overall,
husbands dominate purchase decisions in what is a predominantly patriarchal Saudi society.
Country-of-Origin Effects
An important variable affecting consumer purchase in international marketing is the country of origin (CO). There are many
products where the CO is important to consumers, such as
perfumes, cars, high-fashion clothes, consumer electronics, and
software; for all these products country-specific stereotypes exist,
with certain; countries being associated positively with certain
products. Examples are French perfumes and German cars. For
such products, knowing the CO affects how consumers evaluate
a product. In many cases, the country of manufacture {COM)
also relevant (e.g., in India, consumers often want to look inside
TV sets to see where components have been manufactured).
Once consumers are aware of CO, their familiarity with the
brand, level of involvement in the purchase decision, and
existing preference for domestic products become relevant, as
do product-, and market; level influences, such as the type of
117
functions vary among nations and thus allow the researcher to

adjust market forecasts to account for such country differences.
product and brand image. In industrial product buying,

rational purchasing might be more prevalent, and thus greater
credence might be given to country-of-manufacture effects;
product attributes might be relevant, such as quality, performance, design, aesthetics, price, and prestige, powerful brand
image may be associated with a company and may overcome
origin of manufacture area. The reputation of the dealer or
intermediary may muffle or enhance CO or COM effect, and
truth-in-Labeling requirements as well as demand conditions
can mediate the effect of CO.
Environmental influences also come into play, including the
existence of global markets (when CO may become less
important); level of economic development of the countries
from which products come; and political, social, and cultural
influences favoring certain nations. Together these influences
result in a country-stereotyping effect and ultimately affect the
purchase decision.
What does this mean for the firm? CO and COM effects have
implications for standardization of marketing programs
(whether to source from one or more locations, how to adapt),
for positioning the product, selecting the image in advertising,
and even plant location decisions, all other things being equal.
Together, these disparate decisions affect overall brand profitability.
Religiosity and Consumer Behavior

Cultures differ in many ways, with a central difference being
religion. It is natural to ask whether religion affects consumer
behavior. For example, are devoutly religious people different
from more secular people when it comes to enjoying shopping
and buying a large variety of material goods? What sorts of
advertising appeals are more likely to resonate with a religious
person? In order to answer such questions, one first has to
define religiosity and then attempt to relate it to different
aspects of marketing and consumer behavior. Table 7-8
summarizes these ideas.
A recent study attempted to trace the effects of religiosity on
consumption behavior for a sample of Japanese and U.S.
consumers. The study found that consumer shopping behavior
did not seem significantly different between devout and casually
religious Japanese individuals. However, in the United States,
devout Protestants were more economic, buying products on
sale, shopping in stores with lower prices, being open to buying
foreign-made goods, believing that there was little relation
between price and quality, tending to not believe advertising
claims while preferring subtle and informative advertisements.
Differences also existed at the national level, with Japanese
shoppers preferring to buy domestically made products, visiting
many stores to find the right brand, enjoying shopping, and
preferring stores with better service. As an exploratory study,
with a total sample of under 250 drawn from just two cities,
Tokyo and Washington, D.C., and with none of the respondents having progressed beyond a high school education, we
cannot generalize from this study. It is useful in suggesting
directions for international marketing research, particularly when
marketing to countries with distinct religious systems such as
India, the Middle East, Japan, and China.
118
This lesson aims to give a clear understanding to

the student of the following:
1. Global Market Segmentation
2. Global Targeting
3. Global Product Positioning
Cigarettes are one of the most widely distributed and profitable
global consumer products. However, as the number of
smokers in high-income countries declines due to heightened
antismoking sentiment and health concerns, tobacco industry
giants such as Britains B.A.T. Industries PLC and Americas
Philip Morris Company have set their sights on new market
opportunities. In particular, tobacco companies are targeting
smokers in developing countries such as China; Thailand, India,
and Russia. These are nations in which a combination of forcesrising incomes in some countries and challenging economic
conditions in others, smoking is fashionableness, and the
status assigned to Western cigarette brands-interacts to expand
the smoking market and brand share of the leading global
brands. Moreover, because many women in these countries
view smoking as a symbol of their improving status in society,
the tobacco companies are aggressively targeting women.
The actions taken by managers at Philip Morris, B.A.T., and
other tobacco companies are examples of market segmentation
and targeting. Market segmentation represents an effort to
identify and categorize groups of customers and countries
according to various characteristics. Targeting is the process of
evaluating the segments and focusing marketing efforts on a
country, region, or group of people that has significant
potential to respond. Such targeting reflects the reality that a
company should identify those consumers it can reach most
effectively and efficiently. Segmentation, targeting, and positioning are all examined in this chapter.
Global Market Segmentation

Market segmentation is the process of subdividing a market
into distinct subsets of customers that behave in the same way
or have similar needs. Each subset may conceivably be chosen as
a market target to be reached with a distinctive marketing
strategy. The process begins with a basis of segmentation-a
product-specific factor that reflects differences in customers
requirements or responsiveness to marketing variables (possibilities are purchase behavior, usage, benefits sought,
intentions, preference, or loyalty).
Global market segmentation is the process of dividing the
world market into distinct subsets of customers that behave in
the same way or have similar needs, or, as one author put it, it is
the process of identifying specific segments-whether they be
country groups or individual consumer groups-of potential
customers with homogeneous attributes who are likely to
exhibit similar buying behavior. Interest in global market
segmentation dates back several decades. In the late 1960s, one
observer suggested that the European market could be divided

into three broad categories-international sophisticate, semi
sophisticate, and provincial-solely on the basis of consumers
presumed receptivity to a common advertising approach.
Another writer suggested that some themes (e.g.; the desire to
be beautiful, the desire to be healthy and free of pain, the love
of mother and child) were universal and could be used in
advertising around the globe.
In the 1980s, Professor Theodore Levitt advanced the thesis
that consumers in different countries increasingly seek variety
and that the same new segments are likely to show up in
multiple national markets. Thus, ethnic or- regional foods such
as sushi, Greek salad, or hamburgers might be in demand
anywhere in the world. Levitt described this trend as the
pluralization of consumption and segment simultaneity
that provides an opportunity-for-marketers to pursue a
segment on a global scale.6
Today, global companies (and the advertising agencies that serve
them) are likely to segment world market according to one or
more .key criteria: geography, demographics (including national
income and size of population), psychographics (values,
attitudes, and lifestyles), behavioral characteristics, and benefits
sought. It is also possible to cluster different national markets
in terms of their environments (e.g., the presence or absence of
government regulation in a particular industry) to establish
groupings. An other powerful tool for global segmentation is
horizontal segmentation by user category.
Geographic Segmentation
Geographic segmentation is dividing the world into geographic
subsets. The advantage of geography is proximity: Markets in
geographic segments are closer to each other and easier to visit
on the same trip or to call on during the same time window.
Geographic segmentation also has major limitations: The mere
fact that markets are in the same world geographic region does
not meant that they are similar. Japan and Vietnam are both in
East Asia, but one is a high income, postindustrial society and
the other is an emerging, less developed, pre industrial society.
The differences in the markets in these two countries overwhelm their similarities. Simon found in his sample of
hidden champions that geography was ranked lowest as a
basis for market segmentation (see Figure 7-1).
Demographic Segmentation
Demographic segmentation-is based on measurable characteristics of populations such as age, gender, income, education, and
occupation. A number of demographic trends aging population, fewer children, more women working outside the home,
and higher incomes and living standards-suggest the emergence
of global segments.
For most consumer and industrial products, national income is
the single most important segmentation variable and indicator
119
LESSON 13:
SEGMENTATION, TARGETING AND POSITIONING
of market potential. Annual per capita income varies widely in

world markets, from a low of $81 in the Congo to a high of
$38,587 in Luxembourg. The World Bank segments countries
into high income, upper middle income, lower middle income,
and low income.
The U.S. market, with per capita income of $29,953, more than
$8.3 trillion in 2000 national income, and a population of more
than 275 million people, is enormous. Little wonder, then, that
Americans are a favorite target market! Despite having comparable per capita incomes, other industrialized countries are
nevertheless quite small in terms of total annual income. In
Sweden, for example, per capita gross national product (GNP)
is $24,487; however, Swedens smaller population of 9 million
means that annual national income is only about $220 billion.
About 73 percent of world GNP is located in the Triad. Thus,
by segmenting in terms of a single demographic variableincome-a company could reach the most affluent markets by
targeting three regions: the European Union, North America,
and Japan.
Many global companies also realize that for products with a low
enough price-for example, cigarettes, soft drinks, and some
packaged goods-population is a more important segmentation
variable than income. Thus, China and India, with respective
populations of 1.3 billion and 1.0 billion, might represent
attractive target markets. In a country such as China, where per
capita GNP is only $930, the marketing challenge is to successfully serve the existing mass market for inexpensive consumer
products. Procter & Gamble, Unilever, Kao, Johnson &
Johnson, and other packaged-goods companies are targeting
and developing the China market, lured in part by the possibility that as many - as 100 million Chinese customers are affluent
enough to spend, say, 14 cents for a single use pouch of
shampoo.
Segmenting decisions can be complicated by the fact that the
national income figures such as those cited previously for China
and India are averages. There are also large, fast-growing, highincome segments in both of these countries. In India, for
example, 100 million people call be classified as upper middle
class, with average incomes of more than $1,400. Pinning
down a demographic segment may require additional information; Indias middle class has been estimated to be as low as a
few million and as high as 250 million to 300 million people. If
middle class is defined as persons who own a refrigerator, the
figure would be 30 million people. If television ownership were
used as a benchmark, the middle class would be 100 million to
125 million people.8The important lesson for global marketers
is to beware of the misleading effect of averages, which distort
the true market conditions in emerging markets.
Note also that the average income figures quoted here do not
reflect the standard of living in these countries. In order to really
understand the standard of living in a country, it is necessary 10
determine the purchasing power of the local currency. In low
income countries, the actual purchasing power of the local
currency is much higher than that implied by exchange values.
In India, for example, the authors colleague recently returned
from a trip during which he received a slight cut on his forehead
from a taxi trunk lid. He decided to visit a doctor to get a
120
tetanus shot and, because he knew that malaria was a hazard in

India, he requested a prescription and a one-month supply of
malaria pills. He did this, and the bill from the doctor for the
shot, the pills, and the prescription was 30 rupees or US $1.00.
Age is another-useful demographic variable. One global
segment based on demographics is global teenagers-young
people between the ages of 12 and 19. Teens, by virtue of their
interest in fashion, music, and a youthful lifestyle, exhibit
consumption behavior that is remarkably consistent across
borders. Young consumers may not yet have conformed to
cultural norms-indeed; they may be rebelling against them. This
fact, combined with shared universal needs, desires, and
fantasies (for name brands, novelty, entertainment, and trendy
and image-oriented products), make it possible to reach the
global teen segment with a unified marketing program. This
segment is attractive both in terms of its size (about 1.3 billion)
and its multibillion-dollar purchasing power. Coca-Cola,
Benetton, Swatch, and Sony are some of the companys
pursuing the global teenage segment. The global telecommunications revolution is a critical driving force behind the emergence
of this segment. Global media such as MTV are perfect vehicles
for reaching this segment. Satellites such as Asia Sat I are
beaming Western programming and commercials to millions of
viewers in China, India, and other countries.
Another global segment is the so-called elite: older, more
affluent consumers who are well traveled and have the money
to spend on prestigious products with an image of exclusivity.
This segments needs and wants are spread over various
product categories: durable goods (luxury automobiles); non
durables (upscale beverages such as rare wines and champagne);
and financial services (American Express gold and platinum
cards). Technological change in telecommunications makes it
easier to reach the global elite segment. Global telemarketing is a
viable option today as AT&T International 800 services are
available in more than 40 countries. Increased reliance on catalog
marketing by upscale retailers such as Harrods, Laura Ashley and
Ferragamo has also yielded impressive results.
Psychographic Segmentation
Psychographic segmentation involves grouping people in terms
of their attitudes, values, and lifestyles. Data are obtained from
questionnaires that require respondents to indicate the extent to
which they agree or disagree with a series of statements. In the
United States, psycho graphics is primarily associated with SRI
International, a market research organization whose original V
ALS and updated V ALS 2 analyses of U.S. consumers are
widely known.
Porsche AG the German sports-car maker, turned to psychographics after watching worldwide sales decline from 50,000
units in 1986 to about 14,000 in 1993. Its U.S. subsidiary,
Porsche Cars North America, already had a clear demographic
profile of its customers: 40+-year-old n1ale college graduates
whose annual income exceeded $200,000. A psychographics
study showed that, demographics aside, Porsche buyers could
be divided into five distinct categories. Top Guns, for example,
buy Porsches and expect to be noticed; for Proud Patrons and
Fantasists, on the other hand, such conspicuous consumption
is irrelevant. Porsche will use the profiles to develop advertising
One early application of psychographics outside the United

States focused on value orientations of consumers in the
United Kingdom, France, and Germany. Although the study
was limited in scope, the researcher concluded, The underlying
values structures in each country appeared to bear sufficient
similarity to warrant a common overall communications
strategy-. SRI International has recently conducted
psychographics analyses of the Japanese market; broader-scope
studies have been undertaken by several global advertising
agencies, including Backer, Spiel Vogel & Bates Worldwide
(BSB), Darcy Massius Benton & Bowles (DMBB), and Young
& Rubicam (Y&R). These in human behavior that are culturefree and so basic that they can be found all over the globe.
Table 7-1 : Psychographic profiles of Porsches American
customer
Category
Top Guns
% of
all
owners
27%
Elitists
24%
Proud Patrons
23%
Bon Vivants
17%
Fantasists
9%
Description
Driven and ambitious; care about power and
control; expect to be noticed
Old money; a car-even an expensive one-is
just a car, not an extension of one's
personality
Ownership is what counts; a car is a trophy, a
reward for working hard; being noticed
doesn't matter
Cosmopolitan jet setters and thrill seekers;
car heightens excitement
Car represents a form of escape; don't care
about impressing others; may even feel
guilty about owning car
Three overall groupings can be further subdivided into a total

of seven segments: Constrained (Resigned Poor and Struggling
Poor), Middle Majority (Mainstreamers, Aspirers, and Succeeders), and Innovators (Transitional and Reformers). The goals
motivations, and values of these segments range from
survival, given up, and subsistence (Resigned Poor) to
social betterment, social conscience, and social altruism
(Reformers). Table 7-2 shows some of the attitudinal, work,
lifestyle, and purchase behavior characteristics of the seven
groups.
Combining the 4Cs data for a particular country with other data
permits Y &R to predict product and category purchase
behavior for the various segments. Yet, as noted previously in
the discussion of Global Scan, marketers at global companies
that are Y &R clients are cautioned not to assume that they can
develop one strategy or one commercial to be used to reach a
particular segment across cultures. As a Y &R staffer notes, As
you get closer to the evectional level, you need to be acutely
sensitive to cultural differences. But at the origin, its of
enormous benefit to be able to think about people who share
common values across cultures.
Lifestyle
Purchase Behavior
Unhappy
Labpr
Distrustful
Unskilled
Struggling Poor
Shut-in
Television
Staples
Price
Unhappy
Dissatisfied
Mainstreamers
Happy
Belong
Aspirers
Unhappy
Labor
Craftsmen
Sports
Television
Price
Discount stores
Craftsmen
Teaching
Family
Gardening
Habit
Brand loyal
Sales
Trendy sports
Ambitious
Succeeders
Happy
Industrious
Transitional
Rebellious
White collar
Conspicuous
Consumption
Fashion magazines Credit
Managerial
Professional
Travel
Dining out
Luxury
Quality
Student
Impulse
Liberal
Health field
Arts/crafts
Special-interest
magazines
Attitudes
Work
Resigned Poor
Reformers
Inner growth
Professional Reading
Improve world Entrepreneur Cultural events
Unique products
Ecology
Homemade/grown
Behavior Segmentation
Behavior segmentation focuses on whether people buy and use
a product, as well as how often and how much they use it.
Consumers can be categorized in terms of usage rates for
example, heavy, medium, light, and nonuser. Consumers can
also be segmented according to user status: potential users,
nonusers, ex-users, regulars, first-timers, and users of competitors products. Although bottled water may be considered a
luxury product in some high-income markets, Nestle is
marketing bottled water In Pakistan where there is a huge
market of nonusers who, despite their low income, are willing
to pay 18 rupees a bottle for clean water because of the widespread presence of arsenic poisoning in well water and the
pollution of surface water. Tobacco companies are targeting
China because the Chinese are heavy smokers.
Financial institutions have to consider many different pieces of
information regarding consumer behavior toward saving and
spending n10ney. Japan has the highest number of cash
dispensers, 1,115 per 1 million population, followed by
Switzerland, Canada, and the United States where the average is
slightly higher than 600. The average dollar amount withdrawn
also varies considerably. In Japan, the average withdrawal is
$289. This is followed by Switzerland at $187 and Italy at $185.
The United States is far down the list with $68 as the -average
withdrawal. Japanese people tend to carry around a lot more
cash than people in other countries.
121
tailored to each type. Notes Richard Ford, Porsche vice president

of sales and marketing, We were selling to people whose
profiles were diametrically opposed. You wouldnt want to tell
an elitist how good he looks in the car or how fast he could go.
Results have been promising Porsches U.S. sales improved
nearly 50 percent in 1994.
Benefit Segmentation
Global benefit segmentation focuses on the numerator of the
valueequation-theB in V = B/P. This approach can achieve
excellent results by virtue of marketers superior understanding
of the problem a product solves or the benefit it offers,
regardless of geography. For example, Nestle discovered that cat
owners attitudes toward feeding their pets are the same
everywhere. In response, a pan-European campaign was created
for Friskies dry cat food. The appeal was that dry cat food better
suits a cats universally recognized independent nature.
Vertical Versus Horizontal Segmentation
Vertical segmentation is based on product category or modality
and price points. For example, in medical imaging there is X-ray,
computed axial tomography (CAT) scan, magnetic resonance
imaging (MRI), and so on. Each modality has its own price
points. These price points were the traditional way of segmenting the medical imaging market. One company decided to take a
different approach and segment the same market by the health
care delivery system: national research and teaching hospitals,
government hospitals, and so on. It then rolled out a campaign
that was regional, national, and finally global, which was tailored
for each different type of health care delivery. This horizontal
segmentation approach worked as well in markets outside the
home-country launch market as it did in the home country.
Global Targeting
As discussed earlier, segmenting is the process by which
marketers identify groups of consumers with similar wants
and-needs. Targeting is the act of evaluating and comparing the
identified groups and then selecting one or more of them as
the prospect(s) with the highest potential. A marketing mix is
then devised that will provide the organization with the best
return on sales while simultaneously creating the maximum
amount of value to consumers.
Criteria For Targeting

The three basic criteria for assessing opportunity in global target
markets are the same as in single-country targeting: current size
of the segment and anticipated growth potential; competition;
and compatibility with the companys overall objectives and the
feasibility of successfully reaching a designated target.
1. Current Segment Size and Growth Potential
Is the market segment currently large enough that it presents a

company with the opportunity to make a profit? If it is not
large enough or profitable enough today, does it have high
growth potential so that it is attractive in terms of a companys
long-term strategy? Indeed, one of the advantages of targeting
a market segment globally is that, whereas the segment in a
single-country market might be too small, even a narrow
segment can be served profitably with a standardized product if
the segment exists in several countries? The billion-plus
members of the global MTV Generation constitute a huge
market that, by virtue of its size, is extremely attractive to many
companies.
China represents an individual geographic market that offers
attractive opportunities in many industries. Consider the
growth opportunity in financial services for example. There are
currently only about 3 million credit cards in circulation, mostly
122
used by businesses. Low product saturation levels are also

found for personal computers; there is one computer for every
1,250 people. The ratio in the United States is approaching one
computer for every two people. The opportunity for automobile manufacturers is eyen greater. China has 1.2 million
passenger cars, one car for every 20,000 Chinese. Even with the
market in China growing at an annual rate of 33 percent, a
tremendous potential market still exists.
2. Potential Competition
A market or market segment characterized by strong competition may be a segment to avoid or one in which to utilize a
different strategy. Often a local brand may present competition
to the entering multinational. In Peru, Inca Kola is as popular a
Coca-Cola. In India, Thumbs Cola is a major brand. In the
Siberian city of Krasnoyarsk, Crazy Cola has a 48 percent share
of the market.18 The multinational might try more or different
promotions or may acquire the local company or form an
alliance with it.
Kodaks position as the undisputed leader in the $2.4 billion
U.S. color film market did not deter Fuji from launching a
competitive offensive. In addition to offering traditional types
of 3Smm film at prices below Kodaks, Fuji quickly made
inroads by introducing a number of new film products targeted
at the advanced amateur segment that Kodak had neglected.
Despite its early successes, after nearly two decades of effort,
Fujis U.S. market share has been in the 10 to 16 percent range.
Part of the problem is Kodaks distribution clout: Kodak is
well entrenched in supermarket and drugstore chains, where
Fuji must also jostle with other newcomers such as Konica and
Polaroid. In addition, Kodak has agreements with dozens of
American amusement parks guaranteeing that only Kodak film
will be sold on the premises. Fuji is also developing its market
in Europe, where Kodak commands only 40 percent of the
color film market Fuji currently enjoys 25 percent of the
European market, compared with 10 percent a decade ago.
Meanwhile, Kodak has spent half a billion dollars in Japan, the
worlds second-largest market for photographic supplies; its
market share there currently stands at about 10 percent.
3. Compatibility and Feasibility
If a global target market is judged to be large enough, and if

strong competitors are either absent or not deemed to represent
insurmountable obstacles, then the final consideration is
whether a company can and should target that market. In many
cases, reaching global market segments requires considerable
resources such as expenditures for distribution and travel by
company personnel. Another question is whether the pursuit
of a particular segment is compatible with the companys overall
goals and established sources of competitive advantage.
Although Pepsi was firmly entrenched in the Russian market,
having entered in 1972, Coke waited. 15 years to n1ake its first
move in Russia and 20 years before it decided to make major
investments. At the time of C9kes entry, Pepsi had 100 percent
of the Russian cola market. This would appear to be a difficult
position to challenge, but because of the size of the Coke
investment and the skillful execution of its investment moves
in Russia, by 1996 Cokes market share had reached 50 percent.
Selecting a Global Target Market Strategy
from the Swatch fashion accessory watch at $50 worldwide to

the $100,000+ Blancpain. Although the research and development (R&D) and manufacturing at SMH are integrated and
serve the entire product line, each SMH brand is managed by a
completely separate organization that targets a concentrated,
narrow segment in the global market.
1. Standardized Global Marketing
In the cosmetics industry, Uni-lever NV and Cosmair Inc.

pursue differentiated global marketing strategies by targeting
both ends of the perfume market. Uni-lever targets the luxury
market with Calvin Klein and Elizabeth Taylors Passion; Wind
Song and Brut are its mass-market brands. Cosmair sells
Tresnor and Giorgio Armani Gio to the upper end of the
market and Gloria Vanderbilt to the lower end. Mass marketer
Procter & Gamble (P&G), known for its Old Spice and
Incognito brands, also embarked on this strategy with its 1991
acquisition of Revlons EuroCos, marketers of Hugo Boss for
men and Laura Biagiottis Roma perfume. Now, P&G is
launching a new prestige fragrance, Venezia, in the United States
and nine European countries.
Standardized global marketing is analogous to mass marketing

in a single country. It involves creating the same marketing mix
for a broad market of-potential buyers. This strategy calls for
extensive distribution in the maximum number of retail
outlets. The appeal of standardized global marketing is clear:
greater sales volume, lower production costs, and greater
profitability. The same is true of standardized global communications: lower production costs and, if done well, higher quality
and greater effectiveness of marketing communications.
Coca-Cola, one of the worlds most global brands, uses the
appeal of youthful fun in its global advertising. Its sponsorship
program is global and is adapted to events that are popular in
specific countries such as soccer in -other parts of the world
versus foot ball in the United States.
2. Concentrated Global Marketing
The second global targeting strategy involves devising a

marketing mix to reach a single segment of the global market.
In cosmetics, this approach has been used successfully by the
House of Lauder Channel and other cosmetics houses that
target the upscale prestige segment of the market. This is the
strategy employed by the hidden champions of global marketing: companies that most people have never heard of that have
adopted strategies of concentrated marketing on a global scale.
These companies define their markets narrowly. They go for
global depth rather than national breadth. For example, winter
halter (a German company) is a hidden champion in the
dishwasher market, but the company has never. sold a dishwasher to a consumer. It has also never sold a dishwasher to a
hospital, school, company, or any other organization. It focuses
exclusively on dishwashers for hotels and restaurants. It offers
dishwashers, water conditioners, detergents, and service.
Juergen Winter halter commented in reference to the companys
narrow market definition: This narrowing of our market
definition was the most important strategic decision we ever
made. It is the very foundation of our success in the past
decade.
3. Differentiated Global Marketing
The third target marketing strategy is a variation of concentrated

global marketing. It entails targeting two or more distinct
market segments with different marketing mixes. This strategy
allows a company to achieve wider market coverage. For
example, in the segment of sports-utility vehicles (SUV), Rover
has a $50,000+ Range Rover at the high end of the market; a
scaled-down version, the Land Rover Discoverer is priced at
under $35,000, which competes directly with the Jeep Grand
Cherokee. These are two different segments, and Rover has a
concentrated strategy for each.
One of the world masters of differentiated global marketing is
SMH, the Swiss Watch Company. SMH offers watches ranging
Global Product Positioning

Positioning is the location of your product in the mind of your
customer. Thus, one of the most powerful tools of marketing
is not something that a marketer can do to the product or to
any element of the marketing mix: Positioning is what happens
in the mind of the customer. The position that a product
occupies in the mind of a customer depends on a host ofvariables, many of which are controlled by the marketer.
After the global market has been segmented and one or more
segments have been targeted it is essential to plan a way to reach
the target(s}. To achieve this task, marketers use positioning. In
todays global market environment, many companies find it
increasingly important to have a unified global positioning
strategy. For example, Chase Manhattan Bank launched a $75
million global advertising campaign geared to the theme profit
from experience. According to Aubrey Hawes, a vice president
and corporate director of marketing for the bank, Chases
business and private banking clients span the globe and travel
the globe. They can only know one Chase in their minds, so
why should we try to confuse them?
Can global positioning work for all products? One study
suggests that global positioning is most effective for product
categories that approach either end of a high-touch high-tech
continuum. Both ends of the continuum are characterized by
high levels of customer involvement and by a shared language among consumers.
Global Marketing in Action-targeting

Adventure Seekers with an American Classlc
Over the past decades, savvy export marketing has en-abled HarleyDavidson to dramatically increase worldwide sales of its heavyweight
motorcycles. Export sales increased from 3,000 motorcycles in 1983 to
32,000 units for the 1999 model year. By 1999, non-U.S. sales exceeded $537 million, up from $400 million in 1996, and $115 million
in 1989. From Australia, to Germany to Mexico City, Harley
enthusiasts are paying the equiva-lent of up to $25,000 to own an
123
If, after evaluating the identified segments in terms of the three

criteria presented earlier, a decision is made to proceed, an
appropriate targeting strategy must be developed. There are
three basic categories of target marketing strategies: standardized marketing, concentrated marketing, and differentiated
marketing.
American-built classic. In many countries, dealers must put would-be

buyers on a six-month waiting list because of high demand.
Harleys international success comes after years of neglecting overseas
markets. Early on, the company was basically involved in export selling,
symbolized by its underdeveloped dealer network. Moreover, print advertising simply used word-for-word translations of the U.S. ads. By the late
1980s, after recruiting dealers in the important Japanese and European
markets, company executives discovered a basic principle of global
marketing.
As the saying goes, we needed to think global but act local, says Jerry
G. Wilke; vice president for worldwide marketing. Harley began to adapt
its international mar-keting, making it more responsive to local conditions.
In Japan, for example, Harleys rugged image and high quality helped
make it the best-selling imported motorcycle. Still, Toshifumi Okui,
president of Harleys Japanese division, was not satisfied. He worried that
the tag line from the U.S. ads, One steady constant in an in-creasingly
screwed-up world, did not connect with Japanese riders. Okui finally
convinced Milwaukee to allow him to launch a Japan-only advertising
campaign, juxtaposing images from both Japan and America, such as
American cyclists passing a rickshaw carrying a geisha. After learning
that riders in Tokyo consider fashion and customized bikes to be essential,
Harley opened two stores specializing in clothes and bike accessories.
Today, Japan is Harley-Davidsons largest market outside of the United
States.
Harley discovered that in Europe an evening out means something
different than it does in America. The company sponsored a rally in
France, where beer and live rock music were available until midnight.
Recalls Wilke, People asked us why we were ending the rally just as the
evening was starting. So I had to go persuade the band to keep playing and
reopen the bar until 3 or 4 A.M. Still, rallies are less common in
Europe than in the United States, so Harley encourages its dealers to hold
open houses at their dealerships.
While biking through Europe, Wilke also learned that German bikers
often travel at speeds exceeding 100 miles per hour. This required the
company to investigate design changes to create a smoother ride at
autobahn speeds. Harleys German marketing effort also caused it to
begin focusing on accessories to increase rider protection.
Despite high levels of demand, the company inten-tionally limits
production increases in order to uphold Harleys recent improvements in
quality and to keep the product supply limited in relation to demand.
Harley is till careful to make home-country customers a higher priority
than those living abroad; thus, only 18 percent of its production goes
outside the North American Division. The Harley shortage seems to suit
company executives just fine. Notes Harleys James H. Patterson,
Enough motorcycles is too many motorcycles.
High-tech Positioning
Personal computers, video and stereo equipment, and automobiles are examples of product categories in which high-tech
positioning has proven effective. Such products are frequently
purchased on the basis of concrete product features, although
image may also be important. Buyers typically already possess or
wish to acquire considerable technical information. High-tech
products may be divided into three categories: technical
products, special-interest products, and demonstrable products.
124
1. Technical Products
Computers, chemicals, tires, and financial services are just a

sample of the product categories whose buyers have specialized
needs, require a great deal of product information, and share a
common language. Computer buyers in Russia and the
United States are equally knowledgeable about microprocessors,
20-gigabyte hard drives, modems, and RAM (random access
memory). Marketing communication for high-tech products
should be informative and emphasize features.
2. Special-Interest Products
Although less technical and more leisure or recreation oriented,

special-interest products also are characterized by a shared
experience and high involvement among users. Again, the
common language and symbols associated with such products
can transcend language and cultural barriers. Fuji bicycles, Adidas
sports equipment, and Canon cameras .are examples of
successful global special-interest products.
High-touch Positioning
Marketing of high-touch products requires less emphasis on
specialized information and more emphasis on image. Like
high-tech products, however, high-touch categories are highly
involving for consumers. Buyers of high-touch products also
share a common language and set of symbols relating to
themes of wealth, materialism, and romance. The three
categories of high-touch products are products tJ1at solve a
common problem, global village products, and products with a.
universal theme.
1. Products That Solve a Common Problem
At the other end of the price spectrum from high tech,

products in-this category provide benefits linked to lifes little
moments. Ads that show friends talking over a cup of coffee
in a cafe or quenching thirst with a soft drink during a day at the
beach put the product at the center of everyday life and communicate the benefit offered in a way that is understood
worldwide.
2. Global Village Products
Channel fragrances, designer fashions, mineral water, and pizza

are all examples of products whose positioning is strongly
cosmopolitan in nature. Fragrances and fashions have traveled
as a result of growing worldwide interest in high-quality, highly
visible, high priced products that often enhance social status.
However, the lower-priced food products just mentioned show
that the global village category encompasses a broad price
spectrum.
In global markets, products may have a global appeal by virtue
of their country of origin. The American-ness of Levis,
Marlboro, and Harley-Davidson enhances their appeal to
cosmopolitans around the world. In consumer electronics, Sony
is a name synonymous with vaunted Japanese quality; in
automobiles, Mercedes is the embodiment of legendary
German engineering.
3. Products That Use Universal Themes
As noted earlier, some advertising themes and product appeals

are thought to be basic enough that they are truly transnational.
Additional themes are materialism (keyed to images of well-
It should be noted that some products can be positioned in

more than one way, within either the high-tech or high-touch
poles of the continuum. A BMW car, for example, could
simultaneously be classified as technical and special interest. To
reinforce, the high-touch aspect, BMW publishes BMW
Magazine for BMW owners. In addition to articles on the
technical characteristics of the car, the magazine has lifestyle
articles and advertisements for luxury products such as expensive watches, and jewelry.
3. Amazon.com has been an early winner in the on-line book

business. Which market segments has Amazon served? Are
the Amazon target market segments in the United States and
the rest of the world identical?
Summary
The global environment must be analyzed before a company
pursues expansion into new geographic markets. Through
global market segmentation, the similarities and differences of
potential buying customers can be identified and, grouped.
Demographics, psychographics, behavioral characteristics, and
benefits sought are common attributes used to segment world
markets. After marketers have identified segments, the next step
is targeting. The identified groups are evaluated and compared;
the prospect(s) with the greatest potential is selected from them.
The group are evaluated on the basis of several factors: segment
size and growth potential, competition, and compatibility and
feasibility. After evaluating the identified segments, marketers
must decide on an appropriate targeting strategy. The three basic
categories of global target marketing strategies are standardized
marketing, concentrated marketing, and differentiated marketing. Finally, companies must plan a way to reach their chosen
target market(s) by determining the best positioning for their
product offerings. Here, marketers devise an appropriate
marketing mix to fix the product in the mind of the potential
buyers in the target market. High-tech and high-touch positioning are two strategies that can work well for a global product.
4. Smoking is on the decline in high-income countries where

the combination of higher life expectancy, education, income,
and legal action has created a powerful antismoking
campaign. Global tobacco companies are shifting their focus
from high-income to emerging markets where the
combination of rising income and the absence of
antismoking campaigns is leading to ever-increasing demand
for cigarettes. Is this shift in focus by the global tobacco
companies ethical? What, if anything, should residents in
high-income countries do about the rise in smoking in
emerging markets?
1. What is a global market segment? Pick a market that you
know something about, and describe the global segments
for this market.
2. Identify the major geographic and demographic segments in

global markets.
125
being or status), heroism (themes include rugged individuals or

self sacrifice), play (leisure/recreation), and procreation (imagesof courtship and romance).
TUTORIAL C
SWATCH WATCH U.S.A.: CREATIVE MARKETING STRATEGY
Introduction
As speaker after speaker paid tribute to the extraordinary skills
that had earned him the award of Marketing Executive of the
Year, Max Imgruth, president of Swatch Watch U.S.A., grew
more and more uneasy. Fully confident that the product that
changed the watch industry forever, the Swatch watch, would
enjoy continued success, Imgruth nonetheless felt the need to
change gears. The competition, which was at first slow to react,
had begun to implement strategies that stood to erode Swatchs
position. Gazing from his privileged place on the dais, Imgruth
saw an audience that was content to rehash past successes for a
night, which was nice, but not at all his style.
Imgruth had recently guided his company through a fast paces
and, some would say, controversial diversification program.
Having already achieved spectacular success with the Swatch
watch, Imgruth spearheaded a plan to establish Swatch as a total
fashion enterprise. This move was accompanied by a good deal
of skepticism from colleague and competitor alike. His next
objective was to make sure that this years #1 marketing
executive did not become one of the decades more memorable
disappointments.
Background-the Swiss Watch Industry

1985 was a good year for the Swiss watch industry. The number
of finished watches shipped abroad rose 41 percent to 25.1
million and the value of watch exports increased by 12.2
percent. Luxury watches still comprised the backbone of the
Swiss watch trade, accounting for only 2.1 percent of total
shipments but 41.8 percent of total earnings. In 1985, the Swiss
raised their share of the world market to 10 percent by volume
(number of units sold) and 45 percent by value. For the first
time in 15 years, an increase in employment was registered as
1,000 new jobs were created. The industrys good performance
in 1985, combined with a strong year in 1984, gave every
indication that the Swiss watch industry was back on its feet
after struggling for much of the previous decade.
The comeback had been led by the success of Swatch (a blend
of Swiss and watch). Over 10 million of its brightly colored,
plastic wristwatches were sold worldwide in 1984-85. Success
had been most notable in the United States, where Swatchs
latest move was the launching of a diversification program
aimed at making the company a total fashion enterprise.
Whether or not this expansion of the Swatch product line
proved successful remained to be seen. What was certain, on the
other hand, is that the Swatch watch had given new life (and
increased market share) to an industry that was recently engaged
in a very difficult struggle with Asian competitors. What was
also clear is that Swatchs willingness to break with convention,
especially in the area of marketing strategy, gave it a head start in
what had become a vast new market-the low prices watch as a
fashion accessory.
126
Some might say that the Swatch watch was just another in a
long line of Swiss successes. In the 1950s, few other industries
enjoyed the domination known by the Swiss watch industry. In
that decade, the Swiss possessed an estimated 80 percent share
of the (non-Communist) world watch market. Production was
centered in the Jura region where snowed-in farming families,
doubling as skilled watchmakers, supplemented their incomes
by assembling mechanical watch parts during the winter
months. At the industrys peak in 1956, there were 2,332 such
maisons. Two large watchmaking groups, Allgemeine
Schweitzer Uhren AG (Asuag) and Societe Suisse pour
IIndustrie Horlogere (SSIH), controlled most of the Swiss
brands at this time.
The Swiss remained industry leaders until the mid 1970s when
the mass production of electronic watches changed the watch
industry forever. The most important difference between an
electronic watch and a mechanical watch is that the former is much
easier to manufacture. A mechanical watch is an intricate piece of
machinery whose assembly necessitates a highly skilled workforce.
The electronic watch is typically composed of microchips and
printed units and lends itself well to mass production and
automated processes. After having ruled supreme over the watch
industry for decade, the Swiss suddenly found themselves faced
with strong competition from Japan and such low wage
producers as Hong Kong, Singapore, Taiwan, and Korea. These
newcomers produces inexpensive watches with digital faces that
were more accurate than mechanical watches.
Even though it was the Swiss who introduced the first
electronic quartz watch in 1968, they were low to accept e
importance of the new technology. Hindsight suggests that
small and fragmented producers had a vested inters in keeping
things as they were-the new technology Wt still unproven in the
marketplace and the Swiss proposition was secure. In any event,
the Swiss were late and reluctant entrants into a new market
whose rules were different. In 1970s, for example, watches were
introduced to mass outlets such as department stores and
supermarkets. This was nothing short of blasphemous to the
proud Swiss who required their watches to be sold in approved
watch and jewelry stores. The Swiss continued to produce
watches whose styles were no longer in touch with consumer
de-mands, and they displayed a noticeable lack of marketing
creativity. In reality, the Swiss had ceased to be leaders in the
watch industry. The Swiss luxury watch market was still healthy,
but they had lost a huge amount of market share at the lower
end of the market. In 1974 Swiss watch exports still accounted
for 60 percent of the worlds total. By 1979, the Swiss represented about a third of the worlds watch ex-ports. Economic
recession and a sharp rise in the value of the Swiss franc played a
part in the industrys problems. Most observers, however, now
attribute the decline of the Swiss watch industry to too many
Just imagine the situation in the early post-war years when the
Swiss were the only people making and selling watches; the
industry had a waiting list of months; and selling prices were
set to enable even in-efficient firms to survive. The more
efficient ones were making enormous profits. Why would any
manager in his senses want to change things?
As Switzerland entered the 1980s, the structure of its watch
making industry, which had more or less retained its form since
the late eighteenth century, finally began to adapt to the electronic
age. This meant rationalization of production, automation,
concentration, and the corol-lary of fewer jobs. Between 1980 and
1983, production of watches dropped by 50 percent. By 1983,
only 686 maisons remained and overall employment stood at about
40,000 jobs, down from 90,000 in the early 1970s.
The Merger of Asuag-ssih

The merger of Asuag, whose flagship brand is Longines, and
SSIH, whose best-known brand is now Swatch but also boasts
Omega and Tissot, was Switzerlands first response to the
Asian challenge. The new group was granted a fi-nancial package
worth $310 million, representing the largest rescue scheme in
the history of Swiss banking. Heavy reorganization took place
in both groups, especially SSIH which had lost $77 million in
the year ending March 31,1981. Most of SSIHs management
was sacked and con-trol of the watch division was transferred to
Ernst Thomke, a rank outsider to the industry, who possessed
both a med-ical doctors degree and an advance degree in
chemistry.
The merger, as it turns out, was a sensible move be-cause Asuag
was far better technologically equipped to face the 1980s than
SSIH, having already made a substan-tial commitment to the
research and development of elec-tronic watches. SSIH, for its
part, possessed the better known brand names. (In the summer
of 1985, Asuag-SSIH was renamed the Swiss Corporation for
Microelectronics and Watch making Industries, SMH in short.)
Dr. Thomke made two important, tradition-breaking decisions
in his first year. The first was to sell Swiss watch movements all
over the world instead of restricting such sales to Switzerland, a
move that allowed Asuag-SSIH to improve its technological
base through increased pro-duction. The second was to
recapture the lower end of the watch market by developing a
product that was inexpen-sive to manufacture, low-priced,
durable, technically ad-vanced and stylish. The result was the
Swatch watch, which was especially successful in the United
States, with total retail sales increasing from $3 million in 1983
to $150 million in 1985.
Product Description
The Swatch is a lightweight (3/4 ounce), shockproof, waterresistant (up to 100 feet), electronic watch with a plastic band
that uses a quartz analog (with dial and hands) movement. It is
manufactured by robots and sealed by lasers in a state of the art
factory in Switzerland. The watch is comprised of only 51
components (the average is 91), which lends itself well to the
thin look that is currently in vogue, and is manufactured off a
single assembly line (the Japanese use three). What most
distinguish the product is its design and its departure from

convention. A wide va-riety of faces have been used and even
glow in the dark and scented bands (banana, raspberry, and
mint) have been tried. Battery life is estimated to be three years,
and the watch retails from $30 to $35, which represents a
substan-tial markup on cost.
The Swatch Marketing Strategy

Central to the marketing strategy of the Swatch watch is the
notion of the watch as a fashion accessory. This is a novel
approach in that it is typically used as a selling point for gold.
and diamond-studded watches at the higher end of the market.
Watches in the $30 to $35 range normally compete on the basis
of price, performance or, in the case of digitals in the late 19705
and early 1980s, on accessory features such as a stopwatch and/
or calculator. Swatch, on the other hand, describes its target
market as fashion- oriented 12- to 24-year-olds.
One trend that worked in Swatchs favor from the start is that,
during the period 1976-1986, more and more people bought
watches. No longer was the watch primar-ily a gift item and no
longer was it only the rich who owned more than one. In
1976,240 watches per 1,000 inhabitants were sold in America.
Ten years later the figure was 425 watches per 1,000 inhabitants.
About 90 percent of sales were composed of inexpensive
electronic watches of vari-ous styles and brands.
Of course, Swatch never would have been able to take advantage of this trend without a sound marketing strategy.
According to Imgruth, his companys strategy is divided into
three elements: design, distribution, and production.
1. Design. An essential feature of the fashion-oriented approach
is a constant variety of product lines whose designs suit
seasonal fashions. According to Imgruth, the company has
a clear product concept based on four directions: young and
trendy; active and sporty; cool and clean high style; and
Classic. These four lines are available at all times. There are 12
small-faced models, and 12 larger ones. Every face is only out
a restricted amount of time, some-times only three months,
sometimes 12 months, de-pending on the design concept of
the watch. Each line is given a distinct theme such as the
Cosmic Western group which was described as a combination of Buck Rodgers and the Wild, Wild West. New models
are introduced four times a year, the seasons being spring/
summer/fall/holiday (see Ex-hibit 4). In addition, special
versions of the Swatch Watch such as the $100 diamondstudded Limelight and limited edition art watches are added
periodi-cally. Generally speaking; the trendier the design, the
shorter it will remain available; the more classic the design,
the longer it will remain on the market. Says Imgruth: This
is d6ne on purpose, to create collecting and spur multiple
ownership. Ad-vertising media are chosen based on the
product concept. There are four campaigns running simultaneously, each geared to a specific element of the four-tiered
product mix.
2. Distribution Distribution was originally limited to fashion
outlets and now includes upscale depart-ment stores such as
Bloomingdales, Saks Fifth Avenue, Macys, and so on. Such
stores never used to handle Swiss watches and still only
account for 10 percent of all watches sold. Imgruth
127
years of unqualified suc-cess that gave it an aura of invincibility.

As one watch ex-ecutive put it: -
scrupulously -avoids distributing through drugstores and

mass merchandisers such as Sears and JC Penney, even
though these are the usual paths for watches priced under
$100. Distribution is limited to 5,000 locations in the United
States, although Imgruth claims that 5,000 more would love
to sell his products. As one Swatch executive puts it: You
have to control distri-bution and not flood the market, or
people lose their hunger for the product.
3. Production. The production process described pre-viously
makes the design strategy possible. The flexibility that
Swatch enjoys is unknown else where in the industry. Design
changes for other watch-makers typically require a substantial
capital investment whereas Swatch can make changes without
adding cost. Such flexibility is absolutely essential because of
Swatchs product strategy. Without it, design runs of three
months would be out of the question.
Swatch Marketing Strategy In Action

In view of the fact that Swatchs strategy is unorthodox, it is
not at all surprising that its marketing executives would look
out of place in most corporate boardrooms. All advertising,
marketing, and promotion activities are handled by 27 year old Steve Rechtschaffner, vice president/marketing, and Nancy
Kadner, director of advertising, Rechtschaffner, a former
member of the U.S. Ski Team and self-described workaholic
who recently overcame a bout with thyroid cancer, has no
formal business education. He began his career by forming his
own sports promotion business. As for Kadner, prior to her
work at Swatch she spent over 4 years in the marketing department at MTV.
Rechischaffner and Kadner are the creative forces behind
Swatchs novel marketing strategy. Before Swatch entered the
market, watches priced under $50 competed on the basis of
price or performance. To gain an appreciation of just how
different the Swatch strategy is, a glance at a typical advertisement for a low-priced watch would suf-fice. Normally, the watch
is placed against a background in the hope that the right
message is communicated. Timex developed one of the more
creative performance oriented campaigns in the early 1980s when
it strapped a watch to an auto tire and proclaimed that the
product Takes a lick in and keeps on tick in. Others have not
been so imaginative. For example, it is not uncommon to see
digital watch advertisements where product features are simply
listed next to a black and white photograph of the watch.
Swatch, for its part, has taken roads previously UN traveled by
watch producers. It employs the use of color-ful (and often
humorous) print ads, multi-page advertising inserts in magazines such as Vogue and Rolling Stone, con-cert and event
sponsorship, and the use of music videos and MTV.
A good example of the Swatch strategy in action is its use of a
rap music group and a graffiti artist to promote and develop its
products. In September 1984, Swatch spon-sored the World
Break dancing Championships. One of the participating rap
music groups, the Fat Boys, was hired to do a commercial on
MTV on which its lead singer, the Human Beat Box, incessantly
chants BrrrSWATCHUM ha ha ha SWATCHUM. In
addition, Swatch wanted an artist to help promote the break
dancing championships so. It hired Keith Haring, New Yorks
128
best-known graffiti artist. The result was a four-watch-series

called the Keith Haring Swatch.
The Haring watches were promoted under the banner of
Great Modern Art That Tells Time. Swatch produced 9,999
of each edition. Each watch is numbered and, in Im-gruths
words are a collectible piece of art, a distinctive fashion
accessory, and a sturdy timepiece. The watches were introduced
in separate months, the first being re-leased in December, and
followed by new editions in April, May, and June.
The Competition
The under $50 watch segment is the most competitive in the
watch industry in terms of the number of companies involved. Based on 1984 watch sales, this segment of the watch
market also was responsible for the large majority of all U.S.
watch sales (see Exhibit 5).
Because the Swatch watch was such a novelty at its introduction, the company had free reign over the plastic fashion
watch market (some have called it cheap chic)
Under $10
$10--$50
Over $50
29%
52
19
for well over a year. The picture has now changed consid-erably
as strong competitors in the under $50 segment such as Casio,
Timex, Lorus, Armitron; and Parker Watch have entered the
fray. In addition to imitating some of the very styling and
advertising techniques that Swatch employs (Exhibit 6), the new
competition has targeted drug stores and mass retail outlets, the
very areas Swatch has shied away from, as their primary points
of distribution.
While it remained to be seen if the new entries could match
Swatchs creativity and design flexibility (one Swatch insider said
that technology-conscious Casios bid to enter the fashion watch
market was like John Deere getting into sport scars), the new
array of low-cost watches was certain to exert downward
pressure on retail prices. Lorus initial line of plastic watches
sold for $19.95 at full markup, Timexs Fun Timers sold for
$17.95 and Casios color Burst line started at $19.95. Most drug
retailers feel prices will eventually fall to the $12 to $14 range.
Swatch has also had to concern itself with the sale of phony
Swatch watches and unlicensed sales. In October 1985, 5,000
fakes were uncovered by U.S. Customs and Asuag-SSIH quickly
sued three Swiss imitators. There is also a thriving gray
market in which unlicensed traders exploit price differences
between the United States and Europe (the watch sells at a
lower price in Europe). Swatch elected to buy up all such
watches in 1985, spending an es-timated $500,000 in order to
maximize control over the sale of its products.
The Next Step: Swatch As A Total

Fashion Enterprise
It was perhaps with .an eye to an increasingly competitive
environment that Swatch embarked on a fast-paced diversification program-in-Iate.1-98S. The. company created over 470
Swatch Shops within major department stores na-tionwide
Swatch will continue to employ the same strategies that it uses

to sell its watches. The new product groups are aimed at the
same fashion-oriented 12- to 24-year-olds who are the target
market for Swatch. Fun wear is described as a bright and
whimsical line of unisex casual wear includ-ing shorts, T-shirts,
tank tops, slip-on pants, big shirts, and beachwear. Each
collection has a theme that ties in with a Swatch watch theme.
Swatches own marketing and design people will introduce new
collections every eight weeks, and prices range between $10 and
$50. Fun gear is a collec-tion of leather and rubber knapsacks,
belts, bags, and the jacket pack, which is a backpack containing a
windbreaker and a hood. Prices range from $10 to $65.
Swatch offers more than just the preceding two prod-uct lines.
There are Swatch Shields, which are described as high-fashion
sunglasses; Swatch Guards, small, color-ful devices that cover
watch faces; Swatch Chums, which are eyeglass holders; and
umbrellas and sweats that fea-ture current watch designs.
Swatch also imports and markets pens, notebooks, address
books, key rings, and safety razors.
The Swatch drive to open shops within major de-partment
stores is based on managements conviction that products
should be sold in a total Swatch environment-an environment
that has the Swatch personality. The com-pany president, Max
Imgruth, has predicted that ready-tower and accessories will
represent from 30 percent to 40 percent of total 1986 sales. In
the long term, he expects the new product lines to account for
the majority of Swatch sales.
Other Examples of Brand Transfer

There are several examples of companies that have attempted,
for better or worse, to build on the success of its first product
by using its brand name on other, not neces-sarily related
products. One of the more infamous exam-ples is that of Bill
Blass, who put his name on chocolates only to see the idea fail
miserably. Another example of fail-ure is that of Nike, which
unsuccessfully expanded its col-lection of footwear to running
wear and leisurewear. A Nike spokesman looking back at that
experience notes: When youre tremendously successful in one
area, theres a tendency to develop an arrogance about your
ability to transfer the value of a brand name.
On the other side of the coin, there was the example of
Conrans, which successfully expanded from a producer of
home furnishings to a retailer of everything from towels to
desk lamps. Like Swatch, Conrans started out catering to the
needs of young people and, when expansion took place, stayed
with the same target market. Another point in Swatchs favor
was its Swatch Shops, which spared the com-pany from having
its new product lines being placed on shelves next to competitors who had the advantage of an es-tablished image as quality
producers of ready-to-wear. In order to keep its shops and
continue to avoid head-to-head competition with more
established companies, Swatch had to remain a trend-setting,
creative company. In this way they could avoid the fate of Bill
Blass chocolates, which were sometimes found placed next to
boxes of Godiva choco-lates, leaving the consumer with what
might be a choice easily made.
1. Swatch is a unique success story. Why has the com-pany been
so successful? Was it important that the Swiss watch industry
recapture the lower end of the market? Why? Why not?
2. Do you see any parallels between the decline of the Swiss
watch industry and other Western industries?
3. Evaluate the cultural dimension of the Swatch story, taking
into account such practices as the willingness to bring in
people from other industries, to delegate authority to
younger executives, and to employ new media such as rock
concerts and music videos.
4. Swatch created a new market-can they continue to expand that
market? What must they do to defend their position in this
market?
5. What do you think of Swatchs chances for success as a total
fashion enterprise? Do you agree with managements
extension of the Swatch brand name. to other products?
Why? Why not?
6. Swatch is a classic example of marketing success through
creativity. What lessons can be learned from their experience?
Smart Car
In 1998, Daimler Chysler introduced a new car, a new brand,
and a new technology in nine ED countries. It is named
Smart and is certainly distinctive looking. (See Exhibit 1.)
The Smart car is only 2,500 mm long, 1,515 mm wide, and
1,529 mm high. It seats two adults or one adult and two
children. The Smart car weights 720 kg, has a 22-liter gas tank,
and gets 100 kilometers per-4.8 Liters. It is always two -toned in
color. It has a frame called the Tridion Safety Cell, which comes
in anthracite or silver color, and removable panels, which can be
changed in less than an hour, in such colors as mad red, hello
yellow, jack black, aqua orange, scodic blue, and boomerang
blue, green, or orange. The op-tional leather seats are papaya
colored. If you are thinking that the interchangeable panels and
the wild colors remind you of a Swatch watch, you are correct, as
the Swatch watch was the initial inspiration for developing this
car. In the early stages of the project when Daimler-Benz and
SMH (maker of the Swatch watch) formed a joint venture, the
car was called a Swatch mobile.
The Swatch mobile concept was based on Nicolas Hayeks
(Chairman of SMH) conviction that consumers be-come
emotionally attached to cars just as they do to watches. His
vision was of high safety, ecology, and a very consumer- friendly
area to sit in. Like the. Swatch, the Swatch mobile was to be
affordable, durable, and stylish. Hayek noted that safety would
be a key selling point, declaring, This car will have the crash
security of a Mercedes. Furthermore, the car was to emit
almost no pollutants, thanks to its electric engine: The car
would also be capable of gasoline-powered opera-tion, using a
highly efficient, miniaturized engine. Hayek predicted worldwide
sales would reach 1 million units, with the United States
accounting for about half the market.
In 1998, shortly after the introduction, the joint venture
between SMH and Daimler-Benz ended when Daimler-Benz
bought out SMHs stake. Hayak was disillusioned with
129
selling, in addition to watches, a new ready-tower line called

Fun wear and an accessories line called Fun gear
Daimler-Benz, and Daimler-Benz found Hayak diffi-cult to

work with.
To date, Smart car has two major criticisms: safety and price.
Despite development of a crash management system that
enables smaller cars to be just as safe as larger ones, during its
first winter (1999) on the road, there were reports of several
accidents. In response, the company developed Trust Plus a
software package that will cut power if the wheels start to slip.
As for the price, it originally sold for $10,500. After a period of
disappointing sales in Italy and France, the price was reduced to
$9,300. Although many buyers of the Smart car have high
incomes or already own two cars, they are concerned about the
price-value relationship.
1. What do you think of the market potential of the Smart car?
Comment on the original premise that a car could be the byproduct of the joint -venture of an automobile
manufacturer and a non-automotive marketer.
2. Is the Smart car an international or a global prod-uct? Do you
agree with the European-only launch? Why? Why not?
3. Identify target markets where you would introduce this car.
What sequence of countries would you recommend for the
introduction?
4. How would you position the Smart car in the target markets?
5. Who are the Smart cars major competitors? How are these
products differentiated?
6. Should the price, assuming it would still make a profit, be
reduced?
130
Introduction
This case will give you a general overview of the Swedish
cosmetic company, Oriflame International S.A., with concentration on the impressive development of Oriflames entry
into Eastern and Central Europe. A special focus will be
directed toward oriflames operations in Poland.
Company Profile
Oriflame was founded in Sweden in.1967 by brothers Jonas
and Robert af Jochnick and Bengt Hellsten. In 1972, the parent
company, Oriflame International S.A. (OISA), Lux-embourg,
was established. In 1982, OISA became listed on the London
Stock Exchange.
Oriflames specific market concept, which involves direct sales,
also allowed for rapid market development outside the Nordic
area. The company is currently repre-sented in 42 countries in
Europe, the Far East, Australia, and the Americas.
In 1987, the mail-order operation was expanded fol-lowing the
introduction of the Vevay brand name. In 1992, the natural
cosmetics company Fleur de Sante became af-filiated with the
group. ACO Hud was acquired in 1992 and is Swedens bestknown brand name in skin care products. The products are
retailed through Swedish, Norwegian, and Icelandic pharmacies.
Oriflame develops and produces its own naturally based
products in its manufacturing plant in Ireland where the
groups research laboratories are also located.
Oriflame EasternEurope S.A. (ORESA), which is managed
from Brussels, was established in 1990 with the objective of
penetrating Eastern European markets.
In 1994, direct sales accounted for 83 percent of the groups
sales (DRESA and OISA). Oriflanie is represented by sales
companies in 42 countries of which 29 are wholly owned and
mainly located in Europe Oriflame has licensees operating in an
additional 13 countries. The organizational structure of a
country sales company is shown in Exhibit 1.
The Market
The market for cosmetic products is developing positively with
recent growth averaging around 4 percent per year by volume,
although, as with other consumer industries, growth in 1992-1993
decreased as a consequence of the general eco-nomic recession.
The company has experienced steady growth in sales since the
start in 1967 with, in June 1994, sales totaling $230 million for
the group. The increase has been particularly significant in
Europe with the establishment of new oper-ations in Central
and Eastern Europe. This growth is also explained by the fact
that pe9ple are becoming more dis-cerning about how they buy
things. Many people find vis-iting a department store tiresome
and impersonal. The current trends are returning to -personal
service, care, and attention. Combine that with Oriflames
commitment to offering value for money with a full 100 percent
money back guarantee and the current sales growth is explained.
In addition to Europe, major growth has come from South

and Central America. Oriflames operations on the South
American continent are directed from Chile, where the success
of the local operation continues.
The global market for cosmetics and toiletries (C&T) is mature,
and growth through the year 2000 is projected to reach the
modest rate of 3 percent annually. Europe ac-counts for 37
percent of overall sales and is the major single market for C&T
products. The growth rate in the region is among the strongest
of any in the world when the results from Eastern Europe are
considered. By contrast, the U.S. market is saturated and growth
is slow.
In the global market for C&T, skin care is a large sector in most
countries, except in the United States where skin care is less
developed than in Europe in terms of user pen-etration. One
key trend is the launch of products that are marketed as having
benefits to the skin, which are not just cosmetic. This trend can
be seen across the cosmetic mar-kets and indicates that demand
is becoming more sophisti-cated. It usually involves a close
association with health benefits. These therapeutic cosmetics,
cosmeceuticals, are expected to become a major growth area in
the skin care market. The cosmetics industry has been very active
in the development of such products in recent years, spending
heavily on research and development (R&D) and often transferring medical research to cosmetic products.
Although there is a continuous search for innovation in the
C&T sector, the lack of legal protection in such forms as patents
adds a factor of increased risk and hinders the potential for
return on capital.
Pan- European sales of skin care lines increased by 8 to 10
percent during 1992. The growth trend continues in the area of
antiaging products, with the quality demands on effective longlasting moisturizers rising. The publics in-creasing concern
about environmental pollution and the link to the harn1ful
effects of the suns ultraviolet rays is also of great interest to the
industry.
Body care products continue to perform well in Europe, but
market penetration levels are relatively low compared to the sun
care market.
Cosmetics sold through direct -selling methods make up the
following percentages of the following markets: Sweden (20),
United Kingdom (15), Finland (13), France (7), Denmark (11),
Eastern Europe (11), Spain (7), Hol-land (6), Norway (4), other
(13).Over all, direct sales of cosmetics account for 10 to 15
percent of the entire cosmetics market.
The Direct-selling Industry

Direct selling, which was already a substantial industry in the
United States by 1920, is defined by the Direct Selling Association as follows:
131
ORIFLAME
The selling of consumer goods direct to private in-dividuals, in

their homes and places of work, through transactions initiated
and concluded by a salesperson. Direct selling has several
advantages over shop retail-ing, not only for the customer, but
also for the manu-facturer. The customer can pick up the
products at a service center or have them delivered at home. The
manufacturer does not have to support advertising costs to
attract its customers. The distributors playa double role being
both customers and sales peopled in the recruitment of new
customers.
In July 1994, the World Federation of Direct Selling Association
indicated that direct selling was a $60 billion industry in the
world, with 30 million people involved in this activity each year.
As an example, the United States counted million to 7 million
people in direct selling and Japan more than 2 million. Most
people who sell direct do it not only because they like the
products and want to in-crease their income, but also because it
is a good opportu-nity for them to develop an independent
activity. Direct sales are now a global activity, with many new
players com-peting with traditional companies.
Most of todays successful direct selling companies use a sales
system called Network Marketing or Multilevel Marketing. An
article in The Wall Street Journal described Network Marketing in
the following way:
Network marketing is a sales system which totally omits the
stores. Networks sell all kinds of products: from pens or
toothpaste to computers, cars, and even houses. These
products are usually 15-50 percent cheaper than those purchased
in the stores. By the end of this century, we will be buying 50-60
percent of all the products and services in this way.
The rules are about the same everywhere. An au-thorized
distributor delivers the companys products directly to the
customers house. His first clients are his family and friends. A
distributor buys the products at a price, which is 20-30.percent
cheaper than the price the customer will later pay for them. The
difference is where his profit is. If he wants to make more, he
re-cruits new sales agents. Depending on the number of people
he recruits and on the volume of goods he and the recruits buy,
he receives a commission and a bonus. Sometimes it can be a
prize, a nice trip abroad, some: times even a retirement
pension. Those who recruit the biggest number of new agents
make the most. The company also makes money because it has
no such costs as rent or a lease. It would have to pay for all of
this if it sold its goods in the stores.
Oriflame is one of the main direct-sales companies in many of
its markets and the largest direct-sales company in Scandinavia
and in Central and Eastern Europe.
Oriflame
Direct Selling
Conventional selling involves moving a product through a
hierarchy of middlemen from the manufacturer to the end
customer. All these middlemen-wholesalers, retailers, and
jobbers-earn a profit from handling the product. In a directselling environment, these positions are not neces-sary and
profits are instead shared among the distributors. These cost
132
cuttings also give Oriflame the possibility to sell a higher-quality

product at lower, more competitive prices.
Oriflames responsibility in the markets in which it operates is
to package the products and handle the financing and data
processing, warehousing, shipping, and market-ing, as well as
creating training programs and materials to support the
independent distributors.
The Oriflame distributors offer unique, value-added services
such as cosmetics consultancy in their customers homes or
offices. It is company policy that prospective cus-tomers (1) are
not subject to pressure selling nor are they obliged to
purchase; (2) receive free skin analysis and per-sonalized advice
on proper skin care; and (3) are offered free ongoing after-sales
service.
Oriflame has 300,000 distributors worldwide. Dis-tributors
usually have other jobs; thus, their involvement with Oriflame
is sometimes only a hobby. Historically, dis-tributors have been
paid strictly on commission, and their primary sales tool has
been sales catalogs provided by Ori-flame. (More than. 12
million catalogs in 17 languages are distributed every year.)
Oriflames selling method consists of selling a wide range of
the highest-quality cosmetics to consumers on a person-toperson basis, backed by a unique, multilevel marketing plan.
Distributors get their catalogs every 2 to 4 weeks and use them
to sell to friends, relatives, and colleagues-nor-mally, their
primary customer base. Distributors order products they sell
from the catalogs, receive bundled ship-ments from Oriflame,
and then pass products on to indi-vidual customers.
Oriflame is now implementing and expanding a new (for them)
marketing method. This involves the distributors building up
a sales network and receiving a bonus or commission on the
sales made by each individual recruited to be a distributor, as
well as on the sales made by the recruits. This system, often
called multilevel marketing, can offer career opportunities for
current hobbyists because the system permits main source
levels of income. The method has worked most successfully for
Oriflame in Latin Ameri-can and several Eastern European
countries. Distributors in these countries often enjoy incomes
well above national averages. Catalogs are an integral-part of
this system, but are issued less frequently. Over time, Oriflame
will adapt this method for use in its traditional Western
European markets.
Oriflame has never been successful in the German and U.S.
markets despite several start-up attempts. Direct sales accounted
for 83 percent of Oriflames sales in 1994 com--pared with 70
percent in 1994. It has been decided by the board of directors
that Oriflames future direction will be in the field of direct
selling. This is where the company has its highest potential. (See
appendix The Marketing Plan: An Overview for further
explanations of the marketing plan.)
Other Activities
Mail order at OrifIame can be divided into two types. The first
is by direct customer purchase of specially selected products
appearing in sales catalogs that are distributed 10 to 12 times a
year. This method is referred to as the pos-itive option.
The mail-order market accounts for around 5 percent of the total

cosmetics market. The market is expanding, es-pecially in the
Nordic area. The activities in Eastern Europe have a major
potential as the time is right for this concept and strong development is anticipated generally. The market as a whole is subject to
tough competition from companies such as Yves Rocher.
The mailorder market within the Oriflame group is composed of Oriflames operation in Denmark-Vevays cosmetic
club and Fleur de Santes natural cosmetics. In 1992, the mailorder operations were combined to from a division within the
Oriflame group.
The mail-order operations started in Denmark in 1978 with
Oriflames cosmetics club. Today, Oriflame in Denmark has
around 100,000 members and sales of around $8 million.
Vevay was founded in Sweden in 1987. Since then, op-erations
have expanded to Norway, Finland, and Denmark and during
1993 ORESA started up its Will operations in Poland, Hungary,
and the Czech Republic. Vevay has around 120,000 meP1bers
and sales of around $4 million.
Fleur de Sante has been an associate company of Ori-flame since May 1992 (36 percent ownership). The com-pany, located
in Malmo, has a turnover of around $15 million in Sweden,
Norway, and Finland. In August 1992, -Oriflame acquired the
distribution rights for Fleur de Sante in Eastern Europe. A
company was started in the Czech Re-public in February 1993.
Mail order in 1994 accounted for 7 percent of total Oriflame sales.
ACO
The ACO company evolved from the Swedish pharmacy operations, and the name ACO dates back to 1939. In connec-tion
with the nationalization of Swedish pharmacies in 1972, ACO was
transferred to the government owned pharmaceuticals company,
Kabi Vitrum. Oriflame acquired ACO on January 1, 1992.
ACOs main market is Sweden, where the products are sold
through pharmacies. ACO is the best-known brand name for
skin care products in Sweden. Its main products are creams,
lotions, sun care products, and hand care products.
The ACO products exist within the low and average price
ranges, whereas the Nordic Light products compete with
exclusive prestige brands
The growth in sales during the year has mainly been through
new products or recently introduced products as well as sun care
products. Sales increased to $24 million. ACO accounted for 10
percent of total Oriflame sales.
Manufacturing
At the end of 1977, Oriflames board of directors decided to
build a production plant on the outskirts of Dublin, Ire-land.
The plant was completed 2 years later, in July 1979, following
extensive project work, including transfers of technology from
former subcontractors. The building cov-ered 2,800 square
meters for production, research labora-tories, and quality
control. Extensions were made in 1980, 1989, 1991-1992, and

1992-1993.The current extensions now have been completed
and have increased the capacity for filling from 22 million to
approximately 40 million units. This, of course, includes the
ACO equipment transferred from Stockholm. In 1993, the
factory covered 11,000 square meters for production, research
laboratories, and quality control. The plant is one of Europes
most modern cosmetic manu-facturing units and is well
equipped with high-technology production equipment.
AlI Oriflame products undergo strict physical, chem-ical, and
microbiological control before reaching the cus-tomer. The
objective is that the customer should be able to rely on the
product to provide long-term quality, regardless of how it was
purchased.
In order to attain this objective, all deliveries of raw materials
and packaging are tested according to strict specification before
they enter the production process. An overriding priority is to
offer consumer products that meet the highest safety and
quality standards. The- water used is tested daily to guarantee a
high degree of micro-biological purity.
Research and product development in the Dublin plant is
actively concentrated on developing new cosmetic formulations
in line with the market demands and expectations.
Exhibits 2
Sales
Operating profit
Profit before tax
Profit after tax
Capital expenditure
Profit margin %
Equity/assets ratio (%)
" Return on net capital
employed (%)
Gearing (%)
Employees
Exchange rate $ = 1.56
1994
($ Thousands)
232,137
36,192
37,206
28,676
20,349
16
57
1993
($ Thousands)
192,406
31,431
31,556
23,522
13,822
16.4
55
32
14
1,328
36
31
1,148
In production and development, products and pack-aging are

tested continuously for microbiological stability and quality of
packaging. The production philosophy, in-cluding packaging, is
to concentrate on new consumer de-mands such as biodegradability, recycling, and the absence of animal raw materials.
The Research and Development Department has gen-erated
over 100 new products for Oriflame, Vevay, Fleur de Sante, and
ACO in 1994.
Oriflame Results
In 1993 and 1994, the Oriflame Group results are shown in
Exhibit 2.
Oriflame Eastern Europe

Decision to Start
When Oriflame decided, in 1990, to create Oriflame East-ern
Europe, Jonas of Jochnick called back to Europe a young
Swedish manager, Sven Mattsson, who at the time was
managing director for the operations in the Philippines. The
133
The second category of mail-order sales is based on the book

club type of system. Subscribers/members/cus-tomers are
offered specially composed packages through a brochure. The
parcel is sent to the customers unless they actively inform the
company that they do not wish to re-ceive it (negative option).
year before, of Jochnick had-resigned from his position as

Oriflame chairman in order to devote more time to look at new
marketing opportunities, particularly in Eastern Europe. Af
Jochnick, together with Mattsson and a secre-tary, opened an
office in Brussels for the new company, ORESA. The objective
was to exploit business opportuni-ties for the direct selling of
cosmetic products in Eastern Europe, with initial emphasis on
Czechoslovakia, Hungary, and Poland. In Eastern Europe,
Oriflame targets for the later stage of its development were
Bulgaria, Romania, the Soviet Union, and Yugoslavia.
On July 10,1990, af Jochnick was appointed Chairman of
ORESA. In a letter to Oriflame shareholders, he wrote:
The opening up of the Eastern European markets offers new
and exciting opportunities to establish busi-ness activities in
these countries. There is a strong ambition and commitment by
the new democratically elected governments in some of these
countries to de-velop their markets along the lines of Westernstyle market economies, and legislation is being proposed or
passed in a number of Eastern European countries to encourage foreign investment.
In particular the Directors of ORESA believe that opportunities
exist for companies:
1. Which are active in the consumer goods areas;
2. Which are prepared to re-invest cash and profits in the local
markets and which are in a position to wait a considerable
period before remitting profits;
3. With the resources to establish or invest in local manufacture;
4. Which are willing to invest in the development and
professional training of local nationals as future
management.
Currently there is a high degree of uncertainty as to where and
how quickly these opportunities will de-velop since definite legal
frameworks have not yet been established in all the countries in
Eastern Europe. It is therefore impossible to predict with any
degree of cer-tainty what financial returns can be expected or the
timing 9f such returns.
Investment in these countries must instead be based on the
belief that the recent political changes are irre-versible and that
there will remain a strong commitment to develop these
economies with policies based on Western economic principles.
I believe that for the companies, which take the initiative early
and take a long-term view, future reward and returns should far
exceed what can be expected from mature markets in the West.
The initial objective of ORESA was to establish sales organizations in Czechoslovakia, Hungary, and Poland, using the
well-proven direct-selling techniques already used by the company
in its existing markets. The tech-niques seemed particularly well
suited to these countries due to the highly undeveloped retail
distribution networks found there at that time.
ORESA was also examining the possibility of enter-ing into
joint venture arrangements with existing cosmetic manufacturers in each of these countries to enable prod-ucts to be sourced
locally. In the longer term, manufactur-ing for export of
cosmetic products in Eastern Europe was envisaged.
134
The Development 1990-1994 (Exhibit 3)

The first country that Oriflame entered was Czechoslovakia.
Eliska Wescia, a woman of Czech origin living in Malmo, was
made all offer to return to Prague. She accepted and first sales
were made in December 1990. A 100-square-meter office was
opened and after 3 months, $300,000 worth of sales were
already made. Sales were growing so fast that
Eshibits - 3 Sales Statistic
Country: Czech Republic
1991
Start: December 1990

1992
1993
1994
13700
18804
61%
112
61
600
1000
21
400
12684
7629
81%
138
33
300
660
16
15
12758
12494
68%
125
51
450
700
17
378
Country: Slovakia
Start: January 1993
Total sales (USS in thousands)
Active file count
Activity %/month (average)
Sales/active/month (USS average)
No. of employees
Office space (square meters)
Warehouse space (square meters)
No. of service centers
Advertising spending (USS in thousands)
1993
3197
3795
66%
180
10
280
0
0
23.5
1994
6400
9090
59%
90
30
550
600
60
89
1993
9500
18933
53%
81
60
280
1200
4
275
1994
13500
23285
50%
93
75
400
1200
9
250
4526
2320
74%
490
9
300
600
Total sales (USS thousands)

Active file count
Sales/active/month. (USS average)
No. Of employees
Warehouse space (square' meters)
Start May 1991

Country: Hungary
Active file count
Activity %month (average)
No. of employees
Warehouse space (square. meters)
1991
1400
3602
65%
133
14
60
50
0
0
1992
6500
13442
62%
100
35
180
700
1
20
Start: April 1992

1991
Country: Turkey
Active file count
Active %/month (average)
No. of employees
1992
1278
2523
83.7%
289
11
350
100
1
8.7
1993
9933
16224
61.7%
167
37
450
800
4
44.4
1994
12900
28550
47.4%
98
74
750
1500
9
70.3
1993
554
819
89%
218
11
280
200
1
22
1994
1845
3048
66%
196
26
480
300
3
50
Start: May 1993
1991
1992
Country: Greece
Active file count
No. of employees
Country: Bulgaria
1991 1992 1993
Active file count
No. of employees
1994
810
2450
93%
200
15
400
600
0
2
The company had to stop recruiting for a while to establish a

warehouse and find new office facilities. In 1994, Oriflame had
.a 600-square-meter office in Prague with a 1,000-square-meter
warehouse, and 15 service centers spread over the country.
In Poland, the company recruited the- first 12 distrib-utors in
March 1991. They ordered, among themselves, $20,000 in the
first 2 weeks and are still today among the leaders in the Polish
network. A Polish citizen who had spent 2 years in Iran and
who was fluent in English was re-cruited as country manager.
In Hungary, where competitors like Avon and Amway were
already established, Sven Mattsson was general man-ager of
Oriflame until the company found a Swede with a Hungarian
background, Thomas Grunwald, to assume re-sponsibility for
Hungary in May-1991, which was when the first Oriflame
products were sold. At the beginning, sales did not develop as
fast as in Poland and Czechoslovakia. However, 3 years later,
sales were developing faster in Hungary (plus 38 percent) than
in the Czech Republic (plus 15 percent) or in Poland. Which had
only a small in-crease. Mattsson says, This can partly be
explained by the fact that Oriflame naturally offers the best
service level within the capital region. Approximately 25 percent
of the Hungarian population lies in the Budapest area, a figure
which is much higher then the other bordering countries.
Local management has also been very successful in work-ing
with leaders of the network. In 1994, Oriflame had 75
employees in Hungary.
In April 1992, Oriflame started operations in Turkey. The
company had great hopes for this more Western market where
well-trained managers were available and where everything
seemed to be a lot smoother and easier, in spite of a lot of red
tape and bureaucracy. This was noth-ing compared with what
the company had experienced in Eastern Europe up to now.
The initial investment was paid back after 3 months of
operations. In December 1992, Oriflame sales were $450,000.
Turkish distributors appeared to be entrepreneurial and
cooperative. The operations have been greatly helped by the
countrys well-developed infrastructure (banking, telecommunications, etc.). Ori-flames high expectations were not met in
1994 because of the economic crisis Turkey faced during the
year. In March, the dollar value moved from 14,000 to 40,000
Turkish liras over a few days. Sales dropped 40 percent below
forecast, but Sven Mattsson remained optimistic about the
medium and long-term future. In January 1995, Oriflame
Turkey opened a new 1,200-square-meter office and a 2,OOOsquare-meter warehouse near the Istanbul airport.
In May 1993, Oriflame started its sales in Greece, a member

country of the European Union with no import duties.
Oriflame had to pay 12 percent duties for the Czech Republic
and from 10 to 50 percent for Hungary and 20 per-cent for
Turkey. In 1994, Oriflame Greece showed profit.
In Bulgaria, Oriflame opened a 400-square-meter office and a
600-square-meter warehouse in August 1994. Success was
immediate, and the company experienced its biggest initial
growth, with distributors placing an average monthly order of
$250 in this country where the average income is only about $80
per month.
In Russia, Ukraine, and Latvia, 0 RESA has, since 199(sold its
products wholesale to retail outlets as high in-flation, inadequate banking systems, and a relatively un-developed
infrastructure has made it difficult to use the traditional
Oriflame concept of selling through distribu-tors. However, the
company is now ready to adopt direct sales there, implementing
the same Marketing Plan as in other Eastern European
countries. A Swedish manager, Fredrik Ekman, moved to
Moscow in October 1993
From 1991 to 1995, ORESA increased its staff and office
facilities in Brussels. In 1995 the head office was staffed by 30
people, ensuring centralized functions such as Operations and
Marketing, Finance, Supply, Business De-velopment and Legal
Affairs (see Exhibit 4).
In 1995, ORESA planned to open sales companies in Romania
and Lithuania. A re-launch of Oriflames activi-ties in Germany
took place during the course of 1995. Ori-flame Germany is
being managed from Brussels.
A 10,000-square-meter ultramodern manufacturing plant,
located in Warsaw, was due to start operating in mid-1995. This
involved a total investment of approximately 20 million U.S.
dollars.
As Sven Mattsson likes to say, Our initial aim was to start with
Czechoslovakia and then to follow with Poland and Hungary
and other markets according to our success in established
markets, but also according to available management resources.
Our ambition is to become market leaders, both in the direct
selling industry as well as the cos-metic industry and to
capitalize on all the advantages which result from being the first
on a market.
Oriflame in Poland
Decision to Start
In December 1990, Edward Zieba, who had worked for a state
chemical company in Poland and who had spent 3 years in Iran
with a construction company, was recruited by Oriflame with
the objective of starting operations in Warsaw. During that
month, he had long discussions at the Brussels headquarters of
ORESA and visited the Oriflame production plant in Ireland
and the emerging sales com-pany in Czechoslovakia. Dudng the
first months of 1991, Zieba became very skeptical about the
development of Ori-flame in Poland with direct-selling
techniques and a multi-level approach, which had never been
used in his country.
I really thought at that time that it could not possibly work in
Poland. Our mentality is too different and what we have lived
135
Start: August 1994
through over past decades left little hope of im-plementing

such methods with success. 1 had accepted the job because I
treated it as something new and exciting, but I was very
doubtful, commented Zieba to the case writer during his visit
to Oriflame Warsaw in May 1994.
Oriflame started its operation in Poland in March 1991. At that
time, Zieba gathered some 20 of his friends with their spouses
for a cozy party during which he-did not speak about Oriflame
but only displayed some products on a table in the kitchen.
After a while, all of those gath-ered there started asking
questions. At the end of the evening, he gave a few samples to
those interested (all of them) while briefly explaining the
opportunity of the Ori-flame marketing plan. Although the
quality of the prod-ucts was fully recognized, each of the guests
appeared concerned about the selling method. Three years later,
in 1994, eight of them were selling Oriflame products as their
only professional activity and were at the epicenter of sev-eral
different networks of thousands of distributors.
Products and Pricing

Initially, a selection of 100 items was offered. One year later; the
number increased to 150. Oriflame cosmetics are gentle but
effective. They are produced from nonirritant, natural plant
extracts and protect the skin against the harmful effects of
pollution and stress. Oriflame products link the best of nature
with the best of science to achieve the highest quality.
A first product selection was made by the Marketing Department in Brussels and one of Ziebas first assign-ments was to
propose local pricing. Oriflame generally sells in local currency. At
a later stage, free choice was given with regard to new introductions and discontinuations. Our intention was and still is to
offer the most comprehensive range of skin care, color and
fragrance products in the Polish market. The first months clearly
showed that consumer habits differ in many areas from what
we are used to in western countries.
Since conception, product price positioning has been one of the
most important issues and intensive market studies are
continuously carried out in this area. It is nec-essary to keep on
top of a rapidly changing economic en-vironment. At an early
stage it was decided to offer very competitive prices in order to
attract millions of new cus-tomers rather than selling a limited
number of items with traditionally high margins.
Merchandise Support
Twice a year, Oriflame issues 380,000 copies of its catalog:
showing 250 products classified in the following categories: skin
care, body care, family favorites, color, cosmetics, womens
fragrance, and mens fragrance. Prices are not printed in the
catalog but on a separate loose sheet. Ori-flame prints all its
catalogs in Sweden, using the same cata-log in nine different
countries. Translation and typesetting of the texts is made in
each country before the printing. One of the difficulties the
company has to face is a product sales forecast, which have to be
made 15 months in advance.
Three catalogs, a product guide, information on the marketing
plan, samples, and some real products are all in the starter kit
that any new distributor has to buy at the cost of $28 in order
to start their business. Additional cat-alogs can be acquired at
136
cost by the distributors. The com-pany decided that the catalogs

should always pass through the distributors and would never
be sent directly by the company to a prospective consumer.
We see a catalogue as a major marketing tool and there is a lot
of effort going into the preparation of every issue. I do not
think that one can not over estimate its impact on the company
image, product awareness, and finally on sales. We are still
investing considerable amounts of money into it and experimenting with its look and content. It is one of the best
investments.
Operations
When Oriflame started operating in Warsaw from a rented villa,
people were lining up for hours in the street to buy some of
the first product range. Rapidly, 70 percent of the products were
out of stock, and the company decided to stop recruiting new
distributors for 3 months. That time was used to reorganize all
distribution procedures and open some service centers.
In March 1992, Oriflame Poland purchased Kamelia, a cooperative that produced cosmetic products in Vrsus; a suburb of
Warsaw, later followed by the installation of pack-aging facilities
in the old factory. By April .1992, B040na Karpinska had joined
the company as operations manager in charge of distributors,
warehouses, and customer service.
In 1993,12 service centers were opened, most of them in rented
villas throughout the country, to allow distribu-tors to come
and pick up the merchandise. In 1994, Ori-flame had created a
total of 18 centers, 10 of which were company owned; the
others were on an agreement basis with different entrepreneurs.
A new warehouse has been completed along with new pick and-pack facilities for a few thousand orders per day.
In 1994, Oriflame Poland employed 150 people, all of them of
Polish origin. The distribution network counted over 50,000
registered members.
By 1995, Oriflame was selling a range of 200 products, 60
percent of which were filled and packed in Ursus, with the
remaining 40 percent coming from the factory in Ireland.
On January 31, 1995, a daily newspaper published in Warsaw
printed an article that said: Swedish company Oriflame was the
first direct selling company in our market (1991). According to
Oriflame management, the speed of turnover growth and
network development in Poland is the most remarkable in the
27 years history of the company.
Advertising and Public Relations

In 1993, it became evident that Oriflame was aiming toward a
mass market with its sales volume and, therefore, the com-pany
decided to invest into both advertising and public re-lations
(PR) activities to strengthen its brand awareness. The first
successful advertising campaign was run in the autumn of 1993,
followed by spring and autumn of 1994. The media used were
mainly public TV and all segments of womens magazines. The
advertising budget for 1994 was almost $700:000, of which 70
percent was spent on TV.
Below-the-line activities included not only traditional PR but
also exhibitions and company promotional days in all major
cities in the country, with an estimated audience of 300,000.
The Oriflame Distributors

When a new distributor registers with Oriflame, he or she can
generally place orders on credit up to DS$50O, the av-erage
order being $100. Given the state of the bank system, which
was still very poor in 1994, distributors cash pay-ment facilities
are organized in all service centers across the country.
In December 1994, Oriflame Poland had built a net-work of
50,000 active distributors (placing orders at least once during the
preceding 3 months) plus 30,000 non-active distributors (no
orders in the last 3 months). One distribu-tor, Jerzy Ruggier, a
student at Warsaw University, explains: I know that I have to
create a place for my job. I learned responsibility. It is important
for me to sell high-quality products, to be honest, and not to
break the rules. It is a way to start a small business and to help
people to under-stand the new laws and taxes. Another
distributor, Joanna Szablinska, had set an objective for herself: I
wanted to become a Sapphire Director and buy a new car an
Alpha Romeo. Oriflame is a way of socializing, something which
gives you the opportunity to learn how to make safe contacts
with other people-and buy some luxury in different forms.
Of the 573 distributors who have reached the director level and
beyond, 90 percent of them devoted all their working time to
Oriflame. Another several hundred are making a living that is
far beyond average standards in Poland. The Oriflame network
consists of some 75 percent of women and 25 percent of men,
the majority being 25 to 35 years old. Bert Wozciech, after 3
years as area manager for Benetton in Poland, joined Oriflame
as training man-ager for the whole network. Since 1993, he has
organized training sessions for the directors. Every Monday at
4:30 P.M. in Warsaw, he conducted, in a lawyers club, a seminar
on motivation, which was free of charge and open to any active
or prospective distributor who wished to attend.
400 of the companys own products and a few thousand

products manufactured by other firms from which Amway has
acquired selling rights. Its total annual sales amount in 1994 was
$4 billion. In Poland, the monthly turnover is about $30 million
zloty. In 1992-1993, Amway managed to build a network of
100,000 distribu-tors. An Amway executive stated: Poland is our
best market in both sales and number of distributors in relation
to its population. Amway distributors are not employees of the
company but are independent entrepreneurs who have their own
businesses. So far, Amway in Poland sells about 20 products:
laundry detergents, dishwashing liquids, care cosmetics, and
personal hygiene products. The big ad-vantage of the Amway
products is that they can be returned even after they are taken out
of the packaging.
Amway is not just cosmetics. It is also the author of a television serial, Bliznes Start. This program talks not only about the
basics of entrepreneurship and a free market economy, it also
presents people-Polish businessmen.
Exhibit 5 Sales Statistics
Country: Poland
Total sales (in USS thousands)
Active file count
Activity % /month (average)
No. of employees
Office space (in square meters)
Warehouse space (in square
meters)
Advertising spending (in USS
thousands)
1991
2,250
1,782
84
355
14
130
1992
21,566
24,101
65
288
81
600
1993
35,390
38,925
58
161
130
800
1994
37,180
45,020
53
118
154
1,000
100
900
1100
2,400
14
18
20
320
700
In Sweden, Amway differs from its Swedish competi-tor in

that, at the moment, it has no plans to start pro-duction. The
only products Amway buys from Polish companies are
advertising gadgets: bags, balloons and so forth. Total sales for
1994 were estimated to be$28 million.
The years of rapid growth are over but I am con-vinced that in 3

years from now we will have at least 100,000 active distributors.
Zepter is a Swiss-Austrian firm, which for the past year has been
selling kitchen utensils. The demonstrations of its products
take place in private homes. Using the prod-ucts purchased by
the owner of the house, the person making the presentation
demonstrates the advantages of using the Zepter pots and
pans, which are expensive by Polish standards. Zepter products
can also be purchased by installments. One becomes the owner
of the chrome-nickel pots, pans, and silverware or 24-carat goldplated coffee set only after the last installment is paid. In 1993,
Zepter had 25,000 distributors in Poland but as the companys
repre-sentative assures is, sales grow monthly.
Competition
Oriflame Manufacturing in Poland
In May 1994, Edward Zieba commented on the Ori-flame

situation in Poland:
We want to intensify our support because we do not only want
to do business but also develop social life and the individual
distributor. We do not want to give only more money to the
distributors; we want to develop a club, to make the distributors more able to meet other people and belong to something
special.
In 1994, it was estimated that over a million Poles were working

for different networks in direct-selling, multina-tional companies
such as Avon, Amway, Zepter, Oriflame, Herbalife, and so on.
Two of them, Amway and Zepter, were described as follows:
Amway, one of the worlds largest and most dynamic directsales companies, has been active in Poland since 1992. Although
Amway came to our market relatively late, it now boasts the
largest network of sales agents. In the opinion of the Amway
bosses, Poland is their best market, both in terms of the
number of distributors and in terms of sales. In the world,
Amway has more than 2 million distrib-utors, who sell about
The high demand for natural skin care and makeup products in
Poland inclined the Oriflame corporate management to make
the investment at Ursus. We see Poland as a very big and
important market for our products, a market which is still
growing. We believe it is a prudent decision to broaden our
activities here by building an ultramodern factory, said Jonas
of Jochnick, the companys founder and president, during a
press conference at Oriflame headquarters.
The $20 million manufacturing plant was due to start operating
during 1995. It is a state-of-the-art production equipment and
137
Frequent contacts with the press resulted in broad media

coverage, with little negative comment.
complete research and laboratory facility, which will make it the

most modern cosmetics factory in Poland. Products will be
made from the same ingredients and under the same strict
quality control as in all other Oriflame plants. All production
processes will be environmentally safe.
highest-quality products at reasonable prices each time they

purchase Oriflame cosmetics. According to Mattsson, Our
aim is to have our products priced below our international
competitors and at the same time be considered as an alternative
to cheap local products.
Poland is the second country where Oriflame cosmet-ics will be

manufactured. Part of the production will be ex-ported to
neighboring countries. More than 300 people will be employed
full time once the new plant is operational.
Distribution
In order to facilitate the distributors activity, the company has
created in each country several service centers. This further
improves the lead-time between order and delivery. In 1994.
Poland had 18 service centers; the Czech Republic and Slovakia.
20; Hungary, 9; Turkey, 9: and Greece, 3. The aim has been to
give a 48-hour service turnaround throughout the country, with
a 24-hour service in the capitals. Our distribution strategy has
proven to be very successful. As in all arrears of life today, speed
and accuracy are very important and this is especially true for
direct selling.
Key Factors In Oriflames Success

Looking back over the years from 1990 onward and the
development of Oriflame in Eastern European markets, Sven
Mattsson identified these key factors to the com-panys success.
Local Management.
Since the beginning, in 1990, Oriflame developed a local management policy. Sending expatriates to do the job, even if they had a
solid knowledge and experience of both the companys products
and the local culture was never considered as an appropriate
solution. In each country, the company recruits a local manager
and staff spending a lot of time during interviews explaining the
nature and spirit of the free market economy, the direct-selling
method, and the Oriflame marketing plan.
Marketing Plan.
The marketing plan itself is considered one of the main assets
of the company. Support guidance, and training were supplied
from Brussels, with staff spending a great amount of effort
and time helping local markets. The marketing plan called The
Success Plan, was the same for each country, with minor
adaptations where required.
Mattsson summarizes the Oriflame concept. Oriflame
considers itself as a company offering two kinds of products.
First a concrete one originating from the product range of 200
products displayed in a catalog with a pricing policy that favored
volume rather than margins. Second, a more intangible product,
which originated from the business opportunity offered to each
distributor to develop their own business.
PR and Advertising
Investing in PR has always been considered important. This is
especially true of former communist countries who have long
forgotten the knowledge and practice of a free market economy.
Oriflame was spending approximately $45,000 per year in each
country for PR and is planning to increase it in the coming years.
A considerable amount was invested in above the line
advertising to capitalize on the relative inexperience of media
purchasing during 1991 to 1993. Oriflame has reached 80
percent awareness in Poland, Czech Republic, and Hungary,
which is definitely partly due to successful advertising campaigns
during the past years, says Mattsson oriflamme used a mix of
TV commercials, printed advertisements, and billboards.
Product and Price
Out of the range of approximately 200 products, the company
manufactures about 65 percent; the remaining 35 percent come
from subcontractors. Oriflame cosmetics are made from pure,
natural ingredients. As Jonas of Jochnick explained, The
company is dedicated to ensuring that our customers receive the
138
Strategic Issues
After 14 years of activity in Eastern Europe, results have been
well beyond early expectations Sven Mattsson is now facing
various issues that will influence the recommendations he will
make to Jonas af Jochnick and the ORESA board for the
future.
How far should the company go to increase its service to the
distributors who, of course, appreciate very much having
products available as fast as possible? Moving the products
faster always means higher costs. How much value should be
attributed to distributor convenience? Should inventory of the
whole Oriflame product range be kept at each service center?
Should the company invest in advertising campaigns? How
important is the advertising for a direct selling company to keep
the awareness high? Is it worthwhile continuing when the
increased media prices are taken into considerations?
Should the company enlarge its product range with
noncosmetic products to increase sales and possibly to attract
new distributors?
A few countries into which Oriflame is considering expanding
and where it is conducting marketing research still have high
inflation rates. What kind of specific pricing and product policy
would the company need to implement in order to ensure a
minimum risk for its investment?
Should the company go for local management or expatriates?
What kind of management is needed for starting up a new,
more distant sales company? What kind of management is
required when the company enters into a more mature stage?
Appendix: The Marketing Plan: An

Overview
To become an Oriflame distributor, a candidate should be
sponsored by an existing registered Oriflame distributor.
Products are sold directly to the consumer by independent
distributors who are not employed by Oriflame.
There are no exclusive territories or franchises available under
the Oriflame policy. Any distributor is free to conduct his or her
business in any area of the country. No distributor shall sell,
demonstrate, or display Oriflame products in any retail outlet.
Oriflamme recommends a markup of 30 percent on all

products purchased at distributor price. The distributors
income is based on a monthly accumulation of points. All
products are assigned two sets of number: bonus points (BP),
which normally remains a constant number, and business
volume (BV), which is a monetary value that changes if prices
change. In general, the value of the BV equals the distributor
price (DP), excluding value-added tax (VAT).
The total BP of all the products a distributor buys and sells
during the course of a month will determine the distributors
performance discount percentage. The monthly performance
discount, but also on the business volume generated by any
distributors who have been sponsored by him or her.
The monthly performance of discount is added to the 30
percent markup, the maximum being 21 percent, equivalent to
10,000 BP per month. Distributors can also earn a further 1
percent or 4 percent bonus if they meet certain criteria. Cash
awards from $3000 to $20,000 can be earned when reaching the
higher titles in the marketing plan.
If a customer is not satisfied, the products are replaced or
refunded through the 100% customer satisfaction guarantee.
The available credit per order is $500. all outstanding payments
must be made before a next order is placed, or within 30 days
from the date of invoice. Payments cant be made at the
Oriflame head office, at some Oriflame service centers, at the
post office, or by bank transfer. Orders can be made at service
centers or mail or fax by using a distributor order form.
Monthly BP
10,000+
6,600-9,900
4,000-6,599
2,400-3,999
1,200-2,399
600-1,199
200-599
Monthly Performance
Discount Percentage of BV
21%
18%
15%
12%
9%
6%
3%
139
UNIT IV
GLOBAL MARKETING STRATEGY
LESSON 14:
UNIT 5
ENTRY AND EXPANSION STRATEGIES:
MARKETING AND SOURCING
The objective of this lesson is to understand the

following:
1. Decision criteria for international Business
2. Entry and expansion decision model
3. Exporting
4. Additional international alter national
5. Marketing strategy alternatives
When a company decides to go international, it faces a host of
decisions. Which countries should it enter and in what sequence? What criteria should be used to select entry markets:
proximity, stage of development, geographic region, cultural
and linguistic criteria, the competitive situation, or other factors?
How should it enter new markets? Directly via green fields
expansion, directly through acquisition of a local established
company, or indirectly using agents or representatives? Should
the new market be supplied with imported product from the
home or third countries or locally manufactured product? This
chapter addresses these questions and examines various
strategies that a company can utilize to go international
starting with exporting and advancing to foreign direct investment. These options are not mutually exclusive and may be
used concurrently.
The automobile industry provides a good example. In which
countries can a company obtain parts necessary for production?
In which countries and through which channels should the
automobiles be sold? Should production be relocated or
expanded to another country?
Manufacturers can achieve competitive advantage by shifting
production among different sites. It is little wonder that most
of the worlds leading automakers have set their sights on
Brazil and China. Both countries are big emerging markets; they
boast the biggest populations in their respective regions as well
as rapidly growing economies. Nearly 2 million vehicles were
sold in Brazil in 1996, and analysts forecast sales of
Big Emerging Auto Markets

Like Brazil, China holds huge opportunities for auto: makers. The total
vehicle market is expected to increase If from.1.6 million units in 1996
to 2.7 million by the turn of the century Volkswagen (VW) is currently
the biggest player in the China market; the 200,000 Santana passenger
cars produced each year by VWs joint venture with . Shanghai
Automotive Industry Corporation (SAIC) represent half of the market.
VW also produces its Jetta ( model in Changchun in partnership with
First Auto Works _ (FAW). Chryslers joint venture with Beijing Auto
Works has been producing Jeep Cherokees since the early 19805. ( New
investment plans are announced on a regular basis for example, GM
launched a joint venture with SAIC in 1997 valued at more than $1.5
billion. The venture is slated to produce Buick sedans for government
officials.
140
Despite the general euphoria about China, a variety of obstacles and

pitfalls await those hoping to develop I the market. The Chinese
government does not permit foreign companies to have majority stakes in
joint ventures and reserves the right to set production levels and prices. The
rhetoric from government officials can send chills down a car executives
spine. Recently, for example, an FAW official told a state newspaper,
We shouldnt be the appendage of the foreign automobile industry
anymore. What the South Koreans and Japanese could achieve, so the
Chinese can also manage. The business landscape is littered with stalled
projects; in 1997, for example, Peugeot was forced to abandon a joint
venture in Guangzhou; Mercedes-Benz considered canceling its planned
$1 billion joint venture with Nanfang South China Motor Corporation to
build minivans and engines. The deal had been a triumph for Mercedes,
which had bested both Chrysler and GM for the contract in 1995. Two
years later, however, the venture was at a standstill, I and Jurgen
Hubbert, a member of the Daimle Benz, board, had some sobering
advice for anyone considering: business in China: Whenever youre
finalizing a project, you are really just starting.
The competitive environment in Brazil is also uniquely challenging. For
example, in 1987, Ford and VW established a joint venture called
Autolatina. Internal rivalries bogged down that venture; by 1994, the
partnership was dissolved. Meanwhile, as Ford prepared to build its own
capacity, it supplied the market with imports. In 1996, however, the
Brazilian government suddenly boosted tariffs on car imports to 70 percent
from. 20 percent. Ford had no choice but to supply Brazilian dealers with
a mixed bag of vehicles from a variety of sources-a move that alienated
the dealers and tarnished Fords reputation. Even though the new Fiesta is
a much needed hit with car buyers, production delays allowed Fiat to
reach the market first with its Polio.
3 million units by 2000. Brazil represents Volkswagen AGs

largest market outside of Germany; VW of Brazil operates
seven plants, including a lean-production truck plant in
Resende, that produces nearly half a million vehicles annually.
Fiat, Brazils number-two producer, has spent $1 billion to
increase production; its rugged new Palio world car has been a
hot seller since its introduction in 1996. American producers are
also in the market. General Motors (GM) produces Blazers in
Sao Jose dos Campos; GM has earmarked $1.25 billion for
three new plants including a $600 million state-of-the-art small
car works in the southern Brazil city of Rio Grande do SuI.
Ford has invested more than $1 billion in a plant in Sao
Bernardo do Campo that produces Fiesta subcompacts and the
new Kaminicar. Chrysler has a production facility in Campo
Largo and also participates in a small-displacement engine
manufacturing joint venture with BMW. Surprisingly, Japans
automakers have been relatively slow to develop the market;
Toyota is a minor player, and Hondas $100 million plant
produces only 15,000 Civics each year.
The presence of VW, Fiat, GM, and other automakers in Brazil
illustrates the fact that every firm, at various points in its history,
faces a broad range of strategy alternatives. In far too many
Some companies are making the decision to go global for the

first time; other companies seek to expand their share of world
markets. Companies in either situation face the same basic
sourcing issues introduced in the previous chapter. Companies
must also address issues of marketing and value chain management before deciding to enter or expand their share of global
markets by means of licensing, joint ventures or minority
ownership, and majority or 100 percent ownership. These
decisions are affected by issues of investment and control as
well as a companys attitude toward risk.
Decision Criteria for International

Business
Before doing any business internationally through sourcing,
exporting, investing, or a combination of these strategies, the
company must look at conditions in the potential country to
analyze what the advantages, disadvantages, and costs will be
and whether it is worth the risk.
Political Risk
Political risk, or the risk of a change in government policy that
would adversely impact a companys ability to operate effectively
and profitably, is a deterrent to expanding internationally. The
lower the level of political risk, the more likely it is that a
company will invest in a country or market. 1ne difficulty of
assessing political risk is inversely proportional to a countrys
stage of economic development: All other things being equal
the less developed a country, the more difficult it is to predict
political risk. The political risk of the Triad countries, for
example, is quite limited as compared to a less developed
preindustrial country in Africa, Latin America, or Asia. In
general, there is an inverse-relationship between political risk
and the stage of development of a country. The higher the level
of income per capita, the lower the level of political risk.
McDonalds in war-torn Belgrade, Yugoslavia, had to change its
marketing strategy to survive and minimize its American
origins, which were the basis of physical attacks. A Serbian cap
was added to the Golden Arch logo, the basement was turned
into an air-raid shelter, prices were lowered, and free hamburgers
were distributed to anti NATO demonstrators. Needless to say,
McDonalds corporate headquarters had little to say about these
tactics but local management is quite happy and proud of their
achievement.1
Market Access
A key factor in locating production facilities is market access. If a
country or a region limits market access because of local content
laws, balance-of-payments problems, or any other reason, it
may be necessary to establish a production facility within the
country itself. The Japanese automobile companies invested in
U.S. plant capacity because of concerns about market access. By
producing cars in the United States they have a source of supply
that is not exposed to the threat of tariff or non tariff barriers.

In the 1950sand 1960s, U.S. companies created production
capacity abroad to ensure continued access to markets that had
been established with supply exported from U.S. plants.
Factor Costs and Conditions

Factor costs are land, labor, and capital costs. Labor includes the
cost of workers at every level: manufacturing and production,
professional and technical, and management. Basic manufacturing direct labor costs today range from $0.50 per hour in the
typical developed country (LDC) to $6 to $20 or more per hour
in the typical developed country. Note that, compared to the
United States, manufacturing compensation costs are higher in
Western European countries despite a recent decline, and Asias
emerging countries have increased relative to the United States
since 1980.
German hourly compensation costs for production workers in
manufacturing are 155 percent of those in the United States,
whereas those in Mexico are only 10 percent of those in the
United States. For Volkswagen (VW),if wages were the sole
criteria for making a decision, the wage differential between
Mexico and Germany would dictate a Mexican manufacturing
facility that builds Golf and Jetta models destined for the
United States. Do lower wage rates demand that a company
relocate its manufacturing to the low-wage country? Hardly. In
Germany, VW Chairman Ferdinand Piech is trying to improve
his companys competitiveness by convincing unions to allow
flexible work schedules. For example, during peak demand,
employees would work six-day weeks; when demand slows,
factories would produce cars only three days per week.
Moreover, wages are only one of the costs of production and,
many times, a small percentage of the total cost associated with
the product. Many other considerations enter into the sourcing
decision, such as managements aspirations. For example, SMH
assembles all of the watches it sells, and it builds most of the
components for the watches it assembles. It manufactures in
Switzerland, the highest-income country in the world. SMHs
Hayek decided that he wanted to manufacture in Switzerland in
spite of the fact that a secretary in Switzerland makes more
money than a chief engineer in Thailand: He did this by making
a commitment to drive wage costs down to less than 10 percent
of total costs. At this level, wages rates are no longer a significant factor in competitiveness. As Hayek puts it, he does not
care if his competitors workers work for free! He will still win in
a competitive marketplace because his value is so much greater?
The other factors of production are land, materials, and capital
The cost of these factors depends on their availability and
relative abundance. Often, the differences in factor costs will
offset each other so that, on balance, companies have a level
field in the competitive arena. For example, the United States
has abundant land and Germany has abundant capital These
advantages partially offset each other. When this is the case, the
critical factor is management, professional, and worker team
effectiveness.
World factor costs that affect manufacturing an be divided into
three tiers. The first tier consists of the industrialized countries
where factor costs are tending to equalize. The second tier
consists of the industrializing countries-for example, Singapore
141
cases, companies fail to appreciate the range of alternatives open

to them and, therefore, employ only one strategyoften to
their grave disadvantage. The same companies also fail to
consider the strategy alternatives open to their competitors and
thereby set themselves up to be victims of the dreaded
Titanic syndrome-the thud in the night that comes without
warning and sinks the ship.
and other Pacific Rim countries-that offer significant factor costs

savings as well as an increasingly developed infrastructure and
political stability, making them extremely attractive manufacturing locations. The third tier includes Russia and other countries
that have not yet become significant locations for manufacturing
activity. Third-tier countries present the combination of lower
factor costs (especially wages) offset by limited infrastructure
development and greater political uncertainty.
The application of advanced computer controls and other new
manufacturing technologies has reduced the proportion of
labor relative to capital for many businesses. In formulating a
sourcing strategy, company managers and executives should also
recognize the declining importance of direct manufacturing
labor as a percentage of total product cost. The most advanced
global companies are no longer blindly chasing cheap labor
manufacturing locations because direct labor may be a very small
percentage of total. As a result, it may not be worthwhile to
incur the costs and risks of establishing a manufacturing activity
in a distant location. The experience of the Arrow Shirt
Company also illustrates several issues relating to factor costs.
During the 1980s, Arrow sourced 15 percent of its dress shirts
from the Far East at a cost savings of $15 per dozen compared
to U.S.-manufactured shirts. Arrow decided to phase out
imports after spending $15 million to automate its U.S. plants.
Productivity increased 25 percent and Arrow is no longer at the
mercy of a 12-month lead time between ordering and delivery;
U.S.-sourced shirts can be ordered a mere three months in
advance-a critical issue in the fashion industry. Interestingly, the
Arrow experience illustrates how the decision to source at home
rather than abroad does not automatically defuse the political
issue of exporting jobs: After automating, Arrow laid off 400
U.S. workers and closed four factories.
Many companies have been chagrined to discover that todays
cheap factor costs can disappear as the law of supply and
demand drives up wages and land prices. Shirt makers like
Arrow began sourcing in Japan in the 1950s. As wages and real
estate costs increased, production was shifted to Hong Kong
and then to Taiwan and Korea. During the 1970s and 1980s,
production kept shifting to China, Indonesia, Thailand,
Malaysia, Bangladesh, and Singapore. In recent years, shirt
production has shifted from the Far East to Costa Rica, the
Dominican Republic, Guatemala, Honduras, and Puerto Rico.
In addi60n to low wages, these countries offer tax incentives
under the 1983 Caribbean Basin Initiative agreement .4
Shipping Considerations
In general, the greater the distance between the product source
and the target market, the greater the time delay for delivery and
the higher the transportation cost. However, innovation and
new transportation technologies are cutting both time and
dollar costs. To facilitate global delivery, transportation
companies such as CSX Corporation are forming alliances and
becoming an important part of industry value systems.
Manufacturers can take advantage of inter modal services that
allow containers to be transferred between rail, boat, air, and
truck carriers. Today, transportation expenses for U.S. exports!
and imports represent approximately 5 percent of total costs. In
Europe, the advent of the single market means fewer border
142
controls, which greatly speeds up delivery times and lowers

costs.
Acer, a Taiwanese company and the seventh largest producer of
computers, practices what it calls the fast-food business
model. Like a Big Mac at McDonalds, the final product is
assembled just before the purchase. Acer divides computer
components into two types, perishable and nonperishable. The
nonperishable components such as housings, keyboards, and
floppy disks are manufactured in Taiwan and shipped by sea to
their 39 regional business units (RBUs). Perishables, such as
drives, which are constantly being upgraded, are manufactured
as needed and air shipped to the RBUs where the final product
is assembled. Using this logistics strategy eliminates the
minimum one- to two-month time lag for shipping goods by
sea and costly inventory expense and provides consumers with
the latest product.
Country Infrastructure
In order to present an attractive setting for a manufacturing
operation, it is important that the countrys infrastructure be
sufficiently developed to support a manufacturing operation.
The required infrastructure will vary from company to company,
but minimally it will include power, transportation and roads,
communications, service and component suppliers, a labor
pool, civil order, and effective governance. In addition, a country
must offer reliable access to foreign exchange for the purchase
of necessary material and components from abroad as well as a
physically secure setting where work can be done and product
can be shipped to customers.
A country may have cheap labor, but does it have the necessary
supporting services or infrastructure to support a manufacturing activity? Many developing countries offer these conditions,
yet there are also many other countries that do not, such as
Lebanon, Uganda, and El Salvador. One of the challenges of
doing business in the Russian or Chinese market is an infrastructure that is woefully inadequate to handle the increased
volume of shipments.
Foreign Exchange
In deciding where to locate a manufacturing activity, the cost of
production supplied by a country source will be determined in
part by the prevailing foreign exchange rate for the countrys
currency. Exchange rates are so volatile today that many
companies pursue global sourcing strategies as a way of limiting
exchange-related risk. At any point in time, what has been an
attractive location for production may become much less
attractive due to exchange rate fluctuation. For example, the
financial crisis in Russia in 1998 saw the ruble drop from 6 to
the U.S.dollar to 25 rubles to the dollar. The prudent company
will incorporate exchange volatility into its planning assumptions and be prepared to prosper under a variety of exchange
rate relationships.
The dramatic shifts in price levels of commodities and currencies are a major characteristic of the world economy today. Such
volatility argues for a sourcing strategy that provides alternative
country options for supplying markets. Thus, if the dollar, the
yen, or the mark becomes seriously over valued, a company with
detailed, it is best to directly consult the trade bureaus of

countries that are being considered.
Creating a Product-market Profile

The first step in choosing export markets is to establish the key
factors influencing sales and profitability of the product in
question. If a company is getting started for the first time in
exporting, its product-market profile will most likely be based
on its experience in the home market, which may or may not be
relevant to the individual export markets being considered. The
basic questions to be answered can be summarized as the nine
Ws:
1. Who buys our product?
2. Who does not buy our product?
3. What need or function does our product serve?
4. What problem does our product solve?
5. What are customers currently buying to satisfy the need and/
or solve the problem for which our product is targeted?
6. What price are they paying for the products they are currently
buying?
1. When is our product purchased?
8. Where is our product purchased?
9. Why is our product purchased?
Any company must answer these critical questions if it is going
to be successful in export markets. Each answer provides an
input into decisions concerning the four Ps. Remember, the
general rule in marketing is that, if a company wants to
penetrate an existing market, it must offer more value than its
competitors-better benefits, lower prices, or both. This applies
to export marketing as well as marketing in the home country.
3. Shipping Costs and Time
Market Selection Criteria

Once a company has created a product-market profile, the next
step in choosing an export market is to appraise each possible
market. Six criteria should be assessed: (1) market potential, (2)
market access, (3) shipping costs, (4) potential competition, (5)
service requirements, and (6) product fit.
1. Market Potential
What is the basic market potential for the product? To answer

this question, secondary information is a good place to start.
Valuable sources were discussed in Chapter 6, Global Marketing Information Systems and Research. In the United States,
the federal government has numerous publications available,
compiled by the Central Intelligence Agency (CIA) and various
other agencies and organizations.
The cost of assembling sales literature, catalogs, and technical
bulletins should also be considered in comparison to market
potential and profitability. This cost is particularly important in
selling highly technical products.
2. Market Access
This aspect of market selection concerns the entire set of

national controls that applies to imported merchandise and any
restrictions that the home-country government might have. It
includes such items as export license, import duties, import
restrictions or quotas, foreign exchange regulations, and
preference arrangements. Because this information is quite
Preparation and shipping costs can affect the market potential

for a product. if a similar product is already being manufactured
in the target market, shipping costs may render the imported
product uncompetitive. If it takes months for the product to
reach the target market and the product competes in a rapidly
changing category such as computers, alternative transportation
strategies should be considered. It is important to investigate
alternative modes of shipping as well as ways to differentiate a
product to offset the price disadvantage.
4. Potential Competition
Using a countrys commercial representatives abroad can also be

valuable. When contacting country representatives abroad, it is
important to provide as much specific information as possible.
If a manufacturer simply says, I make lawn mowers. Is there a
market for them in your territory?, the representative cannot
provide much helpful information. If, on the other hand, the
manufacturer provides the following information: (1) sizes of
lawn mowers-manufactured, (2) descriptive brochures indicating
features and advantages, and (3) estimated cost insurance freight
(C.I.E) and retail price in the target market, then the commercial
representative could provide a very useful report based on a
comparison of the companys product with market needs and
offerings.
5. Service Requirements
If service is required for the product, can it be delivered at a cost

that is consistent with the size of the market?
6. Product Fit
With information on market potential, cost of access to the

market, and local competition, the final step is to decide how
well a companys product fits the market in question. In general,
a product fits a market if it satisfies the criteria discussed
previously and is profitable.
Visits to The Potential Market

After the research effort has zeroed in on potential markets,
there is no substitute for a personal visit to size up the market
firsthand and begin the development of an actual export
marketing plan. A market visit should do several things. First, it
should confirm (or contradict) assumptions regarding market
potential. A second major purpose is to gather additional data
necessary to reach the final go/no-go decision.
One way to visit a potential market if through a trade. show.
Hundreds. of trade fairs-usually organized around a product, a
group of products, or activity-are held in major markets. For
example, U.S. trade centers alone hold 60 product shows
annually in major cities abroad.
By attending trade shows and missions, company representatives can conduct market assessment, develop or expand
markets, find distributors or agents, and locate potential end
users (i.e., engage in direct selling). Perhaps most important, by
attending a trade show, it is possible to learn a great deal about
competitors technology, pricing, and the depth of their market
penetration. For example, while walking around the exhibit hall,
143
production capacity in other locations can achieve competitive

advantage by shifting production among different sites.
one can gather literature about products that often contains

strategically useful technological information. Over all, company
managers or sales personnel should be able to get a good
general impression of competitors in the marketplace while at
the same time trying to sell their own companys product.
Entry and Expansion Decision Model

The first issue that an expanding firm must address is whether
to export or produce locally. In many emerging markets, this
issue is resolved by a national policy that requires local production. Any company wishing to enter the market of such a
country must source locally. In high-income countries, local
production is normally not required, so the choice is up to the
company.
Assuming that the choice is up to the company, the trade-offs
for local versus regional or global production are cost, quality,
delivery, and customer value. Costs include labor, materials,
capital, land, and transportation. Scale economies are an
important factor in determining cost: For every product, there is
some minimum volume required to justify the investment
required to establish a production site. If the product is heavy,
transportation costs are greater and provide an incentive to
locate production closer to the Customer. Offsetting transportation costs are scale economies that result from spreading fixed
costs over a greater production volume.
International Market Entry and Expansion Decision

Model
1. Sourcing: Home, third, or host country?
Cost, market access, country of origin factors
2. In country or in-region marketing organization? Cost,
market impact assessment. If choice is to establish own
organization, must decide who to appoint to key positions
3. Selection, training, and motivation of local distributors and
agents
4. Marketing mix strategy: Goals and objectives in sales,
earnings, and share of market positioning; marketing mix
strategy
5. Strategy implementation
If a company decides to source locally, it has a choice of buying,
building, or renting its own manufacturing plant or signing a
local contract manufacturer. A contract manufacturer may be in a
position to add production to an existing plant with less
investment than the manufacturer would require to achieve the
same volume of production. If this is the case, the contract
manufacturer is in a position to quote an attractive price.
Exporting
In Germany, exporting is a way of life for the Mittlestand, 2.5
million small and mid sized companies that generate two thirds
of Germanys gross national product (GNP) and account for 30
percent of exports. For companies such as steel maker J. N.
Eberle; Trumpf, a machine tool manufacturer; and J.
Eberspacher, which makes auto exhaust systems, exports
account for as much as 40 percent of sales. For other companies
the share is even higher. For example, Mattah Hohner has 85
percent of the world mouth organ and accordion market.
Mittelstand owner-managers target global niche markets and
prosper by focusing on quality, and innovation, and investing
144
heavily in research and development. For example, the chief

executive of G. W. Barth, a company that manufactures cocoabean roasting machines, invested nearly $2 million in infrared
technology that reduced temperature variances. The companys
global market share stands at 70 percent-a threefold increase in a
10-year period-as Ghirardelli Chocolate, Hershey Foods, and
other companies have snapped up Barths roasters. At ABM
Baumtiller, a.$4O million manufacturer of motors and other
components for cranes, a major investment in technology
allows the company to tailor products to customer needs by
means of flexible manufacturing. New automated production
equipment was installed-at a cost of $20 million-that allows
changeover to different products in a matter of seconds. The
story is repeated throughout Germany; as a result, in industry
after industry, the Mittelstand are world-class exporters.
The success of the Mittelstand serves as a reminder of the
impact exporting can have on a countrys economy. It also
demonstrates the-difference between export selling and export
marketing. Export selling does not involve tailoring the
product, the price, or the promotional material to suit the
requirements of global markets. The only marketing mix
element that differs is the place-that is, the country where the
product is sold. This selling approach may work for some
products or services; for unique products with little or no
international competition, such an approach is possible.
Similarly, companies new to exporting may initially experience
success with selling. Even today, the managerial mind-set in
many companies still favors export selling. However, as
companies mature in the global marketplace or as new competitors enter the picture, it becomes necessary to engage in export
marketing.
Germanys Mittelstand
Part of the Mittelstands success can also be attributed to Germanys
export infrastructure. Diplomats, bankers, and other officials around the
world are constantly on the lookout for opportunities; information about
promising deals is conveyed back to Germany. Meanwhile, representatives
from. trade associations, export trading companies, and banks assist
exporters with documentation and other issues. Some banks have special
Mittelstand departments to provide export financing and assist companies
in obtaining insurance.The current business environment both outside and
inside Germany is presenting difficult challenges to the Mittelstand. In
response to the 1992-1993 recession in Europe, several countries-notably
Great Britain, Italy, and Sweden-devalued their currencies. This move
brought down prices on exports from those countries and made Germanys
exports correspondingly less price W competitive. Meanwhile, German
unions have won wage hikes for workers, and the marks continued strength
puts additional upward pressure on export prices. Mittelstand owners are
taking steps to ensure their own survival, but a lack of organization has
limited their political influence in Bonn. Germanys banks have tightened
loan terms, resulting in a credit crunch. Many companies are going public
to raise capital, but venture capital can be hard to find. Professional
managers are being hired to assets owners some companies may even move
production out of Germany. Melitta, for example, began assembling home
coffeemakers in Portugal in 1995. For companies in which money is tight,
licensing production is an economical alternative.
Exporting is just one strategy for a company that has decided to

go international. Other options are licensing, franchising, joint
6. After this success, the firm pursues country- or regionfocused marketing based on certain criteria (e.g., all countries
where English is spoken, all countries where it is not
necessary to transport by water).
7. The firm evaluates global market potential before screening
for the best target markets to include in its marketing strategy
and plan. All markets-domestic and international-are
regarded as equally worthy of consideration. At this point,
other environmental factors may come into play and the
marketer might want to explore joint ventures or foreign
direct investment opportunities to maximize international
opportunities.
Exporting Decision Criteria

Export marketing targets the customer in the context of the
total market environment. The export marketer does not take
the domestic product as is and simply sell it to international
customers. To the export marketer, the product offered in the
home market is a starting point. It is modified as needed to
meet the preferences of international target markets. Mittelstand
companies such as ABM Baumiiller exemplify this approach.
Similarly, the export marketer sets prices to fit the marketing
strategy and does not merely extend home-coup-try pricing to
the target market. Charges incurred in export preparation,
transportation, and financing must be taken into account in
determining prices. Finally, the export marketer also adjusts
strategies and plans for communications and distribution to fit
the market. In other words, effective communication about
product features or uses to buyers in export markets may
require creating brochures with different copy, photographs, or
artwork. As the vice president of sales and marketing of one
manufacturer noted, We have to approach the international
market with marketing literature as opposed to sales literature.
Export marketing is the integrated marketing of goods and
services that are destined for customers in international markets.
Export marketing requires.
1. An understanding of the target market environment
2. The use of marketing research and the identification of
market potential
3. Decisions concerning product design, pricing, distribution
and channels, advertising, and communications-the
marketing mix
Research has shown that exporting, in and of itself, is essentially a developmental process that can be divided into the
following distinct stages.
1. The firm is unwilling to export; it will not even fill an
unsolicited export order.
This may be due to perceived lack of time (too busy to fill the
order) or to apathy or ignorance.
2. The firm fills unsolicited export orders but does not pursue
unsolicited orders.
Such a firm would be an export seller.
3. The firm explores the feasibility of exporting (this stage may
bypass stage 2).
4. The firm exports to one or more markets on a trial basis.
5. The firm is an experienced exporter to one or more markets.
100%
Ownership & Strategic

Alliances
Ownership
Equity Joint Venture
Licensing
Franchising
0
0
Control
Management
Contract
100%
The probability that a firm will advance from one stage to the
next depends on different factors. Moving from stage 2 to stage
3 depends on managements attitude toward the attractiveness
of exporting and its confidence in the firms ability to compete
internationally. However, commitment is the most important
aspect of a companys international orientation. Before a firm
can reach stage 4, it must receive and respond to unsolicited
export orders. The quality and dynamism of management are
important factors that can lead to such orders. Success in stage 4
can lead a firm to stages 5 and 6. A company that reaches stage 7
is a mature geocentric enterprise that is relating global resources
to global Opportunity. To reach this stage requires management
with vision and commitment.
One recent study noted that export procedural expertise and
sufficient corporate resources are required for successful
exporting. An interesting finding was that even the most
experienced exporters express a lack of confidence in their
knowledge about shipping arrangements, payment procedures,
and regulations. The study also showed that, although
profitability is an important expected benefit of exporting,
other advantages include increased flexibility and resiliency and
improved ability to deal with sales fluctuations in the home
market. Whereas research generally supports the proposition
that the probability of being an exporter increases with firm
size, it is less clear that export intensity-the ratio of export sales
to total sales-is positively correlated with firm size. Table
summarizes some of the export-related problems that a
company typically faces.
145
ventures, and foreign direct investment when it is an option for

foreign companies (see Figure 8-1). In global marketing, the
issue of customer value is inextricably tied to the sourcing
decision. If customers are nation elastic, they may put a positive
value on the feature made in the home country. Such preferences must be identified using market research and factored in
to solve for value in the equation. Global companies succeed by
convincing customers in world markets that it is their brand
that signifies value and quality, not the country or origin. A
successful global company can source its product from any
location: The customers trust the brand and dont care about
the country of origin.
Logistics
Servicing Exports
1. Arranging transportation
12. Providing parts availability
2. Transport rate determination
13. Providing repair service
3. Handling documentation
14. Providing technical advice
4. Obtaining financial information
15. Providing warehousing
5. Distribution coordination
Sales Promotion
6. Packaging
16. Advertising
7. Obtaining insurance
17. Sales effort
Legal Procedure
18. Marketing information
8. Government red tape
Foreign Market Intelligence
9. Product liability
19. Locating markets
10. Licensing
20. Trade restrictions
11. Customer/duty
21. Competition overseas
The decision to engage in export marketing should be based on

a number of criteria, including potential market size, competitor
activities, and overall marketing mix issues such as price,
distribution, and promotion. The next step is the choice of one
or more export markets to target. The selection process should
begin with a product market profile or plan.
Market data are also available from export census documents
compiled by the Department of Commerce on the basis of
Shippers Export Declarations (known as exdecs or SEDs,
these must be filled out for any export valued at $1,500 or
more). Another important source of market data is the Foreign
Commercial Service Web sites for the individual countries also
provide much valuable information and contacts.
Whatever source of information is used, the ultimate goal is to
determine the major factors affecting demand for a product
Then, using the tools and techniques described in Chapter 7 on
targeting and segmentation, and available data, it is possible to
arrive at a rough estimate of total potential demand for the
product in one or more particular international markets:
National income- is often a good starting indicator on which to
base demand estimates. A caveat, however, is income distribution within the country. India, with a population of 1 billion
people, shows a per capita GNP of $424; however, 10 percent
of the population or 100 million people are considered middle
class and can afford most consumer goods. A market of 100
million customers should not be ignored. Additional statistical
measures will considerably sharpen the estimate of total
demand for example, when estimating the demand (or
automobile-tires, data on the total number of cars registered in
any country in the world should be easy to obtain. These data,
combined with data on gasoline consumption, should permit
estimation of the total mileage driven in the target market.
When this figure is combined with tire life predictions, it is a
straightforward matter to calculate demand estimates.
Organising for Exporting

Manufacturers interested in export marketing have two broad
considerations: organizing in the home country and organizing
146
in the target market country. The issues and approaches that

relate to organizing are discussed next
Organizing in the Manufacturers Country

Home-country issues involve deciding whether to assign export
responsibility inside the company or work with an external
organization specializing in a product or geographic area.
In-House Export Organization
Most companies handle export operations within their own
organization. Depending on the companys size, responsibilities
may be incorporated into an employees domestic job description. Alternatively, these responsibilities may be handled as part
of a separate division or organizational structure.
The possible arrangements for handling exports include the
following:
1. As a part-time activity performed by domestic employees
2. Through an export partner affiliated with the domestic
marketing structure that takes possession of the goods
before they leave the country
3. Through an export department that is independent of the
domestic marketing structure
4. Through an export department within an international
division
5. For multidivisional companies, each of the foregoing
possibilities exists within each division
A company that assigns a sufficiently high priority to its export
business will establish an in-house organization. It then faces
the question of how to organize effectively. This depends on
two things: the companys appraisal of the opportunities in
export marketing and its strategy for allocating resources to
markets on a global basis. It may be Possible for a company to
make export responsibility part of a domestic employees job
description. The advantage of this arrangement is obvious: It is
a low-cost arrangement requiring no additional personnel.
However this approach can work only under two conditions.
First, the domestic employee assigned to the task must be
thoroughly competent in terms of product/customer knowledge. Second, that competence must be applicable to the target
international market(s). The key issue underlying the second
condition is the extent to which the target export market is
different from the domestic market. If customer circumstances
and characteristics are similar, the requirements for specialized
regional knowledge are reduced.
External independent Export Organizations
If a company chooses not to perform its own marketing and
promotion in-house, there are numerous export services
providers from which to choose. These include export trading
companies (ETCs), export management companies, (EMCs),
export merchants, export brokers, combination export managers, manufacturers export representatives or commission
agents, and export distributors. A typical EMC acts as the
export department for several unrelated companies that lack
export experience. EMCs perform a variety of services, including marketing research, channel selection, financing and
shipping arrangements, and documentation. According to one
recent survey of U.S.-based EMCs, the most important
Organizing in the Market Country

In addition to deciding whether to rely on in-house or external
export specialists in the home country, a company must also
make arrangements to distribute the product in the target
market country. The basic decision that every exporting organization faces is: To what extent do we rely on direct market
representation as opposed to representation by independent
intermediaries?
its distribution system capacity and thereby increases the

revenues generated by the system. The manufacturer using the
piggyback arrangement does so at a cost that is much lower I
than that required for any direct arrangement. Successful
piggyback marketing requires that the combined product lines
be complementary. They must appeal to the same customer,
and they must not be competitive with each other. if these
requirements are met, the piggyback arrangement can be a very
effective way of fully utilizing an interlamination channel system
to the advantage of both parties. A case in point is the Kauai
Kookiel Kori1pany, whose owners observed Japanese tourists
stocking up on cookies before returning home from Hawaii.
Now the cookies are sold in a piggyback arrangement with)
travel agencies in Japan. The cookies can be :purchased from a
catalog after travelers have returned home, thus reducing the
amount of baggage.
Direct Representation
There are, two major advantages to direct representation by a
companys own employees in a market: control and communications. Direct representation allows decisions concerning
program development, resource allocation, and price changes to
be implemented unilaterally. Moreover, when a product is not
yet established in a market, special efforts are necessary to achieve
sales. The advantage of direct representation is that these special
efforts are ensured by the marketers investment. The other
great advantage to direct representation is that the possibilities
for feedback and information from the market are much greater.
This information can vastly improve export marketing decisions
concerning Product, price, communications, and distribution.
Direct representation does not mean that the exporter is selling
directly to the consumer or customer. In most cases, direct
representation involves selling to wholesalers or retailers. For
example, the major automobile exporters in Germany and
Japan rely on direct representation in the U.S. market in the
form of their distributing agencies, which are owned and
controlled by the manufacturing organization. The distributing
agencies sell products to franchised dealers.
Independent Representation
In smaller markets, it is usually not feasible to establish direct
representation because the low sales volume does not justify the
cost. Even in larger markets, a small manufacturer usually lacks
adequate sales volume to justify the cost of direct representation; therefore, use of an independent distributor is an effective
method of sales distribution. Finding good distributors can be
the key to export success.
Indirect or independent representation generally handles
numerous other products for different Companies. In many
cases, there is simply not enough incentive for independents to
invest significant time and money in representing a product.
Piggyback Marketing
Piggyback marketing is an innovation in international distribution that has received much attention in recent years. This is an
arrangement whereby one manufacturer obtains distribution of
products through anothers distribution channels. Both parties
can benefit: The active distribution partner makes fuller use of
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activities for export success are gathering marketing information,

communicating with markets, setting prices, and ensuring parts
availability. The same survey ranked export activities in terms of
degree of difficulty; analyzing political risk, sales force management, setting pricing, and obtaining financial information were
deemed most difficult to accomplish. One of the studys
conclusions was that the U.S. government should do a better
job of helping EMCs and their clients analyze the political risk
associated with foreign markets. 8
UNIT 3
LESSON 15:
PLANNING PROCESS & ENTRY STRATEGIES
Planning for Global Markets
Planning is a systematized way of relating to the future. It is an
attempt to manage the effects of external, uncontrollable factors
on the firms strengths, weaknesses, objectives, and goals to
attain a desired end. Further, it is a commitment of resources to
a country market to achieve specific goals. In other words,
planning is the job of making things happen that may not
otherwise occur.
Is there a difference between planning for a domestic company
and for an international company? The principles of planning
are not in themselves different, but the intricacies of the
operating environments of the multinational corporation (i.e.,
host country, home, and corporate environments), its organizational structure, and the task of controlling a multicountry
operation create differences in the complexity and process of
international planning.
Planning allows for rapid growth of the international function,
changing markets, increasing competition, and the ever-varying
challenges of different national markets. The plan must blend
the changing parameters of external country environments with
corporate objectives and capabilities to develop a sound,
workable marketing program. A strategic plan commits
corporate resources to products and markets to increase
competitiveness and profits.
Planning relates to the formulation of goals and methods of
accomplishing them, so it is both a process and a philosophy.
Structurally, planning may be viewed as corporate, strategic,
and/or tactical. International corporate planning is essentially
long-term, incorporating generalized goals for the enterprise as a
whole. Strategic planning is conducted at the highest levels of
management and deals with products, capital, and research, and
long- and short-term goals of the company. Tactical planning,
or market planning, pertains to specific actions and to the
allocation of resources used to implement strategic planning
goals in specific markets. Tactical plans are made at the local level
and address marketing and advertising questions.
A major advantage to a multinational corporation (MNC)
involved in planning is the discipline imposed by the process.
An international marketer who has gone through the planning
process has a framework for analyzing marketing problems and
opportunities and a basis for coordinating information from
different country markets. The process of planning may be as
important as the plan itself because it forces decision makers to
examine all factors that affect the success of a marketing
program and involves those who will be responsible for its
implementation. Another key to successful planning is evaluating company objectives, including managements commitment
and philosophical orientation to international business.
148
Company Objectives and Resources

Evaluation of a companys objectives and resources is crucial in
all stages of planning for international operations. Each new
market can require a complete evaluation, including existing
commitments, relative to the parent companys objectives and
resources. As markets grow increasingly competitive, as
companies find new opportunities, and as the cost of entering
foreign markets increases, companies need such planning.
Defining objectives clarifies the orientation of the domestic and
international divisions, permitting consistent policies. The lack
of well-defined objectives has found companies rushing into
promising foreign markets only to find activities that conflict
with or detract from the companies primary objectives.
Foreign market opportunities do not always parallel corporate
objectives; it may be necessary to change the objectives, alter the
scale of international plans, or abandon them. One market may
offer immediate profit but have a poor long-run outlook, while
another may offer the reverse. Only when corporate objectives
are clear can such differences be reconciled effectively.
International Commitment
The planning approach taken by an international firm affects the
degree of internationalization to which management is
philosophically committed. Such commitment affects the
specific international strategies and decisions of the firm. After
company objectives have been identified, management needs to
determine whether it is prepared to make the level of commitment required for successful international
operations-commitment in terms of dollars to be invested,
personnel for managing the international organization, and
determination to stay in the market long enough to realize a
return on these investments.
The degree of commitment to an international marketing cause
reflects the extent of a companys involvement. A company
uncertain of its prospects is likely to enter a market timidly,
using inefficient marketing methods, channels, or organizational forms, thus setting the stage for the failure of a venture
that might have succeeded with full commitment and support
by the parent company. Any long-term marketing plan should
be fully supported by senior management and have realistic
time goals set for sales growth. Occasionally, casual market entry
is successful, but more often than not, market success requires
long-term commitment.
The Planning Process
Whether a company is marketing in several countries or is
entering a foreign market for the first time, planning is essential
to success. The first-time foreign marketer must decide what
products to develop, in which markets, and with what level of
resource commitment. For the company already committed, the
key decisions involve allocating effort and resources among
countries and product(s), deciding on new markets to develop
Phase I : Preliminary Analysis and Screening; Matching

Company/Country
Whether a company is new to international marketing or heavily

involved, an evaluation of potential markets is the first step in
the planning process. A critical first step in the international
planning process is deciding in which existing country market to
make a market investment. A companys strengths and
weaknesses, products, philosophies, and objectives must be
matched with a countrys constraining factors and market
potential. In the first part of the planning process, countries are
analyzed and screened to eliminate those that do not offer
sufficient potential for further consideration. Emerging markets
pose a special problem since many have inadequate marketing
infrastructures, distribution channels are underdeveloped, and
income level and distribution vary among countries.
The next step is to establish screening criteria against which
prospective countries can be evaluated. These criteria are
ascertained by an analysis of company objectives, resources, and
other corporate capabilities and limitations. It is important to
determine the reasons for entering a foreign market and the
returns expected from such an investment. A companys
commitment to international business and its objectives for
going international are important in establishing evaluation
criteria. A company guided by the global market concept looks
for commonalties among markets and opportunities for
standardization, whereas a company guided by the domestic
market extension concept seeks markets that accept the domestic
marketing mix as implemented in the home market. Minimum
market potential, minimum profit, return on investment,
acceptable competitive levels, standards of political stability,
acceptable legal requirements, and other measures appropriate
for the companys products are examples of the evaluation
criteria to be established.
Once evaluation criteria are set, a complete analysis of the
environment within which a company plans to operate is made.
The environment consists of the uncontrollable elements
discussed earlier and includes both home-country and hostcountry restraints, marketing objectives, and any other company
limitations or strengths that exist at the beginning of each
planning period. Although an understanding of uncontrollable
environments is important in domestic market planning, the
task is more complex in foreign marketing because each country
under consideration presents the foreign marketer with a
different set of unfamiliar environmental constraints. It is this
stage in the planning process that more than anything else
distinguishes international from domestic marketing planning.
The results of Phase 1 provide the marketer with the basic
information necessary to: (1) evaluate the potential of a
proposed country market; (2) identify problems that would
eliminate the country from further consideration; (3) identify
environmental elements which need further analysis; (4)
determine which part of the marketing mix can be standardized
for global companies or which part of and how the marketing

mix must be adapted to meet local market needs; and (5)
develop and implement a marketing action plan.
Information generated in Phase 1 helps a company avoid the
mistakes that plagued Radio Shack Corporation, a leading
merchandiser of consumer electronic equipment in the United
States, when it first went international. Radio Shacks early
attempts at international marketing in Western Europe resulted
in a series of costly mistakes that could have been avoided had
it properly analyzed the uncontrollable elements of the
countries targeted for its first attempt at multinational marketing. The company staged its first Christmas promotion for
December 25 in Holland, unaware that the Dutch celebrate St.
Nicholas Day and gift giving on December 6. Furthermore, legal
problems in various countries interfered with some of their
plans; they were unaware that most European countries have
laws prohibiting the sale of citizen-band radios, one of the
companys most lucrative U.S. products and one they expected
to sell in Europe. German courts promptly stopped a free
flashlight promotion in German stores because giveaways
violate German sales laws. In Belgium, the company overlooked a law requiring a government tax stamp on all window
signs, and poorly selected store sites resulted in many of the
new stores closing shortly after opening.
With the analysis in Phase 1 completed, the decision maker faces
the more specific task of selecting country target markets,
identifying problems and opportunities in these markets, and
beginning the process of creating marketing programs.
Phase 2 : Adapting the Marketing Mix to Target Markets.
A more detailed examination of the components of the

marketing mix is the purpose of Phase 2. When target markets
are selected, the market mix must be evaluated in light of the
data generated in Phase 1. In which ways can the product,
promotion, price, and distribution be standardized and in
which ways must they be adapted to meet target market
requirements? Incorrect decisions at this point lead to costly
mistakes through lost efficiency from lack of standardization;
products inappropriate for the intended market; and/or costly
mistakes in improper pricing, advertising, and promotional
blunders. The primary goal of Phase 2 is to decide on a
marketing mix adjusted to the cultural constraints imposed by
the uncontrollable elements of the environment that effectively
achieve corporate objectives and goals.
The process used by the Nestle Company is an example of the
type of analysis done in Phase 2. Each product manager has a
country fact book that includes much of the information
suggested in Phase 1. The country fact book analyzes in detail a
variety of culturally related questions. In Germany, the product
manager for coffee must furnish answers to a number of
questions. How does a German rank coffee in the hierarchy of
consumer products? Is Germany a high or a low per capita
consumption market? (These facts alone can be of enormous
consequence. In Sweden the annual per capita consumption of
coffee is 18 pounds, while in Japan its half a gram!) How is
coffee used-in bean form, ground, or powdered? If it is
ground, how is it brewed? Which coffee is preferred - Brazilian
Santos blended with Colombian coffee, or robusta from the
149
or old ones to withdraw from, and determining which products

to develop or drop. Guidelines and systematic procedures are
necessary for evaluating international opportunities and risks
and for developing strategic plans to take advantage of such
opportunities.
Ivory Coast? Is it roasted? Do the people prefer dark roasted or

blond coffee? (The color of Nestles soluble coffee must
resemble as closely as possible the color of the coffee consumed
in the country.)
As a result of the answers to these and other questions, Nestle
produces 200 types of instant coffee, from the dark robust
espresso preferred in Latin countries to the lighter blends
popular in the United States. Almost $50 million a year is spent
in four research laboratories around the world experimenting
with new shadings in color, aroma, and flavor. Do the Germans
drink coffee after lunch or with their breakfast? Do they take it
black or with cream or milk? Do they drink coffee in the
evening? Do they sweeten it? (In France, the answer is clear: in
the morning, coffee with milk; at noon, black coffee-i.e two
totally different coffees.) At what age do people begin drinking
coffee? Is it a traditional beverage as in France, is it a form of
rebellion among the young as in England where coffee drinking
has been taken up in defiance of tea-drinking parents, or is it a
gift as in Japan? There is a coffee boom in tea-drinking Japan,
where Nescafe is considered a luxury gift item; instead of
chocolates and flowers, Nescafe is toted in fancy containers to
dinners and birthday parties. With such depth of information,
the product manager can evaluate the marketing mix in terms
of the information in the country fact book.
Phase 2 also permits the marketer to determine possibilities for
standardization. By grouping all countries together and looking
at similarities, market characteristics that can be standardized
become evident.
Frequently, the results of the analysis in Phase 2 indicate that the
marketing mix would require such drastic adaptation that a
decision not to enter a particular market is made. For example, a
product may have to be reduced in physical size to fit the needs
of the market, but the additional manufacturing cost of a
smaller size may be too high to justify market entry. Also the
price required to be profitable might be too high for a majority
of the market to afford. If there is no way to reduce the price,
sales potential at the higher price may be too low to justify entry.
global market set. The marketing plan begins with a situation

analysis and culminates in the selection of an entry mode and a
specific action program for the market. The specific plan
establishes what is to be done, by whom, how it is to be done,
and when. Included are budgets and sales and profit expectations. Just as in Phase 2, a decision not to enter a specific market
may be made if it is determined that company marketing
objectives and goals cannot be met.
Phase 4-Implementation and Control
A go decision in Phase 3 triggers implementation of specific

plans and anticipation of successful marketing. However, the
planning process does not end at this point. All marketing
plans require coordination and control during the period of
implementation. Many businesses do not control marketing
plans as thoroughly as they could even though continuous
monitoring and control could increase their success. An
evaluation and control system requires performance objective
action, that is, to bring the plan back on track should standards
of performance fall short. A global orientation facilitates the
difficult but extremely important management tasks of
coordinating and controlling the complexities of international
marketing.
While the model is presented as a series of sequential phases,
the planning process is a dynamic, continuous set of interacting
variables with information continuously building among
phases. The phases outline a crucial path to be followed for
effective, systematic planning.
Although the model depicts a global company operating in
multiple country markets, it is equally applicable for a company
interested in a single country. Phases 1 and 2 are completed for
each country being considered, and Phases 3 and 4 are developed individually for the target market whether it consists of a
single country or a series of separate country markets. A global
company uses the same process but integrates planning and
information to serve as many markets as feasible and then
concentrates on a global market set in Phases 3 and 4.
On the other hand, additional research in this phase may

provide information that can suggest ways to standardize
marketing programs among two or more country markets. This
was the case for Nestle when research revealed that young coffee
drinkers in England and Japan had identical motivations. As a
result, Nestle now uses principally the same message in both
markets.
Utilizing a planning process encourages the decision maker to

consider all variables that affect the success of a companys plan.
Furthermore, it provides the basis for viewing all country
markets and their interrelationships as an integrated global unit.
By following the guidelines presented in Part VI of the text,
The Country Notebook-A Guide for Developing a Marketing
Plan, the international marketer can put the strategic planning
process into operation.
The answers to three major questions are generated in Phase 2:

(1) Which elements of the marketing mix can be standardized
and where is standardization not culturally possible? (2) Which
cultural/environmental adaptations are necessary for successful
acceptance of the marketing mix? and (3) Will adaptation costs
allow profitable market entry? Based on the results in Phase 2, a
second screening of countries may take place, with some
countries dropped from further consideration. The next phase
in the planning process is development of a marketing plan.
As a company expands into more foreign markets with several

products, it becomes more difficult to efficiently manage all
products across all markets. Marketing planning helps the
marketer focus on all the variables to be considered for successful global marketing. Regardless of which of the three strategies
(domestic market extension, multidomestic, or global) a
company chooses, rigorous information gathering, analysis, and
planning are necessary for successful marketing.
Phase 3 : Developing the Marketing Plan.
At this stage of the planning process, a marketing plan is

developed for the target market-whether a single country or a
150
With the information developed in the planning process and a

country market selected, the decision of the entry mode can be
made. The choice of mode of entry is one of the more critical
Additional International Alternatives

Sourcing
The opposite of exporting is obviously importing. In fact, the
United States imports more goods than it exports, and this
trend appears to be increasing over the years. In analyzing the
import statistics, imports can be subdivided into two categories:
goods that. are purchased ready-made and goods that a foreign
company has a voice in their design and packing. These latter
goods are referred to as soured goods and merit different
marketing considerations than goods that are solely imported.
Sourced goods can be found in both consumer and industrial
goods. Nike doesnt make any athletic shoes. It does not own
any manufacturing facilities. All its shoes are sourced in other
countries, primarily in Asia. Turk, an industrial company known
for its antennae, doesnt produce a single antenna. The antenna
are all sourced in other countries under the specifications of
Turk. How and why does a company select to employ this
strategy?
There are no simple rules to guide sourcing decisions. Indeed,
the sourcing decision is one of the cost complex and important
decisions faced by a global company. As shown in Table, six
factors must be taken into account in the sourcing decision.
Sourcing De3cision Factors
1. Factor costs and conditions
2. Logistics
3. Country Infrastructure
4. Political Risk
5. Market Access
6. Exchange rate, availability, and convertibility of local money.
Licensing
Licensing can be defined as a contractual arrangement whereby
one company (the licensor) makes an asset available to another
company (the licensee) In exchange for royalties; license fees, or
some other form of compensation. The licensed assume may
be a patent, trade secret, or company name. Licensing is a form
of global market entry and an expansion strategy with considerable appeal. A company with advanced technology, know-how,
or a strong brand image can use licensing agreements to
supplement its bottom-line profitability with little initial
investment. Licensing can offer an attractive return on investment for the life of the agreement, providing the necessary
performance clauses are in the contract. The only cost is the cost
of signing the agreement and of policing its implementation.
Of course, anything so easily attained has its disadvantages and
risks. The principal disadvantage of licensing is that it can be a
very limited form of participation. When licensing technology
or know-how, what a company does not know can put it at risk.
Potential returns from marketing and manufacturing may be
lost, and the agreement may have a short life if the licensee
develops its own know-how and capability to stay abreast of
technology in the licensed product area. Eyen more distressing,
licensees have a troublesome way of turning themselves into
competitors to industry leaders. This is especially true because

licensing enables a company to borrow-leverage and exploitanother companys resources. In Japan, for example, Meiji Milk
produced and marketed Lady Borden premium ice cream under
a licensing agreement with Borden, Inc. Meiji learned important
skills in dairy product processing, and, as the expiration dates of
the licensing contracts drew near, rolled out its own premium
ice cream brands.
Perhaps the most famous U.S. licensing fiasco dates back to the
mid-1950s, when Sony cofounder Masaru Ibuka obtained a
licensing agreement for the transistor from AT&Ts Bell
Laboratories. Ibuka dreamed of using transistors to make
small, battery-powered radios. Bell engineers informed Ibuka
that it was impossible to manufacture transistors that could
handle the high frequencies required for a radio; they advised
him to try making hearing aids. Undeterred, Ibuka presented
the challenge to his Japanese engineers, who spent many
months improving high-frequency output. Sony was not the
first company to unveil a transistor radio; an American-built
product, the Regency, featured transistors from Texas Instruments and a colorful plastic case. However, it was Sonys high
quality, distinctive approach to styling, and marketing savvy that
ultimately translated into worldwide success.
Conversely, the failure to seize an opportunity to license can also
lead to dire con sequences. In the mid-1980s, Apple Computer
chairman John Sculley decided against licensing Apples famed
operating system. Such a move would have allowed other
computer manufacturers to produce Macintosh-compatible
units. Meanwhile, Microsofts growing world dominance in
computer operating systems and applications got a boost from
Windows, which featured a Mac-like graphical interface. Apple
belatedly reversed direction and licensed its operating system,
first to Power Computing Corporation in December 1994 and
then to IBM and Motorola. The Mac clones have been very
popular; Power Computing shipped 170,000 Macintosh clones
in 1996, and in 1997 the. Mac clones had captured over 25
percent of the Mac market. Despite these actions, the global
market share for Macintosh and Mac clones has slipped below 5
percent. Apples failure to license its technology in the preWindows era ultimately cost the company over $125 billion
dollars (the market capitalization of Microsoft, the company
that won the operating system war).
Pokemon in the United States

It started in Japan. A cartoon character that engaged in Japanese roleplaying was presented in a simplistic animated style. And it became
popular in Japan. Very popular. In Japan, Nintendo, owner of Pokemon
(whose name means pocket monster), first introduced the video game.
This was followed by toys, comic books, and trading cards. Finally, the
Pokemon television show was introduced: In Japan, 50 percent of children
watch the Pokemon television show. Given its tremendous success in Japan,
the marketing question became Could this popularity be transferred to
the United States?Currently, Pokemon is a licensing success story in the
United States. Despite initial hesitancy on the part of Nintendo, it was
licensed to 4 Kids Entertainment, Inc. of New York. In the United
States, 4 Kids decided to use the reverse introduction sequence of product
introduction. The U.S. effort started with the television show and then
151
decisions for the firm because the choice will define the firms
operations and affects all future decisions in that market.
expanded with 90 different licensing agreements in- I eluding 4 million

video games. Merchandise sales were: estimated at a billion dollars in
1999. The Pokemon cartoon was the 1998-1999 seasons top childrens
show in the United States.The show is also being shown in Canada,
Australia, I New Zealand, England, Mexico, and Latin America. The
U.S. owners, however, spend considerable money to . westernize the
programs. Besides the translation to J English, they have had to adjust for
the wide usage. of puns in the Japanese version, replace all Japanese
writing, and even modify some of the characters. From a financial
perspective, licensing can be quite I lucrative. The licensor receives
between 5 and 15 percent of retail sales. The licensing agent receives 20
to 50 percent of the licensors fees. Clearly, international licensing
opportunities are not to be ignored.
As the Borden and transistor stories make clear, companies may

find that the upfront, easy money obtained from licensing turns
out to be a very expensive source of revenue. To prevent a
licensor/competitor from gaining unilateral benefit, licensing
agreements should provide for a cross-technology exchange
between all parties. At the absolute minimum, any company
that plans to remain in business must ensure that its license
agreements provide for full cross-licensing-that is, the licensee
shares its developments with the licensor. Overall, the licensing
strategy must ensure ongoing competitive advantage. For
example, license arrangements can create export market opportunities and open the door to low-risk manufacturing
relationships. They can also speed diffusion of new products or
technologies.
When companies do decide to license, they should sign
agreements that anticipate more extensive market participation
in the future. Insofar as is possible, a company should keep
options and paths open for other forms of market participation. One path is a joint venture with the licensee.
Trademarks can be an important part of the creation and
protection of opportunities for lucrative licenses. Imageoriented companies such as Coca-Cola and Disney. as well as
designers such as Pierre Cardin, license their trademarked names
and logos to overseas producers of clothing, toys, and watches.
Business is booming: The top-tier names are expanding their
fee income by 15 percent a year and more. When licensing a
trademark, the challenge is to maintain and enhance the brand
equity of the marque. This means that licensees must be
carefully selected and supervised. A bad licensee can seriously
depreciate the value of a marque by turning out merchandise or
services that do not meet up to the standard of the marque.
Franchising is a form of licensing. It is the practice whereby a
company permits its name, logo, cultural design, and operations
to be used in establishing a new firm or store.
Investment: Joint Ventures

A joint venture with a local partner represents a more extensive
form of participation in foreign markets than either exporting
or licensing. The advantages of this strategy include the sharing
of risk and the ability to combine different value chain
strengths-for, example, international marketing capability and
manufacturing. One company might have in-depth knowledge
of a local market, an extensive distribution system, or access to
152
low-cost labor or raw materials. Such a company might link up

with a foreign partner possessing considerable know-how in the
area of technology, manufacturing, and process applications.
Companies that lack sufficient capital resources might seek
partners to jointly finance a project. Finally, a joint venture may
be the only way to enter a country or region if government bid
award practices routinely favor local companies or if laws
prohibit foreign control but permit joint ventures.
Because of these clear advantages, especially in emerging
markets, the conventional wisdom is that a joint venture is the
only way to go. Not all agree With this wisdom. In China,
according to Wilfried Vanhonacker, the situation is changing
rapidly, and today companies should think beyond the equity
joint venture (EJV) with a well-connected local partner and
consider the alternative of a wholly foreign-owned enterprise
(WFOE). In China, EJVs and WFOEs are substantially the
same in terms of taxation and corporate liability. They operate
under similar rules and regulations. There arc some technical
differences, but the bottom line is that the WFOEs take less
time to establish than EJVs and do not require a board of
directors.
Today, there is a shift on the part of foreign investors in China
from the EJV to the WFOE. The reasons are fundamental:
Investors achieve greater flexibility and control with a WFOE,
and-the government is becoming more concerned about what a
company brings to the country in terms of jobs, technology,
and know-how than it is about how its deals are structured.
In China, as everywhere, each case must be decided on its
merits. Two questions must be answered in every case: What
does each partner bring to the deal, and what are the interests
and capabilities of the partners going forward? The fact is that
joint ventures are hard to sustain even in stable environments
because the partners to a joint venture have different capabilities,
resources, visions, and interests. In fast-growing and fastchanging environments, it is much more difficult to sustain
joint ventures. In China, for example, access to markets has
been hindered by what foreign investors thought was the
essential success factor in China: guanxi (relationships). In fact,
what many investors have discovered is that China is a big
country and the scope of their partners guanxi is limited. Many
investors have discovered to their disappoin1ment that their
partner lacked the guanxi needed to move forward. A WFOE
can retain agents and advisors to assist it in acquiring the land;
materials, approvals, and services that it needs to do business in
China.
It is possible to use a joint venture as a source of supply for
third-country markets. This must be carefully thought out in
advance. One of the main reasons for joint venture divorce is
disagreement about third-country markets in which partners
face each other as actual or potential competitors. To avoid this,
it is essential to work out a plan for approaching third-country
markets as part of the venture agreement.
The disadvantages of joint venturing can be significant. Joint
venture partners must share rewards as well as risks. The main
disadvantage of this global expansion strategy is that a company incurs very significant costs associated with control and
coordination issues that arise when working with a partner.
James Rivers European joint venture, Jamont, brought

together 13 companies from 10 countries. Major problems
included computer systems and measures of production
efficiency; Jamont uses committees to solve these and other
problems as they arise. For example, agreement had to be
reached on a standardized table napkin size; for-some country
markets, 30 by 30 centimeters was the norm; for others, 35 by
35 centimeters was preferred.
Difficulties such as those outlined previously are so serious that,
according to one study of 170 multinational firms, more than
one third of 1,100 joint ventures were unstable, ending in
divorce or a significant increase in the U.S. firms power over
its partner.1S Another researcher found that 65 joint ventures
with Japanese companies were either liquidated or, transferred
to the Japanese interest in 1976. This was up from 6 in 1972, a
600 percent increase. The most fundamental problem was the
different benefits ,that each side expected to receive.
In an alliance the real payoff is from learning skills from the
partner rather than just getting products to sell while avoiding
investment. Yet, compared to American and European firms,
Japanese and Korean firms see to excel in their ability to leverage
new knowledge that comes out of a joint venture. For example,
Toyota learned many new things from its partnership with GM
about U.S. supply and transportation and managing American
workers-that have been subsequently applied at its Camry plant
in Kentucky. However, some American managers involved in
the venture complained that the manufacturing expertise they
gained was not applied broadly throughout GM. To the extent
that this complaint has validity, GM has missed opportunities
to leverage new learning. Still, many companies have achieved
great successes pursuing joint ventures. Gillette, for example,
has used this strategy to introduce its shaving products in the
Middle East and Africa.
Investment: Ownership and Ontrol

Another key variable in the location decision is the vision and
values of company leadership. Some chief executives are
obsessed with manufacturing in their home country. Nicolas
Hayek is head of the Swiss Corporation for Microelectronics
and Watch making (SMH), the company best known for its line
of inexpensive Swatch watches. SMHs chief executive has
presided over a spectacular comeback-the revitalization of the
Swiss watch industry. Swatch has become a pop culture
phenomenon, with sales approaching 1 billion watches. The
flagship brand on the high end is Omega, whose models carry
prices ranging from $700 to $20,000.. SMH. recently acquired
Blancpain, a niche producer of luxury mechanical watches that
retail for $200,000 and up. Hayek has demonstrated that, by
embracing the fantasy and imagination of childhood and
youth, a person can build mass-market products in countries
such as Switzerland or the United States. The Swatch story is a
triumph of engineering as well as a triumph of the imagination.

The sourcing decision highlights three roles for marketing in a
global competitive strategy. The first relates to the configuration
of marketing. Although many marketing activities must be
performed in every country, advantage can be gained by
concentrating some of the marketing activities in a single
location. Service, for example, must be dispersed to every
country. Training, however, might be at least partially concentrated in a single location for the world. A second role for
marketing is the coordination of marketing activities across
countries to leverage a companys know-how. This integration
can take many forms, including the transfer of relevant experience across national boundaries in areas such as global account
management and the use of similar approaches or methods for
marketing research, product positioning, or other marketing
activities. A third critical role of marketing is its role in tapping
opportunities in product development and research and
development (R&D). The development of Canons AE-I
camera is a case in point. Research provided the information on
market requirements that enabled Canon to develop a world
product. Canon was able to develop a physically uniform
product that required fewer parts, far less engineering, lower
inventories, and longer production runs. Such advantages
would have been lacking if Canon had developed separate
camera models that were adapted to the unique conditions in
each national market.
As for the form of cooperation and control, there are many,
ranging from the management contract to wholly owned
subsidiaries and global strategic partnerships. The issues that
these alternatives raise are control arid ownership. As shown in
Table, the second issue that must be addressed in international
marketing strategy is whether to establish an in-country or inregion marketing organization. This decision will be resolved by
an assessment of the cost of creating such an organization
compared to the expected impact of an in-country marketing
organization on market share, sales, and earnings.
1.
2.
3.
4.
5.
International Market Entry &

Expansion Decision Model
Sourcing : Home, third, or host country.
Cost, market access, country of origin factors.
In-country or in-region marketing organization?
Cost, market impact assessment. Is choice is to establish
own organization, must decide who to appoint to key
positions.
Selection, training, and motivation of local distributors and
agents.
marketing mix strategy: Goals and objectives in sales,
earnings, and share of market; positioning; marketing mix
strategy.
Strategy implementation.
The next task is the selection, training, and motivation of

agents, distributors, and representatives. If it is decided to not
establish an in-country marketing organization, the agent(s) or
153
Also, as noted earlier with licensing, a dynamic joint venture

partner can evolve into a stronger competitor. In some instances, country-specific restrictions limit the share of capital
help by foreign companies. Cross-cultural differences in
managerial attitudes and behavior can present formidable
challenges as well.
distributor(s) selected will be the in-country marketing organization. The fourth task is to formulate marketing mix and
positioning strategy and, finally, to implement the strategy. This
will be done by the organization itself if it has created an in
country marketing organization, and by the company ill
cooperation with an agent or distributor if it has not.
There are many options that vary the amount of ownership
and investment and the degree of control of country marketing.
Although it is possible to have ownership without control and
control without ownership, greater ownership is normally
linked with greater control (see Figure 8-1 on page 240).
Companies with wholly owned affiliates or subsidiaries have
complete control over every aspect of the affiliates operations:
strategy and structure, human resources, financial strategy and
policy, marketing strategy and policy, and so on.
In the equity joint venture (EJV), this is not the case. The
shared ownership of this type of company gives control to
each of the owners. Licensing and franchising require little
investment, but they may be part of agreements that give the
licensor or franchisor considerable control over the business.
Ownership/Investment
After companies gain experience outside the home country via
exporting or licensing and joint ventures, the time comes for
many companies when a more extensive form of participation
in global markets is wanted. The desire for control and ownership of operations outside the home country drives .the
decision to invest. Foreign direct investment (FDI) figures
record investment flows as companies invest in or acquire plant,
equipment, or other assets outside the home country. By
definition, direct investment presumes that the investor has
control or significant influence over the investment, as opposed
to portfolio investment, in which it is assumed that the
investor does not have significant influence or control. The
operational definition of direct investment is ownership of 20
percent or more of the equity of a company. Companies, in
addition to producing products, are products in themselves and
it appears that many major international companies are on a
shopping spree. While the United States had been the leader in
overseas purchases European companies have purchased many
U.S. companies and these transactions carry large price tags.
Vodafone, British Petroleum, and Scottish Power, which are all
U.K. companies, have acquired Air Touch Communications,
Amaco, and PacifiCorp, respectively. These three deals alone are
valued at over $133 billion. Conversely, Kodak, because of its
stagnant sales in the U.S. market, is investing $1 billion in China
in an effort to preempt Fuji, which controls more than 40
percent of the market, from expanding. By producing locally,
Kodak would circumvent the 60 percent tariff on imported film. China is the worlds third largest film market after the
United States and Japan. Kodak currently has approximately 30
percent of the market. Lucky Film Co., a local producer, has 20
percent of the market.
The most extensive form of participation in global markets is
100 percent ownership, which may be achieved by start-up or
acquisition. (In China this is now referred to as the wholly
foreign-owned enterprise or WFOE.) Ownership requires the
greatest commitment of capital and managerial effort and offers
154
the fullest means of participating in a market. Companies may

move from licensing or joint venture strategies to ownership in
order to achieve faster expansion in a market, greater control, or
higher profits. In 1991, for example, Ralston Purina ended a 20year joint venture with a Japanese company to start its own
pet-food subsidiary. Monsanto Company and Bayer AG, the
German pharmaceutical company, are .two other companies that
have also recently disbanded partnerships in favor of wholly
owned subsidiaries in Japan.19 In many countries, government
restrictions may prevent majority or 100 percent ownership by
foreign companies.
Large-scale direct expansion .by means of establishing new
facilities can be expensive and require a major commitment of
managerial time and energy. Alternatively, acquisition is an
instantaneous-and sometimes less expensive-approach to
market entry. Although full ownership can yield the additional
advantage of avoiding communication and conflict-of-interest
problems that may arise with a joint venture or co-production
partner, acquisitions still present the demanding and challenging
task of integrating the acquired company into the worldwide
organization and coordinating activities.
Table 8-8 lists some additional examples, grouped by industry,
of companies that have pursued global expansion via acquisition.
Market Entry and Expansion by Acquisition

Product Category/Industry Acquiring Company
1. Automotive
Daimler Benz
2. Pharmaceutical
Rhone-Poulenc
3. Tobacco
British American Tobacco
4. Oil
BP Amoco
5. Communications
Vodafone
Target
Chrysler
Hoechst
Zurich
Arco
Mannesmann
Air Touch
The decision to invest abroad-whether by expansion or

acquisition-sometimes clashes with short-term profitability
goals. This is an especially important issue for publicly held
companies. Despite these challenges, there is an increasing trend
toward foreign investment by. companies. The market value of
U.S. direct investment abroad and of foreign direct investment
in the United States exceeds 1 trillion.
Several of the advantages of joint venture alliances also apply to
ownership, including access to markets and avoidance of tariff
or quota barriers. Like joint ventures, ownership also permits
important technology experience transfers and provides a
company with access to new manufacturing techniques. For
example, the Stanley Works, a toolmaker with headquarters in
New Britain, Connecticut, has bought more than a dozen
companies since 1986, among them Taiwans National Hand
Tool/Chiro company, a socket wrench manufacturer and
developer of a cold-forming process that speeds up production
and reduces waste. Stanley is now using the technology in the
manufacture of other tools. Chairman Richard H. Ayers sees
such global cross-fertilization and blended technology as a key
benefit of globalization.
The alternatives discussed earlier-licensing, joint ventures, and
ownership-are in fact points along a continuum of alternative
A firm may decide to enter into a joint venture or co production agreement for purposes of manufacturing arid may either
market the products manufactured under this agreement in a
wholly owned marketing subsidiary or sell the products from
the co production facility to an outside marketing organization.
Joint ventures may be 50-50 partnerships or minority or
majority partnerships. Majority ownership may range anywhere
from 51 percent to 100 percent.
Investment in Developing Countries

Investment in developing nations grew rapidly in the 1990s.
The appeal of the developing economies is their rapid growth,
expanding purchasing power, and expanding markets. Major
flows of investment have been directed toward emerging
markets in Asia, the Americas, the Middle East, and Africa.
Table 8-9 shows the sources of recent investment into Brazil.
Foreign investments may take the form of minority or majority
shares in joint ventures, minority or majority equity stakes in
another company, or, as in the case of Sandoz and Gerber,
outright acquisition. A company may choose to use a combination of these entry strategies by acquiring one company,
buying an equity stake in an Other, and operating a joint
venture with a third. In recent years, for example, UPS has made
more than 16 acquisitions in Europe and has also expanded its
transportation hubs.
Marketing Strategy Alternatives

Regardless of the entry form selected, companies must decide
on their marketing strategy for each market. Broadly, the
alternatives are to use independent-agents and distributors or to
establish a company-owned marketing subsidiary.
The advantage of the agent/distributor option is the fact that it
requires little investment. It is a pay-as-you-go option. The
disadvantage of this option is that it does not create a company
presence in the market and it does not give a company control
over its marketing effort. In addition, agents and distributors
are not necessarily a no investment option. If the manufacturer
has deep pockets, any -termination of an agency or distributorship agreement may lead to a claim by the agent or distributor
for lost profits and damages. A written contract with a no-cause
termination clause is 110 guarantee of protection from an
agent/distributor lawsuit because agents and distributors may
press claims on the grounds of a breach of good faith.
In many countries, companies combine the company-owned
marketing subsidiary with agents and distributors. This option
gives the company local presence- and control of the marketing
effort and, where cost-effective, takes advantage of distributor
and agent capabilities. The local presence of the company can
provide a much better communications link with the regional

and world headquarters and, if it is well executed, ensure that
the companys effort reflects the fullest potential of the
companys ability to execute a global strategy with local responsiveness.
With a local subsidiary presence, a company can focus on
formulating and executing marketing strategies and plans that
work. In China, Procter & Gamble (P&G) operates with a
combination of joint venture-s and its own company presence,
with P&G marketing executives directing the companys China
strategy. This approach has enabled P&G to increase its share of
the urban shampoo market to 60 percent as compared to 9
percent for Unilever. P&G has invested heavily in market
research, advertising, and distribution, and in creating its own
command presence in the market. As a result of these initiatives, Head & Shoulders, P&Gs brand, is Chinas fastest
growing hair care brand.
100%
Control
Company-owned
Subsidiary
Agents/Distributors
0
0
Ownership
100%
Five Market Expansion Strategies

Companies must decide whether to expand by seeking new
markets in existing countries or, alternatively, seeking new
country markets for already identified and served market
segments. These two dimensions in combination produce four
strategic options, as shown in Table 8-10. Strategy 1 concentrates
on a few segments in a few countries. This is typically a starting
point for most companies. It matches company resources and
market investment needs. Unless a company is large and
endowed with ample resources, this strategy may be the only
realistic way to begin.
In strategy 2, country concentration and segment diversification,
a company serves, many market in a few countries. This
strategy was implemented by many European, companies that
remained in Europe and sought growth by expanding into new
markets. It is also the approach of the American companies
that decide to diversify in the U.S. market a opposed to going
international with existing products or creating new global
products: According to the U.S. Department of Commerce,
more than 80 percent of American companies that export limit
their sales to five or fewer markets. This means the majority of
American companies are pursuing strategy 1 or 2.
155
strategies or tools for global market entry and expansion. The

overall design of a companys global strategy may call for
combinations of exporting/importing, licensing, joint
ventures, and ownership among different operating units. Such
is the case in Japan for Borden, Inc.; it is ending licensing and
joint venture arrangements for branded food products and
setting up its own production, distribution, and marketing
capabilities for dairy products. Meanwhile, in nonfood products, Borden has maintained joint venture relationships with
Japanese partners in flexible packaging and foundry materials.
Strategy 4, country and segment diversification, is the corporate

strategy of a global, multibusiness company such as
Matsushita. Over all, Matsushita is multicountry in scope and
its various business units and groups serve multiple segments,
Thus, at the level of corporate strategy, Matsushita may be said
to be pursuing strategy 4. At the operating business level,
however, managers of individual units must focus on the
needs of the world customer their particular global market. In
Table 8-10, this is strategy 3-country diversification and market
segment concentration. An increasing number of companies all
over the world are beginning to see the importance of market
share not only in the home or domestic market but also in the
world market. Success in overseas markets can boost a
companys total volume and lower its cost position.
COUNTRY
Concentration
Concentration
Diversification
Strategy 3;country diversification and market segment

concentration, is the classic global strategy whereby a company
seeks out the world market for a product. The appeal of this
strategy is that by serving the world customer, a company can
achieve a greater accumulated volume and lower costs than any
competitor and, therefore, have an un assailable competitive
advantage. This is the strategy of the well-managed business
that serves a distinct need and customer category.
1. Narrow Focus
2. Country Focus
Ethnocentric
Sees similarities and

differences in a world
region; is ethnocentric or
polycentric in its view of
the rest of the world
Regiocentric
3. Country
Diversification
4. Global
Diversification
Table lists the stages in the evolution of the global corporation,

from domestic to international, multinational, global, and
transnational. As discussed in previous chapters, the differences
between the stages can be quite significant. Unfortunately, there
is little general agreement about the usage of each term. The
terminology suggested here conforms to current usage by
leading scholars however, it should be noted that executives,
journalists, and others who are not familiar with the scholarly
literature may use the terms in quite different ways.
Stage of Development I
2 International
International
Coordinated
Federation
View
of Home
Extension
World
Country
Markets
Orientation Ethnocentric Ethnocentric
156
Home country is
superior; sees
similarities in
foreign countries
Diversification
Alternative Strategies: Stages of

Development Model
Stage & 1 Domestic

Company
Strategy
Domestic
Model
NA
Bartlett and Ghoshal provide an excellent discussion of three

industries-branded packaged goods, consumer electronics, and
telecommunications switching-in which individual competitors
have exemplified the different stages at various times in their
corporate histories. For example, P&G, General Electric (GE),
and Ericsson were stage 2. international companies. For many
years, Unilever, Philips, and International Telephone and
Telegraph (ITT) were stage 3 multinationals. The stage 4 global
companies included in the study were all from Japan: Kao,
Matsushita, and NEC.
3 Multinational
4 Global
5 Transnational
Multidomestic
Decentralized
Federation
National Markets
Global
Centralized
Hub
Global Markets
or Resources
Mixed
Global
Integrated
Network
Global markets
and resources
Geocentric
Polycentric
Each host country

is unique; sees
differences in
foreign countries
Polycentric
Worldview; sees
similarities and
differences in home
and host countries.
Geocentric
Orientation does not change as a company moves from

domestic to international. The difference between the domestic
and the international company is that the international is doing
business in many countries. Like the domestic company, it is
ethnocentric and home-country oriented. However, the stage 2
international company sees extension market opportunities
outside the home country and extends marketing programs to
exploit those opportunities. The first change in orientation
occurs as a company moves to stage 3, multinational. At this
point, its orientation shifts from ethnocentric to polycentric.
The difference is quite important. The stage 2 ethnocentric
company seeks to extend its products and practices to foreign
countries. It sees similarities outside the home country but is
relatively blind to differences. The stage 3 multinational is the
opposite: It sees the differences and is relatively blind to
similarities. The focus of the stage 3 multinational is on
adapting to what is different in a country.
The stage 4 global company is a limited form of the
transnational. Managements orientation is either on global
markets or global resources but not on both. For example,
Harley-Davidson is focused on global markets but not on
global resources. The company has no interest in conducting
R&D, design, engineering, or manufacturing outside of the
United States. Until recently, the same was true for BMW and
Mercedes. Both companies marketed globally but limited R&D,
Stage of Development II
Stage &
Company
Key
Assets
1 Domestic
2 International
3 Multinational
4 Global
5 Transnational
Located
home
country
Core centralized
others dispersed
Decentralized
and
selfsufficient
Dispersed
interdependent
and specialized
Role of
country
units
Knowled
ge
Single
country
Adapting
and
leveraging
competencies
Created at center
and transferred
Exploiting local
opportunities
All
in
home
country
except
marketing
or
sourcing
Marketing
or
sourcing
Marketing
or
sourcing
developed
jointly and
shared
Home
Country
in
Retained within
operating units
Contributions
to
company
worldwide
All functions
developed
jointly
and
shared
Special mention must be made of some of the distinctive

qualities of stage 4 companies that pursue integrated global
strategies. Key assets are dispersed, specialized, and interdependent. A transnational automobile company-Toyota, for
example-makes engines and transmissions in various countries
and ships these components to assembly plants located in each
of the world regions. Specialized design labs might be located
in different countries and work together on the same project.
The role of country units changes dramatically as a company
moves across the stages of development. In the stage 2
international company, the role of the country unit is to adapt
and leverage the competence of the parent or borne-country
unit. In the stage 5 transnational, the role of each country is to
contribute to the company worldwide; In the international and
multinational, the responsibility of the marketing organization
is to realize the potential of the individual national markets. In
the transnational, the responsibility of the marketing unit is to
realize the potential of the national market and, if possible, to
contribute to the success of marketing efforts worldwide by
sharing successful innovations and ideas with the entire
organization.
The transnational combines the strengths of each of the earlier

stages by serving global markets using global resources and
leveraging global learning and experience.
In state 3, the most frequently preferred sourcing arrangement is
local manufacture. In stage 5, product sourcing is based on an
analysis that takes into account cost, delivery, and all other
factors affecting competitiveness and profitabilility. This analysis
produces a sourcing plan that maximizes both competitive
effectiveness and profitability. When a company is in stage 2, key
jobs go to home country nationals in both the subsidiaries and
the headquarters, in stage 3, key jobs in host countries go to
country nationals, whereas headquarters management positions
are usually held by home country nationals. In stage 5, the best
person is selected for all management positions regardless of
nationality. Research and development (R$D) in stage 2 is
conducted in the home country; in stage 3, R$D becomes
decentralized and fragmented. By the time is typically decentralized. The transnational company in stage 5 can take advantage
of resources as well as respond to local aspirations to produce a
worldwide decentralized R&D program.
Table shoes an example of how fleet guard, inc., a wholly
owned subsidiary of commons engine company, evolved over
an 11 year period.
On occasion, the best marketing and management efforts fail
when trying to expand into markets. In this case, it is equally
important to know when to pull out.
Strengths at Each level
International
Ability to exploit the parent companys knowledge and capabilities
through worldwide diffusion of products
Multinational
Flexible ability to respond to national differences
Global
Global market or supplier reach, which leverages the home country
organization, skills, and resources.
Transnational
Combines the strengths of each of the preceding stages in an
integrated network, which leverages worldwide learning and
experience.
The international companys strength is its ability to exploit the

parent companys knowledge and capabilities outside the home
country. In the telecommunications industry, Ericsson gained a
competitive edge over NEC and ITT by pursuing this approach. The multinationals strength is its ability to adapt and
respond to national differences. Unilevers local responsiveness
was well suited to the packaged goods industry. Thus, in many
markets, the company outperformed both Kao and P&G. The
global company leverages internal skills and resources by taking
advantage of global markets or global resources. In consumer
electronics, Matsushitas ability to serve global markets from
world-scale plants caused great woes for Philips and GE. (In
fact, GEs Jack Welch decided to exit the business altogether)
157
engineering, design, and manufacturing activity to Germany.

Mercedes now plans to double its purchases from outside
suppliers and to build more than 10 percent of its vehicles
outside Germany. Notes Mercedes chairman, Helmut Werner,
The fundamental problem of German exports is that we are
producing in a country with a hard currency and selling in
countries with soft currencies. When a company moves from
stage 4 to stage 5, its orientation encompasses both global
markets and global resources
LESSON 16:
COOPERATIVE STRATEGIES AND GLOBAL STRATEGIC PARTNERSHIPS
Alliances are a big part of this game [of global competition}.
They are critical to win on a global basis. . . the least attractive
way to try to win on a global basis is to think you can take on
the world by yourself .
-JACK WELCH
CEO, General Electric Corporation
Business growth and expansion in different parts of the world
will increasingly have to be based on alliances, partnerships,
joint ventures and all kinds of relations with organizations
located in other political jurisdictions,
-PETER DRUCKER;
Author
Alliances as a broad-based strategy will only ensure a companys
mediocrity, not its international leadership.
-MICHAEL PORTER
Professor, Harvard Business School
The learning objectives from this lesson could be as

follows:
1. The Nature of Global Strategic Partnerships
2. Success Factors
3. Alliances Between Manufacturers and Marketers
4. International Partnerships in Developing Countries
5. Cooperative Strategies in Japan: Keiretsu
6. Beyond Strategic Alliances
What does a car, household appliance personal computer a beer,
a deodorizer, and a travel company have in common? In Japan
the answer is a brand. Five major companies (Toyota Motor,
Matsushita Electric. Asahi Breweries and Kao) have formed a
marketing alliance to share the brand name Will.
Their purpose is to create a new, modern image that would
appeal to consumers in their late twenties and early thirties. This
age segment is composed of approximately 8 million consumers who want to express their own preferences and are cynical of
traditional, conservative brands.
Airlines offer an excellent example of global strategic partnerships. Table lists the worlds top airlines and the worlds top
airline fleets. United Airlines, the largest commercial airline in
the world, has agreements with fourteen airlines: Air Canada,
Air New Zealand, All Nippon, Ansett Australia, Austria, British
Midland, Lauda Air, Lufthansa, Mexican, SAS, Singapore, Thai,
Tyrolean, and Varig airlines. This alliance is known as the Star
Alliance, whose motto is The Airline Network for Earth.
158
Top25 Airlines
Rank
Airline
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
United
American
Delta
Northwest
British Airways
Japan Airlines
Continental
Lufthansa
US Airways
Air France
Qantas
KLM
Singapore
All Nippon
Southwest
TWA
Korean
Cathay Pacific
Air Canada
Alitalia
Thai Intl
Iberia
Swissair
America West
Canadian
Top 25 Airline Fleets

1997
Rank
No. of RPK
Airline
195,372
1
American
172,166
2
FedEx
160,398
3
United
115.898
4
Delta
98,405
5
Northwest
79.063
6
US Airways
77,081
7
Continental
68.267
8
British Airways
66,901
9
Southwest
63,812
10
Lufthansa
59.199
11
UPS
55,418
12
Mesa Air Group
55.388
13
TWA
51,219
14
Air France
45,623
15
Air Canada
40,470
16
SAS
40,1 90
.17
Alitalia
38.962
18
All Nippon
36,866
19
Japan Airlines
36.002
20
Iberia
31.154
21
Continental Express
27,679
22
Korean
27,522
23
KLM
26.072
24
Aeroflot Russian
25.784
25
Airborne
" Revenue passenger kilometers
No. of
Aircraft
641
616
575
559
406
352
327
268
261
217
208
185
185
182
155
147
144
136
134
124
121
117
114
113
106
In previous lessons, we reviewed the range of optionsexporting, licensing, joint ventures, and ownership-traditionally
used by companies wishing either to enter global markets for
the first time or expand their activities beyond present levels.
However, recent changes in the political, economic, sociocultural,
and technological environments of the global firm have
combined to change the relative importance of those strategies.
Trade barriers have fallen, markets have globalized, consumer
needs and wants have converged, product life cycles have
shortened, and new communications technologies and trends
have emerged. Although these developments provide unprecedented market opportunities, there are strong strategic
implications for the global organization and new challenges for
the global marketer.
Like the airline example cited previously, such strategies will
undoubtedly incorporate-or may even be structured around-a
variety of collaborations. Once thought of as only joint
ventures with the more dominant party reaping most of the
benefits (or losses) of the partnership, cross-border alliances are
taking on surprising new configurations and even more
surprising players. Why would any firm-global or otherwiseseek to collaborate with another firm, be it local or foreign? Why
do executives decide to pursue competitive collaboration with
other firms, some of which are rivals?
As suggested in the opening chapter quotations, there appears

to be less than agreement by major strategic thinkers on the
wisdom of cooperation. This chapter will address the fundamental issue: whether to cooperate and when to cooperate. It
will focus on global strategic partnerships. The Japanese
keiretsu, and various other types of cooperation strategies that
may be an important element of the success of the global firm.
The Nature of Global Strategic

Partnerships
The terminology used to describe the new forms of cooperation strategies varies widely. The phrases collaborative
agreements strategic alliances, strategic international alliances,
and global strategic partnerships (GSPs) are frequently used to
refer to linkages between companies to jointly pursue a
common goal. A broad spectrum of inter firm agreements,
including joint ventures can be covered by this terminology.
However, the strategic alliances discussed in this chapter exhibit
three characteristics.
1. The participants remain independent subsequent to the
formation of the alliance.
2. The participants share the benefits of the alliance as well as
control over the performance of assigned tasks.
3. The participants make ongoing contributions in technology,
products, and other key strategic areas.
According to estimates the number of strategic alliances has
been growing at a rate of 20 to 30 percent since the mid-1980s.
The upward trend for GSPs comes in part at the expense of
traditional cross-border mergers and acquisitions.
Roland Smith, chairman of British Aerospace offers a straightforward reason why a firm would enter into a GSP:A
partnership is one of the quickest and cheapest ways to develop
a global strategy. Like traditional joint ventures, GSPs have
some disadvantages. Each partner must be willing to sacrifice
some control, and there are potential risks associated with
strengthening a competitor from another country. Despite these
drawbacks, GSPs are attractive for several reasons. First, high
product development costs may force a company to seek
partners; this was part of the rationale for Boeings partnership
with a Japanese consortium to develop a new jet aircraft, the
77~. Second, the technology requirements of many contemporary products mean that an individual company may lack the
skills, capital, or know-how to go it alone. Third, partnerships
may be the best means of securing access to national and
regional markets. Fourth, partnerships provide important
learning opportunities; in fact, one expert regards GSPs as a
race to learn. Professor Gary Hamel of the London Business
School has observed that the partner that proves to be the
fastest learner can ultimately dominate the relationships
GSPs and joint ventures differ in significant ways. Traditional

joint ventures are basically alliances focusing on a single national
market or a specific problem. A true global strategic partnership
is different. It is distinguished by the following six attributes:
1. Two or more companies develop a joint long-term strategy
aimed at achieving world leadership by pursuing cost
leadership, differentiation, or a combination of the two and
by creating a variety, needs, or access-based position or a
combination of the three.
2. The relationship is reciprocal. Each partner possesses specific
strengths that it shares with the others; learning must take
place on all sides.
3. The partners vision and efforts are truly global, extending
beyond home countries and home regions to the rest of the
world.
4. If the relationship is organized along horizontal lines,
continual transfer of resources laterally between partners is
required, with technology sharing and resource pooling
representing norms.
5. If the relationship is along vertical lines, both parties to the
relationship must understand their core strengths and be
able to defend their competitive position against the
possibility of either a forward or backward integration move
by their vertical partner, and they must work together to
create a unique value for the customers of the downstream
partner in the value chain.
6. When competing in markets excluded from the partnership,
the participants retain their national and ideological identities.
The Iridium program described in the box Iridium: Anatomy
of Marketing Failure embodied several prerequisites that
experts believe are the hallmarks of good alliances. First,
Motorola formed an alliance to exploit a unique strength,
namely, its leadership in wireless communications. Second, the
Iridium alliance partners possessed unique strengths of their
own. Third, it was unlikely that any of the partners has the
ability or the desire to acquire Motorolas unique strength.
Finally, rather than focusing on a particular market or product,
Iridium was an alliance based on skills., know-how, and
technology.? However, when all was said and done, Iridium
failed. The lesson is that getting all of the alliance elements
aligned is of no use if the product does not offer a unique
value. Iridium was overtaken by cellular and by alternative and
more realistic satellite projects.
As James Brian 0uinn, Professor Emeritus at the Tuck School.
pointed out, Nike, the largest producer of athletic footwear in
the world, does not manufacture a single shoe; Gallo, the largest
wine company on earth, does not grow a single grape; and
Boeing, the preeminent aircraft manufacturer, makes little more
than cockpits and wings While outsourcing manufacturing for
many companies might be a tactical response dedicated to some
immediate cost savings, it is clear that Nike, Gallo, and Boeing
put significant thought into establishing their supply chains,
and that they could view their supplier arrangements as strategic.
In fact, Nikes ability to outsource its manufacturing to multiple
low-cost producers in the Far East has been a critical component
of its success. Although these vertical arrangements may be
159
Every company faces a business environment characterized by

unprecedented degrees of dynamism, turbulence, and
unpredictability. Todays firm must be equipped to respond to
mounting economic and political pressures. Reaction time has
been sharply cut by advances in technology. The firm of
tomorrow must be ready to do whatever it takes to ensure that
it is creating a unique value for customers and that it has a
competitive advantage.
critically important to the success of the firm, they are not

alliances unless the partners are linked in a long-term relationship. If they are not then they are simply supply agreements.
Iridium: Anatomy of a Marketing Failure

In the spectrum of companies operating in the global marketplace, there
are winners and there are losers. Irid-ium, which thought it had the
resources and strategy to be a leader in the telecommunications industry,
ended up as one of the most expensive marketing failures in history.
Although marketing alone is rarely the sole cause of failure, in the case
of Iridium, the fundamental and critical reason for failure was the total
lack of mar-keting analysis and realistic marketing planning.
The Iridium project cost an estimated $5 billion in 1998. Its business
consisted of a global satellite network of 66 satellites and the manufacture of digital phones and chips. The company was a consortium with
many diverse partners from around the world. Motorola, a major investor,
provided product systems and financing, and owned 18 percent of
Iridium.
Iridium was supposed to revolutionize the telecom-munications industry.
Its unique feature was that it could provide service anywhere in the world.
The primary was international business travelers a market es-timated to
be about eight million.
What actually happened? The Iridium phone was described by users as a
brick-like device. It weighed 500g versus 120g for most cell phones.
and required sev-eral attachments. Instructions for using the phone were
difficult to understand. The phone cost $3,000 and air time ranged from
$3 to $7 per minute.
Iridium spent $140 million in media to launch the product. Their slogan
was Anytime, anywhere. Unfor-tunately, this slogan was referring only
to their world-wide service-the phone could not be used inside buildings or
moving cars. Their advertisements appeared in The Wall Street Journal,
Fortune, other business publi-cations and airline magazines. A direct
mail campaign in numerous international markets and employing 20 different languages was utilized. The advertising campaign generated over one
million sales leads. Unfortunately, the company bungled this effort by not
adequately fol-lowing up on these leads,
As if all these conditions werent enough to con-demn the product to
failure, the first samples of the product were late in delivery and
experienced software problems. The product had not been properly tested,
there was not guarantee for the security of the system, and only 25,000
users could be serviced at one time.
Iridium is an example of technology in search of a market. From the
beginning, the project was driven by a technological vision that ignored both
the competition and the consumer. In the end, it failed because it failed to
create a unique value in a competitive marketplace.
Nike and many other companies have faced a growing consumer

concern about the working conditions in supplier companies.
Essentially, even though the legal link between the supplier and
buyer is limited to the purchase agreement, consumers have
insisted that the buyer be held responsible for working
conditions in the supplier company.
An example of a strategic relationship of partners along vertical
lines is in lean manufacturing; for example, the assembler of an
automobile relies on suppliers to not only build but to also
160
design key components of the automobile. This kind of

cooperation can lead to shorter design cycles, superior quality,
and lower cost but it will not occur unless there is a mutual
commitment to work together and a confidence on both sides
that the two parties will not invade each others domain. This
kind of cooperation can strengthen the competitive advantage
of each of the partners by enabling them to identify and
concentrate on their core strengths.
Another example of a strategic relationship is a university that
contracts with a hospitality company to provide management
services for lodging and meal service at a training center. The
hospitality company provides superior service as compared to
what the university could do itself, and thereby enables the
university to be a more effective competitor in its market. The
relationship is strategic because it enables the company to create
greater value for its customers.
Success Factors
Assuming that a proposed alliance meets the six prerequisites
just outlined, it is necessary to consider the following six basic
factors that are deemed to have significant impact on the success
of GSPs:
1. Mission. Successful GSPs create win-win situations, in which
participants pursue objectives on the basis of mutual need
or advantage.
2. Strategy. A company may establish separate GSPs with
different partners strategy must be thought out up front to
avoid conflicts.
3. Governance. Discussion and consensus must be the norms.
Partners must be viewed as equals.
4. Culture. Personal chemistry is important, as is the successful
development of a shared set of values. The failure of a
partnership between Britains General Electric Company and
Siemens A. G. was blamed in part on the fact that the former
was run by finance-oriented executives and the latter by
engineers.
5 Organization. Innovative structures and designs may be
needed to offset the complexity of multi country
management.
6. Management GSPs invariably involve a different type of
decision-making. Potentially divisive issues must be
identified in advance and clear, unitary lines of authority
established that would result in commitment by all partners.
Companies forming GSPs must keep these factors in mind.
Moreover, successful Collaborators will be guided by the
following four principles:
1. Despite the fact that partners are pursuing mutual goals in
some areas, partners must remember that they are
competitors in others.
2. Harmony is not the most important measure of success;
some conflict is to be expected.
3. All employees, engineers, and managers must understand
where cooperation ends and competitive compromise
begins.
4. As noted earlier, learning from partners is critically important
The challenge is to share enough skills to create advantage vis-avis companies outside the alliance while preventing a wholesale
transfer of core skills to the partner. This is a very thin line to
walk. Companies must carefully select what skills and technologies they pass to their partners. They must develop safeguards
against unintended, informal transfers of information. The
goal is to limit the transparency of their operations.
Alliances Between Manufacturers and

Marketers
Many companies have decided to source their product from
suppliers. Although many companies source in lower-wage
countries; even domestic companies are outsourcing tasks to
achieve greater efficiency. They contract out the manufacturing or
service activities in the value chain to companies that can supply
product at a lower cost than is possible with manufacturing inhouse.
These companies may find themselves at a disadvantage in
GSPs with a supplier; especially if the latters manufacturing
skills are the attractive quality. Unfortunately for the marketer, a
companys manufacturing excellence represents a multifaceted
competence that is not easily transferred. The higher-income
country managers and engineers must also learn to be more
receptive and attentive-they must overcome The not inventedhere syndrome and begin to think of themselves as students,
not teachers. At the same time, they must learn to be less eager
to show off proprietary lab and engineering successes. To limit
transparency, some companies involved in GSPs establish a
collaboration section. Much like a corporate communications
department, this department is designed to serve as a
gatekeeper through which requests for access to people and
information must be channeled. Such gate keeping serves an
important control function those guards against unintended
transfers.
A report by McKinsey and Company shed additional light on
the specific problems of alliances between Western and Japanese
firms. Often, problems between partners had less to do with
objective levels of performance than with a feeling of mutual
disillusionment and missed opportunity. The study identified
four common problem areas in alliances gone wrong. The first
problem was that each partner had a different dream: the
Japanese partner saw itself emerging from the alliance as a leader
in its business or entering new sectors and building a new basis
for the future, while the Western partner sought relatively quick
and risk -free financial returns. Said one Japanese manager, Our
partner came in looking for a return. They got it. Now they
complain that they didnt build a business. But that isnt what
they set out to create.
A second area of concern is the balance between partners. Each
must contribute to the alliance, and each must depend on the
other to a degree that justifies participation in the alliance. The
most attractive partner in the short run is likely to be a company
that is already established and competent in the business with
the need to master, say, some new technological skills. The best
long-term partner, however, is likely to be a less competent
player or even one from outside the industry.
Another common cause of problems is frictional loss, caused

by differences in management philosophy expectations, and
approaches. All functions within the alliance may be affected and
performance is likely to suffer as a consequence. Speaking of his
Japanese counterpart a Western businessperson said, Our
partner just wanted to go ahead and invest without considering
whether there would be a return or not. The Japanese partner
stated that the foreign partner took so long to decide on
obvious points that we were always too slow.14 Such differences often cause much frustration and time-consuming
debates, which stifle decision making.
Finally, the study found that short-term goals can result in the
foreign partners limiting the number of people allocated to the
joint venture. Those involved in the venture may perform only
two- or three-year assignments. The result is corporate amnesia;
that is, little or no corporate memory is built up on how to
compete in Japan. The original goals of the venture will be lost
as each new group of managers takes their turn. When taken
collectively, these four problems will almost always ensure that
the Japanese partner will be the only one in it for the long haul.
Case Examples of Partnerships

CFM Imitational/ GE/Snecma-A Success Story
Commercial Fan Moteur (CFM) International, a partnership
between General Electrics (GEs) jet engine division and
Snecma, a government-owned French aerospace company, is a
frequently cited example of a successful GSP. GE was motivated
in part by the desire to gain access to the European market so it
could sell engines to Airbus Industries; also, the $800 million in
development costs was more than GE could risk on its own.
While GE focused on system design and high-tech work, the
French side handled fans, boosters, and other components. The
partnership resulted in the development of a highly successful
new engine that, to date has generated tens of billions of
dollars in sales to 125 different customers.
The alliance got off to a strong start because of the personal
chemistry between two top executives, GEs Gerhard Neumann
and the late General Rene Ravaud of Snecma. The partnership
thrives despite each sides differing views regarding governance,
management, and organization. Brian Rowe, senior vice
president of GEs engine group, has noted that the French like
to bring in senior executives from outside the industry, whereas
GE prefers to bring in experienced people from within the
organization. Also, the French prefer to approach problem
solving with copious amounts of data, whereas Americans may
take a more intuitive approach is Still, senior executives from
both sides involved in the partnership have been delegated
substantial responsibility.
AT&T/ Olivetti-A Failure
In theory, the partnership in the mid-1980s between AT&T and
Italys Olivetti appeared to be a winner: The collective mission
was to capture a major share of the global market for information processing and communications.16 Olivetti had what
appeared to be a strong presence in the European office
equipment market; AT &T executives, having just presided over
the divestiture of their companys regional telephone units, had
set their sights on overseas growth, with Europe as the starting
161
The issue of learning deserves special attention. One team of

researchers notes the following:
point. AT&T promised its partner $260 million and access to

microprocessor and telecommunications technology. The
partnership called for AT&T to sell Olivettis personal computers in the United States; Olivetti, in turn, would sell AT&T
computers and switching equipment in Europe. Underpinning
the alliance was the expectation that synergies would result from
the pairing of companies from different industries-communications and computers.
Unfortunately, that vision was nothing more than a hope:
There was no real strength in Olivetti in the computer market,
and Olivetti had no experience or capability in communications
equipment. Tensions ran high when sales did not reach
expected levels.
AT&T group executive Robert Kavner cited communication
and cultural differences as being important factors leading to the
breakdown of the alliance. I dont think we or Olivetti spent
enough time understanding behavior patterns, Kavner said.
We knew the culture was different but we never really penetrated. We would get angry, and they would get upset.17 In
1989, AT&T cashed in its Olivetti stake for a share in the parent
company Compagnie Industrial Riunite S.p.A. (CIR). In 1993,
citing a decline in CIRs value, AT&T sold its remaining stake.
Boeing/Japan-A Controversy
GSPs have been the target of criticism in some circles. Critics
warn that employees of a company that become reliant on
outside suppliers for critical components will lose expertise and
experience erosion of their engineering skills. Such criticism is
often directed at GSPs involving U.S. and Japanese firms. For
example, a proposed alliance between Boeing and a Japanese
consortium to build a new fuel-efficient airliner, the 717,
generated a,great deal of controversy, The projects $4 billion
price tag was too high for Boeing to shoulder alone. The
Japanese were to contribute between $1 billion and $2 billion;
in return, they would get a chance to learn manufacturing and
marketing techniques from Boeing. Although the 717 project
was shelved in 1988, a new wide-body aircraft, the 777, was
developed with about 20 percent of the work subcontracted out
to Mitsubishi, Fuji, and Kawasaki. Critics envision a scenario in
which the Japanese use what they learn to build their own
aircraft and compete directly with Boeing in the future-a
disturbing thought because Boeing is a major exporter to world
markets. One team of researchers has developed a framework
outlining the stages that a company can go through as it
becomes increasingly dependent on partnerships,
Stage One: Outsourcing of assembly for inexpensive labor
Stage Two: Outsourcing of low-value components to reduce
product price.
Stage Three: Growing levels of value-added components
move abroad
Stage Four: Manufacturing skills, designs, and functionally
related technologies move abroad
Stage Five: Disciplines related to quality, precision manufacturing, testing, and future avenues of product derivatives leave
Stage Six: Core skills surrounding components, miniaturization, and complex systems integration move abroad.
162
Stage Seven: Competitor learns the entire spectrum of skills

related to the under lying core competence
The next stage is obvious: The partner now has the complete
manufacturing skill set and capability and may decide to push
for forward integration, that is, to move closer to the customer
by introducing its own brand into the marketplace,
International Partnerships in Developing

Countries
Central and Eastern Europe, Asia, Mexico, and Central and
South America offer exciting opportunities for firms seeking to
enter gigantic and largely untapped markets. An obvious
strategic alternative for entering these markets is the strategic
alliance. Like the early joint ventures between American and
Japanese firms, potential partners will trade market access for
know-how, but the question of whether alliances are the best
way to go to gain market access must be carefully evaluated.
In China, multinational companies are required to take local
partners and many are doing quite well. Presently, the top 200
joint ventures in China are growing at an average compound
annual growth rate of 38 percent at an 8 percent after-tax
margin. Although investment spending is understandable in
developing countries, many multinational companies have
taken a long-term strategy too far and are rethinking their joint
venture efforts in China. Rick Yan states, If youre not making
money in China now, theres little chance you will without
changing your strategy. He concludes that companies who
tolerate poor short-term results in the mistaken belief that such
results are a trade-off for future probability should reexamine
their strategies. Yan found that success is more a matter of
managerial capacity, critical mass scale, and product portfolio
than length of stay. Coca-Cola has been successful while PepsiCola is not. When regulations were eased, Coca-Cola sought
equity stakes and management Control in its joint ventures.
Pepsi failed to do this until much later. It is not enough to have
a local partner-marketing and management are also critical.
A Central European market with interesting potential is
Hungary. Hungary already has the most liberal financial and
commercial system in the region. It has also provided investment incentives to Westerners, especially in high-tech industries.
This former communist economy has its share of problems.
Digitals recent joint venture agreement with the Hungarian
Research Institute for Physics and the state-supervised computer systems design firm Szamalk is a case in point. Though
the venture was formed so Digital will be able to sell and service
its equipment in Hungary, the underlying importance of the
venture was to stop the cloning of Digitals computers by
Central European firms.
Corporative Strategies in Japan: Keiretsu

Japans keiretsu represent a special category of cooperative
strategy. A keiretsu is an inter business alliance or enterprise
group that, in the words of one observer, resembles a fighting
clan in which business families join together to vie for market
share. Keiretsu exist in a broad spectrum of markets, including
the capital market primary goods markets, and component parts
markets. Keiretsu relationships are often cemented by bank
ownership of large blocks of stock as well as cross-ownership
Some observers have disputed charges that keiretsu have an

impact on market relationships in Japan, claiming instead that
the groups primarily serve a 60cial function. Others acknowledge the past significance of preferential trading patterns
associated with keiretsu but assert that the latters influence is
now weakening. It is beyond the scope of this chapter to
address these issues in detail, but there can be no doubt that,
for companies competing with the Japanese or wishing to enter
the Japanese market, a general understanding of keiretsu is
crucial. Imagine, for example, what it would mean in the United
States if an automaker (e.g., General Motors [GM]), an electrical
products company.
(GE), a steel maker (USX), and a computer firm (IBM) were
interconnected rather than separate firms. Global competition in
the era of keiretsu means competition exists not only among
products but also between different systems of corporate
governance and in dustrialorganization.
As the hypothetical example from America suggests, some pf
Japans biggest and best-known companies are at the center of
keiretsu. For example, Mitsui Group and Mitsubishi Group are
organized around big trading companies. These two, together
with the I Sumitomo, FuYo, Sanwa, and DKB groups, make
up the big six keiretsu. Each group I strives for a strong
position in each major sector of the Japanese economy. Annual
revenues in each group are in the hundreds of billions of
dollars. In absolute terms, keiretsu constituted less than 0.01
percent of all Japanese companies. However, they accounted for
an astonishing 78 percent of the market valuation of shares on
the Tokyo Stock Exchange, a third of Japans business capital,
and approximately one quarter of its sales. These alliances can
effectively block foreign suppliers from entering the market and
result in higher prices to Japanese consumers, while at the same
time resulting in corporate stability, risk sharing, and long-term
employment.
In addition to the big six, several other keiretsu have formed,
bringing new configurations to the basic forms described
previously. Vertical supply and distribution keiretsu are alliances
between manufacturers and retailers. For example, Matsushita
controls a chain of 25,000 National stores in Japan, through
which it sells its Panasonic, Techniques, and Quasar brands.
About half of Matsushitas domestic sales are genera led
through the National chain, 50 to 80 percent of whose inventory consists of Matsushitas brands. Japans other major
consumer electronics manufacturers, including Toshiba and
Hitachi, have similar alliances (Sonys chain of stores is much
smaller and weaker by comparison). All are fierce competitors in
the Japanese market.
Another type of manufacturing keiretsu outside the big six
consists of vertical hierarchical alliances between assembly
companies and suppliers and component manufacturers. Inter
group operations and systems are closely integrated, with
suppliers receiving long-term contracts. Toyota, for example, has

a network of about 175 primary and 4,000 secondary suppliers.
One supplier is Koits Toyota owns about one fifth of Koitos
shares and buys about half of its production. The net result of
this arrangement is that Toyota produces about 25 percent of
the sales value of its cars, compared with 50 percent for GM.
Manufacturing keiretsu show the gains that can result from an
optimal balance of supplier and buyer power. Because Toyota
buys a given component from several suppliers (some are in the
keiretsu, some are independent), discipline is imposed down
the network. Also, since Toyotas suppliers do not work
exclusively for Toyota, they have an incentive to be flexible and
adaptable.
The practices described here lead to the question of whether or
not keiretsu violate antitrust laws. As many observers have
noted, the Japanese government frequently puts the interests of
producers ahead of the interests of consumers. In fact, the
keiretsu were formed in. the early 1950s as regroupings of four
large conglomerates-zaibots/I-that dominated the Japanese
economy until 1945. They were dissolved after the occupational
forces introduced antitrust as part of the reconstruction. Today,
Japans Fair Trade Commission appears to favor harmony
rather than pursuing anticompetitive behavior. As result, the
U.S. Federal Trade Commission has launched several investigations of price fixing, price discrimination, and exclusive supply
arrangements. Hitachi, Canon, and other Japanese companies
have also been accused of restricting the availability of high-tech
products in the U.S. market. The Justice Department has
considered prosecuting the U.S. subsidiaries of Japanese
companies if the parent company is found guilty of unfair trade
practices in the Japanese market.
Beyond Strategic Alliances

The relationship enterprise is said to be the next stage of
evolution of the strategic alliance. Groupings of firms in
different industries and countries will be held together by
common goals that encourage them to act almost as a single
firm.
More than the simple strategic alliances we know today,
relationship enterprises will be super alliances among global
giants, with revenues approaching $1 trillion. They would be
able to draw on extensive cash resources, circumvent antitrust
barriers, and, with home bases in all major markets, enjoy the
political advantage of being a local firm almost anywhere.
This type of alliance is not driven simply by technological
change but by the political necessity of having multiple home
bases,
Another perspective on the future of cooperative strategies
envisions the emergence of the virtual corporation. (The term
virtual is borrowed from computer science; some computers
feature virtual memory that allows them to function as though
they have more storage capacity than is actually built into their
memory chips.) As described in a Business Week cover story, the
virtual corporation will Seem to be a single entity with vast
capabilities but will really be the result of numerous collaborations assembled only when theyre needed.
On a global level, the virtual corporation could combine the
twin competencies of cost-effectiveness and responsiveness;
163
of stock between a company and its buyers and non financial

suppliers. Furthermore, keiretsu executives can legally sit on each
others boards, as well as share information and coordinate
prices in closed-door meetings of presidents councils. Thus,
keiretsu are essentially cartels that have the governments
blessing.
thus, it could pursue the think global, act local philosophy

with ease. This reflects the trend toward mass customization.
The same forces that are driving the formation of the digital
keiretsu-high-speed communication networks, for example-are
embodied in the virtual corporation As noted by Davidow and
Malone, The success of a virtual corporation will depend on its
ability to gather and integrate a massive flow of information
throughout its organizational components and intelligently act
upon that information.
Why has the virtual corporation suddenly burst onto the scene?
Previously, firms lacked the technology to facilitate this type of
data management. Today, distributed databases, networks, and
open systems make possible the kinds of data flows required
for the virtual corporation. In particular, these data flows permit
supply-chain management. Ford provides an interesting
example of how technology is improving information flows
among the far-flung operations of a single company. Fords $6
billion world car-known as the Mercury Mystique and Ford
Contour in the United States and the Mondeo in Europe-was
developed using an international communications network
linking computer workstations of designers and engineers on
three continents.
One of the hallmarks of the virtual corporation will be the
production of virtual products-products that practically exist
before they-are manufactured. As described by Davidow and
Malone, the concept, design, and manufacture of virtual
products are stored in the minds of cooperating teams, in
computers, and in flexible production lines.
IKEA Cost Focused

IKEA, the Swedish furniture company described in the chapter
introduction, is an example of the cost focus strategy. Notes
George Bradley, president of Levitz Furniture in Boca Raton,
Florida, [IKEAJ has really made a splash Theyre going to
capture their niche in every city they go into. Of course, such a
strategy can be risky. As Bradley explains, Their market is finite
because it is so narrow. If you dont want contemporary,
knockdown furniture, its not for you. So it takes a certain
Customer to buy it. And remember, fashions change. The issue
of sustainability is
central to this strategy concept. As noted, cost leadership is a
sustainable source of competitive advantage only if barriers
exist that prevent competitors from achieving the same low
costs. Sustained differentiation depends on continued perceived
value and the absence of imitation by competitors. Several
factors determine whether focus can be sustained as a source of
competitive advantage. First, a cost focus is sustainable if a
firms competitors are defining their target markets more
broadly. A foeuser does not try to be all things to all people:
Competitors may diminish their advantage by trying to satisfy
the needs of a broader market segment-a strategy that, by
definition, means a blunter focus. Second. a firms differentiation focus advantage is sustainable only if competitors cannot
define the segment even more narrowly. Also, focus can be
sustained if competitors cannot overcome barriers that prevent
imitation of the focus strategy, and if consumers in the target
segment do not migrate to other segments that the focuser
does not serve.
164
IKEAs approach to the furniture business has enabled it to rack

up impressive growth in an industry in which overall sales have
been flat. Sourcing furniture from more than 2,330 suppliers in
64 countries helps the company maintain its low-cost position.
IKEAs international growth has been quite successful but
probably would not have been possible if the company had
gone public according to its founder, Ingvar Kamprad. He does
not feel a need to show constant profits and, therefore, can take
more investment risks. During the 1990s, IKEA opened several
stores in Central and Eastern Europe (Poland is one of its
fastest. growing markets) and has since expanded into Russia
...here it plans to open a total of 10 outlets. Because many
consumers in those regions have relatively low purchasing
power, the stores offer a smaller selection of goods; some
furniture was designed specifically for the cramped living styles
typical in former Soviet bloc countries. Kamprad firmly believes
in long-term investment and states: It will take twenty-five
years to furnish Russia. He believes that investment in Russia
would not have been possible if the company had been a public
company, which often suffers from a need to show short-term
profits, Throughout Europe, IKEA benefits from the
perception that Sweden is the source of high quality products.
The United Kingdom represents the fastest-growing market in
Europe; IKEAs London store has achieved annual sales
growth of 20 percent. Germany currently accounts for more
than one quarter of IKEAs total revenues. IKEA has also
opened two stores in China but is having difficulty securing
local suppliers and positioning for one store that is located in a
shopping mall.
Industry observers predict the United States with eventually be
IKEAs largest market (presently it accounts for 15 percent of
IKEAs volume). The company opened its first U.S. store in
Philadelphia in 1985; today, IKEA has 14 outlets in major
metropolitan areas. Notes Jeff Young, chief operating officer
of Lexington Furniture Industries, IKEA is on the way to
becoming the Wal-Mart stores of the home-furnishing
industry. If youre in this business, youd better take a look.
Some American customers, however, are irked to find popular
items are sometimes out of stock. Another problem is the long
lines resulting from the companys no-frills approach. Complained one shopper, Great idea, poor execution. The quality
of much of what they sell is good, but the hassles make you
question whether its worth it.
Goran Carstedt, president of IKEA North America, responds
to such criticism by referring to the companys mission. If we
offered more services. our prices would go up, he explains.
Our customers understand our p~ilosophy, which calls for
each of us to do a little in order to save a lot. They value our
low prices. And almOst all of them say they will come back
&gain. To keep them coming back, IKEA is spending between
$25 million and $35 million on advertising to get its mesSage
across. Although it is a common industry practice to rely heavily
on newspaper and radio advertising, two thirds of IKEAs
North American advertising budget is allocated forty. John
Sttnik, an executive at IKEAs U.S. Inc., says, We distanced
ourselves from the other furniture stores. We decided TV is
something we can own.
The best strategy is always to be very strong, first generally then

at the decisive point. . . there is no more imperative and no
simpler law for strategy than to keep the forces concentrated.
-CARL VON CLAUSE\VITZ, 17801831
Yom Kriege, Book III, Chapter XI,
Assembly of Forces in Space, (1832-1837)
The following lesson aims to make the student

understand the following topics:
1. Industry Analysis Forces Influencing Competition
2. Global Competition and National Competitive Advantage
3. Competitive Advantage and Strategic Models
4. Strategic Positions
5. Competitive Innovation and Strategic Intent
From its home base in Sweden, IKEA has become the worlds
largest furniture retailer doing $8.5 billion in annual sales in
1998-1999. With 150 stores in 29 countries, the companys
success reflects founder Ingvar Kamprads vision of selling a
wide range of stylish, functional home furnishings at prices so
low that the majority of people can afford to buy them. The
store exteriors are painted bright blue and yellow-Swedens
national colors. Shoppers view furniture on the main floor in
scores of realistic settings arranged throughout cavernous
showrooms. In a departure from standard industry practice,
IKEAs furniture bears names such as Ivar and Sten instead
of model numbers. At IKEA, shopping is very much a selfservice activity; after browsing and writing down the names of
desired items, shoppers pick up their furniture on the lower
level. There they find boxes containing the furniture in kit form;
one of the cornerstones of IKEAs strategy is having customers
take their purchases home in their own vehicles and assemble
the furniture themselves. The lower level of a typical IKEA
store also contains a restaurant, a grocery store called the Swede
Shop, a supervised play area for children, and a baby care room.
The bottom line for IKEA is that the company creates a unique
value for customers: Instead of salespersons, a limited number
of display items, and a catalog from which to order, IKEA
offers informative displays and product information for
everything it sells. In a traditional furniture store, you place an
order and wait weeks or months for delivery. At IKEA, you
make a purchase and take it with you. Traditional furniture is
assembled and ready to use. IKEA furniture is sold in kit form
ready to assemble. The traditional store offers salespersons or
consultants, assembled and ready to use product, delivery, and
higher prices. IKEA offers rock-bottom prices.
IKEA is focused on the young customer or the young at heart:
The core market is the customer with a limited budget who
appreciates IKEAs product line, displays, and prices. Because
IKEA knows the needs and wants of this market segment, it
has been successful in serving customers not only in Sweden
where the company was founded but also globally. IKEAs

success in crossing borders has been instrumental in changing
furniture retailing from a multidomestic industry to a global
one.
The essence of global marketing strategy is in successfully
relating the strengths of an organization to its environment. As
the horizons of marketers have expanded from domestic to
global markets, so too have the horizons of competitors. The
reality in almost every industry today-including home furnishings-is global competition This fact of life puts an organization
under increasing pressure to master techniques for conducting
industry analysis, competitor analysis, understanding competitive advantage at both the industry and national levels, and
developing and maintaining competitive advantage.
Industry Analysis Forces Influencing

Competition
A useful way of gaining insight into the nature of competition
is through industry analysis. As a working definition, an
industry can be defined as a group of firms that produce
products that are close substitutes for each other. In any
industry, competition works to drive down the rate of return
on invested capital toward the rate that would be earned in the
economists perfectly competitive industry. Rates of return that
are greater than this so-called competitive rate will stimulate an
inflow of capital either from new entrants or from existing
competitors making additional investment. Rates of return
below this competitive rate will result in withdrawal from the
industry and a decline in the levels of activity and competition.
According to Michael E. Porter of Harvard University, a leading
theorist of competitive strategy, there are five forces influencing
competition in an industry (see Figure 10-1):
FIGURES 10 1 Forces influencing Competition in an industry
Threat of new entrants
Bargaining Power of
Suppliers
Rivalry among existing

competitors
Bargaining power of
Buyers
Threat of substitute
products or services
The threat of new entrants; the threat of substitute products or

services; the bargaining power of suppliers; the bargaining
power of buyers; and the competitive rivalry between current
members of the industry. In industries such as soft drinks,
pharmaceuticals, and cosmetics, a favorable combination of the
five forces has resulted in attractive returns for competitors.
However, pressure from any of the forces can reduce or limit
profitability, as evidenced by the recent fortunes of some
165
LESSON 17:
COMPETITIVE ANALYSIS AND STRATEGY
competitors in the personal computer (PC) and semiconductor

industries. A discussion of each of the five forces follows.
Threat of New Entrants

New entrants to an industry bring new capacity, a desire to gain
market share and position, and, very often, new approaches to
serving customer needs. The decision to become a new entrant
in an industry is often accompanied by a major commitment of
resources. New players push prices downward and squeeze
margins, resulting in reduced industry profitability. Porter
describes eight major sources of barriers to entry, the presence
or absence of which determines the extent of the threat of new
industry entrants.
The first barrier, economies of scale, refers to the decline in per
unit product costs as the absolute volume of production per
period increases. Although the concept of scale economies is
frequently associated with manufacturing, it is also applicable to
research and development (R&D), general administration,
marketing, and other business functions. Hondas efficiency at
engine R&D, for example, results from the wide range of
products it produces that feature gasoline-powered engines.
When existing firms in an industry achieve significant economies of scale, it becomes difficult for potential new entrants to
be competitive.
Product differentiation, the second major entry barrier, is the
extent of a products perceived uniqueness-in other words,
whether or not it is a commodity. High levels of product
differentiation and brand loyalty, whether the result of physical
product attributes or effective marketing communication, raise
the bar for would-be industry entrants For example, managers
at Monsantos G. D. Searle subsidiary achieved differentiation
an.d erected a barrier in the artificial sweetener industry by
insisting that the Nutrasweet logo and brand mark-a red-andwhite swirl-appear on diet soft-drink cans and bottles.
A third entry barrier relates to capital requirements. Capital is
required not only for manufacturing facilities (fixed capital) but
also for financing R&D, advertising, field sales and service,
customer credit, and inventories (working capital). The enormous capital requirements in such industries as pharmaceuticals,
mainframe computers, chemicals, and mineral extraction present
formidable entry barriers.
A fourth barrier to entry are one-time switching costs caused by
the need to change suppliers and products. These might include
retraining, ancillary equipment costs, the cost of evaluating a
new source, and so on. The perceived cost to customers of
switching to a new competitors product may present an
insurmountable obstacle preventing industry newcomers from
achieving success. For example, Microsofts huge installed base
of PC operating systems and applications presents a formidable
entry barrier.
A fifth barrier to entry is access to distribution channels. To the
extent that channels are full, expensive to enter, or unavailable,
the cost of entry is substantially increased because a new entrant
must create and establish new channels. Most foreign companies have encountered this barrier in Japan. This is not a
so-called non tariff barrier, or a barrier designed to discriminate
against foreign firms-it applies to any firm, domestic or foreign,
seeking market entry.
166
Government policy is frequently a major entry barrier. In some

cases the government will restrict competitive entry. This is true
in a number of industries, especially those in the low, lowermiddle, and upper-middle income countries that have been
designated as national industries by their respective governments. Japans postwar industrialization strategy was based on
a policy of preserving and protecting national industries in
their, development and growth phases. In many cases, the
Japanese companies in these protected industries have gone on
to become major world competitors in their industries.
Komatsu, for example, was a weal local company when
Caterpillar announced its interest in entering the Japanese
market. Komatsu was given two years of protection by the
Japanese government, and today it is the number-two earthmoving equipment company in the world. China is following a
policy today of requiring foreign investors in many industries to
join with local partners in their Chinese investments. In
telecommunications, for example, it is not possible to invest in
China without a partner.
Established firms may also enjoy cost advantages independent
of the scale economies that present barriers to entry. Access to
raw materials, favorable locations, and government subsidies are
several examples.
Finally, expected competitor response can be a major entry
barrier. If new entrants expect existing competitors to respond
strongly to entry, their expectations about the rewards of entry
will certainly be affected, A potential competitors belief that
entry into an industry or market will be an unpleasant experience may serve as a strong deterrent. Bruce Henderson, former
president of the Boston Consulting Group, used the term
brinkmanship to describe a recommended approach for
deterring competitive entry. Brinkmanship occurs when industry
leaders convince potential competitors that any market entry
effort will be countered with vigorous and unpleasant responses.
G. D. Searle used brinkmanship especially price cuts-to deter
competitors from entering the low-calorie artificial sweetener
market as Nutrasweets patents expired. At the end of 1989,
Systse T. Kuipers, a marketing manager at Holland Sweetener
Company, complained that it is a bloody fight and everybodys
losing money. (Nutrasweet managers] go for the last kilo even
if they have to give the product away. In Kuiperss view, G. D.
Searles tactic of deep price cuts on Nutrasweet had the sole
intent of chasing competitors out of the marketplace. In fact,
several European producers have already abandoned the
business, proof that G. D. Searles policy of brinkmanship was
an effective competitive response to the threat of new entrants.
Threat of Substitute Products

A second force influencing competition in an industry is the
threat of substitute products. The availability of substitute
products places limits on the prices market leaders can charge in
an industry; high prices may induce buyers to switch to the
substitute.
For example, Barnes & Noble watched the upstart Amazon
create a new product the on-line bookstore. Customers could
now order from millions of books and have them delivered to
their doors in a matter of days. For a segment of the book
Bargaining Power of Suppliers

If suppliers have enough leverage over industry firms, they can
raise prices high enough to significantly influence the profitability of the industry. Several factors influence supplier bargaining
power:
1. Suppliers will have the advantage if they are large and
relatively few in number.
2. When the suppliers products or services are important
inputs to user firms, are highly differentiated, or carry
switching costs, the suppliers will have considerable leverage
over buyers.
3. Suppliers will also enjoy bargaining power if their business is
not threatened by alternative products.
4. The willingness and ability of suppliers to develop their own
products and brand names if they are unable to get
satisfactory terms from industry buyers will influence their
power.
A good example of the bargaining power of suppliers is
OPEC, which controls the price of oil. In the 1970s and again
in 2000, gasoline prices were significantly raised. At one point in
time gasoline prices at the pumps had increased about 33
percent in six months. Since there is no alternative, customers
are forced to pay the higher prices.
Bargaining Power of Buyers
The ultimate aim of industrial customers is to pay the lowest
possible price to obtain the products or services that they use as
inputs. Usually, therefore, the buyers best interests are served if
they can drive down profitability in the supplier industry. The
following are conditions under which buyers can exert power
over suppliers:
1. When they purchase in such large quantities that supplier
firms depend on the buyers business for survival.
2. When the suppliers products are viewed as commodities-that
is, as standard or undifferentiated-buyers are likely to bargain
hard for low prices because many supplier firms can meet
their needs.
3. When the supplier industrys products or services represent a
significant portion of the buying firms costs.
4. When the buyer is willing to achieve backward vertical
integration.
Rivalry Among Competitors
Rivalry among firms refers to all the actions taken by firms in
the industry to improve their positions and gain advantage over
each other. Rivalry manifests itself in price competition,
advertising battles, product positioning, and attempts at
differentiation. To the extent that rivalry among firms forces
companies to innovate and/or rationalize costs, it can be a

positive force. To the extent that it drives down prices and,
therefore, profitability, it creates instability and negatively
influences the attractiveness of the industry. Several factors can
create intense rivalry:
1. Once an industry becomes mature, firms focus on market
share and how it can be gained at the expense of others.
2. Industries characterized by high fixed costs are always under
pressure to keep production at full capacity to cover the fixed
costs. Once the industry accumulates excess capacity, the drive
to fill capacity will push prices-and profitability-down.
3. A lack of differentiation or an absence of switching costs
encourages buyers to treat the products or services as
commodities and shop for the best prices. Again, there is
downward pressure on prices and profitability.
4. Firms with high strategic stakes in achieving success in an
industry generally are destabilizing because they may be
willing to accept unreasonably low profit margins to
establish themselves, hold position, or expand.
Global Competition and National

Competitive Advantage
An inevitable consequence of the expansion of global marketing activity is the growth of competition on a global basis. In
industry after industry, global competition is a critical factor
affecting success. In some industries, global companies have
virtually excluded all other companies from their markets. An
example is the detergent industry, in which three companiesColgate, Unilever, and Procter & Gamble (P&G)-dominate an
increasing number of detergent markets worldwide, including
Latin America and the Pacific Rim. Because many companies can
make a quality detergent, global brand-name muscle and
marketing skills have become the sources of global competitive
advantage that overwhelm local competition in market after
market.
Based on recent changes in the way business is done around the
world, Michael Porter urges global companies not to lose sight
of Local things-knowledge, relationships and motivation that
distant rivals cannot match. (See discussion under Related and
Supporting Industries later in this chapter.)
The automobile industry has also become fiercely competitive
on a global basis. Part of the reason for the initial success of
foreign automakers in the United States was the reluctance or
inability of US. Manufacturers to design and manufacture highquality, inexpensive small cars The resistance of B.S.
manufacturers was based on the economics of car production:
the bigger the car, the higher the list price. Under this formula,
small cars meant smaller unit profits. Therefore US. manufacturers resisted the growing preference of US. customers for
smaller cars-a classic case of ethnocentrism and marketing
myopia. Meanwhile, European and Japanese manufacturers
product lines have always included cars smaller than those made
in the United States. In Europe and Japan, market conditions
were much different than in America: less space, high taxes on
engine displacement and on fuel, and greater market interest in
functional design and engineering innovations. First
Volkswagen and then Japanese automakers such as Nissan and
167
market, local bookstores with only a few thousand books and a

Starbucks Coffee facility were not necessary. Since it started in
1995, Amazon.com has grown to over $1.6 billion, expanded
its product line into CDs and videos, diversified into pet and
drug supplies to name but two areas, and served 17 million
customers in 160 countries. Amazon.com is growing at the rate
of 169 percent while Barnes & Noble is only growing at 16
percent. Apparently, the virtual bookstore is an extremely
successful replacement for a traditional format.
Toyota discovered a growing demand for their cars in the US.

Market. It is noteworthy that many significant innovations and
technical advances-including radial tires, anti lock brakes, and
fuel injection-also came from Europe and Japan. Airbags are a
no table exception.
Another major innovation in the auto industry, which has since
spread to all industries, is the revolutionary innovation of lean
manufacturing first introduced at Toyota. This radically different
way of designing and building an automobile dramatically
reduced costs and increased quality. Lean manufacturing was
invented in Japan and gave the Japanese automobile companies
a knockout advantage in world markets: lower costs and higher
quality. Indeed, lean manufacturing has replaced mass production in the same way that mass production replaced craft
production, and for the same reasons: It raised the bar on
quality and dramatically reduced costs. Today, companies that
have not mastered the art and science of lean manufacturing are
no longer in the auto business.
The effect of global competition has been highly beneficial to
consumers around the world. In the two examples citeddetergents and automobiles consumers have benefited. In
Central America, detergent prices have fallen and quality has
risen as a result of global competition. In the United States, for
example, foreign companies have provided consumers with the
automobile products, performance, and price characteristics they
wanted. If smaller, lower-priced imported cars had not been
available, it is unlikely that Detroit manufacturers would have
provided a comparable product as quickly. What is true for
automobiles in the United States is true for every product class
around the world. Global competition expands the range of
products and increases the likelihood that consumers will get
what they want.
The downside of global competition is its impact on the
producers of goods and services. When a company offers
consumers in other countries a better product at a lower price,
this company takes customers away from domestic suppliers.
Unless the domestic supplier can create new values and find new
customers, the jobs and livelihoods of the domestic suppliers
employees are threatened. The social effects of these influences
often prompt political responses that destabilize the business
environment. Both business and government policy makers are
trying to better understand the factors that make a specific
nation a better (or worse) place for a company in a specific
industry. Businesses want to understand how to choose
locations for their activities that give them a competitive
advantage. Governments want to know whether they should
intervene in the business environment and, if so, how.
The following section addresses a number of questions. Why is
a particular nation a good home- base for specific industries?
Why, for example, is the United States the home base for the
leading competitors in PCs, software, credit cards, and movies?
Why is Germany the home of so many world leaders in
printing presses, chemicals, and luxury cars? Why are so many
leading pharmaceutical, chocolate/confectionery, and trading
companies located in Switzerland? Why are the world leaders in
consumer electronics home based in Japan?
168
According to Michael E. Porter, the presence or absence of

particular attributes in individual countries influences industry
development. Porter describes these attributes factor conditions,
demand conditions, related and supporting industry, and firm
structure and rivalry-in terms of a national diamond. The
diamond shapes the environment in which firms compete in
their global industries.
Factor Conditions
The phrase factor conditions refers to a countrys endowment
of resources. Factor resources may have been created or
inherited and are divided into five categories: human, physical,
knowledge, capital, and infrastructure.
Human Resources
The quantity of workers available, the skills possessed by these
workers, wage levels, and the overall work ethic of the
workforce together constitute a nations human resource factors.
Countries with a plentiful supply of low-wage labor have an
obvious advantage in the current production of labor-intensive
products; however. in most manufacturing industries of the
developed world, the cost of manual labor is rapidly becoming
a smaller and smaller factor. Presently, labor averages about one
eighth or less of total costs. Any cost advantage will disappear
if wages increase and production moves to
Firm Strategy, Structure, and
Rivalry
Factor conditions
Demand Conditions
Related and Supporting

Industries
Determinants of national advantage
Another country. However, low wage countries may be at

disadvantage when it comes to the production of sophisticated
products requiring highly skilled workers capable of working
without extensive supervision.
Physical Resources
The availability, quantity, quality, and cost of land, water,
minerals, and other natural resources determine a countrys
physical resources. A countrys size and location are also
included in this category because proximity to markets and
sources of supply, as well as transportation costs, are strategic
considerations. These factors are obviously important advantages or disadvantages to industries dependent on natural
resources.
Knowledge Resources
The availability within a nation of a significant population with
scientific, technical, and market-related knowledge means a
nation is endowed with knowledge resources. The presence of
these factors is usually a function of the educational orientation
Capital Resources
Countries vary in the availability, amount, cost, and types of
capital available to the countrys industries. The nations savings
rate, interest rates, tax laws, and government deficits all affect the
availability of capital. The advantage to industries with low
capital costs versus those located in nations with relatively high
costs is sometimes decisive. Firms paying high capital costs are
frequently unable to stay in a market in which the competition
comes from a nation with low capital costs. The firms with the
low cost of capital can keep their prices low and force the firms
paying high costs to either accept low returns on investment or
leave the industry. The globalization of world capital markets is
changing the manner in which capital is deployed. Investors can
now send their capital to nations or markets with the best risk/
return profile. Global firms will increasingly be following capital
to the best places rather than operating in nations where capital
is scarce or expensive.
Infrastructure Resources
Infrastructure includes a nations banking system, health care
system, transportation system, and communications system, as
well as the availability and cost of using these systems. More
sophisticated industries are more dependent on advanced
infrastructures for success.
Basic Versus Advanced Factors

Factors can be further classified as either basic factors, such as
natural resources and labor, or advanced factors, such as highly
educated personnel and modem data communications infrastructure. Basic factors do not lead to sustainable international
competitive advantage. For example, cheap labor is a transient
national advantage that erodes as a nations economy improves
and average national income increases relative to other countries.
Advanced factors, which lead to sustainable competitive
advantage, are scarcer and require sustained investment. For
example, the existence of a labor force of trained artisans offers
Italy a basis of sustained competitive advantage in the Italian
tile industry.
Generalized Versus Specialized Factors

Another categorization of factors differentiates between
generalized factors, such as a suitable highway system, and
specialized factors, such as focused educational systems.
Generalized factors are precedents required for competitive
advantage; however, sustainable advantage requires the development of specialized factors. For example, the competitive
advantage of the Japanese robotics industry is fueled by
extensive university robotics courses and programs that
graduate robotics skilled trainees of the highest caliber.
Competitive advantage may also be created indirectly by nations
that have selective factor disadvantages. For example, the
absence of suitable labor may force firms to Develop forms of

mechanization that give the nations firms an advantage. Scarcity
of raw materials may motivate firms to develop new materials.
For. example, Japan, faced with scarce raw materials, developed
an industrial ceramics industry that leads the world in innovation.
Demand Conditions
The nature of home-market demand conditions for the firms
or industrys products and services is important because it
determines the rate and nature of improvement and innovation
by the firms in the nation. These are the factors that either train
firms for world-class competition or fail to adequately prepare
them to compete in the global marketplace. Three characteristics
of home demand are particularly important to the creation of
competitive advantage: (1) the composition of home demand,
(2) the size and pattern of growth of home demand, and (3)
the means by which a nations home demand pulls the nations
products and services into foreign markets.
The composition of home demand determines how firms
perceive, interpret, and respond to buyer needs. Competitive
advantage can be achieved when the home demand sets the
quality standard and gives local firms a better picture of buyer
needs, at an earlier time, than is available to foreign rivals. This
advantage is enhanced when home buyers pressure the nations
firms to innovate quickly and frequently. The basis for advantage is the fact that the nations firms can stay ahead of the
market when firms are more sensitive to and more responsive
to home demand and when that demand, in turn, reflects or
anticipates world demand.
The size and pattern of growth of home demand are important only if the composition of the home demand is
sophisticated and anticipates foreign demand. Large home
markets offer opportunities to achieve economies of scale and
learning while dealing with familiar, comfortable markets. There
is less apprehension about investing in large scale production
facilities and expensive R&D programs when the home market
is sufficient to absorb the increased capacity. If the home
demand accurately reflects or anticipates foreign demand, and if
the firms do not become content with serving the home
market, the existence of huge-scale facilities and programs will
be an advantage in global competition.
Rapid home-market growth is another incentive to invest in
and adopt new technologies faster, and to build large, efficient
facilities. The best example of this is Japan, where rapid homemarket growth provided the incentive for Japanese firms to
invest heavily in modern, automated facilities. Early home
demand, especially if it anticipates international demand, gives
local firms the advantage of getting established in an industry
sooner than foreign rivals. Equally important is early market
saturation, which puts pressure on a company to expand into
international markets and innovate. Market saturation is
especially important if it coincides with rapid growth in foreign
markets.
The means by which a nations products and services are
pushed or pulled into foreign countries is the third aspect of
demand conditions. The issue here is whether a nations people
and businesses go abroad and then demand the nations
169
of the society as well as the number of research facilities and

universities-both government and privateoperating in the
country. These factors are important to success in sophisticated
products and services and to doing business in sophisticated
markets. 1his factor relates directly to Germanys leadership in
chemicals; for some 150 years, Germany has been home to top
university chemistry programs, advanced scientific journals, and
apprenticeship programs.
products and services in those second countries. For example,

when the U.S. auto companies set up operations in foreign
countries, the U.S. auto parts industry followed. The same is
true for the Japanese auto industry. When the Japanese auto
companies set up operations in the United States, Japanese
parts suppliers followed their customers. Similarly, when
overseas demand for the services of U.S. engineering firms
skyrocketed after World War II, those firms in turn established
demand for U.S. heavy construction equipment. This provided
an impetus for Caterpillar to establish foreign operations.
A related issue is whether foreigners come to a nation for
training, pleasure, business, or research. After returning home,
they are likely to demand the products and services with which
they became familiar while abroad. Similar effects can result
from professional, scientific, and political relationships between
nations. Those involved in the relationships begin to demand
the products and services of the recognized leaders.
It is the interplay of demand conditions that contributes to
competitive advantage. Of special importance are those
conditions that lead to initial and continuing incentives to
invest and innovate and to continuing competition in increasingly sophisticated markets.
Related and Supporting Industries

A nation has an advantage when it is home to internationally
competitive industries in fields that are related to, or in direct
support of, other industries. Internationally competitive
supplier industries provide inputs to downstream industries
that are likely to be internationally competitive in terms of
technological innovation, price, and quality. Access is a function
of proximity both in terms of physical distance and cultural
similarity. It is not the inputs themselves that give advantage. It
is the contact and coordination with the suppliers that allow the
firm the opportunity to structure the value chain so that
linkages with suppliers are optimized. These opportunities may
not be available to foreign firms.
Similar advantages accrue when there are internationally
competitive and related industries in a nation that coordinate
and share value chain activities. These centers of competitive
advantage are known as clusters. Clusters are geographic
concentrations of interconnected companies and institutions in
a particular field, which constitute a critical mass. Opportunities
for sharing between computer hardware manufacturers and
software developers provide a clear example of clusters. Related
industries also create pull-through opportunities as described
earlier. Sales of U.S. computers abroad have created demand for
software from Microsoft and other U.S. companies. Porter
notes that the development of the Swiss pharmaceuticals
industry can be attributed in part to Switzerlands large synthetic
dye industry; the discovery of the therapeutic effects of dyes in
turn led to the development of pharmaceutical companies.
Other clusters are the leather fashion in Italy, chemicals, home
appliances and household furniture in Germany, wood
products in Portugal, and flower growing in the Netherlands.
Multinational companies such as Nestle are incorporating this
concept when establishing locations for their various businesses. They have relocated their headquarters for bottle water
170
to France and moved the Rowntree Mackintosh confectionery

division to York, England.
Firm Strategy, Structure, and Rivalry

Differences in management styles, organizational skills, and
strategic perspectives create advantages and disadvantages for
firms competing in different types of industries, as do differences in the intensity of domestic rivalry. In Germany, for
example, company structure and management style tend to be
hierarchical. Managers tend to come from technical backgrounds
and to be most successful when dealing with industries that
demand highly disciplined structures, such as chemicals and
precision machinery. Italian firms, however, tend to look like,
and be run like, small family businesses that stress customized
rather than standardized products, niche markets, and substantial flexibility in meeting market demands.
Capital markets and attitudes toward investments are important
components of national environments. For example, the
majority of shares of U.S. publicly held companies are owned
by institutional investors such as mutual funds and pension
plans. These investors will buy and sell shares to reduce risk and
increase return rather than get involved in an individual
companys operations. These very mobile investors drive
managers to operate with a short-term focus on quarterly and
annual results. This fluid capital market structure will provide
funds for new growth industries and rapidly expanding markets
in which there are expectations of early returns. On the other
hand, U.S. capital markets do not encourage more mature
industries in which return on investment is lower and patient
searching for innovations is required. Many other countries have
an opposite orientation. For example, in Japan, banks are
allowed to take equity stakes in the companies to which they
loan money and provide other profitable banking services.
These banks take a longer-term view than stock markets and are
less concerned about short-term results.
Perhaps the most powerful influence on competitive advantage
comes from domestic rivalry. Domestic rivalry keeps an industry
dynamic and creates continual pressure to improve and
innovate. Local rivalry forces firms to develop new products,
improve existing ones, lower costs and prices, develop new
technologies, and improve quality and service. Rivalry with
foreign firms lacks this intensity. Domestic rivals have to fight
each other not just for market share but also for employee
talent, R&D breakthroughs, and prestige in the home market.
Eventually, strong domestic rivalry will push firms to seek i
international markets to support expansions in scale and R&D
investments, as Japan, amply demonstrates. The absence of
significant domestic rivalry will create complacency in the home
firms and eventually cause them to become noncompetitive in
the world markets.
It is not the number of domestic rivals that is important;
rather, it is the intensity of the competition and the quality of
the competitors that make the difference. It is also important
that there be a fairly high rate of new business formations to
create new competitors and safeguard against the older companies becoming comfortable with their market positions and
products and services. As noted earlier in the discussion of the
forces shaping industry competition, new entrants bring new
a deliberate policy to strengthen Japanese exports and stem

imports. In other words, government can improve or lessen
competitive advantage but cannot create it.
There are two final external variables to consider in the evaluation of national competitive advantage: chance and
government.
Other Non-market Factors

In addition to government and chance, there are other non
market forces that affect the strategy system. The non market
forces include, in addition to government, interest groups,
activists, and the public. These non market forces are part of a
non economic strategy system that operates on the basis of
social, political, and legal forces that interact in the non market
environment of the firm.9 An understanding of these forces is
especially complicated and critical to the success of global
strategies that are implemented in many different countries and
cultures. The non market environment differs from the market
environment in many ways. For example, the market environment is principally one involving economic exchange, whereas
the non market environment includes regulatory bodies,
interest groups, and others whose interest may not be driven by
economic motives and often involve political motives. For
example, in some countries, environmental groups have
promoted regulations that dramatically increase capital and
operating costs for businesses that operate manufacturing
plants. In the pharmaceutical industry, religious groups have
impeded progress in genetic research. Competing companies
operating in different national or geographic markets that do
not have these limitations or costs have a competitive advantage.
Other Forces Acting on the Diamond

Two additional elements of Porters model to consider in the
evaluation of national competitive advantage are chance and
government. In addition, there are non market forces that are
part of the environment and that should be considered as an
expansion, of or supplement to government and chance.
Chance
Chance events playa role in shaping the competitive environment. Chance events are occurrences that are beyond the control
of firms, industries, and usually governments. Included in this
category are such things as wars and their aftermath, major
technological breakthroughs, sudden dramatic shifts in factor or
input cost (e.g., the oil crises), dramatic swings in exchange rates,
and so on.
Chance events are important because they create major
discontinuities in technologies that allow nations and firms that
were not competitive to leapfrog over old competitors and
become competitiveeven leaders-in the changed industry. For
example, the development of microelectronics allowed many
Japanese firms to overtake American and German firms in
industries that had been based on electromechanical technologies-areas traditionally dominated by the Americans and
Germans.
From a systemic perspective, the role of chance events lies in the
fact that they alter conditions in the diamond shown in Figure
10-2. The nation with the most favorable diamond, however,
will be the one most likely to take advantage of these events
and convert them into competitive advantage. For example,
Canadian researchers were the first to isolate insulin, but they
could not convert this breakthrough into an internationally
competitive product. Firms in the United States and Denmark
were able to do that because of their respective national
diamonds.
Government
Although it is often argued that government is a major
determinant of national competitive advantage, the fact is that
government is not a determinant but rather an influence on
determinants. Government influences determinants by virtue
of its role as a buyer of products and services and by its role as
a maker of policies on labor, education, capital formation,
natural resources, and product standards. It also influences
determinants by its role as a regulator of commerce, for
example, by telling banks and telephone companies what they
can and cannot do.
By reinforcing positive determinants of competitive advantage
in an industry. Government can improve the competitive
position of the nations firms. Governments devise legal
systems that influence competitive advantage by means of tariff
and non tariff barriers and laws requiring local content and
labor. The Yens decline over the past decade was due in part to
The System of Determinants

It is important to view the determinants of national competitive advantage as an interactive system in which activity in
anyone of the four points of the diamond impacts on all the
others and vice versa. This interplay between the determinants is
depicted in Figure 10-3. The interaction of all of the forces is
presented in Figure 10-4.
Single or Double Diamond?
Other researchers have challenged Porters thesis that a firms
home-base country is the main source of core competencies and
innovation. For example, Professor Alan Rugman of the
University of Toronto argues that the success of companies
based in small economies such as Canada and New Zealand
stems from the diamonds found in a particular host country or
countries. For example, a company based in a European Union
(EU) nation may rely on the national diamond of one of the
14 other EU members. Similarly, one impact of the North
American Free Trade Agreement (NAFTA) on Canadian firms is
to make the U.S. diamond relevant to competency creation.
Rugman argues that, in such cases, the distinction between the
home nation and host nation becomes blurred. He proposes
that Canadian managers must look to a double diamond
depicted in Figure 10-5 and assess the attributes of both
Canada and the United States when formulating corporate
strategy.
171
perspectives and new methods. They frequently define and

serve new market segments that established companies have
failed to recognize.
Firms strategy,
structure and rivalry
A group of domestic
rivals encourages the
formation of more
specialized suppliers as
well as related
industries
Factor conditions
Demand conditions
Specialized factor pools

are transferable to
related and supporting
industries
Related and supporting

industries
Large or growing home

demand stimulates the
growth and deepening
of supplier industries
Influences on development of related

and supporting industries
Factor abundance
or specialized factor
creating
mechanisms spawn
new entrants
Factor
Conditions
Firm strategy, structure,

and Rivalry
Early product
penetration
feeds entry
New entrants emerge

from related and
supporting industries
World-class users
enter supplying
industries
Demand
Conditions
Two different models of competitive advantage have received

considerable attention. The first offers generic strategies, which
are four alternative positions that organizations can seek in
order to offer superior value and achieve competitive advantage.
According to the second model, the generic strategies alone do
not explain the astonishing success of many Japanese companies in recent years. A more recent model, based on the concept
of strategic intent, proposes four different sources of competitive advantage. Both models are discussed next.
Generic Strategies for Creating

Competitive Advantage
In addition to the five forces model of industry competition,
Porter developed a framework of so-called generic business
strategies based on two sources of competitive advantage: low
cost and differentiation. Figure 10-6 shows that the combination of these two sources with the scope of the target market
served (narrow or broad) or product mix width (narrow or
wide) yields four generic strategies: cost leadership, product
differentiation, focused differentiation, and cost focus.

industries
Influences on Domestic Rivalry

Firm strategy, structure, and
rivalry
Change
Factor conditions
value for their customers. It is this value that is central to

achieving and sustaining competitive advantage. This unique
value must be something that competitors will not be able to
easily match. The uniqueness and magnitude of the customer
value created by a firms strategy are ultimately determined by
customer perception. Operating results such as sales and profits
are measures that depend on the level of psychological value
created for customers: the greater the perceived consumer value,
the stronger the competitive advantage, and the better the
strategy. A firm may market a better mousetrap, but the
ultimate success of the product depends on customers deciding
for themselves whether to buy it. Value is like beauty-it is in the
eye of the beholder. In sum, competitive advantage is achieved
by creating more value than the competition, and value is
defined by customer perception.
Demand conditions
Generic strategies aiming at the achievement of competitive

advantage demand that the firm make choices. The choices are
the position it seeks to attain from which to offer unique value
(based on cost or differentiation) and the market scope or
product mix width within which competitive advantage will be
attained. The nature of the choice between positions and
market scope is a gamble and involves risk. By choosing a given
generic strategy, a firm always risks making the wrong choice.
Broad Market Strategies

industries
Government
The Complete System
Competitive Advantage and Strategic

Models
Strategy is integrated action in pursuit of competitive advantage.
Successful strategy requires an understanding of the unique
value that will be the source of the firms competitive advantage. Firms ultimately succeed because of their ability to carry
out specific activities or groups of activities better than their
competitors. These activities enable the firm to create unique
172
Cost-leadership Advantage
When the unique value delivered by a firm is based en its

position as the industrys low-cost producer, in broadly defined
markets or across a wide mix of products, a cost leadership
advantage occurs. This strategy has become increasingly popular
in recent years as a result of the popularization of the experience
curve concept. A firm that bases its competitive strategy on
overall cost leadership must con8truct the most efficient facilities
(in terms of scale or technology) and obtain the largest share of
market so that its cost per unit is the lowest in the industry.
These advantages, in turn, give the producer a substantial lead
in terms of experience with building the product. Experience
then leads to more refinements of the entire process of
Competitive scope
Whatever its source, cost-leadership advantage can be the basis

for offering lower prices (and more value) to customers in the
late more competitive stages of the product life cycle,
Cost
Leadership
Board
Target
Differentiation
defined market or customer. This advantage is based on an

ability to create more customer value for a narrowly targeted
segment and results from a better understanding of customer
needs and wants. A narrow-locus strategy can be combined with
either cost or differentiation-advantage strategies. In other
words, whereas cost focus means offering a narrow target
market low prices, a firm pursuing focused differentiation will
offer a narrow target market the perception of product uniqueness at a premium price.
Focused Differentiation
Narrow
Target
Cost Focus
Focused
Differentiation
Lower cost
Differentiation
Competitive advantage
Generic competitive strategies
In Japan, companies in a range of industries-35 mm cameras,

consumer electronics and entertainment equipment, motorcycles, and automobiles-have achieved cost leadership on a
worldwide basis. Cost leadership, however, is a sustainable
source of competitive advantage only if barriers exist that
prevent competitors from achieving the same low costs. In an
era of process reengineering and increasing technological
improvements in manufacturing, manufacturers constantly
leapfrog over one another in pursuit of lower costs. At one
time, for example, IBM enjoyed the low-cost advantage in the
production of computer printers. Then the Japanese took the
same technology and, after reducing production costs and
improving product reliability, gained the low-cost advantage.
IBM fought back with a highly automated printer plant in
North Carolina, where the number of component parts was
slashed by more than 50 percent and robots were used to snap
many components into place. Despite these changes, IBM
ultimately chose to exit the business and the plant was sold.
The German Mittelstand companies have been extremely

successful pursuing focused differentiation strategies backed by
a strong export effort. The world of high-end audio equipment
offers another example of focused differentiation. A few
hundred companies, in the United States and elsewhere, make
speakers and amplifiers and related hi-fi gear that case thousands of dollars per component. Although audio components
as a whole represent a $21 billion market worldwide, annual
sales in the high-end segment are only $1 billion. In Japan
alone, discriminating audiophiles purchase $200 million in
high-end audio equipment each year-much of it American
made. Also, the American companies are learning more about
their overseas customers and building relationships with
distributors outside the United States.
Cost Focus
The final strategy is cost focus, when a firms lower-cost

position enables it to offer a narrow target market lower prices
than the competition. In the shipbuilding industry, for
example, Polish and Chinese shipyards offer simple, standard
vessel types at low prices that reflect low production costs.
Differentiation
When a firms product delivers unique value because of an

actual or perceived uniqueness in a broad market, it is said to
have a differentiation advantage. This can be an extremely
effective strategy for defending market position and obtaining
above-average financial returns; unique products often command premium price, Examples of successful differentiation
include May tag In large home appliances, Nike in athletic shoes
and almost any successful branded consumer product. Among
motorcycle manufacturers, Harley-Davidson stands out as the
market leader in the U.S. market but must adjust its marketing
strategy in various countries depending on the local competition. Figure 10-7 shows Harley-Davidsons market share in its
three geographical divisions.
Narrow Target Strategies

The preceding discussion of cost leadership and differentiation
considered only the impact on broad markets. By contrast;
strategies to achieve a narrow-focus advantage target a narrowly
173
production, delivery, and service, which lead to further cost

reductions.
LESSON 18:
STRATEGIC POSITIONING AND INTENT
Strategic Position
Strategic positions that provide competitive advantage are based
on the activities that a firm chooses to perform and on where it
chooses to perform them. IS From these positions, a firm can
deliver unique value to its customers. A position is based on a
set of activities that combine to create unique value for a market.
Porter has identified three classifications for strategic positions.
A firm may choose to develop one or a combination of these
positions as the basis of its competitive advantage. The three
positions and the related generic strategy are shown in Table.
Variety-based Positioning
Variety-based positioning is based on a firms decision to carry
out a limited number of activities related to delivering a limited
product or service. This type of position is built by a firm such
as Southwest Airlines that chooses to deliver value to its
customers by limiting its product offering (point-to-point
service no baggage transfer service, no seat reservations. no
meals, etc.) in order to minimize its prices and maximize its
reliability and efficiency. Another example is GIVI, an Italian
company that makes luggage for motorcycles. GlVIs product is
unique in design, integration, and fabrication. It is premium
priced, but given its unique design and quality, it is a value
winner in the motorcycle luggage marketplace.; The company is
successfully expanding from its European variety based
position to a world variety-based position.
Needs-based Positioning
Needs-based positioning occurs when a company attempts to
deliver value to a specific customer segment by carrying out
activities to satisfy a comparatively broad set of needs
Position
I. Variety based
Producing a subset of an industry's
product or service
2. Customer needs based
3.
Customer
access
based
Segmenting customers who are
accessible in different ways
Examples
Vanguard
Bic
Jiffy Lube
Citibank
Bessemer Trust
IKEA
CARmike Cinemas
Generic Strategy
Cost leadership
Differentiation
Segmentation
of these customers. This position is well developed by firms

such as IKEA, which offers everything the young (or young at
heart), budget-conscious consumer might need to furnish an
apartment or home. Another example of a company with a
clear positioning strategy is Purdue Pharma, the world leader in
narcotic analgesics for severe pain. Purdue has focused on a
need, alleviation of pain, and developed an integrated program
for addressing this need. It has developed products that offer
more relief with fewer side effects. In addition to focusing on
the need, Purdue has created the worlds best-trained field sales
force to call on doctors to answer their questions on how to
effectively use Purdues products. It has also been able to get its
products listed on the formulary of hospitals and managed care
174
organizations and government agencies. All of these activities

are driven by the companys focus on the need to alleviate pain.
Access-based Positioning
The ability of a firm to uniquely or preferentially reach a specific
market is an access based position. For example, international
management recruitment firms, such as Korn Ferry International, establish relationships with executives and track them
throughout their careers. They know where these executives are
located and help their clients get to them. Access consideration
can be a critical knockout factor. The first level of all international expiation is about access. Global marketing strategy
must deal with barriers to access to national markets that are
typically created by governmental authorities. Access to national
markets is restricted by regulations, tariffs, distance, and a host
of non-tariff barriers, which include ways of doing business
and openness to new entrants. As a prerequisite to international
expansion, firms must develop the ability to carry out the
activities that deal with these barriers to access: However,
developing the ability to operate in many national markets does
not necessarily confer global competitive advantage on a firm.
This is not the same as access-based positioning, which refers to
the advantage that can be gained by preferential access or control
of access to customers. In order to gain competitive advantage
in the target market, the entrant must establish a perceived
unique value to its customers. U other competitors can gain
access or are already established in the market, it is not enough
to merely be present in a market. The annals of international
business failures are replete with examples of companies that
did not understand this message. They believed that all they
needed to do was to show up. When the market told them that
they had a competitive disadvantage, they simply packed up and
retreated. Renault did this in the U.S. automobile market in the
1960s, and Federal Express did it again in the express delivery
market in Europe in the 1980s. FedEx has regrouped and
restrategized its European entry, whereas Renaults setback in
the United States sent it back to Europe, where its position
today was as a regional player in a global industry. It has never
attempted to reenter the U.S. market, but with its operations in
Brazil and its control of Nissan, it is today a global player in a
global industry.
Which Position to Take?
All real strategies are a combination of all three positions: Every
winning strategy is based on a combination of doing the right
thing (activity based), meeting a need (needs based), and on
access. Nevertheless, it is valuable and useful to identify the
principal thrust of a strategy: activity, need, or access. Company
winners are ones that have established a strategic position that
focuses on the decisive point and is, at the same time, everywhere very strong. This is the von Clausewitz maximum: The
best strategy is to be very strong, first generally, and then at the
decisive point.
An alternative framework for understanding competitive

advantage focuses on competitiveness as a function of the pace
at which a company implants new advantages deep within its
organization. This framework identifies strategic intent,
growing out of ambition and obsession with winning, A the
means for achieving competitive advantage. Writing in the
Harvard Business Review, Hamel and Prahalad note:
Few competitive advantages are long lasting. Keeping score of
existing advantages is not the same as building new advantages.
The essence of strategy lies in creating tomorrows competitive
advantages faster than competitors mimic the ones you possess
today. An organizations capacity to improve existing skills and
learn new ones is the most defensible competitive advantage of
all.
This approach is founded on the principles of W. E. Deming,
who stressed that a company must commit itself to continuing
improvement in order to be a winner in a competitive struggle.
For years, Demings message fell on deaf ears in the United
States, whereas the Japanese heeded his message and benefited
tremendously. Japans most prestigious business award is
named after him. Finally, however, U.S. manufacturers are
starting to respond.
The significance of Hamel and Prahalads framework becomes
evident when comparing Caterpillar and Komatsu. As noted
earlier, Caterpillar is a classic example of differentiation: The
company became the largest manufacturer of earth-moving
equipment in the world because it was fanatic about quality and
service. Caterpillars success as a global marketer has enabled it to
achieve a 35 percent share of the worldwide market for earthmoving equipment, more than half of which represents sales
to developing countries. The differentiation advantage was
achieved with product durability, global spare parts service
(including guaranteed parts delivery anywhere in the world
within 48 hours), and a strong network of loyal dealers.
Caterpillar has faced a very challenging set of environmental
forces. Many of Caterpillars plants were closed by a lengthy
strike in the early 1980s; a worldwide recession at the same time
caused a downturn in the construction industry. This hurt
companies that were Caterpillar customers. In addition, the
strong dollar gave a cost advantage to foreign rivals.
Compounding Caterpillars problems was a new competitive
threat from Japan. Komatsu was the worlds number-two
construction equipment company and had been competing with
Caterpillar in the Japanese market for years. Komatsus products
were generally acknowledged to offer a lower level of quality.
The rivalry took on a new dimension after Komatsu adopted
the slogan Maru-c, meaning encircle Caterpillar. Emphasizing
quality and taking advantage of low labor costs and the strong
dollar, Komatsu surpassed Caterpillar in earth-moving
equipment sales in Japan and made serious inroads in the
United States and other markets. Yet, the company continued
to develop new sources of competitive advantage even after it
achieved world-class quality. For example, new-product
development cycles were shortened, and manufacturing was
rationalized. Caterpillar struggled to sustain its competitive
advantage because many customers found that Komatsus

combination of quality, durability, and lower price created
compelling value. Yet even as recession and a strong yen put
new pressure on Komatsu, the company sought new opportunities by diversifying into machine tools and robots.
The Komatsu/Caterpillar saga is just one example of how
global competitive battles are shaped by more than the pursuit
of generic strategies. Many firms have gained competitive
advantage by disadvantaging rivals through competitive
innovation, defined by Hamel and Prahalad as the art of
containing competitive risks within manageable proportions.
They identify four successful approaches utilized by Japanese
competitors: building layers of advantage, searching for loose
bricks, changing the rules of engagement, and collaborating.
Layers of Advantage
A company faces less risk in competitive encounters if it has a
wide portfolio of advantages. Successful companies steadily
build such portfolios by establishing layers of advantage on top
of one another. Komatsu is an excellent example of this
approach. Another is the TV industry in Japan. By 1970, Japan
was not only the worlds largest producer of black-and-white
TV sets but was also well on its way to becoming the leader in
producing color sets. The main competitive advantage for such
companies as Matsushita at that time was low labor costs.
Because they realized that their cost advantage could be temporary, the Japanese also added additional layers of quality and
reliability advantages by building plants large enough to serve
world markets. Much of this output did not carry the
manufacturers brand name. For example, Matsushita Electric
sold products to other companies such as RCA that marketed
them under their own brand names. Matsushita was pursuing a
simple idea: A product sold was a product sold, no matter
whose label it carried.
In order to build the next layer of advantage, the Japanese
spent the 1970s investing heavily in marketing channels and
Japanese brand names to gain recognition. This strategy added
yet another layer of competitive advantage: the global brand
franchise-that is, a global customer base. By the late 1970s,
channels and brand awareness were established well enough to
support the introduction of new products that could benefit
from global marketing-videocassette recorders (VCRs) and
photocopy machines, for example. Finally, many companies
have invested in regional manufacturing so their products can
be differentiated and better adapted to customer needs in
individual markets.
The process of building layers illustrates how a company can
move along the value chain to strengthen competitive advantage. The Japanese began with manufacturing (an upstream
value activity) and moved on to marketing (a downstream value
activity) and then back upstream to basic R&D. All of these
sources of competitive advantage represent mutually desirable
layers that are accumulated over time.
Loose Bricks
A second approach takes advantage of the loose bricks left in
the defensive walls of competitors whose attention i!; narrowly
focused on a market segment or a geographic area. For example,
175
Competitive Innovation and Strategic

Intent
Caterpillars attention was focused elsewhere when Komatsu

made its first entry into the Eastern European market. A similar
chain of events occurred in the global motorcycle industry. For
many years, Harley-Davidson focused its eff0l1s on large
motorcycles. Thus, it was not concerned when Honda first
entered the U.S. motorcycle market with exports of bikes with
small (50 cc) engines. Managers at Harley were not aware of -Dr
did not appreciate the significance of-Hondas involvement with
racing larger bikes in Europe. But Honda used this approach to
gain important experience in large-displacement engine design
and technology. Harley was caught off guard, and by 1983
Honda had more than 50 percent of the U.S. market share in
motorcycles with 700 cc engines or larger.
That same year, import quotas were imposed on large motorcycles imported into the United States. Even though the quotas
helped save Harley from extinction Honda was already using its
core competence in engines to diversify. It created engines for
other products, starting with cars. The first Honda Civic models
were powered by overhead earns motorcycle engines. Today,
Honda boasts a wide product mix that includes lawn mowers,
outboard marine motors, welders, and generators-in short,
anything powered by a gasoline engine. This approach, as noted
earlier allows Honda to enjoy significant scale economies in
R&D and production. Harley-Davidson eventually reshaped
itself by dramatically improving product quality and has
successfully won back much of it lost market share.
Changing the Rules

A third approach involves changing the so-called rules of
engagement and refusing to play by the rules set by industry
leaders. For example, in the copier market, IBM and Kodak
imitated the marketing strategies used by market leader Xerox.
Meanwhile, Canaan, a Japanese challenger, wrote a new rule
book.
Whereas Xerox built a wide range of copiers, Canon built
standardized machines and components, reducing manufacturing costs. Whereas Xerox employed a huge direct sales force,
Canon chose to distribute through office-product dealers.
Canon also designed serviceability, as well as reliability, into its
products so that it could rely on dealers for service rather than
incurring the expense required to create a national service
network. Canon further decided to sell rather than lease its
machines, freeing the company from the burden of financing
the lease base. In another major departure, Canon targeted its
copiers at secretaries and department managers rather than at the
heads of corporate duplicating operations.
Canon introduced the first full-color copiers and the first copiers
with connectivity the ability to print images from such sources
as video camcorders and computers. The results have been
impressive; in 1994, Canons share of the U.S. color copier
market was 64 percent. In both 1988 and 1992, Canon was
granted more U.S. patents than any other company in the
world. The Canon example shows how an innovative marketing strategy-with fresh approaches to the product. Pricing,
distribution, and selling-can lead to overall competitive
advantage in the marketplace.
176
Collaborating
A final source of competitive advantage is using know-how
developed by other companies. Such collaboration may take the
form of licensing agreements ,joint ventures, and partnerships.
History has shown that the Japanese have excelled at using the
collaborating strategy to achieve industry leadership. One of the
legendary licensing agreements of modern business history is
Sonys licensing of transistor technology from AT&Ts Western
Electric subsidiary in the 1950s for $25,000. This agreement gave
Sony access to the transistor and allowed the company to
become a world leader. Building on its initial successes in the
manufacturing and marketing of portable radios, Sony has
grown into a superb global marketer whose name is synonymous with a wide assortment of high quality consumer
electronics products. More recent examples of Japanese
collaboration are found in the aircraft industry. Today,
Mitsubishi Heavy Industries Ltd, and other Japanese companies manufacture airplanes under license to American firms and
also work as subcontractors for aircraft parts and systems. Many
observers fear that the future of the American aircraft industry
may be jeopardized as the Japanese gain technological expertise.
Various examples of collaborative advantage are discussed in
the next section.
Hamel and Prahlad have continued to refine and develop the
concept of strategic intent since it was first introduced in their
groundbreaking 1989 article. Recently, the authors outlined five
broad categories of resource leverage that managers van use to
achieve their aspirations: concentrating resources on strategic
goals via convergence and focus; accumulating resources more
efficiently via extracting and borrowing; complementing one
resource with another by blending and balancing; and conversing resources by recycling, co-opting, and shielding.
Hypercompetition
Professor Richard DAveni suggests that the Porter strategy
frameworks fail to adequately address the dynamics of competition in the 21st century. DAveni notes that, in todays business
environment, market stability is undermined by short product
life cycles, short product design cycles, new technologies, and
globalization. The result is an excalation and acceleration of
competitive forces. In light of these changes, DAveni believes
the goal of strategy has shifted from sustaining to disrupting
advantages. The limitation of the Porter models, DAveni
argues, is that they provide a snapshot of competition at a
given point in time. In other words, they are static models.
Acknowledging that Hamel and Prahalad broke new ground in
recognizing that few advantages are sustainable, DAveni aims
to build on their work to shape a truly dynamic approach to
the creation and destruction of traditional advantages. DAveni
uses the term hypercompetition to describe a dynamic, competitive world in which no action or advantage can be sustained for
long. In such a world, DAveni argues, everything changes
because of the dynamic maneuvering and strategic interactions
by hypercompetitive firms such as Microsoft and Gillette.
According to DAvenis model, competition unfolds in a series
of dynamic strategic interactions in four arenas: cost versus
quality, timing and know-how, entry barriers, and deep pockets.
Each of these arenas is continuously destroyed and recreated
should become necessary. The ISO-9000 standards are widely

accepted by EC members and serve as a method of ensuring
its citizens of the quality of goods freely moving within the
EC. Approximately 15 percent of all products and services that
are sold in the EC are currently regulated by ISO-9000 standards.
DAveni urges managers to reconsider and reevaluate the use of

what he believes are old strategies tools and maxims. He warns
of the dangers of commitment to a given strategy or course of
action. The flexible, unpredictable player may have an advantage
over the inflexible, committed opponent. DAveni notes that,
in hypercompetition, pursuit of generic strategies results in
short-term advantage at best. The winning companies are the
ones that successfully move up the ladder of escalating competition, not the ones that lock into a fixed position. DAveni also
is critical of the five forces model. The best entry barrier, he
argues, is maintaining the initiative, not mounting a defensive
attempt to exclude new entrants.
ISO-9000
Another strategy to achieve competitive advantage is the
incorporation of ISO-9000 criteria in product development and
manufacturing policies, although service companies are finding
innovative ways to apply the criteria to their businesses.
In 1987, the International Organization for Standardization
(ISO) published a series of five international product and
service quality standards. This publication was titled Quality
Management and Quality Assurance Standards-Guidelines for
Selection and Use and is commonly referred to as ISO-9000
standards. The standards were originally designed with the
intent to achieve conformity and congruence for two-party
applications through normal supplier-customer relationships in
a wide range of industries on either a contractual or noncontractual basis. This has now moved to another level whereby
third-part assessment and certification of a suppliers processes
is required by some customers. Basically, the application of ISO9000 standards allows a supplier to direct and control the
operations that determine the acceptability of a product or
service being supplied. ISO-9000 standards represent the
common denominator of business quality that is accepted
internationally. In the United States, the standards are referred
to as the ANSI/ASQC-Q 90 series.
The two major advantages of ISO-9000 registration and
certification occur in domestic advantage and international
advantage. Domestically, it provides (1) competitive advantage
over suppliers who are not certified, (2) a focus on continuous
improvement, (3) media awareness, and (4) customer perception. Internationally, having ISO-9000 certification eases entry
into export markets and as part of product liability defense if it
177
by the dynamic maneuvering of hypercompetitive firms.

According to DAveni, the only source of a truly sustainable
competitive advantage is a companys ability to manage its
dynamic strategic interactions with competitors frequent
movements that maintain a relative position of strength in each
of the four arenas. The irony and paradox of this model is that,
in order to achieve a sustainable advantage, companies, must
seek a series of unsustainable advantages. DAveni is in
agreement with Peter Drucker, who has long counseled that the
role of marketing is innovation and the creation of new
markets. Innovation begins with abandonment of the old and
obsolete. In Druckers words, Innovative organizations spend
neither time nor resources on defending yesterday. Systematic
abandonment of yesterday alone can transfer the
resources..for work on the new.
CASE 1
METRO CORPORATION : TECHNOLOGY LICENSING NEGOTIATION
Details of negotiations between Metro Corporation and
Impecina Construcciones S.A. of Peru, for the licensing of
Petroleum Tank Technology follow.
only for the seals on the floating roof. Metro had not bothered
to file for this patent except in the United States.
The Licensor Firm
Perus indigenous oil output is very low, but it imports and

refines annually 50 million tons mostly for domestic demand.
Following the escalation of oil prices and tight-ening of
supplies in 1973, the Peruvian government deter-minedly set
about to formulate a program to augment Perus oil-storage
capacity. Impecinas representatives at a preliminary meeting with
ICE in U.S. headquarters said their government planned $200
million expenditures on
Metro Corporation is diversified steel rolling, fabricating, and

construction company based in the Midwest and con-siders
itself to be in a mature industry. Innovations are few and far
between. With transport and tariff barriers, and the support
given by many governments to their own compa-nies, exporting as a means of doing foreign business is rather limited.
Similarly, given the large investment, modest return, and
political sensitivity of the industry, direct for-eign investment is
all but a closed option. In a global strate-gic sense then, Metro
Corporation has far more frequently focused on licensing as a
market entry method, with tech-nologies confined to (1)
processes and engineering periph-eral to the basic steel-making
process, for example, mining methods, coke oven door designs,
galvanizing, and so on, and (2) applications of steel in construction and other industries, for example, petroleum tank design,
welding meth-ods, thermo adhesion, and .so on.
All Metros licensing is handled by its international di-vision,
International Construction and Engineering (ICE), which is
beginning to develop a reputation in Western Europe and
South America as a good source for special-ized construction
technology.
The Proposed Licensee

Impecina, a private firm, is the largest construction com-pany in
Peru and operates throughout Latin America. Im-pecina has a
broad range of interests inducing residential and commercial
buildings, hydraulic works, transportation, and maritime works.
Employing several thousand person-nel, engineers, and
technicians, its sales had doubled in the last five years. It was
still primarily a Peruvian business with most turnover in Peru..
but was in the process of ex-panding into Colombia, the North
African Mediterranean countries, and Argentina, Brazil, and
Venezuela. Impecina has advanced computer capacity with a
large IBM and other computers at their branches. In oil-storage
tanks, Im-pecina experience was limited to the smaller fixedcone roof designs under lS0-feet diameter.
The Technology
National Tank Inc., a fabrication division of Metro had developed a computerized design procedure for floating-roof
oil-storage tanks, which minimized the use of steel within
American Petroleum Institute or any other oil industry
standards. Particularly for the larger tanks, for instance, lS0-feet
diameter and above, this would confer upon the bidding
contractor a significant cost advantage. National Tank had spent
one labor-year at a direct cost of $225,000 to write the computer
program alone. Patents were in-volved in an incidental manner,
178
The Market
oil-storage facilities over the next 3 years (mostly in large sized

tanks). Of this, Impecinas ambition was to capture a onethird market share. That this appeared to be a cred-ible target
was illustrated by their existing 30 percent share of the fixedcone type under lSO-feet diameter. Addition-ally, they estimated
private-sector construction value over the next three years to
total $40 million.
Approximately half of a storage systems construction cost goes
for the tank alone, the remainder being excava-tion, foundation,
piping, instrumentation, and other ancil-lary equipment, all of
which Impecinas engineers were very familiar with Neighboring
Colombia was building a 12 million ton refinery, but the tank
installation plans of other South American nations were not
known, according to the Im-pecina representative.
Each of Impecinas competitors in Peru for this busi-ness was
affiliated with a prominent company: Umber-tomas with
Jefferson Inc. in the United States, Zapa with Philadelphia Iron
Steel, Cosmas with Peoria-Duluth Construction Inc., and so
on. Thus, association with Metro would help Impecina in
bidding.
The First Meeting

National Tank had in the past year bid jointly with Im-pecina
on a project in southern Peru. Though that bid was unsuccessful, Impecina had learned about Metros com-puterized design
capabilities and initiated a formal first round of negotiations,
which were to lead to a licensing agreement. The meeting took
place in the United States. Two Impecina executives of subdirector rank were accom-panied by an American consultant.
Metro was represented by the vice president of ICE, the ICE
attorney and an ex-ecutive from National Tank.
Minutes of this meeting show it was exploratory. Both genuine
and rhetorical questions were asked. Important information
and perceptions were exchanged and the groundwork laid for
concluding negotiations. Following is a bare summary of
important issues from the somewhat circular discussion:
1. Licensee Market Coverage: Impecina tried to repre-sent
itself as essentially a Peruvian firm. It reviewed its
government expenditure plans and its hoped-for market
2. Exclusivity: For Peru, Metro negotiators had no dif-ficulty

conceding exclusivity. They mentioned that granting
exclusivity to a licensee for any territory was agreeable in
principle, provided a minimum per-formance guarantee was
given. At this, the question was deferred for future
discussion. At one point a Metro executive remarked, We
could give Impecina a nonexclusive-and say, for example, we
wouldnt give another (licensee) a license for one year (in
those nations), proposing the idea of a trial period for
Impecina to generate business in a territory.
3. Agreement Life: Impecina very quickly agreed to a to-year
term, payment in U.S. dollars, and other minor issues.
4. Trade Name: The Impecina negotiators placed great
emphasis on their ability to use Metros name in bidding,
explaining how their competition in Peru had technical
collaboration with three U.S. companies (as noted
previously). Did that mean Metros Na-tional Tank
Division could compete with Impecina in Peru? they were
asked rhetorically. (Actually both sides seem to have tacitly
agreed that it was not possible for Metro to do business
directly in Peru.)
5. Licensee Market Size: Attention turned to the dollar value
of the future-large (floating-roof) tank market in Peru.
Impecina threw out an estimate of $200 million government
expenditures and $40 million private- sector spending, over
the coming three years, of which they targeted a one-third
share. Later, a lower market-size estimate of $150 million
(government and private) with a share of $50 million
received by Impecina over three years was arrived at
(memories are not clear on how the estimates were revised).
Will Impecina guarantee us they will obtain one- third of
the market? brought the response Thats an optimistic
figure that we hope we can realize, Impecina offered as
evidence their existing one-third share of the fixed roof
under 150 feet market, an impressive achievement.
6. Product Mix Covered by License: It became clear that
Impecina wanted floating-roof technology for all sizes, and
fixed roof over 100 feet diameter. They suggested the
agreement cover tanks over 100 feet in size. Impecina was
asked if it would pay on all tanks (of any size) to simplify
royalty calculation and mon-itoring. After considerable
discussion, Metro seems to have acceded to Impecinas
proposal (to cover both types, only over 100 feet) based on
consensus over three points.
a. The competition probably does not pay (its licen-sors) on
small tanks and, therefore, Impecina would be at a
disadvantage if it had to pay on small tanks also.
b. The market in floating-roof tanks was usually over 100 feet.
c. Impecina claimed that customers normally dictate the
dimensions of the tanks, so Impecina cannot-vary them in
order to avoid paying a royalty to Metro.
7. Compensation Formula: Metro proposed an initial lumpsum payment (in two installments, one when the agreement
is signed, the second on delivery of the computer program
and designs), plus engineers and executives for bid assistance
on a per diem rate, plus a royalty on successful bids based on
the barrel capacity installed by Impecina. Impecinas American
consul-tant countered with the idea of royalties on a sliding
scale, lower with larger-capacity tanks, indicating talk about 1
million barrel capacity talks. The (rheori-cal?) question about
Perus oil capacity seems to have brought the discussion
down to earth and veered it off on a tangent, while both
sides mentally regrouped.
On returning to this topic, Impecina executives ventured that
as a rule of thumb their profit markup on a turnkey job was
6 percent. (However, on excluding the more price-sensitive
portions such as excavation, piping, and ancillary equipment,
which typically constitute half the value, Impecina conceded
that on the tank alone they might mark up as much as 12
percent, although they kept insist-ing. 5 to 6 percent was
enough.)
Impecina executives later offered only royalties (preferably
sliding) and per diem fees for bid assis-tance from Metro
executives and engineers.
Metro countered by pointing out those per diem fees of
$225 plus travel costs amounted at best to re-covering costs,
not profit.
The compensation design question was left at this stage,
deferred for later negotiation, broad outlines having been
laid. Metros starting formal offer, which would mention
specific numbers, was to be telexed to Lima in a week.
8. The Royalty Basis: Metro entertained the idea that Impecina
engineers were very familiar with excavation, piping, wiring,
and other ancillary equipment. Metro was transferring
technology for the tank alone, which typically comprised half
of overall installed value.
9. Government Intervention: Toward the end of the
discussions, Impecina brought up the question of the
Peruvian government having to approve of the agreement.
This led to their retreat from the idea of a 10-year term
agreed to earlier, and Impecina then mentioned five years.
No agreement was reached. (Incidentally, Peru had in the last
two years passed legislation indicating a guideline of five
years for foreign licenses.)
Internal Discussion In Metro Leading To

The Formal Offer
The advantages derived by the licensee would be acquisi-tion of
floating-roof technology, time and money saved in attempting
to generate the computerized design proce-dure in house,
somewhat of a cost and efficiency advan-tage in bidding on
larger tanks, and finally the use of Metros name.
It was estimated that National Tank had spent $225,000 (one
labor-year = two executives for six months, plus other costs) in
developing the computer program. Additionally, it may cost
$40,000 (three quarters of a labor-year) to con-vert the program
into Spanish, the metric system, and adapt it to the material
availability and labor cost factors peculiar to Peru. Simulta-
179
share. Yet through the meeting, there kept cropping up the

issue of the license also covering Libya, Algeria, Morocco,
Colombia, Argentina, Brazil, and Venezuela.
neously, there would be semifor-mal instruction of Impecina

engineers in the use of the pro-gram, petroleum industry codes,
and Metro fabrication methods. All this had to be done before
the licensee would be ready for a single bid.
The Formal Offer
$400,000 lump-sum fee payable in two installment
It was visualized that Metro would then assist Im-pecina for

two labor-weeks for each bid preparation, and four labor-weeks
on successful receipt of a contract award. Additionally, if
Metros specialized construction equip-ment were used, three
labor-months of on-site training would be needed.
A 2 percent royalty on any tanks constructed of size over 100

feet in diameter, with up to one has of royalties owed in each of
the first 5 years reduced by an amount up to $40,000 each year,
with out carryovers from year to year. The royalty percentage
would apply to the total contract value less excavation,
foundation, dikes, piping, instru-mentation, and pumps.
Agreement life of10 years. . Metro to provide services to

Impecina described earlier in consideration of the lump sum
and royalty fees.
For addition at service as described earlier, Metro would

provide on request personnel paid up to $225 per day, plus
travel and living costs while away from their place of
business. The per diem rates would be subject to escalation
based on a representative cost index. There would be a ceiling
placed on the number of labor-days Impecina could request
in any year.
All payments to be made in U.S. dollars, net, after all local

withholding, and other taxes.
Impecina would receive exclusive rights for Peru and

Colombia only, and nonexclusive rights for Morocco, Libya,
Algeria, Argentina, Venezuela, and Brazil. These could be
converted to an exclusive basis on demonstration of
sufficient business in the future. For Peru and Colombia,
Metro reserves the right to treat the agreement as
nonexclusive if Impecina fails to get at least 30 percent of
installed capacity of a type covered by the agreement.
Impecina would have the right to sublicense only to any of

its controlled subsidiaries.
Impecina would supply free of charge to ICE all

improvements made by it on the technology during the term
of the agreement.
Impecina would be entitled to advertise its associ-ation with

Metro in assigned territories on prior approval of ICE as to
wording, form, and content.
As the licensees personnel moved along their learning curve,

assistance of the type just described would diminish until it was
no longer needed after a few successful bids.
Additional considerations that went into a determi-nation of
the initial offer:
The formal offer communicated in a telex a week later called for

the following payment terms:
1. Metro obligations (and sunk costs) in development and

conversion were fairly determinate, whereas their obligations
to assist Impecina in bidding de-pended on the technical
sophistication and absorptive capacity of the licensees
engineers, their success rate in bidding, and so on.
2. If Impecinas market estimates were used, over the next three
year they would generate large tank orders worth $50 million,
on which they would market a profit of $3 million (at 6
percent on $50 million or 12 percent on half the amount).
3. The market beyond three years was an unknown.
4. Exc1usiverights.might be given to Impecina in Peru and
Colombia, with perhaps ICE reserving the right of
conversion to nonexclusive if minimum market share was
not captured,
5. While Impecinas multinational expansion plans were
unknown, their business in the other nations was too small
to justify granting them exclusivity. They may satisfied with a
vague promise of future consideration as an exclusive
licensee in those territories.
6. Metro would agree to a term of 10 years. It was felt that
Impecina computer and engineering capability was strong
enough so they would not need Metro assistance after a few
bids.
Surprisingly, the discussions reveal no explicit consideration
given to the idea that Impecina may emerge some day as a
multinational competitor.
In view of the uncertainty about how successful the licensee
would actually be in securing orders, the uncertainty surrounding the Peruvian governments attitude, a, safe strategy seemed
to be to try and get as large a front-end fee as possible. Almost
arbitrarily a figure of $400,000 was thrown up. (This was
roughly 150 percent of the development costs plus the initial
costs of transferring the technology to the licensee.) There
would be sufficient margin negotiations and to cover uncertainties. In order that the licensees competitiveness not is
diminished by the large lump-sum fee, a formula as described
later may be devised whereby the first five years royalties could
be reduced.
180
The Final Agreement

ICE executives report that the Peruvians did not bat an eyelid
at their demands, and that an agreement was soon reached in a
matter of weeks. The only significant change was Metro
agreeing to take a lump sum of $300,000 (still a large margin
over costs). In return, the provision for re-ducing one half of
the royalties up to $40,000 per year was dropped. The final
agreement called for a straight 2 percent royalty payment (on
tank value alone, as before). Other changes were minor:
Impecina to continue to receive ben-efit of further R&D; ICE
to provide at cost a construction engineer if specialized welding
equipment was used; the per diem fee fixed at $200 per day
(indexed by an average hourly wage escalation factor used by the
u.s. Department of Labor); and the $300,000 lump-sum fee to
be paid in in-stallments over the first year.
In other respects such as territory, royalty rate, exclu-sivity, travel
allowances, and so on, the agreement con-formed with Metros
initial offer.
An Upset
The Peruvian government disallowed a 10-year agree-ment life.
By then, both parties had gone too far to want to reopen the
entire negotiations and Metro appears to have resigned itself to
an agreement life of five years, with a further extension of
another five years subject to mutual consent. Given Impecinas
in-house engineering and com-puter capability, extension of the
agreement life was a very open question.
Analyze the negotiations from each partys perspective:
1. List what each party is offering and what it hopes to receive.
2. Identify the elements in each list that are musts and those
where flexibility may be shown, and state why.
3. Describe negotiating tactics or ploys each party used or could
have used.
4. Compute net cash flows for each party under several
scenarios. For example:
a. Licensee fails to get a single order.
b. Licensee gets one-third market share in Peru for three years,
no orders thereafter, and no orders in any other nation.
c.
Licensee gets one-third share in Peru for ten years and half
again as much in business in other nations, and so forth.
5. Compute the share of net present value of profits that each

of the two parties will capture under various market
scenarios.
6. What do you think of the rule of thumb, encoun-tered in
licensing literature, that licensors should settle for roughly
one quarter to one half of the licensees incremental profit?
7. a.
b.
c.
Are sunk costs relevant here?

What, if any, are the opportunity costs?
In computing the licensors cash flows, remember that in

addition to the direct costs of implementing an agreement,
there are sometimes substantial in-direct costs. What are
they? How would you apply the licensors development
costs to this exercise?
8. Why did the licensee accept the offer (with small changes)
without batting an eyelid? (Hint: Calculate break-even
sales for both parties.)
9. Should the licensor have threatened to pull out when the
government limited the agreement life to five years? (Hint:
Recalculate question 5 under a five-year limit.)
10. Do you think the licensee knew this all along?
11. Discuss the role of government intervention in licensing
negotiations in general.
181
CASE 2:
ASCOM HASLER MAILING SYSTEMS INC. :
COMPETING IN THE SHADOW OF A GIANT
Introduction
On a beautiful fall day in New England at the end of the
millennium, Michael Allacca, president of Ascam Hasler Mailing
Systems Inc., was struggling with the question of haw to move
his company beyond its position as one of the three dwarfs of
the postage meter industry. Although his company had
achieved the greatest share gain of any competitor in the United
States between 1985 and 1997, he was not complacent. He was
number three in the U.S. market, and number one still had
mare than 85 percent of the total market.
mail continues to grow and to be a cost-effective, major source

of information transfer in the United States. Each year the
USPS delivers aver 100 billion pieces of mail through aver
38,000 past offices, to. over 130 million delivery paints. The
USPS handles 41 percent of the worlds mail volume, aver 630
million pieces every day. The next largest postal service market is
in Japan, which handles 6 percent of the worlds mail volume.
With its budget of aver $50 billion, and aver 750,000 career
employees, if the USPS were in the Fortune 500, it would be
ranked number eight.
Moreover, there were technological, market, and regulatory

changes occurring that opened up entry possibilities far new
entrants who had in effect been blacked from entry to the
industry far the past half-century and longer.
While they have same presence in mast developed countries

around the globe, all postage meter manufactur-ers concentrate
their efforts in five main markets: the United States, Canada,
France, Germany, and the United Kingdom.
Globalization had come to the sleepy postage meter industry

with a vengeance, and Mr. Allocca was worried. He knew that he
needed a strategy to improve his position and questioned in his
awn mind whether he had one. He remembered the famous
Van Clausewitz maxim: the best strategy is to be everywhere
very strong, first generally and then at the decisive paint. Easy
to say, he thought, but haw could he be strong as a dwarf in the
industry? And, fur-thermore, what was the decisive paint?
The Major Players
History and Evolution of The U.s. Postage

Meter Industry
In 192O, Arthur Pitney and Walter Bowes received approval
from the United States,. Past Office to market a device they had
invented, which they called a postage meter. The postage meter
was a complex mechanical device that pro-vided the secure
staring of fund information, the dispens-ing of postage, and
the printing of indicia an envelopes or tape. It was a convenient
replacement far the postage stamp in higher-volume mail
applications. Pitney Bowes, Inc. was barn, and a manufacturing
and corporate facility was es-tablished in Stamford, Connecticut
At about the same time, similar companies were independently
established in Europe. Today there are four major players
globally. Pitney Bowes (PB), remaining the largest by far, has
three European counterparts.
Since its beginning, PB has aggressively defended its market
share. Today, after the infiltration by three foreign competitors,
it still retains about 85 percent of the US. market. It has very
effectively used its portfolio of aver 3,000 patents as a weapon
and barrier to the entry of other competitors. In 1959 the US.
Justice Department challenged PBs monopoly. As part of the
consent decree that resulted, PB was required to license its
patents, royalty free. This and other constraints were lifted late
in the 1960s; however, it still offers its patents for a royalty fee
to avoid further confrontation with the Justice Department and
the US. Postal Service (USPS).
While there has been substantial growth in electronic communications, facsimile, and other substitutes far the postal service,
182
A significant measure of U.S. market share is the division of the

installed base of postage meters an rental, pub-lished -quarterly
by the USPS. Exhibit 1 is an indication of recent trends.
1. Pitney Bowes
Pitney Bowes, clearly the world leader in the manufacture and
sale of mailing equipment, in 1998 had total revenues that
exceeded $4.2 billions. Revenue from the sales and fi-nancing
of mailing equipment, related supplies and services, and
postage meters exceeded $2.7 billion. The remaining revenue
comes primarily from its Office Solutions business, which
includes the sale, financing, rental, and service of reprographic and facsimile equipment and related supplies and
facilities management services.
1985
Units
PH
956,987
Neopost 52,077
Ascom 21,007
Postalia 15,227
Totals 1,045,298
EXHIBIT 1
1990
1995
%
Units
Units
91.6 1,156,585 88.6 1,303,106

5.0 67,277
5.1
87,912
2.0 64,018
4.9 104,412.
1.4 15,227
1.4
23,363
100 1,303,107 100 1,518,793
1998
Units
85.8 1,399,156 82.9

5.8 123,367 7.3
6.9 118,774 7.0
1.5
46,497 2.8
100 1,687,794 100
Figures Represent Installed Meters At Year-end.

PBs historically strong financial performance is based on the
foundation, of its postage meter rental base and equipment
leasing business. Fortune. magazine, in its April 27, 1998
issue, ranked PB number one in the Office Equip-ment
Industry Group for Net Operating Profit Margin, Return on
Stockholders Equity, 3-YearTotal Return, and 10-year Total
Return.,
In its mailing equipment business, PB offers the most
comprehensive product line, including postage meter machines, letter folders, inserters, openers, addressing machines,
and PC-based mailing and shipping systems. It offers more
one-stop-shopping opportunities than any of its competi-
When competitors introduced new products into PBs home

market, its-strong technology base allowed it to re-spond
quickly. It did so when Neopost introduced the first
electronic postage meter, when Ascom Hasler introduced the
first modular machines, and when Francotyp - Postalia
introduced the first digital-printing meters. Iris trying to do
so again, as two California start-ups introduced the first
Web-based postage systems.
market and was, therefore, less negatively im-pacted than its

competitors. It has a full product-line of-fering,
manufacturing a line of letter folders and inserters and
OEMing PC-based mail/ shipping management sys-tems
to round out its product line. It was quick to develop a
digital thermal, transfer meter after Francotyp - Pdstalia, and
also got an early start in developing Internet-based postage
evidencing products.
Neopost USA has its headquarters in Union City, Cal-ifornia,
where it employs about 250 people. It distributes its
products through 22 direct field offices in major markets and
over 150 independent dealers. Total US. Employment is over
1,300. Like PB, it also has its own subsidiary that provides
equipment leasing to its customers.
3. Ascom Hasler Mailing Systems
A primary ingredient in PBs formula For domination of the

US. market has been its direct sales organization, con-sisting
of over 100 branch offices and thousands of sales and
service representatives distributed throughout the country.
In 1998, it mounted a new distribution initiative to address
the fast-growing SOHO (Small Office, Home Office) market, with the creation of its Office Direct business unit. It
will provide channels for PBs future Web-based products
and lower ticket items that cannot support direct sales.
Channels include telemarketing, direct -mail marketing, television, the Internet, and retail office-supply store chains.
Ascom A.G. (Ascom), a $2 billion corporation headquartered in Bern, Switzerland, focuses two thirds of its business in the telecommunications market in the areas of car-rier
access, PBX, paging, defense and security systems, and
terminals. The remaining third of its business is in an area it
calls Service Automation, which includes cash-handling
systems, payphone systems, transport revenue systems
(ticketing), and mailing systems (Ascom Hasler Mailing
Systems [AHMS]). For at least the past 10 years, Ascom has
experienced difficulty in its core business due to the
privatization of the Swiss Telecom industry, which began to
privatize and open its market to foreign competitors in the
late 1980s.As a result, AHMS took a back seat to the needs
of Ascoms telecom core business.
For the first time in its history, PB has boldly turned to an

outsider (Brother of Japan) for the development and
production of a core product, raising the potential creation
of a formidable future competitor. It did so to produce a
stand-alone meter product with very low cost to target a new
market of very low-mail-volume users. It is using direct
marketing and, again for the first time, TV advertising to
convince these low-mail-volume users to switch from
stamps to a cost-effective postage meter.
In recent years, its core telecommunications business has also

suffered from an acquisition that resulted in a sig-nificant
cash drain on the company before it failed. In-vestments in
its non-core companies were minimized while it struggled to
return its core business to profitability. As a result, ARMS fell
behind all of its competitors in new product offerings. In
fact, in the mid-1990s, it found itself without a low-end
meter product when its mechanical model was decertified by
the USPS, and it had no elec-tronic model to replace it.
PB very effectively uses its wholly owned subsidiary, Pitney

Bowes Credit Corporation to lease its mailing sys-tem
products. Once captured, a customer is continually revisited for lease renewal.
Ascom Hasler can trace its origin back to the same era as PB,
although it has been in the United States only since the early
1980s. Unlike its three competitors, it distributes exclusively
through a network of independent dealers in the United
States. It has no direct sales offices in the United States and
the core of its product line consists of a range of electronic
mailing machines manufactured in Bern that still print
mechanically, most of which have been installed recently to
replace the USPS decertified mechanical ma-chines. These
machines are vulnerable to a further desertification by the
USPS, which will ultimately require that all meters in service
print digital, encrypted indicia. It is the only manufacturer
that has not yet introduced a digital printing postage meter.
It is also the only manufacturer that has not announced
plans to market a PC-based postage product.
2. Neopost
Neopost, based in Paris, France, started in the mailing
equipment business at about the same time as PB. Its US
subsidiary began in1933 as Friden, a California-based
calculator company. It later expanded into the mailing equipment business, becoming the second US. Supplier. It was
later merged with Roneo, a British company that had been in
the mailing equipment business since the 1930s. Neopost
manufactures in France and in the United Kingdom.
The company prides itself on being a technical inno-vator in
its new products. Friden had the distinction, in 1979, of introducing the first electronic postage meter, before PE. At
the time of the desertification of mechanical meters by the
USPS, Neopost had mostly electronic meters in the US.
Over half of ARMSs business is in the United States. Their

U.S. organization consists primarily of customer and
distribution support. In the past few years, an engineering
organization has been formed at its headquarters in Shel-ton,
183
tors. It prides itself on being a product innovator and uses its

huge patent portfolio to defend its inventions and to provide
an entry barrier to would-be encroachers in its highly valued
and protected market. PB ranked among the top 200 recipients of US. Patents for 13 years in a row. In..1998, it spent
over $100 million in research and development, and was
awarded 124 patents, with 44 percent more than in 1997, its
highest year ever. PB has a precedent for effectively using its
patent clout when each of its foreign competitors attempted
to in-troduce electronic postage meters into the market.
Connecticut, to develop software-based products for global

markets and to support development efforts in Bern,
Switzerland. Engineering and manufacture of the companys core postage meter products are performed in Bern.
Ascom uses a third party to lease its products.
4. Francotyp-postalia
Francotyp-Postalia, Inc. (FP) entered the U.S. market in 1961.
It is a subsidiary of Francotyp-Postalia, A.G., of Berlin,
Germany. The parent started in 1923 as a manufacturer of
special machinery and office machines and as electric equipment wholesalers. It markets its mailing products in 86
coun-tries. The U.S. subsidiary, primarily a distributor, is
located in Lisle, Illinois, and employs about 100 people. The
German- based mailing equipment manufacturer, while a
major player in its home market, has not made a noticeable
impact on the market in the United States. Until recently its
prod-uct line was extremely limited, causing it to market
relabeled products manufactured by Neopost in England.
Until the mid-1990s, FP was the only manufacturer that was
not able to offer postage meter resetting by phone. At that
time, FP appeared to mount a new initiative when it built a
new, modem manufacturing facility in East Berlin and
launched an extensive new-product development effort. FP
was the first manufacturer to introduce a postage meter
named Conquest, which printed variable information
digitally using a dot-matrix print head and thermal transfer
technol-ogy. The introduction of Conquest, and later a
higher-mail -volume machine using inkjet technology to
print indicia, placed FP on a new market-share growth curve,
making it the fastest-growing meter supplier in the United
States.
In July 1998, FP entered into a strategic partnership with EStamp, a start-up company pioneering on-line postage.
FP has two direct sales offices in the United States but uses
independent mailing and office equipment dealers as its
main distribution network to sell and service its prod-ucts. It
uses a third party to lease its products.
The Products
Early meters were totally mechanical and utilized an elec-tric
motor to drive a rotary drum containing a print die of the
indicia. When cost-effective electronics and micro-processors
became available in the mid-1970s, they were utilized in postage
meter design to provide keyboard input, display, calculation,
and control. A motor driven print drum was still used to
deliver the indicia to the envelope or tape. The transition from
mechanical to electronic/software de-vices proved to be a
challenge for all manufacturers.
In addition to postage meters, manufacturers also pro-duce
mailing machines that allow for the automatic feeding, sealing,
and stacking of mail at various speeds. Postage meters are
mounted on these machines to perform the printing of
postage indicia within the mail feeding-stacking process. In this
configuration, the meter is rented and owned by the manufacturer (by U.S. postal regulation), while the mailing machine is
sold. Other peripheral prod-ucts, including postal scales that
compute postage rates based upon weight, folders, inserters,
184
and mail openers, as well as PC-based mail management

systems are manufac-tured or sourced from OEM suppliers in
an effort to pro-vide a complete product line.
An Aggressive USPS Changes Orientation

A congressional hearing in 1967 concluded that despite a huge
growth in mail volume, with the exception of the zip code, the
mail was being handled the same Way it was 100 years ago.
Years of mismanagement, labor problems, poor control of
operations, and transportation facilities resulted in a post office
that was inefficient and piling up debt. Its heavily subsidized
rates bore little relationship to its costs.
In 1969, Congress passed the Postal Service Act, re-moving the
Postmaster General from the Presidents Cab-inet, and creating
a self-supporting postal corporation wholly owned by the
federal government. The Post Office Department became the
United States Postal Service (USPS), an independent establishment of the executive branch of the U.S. government.
Operational authority transferred from the Congress to the
USPS executive man-agement and the board of governors.
Despite this new ori-entation, the USPS continued to face
mounting financial and competitive pressures. Substitutes for
mail, including facsimile and electronic messaging, and funds
transfer threatened to reduce the volume of mail. Private
compa-nies, such as Federal Express, dominated the market for
urgent delivery of mail and packages.
On May 5, 1992, Marvin Runyon became the 70th Postmaster
General of the United States. Unlike several of his predecessors,
Runyon was not a postal career em-ployee. Following a 37-year
career with Ford, he became CEO of Nissan, U.S.A. In 1988, he
left Nissan to take the top job at the Tennessee Valley Authority,
where he was re-sponsible for a major turnaround of the
organization, achieving cumulative savings and efficiency
improvements of $1.8 billion and stable rates for the first time
in 20 years.
Runyon wasted no time in implementing similar cost cutting
changes at the USPS. Within six months, he built a leaner
management structure, improved customer service, and
increased efficiency that resulted from 47,000 volun-tary
employee retirements. His actions essentially elimi-nated a $2
billion deficit the USPS faced in 1993 and set records for ontime performance and customer satisfaction.
In 1993, Runyon targeted the postage meter as a device subject
to tampering, claiming that losses to the USPS exceed $100
million annually. Meter manufacturers were criticized for not
incorporating state-of-the-art tech-nology, particularly microprocessors, making the devices in-herently more tamper-proof. The
new technology was not embraced because previous USPS
administrations discour-aged its use, and the rental business
model favored the lower-cost, longer-life attributes of the
simpler mechanical meters. As part of Runyons initiative, the
USPS started a campaign to decertify: mechanical meters and
demand that they be removed from the market and be replaced
by safer, electronic meters. For postage meter manufacturers this
meant that their existing, profitable rental base of meters would
have to be replaced and recapitulated at great cost. Compared to
their mechanical counterparts, electronic meters are significantly
more costly to design, produce, and maintain, and have much
USPS desertification schedule announced in May 1996:
June 1,1996: Placements of new mechanical meters would no

longer-be allowed.
March 1, 1997: Mechanical meters used by firms processing

mail for a fee would have to be removed from service.
December 31,1998: Mechanical meters mounted on machines

that automatically feed, seal, and stack mail would have to be
removed from service. This resulted in a one-time windfall
for manufacturers whose customers were required to upgrade
their automatic machines to handle the newly mandated
electronic meters.
March 1, 1999: All remaining mechanical meters (stand-alone

meters), would have to be removed from service.
The new, financially oriented USPS openly encouraged the use

of new technologies, promising an expedient certifica-tion
process. At the same time, it used its power to start a process
that would lead to the desertification and phasing out of all
mechanical meters by March 31, 1999. It also ag-gressively took
over the funds that manufacturers were holding in trust for its
customers to allow for the resetting of postage meters by
phone. Manufacturers lost the interest on those funds, which
they claimed helped cover costs of oper-ating the system. PB
sued the USPS for breach of contract and settled in mid-1999
for $52 million. It is expected that the other manufacturers
affected will follow PBs lead.
Technology-driven Changes
Today, growth in the use of computers for electronic funds
transfers (EFT) has led to the development of technologies to
ensure the safety of such transfers. Microelectronics, software, and
communications technologies provide sys-tems that are virtually
impossible to infiltrate. Elaborate systems that encrypted data
before transmission were de-veloped to ensure security.
Working closely with Carnegie Mellon University in its Information-Based Indicia Program, the USPS defined its own criteria
for a system that would result in the secure printing of postage
indicia. The system, developed and an-nounced by the USPS in
.May 1995, is based upon en-crypted Information Base, Indicia
(IEI). The IEI contains the following information: readable
postage amount, mail class, date, device ID number, and town
or licensing post office; in addition, a two-dimensional bar code
that en-codes the readable information as well as a digital signature (for security management), and delivery point code. Unlike
the indicia produced by a demounted on a rotary drum, each
printed indicia is unique, making counterfeit-ing virtually
impossible.
Much of the new technology is covered by PBs patent portfolio. On June 10,1999, PB announced that it had filed suit
against E-Stamp, a new market entry, charging that E-Stamp
was infringing on PB patents. At the same time PB announced
that it was involved in discussions with other marketers of
computer-based postal products, to grant patent licenses for use
of PB-developed technology.
New Market Entries and The Internet

The USPS, as a regulator, had always been a barrier to new
entrants into the postage meter business. In its new image, it
has encouraged and openly promoted new entrants, and
encouraged the use of new technology not requiring huge
capital investments. As a result, two new, serious players have
entered the market, providing a software alternative to postage
stamps to a new segment of the market: the small office and
the home (SOHO) having Internet access.
E-Stamp, a California start-up, developed a system en-titled EStamp Internet Postage that allows a user to access the Internet
and download postage funds into a secure de-vice interfaced to
the users existing PC and printer. The se-cure device is rented to
the user for a monthly fee. The user can draw funds from the
secure device to print postal indi-cia developed on the PC,
directly on envelopes, labels, or documents on an existing offthe-shelf PC printer. E-Stamp has received financing from
Microsoft Corporation, AT&T Ventures, Compaq Computer
Corporation, and FP. Its man-agement team includes computer
industry veterans from Microsoft and Oracle. In the summer of
1999, its products were approved by the USPS and the company
announced its intentions to go public.
Stamps.com, also a California start-up, developed a system
called Stamps.com Internet Postage that utilizes the Internet,
but does not require a secure device to interface with the users
Pc. Instead, it allows users to print the USPS-approved indicia
on envelopes, labels, or documents directly as it is transmitted
over the Internet. Printing is ac-complished on the users
existing off-the-shelf PC printer. Stamps.com will charge a
premium of about 10 percent for postage, which the company
claims is significantly less than the 18 to 25 percent levied by
traditional postage meter systems. Stamps.coms business
venture partners include Intel and AOL. In the summer of
1999, its products were approved by the USPS and the company
went public.
While there are two on-line-postage products that have received
the final approval of the USPS, there are also three additional
products on test:
1. PC Stamp, a stand-alone product offered by Neopost.
2. Postage Plus, an on-line product offered by Neopost.
3. Click-stamp, a stand-alone product offered by PB (PB is also
expected to offer an on-line product shortly).
What to Do
Mr. Allocca looked again at the beautiful New England landscape. He knew that the clock was ticking, and that things would
never be the same for the postage meter industry. He knew that
he needed a strategy, and that it had to address both the
competition and the need to create a unique value. As he saw
the situation, there were four options:
1. Convince its parent company, Ascom, to significantly increase
its investment in new-product development, manufacturing,
and marketing. To be effective in the required time frame
might require a total restructur-ing of the organization
worldwide.
185
shorter life cycles, both factors having negative impact on the

meter rental financial model.
2. Establish a partnership with a competitor, or com-petitors,

or perhaps the USPS, to address the imbal-ance in the
marketplace caused by the dominance of the industry giant.
3. Phase out the companys postage meter business in favor of
a related business in which a competitive advantage could
reasonably be realized. Perhaps a source of opportunity
could be the growing popula-tion of shipments over the
Internet. Use of funds from the postage meter rental base
could help to fund a new venture.
4. Ascom could divest itself of the mailing business and
concentrate on its core telecommunications business.
Perhaps a sale to a competitor would be a possibility.
Which option would you choose? Would you develop an-other?
1. Analyze the attractiveness of the U.S. postage meter mailing
equipment industry for:
Pitney Bowes
PBs three foreign competitors
An increasingly profit-oriented USPS
New Internet-based market entries
2. Develop a SWOT analysis for each of the players listed in

question 1.
3. What key issues must be considered in the development of a
go-forward business strategy for each of the players listed in
question 1?
4. Develop a scenario of how the industry structure might
change over the next five years.
5. Which one of the options identified by Mr. Allocca would
you choose? Why?
6. Formulate your recommended strategy for Ascom Hasler
Inc. and Ascom A.G
186
The Battle for Global Market Share

As retail America undergoes a dramatic change with the
constant consolidation of companies, management must strive
to maintain a competitive advantage or risk being acquired. The
worldwide success of Wal-Mart has led many to diversify and
heed the adage that bigger is indeed better. An example in the
global grocery industry is the Ahoid Group (Netherlands)
which now operates in more than 17 countries including its
recent acquisition of New York based Path mark. In the U.S.
grocery industry, the merger between Albertsons and American
Stores, and the, U.S. drug chain landscape has rapidly changed
over the last two years with only four major players left
standing: CVS, Rite Aid, Walgreens, and Eckerd.
As the retail community shrinks, retailers put greater emphasis
on their suppliers for quality products at a com-petitive price
that enables them to make healthy margins to attract consumers. If one manufacturer cannot supply the necessary
ingredients, retailers will look for other al-ternatives. This
environment has provided an opportunity to shake up an
otherwise mature and stable industry, the photographic
industry, and has paved the way for a viable competitor to
Kodak, such as Fuji Photo Film U.S.A. The phenomenon has
contributed to Fuji making significant in-roads into Kodaks
once commanding U.S. market share in particular and to its
global share in general.
This case study shows the evolution of the Kodak-Fuji
relationship, specifically from Kodaks perspective. The case
study will attempt to show how Kodak has fallen from its lofty
position and how it has developed strategies to rectify the
situation. H. Donald Hopkins provided the groundwork for
this revised case study in his original work Kodak vs. Fuji: A
Case of Japanese-American Strategic Interaction. The followup study examines this relationship, with respect to market
share battles (both globally and domestically), sponsorship
battles, court battles, and the photographic in-dustry in general.
The relationship between Kodak and Fuji had always been
adversarial, as competitors naturally are; however, the relationship took a very serious turn in May 1995, when Kodak filed a
Section 301 petition under U.S. trade law. The petition claimed
that Kodaks 7 to 10 percent market share in Japan was not a
result of consumer choice and market-ing efforts but rather a
result of four principal Japanese wholesalers, backed by the
Japanese government, that are exclusive Fujifilm supporters.
As a result, the World Trade Organization, which eventually
presided over the court decision, announced on January 30,
1998, a sweeping rejection of Kodaks COJl1-plaints about
the film market in Japan.
At present, with the court battles behind them, it ap-pears that
Kodak and Fuji can now pool their efforts to grow the
photographic and imaging business as they did with their
shared effort, along with Canon, Minolta, and Nikon, in

releasing the Advanced Photo System in 1996. These types of
efforts are necessary to stave off the real competition to
photography, the computer-savvy consumer who demands
digital imaging.
Kodak and Fuji. . . Not a Pretty Picture

How can Kodak possibly sit on its hands and allow this to
happen? pondered Alex Henderson, an analyst at Pruden-tial
Securities, Inc. in New York, as quoted in an article in the
Rochester Democrat & Chronicle. You cant have your nearest
competitor growing at this volume and not deal with it,
Analysts stated that for the first time in Kodaks -113- year
history, it could no longer take its home market for granted.
Over the last decade, while the U.S.-based Eastman Kodak
Company was sleeping, the Japanese firm Fuji Photo Film
opened its first film-production plant in the United States, cut
prices, marketed aggressively, and stole valuable market share.
Kodak maintains that it will not engage in a price war to win
customers back due to potential profit erosion. The inroads
that Fuji has made in the U.S. market will certainly continue to
build its momentum. They (Kodak) are com-peting against an
extremely determined, extremely profi-cient and extremely wellfinanced company in Fuji, says Michael Ellman, who tracks
Kodak for Schroder & Com-pany.3What then, begs the
question, is Kodak to do? Many analysts are demanding that
Kodaks CEO George Fisher take drastic action to cut costs,
reduce debt, and right Kodaks sinking ship.
The Changing Customer

The dynamics within the photo industry have changed dramatically within the past 15 years. Once upon a time, the film
industry within the United States was basically stable and
predictable, with industry leader Eastman Kodak, a US. -based
company headquartered in Rochester, New York, holding a
commanding share of the industry, hover-ing between 80 to 90
percent.4 No competitors even had a double-digit percentage of
the amateur photo market and many consumers automatically
equated Kodak with film. Competitors were left to fight for the
scraps off Kodaks table and the pickings were slim.
Then, beginning in 1984, the general photographic market and
particularly Kodak noticed a subtle change in consumer attitude.
Kodak still retains its enviable and com-manding share of the
market, but the market-savvy con-sumers of the new millennium
now have more choices and do not automatically equate film with
Kodak alone. Three major functions have eroded consumer
brand loyalty and allegiance to Kodak these past 15 years.
First, American consumers are more accepting of foreign-based
products, although they enjoy preaching the virtues of buying
American. They celebrate their patri-otic freedom by waving the
American flag at picnics on the Fourth of July. However, it is
not uncommon for some guests to drive to the Independence
187
CASE STUDY
KODAK VERSUS FUJI
Day celebration in a Mercedes Benz (German) automobile,

while listening to music on a Sony (Japanese) radio/disc player.
In addition, while waiting for their all-American burgers to
cook, many Americans are reaching into the ice chest to find
Bass (En-glish) Ale, along with Perrier (French) bottled water.
A January 1999 study showed that the United States recorded
its single largest trade deficit month ever at $17 billion dollars
Imports outweighed exports. Unless pro-tectionist legislation is
initiated and passed, U.S. consumers will continue to purchase
what they perceive is the best deal (be it domestic or foreign) for
their money.
Second, consumers have found a bona fide competi-tor to
Kodak in the name of Fuji film. Clearly, Fuji has emerged from
a minor player in the early 19805 to take a solid number-two
position within the U.S. market and has caught the attention, as
well as the wrath, of Kodak. Third, the landscape within retail
America has changed dramati-cally in the past five years. The
success of Wal-Mart has taught retailers that diversification,
scrambled marketing, and one-stop shopping are important
to consumers. As consolidation sweeps the nation in mass
merchants, food, and drug accounts, retailers realize they must
maintain their competitive advantage or close shop. To survive,
they are squeezing manufacturers for quality products at competitive prices to capture profit margins for expansion within
the industry. This environment has provided an op-portunity
for Fuji to prosper in an otherwise stable and mature photographic industry.
Today an all-out war has emerged. While Kodak and Fuji fight
for market share, the real winner and benefactor is the consumer. Retailers and consumers will be the big
winners in this struggle for market share among the big
players, says one retailer. We are going to get more in-centives
to sell merchandise and the consumer is going to see a lot more
new product at lower prices. Kodak and Fuji deny they are
engaging in a price war, but for each move Fuji makes, Kodak
counters with a vengeance. Smack them until they figure it
out: is how Eric Steen burgh, Kodaks assistant chief operating
officer, describes its strategy toward Fuji.
Todays Picture
The amateur photo markets estimated worth is $14.2 bil-lion.
Film sales generate 20 percent or $2.84 billion (Exhibit 1).
Within film sales, 35-millimeter film commands 80.2 per-cent
or $2.27 billion dollars (Exhibit 2). While unit film sales
showed a moderate 2 percent growth rate, the real shining stars
within this segment, which continues to exhibit strong growth,
are the one-time-use cameras (OTUC), which are considered
film within the industry. Unit sales grew at 23 percent in 1997
and a 20 percent annual growth rate is ex-pected to continue
(Exhibit 3).
The New Players

While Kodak and Fuji are familiar competitors, they have to be
aware as new competition enters the picture. In 1997, digital
imaging accounted for 6.4 percent or just under $1 billion in the
amateur photo market (Exhibit 1). As tech-nology inevitably
increases and prices drop, the consumer may prefer digital
imaging. A recent Salomon Smith Barney report on imaging
188
stated that the digital camera market in the United States will be
12.7 million units by 2002, which is larger than the current
conventional lens shutter business in the United States. The
report also states that the average price of a digital camera in
2002 will be about $168. Digital cameras are being
mainstreamed quickly.
Exhibit 1- 1997 Amateur Photo Market
Segment
Percentage
Dollars
Photo processing
43.50
$6,177,000,000
Film Sales
Conventional
Cameras
Digital Imaging
Portrait Studios
Frames
Photo Accessories
Albums
Camera Repair
Consumables
Video Camcorders
Video Accessories
Other
20.00
$2,840,000,000
9.70
6.40
5.50
3.30
3.20
2.50
1.00
0.90
0.70
0.50
2.80
100.00
$1,377,400,000
$908,800,000
$781,000,000
$468,600,000
$454,400,000
$355,000,000
$142,000,000
$127,800,000
$99,400,000
$71,000,000
$397,600,000
$14,200,000,000
Nontraditional competitors such as Sony, Casio, and HewlettPackard are entering the industry with digital cameras and
printers. To combat these threats, Kodak and Fuji each have
manufactured digital cameras and printers of their own to stay
competitive as film companies in the 21st century: To capture
this technological consumer, both Kodak (Kodak/AOL
Youve Got Pictures) and Fuji (Fuji.Net) have instituted
cutting-edge services to allow customers to order prints directly
over the Internet.
The Global Market Share Battles

Traditionally, Kodak and Fuji have battled it out in the overseas
film markets. In 1995 it was estimated that Kodak had a 44
percent global share while Fuji had 33 percents Today the global
share has changed as the U.S. market and Asian markets have
shifted. Experts estimate that both Kodak and Fuji were neck
in neck, with roughly a third of the market each. Alex
Henderson, managing director of technology research at
Prudential Securities, Inc. in New York, has been watching the
two companies since 1985. Henderson believes that Fuji will
overtake Kodak by 2001. When that happens, says
Henderson, Kodak will go from being Coke to being Pepsi.
In a letter to Kodak employees, Fisher and top man-agement
stated, Competitors are making bold claims. They claim they
will dominate the future of this business. We speak for the tens
of thousands of people who work for Kodak when we say,
Not on our watch.
The U.S. Market Share Battles

Eastman Kodak has a commanding, yet declining, 70 per-cent
of the U.S. market share. Fuji film has approximately 17 percent
of U.S. market share. Other minor players in the U.S. market
include private-label brands, which constitute 7 percent. Agfa of
The Price Wars

Domestically speaking, Kodak and Fuji traditionally en-joyed
healthy margins and treated the market as a mutu-ally profitable
duopoly. Then in the spring of 1996, Fuji cut prices on film by
10 percent to 15 percent after Castco Wholesalers decided to go
exclusively with Kodak. Fuji had excess inventory of 2.5 million
rolls of film. They dis-tributed the heavily discounted film to
other retailers to avoid losses from film expiration. This began a
correlation between price-cutting and market share.
As Fujis market share grew incrementally in 1997 at Kodaks
expense, Kodak initially stated that it would not engage in a
price war. Fisher stated in 1997 that: Our chal-lenge is to figure
out ways to introduce some exciting new products. Thats a
better way to fight an intense battle like the one were in. Later in
the year he said, We do not intend to continue to lose share at
the rate we lost over the summer months. Kodak stated that it
did not intend to engage in a price war, and for good reason.
Jonathan Rosenzweig, an analyst at Salomon Smith Barney,
figures that for very percent cut in Kodak film prices, a per-cent
drop in earnings per share results.
Consumer reaction surprised the industry. Once con-sumers
tried Fuji, they found they liked the product as long as it was
priced lower than Kodak. By 1998 the hectic pace of competition between Fuji and Kodak seemed to slow down, with toe
exception of value packs. Spurring sales this year was the fact
that the category in general got more price competitive, with
both Kodak and Fuji sharpening their prices, particularly in
promoted prices, states Jerry Quindlan, Kodaks vice president
and general manager of Mass and Wholesale Clubs. I would
not call it a price war, however; it is really just sharpening prices.
Our average price did not go down that much, but we did get
more ag-gressive to protect market share.
Sponsorship Battles
The rivalry between Kodak and Fuji does not stop on the
grocery or camera specialty shelves. This rivalry has heated up in
the sponsorship arena as well. In his visit to Pace Uni-versitys
Lubin School of Business on April 28, 1999, Herb Baer,
director of Marketing, Consumer Film and Quick-Snaps at Fuji,
stated, Fuji film sponsored the 1984 Los An-geles Olympic
Games and this sponsorship really helped put Fuji on the map.
As the story goes, Peter Ueberroth the Olympic organizer for
the US. Olympic Games visited Rochester and asked Kodak to
be the exclusive film spon-sor. Kodak refused the $1 million
deal (far below its $4 mil-lion asking price). Ueberroth called
Fuji and Fuji agreed on the spot. Fuji, a relatively small player in
those days, still benefits from this agreement.
Kodak did not sit idle during the actual airing of the Olympic
games. It initiated a legal ambush to divert at-tention away
from Fuji. While Fuji was a worldwide spon-sor of the
Olympics, its competitor, Kodak, became a sponsor of ABC
televisions broadcasts of the games and the official film
supplier to the US. Track team. Fuji re-turned the 1984 favor to
Kodak during the 1988 Olympics and, thus, began the sponsorship and ambush marketing that continues today.
Court Battles
Ironically, Kodak and Fuji each command roughly the same
market share in their home-country markets: 70 per-cent. While
Fuji has recently made significant strides in the US market to
gain approximately 17 percent, Kodak hovers around 7 to 9
percent in the Japanese market.
The main differences between the U.S. and Japanese markets are
the existing systems to distribute film, paper, and supplies to
end-users. III the United States, film manu-facturers sell directly
to retailers and photo finishers. In Japan, distributors mediate
between the two parties. Fuji has close ties to the four principal
distributors, while Kodak claims that these strong relationships
prevent distribution of other brands.
Furthermore, Kodak states that Tokyo-based Fuji has hundreds
of exclusive deals with photo finishing labs and that the
Japanese government is backing the entire system in order to
impede Kodaks success in the Japanese market.
On May 18, 1995, the Eastman Kodak Company asked the
United States 1tade Representative (USTR), the US. Government official responsible for negotiating interna-tional trade
disputes, to investigate whether the government of Japan had
allowed anticompetitive practices to deny Kodak opportunities
to sell film and color paper in Japan.
Kodak asked for this investigation under Section 301 of the US.
Trade Act, a law that requires the USTR to de-termine whether
trade practices by a foreign country are unreasonable and
discriminate against US. Exporters.
In a news conference in Tokyo in July, Kodaks Ira Wolf said,
We understand the risks inherent in going ahead with a 301
case, especially given the feelings of the average Japanese
consumer about 301. But we decided there was no alternative.
The Office of the Trade and Investment Ombudsman (Japan)
is too weak and the Geneva-based World Trade Organization
does not cover competition policy.
Both companies claimed that injustices occurred in their
respective market. Fisher said, While Fuji competes with
Kodak on a global basis, it makes virtually all of its profits in
Japan, using those proceeds to finance low-price sales outside
Japan. He also said, The Japan market, a large percentage,
maybe 70 percent, is closed to us. And as a result, Fuji is
allowed to have a profit sanctuary and amass a great deal of
money, which they use to buy market share in Europe and in
the United States.
Fisher added, All we are seeking is the opportunity to compete
in an open market. We want resolution, not retal-iation. Nor do
we want market share targets. We want an end to illegal market
barriers. . . Kodak sells world-class products. If given a chance,
we believe that our products can compete successfully in any
market. We have not had that chance in Japan.
Fuji rebutted in a 588-page defense entitled, Rewriting I History,
Kodaks Revisionist Account of the Japanese Con-sumer
Photographic Market. In the rebuttal, it cited that Kodaks
problems in Japan stemmed from mismanagement and other
factors, not unfair trade. Fuji film president Minoru Ohnishi
called Kodaks allegations a violation of business ethics and said
that Kodak shamelessly made false allegations against Fuji film.
189
Germany and Konica of Japan each have less than 2 percent

market share,
Fuji drew upon some powerful quotes that people were making
about the case. Some included, The com-bined sales of these
Eastman Kodak subsidiaries in Japan in 1994 was $1.2 billion, and
Eastman Kodak is 43rd on the list of the largest foreign companies. Whatever its com-plaints, Eastman Kodak has a major
position in the Japanese market. It has not been closed out.
Another convincing statement came from former Kodak president
Kay Whitmore. He stated, I think there is no further barrier in the
Japanese market for Kodak to proceed with its business in Japan.
If there should be some-thing, it would be only due to Kodaks
own insufficient effort in the Japanese market.
After nearly two and one half years of court rulings, the World
Trade Organization in Geneva issued a sweep-ing rejection of
Kodaks complaints about the filmmarket in Japan. Fuji
Photo FilmU.S.A. Inc. President Osamu Inoue said, The
WorldTrade Organization failed to find even minimal evidence
.tosupport the US. case. . . After today, there can longer be
doubt: imported filmis widely available and competitively
priced in Japan.
The Eastman Kodak Company

For generations, employment at the Eastman Kodak Com-pany
meant job security. Rochester, New Yorks biggest and most
paternalistic employer gave a sense that Kodak would never
relinquish its US market dominance to for-eign competition.
Kodak opened photography to the masses with inex-pensive
cameras and easy-to-use Kodaks name is one of the most
recognized brand names it consumer goods in the world. Its
slogan of you push the button, we do the rest, enabled
people to take the worry out of a compli-cated, scientific process
and make photography accessible to nearly everyone who
wanted to take pictures.
Kodak has been characterized as the leader in pho-tography, an
industry that has gone from rudimentary glass plates to cuttingedge digital images. Yet, Kodak realizes that for all of its
historical success throughout the world, it must now increasingly include digital technology into the product mix to stay at
the forefront of the photographic and imaging industry.
The climate at Kodak over the past few years has been well
documented. Wall Street has been nervous due in part to soft
sales in the United States, which stemmed from the battles with
Fuji and a botched launch of the New Ad-vanced Photo
System. Massive layoffs (16,000), the strong U.S. dollar-meaning
exports become less profitable and imports become more
profitable for Kodak competitors and sluggish growth in
emerging markets have all con-tributed to Kodaks decline in
market share. We went from 20 percent growth to about 7
percent, says CEO George Fisher glumly.
When Kodak hired Fisher in December 1993, he was hailed as
the leader that would bring back the highest levels of success
that recently had eluded Kodak. Indeed, Fisher has pared down
costs, shed debt, sold off businesses not related to photography, and refocused goals, but ana-lysts say that Kodak was slow
to react when it could see the writing on the wall. According to
Eugene Glazer, a Fortis Advisers analyst who never changed his
mind that Kodak was in a mature business that couldnt grow:
Fisher moved too slowly and didnt instill a sense of urgency.
190
Profits and sales at Kodak have been eroding through-out the

1990s. In 1998, sales were $13.4 billion as compared to $18.9
billion in 1990 (see Exhibit 6). Kodaks market share in 35millimeter film has dropped; film prices have declined an
average of 8 percent, which cuts into Kodaks profitability. The
company is at risk of losing the title of world leader in the
photographic industry. However, Kodak posted a net profit for
the first quarter of 1999, bol-stered by steady film sales growth
in China and Brazil as well as in low-end digital cameras in the
United States.
Nielsen data indicate that film sales in the U.S. market rose 10
percent in the first quarter of1999, as compared to the first
quarter of 1998. Unit sales have increased even though neither
Kodak nor Fuji Photo Film dropped prices in 1999. Theyre all
finally realizing that it is marketing, not price, that makes the
difference Ulysses Yannas, an analyst with Mercer, Bokert,
Buckman & Reid, said.
Perhaps George Fishers vision is taking hold. He has been
successful in attracting new talent to Kodaks close-knit
Rochester community. He appointed Daniel Carp, a 27yearKodak sales veteran in Canada, Latin America, and
London, as president and chief operating officer in De-cember
1996. Carp fully realizes the changing industry as well as
emerging markets. To help foster change, Kodak ad-mitted that
they had to set up shop where the talent is. To that end, they
have software operations in the Silicon Valley and marketing
offices in Atlanta.
In the restructuring of Kodak, four main segments have
emerged:
1. The Consumer Imaging Segment: traditional films, papers,
processing, photo finishing, photographic chemicals, cameras
(including one-time use), and the Advanced Photo System.
2. The Kodak Professional Segment: traditional films, pa-pers,
digital cameras, printers, scanners, and chemicals.
3. The Health Imaging Segment: medical films, chemicals, and
processing equipment as well as services.
4. Other (Digital and Applied Imaging) Imaging Segment:
motion pictures, audiovisual equipment, certain digital
cameras, printers, microfilm products, application software,
scanners, and other equipment.
While these segments serve the advanced countries of the
world and keep Kodak current with competitors, Kodak
recognizes that there are untapped consumers in emerging
markets, such as China. In an interview with Carp in the
February 1999 issue of Photo Marketing, Carp explained, In
terms of strategy, its evolving just as we predicted. We are
building plants that will make world-class products to supply
the domestic market. . . . The second part is to build a team to
get the word out to consumers that photography is fun. . . .
The third part is to build the infrastructure so its a good
experience for the consumer.
Fiscal Year-End: December

Income Statement ($mil)
1998
Sales
Cost of Goods
Sold
SG & A Expense
Net Income
EPS Primary ($)
EPS Fully
Diluted ($)
1997
1996
1995
13,406 14,538 15,968 14,980

7,293
3,303
1,390
4.30
8,130
6,432
5
0.01
8,326
5,438
1,288
3.82
7,962
5,093
1,252
3.67
4.24
0.01
3.82
3.67
Assets ($mil)
1998
1997
1996
1995
1,777
1,764
Cash
457
728
Receivables
Inventories
Current Assets
Total Assets
2,527
1,424
5,599
14,733
2.271
1,252
5,475
13.145
1998
1997
1996
1995
3,988
3,161
4,734
5,121
2,738 3,145
1,575 1,660
6,965 7,309
14,438 14,477
Equity ($mil)
Common Stock
Equity
Shares
Outstanding
(mil.)
Countries
Number of
households
in these regions
Average rolls of
film
consumed per
household year
Total rolls of film
323.3
Japan
United States
323.1
331.8
345.9
Fuji Photo Film has always prided itself on having the

technology to produce superior products to drive sales. The
company has consistently spent 7 percent of sales on re-search
and development to maintain a competitive advantage. Because
of this investment, Fuji was able to introduce faster film with
brighter colors (400 speed, 1600 speed), which is what the
professional and serious amateur photographers were asking
for in the 19705. In 1986, Fuji was the first to introduce onetime-use cameras. By the time Kodak caught up with the
technology, Fuji established a lead in one-time-use cameras that
Kodak never experi-enced with traditional film.
This attention to detail and ability to occasionally outpace
Kodak technologically has endeared Fuji to the pro-fessional
market and served as a stepping-stone to build creditability in
the larger amateur market. Originally, Fuji started out in the
U.S, market in 1965 as a private-brand supplier. In 1972, Fuji
began to market film under its brand name and, after remaining
a very small player in the shadow of Kodak in the United
States; Fujis initial success came with the sponsorship. of the
1984 Olympic Games in Los Angeles. Every year since, Fuji has
been slowly and quietly progressing in the U.S. market. The
fact that Fuji has made inroads in the U.S. has surprised even
Kodak, says Sugaya Aiko, an analyst at Kleinwort Benson in
Tokyo. That is one reason why they are fighting back in every
other market.
Fujis greatest strength is that they always make sure that
consumers are ready to buy their new products, and they actually
get the products to the consumers, says Toby Williams, an
analyst at SBC Wartburg in Tokyo.
Italy
Mexico
Brazil
Thailand
Indonesia
China
Russia
India
145,000,000
Australia
Canada
Korea
France
Germany
United Kingdom
114,000,000
92,000,000
607,000,000
8.2
4.6
2.2
.5
1,189,000,000
524,400,000
202,400,000
303,500,000
Exhibit 7 Ratio of Households to Rolls of Film Consumed

Kodak believes that the future of photography, in ad-dition to
advancing technology, is in getting more people to take
pictures. To that end, it states in its 1998 annual report: What
if households in developing markets shot a full roll of Kodak
film each year? The gain would be immense.
Fuji Photo Film Co., Ltd.

Fuji Photo Film Co., Ltd, was founded in 1934 and is headquartered in Tokyo, Japan. If one person can claim to be the
architect of Fujis growth, its Minoru Ohnishi. At the age of
55, he took over the company in 1980, making him Fujis
youngest president ever. It was under Ohnishis reign that
As a company, Fuji Photo Film has three core

business systems:
1. Imaging System: color films, motion picture film,
cameras, magnetic audiovisual media, electronic
imaging, and equipment.
2. Photo finishing System: photo-finishing
equipment, paper, and chemicals.
3. Information System: graphic systems, medical diagnostic systems, office automation systems,
industrial materials, and data-recording media.
Fujis long-term strategy in the United States is to

pro-duce locally but compete globally. Globalization
through localization translates to producing as much film and
paper on U.S. soil as possible to avoid troublesome trade
disputes, become more responsive to demanding U.S. ac-counts
needs, and keep overall costs to a minimum. In 1981, Fuji
produced just 3.5 percent of its goods outside of Japan; today
the figure is roughly 40 percent, with manufacturing plants in
the United States, the Netherlands, Germany, France, and the
Peoples Republic of China.
Like Kodak, Fuji has to stay competitive with Silicon Valley to
produce state-of-the-art digital products. To that end, Fuji
established FUJIFILM Software (California), Inc. in October 1998.
191
salespeople were encouraged to spend time with dis-tributors

and build relationships. As Japanese insiders say, One cup of
sake means 100,000 yen (of business).
Exhibit 6 1998 Kodak Annual Report
Fuji is one of the leanest Japanese companies. In the past 10

years, Fujis sales have almost doubled, yet the number of staff
in Japan remains almost flat. Fujis world-wide output per
employee is $285,000, while Kodak s-even after extensive
layoffs-is $155,000. It is this type of drive that has maintained
Fujis double-digit sales growth each year for the last decade (see
Exhibit 8).
Still Fujis drive to lead the industry has not come without a
price. As a company Fuji has been so obsessed with building
its brand, improving product quality, and in-vesting in research
and development and marketing that it has neglected areas like
profitability, says Sugaya Aiko of Kleinwort Benson. Payouts
have been far lower than Kodak because they focused too much
on long-term goals, according to Sugaya.
With world-class product quality in the balance for both Kodak
and Fuji, both are poised to battle it out for global dominance.
There are two giants in this field and each wants to be bigger
than the other, according to Sugary. Exhibit 8 Fuji Photo film Co, Ltd. 1998 Annual Report
Fiscal Year-End: March 31
(Assumes Y132 = U.S.$1,3/31/98)
From a global perspective, Kodak and Fuji are vying for

hegemony in another battle, this time in emerging mar-kets,
specifically in China. Both are poised to implement strategies
that will give them market share in this vast region of the
world. Generally speaking, Kodak win concentrate on push
marketing, market share, and cross pro-motion with its photo
processing network, while Fuji will focus on innovative new
products, price advantages over Kodak, and research and
development.
1. How can Kodak protect its strategic advantage from
competitors, especially Fuji?
2. How can Kodak anticipate market changes faster and react
accordingly?
3. What are Fujis chances for future growth?
4. What are some disadvantages that Fuji has to overcome?
5. Should both Kodak and Fuji be concerned over digital
integration into the silver halide Indus
Income Statement ($nu1)

1998
1997
1996
Sales
10,439
9,485
8,219
Income before taxes

Net income
Per share of common stock
Net income
Cash dividends
R&D expenses
Acquisition of fixed assets
Depreciation
Total assets at year-end
Total shareholders' equity
Number of employees
1,230
672
1,214
646
993
552
1.31
0.17
613
854
589
16,148
10,837
36,580
1.25
0.16
575
737
558
15,041
10,188
33,154
1.07
0.15
554
. 571
519
13,991
9,488
29,903
Youd have to spend billions of dollars on research and

development, marketing and distribution and even then, theres
no guarantee you could catch up with these two.
Conclusion
Based on Kodaks 1999 first-quarter earnings, it is too early to
predict Kodaks status. However, Fuji film is a formida-ble
opponent. To Kodaks surprise, statistics indicate that those
consumers who have tried Fuji stay with it as long as there is a
price advantage.
Generally speaking, the industry, Kodak and Fuji in-cluded,
does not want to lower price for fear that it will fi1rn this
industry into a commodity business. Healthy margins are
desirable for everyone involved in the industry at the consumers expense. The formula of V = BIP clearly is crystallized as
consumers enjoy an increased value. For the past two years- the
benefits remained constant, but prices have dropped. The
longevity of this trend is a major concern.
Domestically, new products such as the Advanced Photo
System, digital cameras, and Internet services are the keys to
192
increasing usage, which will invigorate this mature market.

Increased advertising and educated con-sumers will also drive
sales for everyone involved.
UNIT V
GLOBAL MARKETING PROGRAMS
LESSON 19:
PRODUCT DECISIONS
Basic Concepts
We begin our introduction to global product decisions by
briefly reviewing product concepts typically covered in a basic
marketing course. All basic product concepts are fully applicable
to global marketing/ additional concepts that apply specifically
to global marketing are also discussed.
Products: Deffinition and Calssification

What is a product? On the surface, this seems like a simple
question with an obvious answer. A product can be defined in
terms of its tangible physical attributes such as weight,
dimensions, and materials, thus, an automobile could be
defined as 3,000 pounds of metal or plastic, measuring 190
long, 75 wide, and 59 high. However, any description limited
to physical attributes gives an incomplete account of the
benefits a product provides. At a minimum, car buyers expect
an automobile to provide safe, comfortable transportation,
which derives from physical features such as air bags and
adjustable seats. However, marketers cannot ignore status,
mystique, and other intangible product attributes that a
particular model of automobile may provide. Indeed, major
segments of the auto market are developed around these
intangible attributes.
A product, the, can be defined as a collection of physical,
psychological, service, and symbolic attributes that collectively
yield satisfaction. Or benefits, to a buyer or user.
A number of frameworks for classifying products have been
developed. A frequently used classification is based on users and
distinguishes between consumer and industrial goods. Both
types of goods, in turn, can be further classified on the basis of
other criteria, such as how they are purchased (convenience,
preference, shopping, and specialty goods) and their life span
(durable, nondurable, and disposable). These and other
classification frameworks developed for domestic marketing are
fully applicable to global marketing.
Products: Local, National, International,

and Global
Many companies find that, as a result of expanding existing
businesses or acquiring a new business, they have products for
sale in a single national market. For example, Kraft Foods at
one found itself in the chewing gum business in France, the ice
cream business in Brazil, and the pasta business in Italy.
Although each of these unrelated businesses was, in isolation,
quite profitable, the scale of each was too small to justify heavy
expenditures on R&D, let alone marketing, production, and
financial management form international bead quarters, an
important question regarding any product is whether it has the
potential for expansion into other markets. The answer will
depend on the companys goals and objectives and on perceptions of opportunity.
Managers run the risk of committing two types of errors
regarding product decisions in global marketing. One error is to
fall victim to the not invented here (NIH) syndrome,
ignoring product decisions made by subsidiary or affiliate
managers. Managers who behave in this way are essentially
abandoning any effort to leverage product decision policy on all
affiliate companies on the assumption that what is right for
customers in the home market must also be right for customers everywhere.
The four product categories in the local-to-global continuum
local, national, international, and global are described in the
following sections.
Local Products
A local product is available in a portion of a national market. In
the United states, the term regional product is synonymous
with local product. These products may be new products that a
company is introducing using a rollout strategy, or a product
that is distributed exclusively in that region. Originally, cape Cod
Potato Chips was a local product in the New England market.
The company was later purchased by Frito-Lay and distribution
was expanded to other regions of the United States.
National Products
A national product is one that, in the context of a particular
company, is offered in a single national market. Sometimes
national products appear when a global company caters to the
needs and preferences of particular country markets. For
example, Coca-Cola developed a no carbonated, ginsengflavored beverage for sale only in Japan and a yellow, carbonated
flavored drink called Pasturing to compete with Perus favorite
soft drink, Inca Cola. After years of failing to dislodge Inca
Cola, Coke followed the old strategic maxim. if you cant beat
them, buy them, and acquired Inca Cola.
Similarly, Sony and other Japanese consumer electronics
companies produce a variety of products that are not sold
outside of Japan. The reason: Japanese consumers have a
seemingly insatiable appetite for electronic gadgets.
International Products
international products are offered in multinational, regional
markets. The classic inter-national product IS the Euro product,
offered throughout Europe but not In the rest of the world.
Renault was for many years a Euro product When Renault
entered the Brazilian market, it became a multiregional company. Most recently, Renault invested, in Nissan and has taken
193
The learning objectives from this lesson are as

follows:
1. To understand the basic concept of a product
2. How to position the product in the market.
3. Product design considerations
4. Strategic alternatives towards the product
5. New product in global marketing
UNIT 6
control of the company. The combination of Renault in

Europe: and Latin America, and Nissan in Asia, the Americas,
Europe, the Middle East and! Africa, has catapulted Renault
from a multiregional to a global position. Renault is an example
of how a company can move overnight through investment or
acquisition from an international to a global position.
Global Products and Global Brands

Global products are offered in global markets. A truly global
product is offered in the Triad, In every world region, and In
counties at every stage of development. Some global products
were designed to meet the needs of a global market; others
were designed to meet the needs of a national market but also,
happily, meet the needs of a global market.
Note that a product is not a brand. For example, portable
personal sound systems or personal stereos are a category of
global product; Sony is a global brand. A global brand, like a
national or international brand, is a symbol about which
customers have beliefs or perceptions. Many companies,
including Sony, make personal stereos. Sony created the category
more than 10 years ago, when it introduced the Walkman. It is
important to understand that global brands must be created by
marketers; a global brand name can be used as an umbrella for
introducing new products. Although Sony, as noted previously,
markets a number of local products, the company also has a
stellar track record both as a global brand and a manufacturer
of global products.
The qualities of a global brand: It has the same name as is the
case for Coke, Sony, BMW, Harley-Davidson, and so on; or it
may be the same meaning in different languages, as is true of
Unllevers Snuggle (United States) fabric softener, which carries a
cuddly teddy bear logo and the local translation of a meaning
identical or similar to the meaning of snuggle in American
English. A global brand has a similar image, similar positioning, and is guided by the same strategic principles. However, the
marketing mix for a global brand may vary from country to
country. That means that the product, price, promotion, and
place (channels of distribution) may vary from country to
country. Indeed, if one tracks the examples-Marlboro, Coke,
Sony, Mercedes, and Avon-one will indeed find that the
marketing mix for these products varies from country to
country. The Mercedes, which is exclusively a luxury car in the
United States, is also a strong competitor in the taxi market in
Europe. Avon, which is a premium-priced and packaged
cosmetic line in Japan, is popularly priced in the rest of the
world. In spite of these variations in marketing mix, each of
these products is a world or global brand.
Global product differs from a global brand in one important
respect: It does not carry the same name and image from
country to country. Like the global brand, however, it is guided
by the same strategic principles, is similarly positioned, and may
have a marketing mix that varies from country to country.
Whenever a company finds itself with global products, it faces
an issue: Should the global product be turned into a global
brand? This requires that the name and image of the product
be standardized. The two biggest examples of this move were
the shift from Standard Oils many different local brands to
Exxon, and Nissans decision to drop the Datsun marque in
194
the United States and adopt various model names for Nissans
worldwide product line.
When an industry globalizes, companies are under pressure to
develop global products. A major driver for the globalization
of products is the cost of product R&D. As competition
intensifies, companies discover that they can reduce the cost of
R&D for a product by developing a global product design.
Even products such as automobiles, which must meet national
safety and pollution standards, are under pressure to become
global: With a global product, companies can offer an adaptation of a global design instead of a unique national design in
each country.
Coke is arguably the quintessential global product and global
brand. Cokes positioning and strategy are the same in all
countries; it projects a global image of fun, good times, and
enjoyment. Coke is the real thing. There is only one Coke. It
is unique. It is a brilliant example of marketing differentiation.
The essence of discrimination is to show the difference between
your products and other competing products and services.
This positioning is a considerable accomplishment when you
consider the fact that Coke-is a low/no-tech product. It is
flavored, carbonated, sweetened water in a plastic, glass, or metal
container. The companys strategy is to make sure that the
product is within arms reach of desire. However, the marketing
mix for Coke varies. The product itself is adapted to suit local
tastes; for example, Coke increases the sweetness of its beverages in the Middle East, where customers prefer a sweeter drink.
Also, prices may vary to suit local competitive conditions, and
the channels of distribution may differ. However, the basic,
underlying, strategic principles that guide the management of
the brand are the same worldwide. Only an ideologue would
insist that a global product cannot be adapted
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Brand Name
Coca-Cola
Microsoft
IBM
General Electric
Ford
Disney'
Intel
McDonald's
AT&T
Marlboro
Nokia
Mercedes
Nescafe
Hewlett Packard
Gillette
Kodak
Ericsson
Sony
Amex
Toyota
Industry
Beverage
Software
Computers
Diversified
Automobiles
Entertainment
Computers
Food
Telecommunications
Tobacco
Telecommunications
Automobiles
Beverages
Computers
Personal Care
Imaging
Telecommunications
Electronics
Financial Services
Automobiles
Country
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
Finland
Germany
Switzerland
United States
United States
United States
Sweden
Japan
United States
Japan
Source: lnterbrand, www.interbrand.com.
to meet local preferences; certainly, no company building a

global brand needs to limit itself to absolute marketing mix
uniformity. The issue is not exact uniformity but rather offering
essentially the same value.
Product Positioning
Product positioning is a communications strategy based on the
notion of mental space positioning refers to the act of locating
a brand in customers minds over and against other products in
terms of product attributes and benefits that the brand does
and does not offer. The word positioning, first formally used in
1969 by Ries and Trout in an article that appeared in Industrial
Marketing, describes a strategy for staking out turf or filling a
slot in the minds of target customers 6.
Several general strategies have been suggested for positioning
products: positioning by attribute or benefit, quality/price, use
or application, and use/user? Two additional strategies, hightech and high-touch, have been suggested for global products.
Attribute or Benefit
A frequently used positioning strategy exploits a particular
product attribute, benefit, or feature. In global marketing, the
fact that a product is imported can itself represent a benefit
positioning. Economy, reliability, and durability are other
frequently used attribute/benefit positions. Volvo automobiles
are known for solid construction that offer safety in the event
of a crash. In the ongoing credit card wars, VISAs advertising
focuses on the benefit of worldwide merchant acceptance.
Quality/Price
This strategy can be thought of in terms of a continuum from
high fashion/quality and nigh price to good value (rather than
low quality) at a low price.8The American Express Card, for
example, has traditionally been positioned as an upscale card
whose prestige justifies higher annual fees than VISA or
MasterCard. The Discover card is at the other end of the
continuum. Discovers value position results from no annual
fee and a cash rebate to cardholders each year.
Use/User
Positioning can also be achieved by describing how a product is
used or associating a product with a user or class of users the
same way in every market. For example, Benetton user s the
same positioning for its clothing when it targets the global
youth market. Marlboros extraordinary success as a global
brand is due in part to the products association with cowboysthe archetypal symbol of rugged independence,
freedom, space, and Americanaand transformation advertising that targets urban smokers.
Why choose Marlboro instead of another brand? Smoking
Marlboro is a way of getting in touch with a powerful urge to
be free and independent. Lack of physical space may be a
reflection of the Marlboro users own sense of macho-ness
or a symbol of freedom and independence. The message is
reinforced in advertising with an image carefully calculated to
appeal to the universal human desire for those things and urges
smokers to join that rugged, independent cowboy in the Old
West! The advertising succeeds because it is very well done and,
evidently, addresses a deep, powerful need that is found around
the globe,11 Not surprisingly, Marlboro is the most popular
cigarette brand in the former Soviet Union.
High-tech Positioning
Personal computers, video and stereo equipment, and automobiles are product categories for which high-tech positioning has
proven effective. Such products are frequently purchased on the
basis of physical product features, although image may also be
important. Buyers typically already possess or wish to acquire
considerable technical information. High-tech products may be
divided into three categories technical products, special interest
products, and demonstrable products.
Computers, chemicals, tires, and financial services are technical
products in the sense that buyers have specialized needs, require
a great deal of product information, and share a common
language. Computer buyers in Russia and the United States are
equally knowledgeable about Pentium microprocessors, hard
drives, and random access memory (RAM) requirements.
Marketing communications for high-tech products should be
informative and emphasize features.
Special-interest products also are characterized by a shared
experience and high involvement among users, although they
are less technical and mote leisure or recreation oriented. Again,
the common language and symbols associated with such
products can transcend language and cultural barriers. Fuji
bicycles, Adidas and Nike sports equipment, Canon cameras,
and Sega video game players are examples of successful global
special-interest products.
High-touch Positioning
Marketing of high-touch products requires less emphasis on
specialized information and more emphasis on image. Like
high-tech products, however, high-touch categories are highly
involving for consumers. Buyers of high-touch products also
share a common language and set of symbols relating to
themes of wealth, materialism, and romance. There are three
categories of high-touch products: products that solve a
common problem, global village products, and products with a
universal theme. At the other end of the price spectrum from
high-tech, high-touch products that can solve a problem often
provide benefits linked to lifes little moments. Ads that
show friends talking over a cup of coffee in a cafe or quenching
thirst with a soft drink during a day at the beach put the
product at the center of everyday life and communicate the
benefit offered in a way that is understood worldwide. Upscale
fragrances and designer fashions are examples of products
195
Global marketers should systematically identify and assess

opportunities for developing global brands. Creating a global
brand requires a different type of marketing effort-including upfront creative vision than that required to create one or more
national brands. On the other hand, the ongoing effort to
maintain brand awareness is less for a leading global brand than
it is for a collection of local brands. What criteria do marketers
use to decide whether to establish global brands? One expert
has argued that the decision must be determined by bottomup consumer-driven considerations, not by top-down
manufacturer-driven business convenience A major determinant of success will be whether the marketing effort is starting
from scratch with a blank slate, or whether the task is to
reposition or rename an existing local brand in an attempt to
create a global brand. Starting with a blank slate is vastly easierthan repositioning existing brands.
whose positioning is strongly cosmopolitan in nature. Fragrances and fashions have traveled as a result of growing
worldwide interest in high-quality, highly-visible, high-priced
products that often enhance social status.
Products may have a global appeal by virtue of their country of
origin. The Americanness of Levis, Marlboro, McDonalds, and
Harley-Davidson enhances their appeal to cosmopolitans
around the world and offers opportunities for benefit positioning. In consumer electronics, Sony is a name synonymous with
vaunted Japanese quality; in automobiles, Mercedes is the
embodiment of legendary German engineering.
Some products can be positioned in more than one way, within
either the high-tech or high-touch poles of the continuum. A
sophisticated camera, for example, could simultaneously be
classified as technical and special interest. Other products may be
positioned in a bipolar fashion, that is, as both high-tech and
high-touch. For example, Bang & Olufsen consumer electronics
product by virtue of their design elegance, are perceived as both
high-tech and high-touch.
Product Design Considerations

Product design is a key factor in determining success in global
marketing. Should a company adapt product design for various
national markets or offer a single design to the global market?
In some instances, making a design change may increase sales.
However, : the benefits of such potential sales increases must
be weighed against the cost of changing a products design and
testing it in the market. Global marketers need to consider four
factors when making product design decisions: preferences, cost,
laws and regulations, and compatibility.
Preferences
There are marked and important differences in preferences
around the world factors such as color and taste. Marketers who
ignore preferences do so at their own peril. In the 1960s, for
example, Italys Olivetti Corporation had gained considerable
distinction in Europe for its award-winning modern consumer
typewriter designs; Olivetti typewriters had been displayed at
the Museum of Modern Art in New York City. Although
critically acclaimed, Olivettis designs did not enjoy commercial
success in the United States. The U.S. consumer wanted a heavy,
bulky typewriter that was ugly by modern European design
standards. Bulk and weight were considered prima facie evidence
of quality by American consumers, and Olivetti was, therefore,
forced to adapt its award-winning design in the United States.
Sometimes, a product design that is successful in one world
region does meet with success in the rest of the world. BMW
and Mercedes dominate the luxury car market in Europe and are
strong competitors in the rest of the world, with exactly the
same design. In effect, these companies have a world design.
The other global luxury car manufacturers are Japanese, and they
have expressed their flattery and appreciation for the appeal of
the BMW and Mercedes look by styling cars that are influenced
by the BMW and Mercedes line and design philosophy. If
imitation is the most sincere form of flattery, BMW and
Mercedes have been honored by their competition.
196
Cost
In approaching the issue of product design, company managers
must consider cost factors broadly. Of course, the actual cost of
producing the product will create a cost floor. Other designrelated cost whether incurred by the manufacturer or the end
user-must also be consider.
We noted that the cost of rep-air services varies around the
world and has an impact on product design.
Laws and Regulations
Compliance with laws and regulations in different countries ahs
a direct impact on product design decisions, frequently leading
to product design adaptations that increase costs. This may be
seen especially clearly in Europe, where one impetus for the
creation of the single market was to dismantle regulatory and
legal barriers-particularly in the areas of technical standards and
health and safety standards-that prevented pan-European sales
of standardized products. In the food industry, for example,
there were 200 legal and regulatory barriers to cross-border trade
within the European Union (EU) in 10 food categories.
Among these were prohibitions or-taxes on products with
certain ingredients, and different packaging and labeling laws.
Experts predict that the removal of such barriers will reduce the
need to adapt product designs and will result in the creation of
standardized Euro-products.
Compatibility
the last product design issue that must be addressed by
company managers is product compatibility with the environment in which it is used. A simple thing such as failing to
translate the users manual into various languages can hurt sales
of American-made: home appliances built in America outside
the United States. Also, electrical systems range from 50 to 230
volts and from 50 to 60 cycles. This means that the design of
any product powered by electricity must be compatible with the
power system in the country of use.
Manufacturers of televisions and video equipment find that the
world is a very incompatible .place for reasons besides those
related to electricity. Three different TV broadcast and video
systems are found in the world today: the U.S. NTSC system,
the French SECAM system, and the German PAL system.
Companies that are targeting global markets design multi
system TVs and VCRs that allow users to simply flip a witch
for proper operation with any system. Companies that are not
aiming for the global market design products that comply with
a single type of technical requirements.
Measuring systems do not demand compatibility, but the
absence of compatibility in measuring systems can create
product resistance. The lack of compatibility is a particular
danger for the United States, which is the only nonmetric
country in the world. Products calibrated in inches and pounds
are at a competitive disadvantage in metric markets. When
companies integrate their worldwide manufacturing and design
activity, the metric-English measuring system conflict requires
expensive conversion and harmonization efforts.
Labeling and Instructions
Product labeling and instructions must comply with national
law and regulation. For example, there are very precise labeling
Geographic Expansion Strategic

Alternatives
Companies can grow in three different ways. The traditional
methods of market expansion-further penetration of existing
markets to increase market share and extension of the product
line into new-product market areas in a single national market
are both available in domestic operations. In addition, a
company can expand by extending its existing operations into
new countries and areas of the world. The latter method,
geographic expansion, is one of the major opportunities of
global marketing. To pursue geographic expansion effectively, a
framework for considering alternatives is required. When a
company has a product/market base, it can select from five
strategic alternatives to extend this base into other geographic
markets, or it can create a new product designed for global
markets
Strategy 1: Product/Communication Extension (Dual

Extension)
Many companies employ product/communication extension as
a strategy for pursuing opportunities outside the home market.
Under the right conditions, this is the easiest product marketing
strategy and, in many instances, the most profitable one as well.
Companies pursuing this strategy sell exactly the same product,
with the same advertising and promotional appeals as used in
the home country, in some or all world-market countries or
segments.
The critical difference is one of execution and mind-set. In the
stage 2 company, the dual extension strategy grows out of an
ethnocentric orientation; the stage 2 company is making the
assumption that all markets are alike. A company in stage 4 or 5
does not make such as assumptions; the companys geocentric
orientation allows it to thorough understand its markets and
consciously take advantage of similarities in world markets.
The product/ communication extension strategy has an
enormous appeal to global companies because of the cost
savings associated with this approach. The two most obvious
sources of savings are manufacturing economies of scale and
elimination of duplicate product R&D costs. Also important
are the substantial economies associated with standardization
of marketing communications. For a company with worldwide
operations, the cost of preparing separate print and TV ads for
each market can be enormous. Although these cost savings are
important, they should not distract executives Item the more
important objective of maximum profit performance, which
Strategy 2: Produt Extension/Communication

Adaptation
When a product fills a different need, appeals to a different
segment, or serves a different function under conditions of use
that are the same or similar to those in the domestic market, the
only adjustment that may be required is in marketing communications. Bicycles and motor scooters are examples of products
that have been marketed with this approach. They satisfy
recreational needs in the United States but serve as basic or
urban transportation in many other countries. Similarly,
outboard marine motors are usually sold to a recreation market
in the high-income countries, whereas the same motors in most
lower-income countries are mainly sold to fishing and transportation fleets. Another example is the U.S. farm machinery
company that decided to market its U.S. line of home lawn and
garden power equipment in: less developed countries (LDCs) as
agricultural implements. The equipment was ideally suited to
the needs of farmers in many LDCs. Equally important was the
lower price almost a third less than competing equipment
especially designed for small acreage farming, and offered for
sale by competing foreign manufacturers.
As these examples show, the product extension/communication adaptation strategy either design or by accident-results in
product transformation. The same physical product ends u
serving a different function or use than that for which it was
originally designed or created.
The appeal of the product extension/communication adaptation strategy is its relative y low cost of implementation.
Because the product in this strategy is unchanged R&D,
tooling, manufacturing setup, and inventory costs associated
with additions to the product line are avoided. The only costs
of this approach are hi identifying different product functions
and revising marketing communications (including advertising,
sales promotion, and point of-sale material) around the newly
identified function.
Global Product Planning Strategic Alternatives
Strategy 2:Product Extension Strategy 4: Dual Adaptation

Communications
Example: Greeting Cards
Different Adaptation
Example: Bicycles &
Motorcycles
Communication
In which languages should labeling and instructions be printed?

One approach to this issue is to print labels and instructions in
languages that are used in all of the major markets for the
product. The use of multiple languages on labels and instructions simplifies inventory control: The same packaging can be
used for multiple markets. The savings from simplicity must be
weighed against the cost of longer instruction booklet and
more space on labels for information.
may require the use of an adaptation or invention strategy. As

we have seen, product extension, in spite of its immediate cost
savings, may in fact result in market failure.
Strategy 1: Dual Extension

Example: Applications
Same Software
Strategy 3: Product Adaptation

Communication Extension
Example: Electrical Products
Same
Different
Product
197
requirements for prescription drugs and poisons. In addition,

however, labeling can provide valuable consumer information
on nutrition, for example. Finally, many products require
operating and installation instructions.
Strategy 3: Product Adaptation/Communication

Extension
A third approach to global product planning is to extend,
without change, the basic home-market communications
strategy while adapting the product to local use or preference
conditions. Note that this strategy (and the one that follows)
may be utilized by both stage 3 and stage 4 companies. The
critical difference is, as noted earlier, one of execution and mindset. In the stage 3 company, the product adaptation strategy
grows out of a polycentric orientation; the stage 3 company
assumes that all markets are different. By contrast, the geocentric orientation of managers and executives in a Stage 4 global
company has sensitized them to actual, rather than assumed,
differences between markets.
Exxon adheres to this third strategy: It adapts its gasoline
formulations to meet the weather conditions prevailing in
different markets while extending the basic communications
appeal, Put a tiger in your tank, without change.
There are many other examples of products that have been
adjusted to perform the same function around the globe under
different environmental conditions. Soap and detergent
manufacturers have adjusted their product formulations to
meet local water and washing equipment conditions with no
change in their basic communications approach. Household
appliances have been scaled to sizes appropriate to different use
environments, and clothing has been adapted to meet fashion
criteria. Also, food products, by virtue of their potentially high
degree of environmental sensitivity, are often adapted.
Strategy 4: Dual Adaptation
Sometimes, when comparing a new geographic market to the
home market, marketers discover that environmental conditions or consumer preferences differ; the same may be true of
the function a product serves or consumer receptivity to
advertising appeals. In essence, this is a combination of the
market conditions of strategies 2 and 3. In such a situation, a
stage 4/5 company will utilize the strategy of product and
communications adaptation. As is true about strategy 3, stage 3
companies will also use dual adaptation-regardless of whether
the strategy is warranted by market conditions, Preferences,
function, or receptivity.
Unilevers experience with fabric softener in Europe exemplifies
the classic multinational road to adaptation. For years, the
product was sold in 10 countries under seven different brand
names, with different bottles and marketing strategies.
Unllevers decentralized structure meant that product and
marketing decisions were left to country managers. They chose
names that had local-language appeal and selected package designs to fit local tastes. Today, rival Procter & Gamble is
introducing competitive products with a pan-European strategy
of standardized product$ with single names, suggesting that
the European market is more similar than Unilever assumed. In
response, Unilevers European brand managers are attempting
to move gradually toward standardization
Sometimes, a company will draw on all four of these strategies
simultaneously when marketing a given product in different
parts of the world. For example, Heinz utilizes a mix of
strategies in its ketchup marketing. Whereas a dual extension
198
strategy works in England, spicier, hotter formulations are also

popular in Central Europe and Sweden. Recent ads in France
featured a cowboy lassoing a bottle of ketchup and, thus,
reminded consumers of the products American heritage.
Swedish ads conveyed a more cosmopolitan message; by
promoting Heinz as the taste of the big world and featuring
well known landmarks such as the Eiffel Tower, the ads
disguised the products origin.
Strategy 5: Product Invention

Adaptation strategies are effective approaches to international
(stage 2) and multinational (stage 3) marketing, but they may
not respond. To global market opportunities. They do not
respond to the situation in markets in which customers do not
have the purchasing power to buy either the existing or adapted
product. This latter situation applies to the LDCs of the world,
which are home to roughly three quarters of the worlds
population. When potential customers have limited purchasing
power, a company may need to develop an entirely new
product, designed to satisfy the need or want at a price that is
within the reach of the potential customer. Invention is a
demanding but potentially rewarding product strategy for
reaching mass markets ill LDCs.
The winners in global competition are the companies that can
develop products offering the most benefits, which in turn
create the greatest value for buyers. In some instances, value is
not defined in terms of performance but rather in terms of
customer perception. The latter is as important for an expensive
perfume or champagne as it is for an inexpensive soft drink.
Product quality is essential-indeed, it is frequently a given but it
is also necessary to support the product quality with imaginative, value-creating advertising and marketing communications.
Most industry experts believe that a global, appeal and a global
advertising campaign are more effective in creating the perception, of value than a series of separate national campaigns.
How to Choose a Strategy

Most companies seek a product strategy that optimizes
company profits over the long term. Which strategy for global
markets best achieves this goal? There is, unfortunately, no
general answer to this question. Rather, the answer depends on
the specific product market-company mix.
Companies differ in both their willingness and capability to
identify and produce profitable product adaptations. Unfortunately, too many stage one and stage two companies are
oblivious to the foregoing issues. One new-product expert has
described three stages that a company must go through as
follows:
1. Cave dweller : The primary motivation behind launching new
products internationally is to dispose of excess production
or increase plant-capacity utilization.
2. Naive nationalist : The company recognizes growth
opportunities outside the domestic market. It realizes that
cultures and markets differ from country to country, and as a
result, it sees product adaptation as the only
possible alternative.
3. Globally sensitive : This company views regions or the entire
world as the competitive marketplace. New-product
To sum up, choice of product and communications strategy in

international marketing is a function of three key factors: (1) the
product itself, defined in terms of the function or need it
serves; (2) the market, defined in terms of the conditions under
which the product is used, the preferences of potential customer and the ability to buy the products in question; and (3)
the costs of adaptation and manufacture to the company
considering these product/communications approaches. Only
after analysis of the product/ market fit and of company
capabilities and costs can executives choose the most profitable
international strategy.
New Products in Global Marketing

What is new product? Newness can be assessed in the context
of the product itself, the organization, and the market. The
product-may be an entirely new -invention or innovation-for
example, the videocassette recorder (VCR) or the compact disc.
It may be a line extension (a modification of an existing
product) such as Diet Coke. Newness may also be organizational, as when a company acquires an already existing product
with which it has no previous experience. Finally, an existing
product that is not new to a company may be new to a particular market.
In todays dynamic, competitive market environment, many
companies realize that continuous development and introduction of new products are keys to survival and growth. Which
companies excel at these activities? Gary Rainer, a new-product
specialist with the Boston Consulting Group, has compiled the
following list: Honda Compaq, Motorola, Canon, Boeing,
Merck, Microsoft, Intel, and Toyota. One common characteristic:
They are global companies that pursue opportunities in global
markets in which competition is fierce, thus ensuring that new
products will be world class. Other characteristics noted by
Reiner are as follows:
1. They focus on one or only a few businesses.
2. Senior management is actively involved in defining and
improving the product development process.
3. They have the ability to recruit and retain the best and the
brightest people in their fields.
4. They understand that speed in bringing new products to
market reinforces product quality.
Identifying New-product Ideas

The starting point for an effective worldwide new-product
program is an information system that seeks new-product ideas
from all potentially useful sources and channels. Those ideas
relevant to the company undergo screening at decision centers
within the organization. There are many sources of newproduct ideas, including customers, suppliers, competitors,
company salespeople, distributors and agents, subsidiary
executives; headquarters executives, documentary sources (for
example, information service reports and publications), and,
finally, actual firsthand observation of the market environment.
figure 11-3 shows how corporate spending on research and

development varies by country.
New-product Development Location

A global company must make an important decision regarding
new-product development. Should development activity be
dispersed to different country/regional locations, or should
new-product activities be concentrated in a single location? The
advantage of concentration is that all of the new-product
development people can interact daily on a face-to-face basis.
There may also be cost efficiencies in a single location. The
disadvantage of concentration is that it does not take advantage
of global thinking and separates the developers from the
ultimate consumer. Utilizing a dispersed strategy requires coordination of employees and the effective transfer of
information between locations, and may result in duplicated
efforts.
Regardless of which strategy a company selects, a high volume
of information flow is required to scan adequately for newproduct opportunities, and considerable effort is subsequently
required tO5creen these opportunities to identify candidates for
product development. An organizational design for addressing
these requirements is a new-product department. The function
of such a department is fourfold: (1) to ensure that all relevant
information sources are continuously tapped for new-product:
ideas; (2) to screen these ideas to identify candidates for
investigation; (3) to investigate and analyze selected newproduct ideas; and (4) to ensure that the organization commits
resources to the most likely. new-product candidates and is
continuously involved in an orderly program of new-product
introduction and development on a worldwide basis.
With the enormous number of possible new products, most
companies establish screening grids to focus on those ideas that
are most appropriate for investigation. The following questions
are relevant to this task:
1. How big is the market for this product at various prices?
2. Can we market the product through our existing structure? If
not, what changes will be necessary and what costs will be
required to make the changes?
3. Given estimates of potential demand for this product at
specified prices with estimated levels of competition, can we
source the product at a cost that will yield an adequate profit?
4. What are the likely competitive moves in response to our
activity with this product?
5. Does this product fit our strategic development plan?
a. Is the product consistent with our overall goals and
objectives?
b. Is the product consistent with our available resources?
c. Is the product consistent with our management structure?
d. Does the product have adequate global potential?
Testing New Products in National

Markets
The major lesson of new- product introduction outside the
home market has been that whenever a product interacts with
human, mechanical, or chemical elements, there is the potential
for a surprising and unexpected incompatibility. Since virtually
199
opportunities are evaluated across countries, with some

standardization planned as well as some differentiation to
accommodate cultural variances. New-product planning
processes and control systems are reasonably standardized.
every product matches this description, it is important to test a

product under actual market conditions before proceeding with
full-scale introduction. A test does not necessarily involve a fullscale test-marketing effort. It may simply involve observing the
actual use of the product in the target market.
Failure to assess actual use conditions can lead to big surprises,
as in the case of Singer sewing machines sold in African
markets. These machines, manufactured in Scotland by Singer,
were slightly redesigned by Scottish engineers. The location of a
small bolt on the products base was changed; the change had
no effect on product performance but did save a few pennies
per unit in manufacturing costs. Unfortunately, when the
modified machine reached Africa, it was discovered that this
small change was disastrous for product sales. The Scottish
engineers did not take into account the fact that in Africa, it is
customary for women to transport any bundle or loadincluding sewing machines-on their heads. The relocated bolt
was positioned at exactly the place where head met machine for
proper balance; since the sewing machines were no longer
transportable, demand decreased substantially.
200
The international product life cycle (IPLC) theory, developed

and verified by economists to explain trade in a context of
comparative advantage, describes the diffusion process of an
innovation across national boundaries. The life cycle begins
when a developed country, having a new product to satisfy
consumer needs, wants to exploit its technological breakthrough by selling abroad. Other advanced nations soon start
up their own production facilities, and before long LDCs do the
same Efficiency/comparative advantage shifts from developed
countries to developing nations. Finally, advanced nations, no
longer cost-effective, import products from their former
customers. The moral of this process could be that an advanced
nation becomes a victim of its own creation.
IPLC theory has the potential to be a valuable framework for
marketing planning on a multinational basis. In this section the
IPLC is examined from the marketing perspective, and marketing implications for both innovators and initiators are discussed
below.
Stages and Characteristics

There are five distinct stages (Stage 0 through Stage 4) in the
IPLC. Table below shows the major characteristics of the IPLC
stages, with the United States as the developer of the innovation in question. Exhibit shows three life-cycle curves for the
same innovation: one for the initiating country (i.e., the United
States in this instance), one for other advanced nations, and one
for LDCs. For each curve, net export results when the curve is
above the horizontal line; if under the horizontal line, net
import results for that particular country. As the innovation
moves through time, directions of all three curves change. Time
is relative, because the time needed for a cycle to be completed
varies from one kind of product to another. In addition, the
time interval also varies from one stage to the next.
IPLC Stages and Characteristics (for the initiating country)
Stage
(0) Local
Innovation
(1) Overseas
Innovation
(2) Maturity
Import/Export Target
Market
None
USA
Increasing
Export
Stable Export
(3) Worldwide Declining

Imitation
Export
(4) Reversal
Increasing
Import
USA &
advanced
nations
Advanced
nations &
LDCs
LDCs
USA
Competitors
Few: Local
Firms
Few:Local
firms
Advanced
Nations
Advanced
Nations
Advanced
nations &
LDCs
Production
Costs
Initially High
Decline owing
to economies
of scale stable
Stable
Increase owing
to lower
economies of
scale
Increase owing
to comparative
disadvantage
Stage O : Local Innovation

Stage 0, depicted as time 0 on the left of the vertical importing/
exporting axis, represents a regular and highly familiar product
life cycle in operation within its original market. Innovations are
most likely to occur in highly developed countries because
consumers in such countries are affluent and have relatively
unlimited wants. From the supply side, firms in advanced
nations have both the technological know-how and abundant
capital to develop new products
Many of the products found in the worlds markets were
originally created in the United States before being introduced
and refined in other countries. In most instances, regardless of
whether a product is intended for later export or not, an
innovation is initially designed with an eye to capture the U.S.
market, the largest consumer nation.
Stage 1 : Overseas Innovation
As soon as the new product is well developed, its original
market well cultivated, and local demands adequately supplied,
the innovating firm will look to overseas markets in order to
expand its sales and profit. Thus, this stage is known as a
pioneering or international introduction stage. The
technological gap is first noticed in other advanced nations
because of their similar needs and high income levels. Not
surprisingly, English-speaking countries such as the United
Kingdom, Canada, and Australia account for about half of the
sales of U.S. innovations when such products are first introduced overseas. Countries with similar cultures and economic
conditions are often perceived by exporters as posing less risk
and thus are approached first before proceeding to less familiar
territories.
Competition in this stage usually comes from U.S. firms since
firms in other countries may -not have much knowledge about
the innovation. Production cost tends to be decreasing at this
stage because by this time the innovating firm will normally
have improved the production process. Supported by overseas
sales, aggregate production costs tend to decline further because
of increased economies of scale. A low introductory price
overseas is usually not necessary because of the technological
breakthrough; a low price is not desirable because of the heavy
and costly marketing effort needed in order to educate consumers in other countries about the new product. In any case. as the
product penetrates the market during this stage, there will be
more exports from the United States and, correspondingly, an
increase in imports by other developed countries.
201
LESSON 20:
INTERNATIONAL PRODUCT STRATEGIES
their own country. Black-and-white television sets, for example,

are no longer manufactured in the United States because many
Asian firms can produce them much less expensively than any
U.S. firm. Consumers price sensitivity exacerbates this problem
for the initiating country.
IPLC Curves
Exporting
Other Advanced
Nations
Validity of the IPLC

LDCs
Time
Importing
USA (Initiating
Country)
Stage 2 : Maturity
Growing demand in advanced nations provides an impetus for
firms there to commit themselves to starting local production,
often with the help of their governments protective measures
to preserve infant industries. Thus, these firms can survive and
thrive in spite of relative inefficiency.
Development of competition does not mean that the initiating
countrys export level will immediately suffer. The innovating
firms sales and export volumes are kept stable because LDC are
now beginning to generate a need for the product. Introduction
of the product in LDCs helps offset any reduction in export
sales to advanced countries.
Stage 3 : Worldwide Imitation
This stage means tough times for the innovating nation
because of its continuous decline in exports. There is no more
new demand anywhere to cultivate. The decline will inevitably
affect the U.S. innovating firms economies of scale, and its
production costs thus begin to rise again. Consequently, firms
in other advanced nations use their lower prices (coupled with
product differentiation techniques) to gain more consumer
acceptance abroad at the expense of the U.S. firm. As the
product becomes more and more widely disseminated,
imitation picks up at a faster pace. Toward the end of this stage,
U.S. export dwindles almost to nothing, and any U.S. production still remaining is basically for local consumption. The U.S.
automobile industry is a good example of this phenomenon.
There are about thirty different companies selling cars in the
United States, with several on the rise. Of these, only three are
U.S. firms, with the rest being from Western Europe, Japan,
South Korea, Taiwan. Mexico. Brazil and Malaysia.
Stage 4 : Reversal
Not only must all good things end, but misfortune frequently
accompanies the end of a favorable situation. The major
functional characteristics of this stage are product standardization and comparative disadvantage. The innovating countrys
comparative advantage has disappeared, and what is left is
comparative disadvantage. This disadvantage is brought about
because the product is no longer capital-intensive or technologyintensive but instead has become labor-intensive-a strong
advantage possessed by LDCs. Thus, LDCs-the last imitators
establish sufficient productive facilities to satisfy their own
domestic needs as well as to produce for the biggest market in
the world, the United States. U.S. firms are now undersold in
202
Several products have conformed to the characteristics described

by the IPLC. The production of semiconductors started in the
United States before diffusing to the United Kingdom, France,
Germany, and Japan. Production facilities are now set up in
Hong Kong and Taiwan, as well as in other Asian countries.
Similarly, at one time the United States used to be an exporter
of typewriters, adding machines, and cash registers. But with
the passage of time, these simple machines (e.g., manual
typewriters) are now being imported, while U.S. firms export
only the sophisticated, electronic versions of such machines.
Other products that have gone through a complete international life cycle are synthetic fibers, petrochemicals, leather goods,
rubber products, and paper. The electronics sector, a positive
contributor to the trade balance of the United States for a long
time, turned negative for the first time ever in 1984 with a
massive $6,8 billion deficit. A deficit also occurred at the same
time for communications equipment, following the trend set by
semiconductors in 1982.
The IPLC is probably more applicable for products related
through an emerging technology. These newly emerging
products are likely to provide functional utility rather than
aesthetic values. Furthermore, these products likely satisfy basic
needs that are universally common in most parts of the world.
Washers, for example, are much more likely to fit this theory
than are dryers. Dishwashing machines are not useful in
countries where labor is plentiful and cheap, and the diffusion
of this kind of innovation as described in IPLC is not likely to
occur.
Marketing Strategies
For those U.S. industries in the worldwide imitation stage (e.g.,
automobile) or the maturity stage (e.g., computers), things are
likely to get worse rather than better. The prospect, though
bleak, can be favorably influenced. What is critical is for U.S.
firms to understand the implications of the IPLC so that they
can adjust marketing strategies accordingly
Product Policy
The IPLC emphasizes the importance of cost advantage. It
would be very difficult for U.S. firms to match labor costs in
low-wage nations since costs are only eight cents per minute in
Japan, two cents in South Korea, and 0.5 cent in China. Still, the
innovating firm must keep its product cost competitive. One
way is to cut labor costs through automation and robotics. IBM
converted its Lexington (Kentucky) plant into one of the most
automated plants in the world. Likewise, Japanese VCR
manufacturers are counting on automation to help them meet
the challenge of South Korea.
Another way to reduce production costs is to eliminate
unnecessary options, since such options increase inefficiency and
complexity. This strategy may be critical for simple products or
those at the low end of the price scale. In such cases it is
To keep costs rising at a minimum, a U.S. firm may use local

manufacturing in other countries as an entry strategy. The
company not only can minimize transportation costs and entry
barriers but also can indirectly slow down potential local
competition from starting up manufacturing facilities. Another
benefit is that those countries can eventually become a springboard for the U.S. company to market its products throughout
that geographic region. In fact, sourcing should allow the
American innovator to hold U.S. labor costs down and hold on
to the original market as well. Ford Tracr is built by Ford in
Taiwan for the Canadian market and in Mexico for the U.S.
market. Similarly, stereo components sold in the United States
are made in Japan, Taiwan, and South Korea.
Manufacturers should examine the traditional vertical structure
in which they make all or most components and parts themselves because in many instances outsourcing may prove to be
more cost-effective. Outsourcing is the practice of buying parts
or whole products from other manufacturers while allowing a
buyer to maintain its own brand name. For example, Ford
Festiva is made by Kia Motors, Mitsubishi Precis by Hyundai,
Pontiac Lemans by Daewoo, and OM Sprint by Suzuki.
A modification of outsourcing involves producing various
components or having them produced under contract in
different countries. That way, a firm takes advantage of the
most abundant factor of production in each country before
assembling components into final products for worldwide
distribution. IBMs PC system consists mostly of components
made in low-cost countries-monochrome monitor in South
Korea; floppy disk drives in Singapore; and graphics printer,
keyboard, power supply, and semiconductors in Japan. Only the
semiconductors, case, and final assembly are undertaken in the
United States. American firms need to take advantage of this
strategy more extensively.
Once in the maturity stage, the innovators comparative
advantage is gone, and the firm should switch from producing
simple versions to producing sophisticated models or new
technologies in order to remove itself from cut-throat competition. Japanese VCR makers make 99 percent of the machines
sold in the United States and 75 percent of all machines sold
worldwide, but they still cannot compete with low wage Korean
newcomers strictly on price, because labor content in VCRs is
substantial. To retain their market share, the Japanese rely on
new technology, such as 8 mm camcorders.
For a relatively high-tech product, an innovator may find it
advantageous to get its product system to become the
industrys standard, even if it means lending a helping hand to
competitors through the licensing of product knowledge.

Otherwise, there is always a danger that competitors will
persevere in inventing an incompatible and superior system. A
discussion of product adoption earlier should make it clear that
several competing and incompatible systems serve only to
confuse potential adopters who must acquire more information
and who are uncertain as to which system will survive over the
long term.
The worst scenario for an innovating firm is when another
system supplants the innovators product altogether to become
the industrys standard. Sonys strategic blunder in guarding its
Betamax video system is a good case to study. Matsushita and
Victor Co. took the world leadership position away from Sony
by being more liberal in licensing their VHS (Video Home
System) to their competitors. Philips and Grundig did not
introduce their Video 2000 system until VHS was just about to
become the industrys standard in Europe and the world. By
that time, despite price cutting, it was too late for Video 2000 to
attract other manufacturers and consumers. The problem was
so bad that Philipss own North American subsidiary refused to
buy its parents system. Ironically, Sony itself had to start
making VHS-format machines in 1988.
A more recent case of competing technologies and strategic
all1ances involves the digital videodisc (DVD) which can also
store audio and computer data and software. Toshibas system
uses two 0.6 millimeter recording layers that could be bonded
together into a 1.2 millimeter thick disc, thus storing five billion
bytes on each side. The Multimedia Compact Disc system
offered by Sony and Philips has less storage capacity-3.7
gigabytes of data on a single-sided disc. In addition, Toshiba
aggressively courted movie makers (e.g., Warner Bros., MCA,
and MGM/UA) while offering open licensing to other
electronics companies. As a result, such manufacturing giants as
Matsushita, Thomson, and Pioneer chose to ally with Toshiba.
In the end, Sony and Philips had to come to a compromise by
adopting a single format that was closer to Toshibas system
than theirs.
Pricing Policy
Initially, an innovating firm can afford to behave as a monopolist, charging a premium price for its innovation. But this price
must be adjusted downward in the second and third stages of
IPLC to discourage potential newcomers and to maintain
market share. Anticipating a Korean challenge, Japanese VCR
makers cut their prices in the United States by 25 percent and
were able to slow down retailers and consumers acceptance of
Korean brands. IBM, in comparison, was slow in reducing
prices for its PC models. The error in judgment was the result
of a belief that the IBM PC was too complex for Asian
imitators. This proved to be a costly error because the basic PC
hardly changed for several years. Before long, the product
became nothing but an easily copied, standardized commodity
suitable for intensive distribution-the kind that Asian companies thrive on. In addition to such brands as Daewoos Leading
Edge and Seikos Epson, Computer Land even produced its
own private brand. Inevitably, commodity pricing soon
dominates the market.
203
desirable to offer a standardized product with a standard

package of features or options included. In the case of
Chryslers Neon, the company realized that the car must
compete on features and performance and thus chose to cut
costs where they did not matter much to customers. Based on
research, small-car owners felt that power windows were not
critical, allowing the design team to go with the crank variety.
Also since buyers did not feel that the four-speed automatic
transmission was anything special, Chryslers engineers chose to
adapt an existing Chrysler three-speed and saved more than $300 million.
In the last stage of the IPLC, it is not practical for the innovating firm to maintain low price because of competitors cost
advantage. But the firms above-the market price is feasible only
if it is accompanied by top-quality or sophisticated products. A
high standard of excellence should partially insulate the firms
product from direct price competition. U.S. auto makers failed
in this area-high prices are not matched by consumer perception
of superior quality.
Promotion Policy
Promotion and pricing in the IPLC are highly related. The
innovating firms initial competitive edge is its unique product,
which allows it to command a premium price. To maintain this
price in the face of subsequent challenges from imitators,
uniqueness can only be retained in the form of superior quality,
style, or services.
The innovating marketer must plan for a nonprice promotional
policy at the outset of a production diffusion. Timken is able to
compete effectively against the Japanese by offering more
services and meeting customers needs at all times. For instance,
it offers technological support by sending engineers to help
customers design bearings in gearboxes.
One implication that can be drawn is that a new product should
be promoted as a premium product with a high-quality image.
By starting out with a high-quality reputation, the- innovating
company can trade down later with a simpler version of the
product while still holding on to the high-priced, most
profitable segment of the market. One thing the company
must never do is to allow its product to become a commodity
item with prices as the only buying motive, since such a product
can be easily duplicated by other firms. Aprica has been very
successful in creating a status symbol for its stroller by using top
artists and designers to create a product for mothers who are
more concerned with style than price. The stroller is promoted
as anatomically correct for babies to avoid hip dislocation, and
the company uses the snob appeal and comfort to distinguish
its brand from those of Taiwanese and Korean imitators.
Therefore, product differentiation, not price, is most important
for insulating a company from the crowded, low-profit market
segment. A product can be so standardized that it can be easily
duplicated, but image is a much different proposition.
Place (Distribution) Policy
A strong dealer network can provide the U.S. innovating firm
with a good defensive strategy. Because of its near-monopoly
situation at the beginning, the firm is in-a good position to be
able to select only the most qualified agents/distributors, and
the distribution network should be expanded further as the
product becomes more diffused. Caterpillars network of loyal
dealers caused difficulty for Komatsu to line up its own dealers
in the United States. In an ironic case, GMs old policy of
limiting its dealers from carrying several GM brands inadvertently encouraged those dealers to start carrying imports. A firm
must also watch closely for the development of any new
alternative channel that may threaten the existing channel.
When it is too late or futile to keep an enemy out, the enemy
should be invited in. U.S. firms-manufacturers as well as
agents/distributors-can survive by becoming agents for their
204
former competitors. The tactic involves providing a distribution

network and marketing expertise at a profit to competitors who
in all likelihood would welcome an easier entry into the
marketplace. American automakers and their dealers seem to
have accepted. the reality of the marketplace and have become
partners with their Japanese and foreign competitors, as
evidenced by General Motors ventures with Toyota, Suzuki,
and Isuzu (to produce Nova, Sprint, and Spectrum, respectively), American Motors with Frances Renault (before the
subsequent sale to Chrysler), Chryslers with Mitsubishi and
Maserati, and Fords with Mazda and the Korean Kia Motors.
Once a product is in the final stage of its life cycle, the innovating firm should strive to become a specialist, not a generalist, by
concentrating its efforts in carefully selected market segments,
where it can distinguish itself from foreign competitors. To
achieve distinction, U.S. firms should either add product
features or offer more services. For the alert firm, there are early
warning signals that can be used to determine whether the time
has come to adopt this strategy. One signal is that the product
becomes so standardized that it can be manufactured in many
LDCs. Another warning signal is a decline in the U.S. exports
owing to the loss or narrowing of the U.S. technological lead.
By that time, certain forms of market segmentation and
product differentiation are highly recommended. As in the case
of consumer electronics, such great American brands as Marantz
and Scott were once synonymous with good sound and top
quality but have since been bought up or driven out of
business by Japanese and European manufacturers. Still,
American firms dominate the segment of high-end stereo
equipment where top systems may cost up to $100,000.
American firms are successful because of the precision required
and because production runs are short and usually done by
hand.
Product Standardization Versus Product

Adaptation
Product standardization means that a product originally
designed for a local market is exported to other countries with
virtually no change, except perhaps for the translation of words
and other cosmetic changes. Revlon, for example, used to ship
successful products abroad without changes in product
formulation, packaging (without any translation, in some cases),
and advertising. There are advantages and disadvantages to both
standardization and individualization.
Arguments for Standardization

The strength of standardization in the production and
distribution of products and services is in its simplicity and
cost. It is an easy process for executives to understand and
implement, and it also is cost-effective. If cost is the only factor
being considered, then standardization is clearly a logical choice
because economies of scale can operate to reduce production
costs. Yet minimizing production costs does not necessarily
mean that profit increases will follow. Simplicity is not always
beneficial, and costs are often confused with profits. Cost
reductions do not automatically lead to profit improvements,
and in fact the reverse may apply. By trying to control production costs through standardization, the product involved may
become unsuitable for a1tem_tive markets. The result may be
When appropriate, standardization is a good approach. For

example when a consistent company or product image is
needed, product uniformity is required. The worldwide success
of McDonalds is based on consistent product quality and
services. Hamburger meat, buns, and fruit pies must meet strict
specifications. This obsession with product quality necessitates
costly export of French fries from Canada to European
franchises because the required kind of potato is not grown in
Europe. In 1982 a Paris licensee was barred through a court
order from using McDonalds trademarks and other trade
processes because the licensees twelve Paris eateries did not
meet the required specifications.
Some products by their very nature are not or cannot be easily
modified. Musical recordings and works of art are examples of
products that are difficult to differentiate, as are books and
motion pictures. When this is the case, the product must rise
and fall according to its own merit. Whether such products will
be successful in diverse markets is not easy to predict. Films that
do well in the United States may do poorly in Japan. On the
other hand, movies that were not box-office hits in the United
States have turned out to be moneymakers in France (e.g., most
of Jerry Lewiss films).
With regard to high-technology products, both users and
manufacturers may find it desirable to reduce confusion and
promote compatibility by introducing industry specifications
that make standardization possible. In the case of the Japanese
Posts & Telecommunications Ministrys proposal that all valueadded networks (VANs) in Japan comply with an international
standard known as X.75, the specification has been approved by
the International Telecommunication Union and is widely used
in many public data networks, including those of most
European countries. Because most private networks sold by
U.S. suppliers do not comply with X.75, they lamely accuse
Japan of utilizing the standard to hurt the sales of their
products.
A condition that may support the production and distribution
of standardized products exists when certain products can be
associated with particular cultural universals. That is, when
consumers from different countries share similar need characteristics and therefore want essentially identical products.
Watches are used to keep time around the world and thus can
be standardized. The diamond is another example. Levi
Strausss attempt to penetrate the European market with
lighter-weight jeans failed because European consumers wanted
the standard heavy-duty American type after all.
One study confirms that the degree of strategic standardization
is low. Three factors corporate orientation, nature of ownership,
and consumer characteristics and behavior-underlie the degree
of strategic standardization. Yet another study finds that the
majority (81 percent) of the U.S. respondents exported their
products without any modifications. The contradictory result of

the second study is understandable because it focused on
industrial products which are less likely to be affected by users
tastes. Furthermore, it may simply imply that U.S. firms, and
not necessarily MNCs in general, are resistant to the idea of
product adaptation.
A study of U.S. multinationals operating in Latin America
reveals that their standardization and adaptation practices
differed from those of U.S. multinationals operating in
Europe. In terms of the type of product, consumer non
durable goods demonstrated the greatest degree of adaptation
to local conditions. Understandably, such products are most
subject to differences in consumer preference. Consumer
durables and industrial goods, on the other hand, were situated
at the less-adapted end of the spectrum. An important
discovery is that firms that produced more than 50 percent of
their Latin American sales at local production facilities showed a
greater commitment to the markets and adapted more elements
of the marketing mix to local conditions. More technologyintensive firms standardized their marketing strategies more
than. did less technology-intensive firms, probably as a result of
the high cost of adapting high-technology products. Moreover,
the smaller markets of Latin America seemed to encourage the
firms to adapt less there than in the larger and more important
European markets.
Another study also found that industrial managers and
managers of consumer goods regarded certain marketingrelated factors differently, thus implying that product
standardization or customization depends in part on the type
of product. Furthermore, respondents consistently regarded
competitive environment as the most important variable
affecting the extent of marketing standardization.
Arguments for Adaptation

There is nothing wrong with standardized products if consumers prefer those products. In many situations, domestic
consumers may desire a particular design of a product produced
for the American market. But when the product design is placed
in foreign markets, foreign buyers are forced either to purchase
that product from the manufacturer or not purchase anything at
all. This manner of conducting business overseas is known as
the big-car and left-hand-drive syndromes. Both describe
U.S. firms reluctance and/or unwillingness to modify their
products to suit their customers needs.
According to the big-car syndrome, U.S. marketers assume that
products designed for Americans are superior and will be
preferred by foreign consumers. U.S. automakers believe (or
used to believe) that the American desire for big cars means that
only big cars should be exported to overseas markets.
The left-hand drive syndrome is a corollary to the big-car
syndrome. Americans drive on the right side of the road, with
the steering wheel on the left side of the automobile. But many
Asian and European countries have traffic laws requiring drivers
to drive on the left side of the road, and cars with the steering
wheel on the left present a serious safety problem. Yet exported
U.S. cars are the same left-hand-drive models as are sold in the
United States for the right-hand traffic patterns. According to
the excuse used by U.S. automakers, a small sales volume
205
that demand abroad will decline, which leads to profit reduction. In some situations, cost control can be achieved but at the
expense of overall profit. It is therefore prudent to remember
that cost should not be overemphasized. The main marketing
goal is to maximize profit, and production-cost reductions
should be considered as a secondary objective. The two
objectives are not, always convergent.
abroad does not justify converting exported cars to right-hand

steering. And as explained by GMs president Theres a certain
status in having a left-hand steer in Japan. This is one good
reason why American automobile sales abroad have been
disappointing. A half-hearted effort can only result in a halfhearted performance. American exporters have failed time and
time again to realize that when in Rome one should do as the
Romans do. Japanese automakers have not shown the same
kind of indifference to market needs; Japanese firms have
always adapted their automobiles to American driving customs.
Those American firms that have understood the need for
product modification have done well even in Japan. Du Pont
has customized its manufacturing and marketing for the
Japanese market, and its design units work with Japanese
customers to design parts to their specifications. Sprite became
the best-selling clear soft drink in Japan after being reformulated-the lime taste was taken out because Japanese were found
to prefer a purer lemon flavor.18 Yamazaki-Nabiscos Ritz
crackers sold in Japan are less salty than the Ritz crackers sold in
America; similarly, Chips Ahoy are less sweet than versions sold
elsewhere. Responding to the Japanese demand for quality,
Ajinomoto-General Foods used a better grade of bean for its
Maxim instant coffee,
Firms must choose the time when a product is to be modified
to better suit its market. According to the Conference Board,
important factors for product modification mentioned by more
than 70 percent of firms surveyed are long-term profitability,
long term market potential, product-market fit, short-term
profitability, cost of altering or adapting ( e.g, retooling), desire
for consistency (e.g, maintaining a world image), and short-term
market potential. These factors apply to consumer non durable
and durable products as well as to industrial products.
Product adaptation is necessary under several conditions. Some
are mandatory, whereas others are optional.
Mandatory Product Modification

The mandatory factors affecting product modification are the
following:
1. Governments mandatory standards (i.e, countrys
regulations)
2. Electrical current standards
3. Measurement standards
4. Product standards and systems
The most important factor that makes modification mandatory
is government regulation. To gain entry into a foreign market,
certain requirements must be satisfied. Regulations are usually
specified and explained when a potential customer requests a
price quotation on a product to be imported. For example,
starting in 1986, Switzerland banned the use of phosphates in
detergents. Zeolites and nitrilotriacetates may be substituted for
phosphates, but the permissible amount of nitrilotriacetates is
fixed at 5 percent to avoid harmful effects in drinking water. The
new regulation also requires labels and packages to show the
chemical composition of the product. Avon shampoos had to
be reformulated to remove the formaldehyde preservative,
which is a violation of regulations in several Asian countries.
Food products are usually heavily regulated.. Added vitamins in
206
margarine, forbidden in Italy, are compulsory in the United

Kingdom and Holland. In the case of processed cheese, the
incorporation of a mold inhibitor may be fully allowed, allowed
up to the permissible level, or forbidden altogether.
Frequently, products must be modified to compensate for
differences in electrical current standards. In many countries,
there may even be variations in electrical standards within the
country. The different electrical standards (phase. frequency, and
voltage) abroad can easily harm products designed for use in the
United States, and such improper use can be a serious safety
hazard for users as well. Stereo receivers and TV sets manufactured for the U.S. 110- to 120-volt mode will be severely
damaged if used in markets where the voltages are twice as
high. Therefore, products must be adapted to higher voltages.
When there is no voltage problem, a products operating
efficiency can be impaired if the product is operated in the
wrong electrical frequency. Alarm clocks, tape recorders, and
turntables designed for the U.S. 60 Hz (60 cycles per minute)
system will run more slowly in countries where the frequency is
50. Hz. To solve this problem, marketers may have to substitute a special motor or arrange for a different drive ratio to
achieve the desirable operating RPM or service level.
Some U.S. companies that want to sell communications
equipment in the huge Japanese market complain that NIT
(Nippon Telegraph & Telephone) requires them to adapt their
products to lower voltages and also to provide Japanese
manuals. Yet foreign switchboard makers have to meet the U.S.
technical standards in such areas as operating voltage, number
of wires per cable, and other operating features. Plessy Co., a
British firm, was surprised to learn that American customers
wanted their PBX automatically to route all outgoing longdistance calls through the least-expensive carrier-a peculiar
requirement for a European supplier because in Europe each
country has only one long-distance company.
Like electrical standards, measurement systems can also vary
from country to country. Although the United States has
adopted the English (imperial) system of measurement (feet,
pounds, etc.), most countries employ the metric system, and
product quantity should or must be expressed in metric units.
Since 1989 the EU countries no longer accept nonmetric
products for sale. Many countries even go so far as to prohibit
the sale of measuring devices with both metric and English
markings. One New England company was ordered to stop
selling its laboratory glassware in France because the markings
were not exclusively metric.
In 1982 Congress abolished the U.S. Metric Board as well as a
voluntary program for conversion to the metric system in order
to save $2 million. That decision was shortsighted. Metric
demands adversely affect U.S. firms competitiveness because
many American firms do not offennetric-products.19 A Middle
East firm, for example, was unable to find an American
producer that sold pipe with metric threads for oil machinery. A
European firm had to rewire all imported electrical appliances
because the U.S. standard wire diameters did not meet national
standards. It is difficult to find a U.S. firm that cuts lumber to
metric dimensions. Fortunately, the new trade act now requires
the U.S. government and industry to use metric units in
Very few countries still cling to the obsolete nonmetric systems.

Among them are the United States, Burma, Brunei, and Liberia.
Robert Heller of the Federal Reserve Board of Governors made
the following comment: Only Yemen and India have as Iowan
export-to-GDP ratio as the United States. Would it come as a
surprise to you to know that the U.S. and Yemen share
something else in common? They are the only two countries in
the world that have not yet gone metric! If an American
manufacturer has to retool first in order to sell his wares abroad,
his incentive to do is considerably reduced, and it makes his first
step into export markets all that much more expensive.
American firms often cite non tariff barriers as contributing to
their failure in establishing a foothold in the Japanese market.
Some of these nontariff barriers used by the Japanese are
intentionally designed to discourage imports. Yet the Japanese
often point out that U.S. firms commonly refuse to modify
their products. The importance of this refusal is often understated or underestimated. Japans NIT is the second largest
telecommunications company in the- world, but U.S. firms
insist on selling their products without any kind of modification; even though without modification their products are not
compatible with NTTs system. The NTT cannot convert its
elaborate system to accommodate American specifications and
materials. When purchases fail to materialize, many U.S. firms
are quick to cite NTTs discrimination against U.S. imports.
Hewlett-Packard, for example, withdrew from its effort to sell
oscilloscopes after learning that its inch-denominated front
panel screws would have to be replaced with metric screws. The
requirement of measurement conversion would inconvenience
the seller, but a buyer cannot be expected to change complex
business systems in order to accommodate the vendors selling
requirements. American products will have to be produced in
the metric system if those products are to be integrated with
equipment in other countries.
Some products must be modified because of different operating systems adopted by various countries. Television systems
provide a good example. There are three different TV operating
systems used in different parts of the world: the American
NTSC (National Television Systems Committee), the French
SECAM (Systeme Electronique Pour Couleur Avec Memoire),
and the German PAL (Phone Alternating Lines). In 1941 the
United States became the first country to set the national
standards for TV broadcasting, adopting 525 scanning lines per
frame. Most other nations later decided to require 625 lines for a
sharper image. In most cases a TV set designed for one
broadcast system cannot receive signals broadcast through a
different operating system. Videotex and HDTV(highdefinition TV) are other- examples-of products that thus far do
not have a universal system accepted by the industry. When
differences in product operating systems exist, a company
unwilling to change its products must limit the number of

countries it can enter, unless proper modification is undertaken
for other market requirements.
Optional Product Modification

The conditions dictating product modification mentioned so
far are mandatory in the sense that without adaptation a
product either cannot enter a market or is unable to perform its
function there. Such mandatory standards make the adaptation
decision easy: a marketer must either comply or remain out of
the market. Italys Piaggio withdrew its Vespa scooters from the
U.S. market in 1983, choosing not to meet U.S. pollution
control standards for its few exports.
A more complex and difficult decision is optional modification,
which is based on the international marketers discretion in
taking action. Nescafe in- Switzerland, for instance, tastes quite
different from the same brand sold just a short distance across
the French border.
One condition that may make optional modification attractive is
related to physical distribution, and this involves the facilitation
of product transportation at the lowest cost. Since freight
charges are assessed on either a weight or a volume basis, the
carrier may charge on the basis of whichever is more profitable.
The marketer may be able to reduce delivery costs if the
products are assembled and then shipped. Many countries also
have narrow roads, doorways, stairways, or elevators that can
cause transit problems when products are large or are shipped
assembled. Therefore, a slight product modification may greatly
facilitate product movement.
Another determinant for optional adaptation involves local use
conditions, including climatic conditions. The hot/cold,
humid/dry conditions may affect product durability or
performance. Avon modified its Candid moist lipstick line for a
hot, humid climate. Certain changes may be required in gasoline
formulations. If the heat is intense, gasoline requires a higher
flash point to avoid vapor locks and engine stalling. In Brazil,
automobiles are designed to run on low-quality gas, to
withstand the countrys rough dusty roads, and to weather its
sizzling temperatures. As a result, these automobiles are
attractive to customers in LDCs, especially when the automobiles are also durable and simple to maintain. American
automobiles can experience difficulties in these markets, where
people tend to overload their cars and trucks and do not
perform regular maintenance, not to mention the unavailability
of lead-free gasoline.
Another local use condition that can necessitate product change
is space constraint. Searss refrigerators were redesigned to be
smaller in dimensions without sacrificing the original capacity,
so that they could fit the compact Japanese home. Philips,
similarly, had to reduce the size of its coffeemaker. In contrast,
U.S. mills, for many years, resisted cutting plywood according to
Japanese specifications, even though they were told repeatedly
that the standard Japanese plywood dimensions were 3 by 6 ft
not the U.S. standard of 4 by 8 ft. In a related case, Japanese
style homes have exposed wood beams, but U.S. forestproducts firms traditionally allow 2-by-4 studs to be dirty or
slightly warped, since in the United States these studs will most
always be covered over with wallboard. The firms have refused
207
documentation of exports and imports as prescribed by the

International Convention on the Harmonized Commodity
Description and Coding System. The Harmonized System is
designed to standardize commodity classification for all major
trading nations. The International System Units (Systeme
International dUnites (SI) is the official measurement system
of the Harmonized System.
to understand that wood grain and quality are important to the

Japanese because an exposed post is part of the furniture.
Consumer demographics as related to physical appearance can
also affect how products are used and how suitable those
products are. Habitat Mothercare PLC found out that its British
products were not consistent with American customs and sizes.
Its comforters were not long enough to fit American beds, and
its tumblers could not hold enough ice. Philips downsized its
shaver to fit the smaller Japanese hand. One U.S. brassiere
company did well initially in West Germany but failed to get
repeat purchases. The problem was that German women have a
tendency, not to try on merchandize in the store and thus did
not find out until later that the product was ill-fitting because
of measurement variations between American and German
customers usually do not return a product for refund or
adjustment.
Even a doll may have to be modified to better resemble the
physical appearance of local people. The Barbie doll, though
available in Japan for decades, became popular only after Mattel
allowed Takara (which holds the production and marketing
agreement) to reconstruct the product. Of sixty countries, Japan
is the only market where the product is modified. Barbies
Western-style features are modified in several ways: her blue eyes
become brown, her vividly blond hair is darkened, and her
bosom size is reduced.
Local use conditions include users habits. Since the Japanese
prefer to work with pencils-a big difference from the typed
business correspondence common in the United States
copiers require special characteristics that allow the copying of
light pencil lines. Microsofts plant in Ireland was charged with
the task of localizing Windows 95 into more than fifty
languages. IBM, likewise, localized its OS/2 Warp system. It
took four months for IBM to translate it for the Czech
Republic. The words on the screen had to be first translated
from Czech to English. Later. The program was adapted to the
Czech operating system. But on the first try, the OS/2 could
not accept any Windows applications because of the differences
in the Czech system. Another month of adjustment was
necessary before the Czech version was ready. The Polish,
Hungarian. and Russian language versions were also made
available.
Finally, other environmental characteristics related to use
conditions should be examined. Examples are endless.
Detergents should be reformulated to fit local water conditions.
IBM had to come up with a completely new design so that its
machine could inc1udeJapanese word-processing capability.
Kodak made some changes in its graphic arts products for
Japanese professionals, most of whom have no darkrooms and
have to work in different light environments.
Price may often influence a products success or failure in the
marketplace. This factor becomes even more critical abroad
because U.S. products tend to be expensive, but foreign
consumers incomes tend to be at lower levels than Americans
incomes. Frequently, the higher quality of American products
cannot overcome the price disadvantage found in foreign
markets. To solve this problem, American companies can reduce
the contents of the product or remove any nonessential parts or
208
do both. Foreign consumers are generally not convenienceoriented, and an elaborate product can be simplified by
removing any frills that may unnecessarily drive up the price.
This approach is used by General Motors in manufacturing and
selling the so-called Basic Transportation Vehicle in lessindustrialized nations.
One reason that international marketers often voluntarily
modify their products in individual markets is their desire to
maximize profit by limiting product movement across national
borders. The rationale for this desire to discourage gray
marketing is that some countries have price controls and other
laws that restrict profits and prices. When other nearby countries
have no such laws, marketers are encouraged to move products
into those nearby countries where a higher price can be charged.
A problem can arise in which local firms in countries where
product prices are high are bypassed by marketers who buy
directly from firms handling such products in countries where
prices are low. In many cases, because of antitrust laws,
international marketers who wish to maintain certain market
prices cannot ban this kind of product movement by threatening to cut off supply from those firms re exporting products to
high-priced countries. Johnson & Johnson, for example, was
fined $300,000 by the EU for explicitly preventing British
wholesalers and pharmacists from re exporting Gravindex
pregnancy tests to Germany, where the kits cost almost twice as
much.
In spite of authorities efforts to prevent companies from
keeping lower-priced goods out of higher-priced countries,
marketers may do so anyway as long as they do not get caught.
Some manufacturers try to hinder these practices by deliberately
varying packaging, package coding, product characteristics,
coloring, and even brand names in order to spot violators or to
confuse consumers in markets where products have moved
across borders.
Perhaps the most arbitrary yet most important reason for
product change abroad is historical preference, or local customs
and culture. Product size, color, speed, grade, and source may
have to be redesigned in order to accommodate local preference.
Kodak altered its film to cater to a Japanese idea of attractive
skin tones. Krafts Philadelphia Cream Cheese tastes different in
the United States, Great Britain, Germany, and Canada. In Asia,
Foremost sells chocolate and strawberry milk instead of low-fat
and skim milk. Asians and Europeans by tradition prefer to
shop on a daily basis, and thus they desire smaller refrigerators
in order to reduce cost and electrical consumption.
When products clash with a culture, the likely loser is the
product, not the culture. Strong religious beliefs make countries
of the Middle East insist on halalled chickens. In soupconscious Brazil, Campbell soups did not take hold because
homemakers there have strong cultural traditions of a
homemakers role, and serving Campbell soup to their families
would be a soup served not of their own making. As a result,
these homemakers prefer dehydrated products manufactured by
Knorr and Maggi, used as a soup $tarter to which the homemaker can add her own flair and ingredients. Campbell soups
are usually purchased to be put aside for an emergency, such as
if the family arrives home late.
Product changes are not necessarily related to functional

attributes such as durability, quality, operation method,
maintenance, and other engineering aspects. Frequently, aesthetic
or secondary qualities must also be taken into account. There are
instances in which minor, cosmetic changes have significantly
increased sales. Therefore, functional and aesthetic changes
should both be considered in regard to how they affect the total,
complete product.
One company that incorporates multiple features of product
modification in appealing to local tastes is Pillsbury. In marketing its Totinos line of pizzas in Japan, Pillsbury found it wise
to make several mandatory and optional changes in its product.
Japanese food standards ban many preservatives and dyes. The
ban often necessitates an extensive redesign of a product just to
get it into the Japanese market.
Totinos pizzas are basically a belly stuffer in the United
States, a confirmation of many foreigners perceptions that
Americans have pedestrian tastes in food. But the Japanese
eat with their eyes, too-all foods have an aesthetic dimension.
They perceive American foods as being too sweet, too large, and
too spicy, making it necessary to alter the ingredients to suit the
Japanese palate. Furthermore, the pizza size had to be reduced
from the U.S. twelve-ounce size to the Japanese 6.5-ounce size
to fit into smaller Japanese ovens. In effect, Totinos frozen
pizza and package were completely redesigned for the Japanese
market, and Pillsburys success confirms that its efforts were
worthwhile.
In conclusion, marketers should not waste time resisting
product modification. The reluctance to change a product may
be the result of an insensitivity to cultural differences in foreign
markets. Whatever the reason for this reluctance, there is no
question that it is counterproductive in international marketing.
Product adaptation should rarely become an important issue to
the marketer. A good marketer compares the incremental profits
against the incremental costs associated with product adaptation. If the incremental profit is greater than the associated
incremental cost, then the product should be adjusted-without
question. In making this comparison, marketers should
primarily use only future earnings and costs.
209
LESSON 21:
MOVING TOWARD WORLD PRODUCT
A Move Toward World Product :
International or National Product
Malaysian customers can simply order a few different dishes and share
them the local way.
Product standardization and modification may give the

impression that a marketer must choose between these two
processes and that one approach is better than the other. In
many instances, a compromise between the two is more
practical and far superior than in selecting either procedure
exclusively. Black and Decker has stopped customizing products
for every country in favor of a few global products that can be
sold everywhere. Such U.S. publishers as Prentice Hall and
HarperCollins also have adopted the world book concept,
which makes it possible for an English-language book to have
world copyrights. Publishers change, if necessary, only the title
page, cover, and jacket.
KFC provides another good illustration of the adaptation process. In

Japan it is necessary to have a Shinto priest periodically conduct mass
funerals for the firms millions of chickens. The restaurants menu also
has been changed. In addition to serving French fries instead of mashed
potatoes and gravy, KFC sells chicken sandwiches and fish and chips.
Another one of its products is yakitori (chicken in broiled and skewered
bite-size chunks). Several products require reformulation as well. The
company cuts out half of the sugar from the salads, because the Japanese
like their salads to be tart. The firms corn-on-the-cob is a three-inch
piece, which is two inches less than the U.S. version, in order to satisfy the
local preference for a lot of little things. For the Malaysian market, the
company has even had to change its cooking method. Because Malaysians
consider firm chicken to be fresh and soft chicken to be frozen, KFC cooks
its chicken to firm texture instead of the standard soft texture.
World product and standardized product may sometimes be

confused with each other. A world product is a product
designed for the international market In comparison, a
standardized product is a product developed for one national
market and then exported with no change to international
markets. Zenith and RCA TV sets are standardized products,
whereas a German subsidiary of ITT makes a world product by
producing a world chassis for its TV sets. This world chassis
allows assemblage of TV sets for all three color TV systems of
the world {i.e., NTSC, SECAM, and PAL) without changing all
circuitry on the various modules.
Cultural Dimension
Food Brings the World Together
Because of McDonalds Hamburgers and Big Macs are a common sight
around the world. In the United States, Mexican, Italian, Chinese, and
even Thai foods have been quite strange some sixty years ago for anyone in
the United States to predict that flat bread with tomato sauce and melted
cheese on it would become mainstream. Nowadays, that flat bread (pizza)
seems to be more American than Italian. Perhaps, following pizza in the
same direction is pho, the Vietnamese and Thai fish sauce, is becoming
more like soy sauce in terms of acceptance. The adaptive nature of
American culture makes it easy for the foods and eating customs of
immigrant groups to get assimilated into society.
Malaysians are used to fast food offered by KFC and McDonalds and are
thus not averse to new American concepts in food. Newer chain restaurants cater to a more affluent clientele. Kenny Rogers Roasters, Chilis
Grill & Bar, and T.G.I Fridays offer their own versions of an
American culture, and they all have stuck closely to their U.S.formulas.
Fridays imports 70 percent of its food, including beef, cheese, and
potatoes. However, it has made one concession to Malaysian taste by
adding a bottle of chili sauce next to Heinz ketchup on a table. Likewise,
Chilis has kept its American menu intact with one exception: replacing
pork ribs (which are inappropriate in mostly Muslim Malaysia) with beef
ribs. While its customers have complained that the portions are too large,
Chilis feels that it must keep that part of the culture. Besides,
210
A move toward a world product by a company is a logical and

healthy move. If a company has to adapt its product for each
market, this can be a very expensive proposition. But without
the necessary adaptation, a product might not sell at all.
Committing to the design of a world product can provide the
solution to these two major concerns faced by most firms
dealing in the international marketplace. GE, for example,
produces a numerical control system suitable in both metric and
English measures. In addition, it has designed machines to
operate under the wide differences in voltage among the
different European countries. GE refrigerators are built in such
a way that they can be used regardless of whether the frequency
is 50 Hz or 60 Hz. This emerging trend toward world products
is also attractive for items with an international appeal or for
those items purchased by international travelers. Electrical
shavers made by Norelco and portable stereo radios made by
Sony and Crown are produced having a universal-voltage
feature.
One might question whether a world product would be more
expensive than a national or local product, since the world
product may need multipurpose parts. Actually, the world
product should result in greater saving for two reasons. First,
costly downtime in production is not needed to adjust or
convert equipment to product different national versions.
Second, a world product greatly simplifies inventory control
because only one universal part, not many individual parts, has
to be stocked.
A world product may also be able to lower certain production
costs by anticipating necessary local adaptation and thus being
adaptation ready. As an example, the Japanese ministry requires
thirty-two changes on most U.S.-built cars, and the changes
include: replacing headlamps that, because of left-hand drive,
dip in the wrong direction; changing sharp-edged door
handles; replacing outside rearview mirrors, and filling the space
MARKETING STRATEGY
A Global Product
Readers Digest is perhaps the worlds most global magazine. The
publication has remained unchanged and has been successful despite
changes of culture. The magazine has endured for decades, earning the
distinction of being the only mass-circulation, general-interest magazine
that has survived the advent of television. The popularity of this largely
standardized medium is confirmed by the 100 million people who read the
magazines forty-seven editions in nineteen languages. It has a worldwide
circulation of more than twenty-eight million. Its latest addition is the
Thai-language edition which was introduced in 1991.
Readers Digest has always used the same formula for all markets: the
same upbeat editorial format, with the same folksy illustrations for the
magazines back cover in all of its editions. The key to its success in
Eastern Europe is its formula for mixing feature editorial from the
United States and international sources with local stories. When it entered
Poland in 1994, Readers Digest Association set up a wholly owned
subsidiary to publish Readers Digest Wybor. Its full page advertisement
in the New York Times proclaimed: Hello Poland! The newest local
edition of the worlds most global magazine. According to the company,
the key for us is to have local people manage the operations and to become
a local company.
It must be pointed out that a world product has some inherent

problems as well. As illustrated by Ford Escort, the car was
designed in Europe as Fords world car. The companys
American executives, however, proceeded to thoroughly
redesign it for the U.S. market. Therefore, corporate commitment is a necessity. There must be mechanisms to take care of
the conflicting views of executives working in the different
countries. For example, Opel and Cadillac have fought on the
first joint transat1antic project involving Opels Omega and its
modified version (Cadillac Catera) for the U.S. market. The
disputes ranged from. styling to acceleration. German engineers,
appreciating the European obsession with fuel economy,
resisted it request to make changes to accommodate American
drivers desire for more power when pulling away from a stop.
In the end, the German product-development chief at GMs
International Operations ordered lower gearing for more
power.
MARKETING STRATEGY : 2
A World Car
Making a world car is anything but easy. When Ford Motor Co. wanted to
buid a worl car that could satisfy every taste, the concept sounded good.
To make Ford Escort a world car, Ford pooled design, engineering, and
manufacturing from North America and Europe. Unfortunately, rivalries

were great. The car was designed in Europe, but American executives
were skeptical of their European counterparts business and engineering
judgment. In the end, Ford produced two very different models. The
American version was so thoroughly redesigned that the only common part
that remained was the tiny water-pump seal.
Fords subsequent cooperation with Mazda represented a better attempt to
design world products. Mazda and Ford got together to design CT20 to be
sold in ninety markets as Ford Escort or one of the various Mazdas
(323, Protg, or Familia). The process again was not easy. Mazdas
designers correctly pointed out that Fords license-plate recess was not large
enough for all markets (e.g, Malaysian plates). They also had to agree on
a rust-resistent alloy as well as the wheelbase length. While Mazda chose
two lengths for different models )including a shorter one to achieve better
handling on cramped Asian roads), Ford opted for just one wheelbase. To
reduce noise, Mazda wanted to improve the engine, while Ford wanted
other adjustments. A compromise was reached to retune the engine, add
more insulation, and install the motor on softer rubber mounts. Mazda
also manufactures Ford Probe, based on Mazdas MX-6.
Ford wanted to do the world car right the second time around when it bet
$6 billion on the Mondeo. According to the companys rationale, a single
car was worthwhile because of the convergence of emission standards,
safety regulations, and consumer tastes. The plan was for the American
and European versions to have 75 percent common parts. The American
model is slightly longer and has more chrome.
Initial costs of this world car were high, but they were more than offset by
the savings from engineering one car instead of two. There were obstacles,
of course, and five European and American design studios had to
compromise on design proposals that ranged from a soft and rounded body
to a sharply angular one. Major responsibilities were divided, with Fords
chairman himself keeping an eye on the development. The U.S. division
was responsible for automatic transmissions, while the European
counterpart handled manual transmissions.
At last count, Mondeo is selling well in Europe. The American versions
called Ford Contour and Mercury Mystique have also received critical
acclaim, but the relatively high prices have hampered sales. Still Ford
appeared to be successful in getting two big elephants to dance.
As a product of compromise, a world product may have to be

bland enough to partially please everyone while not really
pleasing anyone. That is, it must satisfy the lowest common
denominator of taste in different markets. Fords Mondeo has
done well in Europe, but American consumers have found the
backseat of the American versions (Ford Contour and Mercury
Mystique) to be too tight. Likewise, GMs 1997 front drive
minivan is just right for the Europeans but a little bit too small
for the Americans. As far as the automobile industry is
concerned, a world car has another problem; it has to meet the
worlds toughest environmental and safety rules, thus increasing
costs.
The trend toward an international or world product and away
from a national product will continue as MNCs become more
aware of the significance of world marketing. The willingness
of several companies to consider designing a universal product
for the world market is indeed a good indicator that this trend
will continue.
211
between the body and the rear bumper to prevent catching the
sleeves of kimono-clad women. Honda is able to sell its U.S.made cars in Japan at relatively low prices because it produces
the car ready for sale in Japan. Because cars manufactured by
GM, Ford, and Chrysler are built for the American market, they
must undergo expensive alterations to meet Japanese regulations. The American automakers have taken some steps to
remedy the problem.
COCA-COLA: UNIVERSAL APPEAL?

On April 15, 1996, Douglas N. Daft, the President of the
Middle and Far East Group for Coca-Cola Company was in a
quandary He had just come back from a senior executive
committee meeting where the main focus was on the concern
over the additional investment in India and China, two
countries that reported directly to him. He was baffled by the
concern the committee was placing on funding these new
investments. Coca-Colas strategy had always been to take risks
in emerging markets. It had always understood the need to be
first in new markets to gain the competitive advantage. Even in
tough markets, Coca-Cola ultimately wins market share. For
instance, during apartheid in South Africa, the company stayed
in the country by maintaining a-presence through independent
bottlers while Pepsi left the country. Coke now dominates the
market.
Daft could not understand the committees reluctance to go
ahead with these investments. Chinas market potential was
vast. With a population of 1.2 billion and per capita consumption of only four (meaning each person in China consumed
only four 8-ounce servings of a company beverage per year), the
opportunities were infinite (see Exhibit 1). The investment
slated for China was to build five additional plants in 1996 and
two more in 1997, which would bring the total number of
plants to 23.A recent survey done by the company indicated that
Coke and Sprite were the two leading soft drink brands in
China. In addition, Chinas gallon sales grew by 30 percent last
year.
Indias market potential was similar to Chinas. Its population
of 936 million and per capita consumption of two also made it
a desirable market to be in. Although gallon sales were up 21
percent over 1995, there was a concern about anti multinational
sentiment. The company already had a large, visible presence
there and given the negative attitude toward large multinationals, the committee felt further investment might not be a
financially prudent decision at that time.
Daft quickly got on the phone to John Farrell, head of the
China Division, and Andrew Angle, head of the Southeast and
West Asia Division, to discuss this new turn of events.
Information needed to be gathered, and things need to be
hammered out before going back to committee with his
recommendations. What were the political and economic risks
of these two countries and how could it affect Coca-Cola? If
Coca-Cola chose not to increase its investment in these countries, would it be missing out on an opportunity to further
establish itself in these markets and to gain market share?
Coke articulated its vision in its annual report: We have
become mindful of one undeniable fact-the average body
requires at least 64 ounces of liquid every day just to survive,
and our beverages currently account for not even two of these
ounces. For every person on this planet, consuming at least 64
ounces is not an option; but choosing where those ounces
come from is. Drafts concerns addressed this vision.
Bottling
During the 1980s, Coca-Cola aggressively acquired smaller
family-owned bottlers in the United States. Between 1980 and
1984, bottlers representing 50 percent of the companys volume
212
underwent a change of ownership. Small, family-owned

bottlers were purchased by either the company or large regional
bottlers. This was done in order to control bottlers so that the
company had the ability to do nationwide advertising. knowing
that their bottlers would do the complementary promotional
activities, as well as aggressive discounting when needed.
During the 1990s. Coke began the implementation of a
program consolidation and company investment in
EXHIBIT 1 per capita consumption and market populations
Per Capital M arkets
Population
(in M illions )
179
Argentina
35
292
169
122
181
248
4
107
30
71
201
114
125
2
8
232
87
Australia
Benelux Denmark
Brazil
Canada
Chile
China
Colombia
Egypt
France
Germany
Great Britain
Hungary
India
Indonesia
Israel
Italy
18
31
162
29
14
1,221
35
63
58
82
56
10
936
198
6
58
136
71
322
45
Japan
Korea
Mexico
Morocco
125
45
94
27
256
105
65
6
147
179
60
343
Norway
Philippines
Romania
Russia
South Africa
Spain
Thailand
United States
4
68
23
147
41
40
59
263
60
Zimbabwe
11
bottling operations in the rest of the world. Currently, Coke is

consolidating its bottlers in markets overseas.
Today, Coca-Cola is investing heavily in bottling operations in
order to maximize the strength and efficiency of production,
distribution, and marketing. Their strategy is to get involved in
the bottling business so that it fuels continued growth of their
for 1995, Coca-Colas was 23 percent. Its superior performance

is further indicated
1. The company needs to move quickly in an emerging market

2. When an existing bottler lacks the resources to meet the
companys objectives
3. To help ensure long-term strategic alignment with key
bottling partners
Brand Equity
The Coca-Cola trademark is invaluable. If all of the companys
assets burned to the ground today, it would have no trouble
borrowing the money to rebuild, based on the strength of its
trademark alone. Its brand is pervasive around the world.
Exhibit 2 indicates how strong the brand Coca-Cola is in
specified markets. The companys strategy for sustaining its
brand image is the three Ps:
1. Pervasive Penetration in the marketplace
2. Offering consumers the best Price relative to value
3. Making Coca-Cola the Preferred beverage every where
In addition, Coca-Cola is finding new ways of building relevant
value into Coke and all its other brands by further differentiating them, making them unique and distinctive. Three years ago,
the company abandoned the use of entrusting all advertising
and marketing to one single agency. Now, agencies are selected
on the basis of their particular expertise in enhancing a particular
brand; this year, agency compensation is being tied to the results
their ads produce.
Moreover, Coca-Cola is reigniting the symbols that encapsulate
the essence of its brand-the Dynamic Ribbon device, the
contour bottle for Coke, the Coca-Cola script, the color red, and
the dimpled bottle for Sprite. The new contour bottle, which
was launched in April 1994, is credited with increasing sales by
500 million cases globally in 1994. Through June 1995, volume
increases for Coke were approaching 45 percent in the United
States, 23 percent in Japan, and 30 percent in Spain. In addition,
it is currently linking its brands with one-of-a kind 7vents and
activities such as the Olympic Games in 1996 and doing morein store pollutions -and displays especially in the U.S. market
where growth is considered slow.
Coca-Colas commitment to building and sustaining its brand
image is indicated by the amount of money it spends on
marketing. For instance, in 1995, the company spent $3.8 billion
for marketing. Ad spending, which is still considered one of the
best tools for building brand equity, was $1.3 billion. Its major
rival, PepsiCo, spent more on advertising, at $1.8 billion but
had to allocate these funds for its restaurant and snack-food
segments as well.
Market
Leader
Leadership
Margin
Second Place
Australia
Coca-Cola
3.9:1
Diet coke
Belgium
Brazil
Chile
France
Germany
Great Britain
Greece
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
7.7:1
3.3:1
4.6:1
4.3:1
3.1:1
1.9:1
3.8:1
Coca cola light
Italy
Japan
Korea
Norway
South Africa
Spain
Sweden
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
Coca-Cola
3.1:1
2.3:1
2.1:1
3.3:1
4.1:1
3.0:1
3.8:1
Brazilian brand
Fanta
French brand
Fanta
Diet coke
Fanta
Fanta
Fanta
Korean brand
Coca cola light
Sparletta
Spanish brand
Fanta
by its return on equity, which was 56 percent in 1995, and its

market year-end price of $74.25 at the end of 1995, which
showed an appreciation of 44 percent.
Coca-Colas strong financial performance over the last 5 years
has been due primarily to increased expansion overseas,
especially in the companys bottling and canning operations. In
fact, international operations account for the majority of CocaColas revenues and operating profits: In 1995, the company
derived 71 percent of its revenues and 82 percent of its
operating profit outside the United States
Financials
Coca-Cola is the largest and most profitable soft-drink company
in the world. Over a 10-year period, revenues have grown at a
compound growth rate of 11.9 percent. By 1995, worldwide
revenues exceeded $18 billion, and net income was a little under
$3 billion (see Exhibit 3). Its operating income margin outpaced its major competitor, PepsiCo, significantly. While
PepsiCos beverage segment operating margin was 10 percent
213
syrup business. The company has three criteria for making a

bottling investment:
EXHIBIT 3 Consolidated Statements of Income
Year Ended December 31 (In

Millions Except Per-Share Data)
1995
1994
1993
Net Operating-Revenues
$18,018
$16,181
$13,963
Cost of goods sold

Gross-Profit
Selling, administrative, and general
expenses
Operating Income
6,940
11,078
6,168
10,013
5,160
8,803
6,986
6,297
5,695
4,092
3,716
3,108
Interest income
245
181
144
Interest expense
Equity income
Other income (deductions)-net
Gain on issuance of stock by CocaCola Amatil
Income Before Income Taxes and
Change in Accounting Principle
Income taxes
Income
Before
Change
in
Accounting Principle
Transition effect of change in
accounting for post employment
benefits
Net Income
Income per Share
Before change in accounting
principle
Transition effect of change in
accounting for post employment
benefits
Net Income per Share
Average Shares Outstanding
272
169
20
199
134
(104)
168
91
(2)
74
12
4,328
3,728
3,185
1,342
1,174
997
2,986
2,554
2,188
(12)
$2,986
$2,554
$2,176
$2.37
$1.98
$1.68
(.01)
$2.37
1,262
$1. 98
1,290
$1.67
1,302
Coke operates in 200 countries and employs 32,000 people

worldwide.
Current Industry Outlook and Trends

The US. Soft-drink market is considered mature, growing at
approximately 3 percent to 4 percent annually. This is down
considerably from the 1985 growth rate of 6.5 percent. In 1994,
domestic retail sales were $52 billion, up 2.6 percent, year to year.
Coca-Cola had 41 percent of the retail market and Pepsi had 31
percent. Coca-Colas growth outpaced the industry at 7 percent
and accounted for 80 percent of the US soft drinks industry
growth last year.
Although there is increased competition from other beverage
choices, soft drinks remain the beverage of choice among US.
Consumers, accounting for more than one of every four drinks
consumed. Colas continue to dominate the soft drink category
but are slowly losing market share. They were 66 percent of all
soft drinks consumed in 1994, down from 70 percent in 1990.
International markets appear to mirror this trend.
The international market has been the high growth segment in
the beverage industry, growing at 8 percent to 10 percent
annually. In 1996, Coke sales grew at 8 percent, and it had 47
percent of the world market. Growth rates varied considerably
214
around the world. Some emerging markets grew phenomenally.

For example, last year China grew at 32 percent and Brazil grew
at 52 percent. In 1997, worldwide growth was expected to be 6
percent to 7 percent for soft drinks. The highest growth was
expected from developing Asian countries, including China,
India, Korea, and Indonesia. Moreover, continued growth
from South America was expected. Internationally, Coke
outsells Pepsi three to one.
Competition
Coca-Colas major competitor is PepsiCo (see Exhibit 6).
PepsiCo has three segments: beverage (35 percent of total
revenues), snack foods (28 percent), and restaurants (37
percent). Over a 10 year period, revenues have grown at a
compound rate of 15 percent. In 1995, $1.6 billion was
generated from $30.4 billion of revenues, representing a net
income margin of 5 percent. Its growth has been fueled by the
success of its beverage-and snack -foods segments.
PepsiCos beverage income was $10.5 billion for 1995, and it
generated $1.3 billion in operating profit, representing a 10
percent margin. Although overall beverage revenue and
operating income were up 9 percent and 8 percent, respectively,
its significant revenue growth came from overseas, at 13 percent.
Yet, international revenue and operating profit accounted for
only 34 percent of total beverage revenue and 12percentof total
beverage operating profits (see Exhibit 8).
To gain more market share internationally, Pepsi is unveiling a
comeback plan called Project Blue, which is expected to cost
$500 million. It calls for revamping manufacturing and
distribution to get a consistent-tasting drink around the globe,
as well as an overhaul of marketing and advertising. The most
risky part of the program calls for giving up the red, white, and
blue can in favor of an electric blue one. In addition, Pepsi-Cola
plans to establish new freshness standards and quality controls.
Currently, Coke outsells Pepsi three to one overseas; however,
Pepsi predicts that with its new marketing plan it will be able to
close the gap to 2 to 1 by the year 2000. According to The
Economist, this could be a risky strategy, considering the fact
that Pepsi has spent decades convincing consumers that Pepsi in
a red, white, and blue can is cool to drink. Image is a delicate
thing. By changing the color of its can, it may appear to
consumers that Pepsi-Cola is trying too hard to convince them
to drink their brand; and thus, this plan may come off as just
another blatantly obvious gimmick.
International Markets
Coca-Colas worldwide philosophy has been:
We understand that as a practical matter our universe is
infinite, and that we, ourselves, are the key variable in just how
much of it we can capture.
Coca-Cola always sees 64 daily ounces of opportunity. It
currently has 2 percent of the worlds daily consumption of 64
ounces of liquid. In emerging markets, its potential remains
high, as 60 percent of the worlds population live in markets
where the average person consumes less than 10 servings of
Coca-Cola products per year.
For decades, Coca-Cola has had an established position in
foreign markets. The first foreign office was started in 1926, and
EXHIBIT 6 U S soft drink market share (percent)
1989
Coca-Cola
40.1
PepsiCo
31.8
a
Dr. Pepper / 7Up
9.9
Cadbury Schweppes 5.0
National Beverage 2.2
Royal Crown
2.7
1990
40.4
31.8
9.9
5.0
2.1
2.6
1991
40.7
31.5
10.6
5.0
2.1
2.4
1992
40.4
31.3
11.2
5.0
2.0
2.3
1993
40.4
30.9
11.4
4.9
1.9
2.2
1994
40.7
30.9
11.6
4.8
2.0
2.0
Exhibit 8 Pepsi Co Beverage Revenue and operating income
% Growth Rates
($ in Millions) 1995
1994
1993
1995 1994
$5,918
2,720
$8,638
7
14
9
Net Sales
U.S.
International
$6,977 $6,541
3,571 3,146
$10,548 $9,687
11
16
12
Operating
Profit
Reported
U.S.
$1,145
.' International 164
$1,309
Ongoing"
U.S.
$1,145
International 226
$1,022
195
$1,217
$937
172
$1,109
12
(16)
8
9
13
10
$1,022
195
$937
172
12
16
9
13
$1,371
$1,217
$1,109
13
10
Today, the international segment has grown so much that it

now contributes 71 percent to total revenue. Because of the
importance of international markets to Coca Colas future
growth, it has eliminated its prior structure of two groupsinternational and domestic-and formed five operating groups:
North America, Latin America, Greater Europe, the Middle and
Far East, and Africa. The breakdown of unit case volume by
group is found in Exhibit 9. As indicated by the pie chart,
North America, which includes the United States and Canada,
accounted for the largest, at 32 percent, and Latin America
accounted for 24 percent of sales. Greater Europe and the
Middle and Far East accounted for 21 percent and 18 percent,
respectively. Africa trails at only 5 percent.
The hottest battles between Coca-Cola and PepsiCo will be in
international markets, especially emerging ones. First-mover
advantages can be crucial in the international soft -drink war.
The strategic challenge is to establish greater brand awareness
and preference through advertising on a scale similar to that of
the domestic market. Another challenge is to make their brands

as accessible and ubiquitous as they are in the United States.
This is not often easy, and the effort often requires the direct
intervention of the country managers (CMs) to secure improvements in the efficiency, cooperation, and competitive
aggressiveness of overseas bottlers. For example, in 1995, CocaCola acquired bottling interests in Italy and Venezuela and took
steps to consolidate its system in Germany. Although CocaCola controls the wealthy markets of Greater Europe, PepsiCo
has been more successful in emerging markets such as India, the
Arab nations of the Middle East, and Russia. Entry into new
markets has often required creative maneuvering and increasingly flexible accommodations by the CMs.
As the war heats up between Coca-Cola and PepsiCo, both CMs
will be forced to take more risks. Pepsi is a company going
global 50 years late and cannot afford to follow the leader, CocaCola, but must alter the market as indicated by its Project
Blue plan. Moreover, PepsiCo has rejuvenated the Pepsi
Challenge for overseas markets. In 1994, PepsiCo launched its
first challenge internationally in Mexico, one of Pepsis largest
markets. The result was that 55 percent preferred Pepsi over
Coke. In addition. PepsiCo plans to stage these challenges
worldwide in such markets as Singapore, Malaysia, and Portugal. PepsiCos international commitment is both long term and
aggressive, as indicated by its approval of a $2 billion investment plan over 5 years for the international beverage segment.
starting in 1994.
Of course, Coca-Cola does not take these aggressive moves
sitting down. Coca-Cola will fight back, as it did with the Pepsi
Challenge, by slashing price5, purchasing bottlers, and creating
slick ads and promotions.
Dafts Report To The Committee

Douglas Daft recently met with John Farrell, who was responsible for China, and Andrew Angle, who was responsible
for India. Both Farrell and Angle wished to go ahead with the
investments in their respective countries. However, Douglas
Daft was not sure he had enough information on the political
and economic risks of each country to make an informed
decision. Thus, he asked Farrell and Angle to update him on
the political and economic status of their respective countries.
After he read their reports, he would make his-recommendations to the senior executive committee. Their-reports are
reproduced in Appendices I and II.
1. What is Coca-Colas international strategy?
2. What competitive advantages does Coca-Cola have over its
major rival, PepsiCo?
3. What are the pros and cons of Coca-Colas investing further
in Indias market?
4. What are the pros and cons of Coca-Colas investing further
in Chinas market?
5. What should Douglas Daft recommend to the senior
executive committee concerning further investment in the
emerging markets of China and India? Why?
215
by the 1940s and 19508, Coke was already entrenched Overseas.

In 1950, Time magazine wrote, Cokes peaceful near conquest
of the world is one of the remarkable phenomena of the age.
It has put itself always within an arm if length of desire.
APPENDIX I
The India Report by Andrew Angle, Southeast and
West Asia Division
In 1994, Indias economy grew at 6 percent. 8 million new jobs
were created, and there was $818 million of U.S direct investment. For all these positive signs however. It appears that there
has been a backlash against the economic reforms started 5 years
ago. Why? First, for the 190 million Indians who live below the
poverty line, 5 years of economic reforms have not improved
their standard of living. Millions of poor believe that only the
elite have benefited from economic liberalization. Second,
soaring short-term interest rates, coupled with competition
from foreigners, have hurt local businesses and caused enthusiasm for further economic change to wane. Now that foreign
companies can increase their investment to 51 percent, up from
40 percent, in most industries and even 100 percent in others,
some locals worry that foreigners will run roughshod over
them.
Third, the Hindu right, led by the Bharatiya Janata Party (BJP),
is divided over just what kind of foreign investment should be
allowed. The BJP has adopted a much used phrase-microchips, not potato chips-to describe what sort of investment
should be allowed.5 Thus, it appears that the BJP is against big
American consumer brands such as PepsiCo, McDonalds,
Colgate, and even ourselves, and they are the ones protesting
against the multinationals. Pepsis KFC braved protests and
saw one of its outlets briefly closed. Most of the anti multinational sentiment has been against American companies, which
bear the brunt of Indian worries about cultural imperialism. In
contrast, Japanese and German companies encounter few such
problems.
Last, these anti multinational demonstrations are being allowed
to continue due to the upcoming democratic elections, which
will begin on April 27 and finish on May 7. The existing Indian
government, led by Prime Minister P. V. Narasimha Rao,
dismisses these protests against foreign companies as grumbling of fringe groups. In truth, Rao and his government face
stiff competition from the BJP and do not want to alienate
voters by seeming to be pro foreign. Therefore, the existing
government does little to defend these-companies in the eyes
of the public.
Indias legal system, though it may be slow, provides some
recourse against failure to perform in contracts. For instance,
India backed away from a $2.8 billion power project with
Enron, an American company. Negotiations are resuming
primarily because Enron has a cast-iron case for compensation.
However, the most fundamental problem is that a backlash has
set in before India has taken the most painful changes. The
government has not touched sacrosanct labor laws that make it
virtually impossible for any company employing more than 20'workers to lay anyone off. In addition, India must come up
with a policy to deal with the state sector. About 200 of the
countrys 220 centrally owned companies are chronic money
losers. Heavy borrowing by government companies-$60 billion
from the central government alone-drives up interest rates.
216
Regardless of who wins the upcoming election Raos government, the BJP, or the Left-Front National Front, they will not
turn back reforms already taken place. Some foreign investors
have turned bullish on India, pouring $1.2 billion in the
Bombay exchange for the first 4 months of 1996. Some
companies such as McDonalds, Baskin-Robbins, and PepsiCo
are moving ahead with investments despite the difficulties. The
risk is that Indias reforms will not be quick enough to appease
the growing discontent among its large population. Moreover.
there are many examples of foreign investors who have already
had great success in China, but there are relatively few in India.
APPENDIX II
The China Report by John Farrell, China Division
According to a Business Week article entitled Rethinking China:
In stunningly short order, a powerful China has emerged. As
an economic force, it is entering and altering the global marketplace-and in some cases writing its own rules.
China had a $35 billion trade surplus with the United States last
year, whereas its own markets remain closed in sectors where
U.S. businesses are competitive. Moreover, China is notorious
as one of the worlds greatest rip-off artists and bent on
strong-arming U.S. and European companies into transferring
jobs and technology as the cost for entering its markets.
Although China has cleaned up some intellectual property
abuses, piracy remains rampant, and the toll on U.S. businesses
is growing. Trade officials estimate that bootlegging in China
cost U.S. business nearly $2.5 billion in lost sales last year, far
exceeding the $866 million in 1994.
Tax preferences for foreign investors have been scaled back, and
there currently is a proposal to change the tax system in a way
that puts foreign businesses at a disadvantage to local ones. In
addition, foreign companies in China must grapple with
changing central government rules, grasping local officials and
capricious local business partners. The central government is
cracking down on joint ventures that provincial officials used to
wave through. In addition, contracts are not always enforceable
in Chinese courts.
However, there is growing evidence that firms that are prepared
to shrug off such obstacles and build a business presence in
China will be rewarded. The playing field may be tilted against
foreign companies, but domestic rivals are barely up and
running. In the more open climate, domestic companies already
competing are not able to rely so heavily on their connections.
Privileged information and crony networks. Thus the battle for
Chinas market has been and will continue to be played out by
foreigners for the time being.
This is especially true in the fast-moving consumer goods
markets in which gross margins average 18 percent to 25
percent, partly due to the fact that the Chinese love a good
brand. Just as in the United States, Procter & Gamble fights
Unlived for Chinese consumers. Many multinationals contend
that transferring technology is largely risk free. Many pioneers in
China have reaped rewards without creating new competitors.
Yet, Chinas effort to milk more out of foreigners means few
secrets are really safe. The demands on multinationals to help
make Chinese industry competitive are unrelenting. For
example, Microsoft, under threat of having its software banned,

codeveloped a Chinese version of Windows 95 with a local
partner and agreed to aid efforts to develop a Chinese software
industry.
To keep control of Chinas economy, Communist leaders are
retreating on many risky economic policies, which means no
major reform of state enterprises or the banking system-both
seen as crucial to completing the transformation of Chinas
economic system. There are two reasons. First, to control
economic growth and its resulting inflation, Vice Premier Zhu
Rongji engineered an austerity program in 1993 to curb
inflation; it worked, Growth in 1995 slowed to about 10
percent from 12.6 percent, a year earlier, while retail price
increases eased from 21.7 percent in 1994 to_15 percent in 1995.
Second, the central government fears that the poor inland
provinces are falling too far behind. Many of its 700 million
peasants live in near-feudal conditions, and 100 million have
flooded into cities looking for work. The government fears that
high unemployment will only fuel crime and corruption, which
is already on the rise.
This recentralization is an attempt to enable the central government to set the pace of economic development rather than cede
the power to the coastal provinces. The most needed reforms
are in the state sector, which is one of the biggest drags on the
economy. However, because state-owned factories employ 50
percent of the urban population, the leadership will not let
them go bust. Yet, the states companies chum out goods that
nobody wants and then demand loans from the state banks,
ultimately causing more inflation.
Nevertheless, other economic reforms are accelerating, such as a
convertible currency tied to outside financial markets and
regulations to protect intellectual property rights. The best hope
for major reform is for China to enter into the World Trade
Organization (WTO) because as a member, China would be
forced over a designated period of time to liberalize its
economy by dropping many trade barriers. However, chances of
Chinas entering are slim. China would like to enter with
developing-country status, which would allow it to protect
domestic industries from foreign competition, but the United
States would like China to enter on terms similar to those of
other industrial nations.
The bottom line is that Chinas already large economy is set to
double in the next 8 years, making it the worlds sixth-largest
economy, and those companies anxious to get access to Chinas
riches are willing to take the risks.
217
LESSON 22:
BRANDING DECISIONS
The purpose of this lesson is to acknowledge the strategic
significance of branding and packaging and to examine some of
the problems commonly faced by MNCs. Among the subjects
discussed are brandless products, private brands, manufacturers
brands, multiple brands, local brands, worldwide brands, brand
consolidation, brand protection, and brand characteristics. The
strengths and weaknesses of each branding alternative are
evaluated. The chapter also examines both mandatory and
optional packaging adaptation. The emphasis of the chapter is
on the managerial implications of both branding and packaging.
Branding Decisions
To understand the role of trademark in strategic planning, one
must understand what a trademark is from a legal standpoint.
In Thailand, trademark is legally defined to include a device,
brand, heading, label, ticket, name, signature, word, letter,
numeral, or any combination thereof used or proposed to be
used, or in connection with goods of the proprietor of such
trademark by virtue of manufacture, selection, certification,
deciding with, or offering for sale. According to the Lanham
Trade-Mark Act of 1947, trademark in the United States
includes any word, name, symbol, or device or any combination thereof adopted and used by a manufacturer or merchant
to identify his goods and distinguish them from those
manufactured or sold by others. If a trademark is registered
for a service, it is known as a service mark {e.g., Berlitz). Even
though the two definitions vary somewhat from each other, the
essential idea of branding remains the same in both.
A trademark can be something other than a name. Biennium,
the roly-poly corporate symbol, is Michelins trademark. Nipper,
the familiar fox terrier sitting next to a phonograph along with
the phrase his masters voice, is RCAs official symbol. Other
easily recognized logos include Ralph Laurens polo player and
Goodyears wing foot.
Although companies spend millions of dollars developing
logos, some are more effective than others. One study asked
consumers to judge a companys image by looking at its name
alone as well as with its logo. Motorola Inc., for example,
received a positive score of 55 percent, meaning that the logo
adds a sense of quality and trustworthiness. British Airways
and Infiniti, on the other hand, received negative scores of -20
percent and -16 percent, respectively. In the latter case, the logos,
instead of being helpful, may actually hurt corporate image.
A logo, when inappropriate, ineffective, or dated, should be
modified. In the case of Audi, wanting to further differentiate
itself from parent Volkswagen, it replaced its corporate logo in
1995 with a new one featuring the four silver rings with the
Audi name written underneath in red. It combines its history
with modem design to provide a readily identifiable image.
The new logo, being the seventh change since 1913, replaced the
one in use since 1985.
218
UNIT 7
In many countries, branding. may be nothing more than the

simple process of putting a manufacturers name, signature, or
picture on a product or its package. Many U.S. firms did precisely
this in the old days, as illustrated by King Gillettes own portrait
being used as a trademark for his Gillette razor blades.
The basic purposes of branding are the same everywhere in the
world. In general, the functions of a brand are to (1) create
identification and brand awareness, (2) guarantee a certain level
of quality, quality, and satisfaction, and (3) help with promotion. All of these purposes have the same ultimate goal: to
induce repeat sales. The Spalding name, for example, has a great
deal of marketing clout in Japan. In fact, a group of investors
bought the company in 1982 because they felt that Spalding was
the best-known name in sports in the free world and that the
name was underutilized.
For American consumers, brands are important. Overseas
consumers are just as brand-conscious-if not more so-because
of their social aspirations and the social meanings that brand
names can offer. Eastern European consumers recognize many
Western brand names, including some that are unavailable in
their countries. Among the most powerful brand names are
Sony, Adidas, Ford, Toyota, Volvo, BMW, and Mercedes. When
International Semi-Tech Microelectronics Inc. acquired troubled
SSMC Inc., the most important asset was probably the Singer
trademark.
When a company is for sale, the remainder of the purchase price
after deducting the fair value of the physical assets is called
goodwill, going concern value: or an intangible asset. In the
case of service businesses, nearly all of the purchase price that
companies generate tends to be goodwill. The brand has brand
equity when there is value that is attached to that brand.
Perhaps, Coca-Colas most valuable asset is its brand equity
which is worth $39 billion.
Taking into consideration the importance of branding as a
marketing tool, one would expect that corporate headquarters
would normally have a major role in brand planning for
overseas markets. As a component of an MNCs marketing
mix, branding is the area in which standardization appears to be
relatively high. One study found a standardization branding rate
of 82.5 percent among U.S. consumer-goods manufacturers. In
comparison to the large U.S.-based industrial firms European
marketing strategies, these same firms marketing mix strategies
in Latin America appear to be more standardized. As expected,
branding and product were least adapted, probably because of
the relatively greater cost of adapting products and brands
Westinghouse, for example, requires its Westinghouse do Brasil
affiliate to use the common logo, resulting in all the MNCs
Brazilian companies using the familiar circled W symbol in their
promotion programs. Thus, centralization is a common
practice.
Branding Levels and Alternatives

There are four levels of branding decisions:
1. No brand versus brand
2. Private brand versus manufacturers brand
3. Single brand versus multiple brands
4. Local brands versus worldwide brand
Branding versus No Brand

To brand or not to brand, that is the question. Most U.S.
exported products are branded, but that does not mean that all
products should be. Branding is not a cost-free proposition
because of the added costs associated with marking, labeling,
packaging, and legal procedures. These costs are especially
relevant in the case of commodities (e.g..
Farmers can well attest to this vulnerability because prices of

farm products have been greatly affected by competition from
overseas producers. Yet, there are-ways toremove-a company
from this kind-of cutthroat competition Branding, when
feasible, transforms a commodity into a product (e.g.,/Chiquita
bananas, Dole pineapples, Sunkist oranges, Morton salt, Holly
Farms fryers, and Perdue fryers). A product is a value-added
commodity, and this bundle of added values includes the
brand itself as well as other product attributes, regardless of
whether such attributes are physical or psychological and
whether they are real or imaginary. The 3M company developed
brand identity and packaging for its Scotch videotapes for the
specific purpose of preventing them from becoming just
another commodity item in the worldwide, price-sensitive
market.
Branding makes premium pricing possible because of better
identification, awareness, promotion, differentiation, consumer
confidence, brand loyalty, and repeats sales. According to one
Supreme Court decision (No. 649, May 4, 1942, Mishawaka
Rubber and Woolen Manufacturing Co. v. S. S. Kresge. 53
USPQ 323),
The owner of a mark exploits this human propensity by
making every effort to impregnate-the-atmosphere-of the
market with the drawing power of a congenial symbol. . . .
Once established, the trademark owner has something of
value. Exhibit 11-5 on page 430 examines the importance of
brand names.
Although branding provides the manufacturer with some
insulation from price competition, a firm must still find out
whether it is worthwhile to brand the product. In general, these
prerequisites should be met:
1. Quality and quantity consistency, not necessarily the best
quality or the greatest quantity.
2. The possibility of product differentiation.
3. The degree of importance consumers place on the product
attribute to be differentiated.
salt, cement, diamonds, produce, beef, and other agricultural

and chemical products). Commodities are unbranded or
undifferentiated products which are sold by grade, not by
brands. As such, there is no uniqueness, other than grade
differential, that can be used to distinguish the offerings of one
supplier from those of another. Branding is then probably
undesirable because brand promotion is ineffective in a practical
sense and adds unnecessary expenses to operations costs. The
value of a diamond, for example, is determined by the so-called
four Cscut, color, clarity, and carat weight-and not by brand.
This is why DeBeers promotes the primary demand for
diamonds in general rather than the selective demand for
specific brands of diamonds.
As an example, Nikes unique designs (e.-g.. waffle sole) allowed

the company to differentiate its brand from others and to
become the top-rated brand among serious joggers.
On the positive scale, a brand less product allows flexibility in

quality and quantity control, resulting in lower production costs
along with lower marketing and legal costs.
The basic problem with a commodity or unbranded product is
that its demand is strictly a function of price. The brand less
product is thus vulnerable to any price swing or price cutting.
219
Another study found that international marketing managers

considered some cultural and socioeconomic. conditions of
foreign countries in making global brand image strategy
decisions. If the markets are similar, a firm may be able to use
the standardization strategy by extending its brand-image
theme to the other markets. However, when markets differ in
cultural uncertainty avoidance, individualism, and national
socioeconomic, managers tend to employ the imagecustomization strategy.
EXHIBIT Advantages of Each Branding Alternative (from

manufacturers viewpoint)
No Brand
lower production cost
lower marketing cost
lower legal cost
more flexibility in quality and
quantity control (i.e., possibility of
less rigidity in control)
good
for
commodities
(undifferentiated items)
Private Brand
ease in gaining dealers' acceptance
possibility of larger market share
no promotional hassles and
expenses
good for small manufacturer with
unknown brand and identity
Multiple Brands (in single market)
utilization of market segmentation
technique
creation of excitement among
employees
creation of competitive spirits
avoidance of negative connotation
of existing brand gain of more
retail shelf space
retention of customers who are
not brand loyal allowance of
trading up or down without
hurting existing brand
Local Brands
legal necessity (e.g., name already
used by someone else in local
market)
elimination of difficulty in
pronunciation
allowance for more meaningful
names
(i.e.,
more
local
identification!
elimination
of
negative
connotations.
avoidance
of
taxation
on
international brand
quick market penetration by
acquiring local brand allowance of
variations of quantity and quality
across markets
Brand
better identification
better awareness
better chance for product
differentiation
better chance for repeat sales
possible premium pricing (i.e.,
removal from price com
petition)
possibility of making demand
more price inelastic
Manufacturer's Brand
better control of products and
features
better price because of more price
inelasticity retention of brand
loyalty
better bargaining power
assurance of not being bypassed by
channel members
Single Brand (in single market)
better marketing impact
permitting
more
focused
marketing
brand receiving full attention
reduction of advertising costs
because of better
economies of scale and lack of
duplication
elimination of brand confusion
among employees, dealer , and
consumers
good for product with good
reputation and quality (halo effect)
Worldwide Brand
better marketing impact and focus
reduction of advertising costs
elimination of brand confusion
good for culture-free product
good for prestigious brand
easy identification/recognition for
international travelers
good for well-known designer
Private Brand versus Manufacturers

Brand
Branding to promote sales and move product: necessitates a
further branding decision: whether the manufacturer should use
its own brand or a distributors brand on its product. Distributors in the world of international business include trading
companies, importers, and retailers, among others; their brands
are called private brands. Many portable TV sets made in Japan
for the U.S. market are under private labels. In rare instances,
Japanese marketers put their brands on products made by U.S.
companies, as evidenced by Matsushitas purchases of major
appliances from White and D&M for sale in the United States.
220
The Oleg Cassini trademark is put on the shirts actually made

by Daewoo.
Even though it may seem logical for a distributor to carry the
manufacturers well-known brand, many distributors often
insist on their own private brands for several reasons. First, a
distributor may be able to create a unique product by bundling
or unbundling product attributes and then adjusting the price
to reflect the proper value.
Carrefour, a French retail giant, sells some 3,000 in-house
products at prices about 15 percent lower than national brands.
J. Sainsbury PLC, a British retailer, has a private brand that is
able to get 30 percent of the detergent market, moving it ahead
of Unilevers Persil and just behind Procter & Gambles Ariel
which is the market leader. It is believed that private-label
products now account for 32 percent of supermarket sales in
the United Kingdom and 24 percent in France.
Second, a private brand is a defensive strategy that guarantees
that a distributor is not bypassed by its supplier. For example,
Ponder and Best, after losing the Rolleiflex and Olympus
distributorships, came up with its own brand of photographic
products, Vivitar.
Third, distributors can convert fixed production costs into
variable costs by buying products made by others. Sperrys
products are made by more than 200 manufacturers (e.g.,
Sperrys personal computer is manufactured by Mitsubishi).
With this practice, Sperry is able to save cash and research-anddevelopment expenses. Of course, it is important for a
distributor with a private brand to have a reliable supplier.
Fourth and perhaps the most important reason for a
distributors insistence on a private brand is brand loyalty,
bargaining power, and price. In spite of the lower prices paid by
the distributor and ultimately by its customers, the distributor
is still able to command a higher gross margin than what a
manufacturers brand usually offers. The lower price can also be
attributed to the distributors refusal to pay for the
manufacturers full costs. A distributor may want to pay for the
manufactures variable costs but not all of the fixed costs. Or a
distributor may want to pay for production costs only but not
the manufacturers promotional expenditures, because a
distributor gets no benefit from the goodwill of a
manufacturers advertised brand. If a firm has any problem
with the supplier (manufacturer), it has the flexibility of
switching .to another supplier to make the-identical product,
thus maintaining brand loyalty and bargaining power without
any adverse effect on sales. RCA; for example, switched from
Matsushita to Hitachi for its portable units of VCRs.
Compaq Computer Corp. illustrates the potential benefits and
problems of private branding. It has finally decided to buy
multimedia laptops and home PCs from Taiwanese- subcontractors Invented Group and international Corp. By putting a
Compaq nameplate on the computers made by outside
suppliers, the company is able to take care of the gap in its
product line quickly and economically while solving its inventory
problems. However, after a decade of convincing customers
that Compaqs engineering and manufacturing expertise has
differentiated its products from those made by other PC
clonemakers, this new strategy may make buyers wonder
There are a number of reasons that the strategy of private

branding is not necessarily bad for the manufacturer. First, the
ease if gaining market entry and dealers acceptance may allow a
larger market share overall while contributing to offset fixed
costs. Toronto-based Cott Corp., once an obscure regional
bottling company, has emerged as a leading privatl1-label player
by manufacturing dozens of store-brand sodas. It sells more
than one billion servings of soft drinks to Wal-Mart Stores Inc.
under the label of Sams American Choice. Cott bottles
Sainsbury Classic Cola for L Sainsbury PLC which is the top
food retailer in Britain. In the United States, Safeway Inc. is one
of Cotts largest customers. Safeway feels that it can give
consumers value while earning better margins than on national
brands. As a result, both Coke and Pepsi have to lower their
prices to stay competitive.
Second, there are no promotional headaches and expenses
associated with private branding, thus making the strategy
suitable for a manufacturer with an unknown brand. Suzuki
cars are sold in the United States under the GM Sprint brand
name. Ricohs facsimile machines are sold under AT&Ts wellknown name. Brother has had virtually no name recognition
because it has marketed its many products under the private
labels of U.S. major retail chains; to secure recognition, it has
begun to mount a major campaign.
Third, a manufacturer may judge that the sales of its own
product are going to suffer to a greater or lesser degree by
various private brands. In that case, the manufacturer might as
well be cannibalized by one of those private brands made by
the manufacturer.
There are also reasons why private branding is not good for the
manufacturer. By using a private brand, the manufacturers
product becomes a commodity, at least to the distributor. To
remain in business and retain sales to the distributor, the
manufacturer must compete on the basis of price, because the
distributor can always switch suppliers Cott Corp., for example,
lost its contract to brew its Presidents Choice beer for Loblaw
Cos., Canadas top supermarket, when John Labatt Ltd. paid
Loblaw $28 million for the contract.
By not having its own identity, the manufacturer can easily be
bypassed. Furthermore, it loses control over how its product
should be-promoted-this fact may become critical if the
distributor does not do a good job in pushing the product. For
example, Mitsubishi, which manufactures Dodge Colt and
Plymouth Champ for Chrysler felt that its products did not
receive Chryslers proper attention. As a result, Mitsubishi began
to create its own dealer network and brand identity (e.g.,
Mitsubishi Mirage). Ricoh used to sell copiers in the United
States only under such private brands Savin and Nashua, whose
sales lagged. After switching to its own brand name in 1981,
Ricohs sales increased tenfold to take second place in: unit sales
behind only Canon.
The manufacturers dilemma is best illustrated by Heinzs
experience in the United Kingdom, where consumer recognition for its brand is stronger than in any other. Country in the
world. Whereas Campbell Soup and Nestles Crosse & Blackwell
make some products under private labels to accommodate giant

supermarkets insistence, Heinz produces products only under
its own brand because, as the largest supplier of canned foods
there; it has the most to lose. To preserve its long-term market
leadership at the expense of short-term earnings, Heinz has
held down prices, stepped up new product introductions;
launched big capital-spending programs, and increased advertising. Heinz does make private-label merchandise in the United
States, where private brands account for 10 percent of its U.S.
sales. Its logic is that the slow growth of U.S. private labeling
does not pose a serious threat as in the United Kingdom.
Clearly, the manufacturer has two basic alternatives: (l)its brand
or (2) a private brand. Its choice depends it part on its bargaining power. If the distributor is prominent and the
manufacturer itself is unknown and anxious to penetrate a
market, then the latter may have to use the formers brand on
the product. But if the manufacturer has superior strength, it
can afford to put its own brand on the product and can insist
that the distributor accept that brand as part of the product. For
example, Kinishiroku had U.S. film sales derived primarily from
some thirty original-equipment-manufacturer channels, such as
mail order and drugstore film processors. Fatomat accounted
for 70 percent of the companys original-equipment-manufacturer film sales. In the process of taking over Fotomat,
Kinishiroku announced plans to expand from private-label
manufacturing to direct distribution under its own brand name
of Konica.
The hypothesis of the least dependent person can be quite
applicable in determining the power of the manufacturer and
that of its dealer. The stronger party is the one with resources
and alternatives, and that party can demand more because it
needs the other party less. The weaker party needs the other
partner more because of a lack of resources and/or alternatives,
and thus the weaker must give in to the least dependent
party. In most cases the interests of both parties are interdependent, and neither party may have absolute power. For instance,
Kunnan, a maker of highquality tennis rackets, lost some of its
well-known customers when they began doing their own
manufacturing. When those companies later discovered that
they could not produce as well in terms of cost and quality, they
came back to Kunnan for the private-brand manufacturing.
Private branding and manufacturers branding is not necessarily
an either/or proposition: a compromise can often be reached to
ensure mutual coexistence. If desired~ both options can be
employed together. Michelin, for instance, is world renowned
for its own brand, and most people do not realize that Michelin
also makes tires for Sears, Montgomery Ward, and Venture.
Sanyo, another major international brand, is relatively unknown
in the United States because it has relied heavily on private-label
sales to Sears and other big companies. To rectify this identity
problem, Sanyo has been pushing its own name simultaneously.
Single Brand versus Multiple Brands

When a single brand is marketed by the manufacturer, the
brand is assured of receiv4tg full attention for maximum
impact. But a company may choose to market several brands
within a single market based on the assumption that the market
221
whether the Compaq name is enough of a reason for them to

buy a Compaq PC.
is heterogeneous and thus-must be segmented. Consequently, a

specific brand is designed for a specific market segment.
The watch industry provides a good illustration for the practiceof-using-multiple brands in a single market for different market
segments. Bulova, a well-known brand, also has the Accutron
and Caravelle brands. Citizen, in its attempt to capture the new
youth and multiple-watch owners market, traded down to
include a new brand called Vega. Likewise, Hattori Seiko is well
known for its Seiko brand, which is sold at the upper-medium
price range ($100-300) in better stores; to appeal to a more
affluent segment, the firm traded up with the Lassale name.
Seikos strategy is to deliberately divorce the Seiko and Lassale
names, once used together, in the public mind, with the goldplated Lassale line retailing for $225-750 and the karat-gold Jean
Lassale line retailing for $675-35,000. Lassale watches have Seiko
movements but are made only in the United States and Western
Europe in order to curb parallel trading and they are distributed
only through jewelers and department stores. The company
also trades down, with Pulsar (the cheapest model at $50).
Lorus ($12.95-49.95), and Alba ($9.95-19.95) for Asia.
Multiple brands are suitable when a company wants to trade
either up or down because both moves have a tendency to hurt
the firms main business. If a company has the reputation for
quality, trading down without creating a new brand will hurt the
prestige of the existing brand. By the same rationale, if a
company is known for its low-priced. Mass-produced products,
trading up without creating a new brand is hampered by the
image of the existing products. Casio is perceived as a manufacturer of low-priced watches and calculators and the name
adversely affects its attempt to trade up to personal computers
and electronic musical instruments. To overcome this kind of
problem, Honda uses the Acura name for its sporty cars so that
Acuras image is not affected by the more pedestrian Honda
image.
IBM has begun to segment the PC market and has employed a
multi brand strategy. Toward this end, the company aims
different brands and separate sales channels at different groups
of customers. In Europe it has four product lines which range
from a law-priced PS/1 home model to a relatively expensive
PS/2 hub far corporate networks. The other two lines are
Ambra and Value Paint. Ambra is noteworthy because it is it
product line of imparted Asian computers which are said in
Europe under a non-IBM label.
Cultural Dimension 1 Multi-brand Marketing

Timexs most valuable asset may be its brand name. Its advertisements
showing how rugged Timex watches have been well received over the years.
As a matter of fact, the 1992 Gallup Watch Brand Survey found that
Timex is number one in terms of name recogni-tion, with 98 percent of
consumers knowing the Timex name. Seiko, with 87 percent recognition,
took second place.
Timexs marketing error was its failure to keep up with market trends
as the watch evolved from a functional object to a fashion accessory.
According to the Jewelers of America, the average consumer has five
watches, drastically different from 1.5 watches from thirty years ago.
Timexs Japanese rivals, Seiko and Cit-izen, have long adjusted by
222
introducing a wide variety of styles and prices so that customers can have
differ-ent watches for different looks. In the meantime, Timex was moving
along as a one-brand company. The com-pany has finally decided to go
multi-brand.
Source: At Timex, Theyre Positively Glowing, Business Week, 12
July 1993. 141.
Local Brands versus Worldwide Brand

When the manufacturer decides to put its awn brand name an
the product, the problem does not end there if the manufacturer is an International marketer. The possibility of having to
modify the trademark cannot be dismissed: The international
marketer must then consider whether to use just one brand
name worldwide are different brands far different markets are
countries. To market brands worldwide and to market worldwide brands are not the same thing
A single, worldwide brand is also known as: an international,
universal, or global brand. A Euro-brand is a slight modification of this approach, as it is a single product far a single market
(i.e the European Union and the other Western European
countries), with an emphasis on the search far inter-market
similarities rather than differences.
For a brand to be global or worldwide it must by definition
have a commonly understood set of characteristics and benefits
in all of the markets where it is marketed. Coca cola is a global
brand in the sense that it has been successful in maintaining
similar perceptions across countries and cultures. However,
most other brand does not enjoy this kind of consistency thus
making it debatable whether a gullible brand is a practical
solution.
A worldwide brand has several advantages. First, it tends to be
associated with status and prestige. Second, it achieves maximum market impact overall while reducing advertising costs
because only one brand is pushed. Bata Ltd. a Canadian shoe
marketer and retailer in ninety two countries, found out form it
s research that consumers greatly though Bata to be a local
concern, no matter the country surveyed. The company thus
decided to become and official sponsor of world cup soccer in
order to enhance Batas international stature. For Bata and
others it is easier to achiever worldwide exposure for one brand
than it is for multiple local brands. Too many brands create
confusion and fragmentation.
Third, a worldwide brand provides a convenient identification,
and international travelers can easily recognize the product.
There would be no sense in creating multiple brands for such
international products as Time magazine, American Express
credit card, Diners Club credit card, Shell gasoline, and so on;
Finally, a worldwide brand is an appropriate approach when a
product has a good reputation or is known for quality. In such a
case, a company would be wise to extend the brand name to
other products in the product line. This strategy has been used
extensively by GE In another case, 3M perceived commonalities
in consumer demographics and market development worldwide; in response, it devised a convergence remarketing
strategy to develop global identity for its Scotch brand of
The use of multiple brands, also known as the local or

individual approach, is probably much more common than
many people realize. The automobile industry is a good
example. The Japanese strategy is to introduce a new car in
Japan for one year before exporting it to the U.S. market under a
different name. Toyota XX and Datsun Sunny, dubbed Toyota
Supra and Nissan Sentra for the United States, are examples of
this practice. In the case of Unilever, its fabric softener is sold in
ten European countries under seven names. Due to decentralization, the multinational firm allows country managers to
choose names, packages, and formulas that will appeal to local
tastes. More recently, the company, while keeping local brand
names, has been gradually standardizing packaging and product
formulas.
There-are several reasons for using local brands. First, less
developed countries resent international brands because the
brands goodwill is created by an advertising budget that is
much greater them research-and-development costs, resulting in
no benefit derived from research and development for local
economies. In addition, local consumers are forced to pay
higher prices for advertising and goodwill, benefiting MNCs
but hindering the development of local competitive capacity.
Such resentment may explain why Indias ministries, responding to domestic soft-drink producers pressure, rejected Pepsis
35 percent Pepsi-owned joint venture. Some governments have
considered taxing international brands or limiting the use of
such brands, as in the case of South. Korea, which has considered placing restrictions on foreign trademarks intended for
domestic consumption.
Second, when manufacturer is unable to ensure uniform
product quality across countries; it should consider local brands.
Third, when an existing brand is difficult to pronounce, a new
brand maybe desirable. Sometimes, consumers avoid buying a
certain brand when it is difficult to -pronounce because they
want to avoid the embarrassment of wrong pronunciation.
Wrigley had trouble with its Spearmint name in Germany until
the spelling was changed to Speermint.
Fourth, a local-brand is more easily understood and more
meaningful for local consumers. By considering foreign tastes
and preferences, a company achieves a better marketing impact.
Post-it note pads made by 3M are marketed as Yellow Butterflies in France. Grey, an international advertising agency, worked
with Playtex-to creates appropriate names for Playtexs brassieres
in different languages. The result was Wow in England and
Traumbilgel (dream wire) in Germany. Translation can also
make a brand more meaningful. This approach is sometimes
mistaken for a single brand approach when in fact a new brand
is created. Close-Up (toothpaste) was translated as Klai-Chid
(literally meaning very close) in Thailand; the translation
retained the meaning and the logo of the brand as well as the
package design.
Fifth, a local brand can avoid a negative connotation. Pepsi
introduced a-11oncola line under the Patio name in America but
under the Mirinda name elsewhere because of the unpleasant
connotation of patio in Spanish.
Sixth, some MNCs acquire local brands for a quick market

penetration in order to save time, not to mention money, which
otherwise would be, needed to build the recognition for a new,
unknown brand in local markets. Renault would have been
foolish to abandon the AMC (American Motors) name after a
costly acquisition. Thus, Renault 9, for example, became AMC
Alliance in the United States. Chrysler subsequently bought
AMC from Renault, one reason being AMCs coveted Jeep
trademark.
Seventh, multiple brands may have to be used, not by design
but by necessity, because of legal complications. One problem is
the restrictions placed on the usage of certain words. Diet Coke
in countries that restrict the use of the word diet becomes Coke
Light. Antitrust problems can also dictate this strategy. Gillette,
after acquiring Braun A.G., a German firm, had to sign a
consent decree not to use the name in the U.S. market until
1985, The decree forced Braun to create the Eltron brand, which
had little success.
Eighth and perhaps the most compelling reason for creating
new local brands is because local firms may have already used
the names that multinational firms have been using elsewhere.
In such a case, to buy the right to use the name from a local
business can prove expensive. Unilever markets sure antiperspirant in the United Kingdom but had to test market the product
under the Trust name in the United States, where Sure is Procter
& Gambles deodorant trademark. In an interesting case,
Anheuser-Busch bought the American rights to the Budweiser
name and recipe from the brewer of Budweis in Czechoslovakia; Budejovicky Budvar Narodni Podnik, the Czech brewer,
holds the rights in Europe. Operating from the town of Ceske
Budejovice, known as Budweis before World War this brewer
claims exclusive rights to the Budweiser name in the United
Kingdom, France and several European countries. Courts have
ruled that both companies have the right to sell in the United
Kingdom, but Anheuser-Busch has to use the Busch name in
France and the corporate name in other parts of Europe.
Ninth, a local brand may have to be introduced because of price
control. This problem is especially acute in countries with
inflationary pressures. Price control is also one reason for the
growth of these called gray marketers, as the phenomenon
contributes to price variations among countries for the same
product. Thus instead of buying a locally produced product or
one from an authorized distributor/ importer, a local retailer
can buy exactly the same brand from wholesalers in countries
where prices are significantly lower. A manufacturer will have a
hard time prohibiting importation of gray market goods,
especially in EU countries where products are supposed to be
able to move freely. Parallel trading can be minimized by having
different national brands rather than just a worldwide brand
As mentioned earlier brand standardization is a common
strategy. One study of brand managers in firms operating in
Canada found that brand standardization was utilized to a
much higher degree than advertising standardization. The most
common combination is brand standardization and advertising
non-standardization. In other words, companies tend to brand
globally but advertise locally. Interestingly, although the
McDonalds logo is one of the most recognizable trademarks in
223
electronic recording products, whose design prominently

displays the Scotch name and a globelike logo.
the world, McDonalds has changed its advertising logo just for
Quebec, perhaps the only market in the world with this special
treatment. The most well-known logo in Quebec is JM. This is
a play on j aime which means I love in English.
reaches the point of being cumbersome or confusing. National

Bank Americard used to issue cards around the world under
twenty-two names before consolidating them all under the Visa
umbrella.
The strategy of using a worldwide brand is thus not superior

(or inferior) to using multiple local brands. Each strategy has its
merits and serves its own useful functions. This is where
managerial judgment comes in. Unilever, for example, considers
consumer responses to a particular brand mix. It uses an
international brand for
Another way of consolidating the brand franchise simply is to

drop weak brand Assuag-SSIH weeded out all but its most
prominent watch brands. Its Eterna brand, for example, was
never marketed in the United States, and that brand was
eventually sold to another company.
Brand consolidation on a global scale is a strategy that has been
hotly debated. As in the case of Scott Paper Co., the company
felt that the Scott name, just like Coca-Cola, should command
respect all over the world. 15 Also global branding would allow
Scott to use common advertising messages internationally while
saving costs. So the company has been phasing out local brand
names in its eighty national markets. Even Andrex, a top selling
bath tissue in England, will suffer the same fate, thus diluting
or destroying the goodwill that has been earned.
Marketin g Strategy
Yes
Market Segmentation and Multiple Brands
EXHIBIT A Branding Model for Decision Making
such products as detergents and personal products because
common factors among countries outweigh any differences.
Food products, however, are another story. Food markets are
much more complex because of variations in needs and
responses to different products. The southern half of Europe
mainly uses oil for cooking rather than margarine, white fats, or
butter. The French more than the Dutch consider butter to be
an appropriate cooking medium. German homemakers, when
compared to British homemakers, are more interested in health
and diet products. Soup is a lightweight precursor to the main
dish in Great Britain but can almost be a meal by itself in
Germany. Under such circumstances of preferential variations,
the potential for local brands is greatly enhanced. Exhibit
provides a branding model for decision-making.
Brand Consolidation
Frequently, it is either by accident or by lack-of coordination that
multiple local brands result. Despite the advantages offered by
the multiple-brand strategy, it may be desirable to consolidate
multiple brands under one brand when the number of labels
224
Life is Like a Box of Chocolates

Mars Inc. wants to standardize products not jus~il1 Europe
but worldwide. As a result, the company got-rid of several
highly successful European brand names. In the United
Kingdom its big-selling Marathon chocolate bar became
Snickers. Raider, Europes most successful chocolate biscuit,
became Twix which is the name used in the United States.
Bonitos in France became M&Ms with changes in color, coating,
and chocolate formula.
Mars, however, has not yet solved problem it encounters in its
effort to standardize Milky Way and Mars candy bars. These two
brands, while existing worldwide, refer to different things in
different countries. In Europe, Mars is a caramel and chocolate
bar which is called
Milky Way in the United States. The Milky Way which exists in
Europe does not have any caramel. Furthermore the U.S.
version of Mars has almonds.
When a marketer wants to change brands or consolidate them
under one brand in order to unify all marketing efforts, the
process on an international scale is complex and extremely
costly. Although a unified brand across frontiers provides cost
savings by eliminating duplication of design and artwork,
production, distribution, communications, and other related
issues, such a change is fraught with pitfalls and, if not well
planned and executed, can cause more problems than it solves.
Nestle uses a gradual evolutionary process in preparing its
European brands for 1992. Its package-design unification
involves having the Nestle name appear along with the local
brand. The Nestle name will be gradually enlarged over a period
of four or five years until it replaces the local brand names
entirely.
Another kind of problem presents itself when a brand i~ well
known but the corporate name is not, complicating communication for the company. In this situation, it is probably easier to
change the corporate name to fit the better-known brand, a
strategy used by Sony, Aprica, Olympus, and Amoco.
companies that specialize in creating brand and corporate names

and they use computer programs that can run prefixes, suffixes
and other word combinations.
Still, it must be pointed out that marketers often do not have
the luxury of picking and choosing names that they like. Nor is
it always feasible to conduct marketing research to investigate
the appropriateness of a name. In Brazil Philip Morris chose
the Galaxy name without marketing research because it happened to be one of the companys registered names. NUMMIs
use of the Nova trademark for cars produced jointly by Toyota
and General Motors was due in part to GMs ownership of the
Nova brand name.
Despite Nissans efforts and hundreds of millions of dollars

on the new name, unfortunately, many American consumers
thought that Nissan was a division of Toyota. Furthermore,
not recognizing the names of individual cars, they thought that
Pulsar was a popular watch brand and Maxima was an interestbearing checking account.
It is debatable whether the corporate name and the products
brand name should even be the same. When the name is the
same, a brand that performs poorly or gains notoriety through
bad publicity hurts the corporate image as well, as the images of
the corporation and the product are so intertwined. The strategy
is even riskier for fashion products because fashion comes and
goes. Using the same name, however, is a relatively safe strategy
and should work well if a firm has good quality control and the
reputation of its no fashion products has withstood the test of
time.
Brand Origin and Selection

Brand names can come from a variety of sources, such as from a
firms founders (e.g., Francois Michelin, Albert G. Spalding,
Pierre Cardin, and Yves St. Laurent), places (e.g., Budweiser),
letters-and numbers (e.g., IBM), and coined words (e.g.,
10rdache, a modified acronym for the three brothers Joseph,
Ralph, and Avi Nakash). Sometimes it is easier simply to
purchase an existing brand from another company, Hong Kong
Universal International bought Matchbox, a British toy
carmaker. W. Haking Enterprises, another Hong Kong company, acquired the Ansco name from GAF, and most Americans
do not realize that Hakings low-priced cameras are actually a
Hong Kong brand. North American Philips (NAP) bought the
Schick shaver trade name. Underscoring the value of this name.
Remington even filed a complaint alleging that the Schick name
enabled NAP to avoid spending $25 million needed to launch
new shaver to supplement the Norelco line.
Brand selection is far from being an exact science, a illustrated by
the origins of many successful brands. Gabrielle channel liked
the scent of the fifth sampled bottle in 1921. Feeling that 5 was
a pretty number, she named the perfume channel No. 5
Denmarks Lego Group, well known for its interlocking plastic
bricks, is the works fifth largest toy maker his company Lego
which is a combination of the Danish worked leg god, meaning
Play well.
More recently, brand selection has shifted away from being an
art and is becoming more of a science. There are several
225
Nissans name change in comparison, was risky because it

followed an opposite route. Nissans half-hearted entry into the
U.S. market led to the use of the Datsun name to avoid
embarrassment just in case the effort failed. But the company
was later unhappy that the proud corporate name was not as
widely recognized as its Datsun brand, which enjoyed an 85
percent recognition rate in the United States (compared to 10-15
percent for Nissan). The company decided to institute a
worldwide brand by phasing out Datsun and phasing in
Nissan. Some critics questioned the move because the change
cost Nissan $150 million. Furthermore, years of goodwill
gained from the Datsun name would be lost. To minimize this
problem, both Nissan and Datsun names appeared together at
first.
LESSON 23:
BRANDING AND PACKAGING DECISIONS
Brand Characteristics
Mondeo menad world in Italian
A good brand name should possess certain characteristics, and

such characteristics are thoroughly discussed in most advertising
and marketing textbooks. In essence, a brand should be short,
distinctive, easy to pronounce, and able to suggest product
benefits without negative connotations. In the international
arena these qualities are also relevant.
Mitsubishi, in Japanese, means three pebbles. The company changed it to

three diamonds whose design serves as the companys logo.
In selecting a brand name, a marketer should first find out

whether a brand name has any negative connotation in the
target market One company in the business of brand-name
selection felt that Probe was all inappropriate name for Fords
car, having an unpleasant gynecological reference. IS One reason
why Japans Daihatsu Motor Co. Ltd. did not succeed in the
United States may have to do with its name. According to
research, many American consumers thought that the company
was Korean, and it was a negative association.
An international brand name should reflect the desired product
image. Toward this end, consumer perception should be taken
into account. For instance, worldwide consumers usually
perceive French perfumes to be superior, and French-sounding
names for this kind of product may prove beneficial. Likewise,
good watches are perceived to be made in Switzerland, toiletries
in the United States, machinery and beer in Germany, and so
on. If appropriate, brands should reflect such images. Russian
sounding names can be used to position a vodka brand
positively. Smirnoff originated in the Soviet Union but has
been made in the United States for decades-a fact not known by
many Americans.
Marketing Strategy 1
Name Selection
Brand name selection, although an artistic process has become more
scientific. In the case of automobiles, brand names are carefully chosen so
they can con-note certain positive meanings.
Oldsmobile has changed some of its name plates. Calais has become
Achieva. Calais is a Seaport in north-ern France on the Strait of Dover.
Achieva, in contrast, can communicate the idea that the car is a
compact, dependable, nimble, and responsive automobile. Achieva is a
computer-generated name. Although- it does not really mean anything, it
connotes achieve-ment. Olds mobile initially called it the Achiever, which
implied somewhat negatively a young urban profes-sional who had made
it.
Just like Achieva, Acura is a neologism. Created by Name Lab, the
name suggests precision. One of Hondas desired hallmarks for the brand
was precise engineering.
Altima is a neologism. The word has no real meaning but hints at
ultimate or best.
Geo is a morpheme or the smallest meaningful language unit. It means
world in many languages.
226
The wives of the vice president and the top en-gineer of ford car product
development were born under the Taurus sign of the Zodiac. As a result,
Tau-rus was used as the project code name and in the end stayed as the
name of the car.
Wind star is a successor to Fords aero star mini-van. The company, while
wanting to keep a family re-lationship to the Aerostar, also wanted a
different name to tell buyers that Wind star was a new vehicle.
Marketers may want to consider foreign branding which is a

strategy of pronouncing or spelling a brand name in a foreign
language. Foreign branding, by triggering cultural stereotypes,
may influence product perceptions and attitudes. As shown in
one experimental study, a brand names French pronunciation
affects the perceived hedonism: of the products as well as
attitudes toward the brand name and the brand. Even with the
presence of direct sensory experience, French branding still
changes perceptions of a product.
One way of creating a desired image is to have a brand name
that is unique or distinctive. Exxon has this quality. Aprica, a
status-symbol stroller, is also unique in several respects. In
choosing the name, Kenzo Kassai, the companys owner,
wanted something cute like apple for his folding stroller.
During a trip to Italy, he found apri-an appropriate name for
something that opens and closes. As stroller in Japanese is said
as baby car, theca syllable (for car) is a natural ending. In
effect, Aprica is a blend of English, Italian, and Japanese,
meaning open to the sun.
A unique name often renders itself to graphic design possibilities, another desirable feature of a trademark. Exxon was
chosen because of its distinctiveness, usefulness in world
markets, and graphic design possibilities. After rejecting HotLine and Sound-About for not being appealing, Sony selected
Walkman because of the distinctive logotype with two legs
sticking out from the bottom of the letter A in walk.
An international product should have an international brand
name, and this name should be chosen with the international
market in mind. When possible, the name should suggest
significant benefits. Although Emery Air Freight ships everything large and small anywhere in the world, its name gave no
indication of this advantage. To overcome a secretarys fear of
shipping a letter to foreign countries with a carrier specializing in
freight, the corporate name was changed to Emery Worldwide.
Not wanting the trademark to because identified with the
United States, U.S. Rubber adopted Unifoyal to reflect its
diverse businesses around the world. The former French-born
chairman of Revlon viewed Amoroso as unsuitable for a
A Brief Guide to a Pronunciation of Romanized Chinese

There are four romanized Chinese consonants that cause
pronunciation problems. Here is a guide to pronouncing them
accurately:
c equals the ts of tsar or its; thus cai(finance) sounds like tsai
q equals the ch of China or child; thus Qin (a Dynasty) sounds
like chin
X equals, the sh of shine or sheet; thus xi (west) sounds like
shee
zh equals the J of Jim of jig; thus Zhang (a surname )
sounds like Jang
Chinese vowels are broader, and longer than American vowels
otherwise they are very close in Pronunciation, except for the
Chinese e as in the names Hebei and Henan. The Chinese e is
somewhat like the o of other.
Unless otherwise indicated, two Chinese vowels placed next to
one another are pronounced as one sound, i.e., as a diphthong.
The sister state of Illinois, Liaoning, is-a two syllable wordIyao-ning.
Chinese surnames come first. The given names are not hyphenated in modern Chinese. Thus Huang Zhirong (the Chinese
consul general) should be addressed as Mr. Huang.
Sometimes Chinese, especially those from Beijing, have a
tendency to add an r sound at the end of certain words. Dont
be confused by it. It is analogous to a Harvard r.
One way of making a brand -name more international is by
paying special attention to pronunciation. Many languages do
not have all the letters, and the English language is no exception. The Spanish alphabet does not include the letter w, and
the Italian language has no j, k, w, or y.
Stenographers can easily see why many American words are
misunderstood overseas because shorthand notations are based
on how a word is pronounced and not on the way it is spelled.
In general, any prefix, suffix or word containing such letters as
ph, gh, ch, and sh invites difficulty. Phoenix sewing machines
provide a good example-it is inconceivable to many foreign
consumers how the brand can be pronounced fe-nix and not
pe-nix or fo-nix. It is difficult to understand why the 0 and not
the e is silent in this case. Also, if the 0 is silent, why should it
be in there in the first place? By the same token, people in many
countries do not make any distinction, as far as pronunciation is
concerned, for the following pairs: v and w; z and s; c and z; and
ch and sh. A similar lack of distinction often exists with the trio
ofj, g, and y. The letter c in English words can be confusing
because it can be pronounced like an s, as in the words audience
and fragrance, or like a k, as in the words cat and cost. The letter
y also poses some problems because it can sound like an e at
one time and an i at another time. Consider the hair product
Brylcream. Foreign consumers may think that the I is silent and
that the y should sound like a long i. A simple test could have
easily revealed any pronunciation difficulties.
Brand Protection
The job of branding cannot be considered done just because a
name has been chosen. The brand must also be protected. The
first protective step is to obtain trademark registration. Because
of the cost involve, it may be neither practical nor desirable to
register the name in all countries especially in places where
demand seems weak, it is inexcusable, however, not to do so in
major markets.
There are international arrangements that simplify the registration process. The Paris Convention (International Convention
for the Protection of Industrial Property) is the most significant
multilateral agreement on trademark rights because it establishes
reciprocity, which allows a foreign trademark owner to obtain
the same protection in other convention-member countries as
in the owners home country, Although preventing discrimination against non-nationals, the degree of protection v1lries with
individual national laws. In the case of the Madrid Convention,
nationals of the participating countries can have simultaneous
trademark filing among all member countries. The Trademark
Registration Treaty (TRT) allows a company to file for trademark protection with the International Bureau of the World
Intellectual Property Organization (WIPO) without being
required, as in the case of the Madrid Agreement, to have a
proof home registration. Other treaties include the Central
American Arrangement and the African Intellectual Property
Organization (OAPI). The Arrangement of Nice [France]
Concerning the International Classification of Goods and
Services to Which Trade Marks Apply is the most widely used
trademark classification system. Adopted by the United States
and some sixty countries, the system has thirty four product
and seven service categories.
The United States has two registers. The Principal Register
provides federal protection, a benefit not provided for by the
Supplemental Register. A trademark owner who is unable to
place a mark on the Principal Register may be able to do so later
when the mark has acquired distinctiveness over the years. The
Supplemental Register is still useful for a U.S. marketer who
must obtain registration in the home country before becoming
eligible to do the same in host countries.
The courts have developed a hierarchy of registration eligibility.
Moving from highly protect able to unprotect able, these
categories are fanciful (Kodak), arbitrary (Camel), suggestive
(Eveready), descriptive (Ivory), and generic (aspirin). In general,
for a trademark to be eligible for registration, it must be
distinctive or, if not, must be capable of being distinctive.
Although a valid brand name suggest or imply a products
benefits, it cannot merely describe the fact or the product. A
suggestive mark is revisable, but a descriptive name is not legally
acceptable unless it has acquired distinctiveness through longcontinued exclusive use. Even if the descriptive mark might
somehow have been registered, the mark can still be cancelled
for lack of distinctiveness. Of course, it is not always easy to
distinguish a suggestive mark from a descriptive mark:
Wheedles, as lawn care product, may be either suggestive ordescriptive.
A generic term merely identifies the product rather than the
maker of that product. As such it receives no protection and
227
fragrance for the international audience; consequently, the name

was changed to Jontue.
cannot function as a trademark. Labatt, a Canadian brewer,

attempted to win U.S. trademark protection for the name ice
beer by claiming that it invented the manufacturing process,
Anheuser Busch Cos. Sued and was awarded $5 million in
punitive damage when it St. Louis jury ruled that ice beer was
not a trademark.
The policy of the U.S. government is to contest applications for
generic trademarks abroad (e.g., Wash-and-Wear or such foreign
variants as Lava y Listo). If allowed to be registered, such
trademarks could create significant problems in international
trade. A U.S. exporter, for example, will find it impossible to
use common product names in advertising abroad without the
risk of being sued for trademark infringement, or the exporter
may find that the goods are refused entry into a foreign
Country altogether.
Most countries do not require the display of a trademark in a
specific language or the translation of the trademark. Still, to be
registered, a foreign trademark may have to be written in a local
language in such a way as to give the equivalent pronunciation.
China requires a trademark to be displayed in Chinese characters.
Coca-Cola, depending on a group of Chinese characters used,
may have the right sound but the wrong -interpretations. The
original registered characters (Koo-Kah-koo-lah, when translated, mean either a wax-fattened mare or bite the wax
tadpole. The company then switched slightly to the new
char1icters to read Kah-koo-kah-lah, which translate. to may
the happy mouth rejoice.
Unlike patents, trademark registrations can be renewed indefinitely. To keep registrations in force, trademark owners are
required to pay an annual tax or maintenance fee in most
countries (though not in the United States). The technical
requirements must also be observed. Some countries (e.g.,
Australia) allow the fees to be paid by a foreign trademark
owner residing abroad or by the owner s representative /agent
in a third country. In other countries (e.g., Brazil), the fees can be
paid by only a local or domestically domiciled representative/
agent.
Politics may make registration and maintenance of a trademark
difficult. Most U.S. companies have lost their trademarks in
Vietnam because of invalidation of those trademark registrations that were obtained in South Vietnam before. ]975 and
were not reregistered in the Socialist Republic of Vietnam by
1982.24 While McDonalds registered its trademark in South
Africa in ]968, the company did not open a restaurant there due
to international economic sanctions. According to the South
African law, a foreign company could lose its right by not using
the trademark for five years.
As a result, when McDonalds finally entered the market in
1995, a local court ruled that the company did not have an
exclusive right to its various trademarks. As a matter of fact,
Dax Properties, which opened its own McDonalds hamburger
outlet there selling such things as Little Mac, even tried to bar
the real McDonalds from using the name. Under international
pressure, South Africa passed a new law in 1995 to conform to
international law and to offer protection to world-recognized
names.
228
Its the Law1

Just Do it
The Nike name was first registered in Spain by a Barcelona sock maker
who produced knitted wear during the 1936 39 Spanish Civil War. The
trademark is a photographic negative of the headless Winged Victory of
Samothrace statue in the louver museum. Although the sock maker
stopped production long age, he kept the trademark which was subsequently sold to a Spanish attorney. Spain allows a name to be registered
and renewed even without any production the registration applies only to
sports apparel, not shoes.
In 1990, Nike Inc., the shoemaker was given a registration for its name
and swoosh symbol. The company planned to showcase to showcase its new
line of clothing in Barcelona. Two Spanish courts, however, upheld the
lawyers earlier trademark. Nike argued that the ban did not apply to the
outfits worn by the American and Algerian Track and field teams which
were paid millions of dollars to wear the Nike name. Finally spans
constitutional court, the highest Spanish appeals court, rejected Nikes
appeal, court, rejected Nikes appeal, it thus cannot sell or advertise its
sports apparel in Spains, athletes were not allowed to wear the Nike
name, Nike figured that it suffered losses of $ 20 million in Spain and
several times that amount world wide.
Registration by itself does not offer automatic or complete

protection. Other legal requirements must be met in order to
maintain copyright. Use is a universal requirement. In China,
publication, advertising, and exhibiting of a product with the
trademark all constitute use. To establish use in most countries,
a manufacturer must sell or make that product in the intended
market.
The legal procedure to acquire and maintain a trademark varies
from country to country. Whereas some countries recognize
registration but not prior use, other countries do exactly the
opposite. In most countries, a company can register a mark
subject to cancellation if that mark is not used or continued to
be used within a reasonable period of time. The failure to
register, even with actual prior use, may force the company to
forfeit its rights to another person who registers the same mark
later but before anybody else. The first user can be held for
ransom this way.
Going back as far as the 1870s, trademark rights in the United
States were based on the no trade, no trademark premise.
Until recently, the U.S. Patent and Trademark Office was
practically alone in the world in requiring a potential mark owner
to put the trademark into interstate or foreign commercial use
first before it could even be registered. Registration in the
United States was merely a formality because registration was
optional. The problem with this practice is that more than one
company may invest in an identical mark, not knowing that
there are legal conflicts with others using or working on the
identical or similar mark. A U.S. firm thus could not be certain
that a proposed mark would still be available for registration
when the product reached the consumer years after it was
conceived. To solve the problem, American business has
traditionally relied on token use by making a small-scale
shipment of the product for purposes of filing a trademark
The Trademark Acrof-1946 (the-Lanhan Act) has been updated,

and several changes have been made. One change involves
intent-to-use trademark applications; the change permits
companies to file an application based on projected future use.
Now a declaration of a bona fide intent to use the mark in
commerce is sufficient. A trademark registration is subsequently
issued-when the applications files a statement showing evidence
of actual use of the mark in commerce. To demonstrate use of
the mark, specimens the form of containers, labels, tags, or
displays associated with the goods must be filed. There is no
penalty for reserving names that are never actually used. The
second change is the constructive-use provision. For goods or
services specified in the Principal Registration, an applicant
receives a nationwide priority effect as though the1applicarit had
used the mark. Throughout the nation as of the filing date.
The definition of use of the mark has been changed to
require that use be in the ordinary- course of trade, and token
use is prohibited. To reserve the intent to use- application
becomes the sole avenue. Finally, the term of federal registration
has been reduced from twenty to ten years to clear out trademarks no longer used.
Although a single use of a mark may be adequate to register the
mark, a company must exploit the mark commercially in good
faith to prevent the loss of it. The rationale is to prevent a
company from abusing the law to its advantage when the owner
has no intention of using the trademark other than to bar
potential competitors with genuine interests from utilizing a
Competitive tool. An example is Snob perfume. a name owned
in France by Le Galion, a French company, and in the United
States by Jean Patou an American company. Le Galion was able
to challenge Patous rights successfully because Patou (1) sold
only eighty-nine bottles of Snob perfume in twenty-one years,
(2) never supported the product with promotion, and (3) made
only $100 in gross profit. Thus, Patou was suspected of
registering the name just to bar a potential competitor from
entering the market.
Roquefort cheese, and Champagne are proprietary names in

France but generic names in the United States. The reverse is
true of Ping-Pong, a U.S. registered trademark that is a generic
name in China for table tennis. In Japan, there is no word for
vulcanized rubber, and the Goodyear name is used to identify
this product. Cyanamid has had to fight to keep Formica from
denoting all plastic laminate or laminated wood. Bayers loss of
the Aspirin trademark in the United States was due partly to the
anti-German sentiment during World War II and partly to its
failure to create a generic word for the product, whose chemical
name is acetylsalicylic acid. Bayer would have been on more solid
legal ground if it had established a generic term for household
use (e.g., headache tablet or pain reliever tablet).
To avoid this problem of a brand. name becoming a generic
name, a firm must never use the brand name in a generic sense
(i.e., using it as a verb or adjective to denote the product).
Promotional materials should reflect the proper usage, and the
public should be informed accordingly. Willy Motors always
emphasizes that Jeep is a trademark, and uses an advertisement
to inform consumers not to use Jeep as an adjective(e.g.
jeeplike, jeepy or jeep-type), a verb (e.g.. jeep around or go
jeeping), a plural (e.g. jeeps) or a generic without the capital J. In
the Philippines, however, Jeep has become, a generic: name, and
people there use privately owned small buses mown as jeepnies
for transportation Jeep is now a registered trademark of
Chrysler Corporation.
It is not legally sound to combine trademarks. It may seem
remote that Honda will have trouble, with its Honda Accord
and Honda Civic marks but the fact remains that the second
mark (Accord, Civic) is in jeopardy through inference that it is
the products generic name. The public may thus assume that
manufacturers other than Honda also make Accord and Civic
cars.
The quickest way to lose a trademark is by not using it. A failure

to use a registered trademark for three years terminates all rights
in China. In the case of South Korea, nonuse after a period of
one year is grounds for cancellation of registrations. In Central
and South America, due to inflation, currency devaluations, and
political uncertainty, a manufacturer may find it difficult to
maintain operations there. However, the company risks losing
its trademark if it stops the business activities. It is thus wise to
consider some temporary licensing agreements with local firms
until the situation improves. By doing so, brand awareness and
trademark ownership are sustained. This is exactly what some
international firms did while being forced to retreat from South
Africa at the height of the antiapartheid movement.
Tabasco provides a good illustration of the various legal issues

that have been discussed. Unlike Worcestershire sauce and soy
sauce, Tabasco is a properly registered trademark. It is the name
of a river and a state of southern Mexico. One may question
how a geographical name could ever have been accepted for
registration, as the name is not distinctive. The answer is that
the name was capable of being distinctive and did become
distinctive because it has been used continuously and exclusively
by the manufacturer for a long time. Thus, the name has
become associated with this particular company. Furthermore,
Tabasco is the official botanical name of the hot red peppers,
but those peppers were actually named for the sauce (i.e.,
product) and not the other way around. Tabasco is aware that
consumers might use the brand to denote the product (i.e., hot
sauce) rather than the maker of the product. It has thus hired
two legal firms to police the world for any misappropriation of
the trademark. Its vigorous enforcement enabled it to defeat B.
F. Trappey Sonss legal bid for the right to use the word.
Another caveat is to make sure that the brand does not become
so generic that it is identified with the product itself. A loss of
trademark can occur if the name becomes part of the language;
that is, when members of the consuming public use the brand
name to denote the product or its common function rather
than the producer of the product. Yo-yo (a foreign trademark),
To hold the legal rights to a registered trademark is one thing,

but to prevent others from illegally using it through counterfeiting is another matter altogether:. In fact, counterfeiters, though
acknowledging the illegality of the activity, may see nothing
morally wrong with it. In China, the basic cultural values
relevant to counterfeiting are neutral-it is not a violation to copy
229
application, even though the product might not be ready for

full-scale commercial sale for years.
someones ideas. Great artists works for example, are copied as

a sign of respect.
Its the Law 2

Professional Bootlegging
Apple House Music, an Australian firm, is a professional bootlegger
unlike other bootleggers who make and sell bogus goods and then take the
money and run before getting caught. Apple House Music is quite open
about its business plans~ It has announced that it would release
unauthorized recordings of live performances by stars such as Michael
Jackson, Madonna, Prince, Bruce Springs teen, and Elton John. In the
process, Apple House would deprive legitimate companies of millions of
dollars.
Unlike over producers of unauthorized material, Apple House has
obtained expert legal advice. The companys live recordings were made in
countries such as Bulgaria where artists have gone and willingly given live
performances even though they were aware that they have no protection
under international conventions. Apple House told the courts that it
planned to put a disclaimer on its records stating this live recording and
its release has not been authorized by the artist or his recording company
and the sound recording may not be of the same quality as ,an authorized
release.
Sony unsuccessfully sought an injunction against Apple House Music in
Federal Court. But the full bench of the court ruled that artists had no
protection against unauthorized recordings of their live performances made
before 1992 when Australia amended the Copyright Act.
Source: Aussie Boodeg Record Has Sony in II Spin, The Nation, 2
October 1993.
To prevent the importation into the United States of counterfeits and, to a lesser extent, gray market goods, a trademark
owner whose mark is accepted for the Principal Register can
raster a mark with the U.S. Customs Service for the purpose of
preventing entry of goods bearing an infringing mark. The
Customs Service distinguishes colorable imitation from
counterfeit trademark. A colorable imitation is a mark so similar
as to be confused with a registered mark, whereas a counterfeit
trade mark is basically indistinguishable from a registered
trademark. Colorable imitations are treated more leniently in
that can still gains entry as long as the objectionable mark is
removed. But in the case of counterfeits, the- Customs Reform
and Simplification act of 1978 allows the seizure as well as
forfeiture to the government of any articles bearing counterfeit
trademark.
Packaging: Functions and Criteria

Much like the brand name packaging is another integral part of
a product. Packaging serves two primary purposes: functional
and promotional. First and foremost, a package must be
functional in the sense that it is capable of protecting the
product at minimum cost.
If a product is not manufactured locally and has to be exported
to another country, extra protection is needed to compensate for
the time and distance involved. A countrys adverse environment should also be taken into account. When moisture is a
problem, a company may have to wrap pills in foil or put food
230
in tin boxes or vacuum-sealed cans. Still, the type of package

chosen must be economical. In Mexico, where most consumers
cannot afford to buy detergents in large packages, detergent
suppliers found it necessary to use plastic bags for small
packages because cardboard would be too expensive for that
purpose.
For most packaging applications, marketers should keep in
mind that foreign consumers are more concerned with the
functional aspect of a package than they are with convenience.
As such, there is usually no reason to offer the great variety of
package sizes or styles demanded by Americans. Plastic and
throw-away bottles are regarded as being wasteful, especially in
LDCs, where the labor cost for handling returnable is modest.
Non-American consumers prefer a package to have secondary
functions. A tin box or a glass bottle can be used after the
product content is gone to store something else. Empty glass
containers can be sold by consumers to recoup a part of the
purchase price.
From the marketing standpoint, the promotional function of
packaging is just as critical as the functional aspect. To satisfy the
Japanese preference for beautiful packaging, Avon upgraded its
inexpensive plastic packaging to crystalline glass. Similarly, BSR
packs its product into two cartons, one for shipping and one
for point-of purchase display, because Japanese buyers want a
carton to be in top condition. The successful campaign for
Baileys Irish Cream in the United States included a fancy gold
foil box package that promotes this whiskey-based drinks
upscale image. In any case, packaging does not have to be dull.
Novel shapes and designs can be used to stimulate interest and
create excitement.
Mandatory Package Modification

A package change may be either mandatory or at the discretion
of the marketer. A mandatory change is usually necessitated by
government regulations. Sometimes, it is for safety and other
reasons. Sometimes, packaging regulations are designed more
for protection against imports than for consumer protection.
Several countries require bilinguality (e.g., French and English in
Canada and French and Flemish in Belgium). This requirement
may force the manufacturer to increase package size or shorten
messages and product name, as a bilingual package must have
twice the space for copy communications. In some cases,
modification is dictated by mechanical or technical difficulties,
such as the unavailability of certain typographic fonts or good
advertising typographers:
In many cases, packaging and labeling are highway related.
Packages may be required to describe contents, quantity,
manufacturers name and address, and so on in letters of
designated sizes. Any pictorial illustration that is used should
not be misleading. In Singapore, Certain foods must be labeled
to conform to defined standards. When terms, are used, thatimply added vitamins or minerals (e.g., enriched, fortified,
vitaminized), packages must show the quantities of vitamins or
minerals added per metric unit. In addition, if the product is
hazardous m. any way, marketers should adopt the United
Nations recommendations for the labeling and packaging of
hazardous materials.
As discussed in a previous chapter, countries different

measurel1ent systems may necessitate some form of product
modification, and necessity applies to packaging as well.
Products, toiletries included, cannot be sold in Australia in
ounces. The Australian regulations require products to be sold
in metric numbers, in increments of 25 mm. In Germany,
liquid products must be bottled or packaged in standard metric
sizes. Interestingly, the United States, a non-metric nation, has
the same requirement for liquor products.
Optional Package Modification

Optional modification of package, although not absolutely
necessary, may have to be undertaken for marketing impact or
for facilitating marketing activities. Through accidents and
history, users in many countries have grown accustomed to
particular types of packages. Mayonnaise, cheese, and mustard
come in tubes in Europe, but mustard is sold in jars in the
United States. Orange bottles are popular in the Netherlands.
While non-Dutch beer drinkers all over the world readily
recognize a green Heineken bottle; the domestic Heineken beer
comes in a brown bottle. Ironically, because of a strike at home,
Heineken was forced to import 1.8 million gallons at one time
from some of its ninety breweries worldwide.
In selecting or modifying a package, a marketer should consider
local conditions related to purchasing habits. Products conventionally sold in packs in the United States are not necessarily
sold that way elsewhere and may require further bulk breaking.
This phenomenon is in part the result of lower income levels
overseas and in part the result of a lack of unit pricing, which
makes it difficult for buyers to see any savings derived from the
purchase of a bigger package. Foreign consumers may, desire to
buy one bottle of beer or soft drink at a time instead of buying
a six-pack or eight pack. Likewise, one cigarette, not the whole
pack, may be bought in a purchase transaction.
Cultural Dimension 1
Will the Euroconsumers Please Stand Up?
In terms of consumer behavior, European countries are both similar and
different.
On the one hand, marketers have been pushing to -develop Europe wide
brands. On the other hand, many still believe that. It is essential to adapt
products to local tastes. AS in the case of Sara Lees Douwe Egberts
coffee while the coffee bens are toasted less in Germany and the
Netherlands, they are ground to the consistency of talcum powder in
Greece.
Although Rotterdam is only about thirty miles from Belgium, Unilevers

tomato soup there is differ-ent from the one sold in Brussels. The company
uses another recipe for Germany, while France has yet an-other recipe.
These variations exist even though many of the soups are made in the
same plant.
Procter & Gamble has only one formula, one brand name, and one
package for its fabric softener. For historical reasons, Unilever sold its
Teddy Bear or Snuggle fabric softener in ten European countries while
selling Comfort (a creamier, more expensive version) in seven other
countries. The company wanted to merge the two in order to cut production
and mar-keting costs. Its first step was to introduce identical bottles. In
1993: But since it does not want to upset loyal consumers, Comfort is
still a thicker liquid with a mother and child on its label, while Teddy
Bear fea-tures a bear. There are other complications. German consumers
do not mind paying a premium price for a product that is gentle on lakes
and rivers. Spaniards, on the other hand, want cheaper products that can
get shirts white and soft. In the case of Greeks they want smaller
packages so that they can hold down the cost of each store visit.
In addition to conditions of use, other cultural factors should

be taken into consideration because such factors often determine and influence consumer preference. Although the UHT
(ultra-high temperature) process for packaging milk and juices in
un refrigerated cartons has long been popular in Europe, it took
quite a while for American consumers who were accustomed to
fresh products to start accepting aseptic packaging.
Symbols and colors of packages may have to be changed to be
consistent with cultural norms. If packages are offensive, they
must be made more acceptable if the product is to be marketed
successfully. For example, the controversial Jovan packages, with
their sexual connotations, can prove to be too - suggestive in
some countries. In Japan, because manufacturers of condoms
have female customers in mind, packaging tends to be cute.
One brand, for example, has a pink box with two dancing pigs
and the words BuBu Friend. BuBu is the Japanese equivalent of oink-oink.
Sometimes, it is difficult to tell whether package modification is
mandatory or optional. Take the case of Germanys green dot
packaging laws. Since the early 1990s, Germany has required
manufacturers, distributors, and retailers to take back sales
packaging (used packaging materials) either directly from the
consumers domicile or from designated local collection points.
Those manufacturers who participate in the green dot
program are exempted from this requirement. The green dot is
the symbol which has been adopted by the Duales System
Deutschland GmbH (DSD Dual System of Germany), a
corporation established in 1990, with over 400 participating
companies (shareholders). The DSD collects a fee from the
participating manufacturers for the right to display the green dot
symbol on the products. The revenue is used to finance local
packaging-waste collection and recycling programs. The green
dot tells consumers that such packaging may not be returned to
the retailer but should be consigned to especially dedicated
collection containers or be taken to the local recycling center. The
symbols also indicate that the packaging will be recycled or
reused rather than dumped or incinerated. While goods
without the green dot are not illegal they are unlikely to be
231
Exporters of textile products must conform to countries

varying regulations. Spain has specific and extensive requirements concerning fiber content, labeling, and packaging. In
addition to its flammability requirements, Swedens labeling
regulations include size, material, care, and origin. Venezuela
requires all packaged goods to be labeled in metric units while
specifically prohibiting dual labeling to show both metric and
non metric units. Germany wants the description of fiber
content to be in German, but labeling for Denmark must be in
Danish or kindred. In the case of France care labeling (if used)
must meet an International Standardization Organization
(ISO) directive.
accepted by the market-retailers, wholesalers, and importers. The

DSD estimates that over ten billion units currently being
marketed in Germany carry the green dot.
One helpful sign that should deduce packaging confusion is the
European Unions standardization- attempt Changes in the EU
food packaging requirements should allow foreign food
manufacturers and packaging agents to follow one unified EU
regulation. Although size requirements differ by product, the
EU has harmonized the sizes of sealed packages and containers.
The uniformity assists consumers in comparing prices for the
same quantity, thus abolishing the need for unit pricing. EU
packaging regulations also help to promote conservation by
decreasing the amount of paper utilized in packaging.
Because there is no EU-wide general product-labeling directive,
manufacturers have to label their products differently for each
country, thus increasing expenses. There is also a question about
language requirements. The EU suggests that most products
should have at least two EU official languages so as to increase
the marketability of the products. In terms of what is to be
placed on the product label, EU officials -recommend the
following: (1) the name of the product, (2) a name of the
manufacturer or distributor within the marketing country, (3)
any care conditions, (4) special storage conditions, (5) country of
origin, especially where labels might mislead, (6) metric requirements and (7) list of chemicals/ingredients included.
Conclusion
A product is a bundle of utilities, and the brand and package are
part of this bundle. There is nothing unusual about consumers reliance on brand names as a guide to product quality. As
shown by the perfume industry, the mystique of a brand name
may be so strong as to overshadow the products physical
attributes. When practical and well executed, branding allows a
commodity to be transformed into a product. In doing so with
the aid of product differentiation, brand loyalty is created, and
the product can command a premium price.
Branding decisions involve more than merely deciding whether
a product should be branded or not. Branding entails other
managerial decisions. A manufacturer must decide whether to
use its own brand or that of its dealer on its product. A
marketer must also determine whether to use a single brand for
maximum impact or multiple brands to satisfy the different
segments and markets more precisely. Regardless of the
number of brands used, each brand name must be selected
carefully with the international market in mind. Once selected,
the brand name must be protected through registration, and
other measures should be taken to prevent any infringement on
that name.
Like the brand name, which may have to be varied from one
country to another, packaging should be changed when needed.
Mandatory modification of packaging should not be considered
a problem because the marketer has no choice in the matter-if a
marketer wants to market a product, the marketer must
conform to the countrys stated packaging requirements.
Unilever, for instance, has to conform to the French requirement of selling cube-shaped packs, not rectangular packs, of
margarine. Its descriptions for mayonnaise and-salad dressing
also have to vary from country to country.
232
Optional or discretionary packaging modification, in contrast, is

a more controllable variable within a marketers marketing mix.
Usually, discretionary packaging is moreJe1ated-to product
promotion, and it can take on the same importance as mandatory packaging. Soft-drink containers are a good
example-of-how packaging requirements. must be observed. In
many countries bottles are manufactured in metric sizes because
of government requirements. And the containers must be
made of glass because consumers abroad regard plastic throwaway bottles as being wasteful. Therefore, both mandatory and
optional packaging changes should be considered at the same
time.
Questions
I. What are the requirements that must be met so that a
commodity can effectively be transformed into a branded
product?
2. Explain the least dependent person hypothesis and its
branding implications.
3. When is it appropriate to use multiple brands in (a) the same
market and (b) several markets/countries?
4. What are the characteristics of a good international brand
name?
5. Explain these legal requirements related to branding: (a)
registration, (b) registration eligibility, (c) use, (d) renewal,
and (e) generic trademark.
6. Distinguish colorable imitation from counterfeit trademark.
7. Cite the factors that may force a company to modify its
package for overseas markets. Discuss both mandatory and
optional modification.
Discussion Assignments and Minicases

1. Should U.S. farmers brand their exported commodities (e.g.,
soybean, corn, beef)?
2. Some U.S. retailers (e.g.. Sears) and manufacturers (e.g.,
General Motors) place their trademarks on products actually
made by foreign suppliers. Discuss the rationale for these
actions by these U.S. firms and foreign manufacturers.
3. Discuss how certain English letters, prefixes, suffixes,
syllables, or words create pronunciation difficulties for those
whose native language is not English.
4. Is Hyundai a good name to use for an international brand?
On what do you base your evaluation?
5. Go to the soft-drink section of a supermarket. How many
different types of soft-drink packages are there (in terms of
size, form, and so on.)? Should any of them be modified
for overseas markets?
CASE 1
Majorica S.A. versus R. H. Macy
Majorca is a place well known for its pearls. One Spanish firm,
Majorica S.A, has used Majorica, an ancient name for Majorca,
since 1954 as its trade name as well as a brand name to describe
its pearls.
Majorica was alarmed to lean that R. H. Macy, a major U.S.
department store chain, was selling Majorca-labeled pearls that
were made by Hobe Cie. Ltd., a competitor of Majorica S.A
Contacts with Macy produced no fruitful results in resolving the

difficulty. Macy felt that it had a right to use the name in
question because Majorca was the name of an island and
because the pearls in question were indeed made there.
Subsequently, Majorica filed a lawsuit in a federal court, asking
for a judgment to stop Macy from using the name. Majorica
S.A. cited trademark infringement as the reason for seeking
relief. It argued that Macys action caused confusion among
consumers as well as erosion of goodwill.
Questions
1. Is Majorica a valid brand name or just a generic trademark?
Does the fact that it is the name of a place (i.e., island) affect
the registration eligibility and legal protection of Majorica
S.A?
2. Was Macys action legally defensible? Assuming that you are a
federal court judge, do you think that Macys use of the
name could cause consumer confusion Do you think that
Macys labeling constituted trademark infringement? Can the
branding/labeling be somehow modified to prevent
consumer confusion?
233
LESSON 24:
MARKETING INDUSTRIAL PRODUCTS
The learning Objectives from this lesson would be the following:
The importance of derived demand in industrial markets.
The relationship between a country environment and its

industrial market needs.
How demand is affected by technology.
Characteristics of an industrial product.
The importance of ISO 9000 certification.
The importance of relationship marketing and industrial

products.
The importance of trade shows in promoting industrial

goods.
The growth of business services and nuances of their

marketing.
Global Perspective
How Far Is Up for Intel?
Fortunes cover story, Intel, Andy Groves amazing profit
machine and his plan for five more years of explosive growth
is capped only by times man of the year story, Intels and
Grove, his Microchips have changed the world and its
economy. 1997 was the eighth consecutive year of record,
revenue ($25.1 billion) and earnings ($6.5 billion) for the
company grove helped found. Yet at the beginning of 1998, the
real question was will the world change Intel? Judging from
Intel own forecasts for a flat first quarter in 1998 chairman of
the board Grove and his associates were concerned that the
financial meltdown in Asian markets would affect Intels plans
for five more years of explosive growth. some 30 percent of
the firms record 1997 revenues had come from Asian markets.
Indeed, one pundit has earlier predicted, I see no clear
technology threats. The biggest long term threat to Intel is that
the market growth slows others warned theres some thing
wrong out there computer industry overcapacity.
Actually Intel had an even longer list of threats all posted as a
disclaimer to its published forecast:
Other factors that could cause actual results to differ materially
are the following business and economic conditions, and
growth in the computing industry in various geographic
regions; changes in customer order patterns, including changes
in customer and channel inventory levels and seasonal PC
buying patterns: changes in the mixes of microprocessor types
and speeds, motherboards, purchased components and other
products; competitive factors, such as rival chip architectures,
and manufacturing technologies, competing software
compatible micro processors and acceptance of new products
in specific market segments; pricing pressures; changes in end
users preferences; risk of inventory obsolescence and variations
in inventory valuation; timing of software industry product
introductions; continued success in technological advances,
234
including development, implementation and initial production

of new strategic products and processes in a cost effective
manner; execution of manufacturing ramp; excess storage of
manufacturing capacity; the ability to successfully integrate any
acquired businesses, enter new market segments and manage
growth of such business; unanticipated costs or other adverse
effects associated with processors and other products containing
errata; risks associated with foreign operations; litigation
involving intellectual property and consumer issues; and other
risk factors listed from time to time in the companys SEC
reports.
Times Man of the year had a lot to worry about most of all
that industrial market booms are always followed by busts. Will
the rise truly last five more years?
The issues of standardization versus adaptation have less relevancy to marketing industrial goods than consumer goods since
there are more similari-ties in marketing industrial products
across country markets than there are differences. The inherent
nature of industrial goods and the sameness in motives and
behavior among industrial goods customers create a market
where product and marketing mix standardization are commonplace. Photocopy machines are sold in Belarus for the same
reasons as in the United States: to make photocopies: Some
minor modification may be necessary to accommodate different
electrical power supplies or paper size but, basi-cally, photocopy
machines are standardized across markets, as are the vast
majority of industrial goods. For industrial products that are
basically custom made (specialized steel, customized machine
tools, and so on), adaptation takes place for domestic as well as
foreign markets.
Two basic factors account for greater market similarities among
industrial goods customers than among consumer goods
customers. First is the inherent nature of the product: industrial
services are used in the process of creating other goods and
services; consumer goods are in their final form and are
consumed by individuals. And second, the motive or intent of
the user differs: industrial consumers are seeking profit, whereas
the ultimate consumer is seeking satisfaction. These factors are
manifest in specific buy-ing patterns and demand characteristics,
and in a special emphasis on relationship mar-keting as a
competitive tool. Whether a company is marketing at home or
abroad, the differences between industrial and consumer
markets merit special consideration.
Along with industrial goods, services are a highly competitive
growth market seek-ing quality and value. Manufactured
products generally come to mind when we think of international trade. Yet the most rapidly growing sector of U.S.
international trade today consists of business and consumer
services-accounting, advertising, banking, consult-ing, construction, hotels, insurance, law, transportation, travel, television
programs, and movies sold by U.S. firms in global markets. The
The Volatility of Industrial Demand
results in a complete shutdown of demand for shower-stall

making machines. For Boe-ing circa 1998, Asian financial
problems directly caused reductions in air travel (both vacation
and commercial) to and within the region, which in turn caused
cancellations of orders for aircraft. Indeed, the commercial
aircraft industry has always been and will continue to be one of
the most volatile of all.
There are numerous reasons why consumer products firms

Exhibits 13 1 Derived Demand Example
market internationally-exposure to more
Time
Consumer demand for
Number of Machines in use
Demand for the machines
demanding customers,
Period Premolded Fiberglass shower to produce the shower stalls
keeping up with the
stalls
competition, extending
Year
Previous Current
Net
Previous Current
Net
Replacement New Total
year
year
change
year
year
change
prod-uct life cycles, growing
sales and profits, to name a
1
100000
100000
-500
500
-50
-50
few. For firms producing
2
10000
110000 +10000
500
550
+50
50
50
100
products and services for
3
110000
115000
+5000
550
575
+25
50
25
75
industrial markets there is
4
115000
118000
+3000
575
590
+15
50
15
65
an additional crucial reason
5
118000
100000
-18000
590
500
-90
-40
- 40
6
100000
100000
-500
500
-10
-10
for venturing abroad:
dampening the natural
volatility of industrial
markets. Indeed, perhaps the sin-gle most important difference
Crossing Borders 1
between consumer and industrial marketing is the huge, cyclical
Your Hoses Are a Threat to Public Security!
swings in demand inherent in the latter. It is true that demand
Universal standards have made life miserable for Evan Segal. He
for consumer durables such as cars, furniture, or home computis president of Dor-mont Manufacturing Co., which makes hoses
ers can be quite volatile. In industrial markets, however, two
that hook up deep-fat fryers and the like to gas outlets and which
other factors come into play that exacerbate both the ups and
once sold these hoses throughout Europe. But one day in 1989, one
downs in demand: (1) professional buyers tend to act in
of his top customers, Frymaster Corp. of Shreveport, LA, called
concert; and (2) derived de-mand accelerates changes in markets.
Purchasing agents at large personal computer manufacturers
such as IBM, Apple, Acer, Samsung, and Toshiba are responsible for obtaining component parts for their firms as cheaply as
possible and in a timely manner. They monitor demand for
PCs and prices of components like microprocessors or disk
drives, and changes in either cus-tomer markets or supplier
prices directly affect their ordering. Declines in PC demand or
supplier prices can cause these professionals to slam on the
brakes in their buying; in the latter case they wait for further
price cuts. And because the purchasing agents at all the PC
companies, here and abroad are monitoring the same data, they
all brake (or accelerate) simultaneously. Consumers do monitor
markets as well, but not nearly to the same degree. Purchases of
clothing and cars tends to be steadier.
For managers selling capital equipment and big-ticket industrial
services, under-standing the concept of derived demand is
absolutely fundamental to their success. De-rived demand can be
defined as demand dependent on another source. Thus, the
demand for Boeing 747s is derived from the worldwide
consumer demand for air travel services, and the demand for
Fluor Daniels global construction and engineering services to
de-sign and build oil refineries in China is derived from Chinese
consumers demands for gasoline. Minor changes in consumer
demand mean major changes in the related indus-trial demand.
In the example in Exhibit 13-1, a 10 percent increase in consumer de-mand for shower stalls in year 2 translates into a 100
percent increase in demand for the machines to make shower
stalls. The 15 percent decline in consumer demand in year 5
to alert him that McDonalds was being told it could no longer use
his hoses in its British restaurants. Similar problems popped up
elsewhere, including Euro-Disney outside Paris; shortly be-fore the
theme park opened, French inspectors demanded that Dormonts
hoses be re-placed with French-approved equipment.
The disparate national standards stemmed from the fact that the
hoses are crucial to safe operation of gas appliances and thus fall
under the product-safety provisions allow-ing each country to set up
its own standards. . . . In Dormonts case, the specifications were
written by committees often dominated by domestic producers. They
spell out minutiae of each countrys acceptable gas hose design-such
as the color of plastic coating or how the end pieces should be
attached to the rest of the hose.
Mr. Segal thought he had made a major breakthrough when the
British Standards In-stitute, one of the European agencies that test
equipment and hand out approvals, issued Dormont a certificate
authorizing the company to paste a seal of approval on its prod-ucts
signifying that the hoses conformed with European Union rules for
gas appliances, enabling the company to sell them throughout the
region.
But the victory was short-lived. A miffed German competitor fired
off a formal com-plaint to the European Commission, the EUs
Brussels-based executive body. Commis-sion officials familiar with
the case say the rival argued that the British office erred be-cause
hoses are not really part of a gas appliance. The approval was
withdrawn.
235
intangibility of services creates a set of unique problems to

which the service provider must respond. A further complication is a lack of uniform laws that regulate market entry.
Protectionism, while prevalent for industrial goods, can be
much more pronounced for the service provider.
ISO 9000 Certification: An International

Standard of Quality
With quality becoming the cornerstone of global competition,
companies are requiring assurance of standard conformance
from suppliers just as their customers are requiring the same
from them.
ISO 9000s, a series of five international industrial standards
(ISO 9000-9004) orig-inally designed by the International
Organization for Standardization in Geneva to meet the need
for product quality assurances in purchasing agreements, are
becoming a qual-ity assurance certification program that has
competitive and legal ramifications when doing business in the
European Union and elsewhere.
ISO 9000 refers to the registration and certification of a
manufacturers quality sys-tem. It is a certification of the
existence of a quality control system a company has in place to
ensure it can meet published quality standards. ISO 9000
standards do not apply to specific products. They relate to
generic system standards that enable a com-pany, through a mix
of internal and external audits, to provide assurance that it has a
quality control system. It is a certification of the production
process only, and does not guarantee a manufacturer produces a
quality product. The series describes three qual-ity system
models, defines quality concepts, and gives guidelines for using
international standards in quality systems.
To receive ISO 9000 certification a company requests a certifying
body (a third party authorized to provide an ISO 9000 audit) to
conduct a registration assessment- that is, an audit of the key
business processes of a company. The assessor will ask questions about everything from blueprints to sales calls to filing.
Does the supplier meet promised delivery dates? And is there
evidence of customer satisfaction? Are two of the questions
asked and the issues explored. The object is to develop a
comprehensive plan to ensure minute details are not overlooked. The assessor helps management create a quality manual,
which will be made available to customers wishing to verify the
organi-zations reliability. When accreditation is granted, the
company receives certification. A complete assessment for recertification is done every four years, with intermediate
eval-uations during the four-year period.
Although ISO 9000 is generally voluntary, except for certain
regulated products, the EU Product Liability Directive puts
pressure on all companies to become certified. The directive
holds that a manufacturer, including an exporter, will be liable,
regardless of fault or negligence, if a person is harmed by a
product that fails because of a faulty component. Thus,
customers in the ED need to be assured that the components
of their products are free of defects or deficiencies. A manufacturer with a well-documented qual-ity system will be better able
to prove that products are defect-free and thus minimize liability claims.
A strong level of interest in ISO 9000 is being driven more by
marketplace re-quirements than by government regulations,
and ISO 9000 is becoming an important competitive marketing
tool in Europe. As the market demands quality and more and
more companies adopt some form of TQM (total quality
management), manufacturers are increasingly requiring ISO
236
9000 registration of their suppliers. Companies manufacturing

parts and components in China are quickly discovering that ISO
9000 certification is a virtual necessity and the Japanese construction industry now requires ISO 9000 as part of the government
procurement process.13 More and more buyers, particularly
those in Europe, are refusing to buy from manufacturers that
do not have internationally recognized third-party proof of
their quality capabilities. ISO 9000 may also be used to serve as a
means of differentiating different classes of suppliers
(particularly in high -tech areas) where high product reliability is
crucial. In other words, if two suppliers are competing for the
same contract, the one with ISO 9000 registration may have a
competi-tive edge.
While more and more countries (now more than 100) and
companies continue to adopt ISO 9000 standards, many have
complaints about the system and its spread. For example, 39
electronics companies battled against special Japanese software
criteria for ISO 9000. Electronics companies also protested
against the establishment of a new ISO Health and Safety
Standard. Still others are calling for more comprehensive
interna-tional standards along the lines of Americas Malcolm
Baldridge Award, which consid-ers seven criteria-leadership,
strategic planning, customer and market focus, informa-tion
and analysis, human resource development, management, and
business results. Perhaps the most pertinent kind of quality
standard is now being developed by the Uni-versity of Michigan Business School and the American Society for Quality
Control. Us-ing survey methods, their American Customer
Satisfaction Index (ACSI) measures cus-tomers satisfaction and
perceptions of quality of a representative sample of Americas
goods and services. The approach was actually developed in
Sweden and is now being considered in other European
countries. The appeal of the ACSI approach is its focus on
results, that is, quality as perceived by product and service users.
So far the ACSI ap-proach has been applied only in consumer
product/service contexts; however, the funda-mental notion
that customers are the best judges of quality is certainly
applicable to in-ternational industrial marketing settings as well.
Relationship Marketing and Industrial

Products
The characteristics that define the uniqueness of industrial
products discussed above lead naturally to relationship marketing. The long-term relationship with customers, which is at the
core of relationship marketing, fits the characteristics inherent in
indus-trial products and is a viable strategy for industrial goods
marketing. The first and fore-most characteristic of industrial
goods markets is the motive of the buyer: to make a profit.
Industrial products fit into a business or manufacturing
process, and their contri-butions will be judged on how well
they contribute to that process. In order for an indus-trial
marketer to fulfill the needs of its customer, the marketer must
understand those needs as they exist today and how they will
change as the buyer strives to compete in global markets that call
for long-term relationships.
In the European Community, Standards Are a Must for Telecommunications

The hodge-podge of European telephone industry standard is and was
one of the most daunting problems facing continental unification. Even
in the early 1990s connections were not being made well: in Spain the
busy signal was three pips a second; in Denmark, two. French
telephone numbers were 8 and soon to be 10 digits long; Italian
numbers were almost any length. German phones ran on 60 volts of
electricity; else where, it is 48. The list of difference went on and on;
only 30 percent of the technical specifications involved in phone
systems were common from one country to the next. In telephones, as
in much else in European, each country went its own way.
Technical conflicts abounded. Each national telephone authority set
different technical requirements for equipment to enter its market.
One representative from an electronics company estimated that an
average of 50 to 100 labor years of costly software engineering were
needed to rework computerized exchange equipment for each additional
European country his company entered.
The European learned their lesson well and have now been adopting
the most widely standardized global system for mobile communication
(GSM) even faster than American buyers, for some 30 million users
form Oslo to Rome there is no problem; cellular is skipping over the
spaghetti plate of wires down on he ground. Indeed, roaming in
Rome is no problem. Compared with Europe, the U.S. system is still
in the Dark Ages. In an effort to catch up, American wireless
companies are importing rate plans, phone features, marketing
strategic, and executives from Europe.
Relationship marketing ranges all the way from gathering information on customer needs to designing products and services,
channeling products to the customer in a timely and convenient
manner, and following up to make sure the customer is
satisfied. For example, SKF, the bearing manufacturer, seeks
strong customer relations with posts ales follow-through. The
end of the transaction is not delivery; it continues, as SKF
makes sure the bearings are properly mounted and maintained.
This helps cus-tomers reduce downtime, thus creating value in
the relationship with SKF. SKF marketing efforts encompass an
array of activities to support long-term relationships which go
beyond merely satisfying the next link in the distribution chain
to meeting the more complex needs of the end user, whether
those needs are technical, operational, or financial. In short,
the business [SKF does] consists of providing service to its
customers.
The industrial customers needs in global markets are continuously changing, and suppliers offerings must also continue to
change. The need for the latest technology means that it is not a
matter of selling the right product the first time but one of
con-tinuously changing the product to keep it right over time.
The objective of relation-ship marketing is to make the
relationship an important attribute of the transaction, thus
differentiating oneself from competitors. It shifts the focus
away from price to service and long-term benefits. The reward is
loyal customers that translate into substantial profits.
Focusing on long-term relationship building will be especially
important in most in-ternational markets where culture dictates
stronger ties between people and companies. Particularly in

countries with collectivistic and high-context cultures such as
those in Latin America or Asia, trust will be a crucial aspect of
commercial relationships. Constant and close communication
with customers will be the single most important source of
information about the development of new industrial products
and services. Indeed, in a recent survey of Japanese professional
buyers a key choice criterion for suppliers was a trait they called
caring (those who defer to the requests without argu-ment
and recognize that in return buyers will care for the long-term
interests of sell-ers). Longer-term and more communicationrich relationships are keys to success in international industrial
markets.
IBM of Brazil stresses stronger ties with its customers by
offering planning semi-nars that address corporate strategies,
competition, quality, and how to identify market-ing opportunities. One of these seminars showed a food import/export
firm how it could increase efficiency by decentralizing its
computer facilities to better serve its customers. The companys
computers were centralized at headquarters; while branches took
orders manually and mailed them to the home office for
processing and invoicing. It took sev-eral days before the
customers order was entered and added several days to delivery
time. The seminar helped the company realize it could streamline its order processing by installing branch office terminals that
were connected to computers at the food com-panys headquarters. A customer could then place an order and receive an invoice
on the spot, shortening the delivery time by several days or
weeks. Helping a client or supplier identify a problem and its
solution also helped IBM sell equipment to the company. Not
all participants who attend the different seminars offered
annually become IBM cus-tomers, but it creates a continuing
relationship among potential customers. So much so, as one
executive commented, when a customer does need increased
computer power, he will likely turn to us.
Promoting Industrial Products

The promotional problems encountered by foreign industrial
marketers are little differ-ent from the problems faced by
domestic marketers. Until recently there has been a paucity of
specialized advertising media in many countries. In the last
decade, however, specialized industrial media have been
developed to provide the industrial marketer with a means of
communicating with potential customers, especially in Western
Europe and to some extent in Eastern Europe, the Commonwealth of Independent States (CIS), and Asia.
In addition to advertising in print media and reaching industrial
customers through catalogs (now including Web sites) and
direct mail, the trade show or trade fair has be-come the primary
vehicle for doing business in many foreign countries. As part of
its in-ternational promotion activities, the U.S. Department of
Commerce sponsors trade fairs in many cities around the world.
Additionally, there are annual trade shows sponsored by local
governments in most countries. African countries, for example,
host more than 70 industry-specific trade shows.
Trade shows serve as the most important vehicles for selling
products, reaching prospective customers, contacting and
evaluating potential agents and distributors, and marketing in
237
Crossing Borders 2
most countries. Although important in the United States, they

serve a much more important role in other countries. They have
been at the center of commerce in Eu-rope for centuries and are
where most prospects are found. European trade shows attract
high-level decision makers who are not attending just to see the
latest products but are there to buy. Preshow promotional
expenditures are often used in Europe to set formal appointments. The importance of trade shows to Europeans is
reflected in percentage of their media budget spent on participating in trade events and how they spend those dol-lars. On
average, Europeans spend 22 percent of their total annual
media budget on trade events, while American firms typically
spend less than 5 percent. Europeans tend not to spend money
on circus like promotions, gimmicks, and such; rather, they
focus on providing an environment for in-depth dealings. More
than 2,000 major trade shows are held worldwide every year.
The Hannover Industry Fair (Germany), the largest trade fair in
the world, has nearly 6,000 exhibitors who show a wide range
of industrial products to 600,000 visitors.
Trade shows provide the facilities for a manufacturer to exhibit
and demonstrate products to potential users and to view
competitors products. They are an opportunity to create sales
and establish relationships with agents, distributors, and
suppliers that can lead to more-permanent distribution
channels in foreign markets. In fact, a trade show may be the
only way to reach some prospects. Trade show experts estimate
that 80 to 85 percent of the people seen on a trade show floor
never have a salesperson call on them. Most recently, several
Internet Web sites now specialize in virtual trade shows. They
often include multimedia and elaborate product display booths
that can be virtu-ally toured. Some of this virtual trade shows
last only a few days during an associated actual trade show.
The number and variety of trade shows is such that almost any
target market in any given country can be found through this
medium. In Eastern Europe, fairs and exhibi-tions offer
companies the opportunity to meet new customers, including
private traders, young entrepreneurs, and representatives of
non-state organizations. The exhibitions in countries such as
Russia and Poland offer a cost-effective way of reaching a large
num-ber of customers who might otherwise be difficult to
target through individual sales calls. Specialized fairs in individual sectors such as computers, the automotive industry,
fashion, and home furnishings regularly take place.
Besides country-sponsored trade shows, U.S. governmentsponsored trade shows have proved to be effective marketing
events. A U.S.-sponsored show called Made in USA attracted
20,000 South Africans to visit 335 U.S. companies. Thirty-nine
Ameri-can firms participated in a seven-day electronics production equipment exhibition in Os-aka, Japan, and came home
with $1.6 million in confirmed orders along with estimates for
the following year of $10 million. Five of the companies were
seeking Asian agent/distributors through the show, and each
was able to sign a representative before the show closed. Trade
shows and trade fairs are scheduled periodically and any interested business can reserve space to exhibit.
238
Trade in services is growing faster than the international trade in

goods. Services have special characteristics that pose special
problems in international marketing.
The following lesson tries to accomplish the following learning
objectives:
1. Identify the characteristics that distinguish services from
goods and that influence the way they are marketed
internationally.
2. Determine the basis of comparative advantage in service
industries.
3. Discuss the service industries.
Introduction
What are services? Industries such as wholesaling and retailing,
communications, transportation, utilities, banking and
insurance, tourism, and business and personal services are all
service industries. Service account for the largest portion of
output and employment in the advanced industrialized
countries. In 1994, services as a percent of gross domestic
product (GDP) were 62 percent in Germany, 69 percent in
France, 75 percent in Canada and the United States, 66 percent in
Japan, 69 percent in Italy, and 77 percent in the United Kingdom.
Given the importance of services in the national economies, it
is not surprising that they are becoming increasingly important
in world trade. Trade in services accounts for between 20 and 25
percent of all world trade, having grown at about 16 percent a
year for the past decade compared to a 7 percent growth rate for
merchandise trade.
Hence, the $750 billion estimate for services exports worldwide
underestimates the total size of the international market for
services. U.S. services that have been exported include the
following:
Construction, design and engineering services
Banking and Financial services
Insurance services
Legal and accounting services
Computer software and data services
Training and education
Entertainment, music, film and sports
Management consulting
Franchising
Hotel and lodging services
Transportation services, including airline and maritime

services, and both passenger and cargo service.
Services: How are They Different From

Products?
Services have been defined as those fruits of economic activity
that you cannot drop on your toe: banking to butchery, acting
to accountancy. Indeed services are mostly intangible. The
distinguishing characteristics of services include intangibility,
heterogeneity, perishability, and often, simultaneous production
and consumption. Because of these characteristics, services are
more difficult to price and measure than products.
1. Intangibility
Services are often performances, such as performing an audit,
designing a building, fixing a car. In this sense, they are
intangible. Questions pertinent to the international
marketing of services would include (1) whether actions are
being performed on people (e.g., education) or things (e.g.,
air freight) (2) whether the customer needed to be physically
present during the service or only at initiation and
termination of the service, and (3) whether it is enough that
the customer be mentally present-that is, can the service be
performed at a distance?
2. Heterogeneity
Different customers going to the same service company may
not receive exactly the same service. This quality of
heterogeneity occurs because different people perform the
service. It is therefore impossible to make sure that the
service is performed in exactly the same way each time. One
sales clerk may be less polite or amiable than another,
resulting in consumer dissatisfaction. The implication of
heterogeneity is that quality is difficult to control.
When extending the service to international markets, there is
also the question whether the service standardized for one
national market will satisfy customers in other markets. For
example, one way to standardize a service is to personalize
the interaction between customer and service provider by
training retail salespersons to greet customers by name and
use certain standard conversational gambits. When such
scripts are to be followed, though, cultural factors
probably demand a somewhat different script for each
country market.
3. Perishability
Services are perishable in that they cannot be inventoried,
saved, or stored; thus a plane seat that is not sold when the
flight takes off is lost forever. This makes it harder to adjust
the supply of a service to fluctuating demand, especially at
times of peak demand. Service companies therefore seek
innovations that allow the service to be inventoried in
some fashion, or that allow demand to be managed so that
the supply of services is adequate and can be economically
provided. An example would be providing a restricted
number of reduced-fare, advance-purchase seats on flights,
with the number of such seats being increased if seats on
the flight do not appear to be selling as forecast.
239
LESSON 25:
NTERNATIONAL MARKETING OF SERVICES
Marketing services internationally makes the task of

forecasting demand for services more complex because the
vagaries of the individual national markets affects demand in
unique ways. Further, service must match demand in many
different markets. It is likely that idle capacity exists in some
markets while excess demand is encountered in other
markets.
4. Simultaneous Production and Consumption
Production and consumption of the service often take place
at the same time; that is, the producer and the seller of the
service are often the same person. Moreover, the customer
must often be present for the service to take place. Unlike
products, services usually cannot be exported, so
international marketing means that the service must be
performed by the firm itself in the country market, whether
through franchising, licensing, a direct investment, or an
acquisition. The fundamental question is, Can the service be
performed at a distance? And if not, how should the firm
position itself in a distant market in order to offer the
service? An example would be the use of ATMs, which
allow customers to conduct certain banking transactions
without a teller being present.
5. Pricing Services
Services are difficult to price because calculating the cost of
producing them is difficult. Price can be set in relation to full
costs, based on what the competition charges, or simply set
at whatever the customer is willing to pay. Service businesses
have a high fixed-cost ratio. Hence, if the service can be
offered without much modification in many national
markets, prices can be lower because the fixed costs have
presumably been recovered in the home market. Some
advantages of scale therefore accrue to the company that is
first to market with a new service. For example, in the case of
a banking innovation such as a credit card, U.S. firms have
already recovered much of their fixed costs of developing the
credit-card concept through sales in the U.S. market. Hence,
their foreign credit-card service prices can be lower because
they do not have to incur the fixed costs of product
development a second time.
6. Measuring Service Quality
Service quality is difficult to measure because it is often
unclear what the consumer expects; yet quality is a matter of
meeting customer expectations. In other words, it depends
on consumer perception, which in turn is determined by the
following:
a.
The person doing the service
b.
The technical outcome of the service
c.
He overall image of the company whose employee is

carrying out the service
Consumer dissatisfaction may result from unrealistic

expectations. Other reasons for the gap between desired
quality and perceived quality include not understanding what
consumers expect from a service, inability, or unwillingness
to meet customer expectations; problems with service
delivery; and communications gaps when the firm fails to
240
communicate realistic expectations about what service quality

will be offered.
7. Importance of Customer Loyalty to Services
Because services cannot be stored, a basic marketing strategy
is to ensure repeat business by generating loyalty in existing
customers. Devices such as frequent-flyer plans may be used
to reward customer loyalty. But given that consumers have
different characteristics in different countries, are such plans
necessary for all national markets, or should they be shaped
mainly by competitive variations in each market? Loyalty can
also be maintained and rewarded through pricing, and the
question for each national market is whatever volume
discounts and membership strategies work equally well in all
markets.
8. Advertising
How are services best advertised? By word of mouth, direct
mail, satisfied customer referrals, or ads in newspapers and
on television? Are there national differences in the relative
appeal of these different forms of advertising of services?
What should the focus of advertising be? Which is more
important, the image and name of the company providing
the service, or facets of the service being sold? These
questions will have to be answered for each country market.
9. Organization
A decentralized organization seems more apt for service
industries, given the inherent heterogeneity of the product
and the customer base. But is a firm moves to standardize
the service performance, can it do so without considerable
centralization? This is a key decision for the firm that chooses
to market its services internationally.
10.Cultural Variables
Because services generally involve close interaction between
the service provider and the customer, cultural variables affect
user satisfaction; they also affect service design and the nature
of interaction with the customer.
Services Characteristics
and Their Implications
Service
Characteristics
1. Intangibility
2. Heterogeneity
3. Inseparability:
Implications for Globalization

How to differentiate the service? Advertising
mainly through word of mouth: who are the
influential opinion makers in each market?
Validity of a follow-the client strategy in
entering international markets? Manage
corporate image in multiple markets.
How to reduce across-country variations in
service quality influenced by variations among
service providers? Can all service personnel in
several countries be trained to the same level
and quality of performance? Impact of
cultural differences affecting extent and kind
of training in each market. Develop
ownership and control stake sufficient to
influence recruitment and training.
Can service be provided at a distance
4. Service
Quality and
consumer
participation in
service
creation/delivery
5. Implications
of fixed-cost
structure for
pricing
6. Service as a
process
Can service be provided at a distance

internationally? Enhancing role of technology,
electronic delivery (e.g., ATMs-automatic
teller machines). How much of service
production can be placed in the back office?
Sharing of back office functions across
markets. The need to find service providers
places a constraint on the pace of
international expansion. If technology cannot
facilitate service exporting, then franchising,
licensing, joint venture, and foreign direct
investment are better avenues.
How do consumers determine service quality?
A matter of consumer perceptions. Moreover,
are customers in all markets equally willing to
participate in the service creation process?
What turns off the customer (variations in
customer defection rates across markets)?
How to ensure customer loyalty and repeat
business? Developing market-specific plans to
maintain customer loyalty. Customer
perceptions of service quality may be affected
by culture.
Can scale economies lower costs of
international entry? Will price-bundling
strategies work in all markets? Can price
discrimination be practiced across markets?
Prioritizing markets by volume necessary to
reach break-even. Scale necessitates
internationalization, and hence foreign direct
investment, joint ventures.
Is the service concept culture-bound?
Adaptation versus standardization of the
service of the service concept for overseas
markets. Can standardized scripts for the
service encounter be used across countries?
Franchising and licensing more appealing as
greater adaptation needed.
seeds, which cannot be grown in Hungary. Paper products such as paper

cups are imported. McDonalds opened with seven partially trained
managers and with another 20 employees loaned from stores in other
countries. Most of the loaned employees returned home after a month, with
the exception of a U.S. manager who stayed on as an adviser and trainer.
New employees had training, but little experience, and had to learn on the
job in the ways outside the store. Some of the training focused on
inculcating attitudes of customer service. In a country of shortages where
people are accustomed to waiting. Customer service was to some degree an
unfamiliar concept. McDonalds found it impossible to get part-time help,
which it relies on in most countries. However, with a successful opening
behind it, McDonalds plans to open another five outlets in the next five
years in Budapest. Real estate is difficult to buy at any price, so the
company must build its restaurants in existing buildings. As yet,
McDonalds has not chosen franchisees but plans to do so for perhaps
three of the proposed five restaurants.
After its Hungarian experience, McDonalds natural response was to turn
to Russia. McDonalds Russian entry was shepherded by its head of
Canadian operations, Mr. George Cohon, who had made the initial
contact with some Russian delegation members during the Montreal
Olympics in 1976. But the joint-venture agreement was not signed until
April 1988 because of intervening events such as the U.S.Olympics
boycott. McDonalds Russian venture had some unusual features. Its jointventure partner with a 51 percent ownership was the food service
department of the Moscow City Council. Normally, McDonalds worked
with entrepreneurs, but in Russia in the late 19801s they had no choice
but to work with a leading entity within the Communist party. The joint
venture was also a rubles-only joint venture at a time when the ruble was
inconvertible. This meant that McDonalds would sell its hamburgers to
Russians for rubles and would buy mostly local supplies paid for in rubles.
As in Hungary, the company had difficulty maintaining its reputation
because of poor-quality local suppliers.
Mcdonalds in Hungary and Russia
Ultimately, McDonalds had to invest over $40 million in setting up a

raw material processing plant to supply it with the requisite buns, French
fries, hamburger patties, and so forth. Amortizing this large injection of
foreign capital at a time when the ruble was rapidly devaluing meant that
McDonalds was making no money in the short run. It might well have
been selling Ray Krocs original dream of 15-cent hamburgers. But
overall, McDonalds is hugely profitable and was planning to open over
2,000 restaurants outside the United States in 1995 alone. If one has
faith in the long-term promise of Russia, losing money for a few years
might seem a reasonable investment to ensure front row seats for the
Russian renaissance.
McDonalds began operations in Budapest, Hungary, on April 30, 1988.

On its first day of operation, it broke a McDonalds record for the most
transactions. Today it is one of the busiest McDonalds in the world, with
9,000 transactions daily.
Plans to establish a McDonalds in Hungary began with a joint-venture
agreement in November 1986, although negotiations began back in 1985.
McDonalds is a 50 percent owner, its partner being Hungarys Babolna
Agricultural Cooperative.
Mc Donalds supplied all of the restaurant equipment, including
equipment to established sources of supply such as a bakery to make
hamburger buns. McDonalds also contributed something intangible: a
standard of quality for the fast-food industry. It had to develop a supplier
infrastructure by introducing new food-processing techniques and forcing
development of new products in Hungary, as well as insisting on the
improvement of existing products to meet world standards of quality.
Products such as hamburger buns, the kind of cheese used in its
cheeseburgers, and orange juice concentrate were unavailable in Hungary.
Ketchup was available, but it did not meet McDonalds quality standards.
It took over a year to develop supply sources. McDonalds experts in
purchasing and quality control then worked with suppliers on a monthly
basis to get the desired product and quality.
Locally produced food products are used, except for McCormick spices,
which are used exclusively by McDonalds around the world, and sesame
Activity 1: A group of student should give a presentation on one service

industry and compare it with product industry.
Government Intervention In The Trade In

Services
As is true for goods, international trade in services is also
subject to government interference and protection. U.S.
manufacturers in a survey noted several government barriers:
Rights of establishment (meaning the right to establish a

branch or subsidiary in a foreign country; for example, many
nations ban ownership of television stations by foreigners)
241
3. Inseparability:
The simultaneity
of production
and
consumption
Trade barriers, including limitations on the proportion of a

market that can be served by a foreign company, and
discriminatory taxation of services provided by a foreign
company.
Foreign exchange controls; limits on remitting profits from

service businesses.
Government procurement barriers because government buys

services only from national companies.
Technical issues that may serve to keep out foreign firms,

such as through the use of standards and certification
conditions.
Government subsidies, counterveiling duties, and high customs

valuation of foreign services, leading to higher total tariffs.
Licensing regulations that impose unreasonable terms of

entry or insist on licensing as the only mode of entry.
Restrictions on professional qualifications, including ban on

entry of qualified service company personnel.
Tolerance of commercial counterfeiting.
Fair Trade in Services: The Uruguay

Round
As services grow in importance in world trade, nations have
begun seeking a consensus on fair trade practices with regard to
services. The last round of GATT (now WTO) talks, the
Uruguay Round, gave special attention to protecting intellectual
property rights, referring to the ideas that form the basis for
many high-technology services, such as custom software. These
provisions address the issues of barriers to trade in services,
national treatment of foreign firms, allowance of FDI in services
without undue restrictions, temporary admissions of foreignservice workers, international agreement on the extent of
regulation of international data flows and ownership rights in
international databases, and the importation of materials and
equipment necessary for provision of services. Other thorny
issues included establishing a framework to control restrictive
licensing practices and the right of nonestablishment, which is
growing increasingly important as service firms deliver their
services electronically or through the mail without being physically
present in a country. This governs the conditions under which a
foreign firm can be said to have established a presence in a foreign
market, which may determine whether the foreign firm qualifies
for treatment as a domestic firm; similarly, establishing a
domestic presence is often necessary to qualify for protection
under the laws of intellectual property rights in that country.
Globalizing Services: Federal Express

Federal Express is the U.S. market leader, holding nearly half of the
market for overnight pac-or Federal Express.
Difficulties in using hub-and spoke operations overseas: Federal
Express shipped all its packages to Memphis, where packages are sorted,
regrouped, and rerouted; this permitted standardized sorting and tracking
of packages. Overseas regulators were in no hurry to let Federal Express
develop an efficient international hub-and-spoke system, often preferring to
nurture their own companies.
Protectionism: Just three days before scheduled start of operations,
Japan prevented Federal Express from shipping packages over 70 pounds
242
through Tokyo, and three years elapsed before Federal Express received
permission to fly four times a week from Memphis to Tokyo
Hence, Federal Express has begun to adapt to overseas environments. For
example, in the United States, it stops picking up packages after 5 p.m,
but it had to modify this overseas, where later business hours are the norm,
as in Spain where business is conducted as late as 8 p.m. In Japan,
Federal Express began offering an express freighter service to appeal to
computer manufacturers who wanted to ship heavy cargo to the United
States faster. Federal Express also decided to use alliances, such as
teaming up with Qantas in Australia, and considered using local
companies to handle the local transportation end of the overall business.
Federal Express also began acquiring overseas companies, including Tiger
International, which it bought for $880 million. Ultimately, Federal
Express hopes for a profitable worldwide operation rivaling the U.S.
operations. But being number one at home is no guarantee that foreign
success is ensured.
An additional complication for Federal Express is the threat that it poses
to Japanese cargo operators. This led Japanese air traffic rights negotiators
to threaten to take away the rights of Federal Express (and other U.S.
operators) to pick up cargo and passengers in Japan during stopovers, and
transport them onwards to other points in Asia. Such threats are often
bargaining ploys to extract greater concessions for that countrys companies
but highlight the uncertainty and dependence on government support that
Federal Express faces in order to fully implement its global strategies.
Marketing Services Globally

Exports of services are growing faster than merchandise
exports. Additionally, because of the dynamism of the sector,
the United States main-tains a comfortable trade surplus in
services. The growing importance of American ser-vices exports
clearly reflects the dramatic growth in the services segment of
the U.S. economy itself-80 percent of all Americans were
employed in the services sector in the late 1990s. Perhaps most
amazing, 2.4 million of the 2.6 million jobs created in the U.S.
economy in 1997 were in services. Further, most of these jobs
were created in such well-paid fields as information, health,
education, and social services. Services domi-nate the economies
of other developed nations as well. In OECD countries,
services companies employ more than half the labor force and
produce more than half the GDP.
Services Opportunities in Global Markets

International tourism is by far the largest services export of the
United States, ranking behind only capital goods and industrial
supplies when all exports are counted. In 1996 foreigners spent
some $64 billion while visiting destinations in the United
States. Compare that with Boeings worldwide sales of jet
aircraft at $37 billion for 1996. Worldwide tourists spent some
$400 billion in 1996 and an agency of the United Na-tions
projects that number will grow to $2 trillion by 2020. That same
agency predicts that China will be followed by the United States,
France, Spain, Hong Kong, Italy, Britain, Mexico, Russia, and
the Czech Republic as the most popular destinations in the next
century. Most tourists will be, as they are today, Germans,
Japanese, and Ameri-cans; and Chinese will be the fourth largest
group. Currently, Japanese tourists con-tribute the most to U.S.
tourism income at some $20 billion.
Other top services exports include transportation, financial

services, education, business services, telecommunications,
entertainment, information, and healthcare, in that order.
Consider the following examples of each:
American airlines are falling all over themselves to capture

greater shares of the fast expanding Latin American travel
market through investments in local carriers.
Insurance sales are also burgeoning in Latin America with

joint ventures between local and global firms making the
most progress.
Banking in China is about to undergo a revolution with

National Cash Register ATMs popping up everywhere.
Merrill Lynch is going after the investment-trust business

expected to take off after Japan allows brokers and banks to
enter that business for the first time in 1998.
Foreign students spend some $7 billion a year in tuition to

attend American universities and colleges.
American engineering consulting firms will provide services

to design and manage construction of more than $1 trillion
worth of infrastructure development worldwide during the
next decade.
Currently phone rates in markets such as Germany, Italy, and

Spain are so high that American companies cannot maintain
toll-free information hotlines or solicit phone-order
catalogue sales.
Xena, Hercules, and comparably dumbed-down (i.e.,

heavy on action, violence, and sex) video-game heroes are
conquering electronic screens worldwide.
Cable TV is exploding in Latin America. The latest Gallup

poll in China indicates that 43 percent of Beijing residents are
aware of the Internet.
Finally, not only are foreigners coming to the United States

for health care services in fast growing numbers, but also
North American firms are building hospitals abroad as well.
Most recently two infants, one from Sweden and one from
Japan, received heart transplants at Lorna Linda hospital in
California laws in both their countries prohibit such lifesaving operations. Beijing Toronto International Hospital
will soon open its doors for some 250 Chinese patients, and
the services include a 24-hour satellite link for consultations
to Toronto.
Entering Global Markets

Trade creates demands for international services. That is, most
U.S. service companies enter international markets to service
their U.S. clients, business travelers, and tourists abroad.
Accounting and advertising firms were among the earlier

companies to establish branches or acquire local affiliations
abroad to serve their U.S. multinational clients. Hotels and
auto-rental agencies followed the business traveler and tourist
abroad. Their primary purpose for marketing their services
internationally was to service home -country clients. Once
established, many of these client followers, as one researcher refers
to them, expanded their client base to include local companies.
As global markets grew, creating greater demand for business
services, service companies became mar-ket seekers in that they
actively sought customers for their services worldwide.
Because of the varied characteristics of business services, not all
of the traditional methods of market entry are applicable to all
types of services. Although most services have the inseparability of creation and consumption just dis-cussed, there are those
where these occurrences can be separated. Such services are those
whose intrinsic value can be embodied in some tangible form
(such as a blue-print or architectural design) and thus can be
produced in one country and exported to another. Data
processing and data analysis services are other examples. The
analysis or processing is completed on a computer located in the
United States and the output (the service) is transmitted via
satellite to a distant customer. Some banking services could be
exported from one country to another on a limited basis
through the use of ATMs. Architecture and engineering
consulting services are exportable when the consultant travels to
the clients site and later returns home to write and submit a
report. In addition to exporting as an entry mode, these services
also use franchising, direct investment (wholly owned subsidiaries), joint ventures, and licensing.
Most other services-automobile rentals, airline services,
entertainment, hotels, and tourism, to name a few-are inseparable and require production and consumption to oc-cur almost
simultaneously, and thus, exporting is not a viable entry
method for them. The vast majority of services (some 85
percent) enter foreign markets by licensing, fran-chising, and/or
direct investment.
Market Environment for Business

Services
Service firms face most of the same environmental constraints
and problems con-fronting merchandise traders. Protectionism,
control of trans-border data flows, competi-tion, the protection
of intellectual property, and cultural barriers are the most
important problems confronting the MNC in todays international services market.
1. Protectionism. The most serious threat to the continued
expansion of international services trade is protectionism.
The growth of international services has been so rapid
during the last decade it has drawn the attention of local
companies and governments. As a result, direct and indirect
trade barriers have been imposed to restrict foreign companies from domestic markets. Every reason, from the
protection of infant industries to national security, has been
used to justify some of the restrictive practices. A list of
more than 2,000 instances of barriers to the free flow of
services among nations was re-cently compiled by the U.S.
243
The dramatic growth in tourism has prompted American firms

and institutions to re-spond by developing new travel services.
For example, the Four Seasons Hotel in Philadelphia offers a
two-day package including local concerts and museum visits. In
addition to its attractions for kids, Orlando, Florida, now sells
its Opera Company with performances by Domingo, Sills, and
Pavarotti. This year the cities of Phoenix, Las Ve-gas, and San
Diego have formed a consortium and put together a $500,000
marketing bud-get specifically appealing to foreign visitors to
stop at all three destinations in one trip.
government. In response to the threat of increasing restriction, the United States has successfully negotiated to open
services markets in both NAFTA and GAIT.
Until the GATT and NAFTA agreements there were few
international rules of fair play governing trade in services.
Service companies faced a complex group of national
regulations that impeded the movement of people and
technology from country to coun-try. The United States and
other industrialized nations want their banks, insurance
com-panies, construction firms, and other service providers
to be allowed to move people, capital, and technology
around the globe unimpeded. Restrictions designed to
protect local markets range from not being allowed to do
business in a country to requirements that all foreign
professionals pass certification exams in the local language
before being permitted to practice. In Argentina, for
example, an accountant must have the equivalent of a high
school education in Argentinean geography and history
before being permitted to audit the books of a
multinational companys branch in Buenos Aires.
The European Union is making modest progress toward
establishing a single mar-ket for services. However, it is not
now clear exactly how foreign service providers will be treated
as unification proceeds. Reciprocity and harmonization, key
concepts in the Single European Act, possibly will be used to
curtail the entrance of some service industries into Europe.
Legal services and the U.S. film industry seem to be two that
is very difficult to negotiate. A directive regarding Transfrontier Television Broadcasting created a quota for
European programs requiring EU member states to ensure
that at least 50 percent of entertainment airtime is devoted to
European Works. The EU ar-gues that this set-aside for
domestic programming is necessary to preserve Europes cultural identity. The consequences for the U.S. film industry are
significant, since over 40 percent of U.S. film industry profits
come from foreign revenues.
Crossing Borders 1
Garbage collection an international services?
The service industry in the United States has a bright future with a
variety of services to sell. Ten thousand house hungry Londoners signed up
for more than $ 500 million of mortgages. When a wall street subsidiary
of Salomon brothers has European executives eager to get a package form
Amsterdam to Atlanta, increasingly, they are Turing to Federal Express,
a Memphis company whose international revenues have been doubling
every year since it began operating overseas. That is only part of the story;
there are many services we dont hear about. For example, hospital
Corporation of America, the biggest operator of private hospitals in the
United States, has acquired 28 hospitals abroad and signed contracts to
operate 9 others.
In Japan, service Master of the united states is showing those masters of
industry quality control a few things about improving productivity and
cutting costs when it comes to scrubbing floors and washing laundry.
Services master has in the past few years launched more than 500 home
clearing franchises in Japan and won contracts to do the housekeeping for
40 hospitals.
244
Having persuaded hundreds of local governments in the united

states to contract out street cleaning and trash collection, WMX
technologies is collecting trash, cleaning streets, and constructing
sanitary landfills in 20 countries, including Argentina, new
Zealand, and Saudi Arabia. It also has a 15-year contract to run
a hazardous waste treatment plant that will process all of Hong
Kong industrial and chemical waste.
2. Trans-border Data Flow. Restrictions on trans-border data

flows are potentially the most damaging to both the
communications industry and other MNCs that rely on data
transfers across borders to conduct business. Some countries
impose tariffs on the trans-mission of data and many others
are passing laws forcing companies to open their com-puter
files to inspection by government agencies or tightly control
transmission domesti-cally. Data transmission was tightly
controlled in India via a government monopoly whose high
pricing policies limited Internet usage to about 50,000 in
1997. However, now the Indian Cabinet has voted to open
the Net to private competitors hoping that us-age will
expand to 1-2 million users by the turn of the millennium.
Most countries have a variety of laws to deal with the
processing and electronic transmission of data across
borders. There is intense concern about how to deal with
this relatively new technology. In some cases, concern stems
from not understanding how best to tax trans border data
flows; in other cases, there is concern over the protection of
individual rights when personal data are involved. The
European Commission is con-cerned that data on
individuals (such as income, spending preferences, debt
repayment histories, medical conditions, and employment
data) are being collected, manipulated, and transferred
between companies with little regard to the privacy of the
individuals on whom the data are collected. A proposed
directive by the Commission would require the consent of
the individual before data are collected or processed. A wide
range of U.S. service companies would be affected by such a
directive; insurance underwriters, banks, credit reporting
firms, direct marketing companies, and tour operators are a
few exam-ples. The directive would have wide-ranging effect
on data processing and data analysis firms since it will
prevent a firm from transferring information electronically to
the United States for computer processing if it concerns
individual European consumers. Hidden in all the laws and
directives are the unstated motives of most countries: a
desire to inhibit the activities of multinationals and to
protect local industry. As the global data transmission
business continues to explode into the next century,
regulators will focus increased attention in that direction.
3. Competition. As mentioned earlier, competition in all
phases of the service industry is increasing as host-country
markets are invaded by many foreign firms. The practice of
following a client into foreign markets and then expanding
into international markets is not restricted to U.S. firms.
German, British, Japanese, and service firms from other
4. Protection of Intellectual Property. An important form

of competition that is diffi-cult to combat is pirated
trademarks, processes, and patents. Computer design and
soft-ware, trademarks, brand names, and other intellectual
properties are easy to duplicate and difficult to protect. The
protection of intellectual property rights is a major problem
in the services industries. Countries seldom have adequate-or
any-legislation, and any laws they do have are extremely
difficult to enforce. The Trade Related Intellectual Property
Rights (TRIPS) part of the GATT agreement obligates all
members to provide strong protection for copyright and
related rights, patents, trademarks, trade secrets, in-dustrial
designs, geographic indications, and layout designs for
integrated circuits. The TRIPS agreement is helpful in
protection services but the key issue is that enforcement is
very difficult without full cooperation of host countries. The
situation in China has been particularly bad since that country
has not been active in enforcing piracy of intel-lectual
property. The annual cost of pirated software, CDs, books,
and movies in China alone totals more than $827 million.
Worldwide, industry estimates are that U.S. companies lost
$60 billion annually on piracy of all types of intellectual
property. Since it is so easy to duplicate software, electronically
recorded music, and movies, pi-rated copies often are
available within a few days of their release. In Thailand, for
ex-ample, illegal copies of movies are available within 10 days
of their release in the United States. In Russia, pirated
movies are sometimes available before their (legal) U.S.
debut!
Crossing Borders 2
Homecare Isnt Home Decorating!
Can U.S.-based home healthcare companies expand their services beyond
U.S. borders? There are a number of reasons why this might not be a
viable idea. First, Home health-care was invented in the United States in
response to an aging population and double--digit healthcare inflation in the
1980s giving rise to cost-containment pressures from the government and
managed-care payers. The level of home healthcare sophistication in the
U.S. has significantly lowered hospital lengths of stay and provided an
alternative to hospital admissions resulting in significant cost savings. In
Western Europe, however, homecare is viewed as a lower level of care and
not accepted as clinically viable for pe-diatric, oncology, or medically
complex patients with co-morbidities. Hence, there is a general reluctance
to discharge to home.
Second, exporters of home healthcare are thwarted by the lack of trained
clinicians to deliver the care and sales representatives to communicate the
viability of homecare. In the United Kingdom, homecare is often confused
with home decorating. Third, there are technological barriers to
homecare stemming from electrical incompatibility. In many instances,
home medical equipment and diagnostic instruments were designed to meet
U.S. specifications, thus making them inoperable in the rest of the world.
And finally, medieval traditions stemming from feudal guilds and

aristocracies prevent mod-ern companies from utilizing existing
distribution systems. For example, in the U.K. the royal postal service
cannot be used for the distribution of medications.
Even with these challenges, Western Europe, Asia, and Canada are
primary expan-sion markets for U.S.-based homecare for the next several
decades. Moreover, the na-tional healthcare services in these areas of the
world are looking for alternatives to insti-tutional care to avoid bankrupting the national coffers for an expanding elderly population.
5. Cultural Barriers and Adaptation. Because trade in services

more frequently in-volves people-to-people contact, culture
plays a much bigger role in services than in merchandise
trade. Examples are many: Eastern Europeans are perplexed
by Western expectations that unhappy workers put on a
happy face when dealing with customers. But McDonalds
requires Polish employees to smile whenever they interact
with cus-tomers. Such a requirement strikes many employees
as artificial and insincere. The com-pany has learned to
encourage managers in Poland to probe employee problems
and to assign troubled workers to the kitchen rather than to
the food counter. As another ex-ample, notice if the
Japanese student sitting next to you in class ever verbally
disagrees with your instructor. Classroom interactions vary
substantially around the world. Stu-dents in Japan listen to
lectures, take notes, and ask questions only after class, if
then. In Japan the idea of grading class participation is
nonsense. Alternatively, because Spaniards are used to large
undergraduate classes (hundreds rather than dozens), they
tend to talk to their friends even when the instructor is
talking. Likewise, healthcare de-livery systems and doctor/
patient interactions also reflect cultural differences. Americans ask questions and get second opinions. Innovative
healthcare services are devel-oped on the basis of extensive
marketing research. However, in Japan the social hierarchy is
reflected heavily in the patients deference to their doctors.
While Japanese patient compliance is excellent and longevity
is the best in the world, the healthcare sys-tem there is quite
unresponsive to the expressed concerns of consumers.
Japanese also tend to take a few long vacations-seven to 10
days is the norm. Thus, vacation packages designed for them
are packed with activities. Phoenix, Las Ve-gas, and San
Diego or Rome, Geneva, Paris, and London in 10 days
makes sense to them. The Four Seasons Hotel chain
provides special pillows, kimonos, slippers, and teas for
Japanese guests. Virgin Atlantic Airways and other long-haul
carriers now have interactive screens available for each
passenger, allowing viewing of Japanese (or Amer-ican,
French, etc.) movies and TV.
Managing a global services workforce is certainly no simple
task. Just ask the folks at UPS:
Some of the surprises UPS ran into: indignation in France,
when drivers were told they couldnt have wine with lunch;
protests in Britain, when drivers dogs were banned from delivery trucks; dismay in Spain, when it was found that the
brown UPS trucks resembled the local hearses; and shock in
245
countries follow their clients into foreign markets and then

expand to include local busi-ness as well. Telecommunications,
advertising, construction, and hotels are U.S. ser-vices that face
major competition, not only from European and Japanese
companies but also from representatives of Brazil, India, and
other parts of the world.
Germany, when brown shirts were required for the first time
since 1945.
overseas sales growth, U.S. advertising agencies are more likely

to have opportunities to increase their overseas billings.
And, while tips of 10-15 percent are an important part of

services workers incentives in the United States, this is not
the case in Germany, where tips are rounded to the nearest
deutsche mark, or in China, where they are considered an
insult. Thus, closer manage-ment of service personnel is
required in those countries to maintain high levels of customer satisfaction.
This last point also suggests a path of least resistance for

overseas growth: Follow the client. Such a strategy has been
successful for Japanese auto parts companies in the United
States and for Japanese banks providing Japanese-language, yen
based financial software and services to their Japanese clients.
Clearly opportunities for the marketing of services will

continue to grow well into the next century. International
marketers will have to be quite creative in responding to the
legal and cultural challenges of delivering high-quality
services in foreign markets and to foreign customers.
Marketing Services Overseas: What Have We

Learned?
Experience has taught that because services are intangible,
exporting them is often unfeasible without also exporting the
personnel to provide them. Hence, foreign direct investment,
licensing and franchising and joint ventures are common
vehicles for providing services in international markets.
Intangibility makes selling services overseas more difficult
because the buyer must take the quality of service on faith.
Corporate brand name and reputation sometimes help.
Concepts from the international marketing of goods can be

carried over to services. For example, gap analysis can be used to
determine whether the actual market for a particular service (say,
the use of overnight parcel and small package delivery) is below
the forecast potential. Similarly, the international product
lifecycle model can be used to predict, for example, when a
developing nation will begin accelerating its consumption of
long-distance phone and facsimile services based on the
experiences of the more developed nations.
In conclusion, the ways in which the international marketing of
services differs from that of goods create closer links to an
overall strategy, with issues such as acquisitions and joint
ventures being as important as pure marketing issues.
1. Discuss the importance of international business services to
total U.S. export trade. How do most U.S. service companies
become international?
Financing the overseas expansion of services can be difficult,

with the cost structure leaning toward fixed costs. Although
heavy capital investment may not be necessary, working capital
needs may be high initially, especially in regard to the personnel
required to provide the service. This is another reason that joint
ventures and strategic alliances are common when a firm seeks
to sell services overseas.
Clearly, because direct interaction between buyer and service
provider is essential to marketing services, cultural differences
must be accounted for in seeking buyer satisfaction. Establishing a local presence and using local personnel are usually
recommended for this reason. And if the service must be
adapted to the foreign market, the interaction between buyer
and foreign provider takes on additional importance because
direct contact can facilitate cooperation and result in more
appropriate adaptation.
Service markets are largest in the advanced industrial countries.
The U.S. market is generally saturated for a variety of services,
making foreign expansion attractive. Even with stiff competition in the advanced industrial nations, service markets as a
whole offer greater unrealized potential than goods markets,
especially for U.S. firms with their accumulated experience in
service industry sectors.
However, service exports or foreign sales do not take place in a
vacuum. They often accompany sales of goods. Thus, if
exports of goods are faltering, service sales will be affected. For
example, the billings of U.S.-based advertising agencies overseas
depend somewhat on the success of their U.S. clients overseas.
To the extent that a client such as IBM or Coca-Cola generates
246
2. Discuss the international market environment for business

services.
In any country, three basic factors determine the boundaries

within which market prices should be set. The first is product
cost, which establishes a price floor, or minimum price.
Although it is certainly possible to price a product below the
cost boundary, few firms can afford to do this for extended
periods of time. Second, competitive prices for comparable
products create a price ceiling, or upper boundary. International
competition almost always puts pressure on the prices of
domestic companies. A widespread effect of international trade
is to lower prices. Indeed, one of the major benefits to a
country of international business is the favorable impact of
international competition on national price levels and, in turn,
on a countrys rate of inflation. Between the lower and upper
boundaries for every product there is an optimum price, which
is a function of the demand for the product as determined by
the willingness and ability of customers to buy. As the gray
marketing example illustrates, however, sometimes the
optimum price can be affected by arbitrageurs, who exploit price
differences in different countries.
The interplay of these factors is reflected in the pricing policies
adopted by companies. With increasing globalization, there is
greater competitive pressure on companies to restrain price
increases. In a globalized industry, companies must compete
with other companies from all over the world. Automobiles are
a good example. In the United States, one of the most open
and competitive automobile markets in the world, the fierce
struggle for market share by American, European, Japanese,
and Korean companies makes it difficult for any company to
raise prices. If a manufacturer does raise prices, it is important
to make sure that the increase does not put the companys
product out of line with competitive alternatives. Notes John
Ballard, chief executive officer (CEO) of a California-based
engineering company, We thought about price increases. But
our research of competitors and what the market would bear
told us it was not worth pursuing.
Basic Pricing Concepts

As CEO Ballards experience shows, the global manager must
develop pricing systems and pricing policies that address price
floors, price ceilings, and optimum prices in each of the national
markets in which his or her company operates. The following
list identi-fies eight basic pricing considerations for marketing
outside the home country.
1. Does the price reflect the products quality?
2. Is the price competitive?
3. Should the firm pursue market penetration, market
skimming, or some other pricing objective?
4. What type of discounts (trade, cash, quantity) and allowance
(advertising, trade-off) should the firm offer its international
customers?
6. What pricing options are available if the firms costs increase

or decrease? Is demand in the target market elastic or
inelastic?
7. Are the firms prices likely to be viewed by the host-country
government as reaso1nable or exploitative?
8. Do the target countrys dumping laws pose a problem?
The task of determining prices in global marketing is complicated by fluctuating ex-change rates, which may bear only limited
relationship to underlying costs. According to the concept of
purchasing power parity, changes in domestic prices will be
reflected in the exchange rate of the countrys currency. Thus, in
theory, fluctuating exchange rates should not present serious
problems for the global marketer because a rise or decline in
domestic price levels should be offset by an opposite rise or
decline in the value of the home-country currency and vice versa.
In the real world, however, exchange rates do not move in
lockstep fashion with inflation. This means that global
marketers are faced with difficult decisions about how to deal
with windfalls resulting from favorable exchange rates, as well as
losses due to unfavorable exchange rates.
A firms pricing system and policies must also be consistent
with other uniquely global constraints. Those responsible for
global pricing decisions must take into account international
transportation costs, middlemen in elongated international
channels of dis-tribution, and the demands of global accounts
for equal price treatment regardless of lo-cation. In addition to
the diversity of national markets in all three basic dimensionscost, competition, and demand-the international executive is
also confronted by conflicting governmental tax policies and
claims as well as various types of price controls. These in-clude
dumping legislation, resale price maintenance legislation, price
ceilings, and gen-eral reviews of price levels. For example,
Procter & Gamble (P&G) encountered strict price controls in
Venezuela in the late 19808. Despite increases in the cost of raw
mate-rials, P&G was granted only about 50 percent of the price
increases it requested; even then, months passed before
permission to raise prices was forthcoming. As a result, by 1988
detergent prices in Venezuela were less than what they were in
the United States.
The textbook approach outlined earlier is used in part or in
whole by most experi-enced global firms, but it must be noted
that the inexperienced or part-time exporter does not usually go
to all this effort to determine the best price for a product in
international markets. Such a company will frequently use a
much simpler approach to pricing, such as the cost -plus
method explained later in this chapter. As managers gain
experience and become more sophisticated in their approach,
however, they realize that the factors iden-tified previously
should be considered when making pricing decisions.
5. Should prices differ by market segment?

247
LESSON 26:
BASIC PRICING CONCEPTS
There are other important internal organizational considerations

besides cost. Within the typical corporation, there are many
interest groups and, frequently, conflicting price objectives.
Divisional vice presidents, regional executives, and country
managers are each concerned about profitability at their respective organizational levels Similarly, the di-rector of international
marketing seeks competitive prices in world markets. The controller and financial vice president are also concerned about
profits. The manufacturing vice president seeks long runs for
maximum manufacturing efficiency. The tax manager is
concerned about compliance with government transfer pricing
legislation, and company counsel is concerned about the
antitrust implications of international pricing practices.
Compounding the problem is the rapidly changing global
marketplace and the in-accurate and distorted nature of much
of the available information regarding demand. In many parts
of the world, external market information is distorted and
inaccurate. It is often not possible to obtain the definitive and
precise information that would be the basis of an optimal price.
The same may be true about internal information. In Russia,
for example, market research is a fairly new concept. Historically,
detailed market in-formation was not gathered or distributed.
Also, managers at newly privatized factories are having difficulty
setting prices because cost accounting data relating to manufacturing are frequently unavailable.
There are other problems. When attempting to estimate
demand, for example, it is important to consider product
appeal relative to competitive products. Although it is possible
to arrive at such estimates after conducting market research, the
effort can be costly and time consuming. Company managers
and executives have to rely on intuition and experience. One way
of improving the estimates of potential demand is to use analogy. As described in Chapter 6, this approach basically means
extrapolating potential demand for target markets from actual
sales in markets judged to be similar. -
Environmental Influences On Pricing

Decisions
Global marketers must deal with a number of environmental
considerations when making pricing decisions. Among these are
currency fluctuations, inflation, government controls and
subsidies, competitive behavior, and market demand. Some of
these fac-tors work in conjunction with others; for example,
inflation may be accompanied by government controls. Each
consideration is discussed in detail next.
1. Currency Fluctuations
Fluctuating currency values are a fact of life in international
business. The marketer must decide what to do about this
fact. Are price adjustments appropriate when currencies
strengthen or weaken? There are two extreme positions; one
is to fix the price of prod-ucts in country target markets. If
this is done, any appreciation or depreciation of the value of
the currency in the country of production will lead to gains
or losses for the seller. The other extreme position is to fix
the price of products in home country currency. If this is
done, any appreciation or depreciation of the home-country
248
currency will result in price increases or decreases for

customers with no immediate consequences for the seller.
In practice, companies rarely assume either of these extreme
positions. Pricing de-cisions should be consistent with the
companys overall business and marketing strat-egy: If the
strategy is long term, then it makes no sense to give up
market share in order to maintain export margins. When
currency fluctuations result in appreciation in the value of the
currency of a country that is an exporter, wise companies do
two things: They accept that currency fluctuations may
unfavorably impact operating margins, and
Table 1 Global Pricing Strategies

When domestic
currency is weak
1. Stress price benefits.
When domestic
currency is strong
1. Engage in non-price
2. Expand product competition by improving
quality, delivery, and afterline and add more sale
service.
costly features.
2. Improve productivity
3. Shift sourcing to
and engage in cost
domestic market.
reduction.
4. Exploit market
3. Shift sourcing outside
opportunities in all
home country.
markets.
4. Give priority to exports
5. Use full-costing
to countries with stronger
approach but employ
currencies.
marginal-cost pricing to
5. Trim profit margins
penetrate new or
and use marginal cost
competitive markets.
pricing.
6. Speed repatriation of
6. Keep the foreignforeign-earned income
earned income in host
and collections.
country; slow down
7. Minimize expenditures
collections.
in local or host country
7. Maximize expenditures
currency.
in local or host country
8. Buy advertising,
currency.
insurance, transportation,
8. Buy needed services
and other services in
abroad and pay for them
domestic market.
in local currencies.
9. Bill foreign customers
9. Bill foreign customers
in their own currency.
in the domestic currency.
They double their efforts to reduce costs. In the short run,
lower margins enable them to hold prices in target markets, and
in the longer run, driving down costs enables them to improve
operating margins.
For companies that are in a strong, competitive market position, price increases can be passed on to customers without
significant decreases in sales volume. In more com-petitive
market situations, companies in a strong-currency country will
often absorb any price increase by maintaining international
market prices at pre-revaluation levels. In actual practice, a
manufacturer and its distributor may work together to maintain
market share in international markets. Either party, or both,
may choose to take a lower profit percentage. The distributor
may also choose to purchase more product to achieve volume
discounts; another alternative is to maintain leaner inventories
if the manufacturer can provide just-in-time delivery. By using
these approaches, it is possible to remain price competitive in
If a countrys currency weakens relative to a trading partners

currency, a producer in a weak-currency country can cut export
prices to hold market share or leave prices alone for healthier
profit margins. The Euro is a good example. In the first 17
months after the launch of the Euro at the beginning of 1999,
the currency lost nearly a quarter of its value. One option for the
European Central Bank (ECB) was to raise interest rates to
strengthen the Euro. While the Euro remains weak, Germany is
enjoying an export boom.
The crisis that occurred with the Russian ruble in 1998 is
another good example of how currency fluctuations can affect
marketing. Prior to the devaluation of the ruble from January
1998 to Juneu1998, the market share for Russian shampoos,
face care prod-ucts, hair coloring, toothpaste, deodorants, and
soaps in Russia was only 27 percent.
Table 2
Purpose: To protect parties from unforeseen large swings in currencies.
Exchange rate review is made quarterly to determine possible adjustments
for the next period.
Comparison basis is the three-month daily average and the initial average.
When the price of imported products rose dramatically, many

Russian women switched to local products. By January to June
2000, the market share official products rose to 44 percent and
had forced some foreign producers out of the market.
2. Exchange Rate Clauses
Many sales are contracts to supply goods or services over
time. When these contracts are between parties in two
countries, the problem of exchange rate fluctuations and exchange risk must be addressed.
An exchange rate clause allows the buyer and seller to agree to
supply and purchase at fixed prices in each companys
national currency. If the exchange rate fluctuates within a
specified range, say plus or minus 5 percent, the fluctuations
do not affect the pricing agreement that is spelled out in the
exchange rate clause. Small fluctuations in exchange rates are
not a problem for most buyers and sellers. Exchange rate
clauses are designed to protect both the buyer and the seller
from unforeseen large swings in currencies. Figure 12-1
summarizes the key elements of an exchange rate clause. An
example of an actual clause used by one U.S.-headquartered
Fortune 100 Company is shown in Table 2
Initial Base Exchange Rate Per US $
Base
U.S.
Dollar
$1=
Product
price $5
Italy Spain Britain Germany Sweden Denmark Turkey

Lira Peseta Pound Mark Krona Krone
Lira
1500
7500
115
575
0.699
3.495
1.622
8.11
7.277
36.385
6.261 8849.597
31.305 44247.985
Compare initial base to three-month daily average:

If rate difference are greater than
next three-month period.
5% adjust prices for the
If greater than 10% open discussion negotiation.
The basic design of an exchange rate clause is straightforward:

Review exchange rates periodically (this is determined by the
parties; any interval is possible, but most clauses specify a
monthly or quarterly review), and compare the daily average
during the review period and the initial base average. If the
comparison produces exchange rate fluctuations that are outside
the agreed range of fluctuation, an adjustment is made to align
prices with the new exchange rate if the fluctuation is within
some range. If the fluctu-ation is greater than some limit (10
percent in our example), the parties agree to discuss and
negotiate new prices.
In other words, the clause accepts the foreign exchange markets
effect on currency value, but only if it is within the range of 5 to
10 percent. Anything less than 5 percent does not affect pricing,
and anything more than 10 percent opens up a renegotiation of
prices.
3. Pricing In An Inflationary Environment
Inflation, or a persistent upward change in price levels, is a
worldwide phenomenon. In-flation requires periodic price
adjustments. These adjustments are necessitated by rising
costs that must be covered by increased selling prices. An
essential requirement when pricing in an inflationary
environment is the maintenance of operating profit margins.
Regardless of cost accounting practices, if a company
maintains its margins, it has effectively protected itself from
the effects of inflation. To keep up with inflation in Peru, for
example, Procter & Gamble has resorted to weekly increases
in detergent prices of 20 percent to 30 percent. 5
Within the scope of this chapter, it is possible only to touch
on the major account-ing issues and conventions relating to
price adjustments in international markets. In particular, it is
worth noting that the traditional FIFO (first -in, first -out)
costing method is hardly appropriate for an inflationary
situation. A more appropriate accounting prac-tice under
conditions of rising prices is the LIFO (last-in, first-out)
method, which takes the most recent raw material acquisition
price and uses it as the basis for costing the product sold. In
highly inflationary environments, historical approaches are
less I appropriate costing methods than replacement cost.
The latter amounts to a next-in first-out approach. Although
this method does not conform to generally accepted accounting principles (GAAP), it is used to estimate future
prices that will be paid for I raw and component materials.
These replacement costs can then be used to set prices. This
approach is useful in managerial decision-making, but it
cannot be used in financial statements. Regardless of the
accounting methods used, an essential requirement under
inflationary conditions of any costing system is that it
maintains gross and operating profit margins. Managerial
actions can maintain these margins subject to the following
constraints.
4. Government Controls and Subsidies
If government action limits the freedom of management to
adjust prices, the mainte-nance of margins is definitely
compromised. Under certain conditions, government action
is a real threat to the profitability of a subsidiary operation.
In a country that is undergoing severe financial difficulties
249
markets in which currency devaluation in the importing country

is a price consideration.
and is in the midst of a financial crisis (e.g., a foreign

exchange shortage caused in part by runaway inflation),
government officials are under pressure to take some type of
action. This has been true in Brazil for many years. In some
cases, governments will take expedient steps rather than
getting at the underlying causes of inflation and foreign
exchange shortages. Such steps might in-clude the use of
broad or selective price controls. When selective controls are
imposed, foreign companies are more vulnerable to control
than local businesses, particularly if the outsiders lack the
political influence over government decision-making
possessed by local managers.
constrained in its ability to adjust prices accordingly.

Conversely, if competitors are manufacturing or sourcing in a
lowermost country, it may be necessary to cut prices to stay
competitive.
6. Price And Quality Relationships
Is there a relationship between price and quality? Do you, in
fact, get what you pay for? During the past several decades,
studies conducted in the United States have indicated that
the overall relationship between price and quality as
measured by consumer test-ing organizations is quite weak.
A recent four-country international study found a high
degree of similarity with the results from the U.S. studies.
The authors conclude that the lack of a strong price-quality
relationship appears to be an international phenomenon.6
This is not surprising when one recognizes that consumers
make purchase decisions with limited information and rely
more on product appearance and style and less on technical
quality as measured by testing organizations.
Government control can also take the form of prior cash

deposit requirements im-posed on importers. This is a
requirement that a company has to tie up funds in the form
of a non-interest-bearing deposit for a specified period of
time if it wishes to import prod-ucts. Such requirements
clearly create an incentive for a company to minimize the price
of the imported product; lower prices
mean smaller deposits. Other
Firm Level Factors
Strategic Objectives
government re-quirements that affect the
- Market Share, Profits
pricing decision are profit transfer rules
Marketing Mix Elements
that restrict the con-ditions under which
- Product Positioning,
- Consumer Segments
profits can be transferred out of a
Cost Structure
country. Under such rules, a high transfer
- Fixed Costs
- Product Development,
price paid for imported goods by an
- Manufacturing, Marketing
affiliated company can be interpreted as a
Manufacturing Costs
- Experience Curve, Scale Economies,
device for transferring profits out of a
Lowest-Cost Objectives
country.
Marketing and Other Costs
Government subsidies can also force a
company to make strategic use of sourcing
to be price competitive. In Europe,
government subsidies to the agricultural
sector make it difficult for foreign marketers
of processed food to compete on price
when exporting to the European Union
(EU). In the United States, some, but not
all, agricultural sec-tors are subsidized. For
example, U.S. poultry producers and
processors are not subsi-dized, a situation
that makes their prices noncompetitive in
world markets. One Midwestern chicken
processor with European customers
sourced its product in France for resale in
the Netherlands. By doing so, the company
took advantage of lower costs derived from
subsidies and eliminated price escalation
due to tariffs and duties.
5. Competitive Behavior
As noted at the beginning of this chapter,
pricing decisions are bounded not only by
cost and the nature of demand but also
by competitive action. If competitors do
not adjust their prices in response to
rising costs, management even if acutely
aware of the effect of rising costs on
operating margins-will be severely
250
- Inventory Levels
Product-Specific Factors
Life Cycle Stage
Substitutes
Other Product Attributes
- Quality, Service, Delivery
Shipping/Distance Costs
Place in Product Line
Financing
- Term of Financing, Below-market Interest rate
Market-Specific Factors
Consumers
- Ability to Buy, Information-Seeking
Government Intervention
- As Buyer, Countertrade Demands,
Price Controls,
- Transfer Price Controls, Customs:
Floor Price Setting
Market-Specific Costs
- Product Adaptation,
Marketing/Service Costs,
- Distribution Channels
- Choices/Multiple Outlets,
- Discounting Pressures
Barriers to Trade
- Quotas and Tariffs, Protection/Subsidies,
- Non-Tariff Barriers
Environmental Factors
Competition
- Competitive Goals, Price Signaling
Exchange Rate Effects
- Short-Term Effects, hedging Costs,
Currency of Quote,
- Long-Term Currency Trends
Product Flow between Markets
Macroeconomic Factors
- Business Cycle Stage, Level of Inflation,
Role of Leasing
Foreign Price-Setting
Product Prices in relation to
Product Line
Product Redesign and Price implications
Outsourcing
Shift to Low-Cost Manufacturing Sites
Transfer Price Setting and
Administration
Inflation Adjustments
Pricing for Multinational Clients
Client-Specific Pricing and Discounting
Price-Bundling
Inflating Countertrade and Leasing
Global Pricing Objectives and Strategies

A number of different pricing strategies are available to global
marketers. An overall goal must be to contribute to company
sales and profit objectives worldwide. Customer oriented
strategies such as market skimming, penetration, and market
holding can be used when consumer perceptions, as determined
by the value equation, are used as a guide. Global pricing can
also be based on other external criteria such as the escalation in
costs when goods are shipped long distances across national
boundaries. The issue of global pricing can also be fully
integrated in the product design process, an approach widely
used by Japanese companies. Prices in global markets are not
carved in stone; they must be evaluated at regular intervals and
adjusted if necessary. Similarly, pricing objectives may vary,
depending on a products life-cycle stage and the country-specific
competitive situation.
1. Market Skimming
The market skimming pricing strategy is a deliberate attempt
to reach a market segment that is willing to pay a premium
price for a product. In such instances, the product must create
high value for buyers. This pricing strategy is often used in the
introductory phase of the product life cycle, when both
production capacity and competition are limited. By setting a
deliberately high price, demand is limited to early adopters
who are willing and able to pay the price. One goal of this
pricing strategy is to maximize revenue on limited volume and
to match demand to available supply. Another goal of market
skim-ming pricing is to reinforce customers perceptions of
high product value. When this is done, the price is part of the
total product positioning strategy.
When Sony first began selling Betamax videocassette recorders
(VCRs) in the United States, it used a skimming strategy.
Harvey Schein, who was president of Sony of America at the
time, recalled the response to the $1,295 price tag.
It was fantastic, really. When you have a new product that is
as jazzy as a video-tape recorder, you really skim off the
cream of the consuming public. The Beta-max was selling
for over a thousand dollars. . . . But there were so many
wealthy people who wanted to be the first in the
neighborhood that it just went whoof-like a vacuum. It flew
off the shelf.
The initial success of the Betamax proved that consumers
were willing to pay a high price for a piece of consumer
electronics equipment that would allow them to watch their
favorite television shows at any time of the day or night.
2. Penetration Pricing
Penetration pricing uses price as a competitive weapon to
gain market position. The ma-jority of companies using this
type of pricing in international marketing are located in the
Pacific Rim. Scale-efficient plants and low-cost labor allow
these companies to blitz the market.
It should be noted that a first-time exporter is unlikely to
use penetration pricing. The reason is simple: Penetration
pricing often means that the product may be sold at a loss for
a certain length of time. Companies that are new to exporting
cannot absorb such losses. They are not likely to have the
marketing system in place (including trans-portation,
distribution, and sales organizations) that allows global
companies such as Sony to make effective use of a penetration
strategy. However, a company whose prod-uct is not
penetrable may wish to use penetration pricing to achieve
market saturation before the product is copied by competitors.
When Sony developed the portable compact disc player, the
cost per unit at initial sales volumes was estimated to exceed
$600. Since this was a no-go price in the United States and
other target markets, Akio Morita instructed management to
price the unit in the $300 range to achieve penetration.
Because Sony was a global marketer, the sales volume it
expected to achieve in these markets led to scale economies
and lower costs.
The Sony example illustrates the penetration approach to
pricing as it is practiced by Japanese firms. As shown in
Figure 12-3, the Japanese begin with market research and
product characteristics. Up to this point, the processes are
parallel in the United States and Japan. At the next step, the
processes diverge. In Japan, the planned selling price minus
the desired profit is calculated, resulting in a target cost figure.
It is only at this point that design, engineering, and supplier
pricing issues are dealt with; extensive consultation among all
value-chain members is used to meet the target. Once thenec-essary negotiations and trade-offs have been settled,
manufacturing begins, followed by continuous cost
reduction. In the U.S. process, cost is typically determined
after design, engineering, and marketing decisions have been
made in sequential fashion; if the cost is too high, the
process cycles back to square one-the design stage.
3. Market Holding
The market holding strategy is frequently adopted by
companies that want to maintain their share of the market.
In single-country marketing, this strategy often involves
reacting to price adjustments by competitors. For example,
when one airline announces I special bargain fares, most
competing carriers must match the offer or risk losing passengers. In global marketing, currency fluctuations often
trigger price adjustments.
Market holding strategies dictate that source country currency
appreciation will not be automatically passed on in the form
of higher prices. If the competitive situation in market
countries is price sensitive, manufacturers must absorb the
cost of currency appreciation by accepting lower margins in
order to maintain competitive prices in country markets.
A strong home currency and rising costs in the home country
may also force a com-pany to shift its sourcing to in-country
or third-country manufacturing or licensing agreements,
rather than exporting from the home country, to maintain
market share. IKEA, the Swedish home furnishing
company, sourced 50 percent of its products in the United
States in 1992, compared with only 10 percent in 1989.
Chrysler-Daimler and BMW built manufacturing and
assembly plants in the United States to produce Mercedes
251
Framework For International Pricing

Strategy
and BMW sport-utility and two-seater sport car vehicles for

the United States and the world market. This was a decision
to invest in new locations for capacity expansion. Market
holding means that a company must carefully examine all its
costs to ensure that it will be able to remain competitive in
target markets. In the case of the German automobile
manufacturers, the expansion of production out-side
Germany meant that the companies were no longer tied
exclusively to German costs in their manufacturing.
having a total retail price in excess of US$50,000 in Tokyoalmost double the ex-works Kansas City price.
When the currency of a country weakens, it becomes more

difficult-to compete on price with imported product.
However, a weak-currency country can be a windfall for, a
global company with production operations in a weakcurrency country. When the In donation rupee fell from
2,400 to 18,000 and then recovered to below 8,000 to the
U.S. dollar during the Asian Flu of the late 1990s, global
companies with production opera-tions in Indonesia made
windfall profits. Their costs in rupiah increased 100 percent
but the value of their production in dollars or any hard
currency increased by 300 to 700 percent. Thus, while the
country was in a crisis, many of the global companies in Indonesia were having their best years ever.
AU import charges are assessed against the landed price of

the shipment (cost, insur-ance, freight, or C.I.F. value). Note
that there is no line item for duty in this example; no duties
are charged on agricultural equipment sent to Japan. Duties
may be charged in other countries. A nominal distributor
markup of 10 percent ($3,652) actually represents 12 percent
of the C.I.F. Yokohama price, because it is a markup not
only on the ex-works price but on freight and value-added
tax (VAT) as well. (It is assumed here that the dis-tributors
markup includes the cost of transportation from the port to
Tokyo.) Finally, a
4. Cost Plus/Price Escalation

Companies new to exporting frequently use a strategy known
as cost -plus pricing to gain a toehold in the global
marketplace. There are two cost-plus pricing methods: The
older is the historical accounting cost method, which defines
cost as the sum of all direct and I indirect manufacturing and
overhead costs. An approach used in recent years is known as
the estimated future cost method.
Cost-plus pricing requires adding up all the costs required to
get the product to where it must go, plus shipping and
ancillary charges, and a profit percentage. The obvious
advantage of using this method is its low threshold: It is
relatively easy to arrive at a selling price, assuming that
accounting costs are readily available. The disadvantage of
using historical accounting costs to arrive at a price is that this
approach completely ignores demand and competitive
conditions in target markets. Therefore, historical ac-counting
cost-plus prices will frequently be either too high or too low in
the light of market and competitive conditions. If historical
accounting cost-plus prices are right, it is only by chance.
However, novice exporters do not care-they are reactively
responding to global market opportunities, not proactively
seeking them. Experienced global marketers real-ize that
nothing in the historical accounting cost-plus formula
directly addresses the com-petitive and customer-value issues
that must be considered in a rational pricing strategy.
Price escalation is the increase in a products price as
transportation, duty, and dis-tributor margins are added to
the factory price. Table is a typical example of the kind of
price escalation that can occur when a product is destined for
international mar-kets. In this example, a distributor of
agricultural equipment in Kansas City is shipping a container
load of farm implements to Tokyo, Japan. A shipment of
product that costs ex-works $30,000 in Kansas City ends up
252
Let us examine this shipment to see what happened. First, there

is the total ship-ping charge of $5,453.07, which is 18 percent of
the ex-works Kansas City price. The prin-cipal component of
this shipping charge is a combination of land and ocean freight
totaling $5,267.80. A currency adjustment factor (CAF) is
charged due to, the strength of the dollar relative to the yen; this
figure will fluctuate as currency values change.
Table 3 Price Escalation: A 20 Foot Container of

Agricultural Equipment form Kansas City to Yokohama
Percentage
of FOB
Price
Item
Ex-works Kansas City
Container freight charges
From Kansas city to Seattle
Terminal handling fee
Ocean freight for 2O-foot
container
Currency adjustment factor (CAF)
(51 % of ocean freight)
Insurance (110% of C.I.F. value)
Forwarding fee
Total shipping charges
Total CLF. Yokohama value
VAT (3% of CLF. value)
Distributor markup (10%)
Dealer markup (25%)
Total retail price
$30000
$1475.00
350.00
2280.00
18
1162.80
35.27
150.00
5453.07
3
35453.07
1063.69
36516.76
3651.67
40168.43
10042.10
$50210.53
12
33
166%
dealer markup of 25 percent adds up to $10,042-33 percent-of

the C.LF. Yokohama price. Like distributor markup, dealer
markup is based on the total landed cost.
The net effect of this add-on accumulating process is a total
retail price in Tokyo of $50,210, or 166 percent of the ex-works
Kansas City price. This is price escalation. The example provided
here is by no means an extreme case. Indeed, longer distribution channels, or channels that require a higher operating
margin-as are typically found in export marketing-can contribute
to price escalation. Because of the layered distribution system in
Japan, the markups in Tokyo could easily result in a price that is
200 percent of the C.L.F value.
The example of cost-plus pricing shows an approach that a
beginning exporter might use to determine the C.LF. price.
Another cost-plus example is the export of household
cleaning products from the United States to South America.
The escalation; of the U.S. C.LF price to the retail shelf in
South America, with transportation, import duties and
5. Using Sourcing As A Strategic Pricing Tool

The global marketer has several options when addressing the
problem of price escala-tion described in the last section. The
choices are dictated in part by product and market
competition. Marketers of domestically manufactured
finished products may be forced to switch to lower-income,
lower-wage countries for the sourcing of certain components
or even of finished goods to keep costs and prices
competitive. The athletic footwear in- dusty is an example of
an industry in which the leading companies have opted for
low- income, low-wage country sourcing of their
production. Even companies such as the U.S. firm New
Balance, which continues to manufacture athletic footwear in
the United States, imports components from lower-income
countries.
The low-wage strategy option should never become a
formula, however. The problem with shifting production to
a low-wage country is that it provides a one-time advantage.
This is no substitute for ongoing innovation in creating
value. High-income countries are the home of thriving
manufacturing operations run by companies that have been
creative in figuring out ways to drive down the cost of labor
as a percentage of total costs and in creating a unique value.
The Swiss watch industry, which owns the worlds luxury
watch business, did not achieve and maintain its
preeminence by chasing cheap labor: It continues to succeed
because it has focused on creating a unique value for its
Customers. Labor as a percent of the selling price in Swiss
watches is so small that the price of labor is irrelevant in
determining competitive advantage.
The third option is a thorough audit of the distribution
structure in the target mar-kets. A rationalization of the
distribution structure can substantially reduce the total
markups required to achieve distribution in international
markets. Rationalization may include selecting new
intermediaries, assigning new responsibilities to old
intermedi-aries, or establishing direct-marketing operations.
Gray Market Goods

Gray market good are trademarked products that are exported
from one country to another where they are sold by unauthorized persons or organizations. Sometimes, gray marketers
bring a product produced in one country-French champagne,
for example into a second-country market in competition with
authorized importers. The gray mar-keters sell at prices that
undercut those set by the legitimate importers. This practice,
known as parallel importing, may flourish when a product is in
short supply or when producers attempt to set high prices. This
has happened with French champagne sold in the United States;
it is also true of the European market for pharmaceuticals,
where prices vary widely from country to country. In the United
Kingdom and the Netherlands, for example, parallel imports

account for as much as 10 percent of the sales of some
pharmaceutical brands.
In another type of gray marketing, a company manufactures a
product in the home country market as well as in foreign
markets. In this case, products manufactured abroad by the
companys foreign affiliate for sales abroad are sometimes sold
by a foreign dis-tributor to gray marketers The latter then bring
the products into the producing com-panys home-country
market, where they compete with domestically produced goods.
For example, in the mid-1980s, Caterpillars U.S. dealers found
themselves competing with gray market construction equipment manufactured in Europe. The strong dollar had provided
gray marketers with an opportunity to bring Caterpillar
equipment into the United States at lower prices than domestically produced equipment. Even though the gray market goods
carry the same trademarks as the domestically produced ones,
they may differ in quality, ingredients, or some other way.
Manufacturers may not honor warranties on some types of gray
market imports such as cameras and consumer electron-ics
equipments.
As these examples show, the marketing opportunity that
presents itself requires gray market g09ds to be priced lower
than goods sold by authorized distributors or do-mestically
produced goods. Clearly, buyers gain from lower prices and
increased choice. In the United Kingdom alone, for example,
total annual retail sales of gray market goods are estimated to be
as high as $1.6 billion. A recent case in Europe resulted in a
ruling that strengthened the rights of brand owners. Silhouette,
an Austrian manufacturer of upscale sunglasses, sued the
Hartlauer discount chain after the latter obtained thou-sands of
pairs of sunglasses that Silhouette had intended for sale in
Eastern Europe. The European Court of Justice found in favor
of Silhouette. In clarifying a 1989 directive, the court ruled that
stores couldnt import branded goods from outside the EU
and then sell them at discounted prices without permission of
the brand owner. The Financial Times denounced the ruling as
bad for consumers, bad for competition, and bad for European economies.
In the United States, gray market goods are subject to a 70-yearold law, the Tariff Act of 1930. Section 526 of the act expressly
forbids importation of goods of foreign manufacture without
the permission of the trademark owner. There are, however,
sev-eral exceptions spelled out in the act; the U.S. Customs
Service, which implements the
Gray Marketing
Another type of gray marketing occurs when a company manufactures a
product in multiple locations-in the, home-country market as well as in
foreign markets. In this case products manufactured abroad by the
company foreign affiliate for sales abroad by a foreign distributor to gray
marketers. The latter then bring the products in6to the producing company
home country market, where they compete with domestically produced
goods. Even though the gray market goods carry the same trademarks as
the domestically produced ones, they often differ in quality ingredients, or
in some other way. For example in the mid 1980s. Caterpillars U.S.
dealers found themselves competing with gray market construction
equipment manufactured in Europe. The strong dollar has provided gray
253
taxes, wholesaler and distributor margins, retail margins, and

the VAT is in excess of 300 percent! This kind of escalation
provides a major incentive to locate pro-duction closer to the
customer to reduce and eliminate costs that are part of the
export sourcing arrangement. Experienced global marketers
view price as a major strategic variable that can help achieve
marketing and business objectives.
marketers with an opportunity to bring caterpillar equipment into the

United States at lower prices than domestically produced equipment.
As these examples show, the marketing opportunity that presents itself
depends on gray market goods being priced lower than goods sold by
authorized distributors or domestically produced goods. Clearly, buyers
gain from lower prices and increased choices. However gray market goods
especially cameras and consumer electronics equipment may not be
covered by manufacturers warranties.
In the united states gray
market goods are subject to a 60 year old law, the Tariff act of 1930
section 526 of the act expressly forbids importation of goods of foreign
manufactures without the permission of the trademark owner. There are
however, several exceptions spelled out in the act, this provides the U.S.
customs service, which implements the regulations, and the court system
considerable leeway in decisions regarding gray market goods. For example
in 1988 the U.S supreme court ruled that trademarked goods of foreign
manufactured such as champagne could legally be imported and sold by
gray marketers. In many instances, however, the courts interpretation of
the law differs from that customs service. Because of problems
associated with regulating gray markets, one legal expert has argued that
in the name of free markets and free trade, the U.S, congress should
repeal section 526 in its place a new law should require gray market goods
to bear labels clearly explaining any differences between them and goods a
that come through authorized channels. Other experts believe that instead
of changing the laws, companies should develop proactive strategic
responses to gray markets. One such strategy would be improved market
gray market products less attractive; another would be to aggressively
identify and terminate distributors that are involved in selling to gray
markets.
regulation, and the court system have considerable leeway in

decisions regarding gray market goods. For example, in 1988 the
U.S. Supreme Court ruled that trademarked goods of foreign
manufacture such as champagne could legally be imported and
sold by gray marketers. In many instances, however, the courts
interpretation of the law differs from that of the Customs
Service.
Because of problems associated with regulating gray markets,
one legal expert has argued that, in the name of free markets
and free trade, the U.S. Congress should repeal Section 526. In
its place, a new law should require gray market goods to bear
labels clearly explaining any differences between them and goods
that come through autho-rized channels. Other experts believe
that, instead of changing the laws, companies should develop
proactive strategic responses to gray markets. One such strategy
would be improved market segmentation and product
differentiation to make gray market products less attractive;
another would be to aggressively identify and terminate distributors that are involved in selling to gray marketers.
254
Dumping
Dumping is an important global pricing strategy issue. GATTs
1979 Antidumping Code defined dumping as the sale of an
imported product at a price lower than that nominally charged
in a domestic market or country of origin in addition, many
countries have their own policies and procedures for protecting
national companies from dumping. The U.S. Antidumping Act
of 1921, which is enforced by the U.S. Treasury, did not define
dumping specifically but instead referred to unfair competition.
However, Congress has defined dumping as an unfair trade
practice that results in injury, destruction, or prevention of the
establishment of American industry. Under this definition,
dumping occurs when imports sold in the U.S. market are
priced either at levels that represent less than the cost of
production plus an 8 percent profit margin or at levels below
those prevailing in the producing country.
Dumping was a major issue in the Uruguay Round of GATT
negotiations. Many countries disapproved of the U.S. system
of antidumping laws, in part because the Commerce Department historically almost always ruled in favor of a U.S. company
filing a complaint. Another issue was the fact that U.S. exporters
were often targeted in antidumping investigations in countries
with few formal rules for due process. The US negotiators
hoped to improve the ability of US. Companies to defend their
interests and understand the bases for rulings.
The result of the GATT negotiations was an Agreement on
Interpretation of Article VI. From the US point of view, one
of the most significant changes between the agreement and the
1979 code is the addition of a standard of review that makes it
harder to dispute US. Antidumping determinations. There were
also a number of procedural and methodological changes. In
some instances, these have the effect of bringing regulations
more in line with U.S. law. For example, in calculating fair price
for a given product, any sales of the product at below cost prices
in the exporting country are not included in the calculations;
inclusion of such sales would have the effect of exerting
downward pressure on the fair price. The agreement also
brought GATT standards into line with US. Standards by
prohibiting governments from penalizing differences between
home-market and export-market prices of less than 2 percent
As the nature of these issues and regulations suggests, some
countries use dumping legislation as a legitimate device to
protect local enterprise from predatory pricing practices by
foreign companies. In other nations, they represent protectionism, a device for limiting foreign competition in a market. The
rationale for dumping legislation is that dumping is harmful to
the orderly development of enterprise within an economy. Few
economists would object to long run or continuous dumping.
If this were done, it would be an opportunity for a country to
take advantage of a low-cost source of a particular good and to
specialize in other areas. However, continuous dumping rarely
occurs; the sale of agricultural products at international prices,

with fanners receiving subsidized higher prices, is an example of
continuous dumping. The type of dumping practiced by most
companies is sporadic and unpredictable and does not provide a
reliable basis for national economic planning. Instead, it may
hurt domestic enterprise.
Recently, there has been a shift in the countries bringing charges
of dumping. In 1998, the United States, EU, Australia, and
Canada brought approximately one third or 225 of the cases
opened. This is down significantly from the late 1980s when
these same countries accounted for four fifths of all cases.12
The leading countries bringing suit were South Africa, the
United States, India, the European Union and Brazil.
Nearly 20 percent of the cases were brought against the EU or
member countries followed by China and Korea.
One U.S, company, Smith Corona Corporation of New
Canaan, Connecticut, filed an antidumping complaint against
Brother Industries of Japan in 1974 and was involved in
dumping-related litigation until the day it declared bankruptcy.
One of the lessons from this saga is that it can take years to get
relief from the International Trade Commission (ITC). Smith
Corona had to retile its original complaint; the ITC finally
found in its favor in 1980, ordering a 48,7 percent duty on
imports of portable typewriters.
However, the duties only applied to typewriters; Brother
responded by designing new products with chip-based memory
functions. Because this new product was no longer classified as
a typewriter-rather, it was a word processor-Brother effectively
sidestepped the duties. Brother also began assembling typewriters and word processors from imported parts in a plant in
Tennessee. This example shows to what lengths a company will
go to get around dumping regulations; Brother used both
product innovation and a new sourcing strategy. Finally, in an
ironic twist, Brother turned the tables on Smith Corona by
accusing the latter of dumping. The rationale: Many of Smith
Coronas typewriters are imported from a plant in Singapore;
Brother pointed to its own U.S. plant as evidence that it was the
true U.S. producer.
For a positive proof of dumping to occur in the United States,
both price discrimination and injury must be demonstrated.
The existence of either one without the other is an insufficient
condition to constitute dumping. Companies concerned with
running afoul of antidumping legislation have developed a
number of approaches for avoiding the dumping laws. One
approach is to differentiate the product sold from that sold in
the home market. An example of this is. An auto accessory that
one company packaged with a wrench and an instruction book,
thereby changing the accessory to a tool. The tariff rate in the
export market happened to be lower on tools, and the company
also acquired immunity from antidumping laws because the
package was not comparable to competing goods in the target
255
LESSON 27:
DUMPING AND COUNTERTRADE
market. Another approach is to make non-price-competitive

adjustments in arrangements with affiliates and distributors.
For example, credit can be extended and essentially have the
same effect as a price reduction.
Types of Dumping
There are several types of dumping: sporadic, predatory, persistent, and reverse. Sporadic dumping occurs when a manufacturer
with unsold inventories warts to get rid of distressed and excess
merchandise. To preserve its competitive position at home, the
manufacturer must avoid starting a price war that could harm its
home market. One way to find a solution involves destroying
excess supplies, as in the example of Asian farmers dumping
small chickens in the sea or burning them. Another way to solve
the problem is to cut losses by selling for any price that can be
realized. The excess supply is dumped abroad in a market where
tee product is normally not sold.
The Contrarian Views of James Bovard

James Bovard might be considered the Ralph Nader of global marketing.
He is a tireless advocate of unrestricted trade and a vocal critic of U.S
trade policy who campaigns to influence the views of policy makers and the
general public. In his recent book, the myth of Fair Trade, and in
numerous articles and essays, Bovard argues that U.S trade laws are
hypocritical because they reduce rather than encourage competition, the
result, he asserts, is higher prices for U.S consumers, his positions and
opinions on two trade issues, dumping and super 301 are summarized
next, along with a sampling of response.Dumping: Bovard believes
America antidumping laws should be repealed. Calling dumping laws a
relic of the fixed exchange rate era, he notes that the U.S. commerce
Department can convict a company of dumping on the basis of dumping
margins (price differences) as small as one half of 1 percent, even though
the dollar can experience double-digit fluctuations relative to other world
currencies. Moreover, a dumping conviction can restrict a companys
market access for 15 years, long after an offense has occurred, Bovard
cautions that other nations may copy Americas antidumping regulations,
to the ultimate detriment of U.S. companies.Although the Uruguay
Round of GATT negotiations resulted in some changes addressing
Bovards specific concerns, the broader issue is still open. Should
Americas antidumping laws be repealed? Not according to Don E.
Newquist, former chairman of the international Trade commission. He
argues that antidumping laws help preserve Americas manufacturing and
technology base. He warns that without the laws, foreign producers who are
sheltered form import competitions in their home markets (e.g., Japanese
companies) can use excess profits from domestic sales to subsidize low cost
exports to America. This could lead to market share losses, cash flow
reductions, and even plant closing in the United States.Super 301 and
section 301 -In march 1994 Bovard blasted the Clinton administration
decision to reinstate super 301 to punish Japan for unfair trade practices.
Super 301 was a 1998 trade provision that allowed the united states to
single out individual nations as unfair traders and impose 100 percent
tariffs on exports forms those nations unless U.S. demands were granted.
An earlier regulation section 301 of the Trade Act of 1974 allowed the
U.S. government to investigate and retaliate against unfair trade barriers
in other nations. Bovards specific complaint about president Clinton
action was that both 301 provisions have been ineffective and that threats
of retaliation have brought results in only a handful of casesBovard has
also frequently argued that the united states is hypocritical when it comes
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to trade policy, citing numerous examples of U.S. trade practices over the
past 20 years to supports his claim, for example, in 1990 the united
states initiated a case against Canada for limiting American beer
imports, even though the united states imposes its own complicated
regulations on Canadian beer imports. In 1989, the united states
threatened Japan with section 301 on the grounds that Motorola had not
been granted a large enough geographic selling area. Bovard ascribed
Motorolas sales problems in Japan to a simple lack of product
adaptation, the company initially exported cellular phones designed for
American frequencies; Japaneses cellular phone exports to the united
states are designed for U.S. frequencies.
Predatory Dumping is more permanent than sporadic

dumping. This strategy involves selling at a loss to gain access to
a market and perhaps to drive out competition. Once the
competition is gone or the market established, the company
uses its monopoly position to increase price. Some critics
question the allegation that predatory dumping is harmful by
pointing out that if price is subsequently raised by the firm that
does the dumping, former competitors can rejoin the market
when it becomes more profitable again.
Hitachi was accused of employing predatory pricing for its
EPROM (electrically programmable read-only memory) chips. A
memo prepared by the company urged U.S. distributors to
quote 10 percent below competition (until) the bidding stops,
when Hitachi wins. The Justice Department, after a year along
investigation, dropped the probe because it found that there
was insufficient evidence to prosecute.
Zenith has long accused Japanese television manufacturers of
using predatory dumping. It charged in its antitrust suit that
major Japanese manufacturers, through false billing and secret
rebates, conspired to set low, predatory prices on TV sets in the
U.S. market with the purpose of driving U.S. firms out of
business in order to gain a monopoly. Both the Japanese and
U.S. governments defended the Japanese firms cooperation on
the grounds of sovereign compulsion. In other words, the
defendants cooperation was the result of a compliance with the
Japanese governments export policy. After sixteen years of legal
maneuvering, the Supreme Court dismissed the conspiracy
theory but ordered a trial concerning the dumping charge.
Persistent dumping is the most permanent type of dumping,
requiring a consistent selling at lower prices in one market than
in others. This practice may be the result of a firms recognition
that markets are different in terms of overhead costs and
demand characteristics. For example, a firm may assume that
demand abroad is more elastic than it is at home. Based on this
perception, the firm may decide to use incremental or marginalcost pricing abroad while using full-cost pricing to cover fixed
costs at home. This practice benefits foreign consumers, but it
works to the disadvantage of local consumers. Japan, for
example, is able to keep prices-high at home, especially for
consumer electronics, because it has no foreign competition
there. But it is more than willing to lower prices in the U.S
market .in order to gain or maintain market share. Japanese
consumers, as a result, must Sacrifice by paying higher prices
for Japanese products that are priced much lower in other
markets.
Activity 1: Two students should give a real life case study

presentation on dumping and WTO decision on it.
Legal Aspect of Dumping

Whether dumping is illegal or not depends on whether the
practice is tolerated in a particular country. Switzerland has no
specific antidumping laws. Most countries, however, have
dumping laws that set a minimum price or a floor on prices
that can be charged in the market.
Illegal dumping occurs when the price charged drops below a
specified level. What are the unfair or illegal price level, and what
kind of evidence is needed to substantiate a charge of dumping? The case of Melex golf carts from Poland illustrates the
difficulty in determining a fair price. The success of Melex in the
United States led to an accusation of dumping. The Treasury
Department was unable to ascertain whether Melexs U.S. price
was lower than prices at home in Poland because Poland has no
golf courses and no demand for such a product. The cost of
production was unsuitable for determining its fair price. Poland,
as a socialist economy, does not let market forces fully dictate the
costs of factors of production. For this reason, the 1974 Trade
Act does not allow production costs in a communist/socialist
country to be used for comparison purpose.
To determine fair costs, the Treasury began to use a small
Canadian manufacturers costs as reference prices, only to see the
Canadian firm stop making golf carts. Also, Poland protested
that the Canadian firms production costs were too high and
unsuitable for comparison. The Treasurys next step was to rely
on reference prices of a comparable product from free-market
countries. Mexico and Spain were chosen because they were
considered to be similar to Poland in terms of their level of
economic development. Even though Mexico and Spain do not
produce golf carts, they were used anyway to determine what
their production costs would be if they produced such a
product. After much review and discussion, the ruling was that
the constructed value did not differ appreciably from Melexs
actual price.
The 1980 ruling did not end the matter. The American producers still wanted Melex to pay the dumping charges for the years
1979 to 1980, and the Commerce Departments 1992 review
imposed a duty of $599,053.51 plus interest. Melex has
continued to fight the case, which has outlasted five U.S.
administrations, Polands martial law, and the Soviet Union
empire.
One item of evidence of dumping occurs when a product is
sold at less than fair value. The Commerce Department, for
example, made a final determination that imports of certain
small-business telephone systems and subassemblies from
Japan and Taiwan were being sold in America at less than fair
value. Subsequently, the U.S. International Trade Commission
made final determinations and found injury to industries in the

United States from such imports. The Commissions injury
finding led to antidumping duties being placed on imported
products to offset their price advantage.
Another example of dumping evidence is a product sold at a
price below its borne-market price or production cost. The
United States relies on the official U.S. trigger price, which is
designed to curb dumping by giving an early signal of an
unacceptable import price. In the case of steel, the trigger price
sets a minimum price on imported steel that is pegged to the
cost of producing steel in Japan. According to the General
Accounting Office, some 40 percent of all imports at one time
were priced below the trigger price.
To provide relief, the Antidumping Act requires the Department of Commerce to impose duties equal to the dumping
margin. The antidumping duty is based on the amount by
which the foreign market value or constructed value exceeds the
purchase price or an exporters sale price.
How to Dump (Legally and Illegally)

Dumping is a widespread practice. Exporters and their importers insist on its use, when necessary, and will find ways to
conceal the practice. One can team from the Mitsui case. Mitsui
was responsible for generating the largest dumping case and
pleaded guilty to all twenty-one counts involving kickbacks and
the falsifying of documents to customs officials in order to sell
steel below trigger prices. Mitsui attempted to conceal its
dumping activities through several means. It hid the origin of
the Japanese steel products by disguising them as U.S. made
(e.g., wire rope imported to Houston). It submitted false
documents to conceal the true merchandise value and backdated
invoices to avoid trigger prices. Furthermore, it gave its U.S.
customers a rebate equal to, the difference between the nominal
exchange rate and the actual exchange rate, and the calculations
were made after product entry. These illegal rebates totaled, $1.3
million between 1978 and 1981. Another deceptive method
involved the use of damage claims. Mitsui honored false claims
that goods were damaged during shipment and granted credits
of $22,676 for damaged Korean wire nails without investigating or reporting these losses to its insurance company. In
spite of these ingenious methods, Mitsui was exposed and
paid heavy fines for dumping and fraud.
Sears was similarly indicted for conspiring with Sanyo and
Toshiba to file false customs invoices involving the-importation
of Japanese TV sets between 1968 and 1975. To avoid customs
penalties on low-priced Japanese sets whose prices were below
Japanese market prices, Sears certified the purchase prices to be
higher than what was actually paid. For two of those seven
years, Sears overstated Toshibas price by $1.66 million and
Sanyos prices by $7 million.
To prevent Japanese firms from dumping their EPROM chips
in the U.S. market, the United States and Japan have established
fair market values or minimum prices for these chips. But
American chip makers asserted that the Japanese violated the
trade agreement by dumping chips in Hong Kong, Taiwan, and
Singapore and by selling chips to Korean users at fair market
value but with rebate. The problem was that these chips could
find their way to the U.S. market or that U.S. semiconductor
257
The three kinds of dumping just discussed have one characteristic in common: each involves charging lower prices abroad
than at home. It is possible, however, to have the opposite
tactic-reverse dumping. In order to have such a case, the
overseas demand must be less elastic, and the market will
tolerate a higher price. Any dumping will thus be done in the
manufacturers home market by selling locally at a lower price.
customers might move their manufacturing operations to these

other markets to take advantage of lower chip prices.
Without doubt, dumping is a risky practice that can cause a great
deal of embarrassment, in addition to the payment of large
financial penalties. Thus, a preferable strategy is to use other
means to legally overcome dumping laws. One method that can
help avoid charges of dumping is to differentiate the exported
item from the item being sold in the home market. By deliberately making the home product and its overseas version not
comparable, there is no home-market price that can be used as a
basis for price comparison. This may be one reason why
Japanese automakers market their automobiles under new or
different names in the United States. Another method used to
circumvent dumping laws is to provide financing terms that can
have the same effect as a price reduction.
The dumping problem can also be overcome if the production
of a product, rather than its importation is carried out in the
host country. This option has become necessary for Japanese
manufacturers, who have no desire to lower prices in Japan
because they do not have to contend with foreign competitors.
The high prices at home, however, work to the disadvantage of
Japanese manufacturers because it is easy to prove that they are
engaged in dumping in the U.S. market.
The Strange World of Dumping

In 1974, Smith Corona Corp. claimed that rival Japanese manufacturers
unfairly dumped typewriters at below-cost prices in the U.S. market.
Subsequently, Smith Corona moved most of its manufacturing to
Singapore and switched from being Americas largest manufacturer of
portable electric typewriters to being the largest U.S. importer of such
typewriters. In the meantime, Brother Industries USA Inc, a wholly
owned Japanese subsidiary, began assembling typewriters in Tennessee.
Ironically, Brother later filed charges under U.S. trade law alleging that
Smith Corona dumped its Singapore-made portable electric typewriter
products in the United States by selling below costs and cutting the price
from $120 per unit in early 1989 to $82.99 by late 1990. The
Commerce Departments International Trade administration, seeing no
proof of injury to a U.S. firm, dismissed Brother Industries (USA) Incs
complaint. The Department did not view Brother as a U.S. firm since its
U.S. plant performed only the final assembly of portable electric
typewriters with mostly Japanese-made components. On the other hand, the
Department ruled a month earlier that Smith Corona Corp., a Britishcontrolled company with mostly U.S. operations, was a U.S. firm. Acting
on Smith Coronas complaint, the Department imposed duties of 58.3
percent on Brothers imports of portable word processors.
Case Study
Pricing for (No) Profit?
U.S. firms pioneered the semiconductor industry but soon
found them under; a great deal of pressure from Japanese
competitors. American firms felt- that the Japanese market was
closed to them while they were undercut at home and elsewhere
by Japanese firms unfair and below the-cost prices Whatever
the reason, American firms lost some $500, million over two
years. Because of the Japanese firms dumping of DRAMs
(dynamic, random-access memory chips), they gained 78 percent
258
of the U.S. market and, in the process, drove eleven of fourteen

U.S. DRAM makers out of business. In the 1 990s, Micron and
Texas Instruments are the only two American firms that sill
manufacture DRAMs domestically; IBM Corp. primarily
manufactures them for internal use.
Contending that Japan exported unemployment to the United
State by dumping its chips, the United States was successful in
forcing Japan to sign a five-year semiconductor trade agreement
in 1986. The agreement required Japan to stop selling semiconductors at prices below cost.
The historic agreement soon turned sour. The United States
accused Japanese manufacturers of continuing to dump their
products elsewhere. In third countries such as Singapore,
Japanese chips were available at low, prices, and those chips
found their way to the U.S. market. In its defense, Japan
explained that it could not control all but major manufacturers.
Also, it could not prevent gray-market dealers and brokers who
came to Japan and left with suitcases full of chips. The gray
marketers clients included American consumer-product
manufacturers.
The violation of the trade agreement led the United States to
impose penalties in 19.87 against Japanese products. Tariffs of
100 percent were imposed on a minimum of $135 million and
up to $300 million of Japanese goods. The products singled
out for sanction included all black-and-white and some color
television sets, automobile tape players, blank tape, refrigerators,
computers, cash registers, and communications satellites. The
U.S. government claimed that there should be no major price
increases because the targeted products could be obtained from
non-Japanese manufacturers. In reality it was inevitable that
consumers had to pay more for Japanese electronics goods.
Japanese electronics companies seemed to face more hurdles
than other Japanese companies. In addition to the phenomenal
rise in the value of the yen, which made exports difficult, the
electronics industry had other problems. Because of the
dumping charge and subsequent agreement, the Japanese
firms had to agree to export products at prices mandated by the
U.S. Department of Commerce. The additional penalty duties
resulting from the semiconductor violation worsened the
situation even more. Initially, Japanese electronics firms did not
fare well and exports dropped a record II percent in 1986. Since,
then, the strong ones have become leaner and stronger.
In the early 1990s, it was South Korean firms turn to be
accused of dumping memory chips in the United States. The
U.S. Department of, Commerce ruled that Korean firms were
illegally selling semiconductors for a fraction of their manufacturing cost. The number one DRAM-maker in the world,
Samsung Electronic Co. was found to be selling its chips at 87
percent below cost (i.e., selling a $10 chip for only $1.30).
Goldstar Co., likewise, was selling DRAMs at 52 percent below
cost, while Hyundai Electronics Co. had a dumping margin of 6
percent. Not surprisingly, Korean firms aggressive pricing
enabled them to capture 20 percent of the worldwide market
for DRAMs. Thus, the U.S. government required them to post
bonds and face duties ranging from 6 percent to 87 percent. A
day after the Commerce Departments preliminary finding,
prices for DRAMs surged by as much as 20 percent on the spot
Questions
1. Does the U.S. governments action to force up the prices of
semiconductors serve a useful purpose?
2. Should semiconductors be considered products or
commodities? How does the classification affect the pricing
of semiconductors?
3. How should Japanese electronics companies react
to
quotas and duties? What should be their pricing and other
strategies?
Countertrade
Counter trade constitutes an estimated 5 to 30 percent of total
world trade. Counter trade greatly proliferated in the 1980s.
Perhaps, the 8lhgle most important contributing factor is LDCs
decreasing ability to finance their import needs through bank
loans. I Regarding Russia, its officials have estimated that 90
percent or more of the transactions having to do with critical
imports involve reciprocal trade exchanges. Counter trade in
Russia may proliferate because, with the Russian banking system
in disarray, it is difficult to arrange traditional export financing
(e.g., letter of credit).
Counter trade, one of the oldest forms of trade, is a government
mandate to pay for goods and services with something other
than cash. It is a practice, which requires a seller as a condition of
sale, to commit contractually to reciprocate and undertake certain
business initiatives that compensate and benefit the buyer. In
short, a goods-for-goods deal is counter trade.
Unlike monetary trade, suppliers are required to take customers
products for their use or for resale. In most cases, there are
multiple deals that are separate yet related, and a contract links
these separable transactions. Counter trade may involve several
products, and such products may move at different points in
time while involving several countries. Monetary payments may
or may not be part of the deal.
Price DistortionPrice controls are a common practice in
communist and socialist countries that have state
planning. China is a typical example. Its price system in
the final analysis causes a distortion in the operation of
the market. The state deliberately keeps the price of coal
and other raw materials low while pricing some consumer durables well above the true market value. In
several cases production plants are trapped between
artificially high prices for material inputs and artificially low prices for factory outputs. As a result the
plants may choose to stop producing inexpensive,
everyday items because Of low profit margins. These
price distortions encourage, some plants to produce such
high-priced goods as washing machines watches bicycles
and sewing machines even though these goods are too
costly for consumers to purchase and are stored in
warehouses that are already full of this kind of merchandise. Therefore. a poorly managed factory can show a
hefty profit, at least on paper, because of the distortion

that exists between profit incentive and centrally
planned prices.In an attempt to solve the problem. China
has experimented with the free market method. Which
emphasizes material incentive free enterprise market
oriented prices profits and bonuses. Farmers were
allowed to plant crops on private plots and sell their
surplus in, a free market at market prices for profit.
The result of this experiment was that output almost
doubled. The experiment was later extended to 6.600
factories in various large cities. State enterprises have
been allowed to function as independent companies in
determining profit and production. Certain factories
have been permitted to keep a portion of their profits for
reinvestment in new capital equipment or distribution to
workers. Once the quota is filled the companies can
diversify into new products or market the surplus
directly and managers can reward and punish workers.
Realistic prices should help market excess or unpopular
items as well as goods that are in short supply. Prices of
unsold durables should fall whereas the prices of
popular but unavailable refrigerators for example should
increase.
There are three primary reasons for counter trade: (1) counter
trade provides a trade financing alternative to those countries
that have international debt and liquidity problems, (2) counter
trade relationships may provide LDCs and MNCs with access to
new markets, and (3) counter trade fits well conceptually with
the resurgence of bilateral trade agreements between governments. The advantages of counter trade cluster around three
subjects: market access, foreign exchange, and pricing. Counter
trade offers several advantages. It moves inventory for both a
buyer and a seller. The seller gains other benefits, too. Other
than the tax advantage, the seller is able to sell the product at
full price and can convert the inventory to an account receivable.
The cash-tight buyer that lacks hard currency is able to use any
cash received for other operating purposes.
Types of Counter trade
There are several types of counter trade, including barter,
counter purchase, compensation trade, switch trading, offsets
and clearing agreements.
1. Barter- Barter, possibly the simplest of the many types of
counter trade, is a onetime direct and simultaneous exchange
of products of equal value (i.e., one product for another). By
removing money as a medium of exchange barter makes it
possible for cash-tight countries to buy and sell. Although
price must be considered in any counter trade, price is only
implicit at best in the case of barter. For example, Chinese
coal was exchanged for the construction of a seaport by the
Dutch, and Polish coal was exchanged for concerts given by a
Swedish band in Poland. In these cases. the agreement dealt
with how many tons of coal was to be given by China and
Poland rather than the actual monetary value of the
construction project or concerts. It is estimated that about
half of the U.S. corporations engage in some form of barter
primarily within the local markets of the United States.
259
market. A month earlier, the European Community also

imposed a 10.1 percent duty on Korean imports.
2. Counter purchase (Parallel Barter)- Counter purchase

occurs when there are two contracts or a set of parallel cash
sales agreements, each paid in cash. Unlike barter which is a
single transaction with an exchange price only implied. a
counter purchase involves two separate transactions-each
with its own cash value. A supplier sells a facility or product
at a set price and orders unrelated or non-resultant products
to offset the cost to the initial buyer. Thus, the buyer pays
with hard currency, whereas the supplier agrees to buy certain
products within a specified period. Therefore money does
not need to change hands. In effect, the practice allows the
original buyer to earn back the currency. GE won a contract
worth $300million to build aircraft engines for Swedens
JAS fighters for cash only after agreeing to buy Swedish
industrial products over a period of time in the same
amount through a counter purchase deal. Iraq persuaded the
New Zealand Meat Board to sell $200 million worth of
frozen lamb for a purchase of the same value of crude oil.
Brazil exports vehicles, steel, and farm products to oilproducing countries from which it buys oil in return.
3. Compensation Trade (Buyback)-A compensation trade
requires a company to provide machinery, factories, or
technology and to buy products made from this machinery
over an agreed-on period. Unlike counter purchase, which
involves two unrelated products, the two contracts in a
compensation trade are highly related. Under a separate
agreement to the sale of plant or equipment, a supplier
agrees to buy part of the plants output for a number of
years. For example, a Japanese company sold sewing
machines to China and received payment in the form of
300,000 pairs of pajamas. Russia welcomes buyback.
4. Switch Trading-Switch trading involves a triangular rather
than bilateral trade agreement. When goods, all or part, from
the buying country are not easily usable or salable; it may be
necessary to bring in a third party to dispose of the
merchandise. The third party pays hard currency for the
unwanted merchandise at a considerable discount. A
hypothetical example could involve Italy having a credit of $4
million for Austrias hams, which Italy cannot use, A thirdparty company may decide to sell Italy some desired
merchandise worth $3 million for a claim on the Austrian
hams. The price differential or margin is accepted as being
necessary to cover the costs of doing business this way. The
company can then sell the acquired hams to Switzerland for
Swiss francs, which are freely convertible to dollars.
5. Offset- In an offset, a foreign supplier is required to
manufacture/assemble the product locally and/or purchase
local components as an exchange for the right to sell its
products locally. In effect, the supplier has to manufacture at a
location that may not be optimal from an economic
standpoint. Offsets are often found in purchases of aircraft
and military equipment. One study found that more than half
of the companies counter trading with the Middle East were
in the defense industry and that the most common type of
counter trade was offset.4 These companies felt that counter
trade was a required element in order to enter these markets.
260
6. Clearing Agreement- A clearing agreement is clearing

account barter with no currency transaction required. With a
line of credit being established in the central banks of the
two countries, the trade in this case is continuous, and the
exchange of products between two governments is designed
to achieve an agreed-on value or volume of trade tabulated
or calculated in nonconvertible clearing account units. For
example, the former Soviet Unions rationing of hard
currency limited imports and payment of copiers. Rank
Xerox decided to circumvent the problem by making copiers
in India for sale to the Soviets under the countrys clearing
agreement with India. The contract set forth goods, ratio of
exchange, and time length for completion. Any imbalances
after the end of the year were settled by credit into the next
year, acceptance of unwanted goods, payment of penalty, or
hard currency payment. Although nonconvertible in theory,
clearing units in practice can be sold at a discount to trading
specialists who use them to buy salable products.
Problems and Opportunities

Although counter trade is a common and growing practice, it
has been criticized on several fronts. First, counter trade is
considered by some as a form of protectionism that poses a
new threat to world trade. Such countries as Sweden, Australia,
Spain, Brazil, Indonesia, and much of Eastern Europe demand
reciprocity in order to impose a discipline on their balance of
payments. In other words, imports must be offset by exports.
Indonesia links government import requirements in contracts
worth more than Rp. 500 million to the export of Indonesian
products, other than oil and natural gas, in an equivalent
amount to the foreign-exchange value of the contract. Mexico
took a hard line in 1981 against foreign automakers by ordering
them to earn back hard currency if they wanted to stay in
business with Mexico. As a result, VW de Mexico had to
purchase and export Mexican coffee. Nissan Mexicana agreed to
accept coffee, horsemeat, chickpeas, and honey. Brazil enacted a
similar requirement and was able to extract agreements from
foreign-owned automobile and truck makers to export nearly
$21 billion worth of vehicles and other products in return for
the right to import duty-free parts for their Brazilian plants.
Despite this charge, there is evidence that counter trade does not
necessarily restrict the overall trade volume.
Second, counter trade is alleged to be nothing but covert
dumping. To compensate any supplying partners for the
nuisance of taking another-product as payment, a counter
trading country frequently trades its products away at a discount.
If the counter trading country discounts directly by selling its
goods itself in another market instead of through a foreign
firm, dumping would clearly occur. But according to an
International Trade Commission study, the practice does not
seem to be harmful to the United States. Counter trade activity
actually results in U.S. exports always greatly exceeding the value
of imports. Thus, it would appear that many products that U.S.
firms agree to take from their customers for overseas marketing
are not dumped back in the U.S. market.
Third, counter trade is alleged to increase overhead costs and
ultj.n1ately the price of a product. Counter trade involves time,
personnel, and expenses in selling a customers product-often at
Related to this charge of increasing costs is the problem of

marketing unwanted merchandise that may remain unsold? A
company may have to take on the added job of marketing its
customers goods if it does not want to lose business to rivals
who are willing to do so. GE lost a major sale of CAT scanners
to Austrian hospitals after Siemens agreed to preserve 4,000
jobs by stepping up production of unrelated electronic goods
within its Austrian plants. McDonnell Douglas was able to
secure a contract to sell 250 planes to former Yugoslavia only
after agreeing to market such Yugoslav goods as hams and
other foods, textiles, leather goods, wine, beer, mineral water,
and tours. The company had a difficult time selling the $5
million worth of hams and finally did so to its own employees
and suppliers. With Regard to the Yugoslavian tours, the best
the company could do was to offer the trips as incentives to
employees.
rating and its propensity to counter trade is not as strong as

commonly believed. Second, buyback and counter purchase are
substitutes .to foreign direct investment. Third, there is a
surprisingly large volume of counter trade between developing
countries themselves. Fourth, each counter trade type seems to
have its own separate motivation. Barter -allows exchange
without the use of money and explicit prices. Barter is therefore
useful in order to bypass: (1) exchange controls, (2) public or
private price controls, and (3) a creditors monitoring of
imports.
Those firms that tend to benefit from counter trade are the
following: (1) large firms that have extensive trade operations
from large, complex products; (2) vertically integrated firms that
can accommodate counter trade take backs; and (3) firms that
trade with countries that have inappropriate exchange rates,
rationed foreign exchange, import restrictions, and importers
inexperienced in assessing technology or in export marketing. In
contrast firms whose characteristics are the opposite of those
just enumerated are likely to encounter significant barriers to
counter trade operations and to receive few benefits.
In general, the U.S. government is opposed to governmentmandated countertrade. However, recognizing that counter
trade is a fact of life, the U.S. government has maintained a
hands-off policy toward counter trade arrangements that do
not have government intervention or those American exporters
choose to pursue. It does not oppose participation by American
firms in counter trade transactions when they do not have a
negative impact on national security. But the U.S. policy
prohibits federal agencies from promoting counter trade in their
business and official contacts.
Financing, essential in virtually all types of conventional

transactions, becomes more complicated in the case of counter
trade this is especially true when the sale of one product is
contingent on the purchase of an unrelated product in return.
Understandably, banks may hesitate to provide credit for such a
deal because of their concern that the exporter may not be able
to profitably dispose of the product given to the exporter as
payment.
Interestingly, the U.S. government itself has published a guide

on counter trade practices so that U.S. firms can take advantage
of marketing opportunities in the former Soviet Union. The
irony is that the Russian government, seeking hard currency
earnings, now appears to prefer cash transactions and has begun
to discourage counter trade transactions of marketable commodities. Still, those Russian products that do not have a ready
market probably will still require some form of counter trade.
When a company is unable or does not want to be concerned

with disposing of the product taken from its customer, it can
turn to companies that act as intermediaries. The intermediaries
may agree to dispose of the merchandise for a commission or
they may agree to buy the goods outright. The Mediators is one
such middleman organization that operates a $500 million a
year business globally.
There is no question that counter trade is a cumbersome

process. Yet a firm is unwise not to consider it. Much like other
trade practices, counter trade presents both problems and
opportunities. More often than not, problems of counter trade
are more psychological rather than real obstacles. Problems can
be overcome. One need only remember that in the final analysis
all goods can be converted into cash.
An examination of counter trade literature found that an

overwhelming number of the published articles were theoretical
rather than empirical. There are a few empirical studies, however,
that have shed some light on the practice of counter trade.
According to one model, developing countries, which impose
counter trade, have these characteristics: declining foreign
exchange reserves, commodity terms of trade, and balance of
trade and increasing debt-service ratios. There is some evidence
that these variables can help exporters identify those countries,
which are likely to be counter traders.
Case Study
The results of one study dispel some widely held views about
counter trade. First the relationship between a countrys credit
Countertrade: Counterproductive?
In modern times barter and its numerous derivations, which
have conceptually been gathered together under the rubric
counter trade, have gained renewed stature in international
trade. This has occurred despite the fact that international
money and credit markets have attained unparalleled levels of
sophistication.
Where readily acceptable forms of money exchange and viable
credit facilities are available, markets shun cumbersome and
inefficient barter-type transactions. But, international liquidity
261
a discount. If another middleman is used to dispose of the

product a commission must also be paid. Because of these
expenses, a selling company has to raise- the price of the original
order to compensate for such expenses as well as for the risk of
taking another product in return as payment. The fact that the
goods are saleableeither for other goods or, in the end, for
cash somewhere else means that additional and probably
unnecessary costs must be incurred. As explained by Fitzgerald,
Counter trade requirements, like any trade restrictions, increase
the cost of doing business. These cost cannot be passed into
the international market but must be borne within the country
imposing the requirements. It is believed that barter transactions are responsible for reducing Russias revenues by 500
billion rubles.
problems and government restrictions on the operation of

markets have prompted many less-developed countries (LDCs)
and non market economies (NMEs), as well as industrial
countries, to promote creative trade transactions that
circumvent the normal exchange medium of modern markets.
The shortcomings of counter trade include the following:
1. Counter trade has a high inherent transaction cost.
2. Counter trade limits competitive markets.
3. Counter trade contributes to market distortions that lead to
inappropriate economic planning.
Inefficiency In Transactions Costs

The underlying weakness of counter trade as a mechanism of
trade and exchange is its inefficiency. The indivisibility of goods
made barter inefficient, for example, and forced those involved
with such trade to search for a better way. Barter gave way to
goods/ services-for-money exchange, which permitted transactions to incorporate divisibility as well as time shifting. The
opportunity for more convenient (i.e., efficient), multiparty
trade became a reality.
A major factor in. the expansion of world trade during the last half
of the twentieth century has been the emergence of a few widely
accepted currencies, especially the U.S. dollar, as settlement currencies
for international transactions. The development of international
credit markets to support trade depended on the fact that transactions could be entered into without undue concern by the parties
involved as to the delivery of the specific quantity and quality of
goods and the timeliness of payment. A key characteristic of this
type of market is that the channels of communication and
exchange are well defined and relatively simple.
As a consequence of this clarity and simplicity, such markets are
efficient. Specifically, the direct and indirect costs involved in the
process of exchange account for a relatively small portion of the
total cost of the transaction.
In counter trade the costs of financing are shifted. They become

implicit rather than explicit. The seller may absorb this cost in
the form of accepting the obligation to buy. or use or resell
goods it otherwise would not accept (thus reducing its return
on the transaction). Alternatively, the seller may build the
transactions finance costs into the price the buyer must pay. The
finance costs are there, though hidden.
Limiting Competition
There is another implicit cost when counter trade is required by
the LDC or non-market economy (NME) buyer as a condition
of the transaction. Counter trade limits the potential number
of sellers in the market. Not every seller firm is willing or able to
engage in counter trade thus, an LDC or NME buyer that
insists on counter trade as part of a trade package limits its
potential for obtaining a competitive product, service, or price.
The fact is that engaging in counter trade costs the LDC or
NME economy more in terms of real resources than a straight
commercial transaction.
Market Distortions and False Signals

Developing countries may not have well-developed international marketing facilities. As a result they often find it
difficult to break into international markets with goods and
services that are nontraditional for their economy.
In other cases an LDC or NME may choose to develop a new
domestic industry by buying the technology and plan from
abroad. Domestic demand may not be adequate for an efficient
plant size. In response, they may opt for a larger, more efficient
(but possibly from a world supply view, redundant) plant with
the expectation of placing the marginal production on the
international market.
Such efficiency is not present in the conditional transactions that

make up counter trade. The inefficiency cost must be borne by
one or more of the parties involved.
Under such conditions counter purchase or buyback agreements

may be sought by the LDC or NME to finance the importation of plant and equipment for a new industry (as in a
buyback agreement) or general imports (as in a counter purchase
agreement). The LDC or NME also may be seeking a more
knowledgeable partner to handle the international marketing of
goods for which it does not have the expertise. .
Many counter trade transactions are entered into because the

importing country is unable to obtain financing in the international markets and is short of hard-currency reserves. The lack
of access, or limited access, to the credit markets may be due to
restrictions on the country, placed as a condition for specific new
lending by the International Monetary Fund (IMF) or foreign
commercial banks. In this environment counter trade is
sometimes viewed by an LDC government as a means of
engaging in trade without the cost of entering the international
finance markets.
The difficulty with this approach is that counter trade may be

used to get goods onto the international market that would not
make it under usual conditions and will not be competitive
once the buyback agreement expires. Further, the industrial
country firm that accepted the counter traded goods may dump
them, which would be disruptive to international markets. The
result may be that the LDC or NME producer may falsely
interpret the signals and overestimate the real market demand
for the dumped goods as being stronger than a longer-.term,
unsubsidized, market can bear.
Whereas it is correct that counter trade may mean that the

international financial markets may not have to be tapped, it is
not correct to assume that there are no financing costs associated
with a counter trade transaction. In fact, because of the
complexity associated with carrying out a counter trade transaction, the cost is higher than if the LDC has had access to
those credit markets. Moreover, counter trade may end up
subverting the capital and austerity restrictions that in some
cases are a part of an IMF/LDC lending agreement.
Moreover, the secondary consequences of counter trade

transactions are not benign. The inefficiencies of counter tradethe false-price signals that result in the building of redundant
plant and equipment-tend to promote the establishment of
bureaucracies within governments and private firms that have
bought into counter trade. In turn, these bureaucracies have a
vested interest in maintaining the economic distortions that
under gird the growth in counter trade.
262
Counter trade is a significant factor in modern international

trade. In its different forms it is used as a marketing tool, as a
competitive tool, as a tool to restrict trade alternatives, and as a
tool to tie the trade of one country to another country. Counter
trade in a modern world economy with highly developed
goods, capital, and financial markets appears on its face to be an
incongruous development. Counter trade is a costly, inefficient,
and disruptive anomaly. Yet observers of international trade
suggest that the volume of counter trade is growing.
Counter trade takes place in a world of imperfection where the
political and economic policies of government and industry
distort the relationships between and within the goods, capital,
and financial markets.
Questions
1. Discuss the pros and cons of counter trade as a form of
trade.
2. As a manufacturing firm located in a developed country, you
are interested in taking advantage of the Eastern European
markets movement toward market-oriented economies.
However, your potential customers lack hard currency and
have asked you to consider counter trade. Are you willing to
engage in counter trade? Why or why not?
Trade Terms
A number of terms covering the condition of the
delivery are commonly used in international trade. The
internationally accepted terms of trade are known as
Incoterms. Every commercial transaction is based on a
contract of sale, and the trade terms used in that
contract have the important function of naming the exact
point at which the ownership of merchandise is transferred from the seller to the buyer.The simplest type of
export sale is ex-works (manufacturers location). Under
this type of contract, the seller assists the buyer in
obtaining an export license, but the buyers responsibility ends there. At the other extreme, the easiest terms of
sale for the buyer are Delivered Duty Paid (named place
of destination), including duty and local transportation
to his or her warehouse. Under this contract, the buyers
only responsibility is to obtain an import license if one is
needed and to pass the customs entry at the sellers
expense. Between these two terms, there are many
expenses that accrue to the goods as they move from the
place of manufacture to the buyers warehouse. Following are some of the steps involved in moving goods from
a factory to a buyers warehouse:
1. Obtaining an export license if required (in the United
States, nonstrategic goods are exported under a general
license that requires no specific permit).
5. Preparing a land bill of lading.

6. Completing necessary customs export papers.
7. Preparing customs or consular invoices as required by
the country of destination.
8. Arranging for ocean freight and preparation.
9.Obtaining marine insurance and certificate of the
policy.Who carries out these steps? It depends on the
terms of the sale. In the following paragraphs, some of
the major terms are defined.The following two terms are
acceptable Incoterms for all modes of transportation:Exworks. In this contract, the seller places goods at the
disposal of the buyer at the time specified in the
contract. The buyer takes delivery at the premises of the
seller and bears all risks and expenses from that point
on.Delivered Duty Paid. Under this contract, the seller
undertakes to deliver the goods to the buyer at the place
he or she names in the country of import with all costs,
including duties, paid. The seller is responsible under
this contract for getting the import license if one is
required.The following are acceptable Incoterms for sea
and inland waterway transportation only:FAS (Free
Alongside Ship) Named Port of ShipmentUnder this contract, the
seller must place goods alongside, or available to, the
vessel or other mode of transportation and pay all
charges up to that point. The sellers legal responsibility
ends once he or she has obtained a clean wharfage
receipt.FOB (Free on Board).In an FOB contract, the responsibility and liability of the seller does not end until the
goods have actually been placed aboard a ship. Terms
should preferably be FOB ship (name port). The term
FOB is frequently misused in international sales. FOB
means, goods must be loaded on board, and buyer pays
freight. Since freight charges generally include loading
the goods, in essence, a double payment is made; the
buyer pays twice.CIF (Cost, Insurance, Freight) Named Port of
Importations.Under this contract, as in the FOB contract,
the risk of loss or damage to goods is transferred to the
buyer once the goods have passed the ships rail.
However, the seller has to pay the expense of transportation for the goods up to the port of destination, including
the expense of insurance.CFR (Cost and Freight).The
terminology is the same as CIF except the seller is not
responsible for risk or loss at any point outside the
factory.The following Incoterm is acceptable for air, rail
shipments, and multinational shipments:FCA (Free Carrier)
Named Place.Seller fulfills obligations when he or she
hands over goods cleared for exports to the carrier named
by the buyer at the named place or point (e.g, airport,
rail siding, or sellers factory).
2. Obtaining a currency permit if required.

3. Packing the goods for export.
4. Transporting the goods to the place of departure (this
would normally involve transport by truck or rail to a
seaport or airport).
263
Summing Up
LESSON 28:
TRANSFER PRICING AND OTHER PRICING APPROACHES
Transfer Pricing
Transfer pricing refers to the pricing of goods and service
bought and sold by operating units or divisions of a single
company. In other words, transfer pricing concerns intra-corporate exchanges-transactions between buyers and sellers that
have the same corporate parent. For example, Toyota subsidiaries sell to, and buy from, each other. The same is true of other
companies operating globally. As companies expand and create
de-centralized operations, profit centers become an increasingly
important component in the overall corporate financial picture.
Appropriate intra-corporate transfer pricing systems and policies
are required to ensure profitability at each level. When a
company extends its operations across national boundaries,
transfer pricing takes on new dimensions and complications. In
determining transfer prices to subsidiaries, global companies
must ad-dress a number of issues, including taxes, duties and
tariffs, country profit transfer rules, conflicting objectives of
joint venture partners, and government regulations.
There are three major alternative approaches to transfer pricing.
The approach used will vary with the nature of the firm,
products, markets, and the historical circumstances of each case.
The alternatives are (1) cost-based transfer pricing, (2) marketbased trans-fer pricing, and (3) negotiated prices.
1. Cost-based Transfer Pricing
Because companies define costs differently, some companies
using the cost-based ap-proach may arrive at transfer prices
that reflect variable and fixed manufacturing costs only.
Alternatively, transfer prices may be based-on full costs,
including overhead costs from marketing, research and
development (R&D), and other functional areas. The way
costs are defined may have an impact on tariffs and duties on
sales to affiliates and sub-sidiaries by global companies.
Cost-plus pricing is a variation of the cost-based approach.
Companies that follow the cost-plus pricing method are
taking the position that profit must be shown for any
product or service at every stage of movement through the
corporate system. In such an instance, transfer prices may be
set at a certain percentage of fixed costs, such as 110 percent
of cost While cost-plus pricing may result in a price that is
completely unre-lated to competitive or demand conditions
in international markets, many exporters use this approach
successfully.
2. Market-based Transfer Price
A market based transfer price is derived from the price
required to be competitive in the international market The
constraint on this price is cost However, as noted previously,
there is a considerable degree of variation in how costs are
defined. Because costs gen-erally decline with volume, a
decision must be made regarding whether to price on the
basis of current or planned volume levels. To use market-
264
based transfer prices to enter a new market that is too small

to support local manufacturing, third-country sourcing may
be required. This enables a company to establish its name or
franchise in the market without committing to a major
capital investment.
3. Negotiated Transfer Prices
A third alternative is to allow the organizations affiliates to
negotiate transfer prices among themselves. In some
instances, the final transfer price may reflect costs and market
prices, but this is not a requirement. The gold standard of
negotiated transfer prices is known as an arms-length price:
the price that two independent, unrelated en-tities would
negotiate.
4. Tax Regulations And Transfer Prices
Because the global corporation conducts business in a world
with different corporate tax rates, there is an incentive to
maximize system income in countries with the lowest tax
rates and to minimize income in high-tax countries.
Governments, naturally, are well aware of this situation. In
recent years, many governments have tried to maximize national tax revenues by examining company returns and
mandating reallocation of income and expenses.
Although a full treatment of tax issues is beyond the scope
of this book, students should understand that a basic
pricing question facing global marketers is, What can a
company do in the international pricing area in the light of
current tax law? It is im-portant to note that U.S. Treasury
regulations do not have the weight of law until they are
upheld by the courts Global marketers must examine the
regulations carefully, not only because they are the tax laws
but because they guide the Internal Revenue Service (IRS)
when it reviews transactions between related business
organizations. In the United States, Section 482 of the tax
code and the accompanying regulations are devoted to
transfer pricing. The complete text of Section 482 appears in.
Appendix 2 at the end of this chapter
a. Sales of Tangible and Intangible Property
Section 482 of the U.S. Treasury regulations deals with
controlled intra-company trans-fers of raw materials and
finished and intermediate goods, as well as intangibles such
as charges for the use of manufacturing technology. The
general rule that applies to rules of tangible property is
known as the arms-length formula, defined as the prices that
would have been charged in independent transactions
between unrelated parties under similar circumstances. Three
methods-listed next in order of priority-are spelled out in
the regulations for establishing an arms-length price. The
regulations require that a company disprove the applicability
of one method before utilizing a lower-priority one.
Table 4 summarizes the results of recent studies comparing

transfer-pricing methods by country. As shown in the table,
nearly half of U.S.-based companies doing business
internationally use some form of cost-based transfer pricing.
b. Competitive Pricing
Because Section 482 places so much emphasis on armslength price, a manager at an American company who
examines the regulations might wonder whether the spirit
of these regulations permits pricing decisions to be made
with regard to market and com-petitive factors. Clearly, if
only the arms-length standard is applied, a company may
not be able to respond to competitive factors existing in
every market, domestic and global. Fortunately, the
regulations provide an opening for the company that seeks
to be price competitive or to aggressively price U.S.-sourced
products in its international opera-tions. Many interpret the
regulations to mean that it is proper for a company to reduce
prices and increase marketing expenditures through a
controlled affiliate to gain market share even when it would
not do so in an arms-length transaction with an
independent distributor. This is because market position
represents, in effect, an investment and an asset. A company
would invest in such an asset only if it controlled the resellerthat is, if the reseller is a subsidiary. The regulations may also
be interpreted as permitting a company to lower its transfer
price for the purpose of entering a new market or meet-ing
competition in an existing market either by instituting price
reductions or by in-creased marketing efforts in the target
markets. Companies must have and use this latitude in
making price decisions if they are to achieve significant
success in interna-tional markets with US sourced goods.
Table 4
Methods
Cost based
Market price
based
Negotiated
Other
United
states
46%
35%
14%
5%
100%
Canada
Japan
33%
37%
26%
4%
100%
41%
37%
22%
0%
100%
United
kingdom
38%
31%
20%
11%
100%
c. Importance of Section 482 Regulations

Whatever the pricing rationale, it is important that executives
and managers involved in international pricing policy
decisions familiarize themselves with the Section482 regulations. The pricing rationale must conform with the
intention of these regulations. In an effort to develop more
workable transfer pricing rules, the US. Internal Revenue Service (IRS) issued regulations calling for contemporaneous
documentation that supports transfer price decisions. Such
documentation will require participation of management and
marketing personnel in transfer pricing decisions, as opposed
to the tax department. Companies should be prepared to
demonstrate that their pricing methods are the result of
informed choice, not oversight.
It is true that US Treasury regulations and IRS enforcement
policy often seem perplexingly inscrutable. However, there is
ample evidence that the government simply seeks to prevent
tax avoidance and to ensure fair distribution of income from
the operations of companies doing business internationally.
Still, the government does not always succeed in its efforts to
enforce Section 482 by reallocating income. In one recent
court decision, Merck & Co. sued the U.S. government on the
grounds that the IRSs al-location of 7 percent of the income
from a wholly owned subsidiary to the parent com-pany was
arbitrary, capricious, and unreasonable. The IRS had
argued that Merck artificially shifted income to the subsidiary
by sharing costs associated with research and, development,
marketing facilities, and management personnel. The court
agreed with Merck and ordered the IRS to issue a tax refund.
As the Merck case demonstrates, even companies that make a
conscientious effort to comply with the regulations and that
document this effort may find them in tax court. Should a
tax auditor raise questions, executives should be able to
make a strong case for their decisions: Fortunately, consulting
services are available to help managers deal with the arcane
world of transfer pricing.
Transfer pricing to tax liabilities can lead to unexpected and
undesired dis-tortions. A classic example is a major US.
Company with a decentralized, profit-centered organizations
that promoted and gave frequent and substantial salary
increases to its divisional manager in Switzerland. The reason
for the managers rapid rise was his outstanding profit
record. His stellar numbers were picked up by the companys
performance appraisal control system, which in turn
triggered the salary and promotion actions. The problem in
this company was that the financial control system had not
been adjusted to recognize that a Swiss tax haven profit
center had been created. The man-agers sky-high profits were
simply the result of artificially low transfer pricing into the
tax haven operations and artificially high transfer pricing out
of the Swiss tax haven to operating subsidiaries. It took a
team of outside consultants to discover the situation. In this
case, the companys profit and loss records were a gross
distortion of true operat-ing results. The company had to
adjust its control system and use different criteria to evaluate
managerial performance in tax havens.
265
According to the comparable uncontrolled price method,

uncontrolled sales (be-tween unrelated seller and buyer) are
considered comparable to controlled sales (sales between
related parties) if the property and circumstances involved are
identical or nearly identical to those in controlled sales.
Frequently, no comparable uncontrolled sale is available to
use as a reference. In such instances, it may be necessary to
deter-mine an applicable resale price, that is, the price at which
property purchased in a con-trolled sale is resold by the buyer
in an uncontrolled sale. Using this approach, which is
sometimes referred to as retail price minus, an arms-length
price can be established by reducing the applicable resale price
by an amount that reflects an appropriate markup. This is the
resale price method of determining transfer prices. The third
and lowest pri-ority method is the cost-plus method. When
the quest for an arms-length price brings a global company
to cost-plus pricing, it has come full circle to the basic transfer
pric-ing methods described earlier.
Transfer Pricing at Hewlett-packard

Transfer pricing plays a key role in coordinating numerous and distant
profit centers at Hewlett-Packard (HP), a multinational firm that gets
over half of its sale from outside the United States. HPs transfer pricing
objectives include (1) motivating local managers who wish to show large
profits, (2) minimizing the chances of a tax audit, and (3) moving profits
to low-tax jurisdictions while satisfying tax authorities of the business
reasons for such moves. HPs accounting and finance manual describes the
basis for transfer pricing, using either a list price minus a discount or a
cost-plus method. HP typically uses cost plus 10 percent as the desired
company rate of return. The U.S. Internal Revenue Service (IRS)
generally advises corporations to base transfer pricing markups on a
return on assets method.
HP believes, however, that such a return on assets method is more
appropriate to capital-intensive and machinery-based industries; HP and
other high-tech companies spend an enormous amount on R&D, which is
often expensed. Thus, capital assets may be understated. Hence, HP
argues that using a cost-plus method allows adequate return to R&D.
Hps tax department breaks down the profit from each product line and
shows how it is allocated among R&D, manufacturing, and sales.
To avoid ongoing conflicts with the IRS over transfer pricing, however, HP
has considered whether to adhere to the new IRS approach to transfer
pricing, called advanced determination rulings (ADR). The ADR
method suggests that companies submit proposed transfer pricing plans to
it to determine whether they comply with IRS regulations rather than wait
for an audit to rule on the acceptability of a formula already in use.
However, HP believes that the ADR approach needs to be modified to
make it more attractive. Several areas of concern exist:
1. The amount of detailed information and economic analysis required by
the IRS; HP found this burden to be as great as the requirements of a
tax audit.
2. The financial information disclosed might become available to
competitors.
3. The information submitted would later be used by other parts of the
IRS in a tax audit. HP wanted the department carrying out the ADR to
be in a different jurisdiction from the one doing previous years tax audits.
Similarly, HP wanted IRS agents involved in the ADR to agree not to
disclose information gained from the ADR to agents conducting an audit.
Given the importance of transfer pricing, ADRs look promising,
especially because other countries such as Japan and Germany use them,
and bilateral agreements are being developed. Under bilateral agreements
between two countries, the results of one countrys ADR investigations
would be accepted in the other country.
5. Duty and Tariff Constraints

Corporate costs and profits are also affected by import
duties. The higher the duty rate, the more desirable a low
transfer price. The high duty creates an incentive to reduce
transfer prices to minimize the customs duty. Duties in
many industry sectors were substantially reduced or
eliminated by the Uruguay Round of GATT negotiations.
Many companies tend to downplay the influence of taxes
when developing pricing policies. There are a number of
reasons for this. First, some companies consider tax savings
to be trivial in comparison with the earnings that can be
obtained by concentrating on effective systems of
266
motivation and corporate resource allocation. Second,

management may consider any effort at systematic tax
minimization to be un-ethical. Another argument is that a
simple, consistent, and straightforward pricing policy
minimizes the tax investigation problems that can develop if
sharper pricing policies are pursued. According to this
argument, the savings in executive time and the costs of outside counsel offset any additional taxes that might be paid
using such an approach. Fi-nally, after analyzing the
worldwide trend toward harmonization of tax rates, many
chief financial officers (CFOs) have concluded that any set of
policies appropriate to a would characterized by wide
differentials in tax rates will soon become obsolete. They
have, therefore, concentrated on developing pricing policies
that are appropriate for a world that is very rapidly evolving
toward relatively similar tax rates.
Thunderbird: The American Classic

Tariff structures in a country can lead to some opportunities for products.
In some situations, they can even dictate taste. In Kuala Lumpur,
Malaysia, Ms. Muthu, on her way to a party, stops by a premier
supermarket for a favorite California wine to help ring in the New Year.
She heads straight for the Thunderbird and Night Train Express, cheap
forfeited apple wines often associated with skid-row drinking in the U.S.
We like the taste of it as well as the low price, she says.
Thunderbird, which promotes itself, as The American Classic, and
Night Train Express dont have much of an image problem in Kuala
Lumpur. They are prominently displayed in upscale department stores
and at some of the toniest supermarkets in this affluent capital. They
sell like hot cakes, says the liquor department head. Night Train
Express (label instructions: serve very cold) was such a hot seller that the
store ran out of stock in the crucial days before the long New Years
holiday weekend.
The popularity of these two wines shows how a tariff system can help
dictate taste. Malaysias bureaucrats decided years ago that so-called
beverages wines-those made from fruit other than grapes-should be taxed
at a significantly lower rate than grape wines. As a result, cheap table
wine, until recently, sold at more than twice the price of Thunderbird,
which retails for less than $5. Night Train Express is a little more
expensive. Obviously the wine market in Kuala Lumpur has little
understanding of the nuances of wine and that makes price differences
critical.
6. Joint Ventures
Joint ventures present an incentive to set transfer prices at
higher levels than would be used in sales to wholly owned
affiliates because a companys share of the joint venture
earnings is less than 100 percent. Any profits that occur in the
joint venture must be shared. The increasing frequency of tax
authority audits is an important reason for working out an
agreement that will also be acceptable to the tax authorities.
The tax authorities crite-rion of arms-length prices is
probably most appropriate for the majority of joint
ventures.
To avoid potential conflict, companies with joint ventures
should work out pricing agreements in advance that are
1. The way in which transfers prices will be adjusted in response

to exchange rate changes. 2. Expected reductions in manufacturing costs arising from
learning curve improve-ments and the way these will be
reflected in transfer prices.
3. Shifts in the sourcing of products or components from
parents to alternative sources.
4. The effects of competition on volume and overall margins.
Global Pricing Three Policy Alternatives

What pricing policy should a global company pursue? Viewed
broadly, there are three alternative positions a company can take
on worldwide pricing.
1. Extension / Ethnocentric
The first can be called an extension/ethnocentric pricing
policy. This policy requires that the price of an item be the
same around the world and that the importer absorb freight
and import duties. This approach has the advantage of
extreme simplicity because no information on competitive or
market conditions is required for implementation. The
disadvantage of this approach is directly tied to its simplicity.
Extension pricing does not respond to the competitive and
market conditions of each national market and, there-fore,
neither maximizes the companys profits in each national
market nor globally. The box, Pricing Reeboks in India,
gives an example of a company that is trying to main-tain its
image of high quality in global markets.
2. Adaptation/Polycentric
The second pricing policy can be termed adaptation/
polycentric. This policy permits sub-sidiary or affiliate
managers to establish whatever price they feel is most
desirable in their circumstances. Under such an approach,
there is no control or firm requirement that prices be
coordinated from one country to the next. The only
constraint on this approach is in setting transfer prices within
the corporate system. Such an approach is sensitive to local
conditions, but it may create product arbitrage opportunities
in cases in which disparities in local market prices exceed the
transportation and duty cost separating markets.
Pricing Reeboks In India

When Reebok, the worlds number two athletic shoe company, decided to
enter India in 1995, it faced several basic marketing challenges. For one
thing, Reebok was creating a market from scratch. Upscale sports shoes
were virtually unknown, and the most expensive sneakers available at the
time cost 1,000 rupees (about $23). Reebok officials also had to select a
market entry mode. The decision was made to subcontract with four local
sup-pliers, one of which became a joint venture partner. Only a limited
number of distribution options were available. Bata, a Canadian company
with global operations, was the sole shoe retailer with national coverage.
American- style sports stores were unknown in India. To reinforce
Reeboks high-tech brand image, company officials de-cided to establish
their own retail infrastructure: There were two other crucial pieces of the
puzzle: product and price. Should Reebok create a line of mass-market
shoes specifically for India and priced at. Rs 1,000? The alternative was
to offer the same designs sold in other parts of the world and price them at
Rs 2,500 ($58), a figure that represented the equivalent of a months
salary for a junior civil servant.In the end, Reebok decided to offer Indian
consumer about 60 models chosen from the companys global offerings. The
decision was based in part on a desire to sustain Reeboks brand image of
high quality. Management realized that the decision would limit the size
of the market. Despite estimates that Indias middle class was
comprised of 300 million people, the number who could afford premiumpriced products was estimated to be about 30 million. Reeboks least
expensive shoes were priced at about Rs 2,000 per pair; for about the
same amount of money, a farmer could buy a dairy cow or a homeowner
could buy a new refrigerator. Nevertheless, customer response was very
favorable, especially among middle-class Youth .As Muktesh Pant,
Reebok regional manager, noted, For Rs 2,000 to Rs 3,000, people feel
they can really make a statement. Its cheaper than buying a new watch,
for instance: if you want to make a splash at a party. And though our
higher-priced shoes put us ill competition with things like refrigerators and
cows, the upside is that were new being treated as a prestigious
brand.Reebok was also pleased to discover that demand was strong outside
of key metropolitan markets such as Delhi, Mumbai, and Chennai. The
cost of living is lower in small towns, so consumers have more disposable
income to spend. In addition, inhabitants of rural areas have had less
opportunity to travel abroad and therefore have not had the opportunity to
shop for trendy brands elsewhere. Reebok now has about 100 branded
franchise stores that sell about 300,000 pairs of athletic shoes in India
each year. The company exports twice that number of Indian-made shoes
to Europe and the United States. As Pant observed, At first we Were
embarrassed about our pricing. But it has ended up serving us well
When such a condition exists, there is an opportunity for the enterprising
business manager to take advantage of these price disparities by buying in
the lower-price market and selling in the higher-price market There is also
the problem that under such a policy, valuable knowledge and experience
within the corporate system concerning effective pric-ing strategies are not
applied to each local pricing decision. The strategies are not applied
because the local managers are free to price in the way they feel is most
desirable, and they may not be fully informed about

company experience when they make their decision.
Letting each country unit make price decisions carries another
disadvantage: It may send a signal to the rest of the world
that is contrary to company interests. For example, drug
companies must be extremely careful when setting prices for
drugs sold to agen-cies in different countries. They are
dealing with monopoly buyers in many countries, and these
buyers have the resources and motivation to negotiate the
lowest possible price. Without headquarters control, a small
country might decide for various reasons to sell a drug at a
low price that would be extremely disadvantageous and
unwise for the company in the rest of the world. In the
chemical industry, a price move anywhere in the world is
known instantly all over the world. It is, therefore, important
for pricing to be under the control of the headquarters
organization.
3. Invention/Geocentric
The third approach to international pricing can be termed
invention/geocentric. Using this approach, a company
267
acceptable to both sides. The following are several considerations for joint venture transfer pricing:
neither fixes a single price worldwide nor remains aloof from

sub-sidiary pricing decisions but instead strikes an
intermediate position. A company pursu-ing this approach
works on the assumption that there are unique local market
factors that should be recognized in arriving at a pricing
decision. These factors include local costs, income levels,
competition, and the local marketing strategy. Local costs
plus a return on invested capital and personnel fix the price
floor for the long term. However, for the short term, a
company might decide to pursue a market penetration
objective and price at less than the cost-plus return figure
using export sourcing to establish a market An-other shortterm objective might be to estimate the size of a market at a
price that would be profitable given local sourcing and a
certain scale of output Instead of building facil-ities, the
target market might first be supplied from existing highercost external supply sources. If the price and product are
accepted by the market the company can then build a local
manufacturing facility to further develop the identified
market opportunity in a profitable way. If the market
opportunity does not materialize, the company can experiment with the product at other prices because it is not
committed to a fixed sales volume by existing local
manufacturing facilities.
Selecting a price that recognizes local competition is essential.
Many international market efforts have floundered on this
point. A major U.S. appliance manufacturer in-troduced its
line of household appliances in Germany and, using U.S.
sourcing, set price by simply marking up every item in its line
by 28.5 percent. The result of this pricing method was a line
that contained a mixture of under priced and overpriced
products. The overpriced products did not sell because better
values were offered by local companies the under priced
products sold very well, but they would have yielded greater
profits at higher prices. What was needed was product line
pricing, which took lower than normal margins in some
products and higher margins in others to maximize the
profitability of the full line.
For consumer products, local income levels are critical in the
pricing decision. If the product is normally priced well above
full manufacturing costs, the global marketer has the latitude
to price below prevailing levels in low-income markets and,
as a result, reduce the gross margin on the product. No
business manager enjoys reducing margins; however,
margins should be regarded as a guide to the ultimate
objective, which is profitability. In some markets, income
conditions may dictate that the maximum profitability will
be ob-tained by sacrificing normal margins. The important
point here is that in global market-ing there is no such thing
as a normal margin.
The final factor bearing on the price decision is the local
marketing strategy and mix. Price must fit the other elements
of the marketing program. For example, when it is decided
to pursue a pull strategy that uses mass-media advertising
and intensive dis-tribution, the price selected must be
consistent not only with income levels and compe-tition but
also with the costs and extensive advertising programs.
268
In addition to these local factors, the geocentric approach

recognizes that head-quarters price coordination is necessary
in dealing with international accounts and product arbitrage
(the purchase and sale of product in different markets to
profit from price discrepancies). Finally, the geocentric
approach consciously and systematically seeks to ensure that
accumulated national pricing experience is leveraged and
applied wherever relevant.
Of the three methods, only the geocentric approach lends
itself to global competi-tive strategy. A global competitor
will take into account global markets and global competitors
in establishing prices. Prices will support global strategy
objectives rather than the objective of maximizing
performance in a single country.
4. Actual Pricing Practices
Samli and Jacobs studied the pricing practices of US
multinational firms. Based on a mail survey, they concluded
that 70 percent of the firms in their sample of the top 350
of the Fortune 500 largest industrial companies and the 100
largest US multinational companies standardized their prices,
whereas 30 percent used variable pricing in world markets.
The survey raises two interesting questions. The first is:
What are the actual pricing practices of companies operating
globally? Are 70 percent of US firms approach-ing global
markets with standardized prices? As Samli and Jacobs
suggest, if indeed this is true, it would appear that many
companies should consider reviewing the pricing poli-cies.
What are the practices of non-US firms? However, results of
a mail survey on a subject as sensitive and complex as pricing
must always be considered suspect.
The second question is: What should be the pricing policy of
firms operating glob-ally? As we outlined earlier, there are
three options: extension/ethnocentric or stan-dardized,
adaptation/polycentric or localized, and invention/
geocentric. Of the three, the third is clearly superior
theoretically. It requires more information and integration)
between headquarters and subsidiaries than either of the
other two approaches, but it is clearly superior in its ability to
respond to both the customers ability to pay and
competitive pricing in each national market.
Price Quotations
In quoting the price of goods for international sale, a contract
may include specific elements affecting the price, such as credit,
sales terms, and transportation. Parties to the transaction must
be certain that the quotation settled on appropriately locates
responsibility for the goods during transportation and spells
out who pays transportation charges and from what point. Price
quotations must also specify the currency to be used, credit
terms, and the type of documentation required. Finally, the
price quotation and contract should define quantity and quality.
A quantity definition might be necessary because different
countries use different units of measurement. In specifying a
ton, for example, the contract should identify it as a metric or an
English ton, and as a long or short ton. Quality specifications
can also be misunderstood if not completely spelled out.
Furthermore, there should be complete agreement on quality
standards to be used in evaluating the product. For example,
Administered Pricing
Administered pricing relates to attempts to establish prices for
an entire market. Such prices may be arranged through the
cooperation of competitors, through national, state, or local
governments, or by international agreement. The legality of
administered pricing arrangements of various kinds differs
from country to country and from time to time. A country may
condone price fixing for foreign markets but condemn it for the
domestic market, for instance.
In general, the end goal of all administered pricing activities is
to reduce the impact of price competition or eliminate it. Price
fixing by business is not viewed as an acceptable practice (at least
in the domestic market), but when governments enter the field
of price administration, they presume to do it for the general
welfare to lessen the effects of destructive competition.
The point when competition becomes destructive depends
largely on the country in question. To the Japanese, excessive
competition is any competition in the home market that
disturbs the existing balance of trade or gives rise to market
disruptions. Few countries apply more rigorous standards in
judging competition as excessive than Japan, but no country
favors or permits totally free competition. Economists, the
traditional champions of pure competition, acknowledge that
perfect competition is unlikely and agree that some form of
workable competition must be developed.
The pervasiveness of price-fixing attempts in business is
reflected by the diversity of the language of administered prices;
pricing arrangements are known as agreements, arrangements,
combines, conspiracies, cartels, communities of profit, profit
pools, licensing, trade associations, price leadership, customary
pricing, or informal interfirm agreements. The arrangements
themselves vary from the completely informal, with no spoken
or acknowledged agreement, to highly formalized and structured arrangements. Any type of price-fixing arrangement can
be adapted to international business, but of all the forms
mentioned, cartels are the most directly associated with international marketing.
Cartels
A cartel exists when various companies producing similar
products or services work together to control markets for the
types of goods and services they produce. The cartel association
may use formal agreements to set prices, establish levels of
production and sales for the participating companies, allocate
market territories, and even redistribute profits. In some
instances, the cartel organization itself takes over the entire
selling function, sells the goods of all the producers and
distribute the profits.
The economic role of cartels is highly debatable, but their
proponents argue that they eliminate cutthroat competition and
rationalize business, permitting greater technical progress and
lower prices to consumers. However, in the view of most
experts, it is doubtful that the consumer benefits very often

from cartels.
The Organization of Petroleum Exporting Countries (OPEC)
is probably the best-known international outlet. Its power in
controlling the price of oil resulted from the percentage of oil
production it controlled. In the early 1970s, when OPEC
members provided the industrial world with 67 percent of its
oil, OPEC was able to quadruple the price of oil. The sudden
rise in price from $10 or $12 barrel to $50 or more a barrel was a
primary factor in throwing the world into a major recession.
Non-OPEC oil-exporting countries benefited from the price
increase while net importers of foreign oil suffered economic
downturns. Among Third World countries, those producing
oil prospered while oil importers suffered economically from
the high prices.
One important aspect of cartels is their inability to maintain
control for indefinite periods. Greed by a cartel member and
other problems generally weaken the control of the cartel.
OPECs control began to erode as member nations began
violating production quotas, users were taking effective steps for
conservation, and new sources of oil production by non-OPEC
members were developed.
A lesser-known cartel but one that has a direct impact on
international trade is the shipping cartel that exists among the
worlds shipping companies. Every two weeks about 20
shipping-line managers gather for their usual meeting to set
rates on tens of billions of dollars of cargo. They do not refer
to themselves as a cartel but rather operate under such innocuous names as The Trans-Atlantic Conference Agreement.
Regardless of the name, they set the rates on about 70 percent
of the cargo shipped between the United States and Northern
Europe. Shipping between the United States and Latin America
ports and between the United States and Asian ports also is
affected by shipping cartels. Not all shipping lines are members
of cartels, but a large number are and thus they have a definite
impact upon shipping. Although legal, shipping cartels are
coming under scrutiny by the U.S. Congress, and new regulations may soon be passed.
The legality of cartels at present is not defined. Domestic
cartelization is illegal in the United States, and the European
Community also has provisions for controlling cartels. The
United States, however, does permit firms to take cartel-like
actions in foreign markets although it does not sanction foreign
market cartels if the results have an adverse impact on the
United States economy. Archer Daniels Midland Company, the
U.S. agribusiness giant, was fined $205 million for its role in
fixing prices for two food additives, lysine and citric acid.
German, Japanese, Swiss, and Korean firms were also involved
in the cartel.
The group agreed on process to charge and then allocated the
share of the world market each company would get down to
the tenth of a decimal point. At the end of the year, any
company that sold more than its allotted share was required to
purchase in the following year the excess from a co-conspirator
that had not reached its volume allocation target. Increasingly, it
has become apparent that many governments, concluding they
cannot ignore or destroy cartels completely, have chosen to
269
customary merchantable quality may be clearly understood

among U.S. customers but have a completely different interpretation in another country. The international trader must review
all terms of the contract; failure to do so may have the effect of
modifying prices even though such a change was not intended.
establish ground rules and regulatory agencies to oversee the

cartel-like activities of businesses within their jurisdiction.
Government Influenced Pricing

Companies doing business in foreign countries encounter a
number of different types of government price setting. To
control prices, governments may establish margins, set prices
and floors or ceilings, restrict price changes, compete in the
market, grant subsidies, and act as a purchasing monopsony or
selling monopoly. The government may also influence prices by
permitting, or even encouraging, businesses to collude in
setting manipulative prices.
The Japanese government traditionally has encouraged a variety
of government influenced price-setting schemes. However, in a
spirit of deregulation that is gradually moving through Japan,
Japans Ministry of health and Welfare will soon abolish
regulations of business hours and price setting for such
businesses as barbershops, beauty parlours, and laundries.
Under the current practice, 17 sanitation related businesses could
establish such price-setting schemes, which are exempt from the
Japanese Anti-Trust Law.
Governments of producing and consuming countries seem to
play an ever-increasing role in the establishment of international
prices for certain basic commodities. There is, for example, an
international coffee agreement, an international cocoa agreement, and an international sugar agreement. And the world
price of wheat has long been at least partially determined by
negotiations between national governments.
Despite the pressure of business, government, and international price agreements, most marketers still have wide latitude
in their pricing decisions for most products and markets
270
LESSON 29:
GLOBAL ADVERTISING
Global Advertising Content: The
Extension Verus Adaptation Debate
Communication experts generally agree that the overall requirements of effective Communication and persuasion are fixed and
do not vary from country to country. The same thing is true of
the components of the communication process: The marketer or
senders message must be encoded, conveyed via the appropriate
channel(s), and decoded by the customer or receiver. Communication takes place only when meaning is transferred. Four major
difficulties can compromise an organizations attempt to
communicate with customers in any location
1. The message may not get through to the intended recipient.
This problem may be the result of an advertisers lack of
knowledge about appropriate media for reaching certain
types of audiences. For example, the effectiveness of
television as: a medium for reaching mass audiences will vary
proportionately with the extent to which television viewing
occurs with a country.
2. The message may reach the target audience but may not be
understood or may even be misunderstood. This can be the
result of an inadequate understanding of the target
audiences level of sophistication or improper encoding.
3. The message may reach the target audience and may be
understood but still may not induce the recipient to take the
action desired by the sender. This could result from alack of
cultural knowledge about a target audience.
4. The effectiveness of the message can be impaired by noise.
Noise in this case is an external influence such as competitive
advertising, other sales personnel, and con-fusion at the
receiving end, which can detract from the ultimate
effectiveness of the communication.
The key question for global marketers is whether the specific
advertising message and media strategy must be changed from
region to region or country-to-country because of environmental requirements. Proponents of the one world, one voice
approach to global advertising believe that the era of the global
village is fast approaching and that tastes and preferences are
converging worldwide. According to the standard-ization
argument, because people everywhere want the same products
for the same rea-sons, companies can achieve great economies
of scale by unifying advertising around the globe. Advertisers
who follow the localized approach are skeptical of the global
village argument. Even Coca-Cola, the most global brand in the
world, records radio spots in 40 languages with 140 different
music backgrounds. Coca-Cola asserts at consumers still differ
from country to country must be reached by advertising tailored
to their respective countries. Proponents of localization point
out that most blunders occur because advertisers have failed to
understand and adapt to foreign cultures. Nick Brien, managing
director of Leo Burnett, explains the situation this way:
As the potency of traditional media declines on a daily basis,
brand building locally becomes more costly and international
UNIT 8
brand building becomes more cost effective. The challenge for

advertisers and agencies is finding ads, which work in different
countries and cultures. At the same time as this global tendency, there is a growing local tendency. Its becoming
increasingly important to understand the requirements of both.
During the 1950s, the widespread opinion of advertising
professionals was that effective international advertising
required assigning responsibility for campaign preparation to a
local agency. In the early 1960s, this idea of local delegation was
repeatedly challenged. For example, Eric Elinder, head of a
Swedish advertising agency wrote: Why should three artists in
three different countries sit drawing the same electric iron and
three copy Writers write about what after all is largely the same
copy for the same iron? Elinder argued that consumer differences between countries were diminishing and that he would
more effectively serve a clients interest by putting top specialists
to work devising a strong international campaign. The campaign would then be presented with insignificant modifications
that mainly entailed translating the copy into language well
suited for a particular country.
Global Campaigns For Global Products

Certain consumer products lend themselves to advertising extension. If a
product appeals to the same need around the world, there is a possibility
of extending the appeal to that need. The list of products going global,
once con-fined to a score of consumer and luxury goods, is growing. Global
advertising is partly responsible for increased worldwide sales of
disposable diapers, diamond watches, shampoos, and athletic shoes Some
longtime global ad-vertisers are benefiting from fresh campaigns. Jeans
mar-keter Levi Strauss & Company racked up record sales in Europe in
1991 on the strength of a campaign extended unchanged to Europeans,
Latin Americans, and Australians. The basic issue is whether there is in
fact a global market for the product. If the market is global, appeals can
be standardized and extended. Soft drinks, Scotch whiskey, Swiss
watches, and designer clothing are exam-ples of product categories whose
markets are truly global. For example, Seagrams recently ran a global
campaign keyed to the theme line, There will always be a Chivas Regal
The campaign ran in 34 countries and was transited into 15 languages. In
1991, Seagrams launched a global billboard campaign to enhance the
universal ap-peal for Chivas. The theory: The rich all over will sip the
brand, no matter where they made their fortune.
Gillette Company took a standardized one product/ one brand name/one
strategy global approach when it introduced the Sensor razor in 1990.
The campaign slogan was Gillette. The Best a Man Can. Get, an
appeal that was expected to cross boundaries with ease. Peter Hoff-man,
marketing vice president of the North Atlantic Shaving Group, noted in
a press release: We are blessed with a product category where were able
to market shav-ing systems across multinational boundaries as if they
were one country. Gillette Sensor is the trigger for a total Gillette megabrand strategy which will revolutionize the entire shaving market. In the
Japanese market, Gillettes standardized advertising campaign differs
271
UNIT V
strikingly from -that of archrival Schick. Prior to the Sensor launch,

Gillette custom-made advertising for the Japanese mar-ket; now, except
that the phrase, The best a man can get, is translated into Japanese, the
ads shown in Japan are the same as those shown in the United States and
the rest of the world. Schick, meanwhile, uses Japanese actors in its ads.
The standardized-versus-localized debate picked up tremendous momentum after the publication in 1983 of Professor
Ted Levitts Harvard Business Review article titled The
Globalization of Markets, noted in earlier chapters. In contrast
to the view expounded by Levitt and Liotard Vogt, some recent
scholarly research suggests that the trend is toward the increased
use of-Localized international advertising. Kanso reached that
conclusion in a study surveying two different groups of
advertising managers -those taking localized approaches to
overseas advertising and those taking standardized approaches.
Another finding was that managers who are attuned to cultural
issues tended to prefer the localized approach, whereas managers less sensitive to cultural issues preferred a standardized
approach. Bruce Steinberg, ad sales director for MTV Europe,
has discovered that the people responsible for executing global
campaigns locally can exhibit strong resistance to a global
campaign. Steinberg sometimes has to visit as many as 20
marketing directors from the same company to get approval for
a pan European MTV ad.
As Kanso correctly notes, the controversy over advertising
approaches will proba-bly continue for years to come. Localized
and standardized advertising both have their place and both will
continue to be used Kansos conclusion: What is needed for
suc-cessful international advertising is a global commitment to
local vision. In the final analysis, the decision of whether to use
a global or localized campaign depends on recog-nition by
managers of the trade-offs involved. On the one hand, a global
campaign will result in the substantial benefits of cost savings,
increased control, and the potential cre-ative leverage of a global
appeal. On the other hand, localized campaigns have the advantage of appeals that focus on the most important attributes
of a product in each nation or culture. The question of when to
use each approach depends on the product involved and a
companys objectives in a particular market.
In Japan, for example, PepsiCo has achieved great success with a
local campaign fea-turing Pepsiman, a superhero action figure.
Prior to 1996, the ads shown in Japan were the same global
spots used throughout the rest of the world. However, in
Japans $24 billion soft-drink market, Pepsi trailed far behind
Coca-Cola; Pepsi had a mere 3 per-cent market share compared
with Cokes 30 percent share. The Pepsiman character was
designed by local Japanese talent, but Industrial Light & Magic,
the special-effects house owned by Star Wars creator George
Lucas, was retained to give the TV spots a U.S.-style, high-tech
edge. By breaking with its usual strategy of running global ads
and increasing the ad budget by 50 percent over 1995, Pepsis
1996 sales in Japan rose by 14 percent.
McDonalds advertising has also enjoyed a surge of popularity
in Japan, but for the opposite reason: McDonalds is including
Japan in its global approach that invites consumers to associate
the restaurant with family members interacting in various
272
situations. Starting in 1996, McDonalds campaign in Japan

depicted various aspects of fatherhood. One spot showed a
father and son bicycling home with burgers and fries; another
showed a father driving a vanful of boisterous kids to
McDonalds for milkshakes. The ads come at a time when many
Japanese salary-men are reassessing the balance between work
and family life. The campaign illustrates the use of localized
global advertising; Japanese actors are used in the spots and
local musicians composed music reminiscent of Japan-ese
prime time TV shows.
Activity 1: Two groups of students should give presentation on comparison of two brands and their advertising
campaigns in India and abroad.
Selecting An Advertising Agency

Another global advertising issue companies face is whether to
create ads in, house, use an outside agency, or combine both
strategies. For example, Chanel, Benetton, and Diesel rely on inhouse marketing and advertising staffs for creative; Coca-Cola
has its own agency, Edge Creative, but also uses the services of
outside agencies such as Leo Burnett. When one or more
outside agencies are used, they can serve product accounts on a
multi-country or even global basis. It is possible to select a local
agency in each na-tional market or an agency with both domestic
and overseas offices. In addition to Coca-Cola, Levi Strauss and
Polaroid use local agencies. Today, however, there is a growing
tendency for Western clients to designate global agencies for
product accounts in order to support the integration of the
marketing and advertising functions; Japan- based companies
are less inclined to use this approach. Agencies are aware of this
trend and are themselves pursuing international acquisitions
and joint ventures to extend their geographic reach and their
ability to serve clients on a global account basis. The 20 largest
global advertising organizations ranked by 1998 gross income
are shown in Table below
The organizations identified in Table may include one or more
core advertis-ing agencies as well as units specializing in direct
marketing, public relations, or research. The family tree of
Adidas AGs advertising agency reflects the structure that is
typical of agency ownership today: Leagas is owned by Abbott
Mead Vickers/BBDO, which in turn is a unit of BBDO
Worldwide, whose parent is the Omnicom Group. Als9 interesting to note is that the only three agencies to show declines
were Japanese and that the declines were greater than 10 percent,
the direct result of the Asian economic crisis. Total gross
income in Japan fell 2.2 percent, 33.1 percent in Thailand, 33.9
percent in Malaysia, 39.1 percent in South Korea, and 68.1
percent in Indonesia.
In selecting an advertising agency, the following issues should
be considered:
Company organization. Companies that are decentralized

may want to leave the choice to the local subsidiary.
National responsiveness. Is the global agency familiar with

local culture and buying habits in a particular country, or
should a local selection be made? .
Area coverage. Does the candidate agency cover all relevant

markets?
Buyer perception. What kind of brand age does the

company want to project? If the product needs a strong local
identification, it would be best to select a national agency.
It should be noted that advertising agencies in other countries

might differ in their structure and strategies. In Japan, the
advertising is much more concentrated than in the United
States. There are two super agencies, Hakuhodo and Dentsu,
while global agencies
Rank
1998
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Ad Organization
Omnicom Group
Intrpublic Group of Coso
WPP Group
Dentsu
Young & Rubicam
Havas Advertising
True North Communications
Grey Advertising
Leo Burnett Cp.
Publicis
Snyder Communications
MacManus Group
Hakuhodo
Saatchi & Saatchi
Cordiant Communications Group
TMP Worldwide
Asatsu-DK
Carlson Marketing Group
USWeb/CKS
HA-Lo
Worldwide Gross
Income
Headquarters 1998 % Change
$4,812.
12.0
New York
0
13.1
New York
4,304.5
14.9
London
-10.2
4,156.8
Tokyo
10.8
1,786.0
New York
9.7
1,659:9
Paris
3.1
1,297.9
Chicago
8.5
1,242.3
8.2
New York
1,240.4
28.8
949.8
Chicago
29.1
930.0
New York
2.0
Bethesda, MD 904.2
-13.4
859.2
New York
7.5
734.8
Tokyo
1.0
682.1
New York
13.7
603.2
London
-12.5
347.4
New York
15.2
343.4
Tokyo
100.0
326.8
37.4
Plymouth, MN 228.6
224.0
Santa Clara
Niles, IL
only account for approximately 6 percent of billings. The

Japanese place much more em-phasis on media and it is not
unusual for an agency to represent direct competitors.
Advertising Appeals and Product

Characteristics
Advertising must communicate appeals that are relevant and
effective in the target market environment. Because products are
frequently at different stages in their life cycle in various national
markets, and because of the basic cultural, social, and economic
differences that exist in markets, the most effective appeal for a
product may vary from market to market. Yet, global marketers
should attempt to identify situations in which
1. Potential cost reductions exist because of the presence of
economies of scale;
2. Bar-riers to standardization such as cultural differences are
not, significant; and
3. Products satisfy similar functional and emotional needs
across different cultures.
Green, Cunningham, and Cunningham conducted a crosscultural study to deter-mine the extent to which consumers of
different nationalities use the same criteria to evaluate two
common consumer products: soft drinks and toothpaste. Their
subjects were college students from the United States, France,
India, and Brazil. Compared to France and India, the U.S.
sample placed more emphasis on the subjective and less on
functional product attributes, and the Brazilian sample appeared
even more concerned with the subjective attributes than did the
U.S. sample. The authors concluded that advertising messages
should not use the same appeal for these countries if the
Advertiser is con-cerned with communicating the most
important attributes of its product in each market.
Effective advertising may also require developing different
creative executions or presentations using a products basic
appeal or selling proposition as a point of depar-ture. In other
words, there can be differences between what one says and how
one says it. If the creative execution in one key market is closely
tied to a particular cultural at-tribute, the execution may have to
be adapted to other markets. For example; the sell-ing proposition for many products and services is fun or pleasure, and the
creative presentation should show people having fun as
appropriate for a country or culture.
According to one recent survey, experienced advertising
executives indicated that strong selling propositions can be
transferred more than 50 percent of the time. An ex-ample of a
selling proposal that transfers well is top quality. The promise
of low price or of value for money regularly surmounts
national barriers. In the same survey, most ex-ecutives indicated
that they did not believe that creative presentations traveled well.
The obstacles are cultural barriers, communications barriers,
legislative problems (for ex-ample, children Cannot be used in
France to merchandise products), competitive posi-tions (the
advertising strategy for a leading brand or product is normally
quite different from that for a minor brand), and execution
problems.
Food is the product category most likely to exhibit cultural
sensitivity. Thus, mar-keters of food and food products must
be alert to the need to localize their advertising. A good example
of this is the recent effort by H. J. Heinz Company to develop
the in-ternational market for ketchup. Heinzs strategy called for
adapting both the product and advertising to target country
tastes. In Greece, for example, ads show ketchup pouring over
pasta, eggs, and cuts of meat. In Japan, they instruct Japanese
homemakers on using ketchup as an ingredient in Western-style
food such as omelets, sausages, and pasta. Barry Tilley, Londonbased general manager of Heinzs Western Hemisphere trading
division, says Heinz uses focus groups to determine what
foreign consumers want in the way of taste and image.
Americans like a relatively sweet ketchup, but Europeans prefer a
spicier, more piquant variety. Significantly, Heinzs foreign
marketing efforts are most successful when the company quickly
adapts to local cultural preferences. In Sweden, the made-inAmerica theme is so muted in Heinzs ads that Swedes dont
realize Heinz is American. They think it is German because of
the name, says Mr. Tilley. In contrast to this, American themes
still work well in Germany. Kraft and Heinz are trying to outdo
each other with ads featuring strong American images. In
Heinzs latest TV ad, Ameri-can football players in a restaurant
become very angry when the 12 steaks they ordered arrive
without ketchup. The ad ends happily, of course, with plenty of
Heinz ketchup to go around.
In general, the fewer the number of purchasers of a product,
the less important advertising is as an element of the promotion mix. For example, successful marketing of expensive and
273
technically complex industrial products generally requires a

highly trained direct sales force. The, more sophisticated and
technically complicated an industrial product is, the more
necessary this becomes. For such products, there is no point in
letting national agencies duplicate each others efforts. Advertising of industrial products computers and telecommunications
equipment, for example does play an important role in setting
the stage for the work of the sales force. A good advertising
campaign can make it significantly easier for a salesperson to get
in the door and, once inside, make the sale.
Creating Advertising
Art Direction
Art direction is concerned with visual presentation-the body
language of print and broadcast advertising. Some forms of
visual presentation are universally understood. Revlon, for
example, has used a French producer to develop television
commercials in English and Spanish for use in international
markets. These commercials, which are filmed in, Parisian
settings, communicate the universal appeals and specific advantages of Revlon products. By producing its ads in France, Revlon
obtains effective television commercials at a much lower price
than it would have to pay for similar-length com-mercials
produced in the United States. PepsiCo has used four basic
commercials to communicate its advertising themes. The basic
setting of young people having fun at a party or on a beach has
been adapted to reflect the general physical environment and racial
characteristics of North America, South America, Europe, Africa,
and Asia. The music in these commercials has also been adapted
to suit regional tastes, ranging from rock and roll in North
America to boss a nova in Latin America to high life in Africa.
The international advertiser must make sure that visual
executions are not inappro-priately extended into markets.
Benetton recently encountered a problem with its United
Colors of Benetton campaign. The campaign appeared in
countries, pri-marily in print and on billboards. The art
direction focused on striking, provocative inter-racial juxtapositions-a white hand and a black hand handcuffed together, for
example. Another version of the campaign, depicting a black
woman nursing a white baby, won ad-vertising awards in France
and Italy. However because the image evoked the history of
slavery in America that particular creative execution was not used
in the U.S. market.
Copy
Translating copy or the written text of an advertisement, has been
the subject of great debate in advertising circles. Copy should be
relatively short and avoid slang or idioms. This is because other
languages invariably take more space to convey the same message;
thus, the increased use of pictures and illustrations. More and
more European and Japanese advertisements are purely visual,
conveying a specific message and invoking the company name.
Low literacy rates in many countries seriously compromise the use
of print as a communications device and require greater creativity
in the use of audio-oriented media.
It is important to recognize overlap in the use of languages in
many areas of the world (e.g., the EU, Latin America, and North
America). Capitalizing on this, global ad-vertisers can realize
274
economies of scale in producing advertising copy with the same

lan-guage and message for these markets. Of course, the success
of this approach will depend in part on avoiding unintended
ambiguity in the ad copy. On the other hand, in some situations
ad copy must be translated into the local language. Advertising
slogans often present the most difficult translation problems.
The challenge of encoding and doing slogans and tag lines in
different national and cultural contexts can lead to hilarious errors.
For example, Kentucky Fried Chickens Finger-licking good
came out in Chi-nese as eat your fingers off ; the Asian version
of Pepsis Come Alive copy line was rendered as a call to bring
ancestors back from the grave.
Advertising executives may elect to prepare new copy for a foreign
market in the language of the target country, or to translate the
original copy into the target language. A third option is to leave
some (or all) copy elements in the original (home-country) language. In choosing from among these alternatives, the advertiser
must consider whether a translated message can be received and
comprehended by the intended foreign audi-ence. Anyone with a
knowledge of foreign languages realizes that the ability to think
in that language facilitates accurate communication: One must
understand the connota-tions of words, phrases, and sentence
structures, as well as their translated meaning, in order to be
confident that a message will be understood correctly-after it is
received. The same principle applies to advertising, perhaps to an
even greater degree. A copywriter who can think in the target
language and understands the consumers in the target coun-try
will be able to create the most effective appeals, organize the ideas,
and craft the specific language, especially if colloquialisms, idioms,
and humor are involved. For example, in southern China,
McDonalds is careful not to advertise prices with multiple occurrences of the number four. The reason is simple: In Cantonese,
the pronunciation of the word four is similar to that of the word
death. In its efforts to develop a global brand image, Citicorp
discovered that translations of its slogan City Never Sleeps
conveyed the meaning that Citibank had a sleeping disorder such
as insomnia. Company execu-tives decided to retain the slogan
but use English throughout the world.
When formulating television and print advertising for use in
high-income countries such as the United States, Canada, Japan,
and the EU, the advertiser must recognize major style and
content differences. Ads that strike viewers in some countries as
irritating may not necessarily be perceived that way by viewers in
other countries. American ads make frequent use of spokespersons and direct product comparisons and use logical arguments
to try to appeal to the reason of audiences. Japanese advertising
is more images oriented and appeals to audience sentiment. In
Japan, what is most important frequently is not what is stated
explicitly but, rather, what is implied. Nikes U.S. advertising is
legendary for its irreverent, in your face style and relies heavily
on celebrity sports endorsers such as Michael Jordan. In other
parts of the world, where soccer is the top sport, some Nike ads
are considered to be in poor taste and its pitchmen have less
relevance. Nike has re-sponded by adjusting its approach; notes
Geoffrey Frost, director of global advertising, We have to root
ourselves in the passions of other countries. Its part of our
growing up.
China
Effective October 31. 1994, the Chinese government banned all types of
tobacco advertising. With a popula-tion of 1.2 billion people and having
one out of every three smokers in the world, China is considered to be a
massive potential market for cigarette manufacturers at a time when
Western markets are shrinking. The ban which prohibits advertising in
the media and public places such as theaters and sporting events-was part
of Chinas first Law of Advertisements. The law means that the green
neon sign for R. J. Reynolds (RJRs) Salem brand will be removed from
the Shanghai airport, where freelance antismoking police are employed to
collect fines from violators of the smoking ban.
Central And Eastern Europe
The recent flood of Western goods, from Mars candy bars and Winston
cigarettes to Mercedes cars, has begun to cause some hard feelings in
Russia. As one observer noted, hostility to Western advertising and sales
goes back to the communist era, when the Soviets were afraid of being
cheated in arms talks or trade agreements. Now that the Cold War is
over, the animosity is manifesting itself at the consumer level. Advertising
opponents are receiving help from the West: Late in 1993, TV spots
advocating a ban on all types of cigarette advertising began appearing on
most Russian channels. The ads were financed by Andrew Tobias, a
Time columnist and financial guru, and Smoke-free Educational Services,
a U.S. antismoking group.A spokeswoman for RJR in Winston-Salem,
North Carolina, said the company is simply fulfilling a need that was
already there. The company was asked by the Russian government to help.
fill a demand after riots over a cigarette shortage several years ago. Still,
many Russians believe Western tobacco companies spend heavily on ads in
their country because they know there are enormous profits to be made
from Russian smok-ers. As one Russian noted, In most countries, tobacco
advertising is banned. Is our health worth less than theirs? Please,
President Yeltsin, put a stop to cigarette advertising.There have been
efforts in other countries such as Hungary and Romania to crack down on
tobacco advertising with bans or partial bans, but the new laws tend to be
so confusing and poorly enforced that marketers frequently ignore them.
Nonetheless, some tobacco mar-keters have already prepared for growing
restrictions on tobacco advertising by eliminating all mention of cigarettes
and even the pack itself from their ads. As one example, Philip Morriss
Marlboro ads are widely recog-nizable from just their red and white logo.
Australia
In June 1994, the Philip Morris Company began legal action to overturn
the Australian governments ban on cigarette advertising, contending that
it infringes on the companys freedom of speech. Under legislation passed
in 1992, tobacco advertising and sponsorship in Australia are being
phased out and will be banned entirely by 1996, except for international
events such as Formula One racing. Philip Morris is trying to have the
Commonwealth Tobacco Advertising Prohibition Act declared invalid.
Vice president David Davies believes the act goes be-yond preventing
cigarette advertising and imposes a wide array of restrictions that infringe
on basic rights. Accord-ing to Davies, The Philip Morris Australian
subsidiary says the anti-tobacco laws breach the Australian Constitutions implied guarantee of freedom of communication, breaches the
states and is beyond the powers of the fed-eral Government.
European Union
Portugal, Norway, and France have banned tobacco ad-vertising altogether.
However, print ads in France and Norway offer branded products such as
Camel boots and Marlboro lighters. In the United Kingdom, voluntary restrictions have been in force since 1971; cigarette ads are barred from
shop windows, TV, and movie theaters, but outside posters, billboards,
and sponsorship of sporting events are allowed. In a 1997 speech, Queen
Elizabeth called for a. total ban. A Union-wide tobacco ad ban pro-posal
was introduced in mid-1991 with the aim of fulfill-ing single-market
rules of the Maastricht Treaty on European Union. Not surprisingly, the
ban has been op-posed by tobacco companies and advertising associations.
The commission justified the ban, noting that various countries had or were
considering restrictions on tobacco advertising and that there was a need for
common rules on cross-border trade.The hotly debated directive to ban
tobacco adver-tising across the European Union (EU) is losing steam and
was sent back to the negotiating table. Greece, a country that has opposed
the ban, officially took over the EU presidency in January 1994 and set
the agenda for the ED negotiations. A big campaign to save the tobacco
directive is highly unlikely. EU members are coming to the conclusion that
each country should handle the ban individually rather than blindly
following the ED direc-tive. For example, in January 1994, the Dutch
prime min-ister pressed leaders at the Brussels European Council to
withdraw the tobacco directive and allow countries to decide their own
fates.For R. J. Reynolds International, Philip Morris In-ternational,
B.A.T., and other tobacco marketers, the re-ceding threat of a panEuropean ban on tobacco ads is welcome news. 1he industry spends
between $600 mil-lion and $1- billion on advertising in the ED annually.
An EU ban would have hurt them most in the countries where they
compete with entrenched state tobacco mo-nopolies, namely France, Italy,
and Spain.
Cultural Considerations
Knowledge of cultural diversity, especially the symbolism
associated with cultural traits, is essential when creating
advertising. Local country managers will be able to share important information, such as when to use caution in advertising
creativity. Use of colors and man-woman relationships can
often be stumbling blocks. For example, white in Asia is
associated with death. In Japan, intimate scenes between men
and woman are considered to be in bad taste; they are outlawed
in Saudi Arabia. Veteran adman John OToole offers the
following insights to global advertisers:
Transplanted American creative people always want to
photograph Euro-pean men kissing womens hands. But they
seldom know that the nose must never touch the hand or that
this rite is reserved solely for married women. And how do you
know that the woman in the photograph is married? By the
ring on her left hand, of course. Well, in Spain, Denmark,
Holland, and Ger-many, Catholic women wear the wedding
ring on the right hand.
When photographing a couple entering a restaurant or theater,
you show the woman preceding the man, correct? No. Not in
Germany and France. And this would be laughable in Japan.
Having someone in a commercial hold up his hand with the
back of it to you, the viewer, and the fingers moving toward
him should communicate, Come here. In Italy it means
good-bye.
Tamotsu Kishii identified seven characteristics that distinguish
Japanese from American creative strategy.
275
Regulations of Tobacco Advertising
1. Indirect rather than direct forms of expression are preferred

in the messages. This avoidance of directness in expression
is pervasive in all types of communi-cation among the
Japanese, including their advertising. Many television ads do
not mention what is desirable about the brand in use and let
the audience judge for them.
2. There is often little relationship between ad content and the
advertised product.
3. Only brief dialogue or narration is used in television
commercials, with minimal explanatory content. In the
Japanese culture, the more one talks, the less others will
perceive him or her trustworthy or self-confident. A 30second advertisement for young men swear shows five
models in varying and seasonal attire, ending with a brief
statement from the narrator: Our life is a fashion show!
4. Humor is used to create a bond, of mutual feelings. Rather
than slapstick, humorous dramatizations involve family
members, neighbors, and office colleagues.
5. Famous celebrities appear as close acquaintances or everyday
people.
6. Priority is placed on company trust rather than product
quality. Japanese tend to believe that if the firm is large and
has a good image, the quality of its products should also be
outstanding.
Yellow Pages and magazines and would rival advertising

expenditures on radio. For example, circulation figures of
newspapers on a per capita basis cover a wide range. In Japan,
where readership is high, there is one newspaper in circulation
for every two people. There are approximately million newspapers in daily circulation in the United States, a per capita ratio of
ap-proximately one to four. The ratio is one paper to 10 to 20
people in Latin America and one to 200 persons in Nigeria and
Sweden.
Even when media availability is high, its use as an advertising
vehicle may be lim-ited. For example, in Europe, television
advertising either does not exist or is very limited, as in
Denmark, Sweden, and Norway. The time allowed for advertising each day varies from 1minutes in Finland to 80 in Italy, with
12 minutes per hour per channel allowed in France and 20 in
Switzerland, Germany, and Austria. Regulations concerning
content of commercials vary, and there are waiting periods of
up to two years in several coun-tries before an advertiser can
obtain broadcast time. In Germany, advertising time slots are
reserved and paid for one -year in advance.
In Saudi Arabia, where all advertising is subject to censorship,
regulations prohibit a long list of subject matter, including the
following:
7. The product name is impressed on the viewer with short, 15second commercials.
Advertisements of horoscope or fortune-telling books,

publications, or magazines- are prohibited. -
A recent survey of Japanese marketing and advertising executives

identifies five pri-mary approaches to advertising copy in Japan:
Advertisements that frighten or disturb children are to be

avoided.
Connectors (30%) Focuses on fostering personal bonds.

between the brand and consumer.
Use of preludes to advertisements that appear to indicate a

news item or official statement is to be avoided.
Use of comparative advertising claims is prohibited.
Product Pusher (19%) Focuses on the products strength. A

short-term sales tactic.
Non-censored films cannot be advertised.
Women may appear only in those commercials that relate to

family affairs, and their appearance must be in a decent
manner that ensures their feminine dignity.
Female children under 6 years of age may appear in

commercials provided that their roles are limited to a
childhood-like activity.
Women should wear a long, suitable dress that fully covers

their body except face and palms. Sweat suits or similar
garments are not allowed.
Ubiquity Seeker (19%) Desire to win awards and popular

acclaim through integrated marketing activities.
Cut-Through (18%) Use of celebrities, exaggerated product
attributes and other memorable associations.
Entertainers (14%) Feel that advertising should be entertaining
or newsworthy.
Global Media Considerations

Marketers and their advertising agencies invest great amounts
of-time and money to de-velop the appropriate advertising
appeals, but effective media must be se1ededto reach consumers
with these advertising appeals. The creative task of developing
appeals in turn should be informed by knowledge of the media
channels that will be used to com-municate the appeals.
Media Decisions
Although markets are becoming increasingly similar in industrial countries, media sit-uations still vary to a great extent. The
availability of television, newspapers, and other forms of
electronic and print media varies around the world. The rapid
increase of In-ternet users is also changing global advertising.
This can have an impact on media deci-sions. Spending for online advertising by U.S. companies is expected to triple by 2004.
This would place the spending ahead of advertising in the
276
Media Vehicles and Expenditures

As with all marketing decisions, advertisers must choose
between global or local media vehicles. Global media consist
primarily of cable television such as MTV, ITN, and CNN,
which are rapidly expanding, and regional editions of publications. An exploding new global advertising medium is the
World Wide Web. Any company, organization, or indi-vidual
can plant a flag on the Net, and if they are willing to create their
Web site, they have established a global presence!
%1996
Japan
Television
Newspapers
Magazines
Radio
Outdoor
33%
22%
7%
4%
34%
100%
United
Kingdom
36%
38%
17%
4%
5%
100%
A key issue in advertising is that of which of the measured

media-print, broadcast, transit and so forth-to utilize. Print
advertising continues to be the number one adver-tising vehicle
in most countries. However, spending on print media in the
United States has been declining. The use of newspapers for
print advertising is so varied around the world as to almost defy
description. In Mexico, an advertiser that can pay for a full-page
ad may get the front page, whereas in India, paper shortages
may require booking an ad six months in advance.
The Millennium
What will advertising look like in this millennium? The
advertising agency of the future will be very different. The major
differences will be the increasing use of computers for all
functional areas of the agency and in all markets. Computers
will be the source of more timely market research creative who
live in different countries will be able to work together on the
same campaign. And as a global advertising medium, the
number of Internet users around the world will increase.
Agencies will have alliances around the world as advertising
becomes more global and as consumers simultaneously become
more global and more individualistic at the same time. There
will be an increasing integration of marketing analysis and
strategy and creativity as the old divi-sions between marketing
consulting and creative agencies give way to a new integration of
these activities.
In some countries, especially those where the electronic media

are government owned, television and radio stations can
broadcast only a restricted number of advertising messages. In
Saudi Arabia, no commercial television advertising was allowed
prior to 1986; currently, ad content and visual presentation are
restricted. In such countries the proportion of advertising
funds allocated to print is extremely high. In 1995 Russia
national Channel banned all commercial advertising; the ban
was subsequently lifted.
As ownership of television sets increases in other areas of the
world, such as South-east Asia, television advertising will become
more important as a communication vehicle.
Worldwide, radio continues to be a less important advertising
medium than print and television. As a proportion of total
measured media advertising expenditures, radio trails considerably behind print, television, and direct advertising. However, in
countries where advertising budgets are limited, radios enormous reach can provide a cost-effective means of
Communicating with a large consumer market. Also, radio can be
effective in countries where literacy rates are low. Radio accounted
for more than 20 percent of the total measured media in only
two countries, which were both less developed countries.
As countries add mass-transportation systems and build and
improve their highway infrastructures, advertisers are utilizing
more indoor and outdoor posters and billboards to reach the
buying public. Transit advertising was recently introduced in
Russia, where drab streetcars and buses have been emblazoned
with the bright colors of Western brands.
Another issue facing advertising agencies is whether they will be
compensated on a flat rate or on performance basis. In using
the Internet, rates are either based on a flat rate per 1,000
banner ads or by the number of people who actually click onto
a site. Tracking performance in the various, markets around the
world will not be easy, but major advertisers are pressing for it
in the United States.
277
Table Media Spending In Japan Versus United Kingdom
LESSON 30:
ADVERTISING SCHOOL OF THOUGHTS
Standardized International Advertising
Standardized international advertising is the practice of
advertising the same prod-uct in the same way everywhere in the
world. The controversy of the standardization of global
advertising centers on the appropriateness of the variation (or
the lack of it) within advertising content from country to
country. The technique has generated heated and lively debate
for more than thirty years and has been both praised am
condemned-passionately.
Doing research is difficult in this area because of the ambiguous
definition a: standardization itself. Strictly speaking, a standardized advertisement is an advertise-ment that is used
internationally with virtually no change in its theme, copy, or
Illustration (other than translation). More recently a new breed
of advocates of standardization has claimed that an advertisement with changes in its copy or illustration (e.g., a foreign
model used in an overseas version) is still a standardized
advertise-ment as long as the same theme is maintained. This
new and broadened definite can cloud the issue even more with
the added element of subjectivity: Because standardization is a
matter of degree rather than an all-or-nothing phenomenon, a
precise definition of standardized advertising, conceptually and
operationally, would go a long way toward solving the confusion created by contradictory claims.
The issue of advertising standardization, without doubt, has
far reaching impli-cations. If it is a valid strategy, international
business managers should definitely take advantage of the
accompanying benefits of decision simplification, cost reduction, and efficiency. On the other hand, if the premise of this
approach is false, the indis-criminate application of standardized advertising in the marketplace will cause more harm than
good since it can result in consumers misinterpreting the
intended mes-sage. Consequently, the important function of
advertising to facilitate a consumers search process can be
seriously impaired.
Three Schools of Thought

There are three schools of thought on the issue of standardized advertising: (1) stan-dardization, (2) individualization, and
(3) compromise. The standardization school, so known as the
universal, internationalized, common, or uniform approach,
questions the traditional belief in the heterogeneity of the
market and the importance of the localized approach. This
school of thought assumes that better and faster communication has forged a convergence of art, literature, media
availability, tastes, thoughts, re-ligious beliefs, culture, living
conditions, language, and, therefore; advertising. Even when
people are different, their basic physiological and psychological
needs are still presumed to remain the same. Therefore, success
in advertising depends on motiva-tion patterns rather than on
geography. This belief is held by Elinder, Roostal, Fatt, Strouse,
and Levitt, among others. British Airwayss image advertise278
ments, which were designed by Saatchi and Saatchi to trumpet

the newly sleek British Airways, have been cited as an example
of a successful standardized campaign.
The opposite view of the standardization school is the
individualization school. also known as the non-standardization, specificity, and localization, of customization ap-proach.
This conventional school of thought holds that advertisers
must particularly make note of the differences among countries
(e.g., culture, taste, media, discretionary income). These differences make it necessary to develop specific advertising pro-grams
to achieve impact in the local markets. Authorities sharing this
view include Nielsen, Lenormand, Lipson, and Lamont.
A good illustration of the importance of individualization is
the Shiseido case. That company, the worlds third largest
cosmetic company, did poorly in its first at-tempt to penetrate
the U.S. market because its advertisements featured only
Japanese models.
Between these two extreme schools is the compromise school
of thought. While recognizing local differences and cautioning
against a wholesale or automatic use of standardization, this
middle-of-the-road school holds that it may be possible, and in
certain cases even desirable, to use U.S. marketing techniques
under some conditions. Those with this moderate view include
Dunn, Keegan, Peebles, Ryans, and Vernon.
Jain has proposed a framework for determining marketing
program standard-ization. Standardization is more practical and
effective under these conditions:
1. Markets are economically alike.
2. Worldwide customers, not countries, are the basis for
identifying the segments to serve.
3. Countries have similar customer behavior and lifestyle.
4. The product has cultural compatibility across countries.
5. There is a great degree of similarity in the firms competitive
position in different mar-kets.
6. The firm competes against the same adversaries with similar
share positions in differ-ent markets.
7. Product is industrial or high-tech (versus consumer
product).
8. Home-market positioning strategy is meaningful in the
host market.
9: Countries have similar physical, political, and legal
environments.
10. There are similar marketing infrastructures in the home and
host countries
11. Firms possess key managers who share a common
worldview.
12. Strategic consensus exists among parent-subsidiary
managers.
Keegan provides a set of guidelines that can help in determining when it is ap-propriate to use standardized advertising.
According to Keegan there are five inter-national product and
promotion strategies. The choice of strategy depends on such
factors as cost, need, and use conditions. A particular product
can be extended (i.e., unchanged) if use conditions are uniform
across- markets. Likewise, a promotional campaign can be
standardized or extended if consumer need for this particular
prod-uct is universal. As a company moves from the first
strategy toward the last, there is a corresponding increase in cost.
The first of the five strategies is one product, one message,
worldwide. This strategy is feasible if both the need and use
conditions are uniform across countries. Not many products
satisfy these conditions, though Coke and Pepsi are often cited
as examples. Other examples include diamonds, Chivas Regal
scotch, and BMW automobiles. Mentioned in jest by some
authorities are prod-ucts that may even be more truly global,
such as Israeli Uzi submachine guns, French Exocet missiles,
Russian Kalashnikov rifles, and nuclear weapons.
The second of the five strategies is product extensioncommunications adapta-tion. A product may be extended to
other countries because of uniform use condi-tions, but the
promotional message very likely must be changed because needs
vary. Toothpaste is used in the same manner everywhere but
often for different reasons. People in the north of England and
in the French-speaking areas of Canada use tooth-paste
primarily for breath control, making the appeal of fluoride
toothpastes rather limited. Anheuser-Busch and its partners
market the same beer in many countries but customize their
advertisements (based on American themes) for each national
mar-ket.
Product adaptation-communications extension is the third
strategy. When use conditions differ but need remains constant
across markets, modification of product but not promotion is
necessary. Black and Decker, although wanting to globalize its
power tools, must make several product adjustments to fit
certain markets. The tools everywhere look the same on the
outside. But inside it is another matter, especially for markets in
which the variations in electrical outlets and voltages require
different circuits and cords.
Dual adaptation is the fourth strategy. Both the product and
promotion have to be changed for a foreign market owing to
variations in need as well as use conditions in various countries.
Refrigerators made for the United States, for example, must be
modified to accommodate 220-volt and 50 Hz electricity
overseas. The large refrig-erator and its large freezer compartment do not appeal to people in countries where shopping for
fresh food is done daily and where a refrigerator is used mainly
for short--term storage. Additionally, with the high cost of
electricity in virtually all markets outside the United States, the
advertising appeal must be based on low electricity consumption; durability, reliability, and compactness.
Product invention is the last strategy. This strategy may have to
be used if the existing product is too expensive for foreign
consumers. A brand new product with different features may
have to be designed in order to make it affordable. For generations, Indians have called dhobis to collect dirty laundry from
middle-class neigh-borhoods and wash it upon the rocks at the;
river. Seeing this as an opportunity for product invention,
Whirlpool Corp. has appealed to young professional Indian
cou-ples who want Western-style automatic washing machines
by offering what it calls the World Washer. Whirlpools compact
washers have specially designed agitators that do not tangle
saris, the flowing outfits worn by a large number of Indian
women. Variations of the World Washer are also manufactured
and sold in Brazil and Mexico, and there are plans to export
them to other Asian and Latin American countries. Except for
minor variations in the controls, the three versions are nearly
identical and sell for $270 to $650. The World Washer is a
simple, affordable, bare-bones washer that does only eleven
pounds of wash, or about one-half the capacity of the typical
US. model.
Keegans guidelines, although useful, are quite general. Thus,
one must con-sider other relevant factors and treat them
explicitly.
1. Feasibility and Desirability
For an international advertising manager the decision is
affected by his or her perception of whether it is feasible
and desirable to implement standardization. In some
cases, it may be feasible but not desirable to use a
standardized advertisement; in other cases, it may be
desirable but not feasible to do so. The applicability of-advertising standardization is a function of these two
conditions.
The feasibility issue has to do with whether environmental
restrictions or diffi-culties may prohibit the use of a
standardized campaign. Three common problems are literacy
(for print advertisements), local regulations; and media and
agency availability.
Because illiteracy adversely affects the comprehension of
advertising copy, the text portion of an advertisement must
frequently be minimized or replaced with pictures.
Nevertheless, although pictures may appear to be an effective
means of communicating with non-literate market
segments, there are problems in pictorial perception, and
certain types of pictures are likely to fail to communicate with
non-Literate markets in developing countries. Therefore,
international marketers should research their markets before
attempting to communicate with them through pictures.
Many countries have laws that place restrictions on the
nature, content, and style of advertising messages. The
Marlboro cowboy was banned in England on the grounds
that cowboy worship among children might induce them to
take up smoking. So the company had to use non-cow boys
driving around Marlboro country in a Jeep.
Germanys emphasis on fair competition results in the
prohibition of slander against competitors. As a result, the
advertiser must be wary of using comparatives (e.g., better,
superior) and superlatives (e.g., best, most durable). In
China, Duracell battery commercials were taken off the air
because the drumming bunnys endurance claim violated the
279
13. Authority for setting policies and allocating resources is

centralized.
rules that prohibit superlative claims and comparative

advertising. Likewise, Budweisers King of Beers slogan
was found to be unacceptable.
A multinational advertiser wishing to use a standardized,
advertising campaign needs to rely on an advertising agency
with a worldwide network to coordinate the campaign across
nations. Unfortunately, almost no agencies, regardless of
size, are in a position to control local agencies overseas. In
spite of this difficulty, a few multination-als (e.g., Bayer,
Colgate-Palmolive) have decided to consolidate their global
advertising at one agency. Ogilvy & Mather Worldwide,
overseeing 272 offices, created White on White TV
commercials to sell laundry detergent in France and was later
used to re-place twenty different local campaigns in thirty
countries. Similarly, IBMs Personal Systems Group awarded
its entire sales-promotion business to Einson Freeman Pr0motional Campaigns, making it the first global brand to use
a single agency.
It must be noted that the use of a single agency to handle
worldwide advertis-ing, while resembling the
standardization approach, does not necessarily mean that the
approach is purely standardization. While Colgate-Palmolive
believes that there is no need to reinvent a winning formula,
the directive of IBMs Personal Systems Group is do it
once, replicate, and localize.
According to one study, advertising agency executives believe
that client pres-sure will result in greater use of
standardization. However, they also feel that client pressure
and saving money are among the least important reasons
for standardiza-tion because it makes no sense to use: a bad
or unproven campaign just to save money. Local agencies
tend to think that they can produce better advertisements for
their lo-cal markets and that creative impact should be the
most important reason as to whether an advertisement
should be standardized or localized.
Degree of feasibility varies from country to country,
facilitating the implemen-tation of standardization in some
countries while creating problems in others. Fur-thermore,
an environment may change, permitting either more or less
opportunity for standardization in the future. Therefore,
feasibility is dependent on the situation and does not offer
solid support for either of the two extreme schools of
thought.
Two major criteria exit to judge the degree of desirability of a
standardized ad-vertisement. One of these is the amount of
cost savings that might be achieved. Thus, standardization is
desirable only when the derived saving in production cost of
this type of advertisement is significant.
Another criterion of desirability is consumer homogeneity, a
major assumption of the uniform approach. If consumers
were indeed homogeneous across countries, the debate
would be resolved, since consumers could then be motivated
in exactly the same way. Are consumers homogeneous? The
proponents of each school of thought have offered real-life
examples that are subjective and highly judgmental.
Consumers would be better served if the collection of
empirical data were based on research de-signs that eliminate
280
the effect of confounding factors. The results of the

literature re-view of management responses, consumer
characteristics, and consumer responses in-dicate that there is
no theoretical or empirical evidence to support the
standardization perspective in its present form.
2. Researches and Empirical Evidence
At present, the research focus has shifted toward a more
limited level of horizontal homogeneity. Instead of
showing that multiple countries are basically equivalent
(when it is now quite clear that they are not), several
researchers have moved away from the country as a unit of
analysis. Instead, they focus on examining whether a subset
of one national market is similar to another subset of
another national market. This is what Hassan and Blackwell
and Unnavaand others call a global segment.
One recent study focused on marketing universals which
are defined as con-sumer behaviors within a segment and
toward a particular product category that are invariant across
cultures. The researchers used a sample representing thirtyeight na-tionalities and found that, while certain behaviors
are likely to be universal, others are not. Therefore, marketing
strategies should not be uniform across countries.
Examinations of advertisement content have repeatedly
found that, in practice, the content or message of
advertisements varies significantly from one market to another. A study of the information content of U.S. and
British TV commercials found that advertisements for highinvolvement and rational products contain the most information, with generally higher levels in the United States
than in England. A study of automobile advertisements that
appeared in business magazines in Brazil and in the United
States found that Brazilian advertisements used urban
themes more fre-quently, but that American advertisements
used leisure themes more frequently.
Is Murphy Brown French?
Although Murphy Brown is a popular show in the United States, it is not
a hit in Quebec. Candice Bergen, the shows star, is as well known in the
United States as the Murphy Brown character and for her spokesper-son
role for the long-distance telephone carrier Sprint. Since Quebec residents
prefer watching made-in-Que-bec shows to watching American networks,
they were not widely exposed to Sprints U.S. advertising cam-paign and do
not perceive Bergen to be a star.
In 1993, Bergen, who speaks French, filmed two sets of advertisements
for Sprints The Most World-wide service. The service is called Le
Maxiphone in French. Quebecs response to the commercials was be-low
that in English-speaking Canada. Since the Murphy Brown show is
dubbed in French in Quebec, Quebec consumers do not associate Candice
Bergens natural voice with that of Murphy Brown. Instead, Bergen in the
commercials was, just an Englishwoman speaking French.
Children Should Be Seen but Not Heard

A print advertisement for a childrens nutritional sup-plement showed a
boy wearing a baseball cap sideways. The boy, with his fist raised, said:
Come on, Dad. If you can play golf five times a week, I can have
Susta-gen once a day. Singapores Prime Minister G6h Chok Tong was
unhappy with the advertisement since it pro-moted American-style
insolence to parents. He criti-cized attitudes and manners that undermine
Asian childrens traditional politeness and deference to parents and elders.
Singapore has waged a campaign against Western values that focus on
individual rights at the expense of family and society. The advertisement
in question was subsequently discontinued. Ironically, the advertisement
originated in Malaysia and was created by Asians.
Brazilian and U.S. advertisements were about equal in using

work themes. Because values differ between the business culture
of Brazil and that of the United States, ad-vertisers considering
a standardized advertising theme should carefully research each
national market.
At present, the available empirical data deal with the effectiveness of standard-ization only in an indirect manner. The
available data are primarily concerned with showing how
national markets differ in some ways without showing whether
such differences actually influence the effectiveness of international standardization. Most of the recent studies have shifted
the emphasis to national advertising practices. The evidence is
rather overwhelming that certain advertising methods (e.g., use
of symbols, comparative advertising, etc.) may be the norm in
some countries but the ex-ception in others (see Table 15-5).
The researchers are virtually unanimous in cau-tioning against
the automatic use of standardization. According to them, since
consumers are used to a certain advertising method, which is
predominant in their country, these consumers may not be
receptive to other advertising tactics.
One group of researchers has focused on corporate responses
by investigating whether multinational firms prefer to standardize or localize their campaigns Ac-cording to one recent study
most of the firms employed the localized approach.
TABLE 15-5 Empirical Evidence: National Advertising
Approaches
Author
Benedetto,
Tamate,
and Chandran
(1992)
Cutler, Javalgi,
and
Erramilli
(1992)
Cutler and
Javalgi and
(1992)
Englis,
Solomon,
and Olofsson
Media
TV
print
print
music
video
Results
creative differences between
U.S. and Japanese commercials
substantial differences across
the United States, the United
Kingdom, France, India, and
Korea
country differences exceeding
country similarities
stylistic differences between
music videos produced by U.S.
and European artists
Miracle,
Taylor, and
Chang (1992)
Miracle,
Chang,
and Taylor
(1992)
Mueller
(1992)
Mueller
(1991)
Ramaprasad
and
Hasegawa
(1992)
Razzouk and
AI-Khatib
(1993)
Zandpour,
Chang,
and Catalano
(1992)
TV
TV
print
print
and
TV
TV
TV
TV
Zandpour et
al.
(1994)
TV
Cutler, Javalgi,
and Lee
(1995)
print
significant differences between

U.S. and Japanese advertising
U.S. and Korean advertising
Japanese advertising far from
being Westernized
messages more standardized
when transferred between
Western markets and Less
when transferred between
Western and Eastern markets
U.S. and Japanese commercial
advertising in Saudi Arabia
adhering to Islamic values
cross-national differences
among U.S., French, and
Taiwanese commercials
cultural traits affecting style of
TV advertising in the United
States, the United Kingdom,
Mexico, France, Germany
Spain, Taiwan, Korea, etc.
different emphasis on youthful
appearance, celebrities, etc.
Likewise, another study involving 344 affiliates of u.s. advertising agencies in six major world regions found that only a small
percentage of practitioners standardized their multi-country
campaigns. There is also evidence that the degree of product/
pro-motion adaptation is a function of company, product/
industry, and export market char-acteristics.
In practice, the degree of standardization depends in part on
corporate policy and strategic planning. At the same time it also
depends on the importance of a par-ticular overseas market and
the insistence of the head of that subsidiary. As in the case of
Harley-Davidson, the corporate headquarters had always
required the Japan-ese to use the U.S. print advertisements. But
the president of the Japanese unit felt that desolate scenes and
the tag line one steady constant in an increasingly screwed up
world were not meaningful to Japanese buyers. He was finally
able to get per-mission to run a separate advertising campaign.
The advertisements juxtaposed Amer-ican images with
traditional Japanese ones (e.g., American riders passing a geisha
in a rickshaw). While it is difficult to determine the effect of the
new campaign on sales, the waiting lists for Harley-Davidson
motorcycles have grown longer.
After having seen or experienced difficulties in implementing
the standardiza-tion concept, most international advertisers
today have had second thoughts about standardization and
281
have moved toward some degree of localization. Parker Pen Co.

launched an ambitious one world, one voice program in 1984
to sell writing in-struments all over the world. The campaign
was a big disappointment, and the com-pany has once again
tailored advertisements to local markets. As Procter & Gambles
international chief has pointed out, although technology
(e.g., gel toothpaste) is global, other aspects such as taste,
coloring, packaging, and advertising of the tech-nology are
usually local.
3. A Decision-Making Framework
All forms of advertising standardization should not be
ignored by the marketer. This technique may be appropriate
on a modest scale, though definitely not on a world-wide
basis. A limited homogeneity does exist in many cultures
around the world. Thus, it is a good idea to find out when
and where this limited scale of homogeneity exists so that
some level of standardization can be considered.
A market should be segmented when five requirements are
met: identification, accessibility, differential response,
segment size, and cost/profit. Each country (or re-gion)
should be considered a distinct segment if the following
conditions are met:
1. The marketer can identify the countrys unique demographic
characteristics.
2. The country is accessible through available selective
advertising media with minimum promotion waste.
3. The responses to a unique marking mix of customers in the
country will be favorably different from those of other
countries.
4. The countrys population size is large enough to justify the
specially designed market-ing campaign.
5. Incremental cost as a result of the segmentation is less than
incremental profit.
A Tough Grandma
Gertrude Boyle, in her 70s, is the owner of Columbia Sportswear Co., an
outerwear company based in Port-land. The company sells jackets and hats
to hunters and fishermen. Columbias big break came when it in-troduced a
jacket with a zip-out lining (Bugaboo parka) that could be worn separately.
In 1983, Columbias advertising agency put Gertrude Boyle and her son,
Tim, in a humorous cam-paign. She was portrayed as a tough lady who, in
one commercial, forced Tim to walk through a car wash to demonstrate the
jackets waterproofing. A more re-cent commercial showed Tim accidentally
push his mother off a cliff. He was able to rescue her by knot-ting together
the shell and liner of his Bugaboo parka. The jackets resilience allowed
him to pull her up. The campaign has been a huge success, turning the fledgling company into the worlds largest manufacturer of outdoor apparel. It has
captured 30 percent of the, out-door apparel market in the United States
and wants to penetrate overseas markets.
Gertrude was told that her campaign depicting her as a tough-talking
matriarch might not be well re-ceived in Tokyo. Her Japanese distributor
was con-cerned that Japanese shoppers would find her to be too abusive.
But the campaign worked well in Japan and elsewhere, making
Columbias jackets best sellers. Overseas sales have tripled in two years.
282
Although Boyles Tough other image works almost everywhere, certain

points are difficult to ex-port. For instance, the Born to Nag tattoo she
sports in some advertisements was too difficult to translate.
When all these segmentation criteria are met, market segmentation is applicable but advertising standardization is not.
There is no question that the United States is a market segment
of its own be-cause of its unique characteristics and responses,
media availability, market size, and great profit potential. As
such, Asian marketers and European firms (including those
from the United Kingdom) as a rule design advertisements
specifically for the U.S. market. In contrast, these marketers are
more likely to introduce in, say, Asian coun-tries (except Japan)
the advertisements that they have already used in their own
coun-tries. This action may be due to their belief that these
other markets are either simi-lar or are not economically
significant enough to justify non-standardized advertising.
Marketers should understand that standardization is not a
universal tool that can be automatically used without proper
consideration. It makes no sense to forge world-wide uniformity and conformity for managements convenience if
consumers seek di-versity and individuality. Standardization and
advertising are not synonymous. Ad-vertising is supposed to
(1) inform and (2) persuade customers (3) effectively. Standardization may fail to perform any (Of all) of these three
objectives. Thus, it is critical to pretest each advertisement in an
international context to determine the ef-fectiveness in terms of
attention getting, comprehension, and persuasion.
It is probably a mistake to use either standardization or
localization on a whole-sale basis. Some degree of standardization or localization on an international or re-gional basis should
be carefully considered. While a U.S. campaign may not work
well in Europe, some type of pan-European advertising may be
possible. But even then, some country-specific information may
still be required. It is important to real-ize that a well-thoughtout advertising idea tends to perform reasonably well in
mul-tiple markets without a great deal of adjustment. But for a
flawed or weak concept mistakes multiply in tandem with the
number of countries. As advised by Mc-Collum Spielman
Worldwides chief executive officer, the best precept to follow
is to do your homework. When entering another country, make
sure that your ad cam-paign meets the basic rules and preconditions of its targeted culture. Test it! And be sure to test through
a researcher who is part of that culture.
Global, Maybe; Effective, Maybe Not
PepsiCo ran a teaser advertisement repeatedly to an-nounce its big event.
The event was the debut of its commercial with pop singer Madonna who
reportedly received $5 million for three Pepsi commercials. It would be a
record and advertising first because the commercial would accompany the
first public airing of Madonnas new song Like a Prayer. It was a novel
approach since it was customary to launch pop songs on radio. Pepsi felt
that its revolutionary approach might change-the way popular tunes were
released.
The event did not work out as planned. Madonnas video music was heavily
criticized as having an antireligious tone. Because of the backlash, the
com-pany was forced to withdraw the advertisement later. It should be
obvious that just simply running the same advertisement in numerous
countries does not make it automatically effective. A bad advertisement
run glob-ally will achieve great impact-negatively.
Criterion 1: Identification
Does the target group have unique and
measurable characteristics?
Criterion 2: Selectivity
Can this group be reached through the
available media with minimum waste?
Criterion 3: Response will this group

respond differently but more favorably
than other groups to this particular
marketing mix (e.g., a specially
prepared advertisement)?
Criterion 4: Size
Is the group significant enough in
terms of size to justify a special
attention?
Pan-European Advertising
The Whirlpool brand was virtually unknown in Europe when Whirlpool
Corp. formed a joint venture with Philips Electronics NY in 1989.
Although Whirlpool could brand its appliances Philips-Whirlpool until
1998, it wanted its own image. Toward this end, Whirlpool wanted an
advertising idea that could overcome Europes national barriers.
Electrolux and other competitors plus some of Whirlpools national
managers as well as Whirlpools own advertising agency were quite
skeptical of the pan-European approach.
Whirlpool carefully formulated ground rules and evaluated more than twenty
proposed campaigns. It decided on a campaign under the slogan Philips and
Whirlpool bring quality to life. The campaign featured a cool, bluish dream
world of dryers and dishwashers and emphasized high technology and the
universal de-sire for more free time. The campaign worked as polls showed
that more consumers were aware of Whirlpool and that they had positive
associations with the companys products. Also in 1991 at the time when
industry sales of major appliances in Europe stagnated, Whirlpool instead
gained market share in Europe as a whole and in Germany, France, and
Britain in particu-lar. Subsequently, it dropped the Philips name in Britain,
Ireland, the Netherlands, and Austria and planned to do the same in the
rest of Europe long before 1998.
Criterion 5: Cost/Profit
Will extra costs associated with the
special attention to the group be less
than incremental profit?
No
Standardization
Pepsis novel approach involved placing the ad-vertisement on a top-rated

evening show in each coun-try, representing one of the largest single-day
media buys in history. It purchased two minutes of prime TV time in
each of forty countries from Finland to the Philippines, and the company
expected 250 million peo-ple to witness the event.
No
Standardization
No
Standardization
No
Standardization
No
Standardization
Yes
Market segmentation
Yes
Localization
(non-standardization)
Exhibit 1 A Decision-making Framework For Advertising

Standardization
4. Global Advertising: True Geocentricity
Criticisms of myopic standardization should not be
interpreted as an endorsement for a polycentric approach,
which requires custom-made campaigns for each individual
market. Localization, practiced for its own sake, can be just as
myopic. What is de-sirable is a kind of geocentricity, which is
not the same thing as standardization.
Standardization is basically a campaign designed for one
market but exported to other markets regardless of
justification. In contrast, a geocentric campaign requires an
advertisement to be designed for the worldwide audience
from the outset in order to appeal to shared common
denominators while allowing for some modification to suit
each market. The geocentric approach combines the best of
both worlds (i.e., the cost-reduction advantage of
standardization and the advantages of local relevance and
effective appeal of individualization). For example, Levi
Strauss has switched from all localized advertisements to a
pattern advertising strategy that provides the broad outlines,
but not the details, of the campaign.
Devising a global advertisement is anything but easy.
However, with some plan-ning, it is possible to create an
advertisement, which can maintain the main theme internationally while allowing necessary adaptation. A global
advertisement should be adaptation-ready in the sense that
necessary and desirable adaptation is planned at the time of
283
conception rather than after the fact. Coca-Cola Co.s General

Assembly campaign is a good example. The campaign
shows a thousand children singing the praises of Coke.
Because each McCann office had permission to edit the film
to in-clude close-ups of a youngster from its market, at least
twenty-one different versions of the spot existed.
The success of IBMs Subtitles campaign has demonstrated
that it is possible to integrate global and local action if the
markets are similar and if the product/brand is perceived
similarly in those markets. Previously, the company allowed
each of its core thirteen semiautonomous business entities
to develop its own independent busi-ness strategy. Seeing
greatness in the sum of the parts, IBMs new chairman
reinte-grated these units into a cohesive whole in 1993. One
advertising agency was ap-pointed in 1994 to have the prime
responsibility for executing IBMs communication programs
with a single voice worldwide.
The Subtitles campaign achieved global imagery through the
use of the same footage in each country while employing
local subtitles to translate the foreign lan-guage of the
commercial. Local subtitling permits each country to retain its
home cul-tural accent. The message of the campaign was that
IBMcould deliver simple and yet powerful solutions to
manage information anywhere and anytime for individuals
and companies of all sizes. The company wanted to
communicate that it was vigor-ous and innovative while
maintaining the latent strengths of global scope, leadership,
and reliability. Naturally, the international implementation
encountered some local difficulties ranging from a limited
access to television commercials to .the common practice of
dubbing for foreign language films and commercials.
The campaign was run in 47 countries, and it was pretested
and/or tracked in over 20 markets worldwide. Although
individual markets showed some response vari-ations, the
responses to the campaign were considerably consistent.
Among those who were aware of the campaign, their
responses showed that the company key attribute
dimensions improved significantly while measures of
negative attribute dimensions declined. In comparison, the
other brands tracked did not show a positive movement.
Thus, the Subtitles campaign has proved to be one of IBMs
longest and most suc-cessful runs of the companys image
campaign in recent-history.
Case Study
The Marlboro Man
Should We Modify His Image Overseas?
JEFFREY A. FADIMAN
The downfall of Winston was due in part to the broadcast ban on cigarette
advertising. R. J. Reynolds had a difficult time adapting Winstons appeal
to the print media. In contrast, Marlboro did not have this problem and
Philip Morris was able to use magazines and other print media to promote
its Marlboro brand effectively. Overtaking Winston in 1976. Marlboro is
now the undisputed leader in both the United States and
worldwide.Marlboros success was quite spectacular. It was responsible for
the transformation of Philip Morris from a small tobacco company to the
number-one cig-arette company in the United States. But it was riot an
overnight success. Initially introduced in a soft box with, among other
filters, a red-cork tip, Marlboro had a female image, which made the
brand unpopular among men. The company decided to make a few
changes, which included the neutral-cork tip and the addition of a flip-top,
crush-proof box. Perhaps the most important change was the advertising
theme. Marlboros advertisements featured rugged-looking men, tattooed
laborers, and cowboys who came up the hard way. These virile men
usually told something about their he-man lives and explained why they
chose Marlboro. Philip Morris was extremely successful in creating a
unique image that allowed a man to project himself through the cigarettes
he smoked. Winston, on the other hand, could not acquire this distinct
image.The Marlboro cowboy is now a legend. Most U.S. consumers
(including many others in all parts of the world) are accustomed to seeing
the Marlboro Man. All advertisements of the Marlboro line (full-flavored
Marlboro, Marlboro Lights, Marlboro Menthol, Marl-boro Mediums,
Marlboro 25s, and Marlboro 100s) have one thing in common-the cowboy.
He may ride a horse or he may sit at a campfire. He may be alone or he
may be with other cowboys. But he is always in the advertisements. The
image is so strong that the copy needs only a few words. Yet the message is
readily understood.
Questions
Consider the Marlboro advertisement and select a certain country. as your
target market. Write a for-mal business memo to a chief executive officer
of a small international advertising agency in which you sub-mit
suggestions about
1. How you would modify the advertisement in order to make it more
attractive to a selected target clien-tele (identify) within the country you
have chosen.
2. Why each change you suggest would help the prod-uct image to conform
more closely to their ex-pectations.Note: Rough sketches would be nice but
are not nec-essary. Word-pictures can be drawn with equal skill. Simply
show each change that you are making: It is the originality, imagination,
and effectiveness of each sug-gestion, not your artistic skill that will count.
284
The following lesson aims at making the following topics

understood by the students:
1. Public Relations and Publicity
2. Personal Selling
3. Sales Promotion
4. Direct Marketing
supports the view that two-way symmetrical communication is

more desirable and successful than asymmetrical PR. The twoway and consensus models are presumed to be especially effective
in situations with a potential for conflict between differing parties.
The issues pertaining to planning a hazardous waste landfill
would-be one example. However, as one expert has noted,
implementation of these models remains problematic.
5. Trade Shows and Exhibitions

6. Sponsorship Promotion
In the last lesson we focused on advertising, one of the forms of
communication available to marketers. In this chapter, we focus
on global promotion, which includes public relations (sometimes
known as marketing publicity), personal selling, sales promotion
direct marketing, trade shows, and sponsorship.
Public Relations and Publicity

A companys public relations (PR) effort should-foster goodwill
and understanding among constituents both inside and
outside the company. PR practitioners attempt to I generate
favorable publicity, which, by definition, is a non-paid form of
communication. (in the PR world, publicity is sometimes
referred. to as earned media, whereas advertising and promotions are known unearned media.) PR personnel also playa key
role in responding to unflattering media reports or controversies that arise because of company activities in different parts of
the globe. In such instances, PRs job is to make sure that the
company responds promptly and gets its side of the story told.
The basic tools of PR include news releases, newsletters, press
conferences, tours of plants and ether company facilities, articles
in trade or professional journals, company publications and
brochures, TV and radio talk show appearances by company
personnel, special events, and homepages on Internet. As noted
earlier, a company exerts complete control over the content of
its advertising and pays for message placement in the media.
How ever, the media typically receive far more press releases and
other PR materials than they can use. Generally speaking, a
company has little control over when, or if, a news story runs.
The company cannot directly control the spin, slant, or tone
of the story. In addition to the examples discussed later, Table
summarizes several recent instances of global publicity involving well-known firms.
Indeed, even in the field of PR itself, there are often great
differences between the theory and the practice. One specific area
of discourse is the notion of PR as a two-way symmetrical
model of communication that should occur between equal
entities. This mode holds that public relations efforts should be
oriented toward social responsibility and problem solving and
be characterized by dialogue -and harmonization of interests.
As such, the symmetrical model takes PR beyond an advocacy
role that benefits the organi-zation. A similar model developed
in Austria known as consensus-oriented public rela-tions
PepsiCo made good use of integrated marketing communications when it under-took an ambitious global program to
revamp the packaging outs flagship cola. To raise awareness of
its new blue can, Pepsi leased a Concorde jet and painted it in
the new blue color. Pepsi also garnered some free ink by
spending $5 million to film an ad with two Russian cosmonauts holding a giant replica of the new can while orbiting the
earth in the Mir space station. As Massimo dAmore, PepsiCos
head of international market-ing, told reporters, Space is the
ultimate frontier of global marketing. The cola -wars have been
fought all over the place, and its time to take them to space. It
remains to be seen whether this effort will payoff in terms of
increased brand loyalty.
IBM spent about $5 million to stage a rematch of a 1996 chess
game between Gary Kaparov and a computer called Deep Blue.
The match, which took place in New York
Company/Brand
(Home country)
Bruno Magli
(Italy)
Nike (United
States)
Mitsubishi
(Japan)
McDonald's
(United States)
Nature of Publicity
Markets shoes, allegedly worn by O.J.
Simpson on the night Nicole Simpson was
murdered; widespread attention in newsreels
and. print media estimated to be worth $100
million. Shoe sales increased 50 percent
during trial.
Victims of Heaven's Gate suicide cult wore
Nikes when they died.
Charges of sexual harassment at a plant in
Illinois received widespread media coverage.
Plaintiff in the longest civil trial in British
history. McDonald's charged two vegetarian
activists with libel after the two distributed
pamphlets
calling
McDonalds
a
"multinational menace" that abused animals
and workers. The defendants gained
worldwide publicity for their cause.
City was hailed as one of the best publicity stunts in recent

years. To build visibility and interest, IBM purchased full-page
newspaper ads, sent out numerous press releases, established
an Internet site, and purchased bus posters in Manhattan. The
effort was -a text... book study in integrated marketing communications; the match was widely covered by the world media. As
Peter Harleman of Landor Associates, a corporate-identity firm,
told The Wall Street Journal, Money almost cant buy the
285
LESSON 31:
GLOBAL PROMOTION
advertising [IBM] is getting -out of this. John Lister, of the

Lister Butler brand identity-consulting firm, agreed. Theyre
doing a tremendous job of leveraging the brand in this. Not
only do they have the IBM name attached to virtually every
news report about it, but they even branded their computer the
corporate color, blue. Industry experts estimate that the match
generated about $100 million in favorable earned media. IBMs
Internet site provided live coverage and generated a million
visits during a single match, a number that was believed to be a
record for the World Wide Web at that time. The publicity was
especially gratifying to IBM officials because its problems with
its much-ballyhooed information system at the 1996 Olympics
resulted in a great deal of negative news coverage.
Sometimes publicity is generated when a company simply goes
about the business of global marketing activities. Nike and
other marketers have received a great deal of negative publicity
regarding alleged sweatshop conditions in factories run by
subcontractors. To date, Nikes public relations team has not
done an effective job of counter-acting the criticism by effectively
communicating the positive economic impact Nike has had on
the nations where its sneakers are manufactured. Volkswagen
received a great deal of press coverage over a period of several
months after its newly hired operations chief was accused of
industrial espionage.
The ultimate test of an organizations understanding of the
power and importance of public relations occurs during a time
of environmental turbulence, especially a potential or actual
crisis. When disaster strikes, a company or industry often finds
itself thrust into the spotlight. A companys swift and effective
handling of communications during such times can have
significant implications. The best response is to be forthright
and direct, reassuring the public and providing the media with
accurate information.
Any company that is increasing its activities outside the home
country can utilize PR personnel as boundary spanners between
its stakeholders: the company and employees, unions, stockholders, customers, the media, financial analysts, governments,
and suppliers. Many companies have their own in-house PR
staff. Companies may choose to engage the services of an
outside PR firm. Some PR firms are associated with advertising
organizations; for example, Burston - Marsteller is a PR unit of
Young & Rubicam, while Fleishman-Hillard is affiliated with D
Arcy Masius Benton & Bowles. Other PR firms, including the
London-based Shandwick PLC and Edelman Public Relations
Worldwide and Canadas Hill & Knowlton, are independent.
Several independent PR firms in the United Kingdom,
Germany, Italy, Spain, Austria, and the Netherlands have joined
together in a network known as Globalink. The purpose of the
network is to provide members with various forms of
assistance such as press contacts, event planning, literature
design, and suggestions for tailoring global campaigns to local
needs in a particular country or region.
The Growing Role of Public Relations In

Global Marketing Communications
Public relations professionals with international responsibility
must go beyond media relations and serve as more than a
company mouthpiece; they are called on to simulta-neously
286
build consensuss and understanding, create trust and harmony,

articulate and in-fluence public opinion, anticipate conflicts, and
resolve disputes. As companies become more involved in
global marketing and the globalization of industries continues,
it is im-portant that company management recognize the value
of international public relations. One recent study found that,
internationally; PR expenditures are growing an average of 20
percent annually. Fueled by soaring foreign investment, industry
privatization, and a boom in initial public offerings (IPOs), PR
expenditures in India are reported to be growing by 200 percent
annually.
The number of international PR associations is growing as well.
The new Austrian Public Relations Association is a case in
point; many European PR trade associations are part of the
Confederation Europeans des Relations Publiques and the
Interna-tional Public Relations Association. Another factor
fueling the growth of international PR is increased governmental relations between countries. Governments and
organi-zations are dealing with broad-based issues of mutual
concern such as the environment and world peace. Finally, the
technology-driven communication revolution that has ush-ered
in the information age makes public relations a profession with
truly global reach. Faxes, satellites, high-speed modems, and the
Internet allow PR professionals to be in contact with media
virtually anywhere in the world.
In spite of these technological advances, PR professionals must
still build good per-sonal working relationships with journalists
and other media representatives as well as leaders of other
primary constituencies. Therefore, strong interpersonal skills are
needed. One of the cost basic concepts of the practice of public
relations is to know the audi-ence. For the global PR practitioner, this means knowing the audiences in both the home
country and the host country or countries. Specific skills needed
include the ability to communicate in the language of the host
country and familiarity with local customs. Ob-viously a PR
professional who is unable to speak the language of the host
country will be unable to communicate directly with a huge
portion of an essential audience. Like-wise the PR professional
working outside the home country must be sensitive to nonverbal communication issues in order to maintain good
working relationships with host-country nationals. Commenting on the complexity of the international PR profes-sionals
job, one expert notes that, in general, audiences are increasingly
more unfamil-iar and more hostile, as well more organized and
powerful . . . more demanding, more skeptical, and more
diverse. International PR practitioners can play an important
role as brides over the shrinking chasm of the global village.
Constituent Groups Company Responsibilities to each Group

1. Customers
2. Suppliers &
Channel Members
3. Employees
4. Shareholders
5. Society
business
To provide products with superior benefits

To listen and respond to customer opinion
To ensure products are safe for intended use and
anticipate accidental misuse.
To strive for fair and open business relationships
To help business partners improve performance
To reject illegal or deceptive activities anywhere in the
World
To provide a safe workplace
To show concern for the well being of all employees
To create opportunities for individual achievement,
creativity, and personal reward.
To provide a fair annual return to the owners
To build for the future to maintain growth
To safeguard the environment
To encourage employees to participate in community
activities
To be a good neighbor in communities in which
is done.
How Public Relations Practices Differ

Around The World
Public relations practices in specific countries can be affected by
cultural traditions, social and political contexts, and economic
environments. As noted earlier, the mass media and the written
word are important vehicles for information dissemination in
many industri-alized countries. In developing countries,
however, the best way to communicate might be through the
gong man, the town crier, the market square, or the chief s
courts. In Ghana, dance, songs, and storytelling are important
communication channels. In India, where half of the population cannot read, writing press releases will not be the most
effective way to communicate.6 In Turkey, the practice of PR is
thriving in spite of that countrys reputation for harsh treatment of political prisoners. Although the Turkish government
still asserts absolute control as it has for generations, corporate
PR and journalism are allowed to flourish so that Turkish
organizations can compete globally.
Even in industrialized countries, there are some important
differences between PR practices. In the United States, much of
the news in a small, local newspaper is placed by means of the
hometown news release. In Canada, on the other hand, large
metropolitan population centers have combined with Canadian
economic and climatic conditions to thwart the emergence of a
local press. The dearth of small newspapers means that the
practice of sending out hometown news releases is almost
nonexistent? In the United States, PR is increasingly viewed as a
separate management function. In Europe, that perspective has
not been widely accepted; PR professionals are viewed as part of
the marketing function rather than distinct and separate
specialists in a company. In Europe, fewer colleges and universities offer courses and degree programs in public relations than
in the United States. Also, European coursework in PR is more
theoretical; in the United States, PR programs are often part of
mass communication or journalism schools and there is more
emphasis on practical job skills.
A company that is ethnocentric in its approach to PR will extend
home-country PR activities into host countries. The rationale
behind this approach is that people everywhere are motivated
and persuaded in much the same manner. Obviously, this

approach does not take cultural considerations into account. A
company adopting a polycentric approach to 1 PR gives the
host-country practitioner more leeway to incorporate local
customs and practices into the PR effort. Although such an
approach has the advantage of local responsiveness, the lack of
global communication and coordination can lead to a PR
disaster.
In 1994, computer chip maker Intel showed a poor understanding of public relations basics after a college professor discovered
a technical defect in the companys flagship .Pentium chip. The
professor, Thomas Nicely, contacted Intel and asked for a
replacement chip, but his request was refused. Intel acknowledged that Pentium had a flaw but insisted it would cause a
computing error only once in 27,000 years. Having received no
satisfaction from the semiconductor giant-Intel commands an
80 percent share of the global semiconductor market-Nicely
posted his complaint on the Internet. Word about the
Pentium flaw and Intels response spread quickly. Intel chief
executive officer (CEO) Andrew Grove added fuel to the fire
when he issued an apology via the Internet. Grove said, No
chip is ever perfect, and offered to replace defective chips if
customers could prove they used computers to perform
complicated mathematical calculations. Groves lack of humility,
coupled with revelations that the chipmaker itself had been
aware of the Pentium flaw for months, only worsened the
publics perception of the company. After weeks of negative
publicity around the world, Intel finally announced that new
Pentium chips would be available to anyone who requested
them. The furor eventually died down without permanent
damage to Intels reputation.
Personal Selling
Personal selling is two-way, personal communication between a
company representative and a potential customer as well as back
to the company. The salespersons job is to cor-rectly understand the buyers needs, match those needs to the companys
product(s), and then persuade the customer to buy. Effective
personal selling in a salespersons home country requires
building a relationship with the customer; global marketing
presents ad-ditional challenges because the buyer and seller may
come from different national or cul-tural backgrounds. It is
difficult to overstate the importance of a face-to-face, personal
selling effort for industrial products in global markets. In 1993 a
Malaysian developer; YTL Corp, sought bids on a $700 million
contract for power-generation turbines. Siemens AG of
Germany and General Electric (GE) were among the bidders
Datuk Francis Yeoh, managing director of YTL, requested
meetings with top executives from both companies wanted to
look them in the eye to see if we can do business, Yeoh said
Siemens com-plied with the request; GE did not send an
executive Siemens was awarded the contract.
The selling process is typically divided into several stages:
prospecting, pre-approach-ing, approaching, presenting,
problem solving, handling objections, closing the sale, and
following up. The relative importance of each stage can vary by
country or region. Expe-rienced American sales reps know that
persistence is one tactic often required to win an order in the
287
PROCTER AND GAMBLES ETHICAL PHILOSOPHY
United States; however, persistence in the United States often

means tenac-ity, as in dont take no for an answer. Persistence is also required if a global industrial marketing effort is to
succeed; in some countries, however, persistence often means
en-durance, a willingness to patiently invest months or years
before the effort results in an actual sale. For example, a
company wishing to enter the Japanese market must be prepared for negotiations to take from 3 to 10 years.
Prospecting is the process of identifying potential purchasers
and assessing their probability of purchase. If Ford wanted to
sell vans in another country where they would be used as
delivery vehicle, which businesses would need delivery vehicles?
Which businesses have the financial resources to purchase such a
van? Those businesses that match these two needs are better
prospects than those who do not. Successful prospect-ing
requires problem-solving techniques, which involve understanding and matching the customers needs and the companys
products in developing a sales presentation.
The purpose of the pre-approach or problem solving stage is to
gather information on a prospective customers problem areas
and tailor a presentation that demonstrates how the companys
product can solve these specific problems. If a potential
customer has a grocery business, their needs in a van would be
different from a customer who owns a carpentry business. The
sales representative would need to select the best models of
Ford vans, collect the appropriate model specifications, and so
on to prepare for an effective presentation.
The next two steps, the approach and the presentation, involve
one or more meet-ings between seller and buyer. In global
selling, it is absolutely essential for the sales-person to understand cultural norms and proper protocol. In some countries,
the approach is drawn out as the buyer-gets to know or takes
the measure of the salesper-son on a personal level with no
mention of the pending deal. In such instances, the presentation comes only after rapport has been firmly established.
During the presentation, the salesperson must deal with
objections. Objections may be of business or personal nature.
A common theme in sales training is the notion of active
listening; naturally, in cross-cultural selling, verbal and nonverbal
communication barriers present special challenges for the
salesperson. When objections are successfully overcome, the
salesperson moves on to the close and asks for the order. A
successful sale does not end there however; the final step of the
selling process involves following up with the customer to
ensure his or her ongoing satisfaction with the purchase.
Personal Selling In India

New Delhi
India is one market where Coke trails Pepsi. As part of its catch-up
strategy, Coke recruited paraplegics to sell Coke in New Delhi. They
were encouraged in this by the New Delhi Handicapped Welfare Society.
The Society supplies the handpowered tricycles and Coke expects public
relations benefits as well as sales from these new vendors.
Rural India
Colgate is a strong leader in the toothpaste market in India, but most of
its sales are in urban areas, which account for less than one-third of
Indias population.
To reach rural customers, Colgate began a program of traveling videovans to the villages. The van arrives, playing music from a popular movie,
and invites villagers to come. When the back door opens, there is a video
screen and soon about 100 villagers gather. A 27-minute infomercial is
shown. It is a romantic story about a wedding and wedding night where the
message comes through that Colgate is good for your breath, your teeth, and
your love life.
Free samples are given out after the video and there is a tooth brushing
demonstration. A van will visit about three villages a day and returns to
ach village one month later. In one year, these vans reached over 16,000
villages and over 10 million people. Colgate attributes a doubling of rural
toothpaste consumption to these efforts and expects over 50 percent of its
sales from rural areas in the new millennium.
Sales Promotion
Sales promotion refers to any consumer or trade program of
limited duration that adds tangible value to a product or brand.
Saks promotion laws and usage vary around the world but may
consist of any of the following: promotional pricing tactics,
contests, sweepstakes and games, premium and specialties,
dealer loaders, merchandising materials, tie-ins and crosspromotions, packaging, trade shows (also known as
exhibitions), and spon-sorship. The EU, however, is working
to harmonize promotional tactics across its member countries.
It is considering mutual recognition that would allow a
company to carry out promotional activities in another country
as long as that tactic is legal in the companys I home country.
The tangible value created by the promotion may come in
venous forms, such as a price reduction or a buy one, get one
free offer. The purpose of a sales promo-tion may be to
stimulate customers to sample a product or to increase consumer demand. Trade promotions are designed to increase
product availability in distribution channels.
The increasing popularity of sales promotion as a marketing
communication tool outside the United States can be explained
in terms of several strengths and advantages. Besides providing
a tangible incentive to buyers, sales promotion also reduces the
perceived risk buyers may associate with purchasing the product.
From the point of view of the company, sales promotion
provides accountability; the manager in charge of the promotion can immediately track the results of the promotion.
Moreover, some con-sumer sales promotions, including
sweepstakes and rebates, require buyers to fill out a form and
mail it to the company. This allows a company to build up
288
KEY: Yes-legally allowed; ??-Under review; No-not legally

allowed
Many international managers have learned about American-style

promotion strate-gies and tactics by attending seminars such as
those offered by the Promotional Mar-keting Association of
America (PMAA). Sometimes, adaptation to country-specific
conditions is required; for example, TV ads in France cannot
have movie tie-ins. Ads must be designed to focus on the
promotion rather than the movie. According to Joseph,
Potacki, who teaches a Basics of Promotion seminar for the
PMAA, the biggest difference between promotion in the
United States and in other countries pertains to couponing. In
the- United States, couponing accounts for 70 percent of
consumer promotion spending. That percentage is much lower
outside the United States. According to Potacki, It is far less
or nonexistent in most other countries simply because the
cultures dont accept couponing. Potacki notes that couponing
is gaining importance in countries such as the United Kingdom
as retailers learn more about couponing.
bottom line was that Hoover had failed to budget enough for
the promotion, forcing Maytag CEO Leonard Hadley to take
pretax charges of $72.6 million. In an effort to honor its
commitment to Hoover customers, May tag bought several
thousand seats on vari9us airlines. The Hoover name in the
United Kingdom is valuable, and this invest-ment in our
customer base there is essential to our future, Hadley said.
Hadley fired the president and director of marketing services at
Hoover Europe and the vice president of marketing at Hoover
UK. Fallout from the promotion became an ongoing PR
nightmare, as headlines in the London Daily Mail trumpeted
Hoover Fiasco: Bosses Sacked and How Dumb Can You
Get? Meanwhile, complaints from angry Eu-ropeans poured
into May tags Newton, Iowa, headquarters. A Hoover Holiday
Pressure Group was rumored to have thousands of members;
three people even traveled to Newton in an unsuccessful
attempt to meet with CEO Hadley. By May 1995, Hadley was
ready to throw in the towel: He decided to sell Hoover Europe
to Italys Candy SpA for $170 million. Hadley intends to refocus
May tag on the North American market.
Despite efforts to harmonize regulations, sales promotion

within the EU is still quite: -diverse, as shown in Table 2.
Germany is the most strict while France and the United
Kingdom are the most open. More important is the fact that
several types of promotion techniques are under review by
individual countries, thus warranting constant monitor-ing of
regulations to assure that a companys promotions comply with
local regulations.
Direct Marketing
The use of direct marketing is growing rapidly in many parts of
the world due to increased use of computer databases, credit
cards, and toll-free numbers, as well as changing life styles.
Direct marketing is a system of marketing that integrates
ordinarily separate mar-keting mix elements to sell directly to
both consumers and other businesses, bypassing retail stores
and personal sales calls. It is used by virtually every consumer
and business to-business category from banks to airlines to
nonprofit organizations. Because the cus-tomer responds
directly to the company making the offer, international considerations that apply to communications, distribution, and sales
have to be considered. Direct marketing uses a wide spectrum
of media, including direct mail; telephone; broadcast, in-cluding
television and radio; and print, including newspapers and
magazines.
Companies must take extreme care when designing a sales

promotion. A 1992 promotion sponsored by Maytag
Corporations Hoover European Appliance Group was a
smashing success that turned into a financial and public
relations fiasco. Over a period of several months, Hoover
offered free round-trip airline tickets to the United States- and
Europe to purchasers of vacuum cleaners or other Hoover
appliances. The promo-tion was designed to take advantage of
low-cost, space available tickets; executives hoped that the cost
of the tickets would be offset by commissions paid to Hoover
when customers rented cars or booked hotel rooms. Finally, it
was expected that a percentage of customers who bought
appliances would fail to meet certain eligibility requirements
and, thus, be denied free tickets.
The usage of direct mail, the most popular type of direct

marketing, varies around the world based on literacy rates, level
of acceptance, infrastructure, and culture. In coun-tries with low
levels of literacy, a medium that requires reading is not effective.
In other countries, the literacy rate may be high, but consumers
are unfamiliar with direct mail and suspicious of products they
cannot see.
The number of people who actually qualified for the free

tickets-more than 200000 in all-far exceeded company forecasts,
while the number of car rentals and hotel book-ings was lower
than expected. Hoover was swamped by the volume of
inquiries; many customers were angered by long delays in
responses to their requests for the tickets. The
Table 2
Tactic
O n-pack price
Germany France
U.K.
reductions
Yes
Yes
Yes
In-pack gift
??
??
Yes
Extra product
??
Yes
Yes
Money-off
vouchers
No
Yes
Yes
Free prize contest
No
Yes
Yes
The infrastructure of a country must be developed sufficiently

to handle direct mail the postal system must deliver mail on a
timely basis and be free of corruption. In addition to
Netherlands Belgium
physical infrastructure, a system for developing databases
and retrieving appropriate target names and the tracking
Yes
Yes
results is necessary. In one former Soviet re-public,
??
??
merchants were resistant to having their name and address
publicly listed in the telephone directory. They feared that
??
??
the local mafia could readily use this informa-tion to
Yes
Yes
extort protection money from these businesses.
No
No
289
information in its database, which it can use when communicating with customers in the future.
Direct Mail In Mexico

Mexico is an often-ignored market for direct mail, yet actually has a lot
of potential. Recently, the countrys 99 million plus consumers have
been enjoying a gross national product (GNP) per capita real growth rate
of approximately 6 percent, with GNP per capita of $US 3,943.
Inflation is in check, and the North American Free. Trade Agreement
(NAFTA) has resulted in lower tariffs and more jobs.
To date, Mexicans receive very little direct mail, so they are not as jaded as
consumers in the United States, who refer to direct mail as junk mail.
Mexicans love bargains and are brand conscious and brand loyal. An added
benefit to marketers is that postage and fulfillment costs are low.
international companies were 33 percent and 40 percent.

International trade shows offer businesses the opportunity to
identify and recruit importers/exporters and agents and to
make contact with trade bureaus of foreign governments. They
also offer an inexpensive and efficient way to meet -potential
customers from other countries. Trade shows differ from
country to country. For example, in the United States printed
material and promotion giveaways are much more common
than in many other countries. Figure 1 is a general model for
trade shows performance, which suggests the variables that
should influence the selection of shows, and the management
of show performance.
In a recent direct-mail campaign, an automobile financing company,

Gruppo Financiero Serfin, distributed 8,000 pieces, had a 10 percent
response rate, and converted 33 percent of respondents.
Culture also plays a significant role in the decision to use direct

mail. In Thailand, the local astrologer plays an important role in
many business decisions. If the day that a direct-mail campaign
is scheduled to begin is not auspicious, the marketer may delay j
the mailing until a more fortuitous day appears.
Database marketing uses
extensive lists of prospects
and relevant demographic
and psycho-graphic information to narrow target
markets to serious prospects
and then to cus-tomize an
offer to the prospects
interests. This is essential
not only for direct marketing but also for market
research and personal selling.
Lists can be created in house
from the J companys
current customers, from
responses to previous
direct-marketing offers, or
from I telephone or
membership directories.
These lists may also be
purchased from list brokers,
companies that specialize in
the acquisition and sale of
lists of prospective customers.
ENVIRONMENTAL INFLUENCES:
. Competitors in the Market.
. New Competitors in the Market.
. Competitors in the Trade Show.
. New Competitors in the Trade Show.
. Present Channel Members at the Show.
. New Channel Members in the Show.
. Number of Existing Suppliers at the Show.
. Number of New Suppliers at the Show.
. Number of Visitors.
. Quality of Visitors.
. Life Cycle Stage.
Feedback
Loop
COMPANY INFLUENCES:
. Annual Sales.
. Number of Customers.
. Customers' Concentration.
. Product Complexity.
. Trade Show Budget.
. Trade Show Cumulative Experience.
. The Value of Continuation to the Exhibiting
Company.
. The Geographical Emphasis of the Company.
. Width and Length of Available Product Lines.
TRADE SHOW SELECTION:

. Number of International Shows.
. Number of National Shows.
. Number of Regional Shows.
. Emphasis on Show Types.
Trade Shows and

Exhibitions
Trade shows and exhibitions are other promotion
SHOW PERFORMANCE:
. Sales.
vehicles that are increasingly
. Intelligence.
important in the promo. Suppliers' Contacts.
tional mix, especially for
. Psychological Objectives.
industrial products and in
the international marketplace. At two recent
international packaging trade shows, the percentages of
290
BOOTH MANAGEMENT:
. Width and Length of Exhibited Lines.
. Show Budget.
. Availability of New Products.
. Booth Quality.
. Booth Management.
. Show Objectives.
Figure 1 A General Model of trade show performance
Sponsorship serves purposes other than sales promotion.

Sponsorship can be used to in-crease awareness and esteem, to
build the brand identification, to-enhance the brands positioning and sales, and to circumvent advertising restrictions in
some countries. Examples of global sponsorship are the
Olympics, the World Cup in Soccer, the Grand Prix, and the
Tour de France. An example of a regional sponsorship event is
the Pan American Games while a local sponsorship event is the
Vasaloppet Ski Race in Sweden or sumo wrestling in Japan.
Table below shows how Coca-Cola varies its sponsorship
programs around the world.
Table: Coca Cola sponsorship Around the world
Canada
Zambia Ghana
Malaysia Ireland China
Leftie Rightie Golf Match

Annual Big Rock Games for Waiters,
Waitresses, and Bartenders
Soccer camp, squash tournament
Soccer tournament
Youth participation in Malaysia World Cup
Industry Challenge for Primary Schools contest
International breeding program to protect pandas
Spending By Region
Total
North America
Europe
Pacific Rim
Central and
South America
Other
Spending
US$ 19.2B
7.6B
5.6B
3.4B
1.5B
1.1B
% Total
100
40
29
18
8
5
% Change'
+11%
+ 12 %
+11%
+ 4%
+19%
+10%
Uncle Sam As International Marketer

Protection and promotion of a countrys economic interests have long been
a part of an ambassadors job but usually only a small part for U.S.
ambassadors. After the collapse of Communism, economic matters have
become a much more important part of a U.S. ambassadors job. This
began in the Bush administration and continued under Clinton. Secretary
of State Albright noted in her confirmation hearing that a major
administration goal was to assure that American economic interests can
be pursued globally. Trade is now covered in the two-week seminar given
new ambassadors before assignment. In recent years, embassies have
helped U.S. firms win contracts in such diverse places as Belgium and
Indonesia.
The Department of Commerce opened an Advocacy Center in 1994 as a
new form of trade promotion. In its first year, it helped U.S. companies
win 70 contracts with an export value of $ 20 billion.
Ron Brown, former Secretary of Commerce under Clinton, became an
active international marketer, flying to China and other countries with a
planeload of CEOs to promote U.S. businesses abroad. Brown also
helped get Ex-Im Bank support for some U.S. contracts abroad.
President Clinton himself became active in promoting U.S. businesses
abroad. Some examples:
1. Clinton called and wrote King Fahd of Saudi Arabia about a
potential airplane contract. This was influential in Boeing and
McDonnell-Douglas winning a $6 billion contract against Airbus.
2. Clinton again intervened in a telecommunications contract in Saudi
Arabia. AT&T won a $4 billion contract even though Ericsson and
Northern Telecom claimed lower bids.
3. In Brazil, Raytheon won a contract with Clintons help.
Just as with media, the effectiveness of sponsorship varies

across geographic regions and should be taken into consideration when planning programs in in-dividual countries or
measuring program effectiveness.
Chevron participated in a $20 billion oil deal in Kazakhstan aided by the

president
Expenditures on sponsorship are rising and expected to

continue to do so. Two causes for this trend are increases in
corporate mergers and cause marketing. Many companies that
are consolidating want to quickly increase awareness of the
merger and to establish a new image. Cause marketing, which is
the use of marketing funds to enhance a cause while acting as a
good corporate citizen, is gaining popularity. In the United
States, Clairol Professional Care Products supports AIDS
research while Avon supports breast cancer research.
Sponsorship, however, does have its distractors. Many people
claim the Olympics are over commercialized and that sponsors
McDonaldize local events. Needless to say, these people are in
the minority given the wide acceptance of sponsorship, but
some may generate negative publicity for the company.
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Sponsorship Promotion
LESSON 32:
CHANNELS OF DISTRIBUTION
Introduction
The lesson describes the varieties of intermediaries (i.e., agents,
wholesaler and retailers) involved in moving products between
countries as well as within countries. The tasks and functions of
the various intermediaries will be examined. It should be kept
in mind that certain types of intermediaries do not exist in
some countries and that the pattern of use as well as the
importance of each type of intermediary varies widely from
country to country.
A manufacturer is required to make several decisions that will
affect its channel strategy, including the length, width, and
number of distribution channels to b used. The chapter
examines the various factors that influence these decisions. For
an operation to be a success, a good relationship among channel
members is vital.
Direct and Indirect Selling Channels

Companies use two principal channels of distribution when
marketing abroad: (1) in direct selling and (2) direct selling.
Indirect selling, also known as the local or domestic channel, is
employed when a manufacturer in the United States, for
example, market its product through another U.S. firm that acts
as the manufacturers sales intermediary (or middleman). As
such, the sales intermediary is just another local or domestic
channel for the manufacturer because there are no dealings
abroad with a foreign firm. By exporting through an independent local middleman, the manufacturer has no need to set up
an international department. The middleman, acting as the
manufacturers ex-ternal export organization, usually assumes
the responsibility for moving the product overseas. The
intermediary may be a domestic agent if it does not take title to
the goods, or it may be it domestic merchant if it does take title
to the goods.
There are several advantages to be gained by employing an
indirect domestic channel. For example, the channel is simple
and inexpensive. The manufacturer in-curs-no-start-up cost for
the channel and is relieved of the responsibility of physically
moving the goods overseas. Because the intermediary very likely
represents several clients who can help share distribution costs,
the costs for moving the goods are fur-ther reduced.
An indirect channel does, however, have limitations. The
manufacturer has been relieved of any immediate marketing
costs but, in effect, has given up control over the marketing of
its product to another firm. This situation may adversely affect
the products success in the future. If the chosen intermediary is
not aggressive, the man-ufacturer may become vulnerable,
especially in the case where competitors are care-ful about their
distribution practices. Moreover, the indirect channel may not
neces-sarily be permanent. Being in the business of handling
products for profit. The intermediary can easily discontinue
292
handling a manufacturers product if there is no profit or if a

competitive product offers a better profit potential.
Direct selling is employed when a manufacturer develops an
overseas channel. This channel requires that the manufacturer
deal directly with a foreign party with-out going through an
intermediary in the home country. The manufacturer must set
up the overseas channel to take care of the business activities
between the countries
Being responsible for shipping the product to foreign markets
itself, the manufacturer exports through its own internal export
department or organization.
One advantage gained in using the direct-selling channel is active
market exploiter since the manufacturer is more directly
committed to its foreign markets. Another advantage is greater
control. The channel improves communication because
approval does not have to be given to a middleman before a
transaction is completed. Therefore, the channel allows the
companys policy to be followed more uniformly.
Direct selling is not without its problems. It is a difficult
channel to manage if the manufacturer is unfamiliar with the
foreign market. Moreover, the channel is time consuming and
expensive. Without a large volume of business, the manufacturer may find it too costly to maintain the channel. Hiram
Walker, a Canadian distiller, used to have its own marketing
operation in New York City to distribute such brands as
Ballantine Scotch, Kahlua, and CC Rye. Poor earnings finally
forced the company to phase out its costly U.S. selling organization along with its New York City market-ing operation.
Exporters who do not undertake international marketing
research have a ten-dency to sell directly to a U.S. export agent.
In contrast, those who undertake more formal international
marketing research tend to be committed to exporting and
invest resources in establishing a separate department to export
their product directly to end users.
One study found a positive relationship between channel
directness and export performance of Hong Kong and
Singaporean exporting firms. Another study found that
American exporters who are committed to exporting and are
formally trained in international business prefer to sell directly
to end-users and utilize their own export department. Since
these exporters charge higher prices for exported products than
for sales in the domestic market, they also perform better
financially.
A survey of exporting firms in the electrical machine tool builders
food equipment, and fluid power industries found that firms
that export industrial goods use dis-tribution channel members
identical Jo those used at home. The export distribution channels
used most often by these industrial firms were sales representatives and ex-port distributors. Although respondents appeared
to be somewhat satisfied with their overall distribution system,
Wanted: A Good Agent
Pantresse, Inc. is a Massachusetts manufacturer and dis-tributor of haircare products (shampoos and condi-tioners) for the professional beauty
trade. The Mexi-can market is important to Pantresse since it accounts
for one-third of the companys total sales. There are two keys to the
companys success in Mexico: having a top-notch local agent and a strong
promotion and advertising program. It was critical for Pantresse to find a
local agent that had experience in selling its particu-lar product line. The
agent must also have strong mar-keting skills and viable contacts.
Pantresse was able to develop a business link with one of Mexicos largest
pharmaceutical supply companies. This Mexican firm also has extensive
media holdings.
Types of Intermediaries
Direct Channel
There are several types of intermediaries associated with both
the direct and indirect channels. Exhibit 1 compares the two
channels and lists the various types of do-mestic and foreign
intermediaries.
1. Foreign Distributor
A foreign distributor is a foreign firm that has exclusive
rights to carry out distrib-ution for a manufacturer in a
foreign country or specific area. For example, when Don
Wood returned to Detroit, he still remembered the MG
sports car he drove in Eng-land during World War II. His
letter asking MGs chairman to sell and ship one car to him
brought the response that MGs policy was to sell only
through authorized dis-tributors. But MG was willing to
appoint Wood its Midwest distributor if he would order
two cars instead. Wood agreed to do so and went on to
become a successful distributor.
Orders must be channeled through the distributor, even
when the distributor chooses to appoint a subagent or subdistributor. The distributor purchases merchandise from the
manufacturer at a discount and then resells or distributes the
merchandise to retailers and sometimes-final consumers. In
this regard, the distributors function in many countries may
be a combination of wholesaler and retailer. But in most
cases the distributor is usually considered as an importer or
foreign wholesaler. The length of as-sociation between the
manufacturer and its foreign distributor is established by a
con-tract that is renewable provided the continued
arrangement is satisfactory to both.
In some situations, the foreign distributor is merely a
subsidiary of the manu-facturer. Seiko U.S.A., for example, is
a distributor for its Japanese parent (Hattori Seiko), which
manufactures Seiko watches. More frequently, however, a
foreign dis-tributor is an independent merchant. Charles of
the Ritz Group has been the U.S. dis-tributor for Opium, a
very popular perfume made in France. A distributor may
some-times take on the name of the brand distributed even

though the distributor is an independent operator and not
owned by me manufacturer. Brother International Corp. is
an independent U.S. distributor of Brother Industries, Ltd.,
a Japanese firm. Longines- Wittnauer Watch Co. distributes
the Swiss-made Longines watch in the U.S. market. This
distributorship is actually a subsidiary of the Westinghouse
Electric Corp.
There are a number of benefits in using a foreign
distributor. Unlike agents, the distributor is a merchant who
buys and maintains merchandise in its own name. This
arrangement simplifies the credit and payment activities for
the manufacturer. To carry out the distribution function, the
foreign distributor is often required to warehouse ad-equate
products, parts, and accessories and to have facilities and
personnel immediately available to service buyers and users.
Still, the manufacturer must be careful in select-ing a foreign
distributor or it may end up with a distributor who is
deficient in mar-keting and servicing the product. Apple
Computer now does its own distribution in Japan because
the services of Toray Industries, its former distributor,
proved inadequate.
2. Foreign Retailer
If foreign retailers are- used, the product in question must
be a consumer product rather than an industrial product.
There are several means by which a manufacturer may contact
foreign retailers and interest them in carrying a product,
ranging from a personal visit by the manufacturers
representative to mailings of catalogs, brochures, and other
literature to prospective retailers. The use of personal selling
or a visit, al-though expensive because of travel costs and
commissions for the manufacturers rep-resentative provides
for a more effective sales presentation as well as for better
screening of retailers for the distribution purpose. The use
of direct mail, although less expensive, may not sufficiently
catch the retailers attention.
For such big-ticket items as automobiles or for high-volume
products, it may be worthwhile for a manufacturer to sell to
retailers without going through a foreign distributor. In fact,
most large retailers prefer to deal directly with a manufacturer.
In Europe, for example, a number of retail food chains are
becoming larger and more powerful, and they prefer to be in
direct contact with foreign manufacturers in order to obtain
price concessions.
3. State-Controlled Trading Company
For some products, particularly utility and
telecommunication equipment, a manu-facturer must contact
and sell to state-controlled companies. In addition, many
coun-tries, especially those in Eastern Europe, have statecontrolled trading companies, which are companies that have
a complete monopoly in the buying and selling of goods.
Hungary has about one hundred state trading organizations
for a variety of products, ranging from poultry to
telecommunication equipment and for both imported and
exported products.
293
they also showed relative dissatisfaction with trading com-panies in

general. In the balance, firms that have been exporting for a while
are hap-pier with their distribution system than firms that have
relatively little exporting ex-perience.
Exporting a Shopping Experience
Newsweek, and Business Week facilitate the ordering process

because they publish international edi-tions. Of course, an
advertiser can also place its advertisement directly with
foreign publishers. This is the process many countries follow
in order to promote the local tourism industry.
Pier I is a Texas based retailer, and its many stores can be readily found
in the United States. Its retail for-mula is to import and stock unusual
items, price them moderately, and display them in an integrated fashion to
give an atmosphere of the United Nations. Blue Japanese sake cups, for
example, are displayed with blue European plates rather than with other
Japanese goods.
Direct Marketing
Pier I wants to repeat its retail magic overseas and plans to open 250
stores outside North America in seven years which will account for 5
percent of the companys sales and 10 percent of operating profits. This
is not an easy task. Few American retailers have tried to do retailing
abroad, and most foreign retailers that have opened stores in the United
States have per-formed very poorly. Naturally, retailing is a local phenomenon.
Dell Computer Corp. builds and markets a full line of desktop, notebook,
and network-server PCs. After having found success in the United States,
Dell Com-puter Corp. has gone overseas. The company operates wholly
owned subsidiaries in fifteen countries, which in-clude most of the European
Union countries, Mexico, Canada, and Poland. Its manufacturing plants
are lo-cated in Ireland and Malaysia. Being committed to in-ternational
markets, Dell has operations in 115 coun-tries.
The company believes that its formula is unique and can travel overseas.
But some adaptation is re-quired. Stores in Asia definitely have no need to
carry chopsticks (which are popular in the U.S. stores) but will focus on
American goods. Furniture will be made smaller for the Japanese market
to suit tiny apartments. Also in Europe and Asia, Pier I will stock
posters of American pop heroes and other American-related items.
Several skeptics questioned whether Dells direct marketing strategy would

work outside of the United States since Europe does not have the same
telephone culture. Actually, consumers in most countries prefer to do
business directly with a manufacturer rather than a third-party vendor.
Dells worldwide telephone sales force handles 35,000 calls each day.
For most countries Pier I will use joint ventures and licensing to penetrate
the markets. In the case of Puerto Rico, the retailer feels that the market
resem-bles Florida and that it knows enough about the mar-ket. Therefore.
it does not need a partner in Puerto Rico where its thirty-five stores use the
same inven-tory found elsewhere in the United States to attract Cuban and
Hispanic Americans.
Being government sanctioned and controlled for trading in

certain goods, buy-ers for state-controlled trading companies
are very definitely influenced by their gov-ernments trade
policies and politics. Most opportunities for manufacturers
are lim-ited to raw materials, agricultural machinery,
manufacturing equipment, and technical instruments rather
than consumer or household goods. Reasons for this
limitation in-clude shortage of foreign exchange, an
emphasis on self-sufficiency, and the central planning
systems of the communist and socialist countries.
4. End User
Sometimes, a manufacturer is able to sell directly to foreign
end users with no in-termediary involved in the process.
This direct channel is a logical and natural choice for costly
industrial products. For most consumer product the
approach is only prac-tical for some products and in some
countries. A significant problem with consumer purchases
can result from duty and clearance problems. A consumer
may place an order without understanding his or her
countrys import regulations. When the mer-chandise arrives,
the consumer may not be able to claim it. As a result, the
product may be seized or returned on a freight-collect basis.
Continued occurrence of this problem could become
expensive for the manufacturer.
To solicit orders, a manufacturer may use publications to
attract consumers Many U.S. magazines receive overseas
distribution, and the advertisements inside are read by
foreign consumers. Other U.S. magazines including Time,
294
Dells formula is to emphasize a solid product line, attractive prices,

aggressive marketing, and qual-ity service and support. In earn country
the company advertises in the leading PC publications that are widely read
by PC users and buyers. Not only has Dell been successful in building its
business, but it has also legitimized the computer mail-order market.
The companys subsidiaries are run by localsnot expatriates. Since
countries differ in size, language, social structure, and business
philosophy, the locals keep Dell abreast of the nuances of doing business
in each market.
How successful is Dell? It is the worlds largest direct marketer of IBMcompatible PCs.
Types of Intermediaries: Indirect Channel

For a majority of products, a manufacturer may find it impractical to sell directly to the various foreign parties (i.e., foreign
distributors, foreign retailers, state-controlled trading companies, and end users). Other intermediaries, more often than not
have to come between- these-foreign buyers and the manufacturer. This section examines the roles of those middlemen
located in the manufacturers country.
With an indirect channel, a manufacturer does not have to
correspond with for-eign parties in foreign countries. Instead;
the manufacturer deals with one or more domestic middlemen,
who in turn move and/or sell the product to foreign middlemen or final users. Although there are many kinds of local sales
intermediaries, all can be grouped under two broad categories:
(1) domestic agents and (2) domestic merchants. The basic
difference between the two is ownership (title) rather than just
the physi-cal possession of the merchandise. Domestic agents
never take title to the goods, re-gardless of whether the agents
take possession of the goods or not. Domestic mer-chants, on
the other hand, own the merchandise, regardless of whether the
merchants take possession or not. An agent represents the
manufacturer. Whereas a merchant (e.g., distributor) represents
the manufacturers product. The merchant has no power to
Agents can be further classified according to the principal whom

they represent. Some agent intermediaries represent the buyer;
others represent the interests of the manufacturer. Those who
work for the manufacturer include export brokers; manufacturers export agents or sales representatives, export management
companies, co-operative exporters, and Webb Pomerene
associations. Agents who look after the in-terests of the buyer
include purchasing (buying) agents/offices and countrycontrolled buying agents
1. Export Broker
The function of an export broker is to bring a buyer and a seller
together for a fee. The broker may be assigned some or allforeign market in seeking potential buyers. It negotiates the best
terms for the seller (i.e., manufacturer) but cannot conclude the
transaction without the principals approval of the arrangement.
As a representative of the manufacturer, the export broker may
operate under its own name or that of the manufacturer. For
any action performed, the broker receives a fee or commission.
An export broker does not take possession or title to the
goods. In effect, it has no fi-nancial responsibility other than
sometimes making an arrangement for credit. An ex-port broker
is less frequently involved in the export (shipping) of goods
than in the import (receiving) of goods.
The export broker is useful because of its extensive
knowledge of the market supply, demand, and foreign
customers. This knowledge enables the broker to nego-tiate
the most favorable terms for the principal. The broker is also
a valuable associate for highly specialized goods and seasonal
products that do not require constant distribution. An
export broker may be thus used on a one-time basis by small
manufacturers with limited financial resources who are selling
in broad markets.
2. Manufacturers Export Agent or Sales Representative
Because of the title of this intermediary, one might easily
mistake an export agent or sales representative for a
manufacturers employee when, in fact, this is an independent businessperson who usually retains his or her own
identity by not using the manufacturers name. Having more
freedom that the manufacturers own salesper-son, a sales
representative can select when, where, and how to work
within the as-signed territory. Working methods include
presenting product literature and samples to potential
buyers. An export agent pays his or her own expenses and
may represent manufacturers of related and non-competing
products. The person may operate on ei-ther an exclusive or
nonexclusive basis.
Like a broker, the manufacturers export agent works for
commission. Unlike the broker, the relationship with the
manufacturer is continuous and more permanent. The
contract is for a definite period of time and. the contract is
renewable by mutual agreement. The manufacturer, however,
retains some control because the contract de-fines the territory,
terms of sale, method of compensation, and so on.
The manufacturers export agent may present some

problems to the manufac-turer because an agent does not
offer all services. Such services as advertising, credit assistance,
repair, and installation may be excluded. An export agent
may take pos-session but not title to the goods and thus
assumes no risk-the risk of loss remains with the
manufacturer. Finally, the manufacturer relinquishes control
over marketing activities, and this can hurt a manufacturer
whose volume is too small to receive the agents strong
support. The experience of Arthur C. Bell, a British firm, is a
case in point. James B. Beam, its previous agent in the
United States, neglected Bell because its salespeople had too
many other products to handle. Bell switched to Monsieur
Henri as its new agent. However, this hardly improved the
situation because Henri also preferred to concentrate on
larger accounts. As a result, Bell was left out of Christmas
catalogs or dropped by many retailers. Bell thus
contemplated acquiring a U.S. importer to have stronger
control over its own marketing destiny.
Under certain circumstances, it may not be justifiable for a
small manufacturer to set up its own sales force and
distribution network. Such circumstances include the
following:
1. When the manufacturer has a geographically widespread
market-the usual case in in-ternational marketing.
2. When some overseas markets are too thin.
3. When the manufacturers product is new and the demand is
uncertain.
4. When the manufacturer is inexperienced in international
marketing.
5. When the manufacturer wants to simplify business activities.
A manufacturer can avoid fixed costs associated with having
its own sales and dis-tribution organization when it employs
an agent, since the commission is paid only when sales are
made. A manufacturers export agent has extensive
knowledge of spe-cific foreign markets and has more
incentive to work than the manufacturers own salespersons.
Additionally, the agent carries several product lines, and the
result is that the expense of doing business is shared by
other manufacturers. This arrange-ment allows the
manufacturer to concentrate time, capital, and expertise on
the pro-duction of goods rather than on having to deal with
the marketing aspect. Of course, if the product is successful,
the manufacturer can always set op its own sales force.
Activity 1: Students should be encouraged to differentiate
between the various types of intermediaries, their merits
and demerits.
3. Export Management Company (EMC)

An export management company (EMC) manages, under
contract, the entire ex-port program of a manufacturer. An
EMC is also known as a combination export manager
(CEM) because it may function as an export department for
several allied but non-competing manufacturers. In this
regard, those export brokers and manufac-turers export
agents who represent a combination of clients can also be
called EMCs. When compared with export brokers and
295
contract on behalf of the manufacturer, but the agent can bind

the manufacturer in authorized matters to contracts made on
the manufacturers behalf.
manufacturers export agents, the EMC has greater freedom and

considerable authority. The EMC provides extensive services,
ranging from promotion to shipping arrangement and
documentation. Moreover the EMC handles all, not just a
portion, of its principals products. In short, the EMC is
responsible for all of the manufacturers international activities.
Foreign buyers usually prefer to deal directly with the
manufacturer rather than through a third party. Therefore, an
EMC usually solicits business in the name of the
manufacturer and may even use the manufacturers
letterhead. Identifying it as the manufacturers export
department or international division, the EMC signs correspondence and documents in the name of the manufacturer.
This may be an advan-tageous arrangement for small and
medium-sized firms that lack expertise and ade-quate human
and financial resources to obtain exports. This arrangement
may be a good way for a firm to develop foreign markets
while creating its own identity abroad. The EMC, on the
other hand, faces a dilemma because of a double risk: it can
easily be dropped by its clients either for doing a poor job or
for making the manufac-turers products too successful.
American EMCs are typically small. While the number of
employees ranges from two to fifty, a majority of them have
six or fewer employees. It is normal for an EMC to have
only one or a few managers or market specialists.
An EMC typically requires at least a one-year contract to
handle a manufac-turers products. More often, it is a threeyear contract. This is understandable be-cause it takes at least
six to twelve months to produce significant results.6
Interest-ingly, due to uncertainties about the relationships,
most U.S. manufacturers and EMCs do not have a formal,
written agreement.
EMCs are compensated in several ways. Frequently,
compensation is in the form of a commission, salary, or
retainer plus commission. Depending on the product, the
commission may be as high as 20 percent, with the 6 percent
to 10 percent range be-ing the most prevalent. Some EMCs
may require a manufacturer to pay a one-time pro-ject fee,
and such start-up costs may range from a few hundred
dollars to tens of thou-sands of dollars. Meridian Group, a
Los Angeles EMC, has stated that it can help handle sales,
distribution, credit, shipping, and everything else. Typically,
an export manager charges a fee of between 10 percent and
15 percent of a shipments wholesale value.
Many EMCs are also traders (i.e., export merchants). As a
matter of fact, as both agents and merchants, EMCs engage
in more of the buy-and-reseal method than the commission
arrangement. In such cases, they buy merchandise outright
and thus take title to the goods. They are compensated by
receiving discounts on goods pur-chased for resale overseas,
and such discounts may be greater than what other middlemen receive for the domestic market. They may receive
promotion allowances as well. As in the case of Overseas
Operations, Inc., it markets builders hardware, hous-ing
accessories, door closures and locks, and computer software
and accessories. As an exclusive representative of a number
296
of American manufacturers, the company buys products

when orders are received and makes its profit on the markup.
Both the nature of the promotional function and the type
of product impact the pricing method. When an EMC has
to assume a promotional function, it passes on the costs to
the producer by receiving a discount. EMCs which market
highly differ-entiated products and spend large but
predictable sums of money on non-price promotional
activities (e.g., foreign trade fairs) may ask for a fixed
percentage discount off the producers domestic wholesale
price. But those EMCs marketing undifferen-tiated products
while spending unpredictable sums of money in non-price
promotion (e.g., promotional product brochures) are more
likely to use a negotiated pricing pro-cedure.
There are several reasons why a firm uses an EMC. It has
international market-ing expertise and distribution contacts
0verseas. For the many services provided, an EMCs costs are
relatively low because of the efficiencies of scale; that is, costs
can be spread over the products of-several clients. In
addition, the EMC provides shipping efficiency because it can
consolidate several manufacturers products in one shipment.
The orders are consolidated at the port and shipped on one
ocean bill of lading to the same foreign buyer. By
consolidating shipments of products from several principals,
a company obtains better freight rates. Also, many EMCs
provide financial services. By guaranteeing payments and
collecting from overseas buyers, a manufacturer is as-sured
of immediate payment. By providing all of these services,
the EMC allows the manufacturer to concentrate on internal
efforts and its domestic market.
Using EMCs, like using other types of intermediaries, does
have its disadvantages. First, an EMC prefers new clients
whose products complement the EMCs ex-isting product
lines. The EMC is very likely not interested in unknown
products or new technologies that require too much time
and effort in opening new markets over-seas. A problem for
a small manufacturer may be the extent of support it
receives. If a firm seeks to do business with a large EMC, the
EMC is not likely to give the small client adequate attention.
If a small EMC is used, the EMC may be too small to give
attention to all products of its clients. In general, most
EMCs do put forth a serious effort and are willing and able
to provide sufficient services for new clients.
According to one study, EMCs believe that gathering
marketing information and communicating with markets are
most important to successful exporting. They also feel that
political-risk analysis and sales-force management are the two
most difficult things to accomplish.
4. Cooperative Exporter
A cooperative exporter is a manufacturer with its own export
organization that is retained by other manufacturers to sell in
some or all-foreign markets. Except for the fact that this
intermediary is also a manufacturer, the cooperative exporter
functions like any other export agent. The usual arrangement
is to operate as an export distrib-utor for other suppliers,
The cooperative exporters motive in representing other

manufacturers primar-ily involves its own financial interests.
Having fixed costs for the marketing of its own products,
the cooperative exporter desires to share its expenses and
expertise with others who want to sell in the same markets
abroad. Because of these activities, a cooperative exporter is
often referred to as a mother hen, a piggyback exporter,
or an export vendor. Examples of cooperative exporters
include such well-known companies as GE, Singer, and
Borg-Warner. By representing several clients, the co-operative
exporter is regarded as a form of EMC.
The relationship between the cooperative exporter and its
principal is a long--term one. The arrangement provides an
easy, low-risk way for the principal to start marketing
overseas, and the relationship should ordinarily continue as
long as unre-lated or noncompetitive products are involved.
A problem may arise if the principal decides to market a new
product that competes directly with the cooperative
exporters own product or those of the exporters other
clients.
5. Webb Pomerene Association
A Webb-Pomerene association is formed when two or more
firms, usually in the same industry, join together to market
their products overseas. The association con-stitutes an
organization jointly owned by competing U.S. manufacturers
exclusively for the purpose of export. It may seem strange
for competing firms (rather than non-competing firms) to
cooperate, but experience has shown that joint export
operations are not effective for unrelated products. The
largest such association has almost 300 members, whereas
the Northwest Dried Fruit Association has only two
members.
Basically, a Webb-Pomerene association is an export cartel.
Although cartels are illegal in the United States, this kind of
cartel is allowed to operate as long as it has no
anticompetitive impact on domestic marketing in the U.S.
market. Although receiving no prior certification of antitrust
exemption, the Webb-Pomerene Act pro-vides the
association with a qualified exemption. The only legal
requirement is that the association must file with the Federal
Trade Commission within thirty days after its organization.
The Webb-Pomerene association performs several useful
functions. It provides information to member firms, sets
prices, allocates orders, and sell products. It arranges
shipping of the merchandise by providing for freight
consolidation, rate negotiation, and ship chartering or
booking. The association thus takes possession of goods
and makes all necessary arrangements but without taking title
of the goods. As coopera-tive organizations, these
associations tend to operate on a nonprofit or expense basis.
There are disadvantages in this type of long-term
relationship. First, this type of arrangement is not available
in the service sector because the act prohibits service firms
from joining together. Second, convenient financing is not

available because banks have not been allowed to participate
in this type of commercial venture since the 1920s. Third, as
expected for most partnerships, some opposition and
disagree-ment among members is inevitable. If members fail
to agree or cooperate, the asso-ciations effectiveness is
seriously impaired. Finally, member firms lose individual
identity because exports are done in the name of the
association, making the arrange-ment somewhat more
suitable for unbranded goods or commodities. Specialized
prod-ucts and popular brands are able to do their own
exporting and thus do not want their brands replaced by a
common association label or trademark. An unusual but
possi-ble arrangement is for members to retain individual
identity (i.e., individual brand names); the machine-tool
associations are a prime example. These associations were
formed primarily to offer technical assistance and credit in
markets too small to jus-tify each exporters own facilities.
6. Purchasing/Buying Agent
An export agent represents a seller or manufacturer; the
purchasing buying agent represents the foreign buyer. By
residing and conducting business in the exporters country,
the purchasing agent is in a favorable position to seek a
product that matches the foreign principals preferences and
requirements. Operating on the overseas cus-tomers behalf,
the purchasing agent acts in the interest of the buyer by
seeking the best possible price. Therefore, the purchasing
agents client pays a fee or commis-sion for the services
rendered. The purchasing agent is also known by such names
as commission agent; buyer for export, export commission
house, and export buying agent. This agent may also become
an export-confirming house when confirming pay-ment and
paying the seller after receiving invoice and title documents
for the client.
The buying agent is valuable for manufacture because it seeks
those-firms-out and offers them services. However, since the
agent operates on an order basis, the relationship with either
seller or buying is not continuous. This arrangement thus
does not offer a steady volume of business for the
manufacturer and neither does it offer any reduction in
financial risk. In any case, the transaction between the
manufacturer and the buying agent (or the agents customer)
may be completed as a domestic en-terprise in the sense that
the agent will take care of all shipping arrangements Otherwise, the manufacturer will have to make its own
arrangement.
7. Country-Controlled Buying Agent
A variation on the purchasing agent is a country-controlled
buying agent. This kind of agent performs exactly the same
function as the purchasing buying agent, the only distinction
being that a country-controlled buying agent is actually a
foreign govern-ments agency or quasi-governmental firm.
The country-controlled buying agent is empowered to locate
and purchase goods for its country. This agent may have a
per-manent office location in countries that are major
suppliers, or the countrys repre-sentative may make formal
visits to supplier countries when the purchasing need arises.
297
sometimes acting as a commission representative or broker.

Because the cooperative exporter arranges shipping, it takes
possession of goods but not title.
8. Resident Buyer
Another variation on the purchasing agent is the resident
buyer. As implied by the name, the resident buyer is an
independent agent that is usually located near highly
centralized production industries. Although functioning
much like a regular purchas-ing agent, the resident buyer is
different because it is retained by the principal on a
continuous basis to maintain a search for new products that
may be suitable. The long--term relationship makes it
possible for the resident buyer to be compensated with a
retainer and a commission for business transacted.
activities. The mer-chant mayor may not offer a steady

business relationship for his supplier.
10. Export Drop Shipper
An export drop shipper, also known as a desk jobber or cable
merchant, is a spe-cial kind of export merchant. As all these
names imply, the mode of operation re-quires the drop
shipper to request a manufacturer to drop ship a product
directly to the overseas customer. It is neither practical nor
desirable for the shipper to physi-cally handle or possess the
product. Based on this operational method, the shippers
ownership of the goods may only last for a few hours.
The resident buyer provides many useful services for a

manufacturer. It can of-fer a favorable opportunity for a
supplier to maintain a steady and continuous busi-ness
relationship as long as the supplier remains competitive in
terms of price, ser-vice, style, and quality.
Upon the receipt of an order from overseas, the export drop

shipper in turn places an order with a manufacturer, directing
the manufacturer to deliver the prod-uct directly to the
foreign buyer. The manufacturer collects payment from the
drop shipper, who in turn is paid by the foreign buyer.
For a foreign buyer, the resident buyer offers several useful

services, one of which is the purchasing function. The resident
buyer uses its judgment to make de-cisions for its overseas
client which does not have the time to send someone to visit
production sites or firms or which cannot wait to examine
samples. Another service provided by the resident buyer is the
follow-up function. The resident buyer can make certain that
delivery is made as promised. A late delivery can make the
purchase meaningless, especially in the case of seasonable or
fashion products. If the foreign client decides to visit
manufacturing plan~ or offices, the resident buyer can assist
by making hotel reservations, announcing the visit to
suppliers, arranging vendor ap-pointments, and so on
Use of a drop shipper is common in the international

marketing of bulky prod-ucts of low unit value (e.g., coal,
lumber, construction materials). The high freight volume
relative to the low unit value makes it prohibitively expensive
to handle such products physically several times. Minimizing
physical handling reduces the cost ac-cordingly. .
9. Export Merchant
The intermediaries covered so far have certain factors in
common: they take neither risks nor title, preferring to receive
fees for their services. Unlike these middlemen domestic
merchants are independent businesses that are in business
to make a profit rather than to receive a fee. There are several
types of domestic merchants. Because they all take title, they
are distinguished by other features such as physical possession goods and services rendered
One kind of domestic merchant is the export merchant. An
export merchant seeks out needs in foreign markets and
makes purchases from manufacturers in its own country to
fill those needs. Usually the merchant handles staple goods,
undif-ferentiated products, or those in which brands are
unimportant. After having the mer-chandise packed and
marked to specifications, the export merchant resells the
goods in its own name through contacts in foreign markets.
In completing all these arrange-ments, the merchant assumes
all risks associated with ownership.
The export merchants compensation is a function of how
product is priced. The markup is affected by the profit
motive as well as by market conditions. In any case, the
export merchant hopes that the price at which the product is
sold will exceed all costs and expenses in order to provide a
profit. An export merchant may sometimes seek extra
income by importing goods to complement its export
298
One may question why a manufacturer does not simply deal

directly with a for-eign buyer, bypassing the drop shipper
and saving money in the process-the ship-ping instructions
would reveal the name and address of the foreign buyer. The
an-swer is that the manufacturer can reduce the risk while
simplifying the transactional tasks. It is a great deal easier for
the manufacturer to call the export drop shipper in the
manufacturers own country instead of trying to sell to and
collect from the buyer in a far-away destination.
There are also good reasons why the foreign buyer may not
be able to or want to bypass the export drop shipper. The
buyer may not have adequate product knowl-edge or supply
knowledge, and the buyers order may be too small to entice
the man-ufacturer to deal directly. The drop shipper is thus
valuable because this kind of mer-chant is highly specialized
in knowing the sources of supply and markets. The drop
shipper also has information and advice about the needed
product and can arrange all details for obtaining it.
11. Export Distributor
Whereas export merchants and drop shippers purchase from
a manufacturer when-ever theyreceive-orders from
overseas, an export distributor deals with the manu-facturer
on a continuous basis. This distributor is authorized and
granted an exclu-sive right to represent the manufacturer and
to sell in some or all-foreign markets. It pays for goods in its
domestic transaction with the manufacturer and handles all
fi-nancial risks in the foreign sale.
An export distributor differs from a foreign distributor
simply in location. The foreign distributor is located in a
particular foreign country and is authorized to dis-tribute
and sell the product there. The export distributor, in
comparison, is located in the manufacturers country and is
authorized to sell in one or more markets abroad. Consider
Mamiya, a Japanese manufacturer. J. Osawa is Mamiyas
The export distributor operates in its own name or that of

the manufacturers handles all shipping detail, thus relieving
the manufacturer of having to pay atten-tion to overseas
activities. In other words, the sale made to the export
distributor is just like another domestic transaction for the
manufacturer. Because the export dis-tributor as a rule
represents several manufacturing firms, it is sometimes
regarded as a form of EMC.
The export distributor usually sells the manufacturers
product abroad at the manufactured list price and receives an
agreed percentage of the list price as remu-neration That is,
the export distributor is either paid by commission or
allowed a dis. count for Its purchase. The manufacturer may
bill a foreign buyer directly or may let the distributor bill the
buyer to obtain the desired margin.
12. Trading Company
Those that want to sell and those that want to buy often
have no knowledge of each other or no knowledge of how
to contact each other. Trading companies have come into
existence to fill this void. In international marketing activities
for many coun-tries, this type of intermediary may be the
most dominant form in volume of busi-ness and in
influence. Many trading companies are large and have
branches wherever they do business. They operate in LDCs,
developed countries, and their own home markets. Half of
Taiwans exports are controlled by trading companies. In
Japan, gen-eral trading houses are known as sogo shosha,
and the largest traders include such well-known MNCs as
Mitsubishi, Mitsui, and C. Itoh. The nine largest trading
firms handle roughly half of Japans imports and exports.
Even large Japanese domestic companies buy through
trading companies.
A trading company performs many functions; the term
describes many intermediaries that are neither brokers nor
import merchants. A trading company may buy and sell as a
merchant. It may handle goods on consignment, or it may
act as a com-mission house for some buyers. By representing
several clients, it resembles an EMC, except for the fact that it
(1) has more diverse product lines, (2) offers more services.
(3) Is largest and letter financed, (4) takes title (ownership)
to merchandise, (5). Is not exclusively restricted to engaging
in export trade, and (6) goes beyond the role of an
intermediary (which provides only export facilitation services)
by engaging directly in production physical distribution
channel development, financing, and resource development.
As the name implies, the trading company trades on its own
account for profit. By frequently taking title to the goods it.
Handles, its risks of doing business greatly increase. A
trading company does not merely represent manufacturers
and/or buyers thus reducing risks, because increased risks are
usually accompanied by increased re-wards. In the case of
WSJ International, which are a trader as well as a
representative profit margins gained on trading are about
four times greater than margins on repre-sentative sales. It is
thus not surprising that trading accounts for half of the

companys revenues. Manufacturers and buyers use trading companies for good
reasons. The trading company gathers market information;
does market planning; finds buyers; package and warehouses
merchandise; arranges and prepares documents for
transportation. In-surance and customs; provides financing
for suppliers and/or buyers; accepts busi-ness risks; and
serves foreign customers after sales. It is, in short a valuable
entity in overcoming cultural and institutional barriers.
Nanodata for example concluded that it was too expensive
to reach unfamiliar and distant market areas. The company
decided to hire TKB Technology Trading Corporation, a
trading company, to iden-tify good European markets for
Nanodatas computer and to develop a distribution channel
by choosing agents, distributors, or direct subsidiaries. TKB
offered entry without expensive staff buildup until
Nanodata was ready to do so on its own.
Like other intermediaries, however, the trading company
must always face the possibility of being bypassed by its
clients, and it thus must offer something of value to its
customers. This holds true even for Mitsubishi, the worlds
largest trader with more than $164 billion in sales. Without
its own production, this company could be squeezed out by
Japanese clients that would set up their own marketing
departments. Mitsubishis solution in keeping old customers
and getting new ones is to give buy-ers and sellers an
incentive to do business with it. It has formed joint ventures
with American and Japanese partners with an aim to acquire
ownership influence with both its suppliers and customers.
Furthermore, this firm cannot be easily replaced because of
its long experience, expertise, and established networks.
Japanese Trading Companies Because of the spectacular
success of the huge Japanese trading companies, many
companies-especially those in the United States-would like to
emulate or duplicate them. Japanese trading companies
perform a number of marketing functions: market
identification and analysis, sales forecasts, buying goods
from manufacturers, selling goods to customers, and bearing
financial risks.
Japanese trading companies have several distinct
characteristics. They are sup-ported by domestic Japanese
business. They are partners with groups of banks and other
financial intermediaries, allowing them to have easy,
convenient, and almost permanent access to enormous
amounts of capital and financing.
Traditionally, Japanese manufacturers prefer to separate
manufacturing from mar-keting, leaving the marketing
function to trading firms. A new breed of Japanese
manufacturers, however, prefers to have more marketing
control and has been shifting away from this pattern of
specialization by pursuing forward integration. Responding
to this adverse trend, the sogo shosha is emphasizing its
core competence: information gath-ering. It has transformed
itself into an information-based organization.
13. Export Trading Companies In the United States the
entities most resembling trad-ing companies are Webb299
worldwide dis-tributor (i.e., export distributor). Bell and

Howell: Mamiya is in turn J. asawas ex-clusive U.S.
distributor (i.e., foreign distributor).
Pomerene associations and EMCs, which together account

for 12 percent of U.S. exports. Although EMCs and trading
companies perform sev-eralsimilar-functions. EMGs- aredifferent-because-they tend to besmaller, with just a few
employees. EMCs also lack easy access to sources of
financing and thus are usually undercapitalized. As a result,
EMCs are less diversified in product and geo-graphic area,
and they restrict their business to exports with very little
import focus. Thus, EMCs are not able to provide the
complete range of services required by man-ufacturers.
Because of the limited success of EMCs and WebbPomerene companies (along with a concern over trade
deficits), the United States has begun to turn to trading
companies for a solution. The Export Trading Company
(ETC) Act was passed in 1982. In Section 103 of the act, an
export trading company is defined as a firm
Which is organized and operated principally for the purposes
of -(a) exporting goods and services produced in the United
States; and (b) facilitating the exportation of goods and
services produced in the United States by unaffiliated
persons by providing one or more export trade services. . . .
The term export trade services includes, but is not lim-ited
to, consulting, international market research, advertising,
marketing, insurance, product research and design, legal
assistance, transportation, including trade documen-tation
and freight forwarding, communication and processing of
foreign orders to and for exporters and foreign purchasers,
warehousing, foreign exchange, and financing, when
provided in order to facilitate the export of goods or services
produced in the United States.
This act removed legal roadblocks that had impaired the
effectiveness of EMCs and Webb-Pomerene associations.
The two entities have not grown satisfactorily for two main
reasons: lack of financing and antitrust restrictions. In the
past, dealing with one of those two problems often
involved getting into difficulty with the other. If firms tried
to join together to strengthen their financial resources, they
would be Violating the antitrust laws. In trying to avoid
antitrust problems, they remained resource poor.
For more than half a century, the Glass-Steag all Act of 1934
banned banks from engaging in non-financial activities and
bank ownership of commercial enterprises. Ti-tle III of the
ETC Act removed this ban, allowing banks to hold equity
positions in export trading companies. An amendment to
the banking regulations permitted banks to participate in
ownership indirectly through bank holding companies,
Bankers Banks, or Edge Act cooperatives. The act still bars
any direct bank equity in ETCs, however. Also, unlike nonbank investors who can import freely, a bank-affiliated ETC
must be either exclusively related to exporting activities or
operated principally to fa-cilitate U.S. exports. That is,
revenue derived from export must be greater than 50 percent
of the ETCs revenue.
The participation of banks in export trading is critical. The
obvious benefit is financial resources, but banks have other
strengths. They provide many of the ser-vices that ETCs do.
They can reach out to small and medium-sized firms by
300
using their foreign branches to identify foreign buyers and

domestic branches in order to contact U.S. manufacturers.
Because trading companies often take title to goods to
expedite deals the act has provided banks with an incentive
to overcome their re-luctance to take ownership. The- banks
are now in a position Jo derive higher profit margins than
when they, merely acted as agents.
The 1982 act provided a remedy for the antitrust problem as
well. For decades, the Webb-Pomerene Export Trade Act of
1918 allowed firms to-participate in joint export but may
have discouraged participation unintentionally by granting
antitrust exemption to only a limited degree. Title III of the
1982-act solved this problem by allowing domestic
competitors to obtain binding antitrust preclearance for
specified export activities: By granting prior antitrust
immunity, the antitrust threat was re-moved, creating a
favorable environment for the formation of joint export
ventures. Such ventures, through large-scale operations and
economies of scale, can now re-duce cost and risk while
promoting efficiencies. In order to be certified as not violating antitrust laws, 3' group of companies and banks that
join forces for the purpose of export can obtain a Certificate
of Review from the Department of Commerce (with the
concurrence of the Justice Department) for certification as an
ETC. This certifi-cate functions as an antitrust insurance
policy: The ETC is then exempted from both criminal and
civil antitrust activities and is immune from federal and state
antitrust suits as long as the overseas cooperation does not
filter back to affect competition and prices at home. When
challenged, the certificate holder can recover legal ex-penses if
the holder prevails.
Many of the companies applying for antitrust certificates
were members of Webb-Pomerence associations and they in
all likelihood decided to obtain more com-prehensive
antitrust immunity. One study of U.S. intermediaries found
that they have responded to various environmental factors
by making changes in terms of their prod-ucts markets and
services and that they have shifted from being a pure EMC
to be-come a trading company the firms that have recently
formed ETCs are from various backgrounds. Some are
manufacturers with subsidiaries that have ready access to the
parents products. GE Trading Company for example, has
access to GEs 300.000 prod-ucts. Other manufacturers
include Rockwell International and GM, which have set up
Rockwell International Trading Company and General
Motors Trading Com-pany respectively. Retailers have also
formed ETCs (e.g., Sears Roebuck Trading Company formed
by Sears). Retailers such as Sears and Kmart have a great deal
of bargaining power because of their enormous purchases
and this leverage serves them well in marketing U.S. exports
through foreign retail chains. Other organi-zations forming
ETCs are hanks. Which seem natural for this purpose.
Because banks can own up to 100 percent of an ETCs stock,
these ETCs are guaranteed to have adequate financial
resources. In some cases, banks and other business firms
may want to form a joint venture, as in the case of First
Chicago and Sears World Trade. Inc.
One problem with ETCs is that the ETC Act is designed to

promote only U.S. exports. Thus ETCs import activities
must take a secondary position, undertaken only when they
are needed to promote exports. Consequently, ETCs may
lack an efficient infrastructure for developing two-way trade.
In this regard, ETCs differ greatly from Japanese trading
companies, which achieve their efficiencies through domestic,
for-eign, and third-country trading activities. American ETCs
may thus lack a compre-hensive international perspective.
Responses to the formation of ETCs have not been
enthusiastic.
301
LESSON 33:
CHANNEL DEVELOPMENT & ADAPTATION
Channel Development
The suitability of a particular channel depends greatly upon the
country in which it is used. A particular type of intermediary
that works well in one country may not work well elsewhere or
may lose effectiveness over time. This does not necessarily mean
that each country requires a unique channel. But a company may
find that a country classification system is useful, a system that
can be used to determine how the distribution, strategy should
be set up from one group of countries to another.
Litvak and Banting suggest the use of a country temperature
gradient to clas-sify countries. Their classification system is
based on these environmental charac-teristics: (1) political
stability, (2) market opportunity, (3) economic development and
performance, (4) cultural unity, (5) legal barriers/restrictions, (6)
physiographic bar-riers, and (7) geocultural distance. Based on
these characteristics, countries may be classified as hot, moderate, or cold. A hot country is one that scores high on the first
four characteristics and low on the last three. A cold country is
exactly the opposite and a moderate one is medium on all seven
characteristics.
The United States generally falls in line with the characteristics of a
hot coun-try. So does Canada, even though its cultural unity is
moderate (rather than high) and its physiographic barriers are
moderate (rather than low). Germany, likewise, is a hot country in
spite of some slight interference in the sense that its legal barriers
and geo-cultural distance are moderate rather than low. Brazil, in
contrast, largely conforms to a cold countrys characteristics.
It is a judgment call whether so many characteristics are necessary
for the pur-pose of classifying countries. The level of economic
development could be used as the sole indicator, but such a
classification would be misleading because hot coun-tries are
not the same as industrialized countries. Still, one must
question whether the refinement and improvement in the
classification process justifies the extra effort nec-essary to wade
through all relevant characteristics, especially since the level of
eco-nomic development correlates well with these characteristics.
For practicality, a short-cut appears to be desirable.
Classification is a means to an end, and the purpose of the
country temperature gradient is to determine which intermediary should be used in a given country. The temperature gradient
also indicates which kind of intermediary is likely to be functioning in a country. In a cold country, competitive pressures on
institutional change are not dynamic. Legal restrictions, for
example, can prevent or slow down new dis-tribution innovations. Consider Egypt as an example. Only persons born of
Egyptian fathers or Egyptian legal entities can represent foreign
principals. Being comfortably cold, middlemen see few
threats to their existence. In China all tobacco must be sold
through the China National Tobacco Co. monopoly.
302
For a hot country, environmental forces may be so hot that new

institutional structures arise. Middlemen who fail to adjust will be
bypassed and go out of exis-tence. The survival of a channel
member is thus a function of the ability to adapt to changing
environmental conditions because the channel member cannot hide
behind local regulations for protection. For example, in the United
Kingdom, either the prin-cipal or the intermediary can terminate an
agency relationship provided there is a rea-sonable notice.
The country temperature gradient has implications for all
channel members. A foreign manufacturer can exercise maximum control over the evolutionary process in the distribution
channel. The firm can initially rely on middlemen/distributors.
If sales increase, the manufacturer can bypass the intermediary
by setting up a sales branch or subsidiary. This is the trend
being followed by foreign liquor suppliers in the U.S. market.
These suppliers now very much control their own destiny by
being respon-sible for their own distribution. E. Remy Martin
& Co. took its cognac away from Glenmore Distillers and
became its own U.S; distributor through its Premier Wine
Merchants. Distillers Co. a Scottish firm, did like wise by buying
Somerset-Importers from Esmark. Pernod Ricard and MonetHennessy adopted the same strategy by buy-ing AU3tin Nichols
and Schieffelin, respectively.
A local manufacturer should be alert to any new channel since
the new chan-nel may pose a threat to the existing channel.
When possible, the manufacturer must preempt the competition from utilizing it. Xerox was successful and secure with its
direct sales-force channel-so secure that, when the Japanese
competition entered the market, Xerox was totally unprepared.
The Japanese invaded the U.S. market quickly and cheaply by
using independent office equipment dealers, a channel that had
been ignored by Xerox. The Japanese firms had their own direct
sales-force large met-ropolitan areas, but they also supplied their
machines to such U.S. firms as firm, Mon-roe, and Pitney
Bowes, thus exploiting these U.S. firms extensive sales and
distrib-ution networks. Xerox was forced to experiment with
such alternative channels as re-tail stores, direct mail, and parttime representatives.
Wholesalers, especially those involved in high-margin, lowvolume operations, are particularly vulnerable to the threat
posed by modem institutions. Wholesalers can easily be
bypassed if they are successful in promoting their principals
products. Super scope, for example, lost the Sony franchise. On
the other hand, if wholesalers do the job poorly, they are also
likely to be eliminated or their authority and responsi-bility
reduced. Mitsubishi was so unhappy with Chryslers performance that the Japan-ese company developed its own
independent dealer network in order to catch up with Toyota
and Nissan.
Local retailers in a hot country are not exempt from innovations
either. In Eu-rope, computer makers have to depend on highly
Innovations tend to take place in a hot country before spreading

to other hot countries and finally LDCs. Retailing innovations
that conform to this description in-clude self-service stores,
discount houses, and supermarkets, all of which initially developed in the United States. Hypermarche, on the other hand,
utilizes a mass-mer-chandising method developed in Europe.
This retail store is an enormous self-service combination of
food and general merchandise, generally displayed in shipping
con-tainers. A single set of checkout counters is used. This
innovation has had only lim-ited success when introduced in
the United States.
In another example, Apple has attempted to establish Apple
Centers in the United States-a retailing concept utilized
successfully in Europe. In 1985 Apple had few dealers and little
public visibility in England. Apple thus developed the concept
of Apple Centers as part of a strategy to improve its performance. The strategy in-volves having independently owned and
managed retail outlets that are focused pri-marily on Apple
products but also include software and peripherals from various
man-ufacturers. The centers are offices that, under one roof,
combine computer marketing, sales, training, support, and
service. The concept was later extended to other Euro-pean
countries; resulting in more than sixty Apple Centers, which
have helped the European unit become the biggest contributor
to corporate profit. Because markets vary, Apple has made
substantial adjustments in its Apple Centers to perform different functions in different markets.
The success of an innovation is affected not only by the country
temperature gradient but also by several other factors. A certain
minimum level of economic de-velopment is required to
support any form of outlet beyond simple retailing methods.
General stores, a dying breed in the United States, are still very
common in many countries. Firms aggressive behavior will
also be a determinant of the success of a new retailing method.
Other cultural, legal, and competitive factors play an impor-tant
role too. In LDCs, where there is plenty of low-cost labor and
where people are accustomed to being waited on, self-service
stores, discount houses, and supermar-kets are slow in gaining
widespread acceptance. In developed countries, by compar-ison,
various factors work in the favor of large modem discount
stores/supermarkets, including high population density,
urbanization, literacy, and labor costs. Also, the high-income
level and relatively even income distribution make refrigerators
and au-tomobiles affordable and accommodate infrequent
shopping trips and large purchases.
Channel Adaptation
Because the standardized/globalized approach to international
marketing strategy may not apply to distribution strategy in
foreign markets, it is imperative that international marketers
understand the distribution structures and patterns in those
markets. To-ward this end, comparative marketing analysis
should be conducted. A study of the degree of standardization
in the marketing mix by large U.S.-based industrial firms in their

Latin American business found that distribution was highly
adapted to the different conditions in Latin America. The
regions government regulation, a barrier to standardization,
appears to force firms to adjust their prices, advertising, and distribution more than their products and brands.
Some channel adaptation is frequently a necessity. Suspicion and
privacy can limit the effectiveness of door-to-door selling or
other direct-selling methods. Avon has had to develop other
distribution methods in Japan and Thailand. Discount retailing may not be effective in countries where there are many
middlemen handling small volumes of merchandise. A
traditional distribution channel may seem ineffi-cient, but it
may maximize the utilization of inexpensive labor, leaving no
idle re-sources.
A manufacturer must keep in mind that, because of adaptation,
a particular type of retailer may not operate in exactly the same
manner in all countries. Whereas a U.S. supermarket emphasizes
low gross margin, its foreign counterpart may have a relatively
high gross margin, emphasizing specialty goods and imported
goods to a high degree. Furthermore, that foreign counterpart
often operates a ready-to-eat food section. Interestingly,
American supermarkets, especially those that have converted
into superstores, have begun to do the same.
A particular distribution concept proven useful in one country
may have to be further refined in another. Although 7-Eleven
pioneered the convenience food store concept in Japan; the
Japanese operation has evolved into being more sophisticated
than the original Counterpart in United States. Even Japan
offers its customers steaming fish cakes, canned tea and rice
balls, while accepting payment for utility bills and accepting
orders form the Tiffanys catalog. The 4,328 Japanese stores,
viewing slurpie and ice drinks as pass, stopped serving them
some years ago. To provide the most popular and latest
products, about two thirds of a typical stores 3000 items will
change in a year.
Channel Decision
As in any domestic market, the international market requires a
marketer to make at least three channel decisions: length, width,
and number of channels of distribution. Channel length is
concerned with the number of times a product changes hands
among intermediaries before it reaches the final consumer. The
channel is considered long when a manufacturer is required to
move its product through several middle-men. The channel is
short when the product has to change hands just once or twice.
If the manufacturer elects to sell directly to final consumers, the
channel is direct. U.S. and Japanese manufacturers of TV sets
employ different strategies in the length of channel. Zenith uses
a two-step distribution, system, requiring retailers to buy from
independent distributors. The system is unsuitable for video
specialty stores. Which prefer to buy directly from manufacturers. As a result, video specialty stores have turned to Japanese
manufacturers who in addition to having lower prices are willing to distribute direct to these stores.
Channel width is related to the number of middlemen at a
particular point or step in the distribution channel. Channel
width is a function of the number of whole-salers and the
303
fragmented channels consisting of small retailers without

financial resources for large inventories. Computer land has
mounted an effort to change this distribution network by using
its mass-marketing technique to duplicate its U.S. success in
Europe. The company has opened several stores there.
different kinds that are used, as well as a function of the number

and kind of retailers used. As more intermediaries or more types
are used at a certain point in the channel. The channel becomes
wider and more intensive. If only a few quali-fied intermediaries
are needed to provide proper product support at a particular level
or at a specific location, the channel is selective. The product
though perhaps not available everywhere, is still carried by at least
a few qualified middlemen within the same area. Finally, the
distribution becomes exclusive if only one intermediary of one
type is used in that particular area.
The watch industry and its distribution strategies provide a
good illustration of an industry with various channel widths.
Timex, as a low-priced, mass-market prod-uct, is intensively
distributed in the sense that any intermediary, no matter what
kind, is allowed to carry the brand. Seiko is more selective. Seiko,
as an upper-medium-priced brand, is sold through jewelry
stores and catalog showrooms and is less likely to be found in
discount or drug stores.
Channel width is relative. Both Seiko and Omega employ
selective distribution, though Omega is much more selective.
Omegas tighter policy of selective, limited distribution results
in the brand being available only in top jewelry, specialty, and department stores. Because of the relative nature of channel
width, it is inappropriate to compare width at the retail level
with wholesale width. Because there are many more retailers
than wholesalers, the issue of channel width applies only to a
particu-lar distribution level rather than through distribution
levels. The degree of selectivity depends on the relative, not the
absolute, number of intermediaries at a particular dis-tribution
level. As a product is moved closer to end users, the distribution channel tends to become broader. At a point closer to the
manufacturer, the channel is not as broad. For example, at the
distributor level, Brother International is the exclusive U.S.
distributor for Japans Brother Industries.
Another decision that concerns the manufacturer is the number
of distribution channels to be used. In some circumstances, the
manufacturer may employ many channels to move its product
to consumers. For example, it may use a long channel and a
direct channel simultaneously. The use of dual distribution is
common if the manufacturer has different brands intended for
different kinds of consumers. Another reason for using
multiple channels may involve the manufacturers setting up its
own direct sales force in a foreign market where the manufacturer cannot remove the orig-inal-channel (e.g., agents) because
of strategic or legal reasons. Although Seiko, Las-sale, and Jean
Lassale are all made by the same Japanese firm, dual channels are
used for these brands. Seiko and Lassale are sold through
distributors in the United States, whereas Jean Lassale is sold by
the manufacturer directly to retailers Gewelers).
Determinants of Channel Types

There is no single across the board solution for all manufacturers channel decisions. Yet there are certain guidelines that can
assist a manufacturer in making a good decision factors that
must be taken into account include legal regulations, product
image, product characteristics, intermediaries loyalty and conflict,
and local customs.
304
1. Legal Regulations
A country may have specific laws that rule out the use of
particular channels or mid-dlemen for example, prohibits the
use of doors to door selling. Although private importers in
Iraq may choose to deal through commission agents, Iraqi
legislation prohibits state enterprises form dealing with third
party intermediaries (including commission agents) in
obtaining foreign supplies, Saudi Arabia requires every
foreign company with work there to have a local sponsor
who receives about 5 percent of any contract. Not
surprisingly, many Saudis, acting as agents, have become
millionaires almost overnight.
The overseas distribution channel often has to be longer
than desired. Because of government regulations, a foreign
company may find it necessary to go through a local agent/
distributor. In china, foreign firms cannot wholly own retail
outlets, and they can to engage in wholesaling activities. In
addition, only fourteen foreign retail ventures have direct
import authority, forcing those without direct import
authority to add another layer of middlemen.
Channel width may be affected by the law as well. In general,
exclusive representation may be viewed as a restraint of
especially if the product has it dominant market, position. In
Germany, the Federal cartel Office may intervene with
exclusive dealing and distribution requirements.
Due to the EUs single market program, geographic barriers
between national markets have blurred, making it possible
for consumers outside national sales territories to gain
greater access to products and services. Therefore, EU
antitrust au-thorities have increased their scrutiny of
national and exclusive sales agreements. The Treaty of
Rome prohibits distribution arrangements that affect trade
or restrict competition (i.e., restrictions on territory, noncompetition clauses, and grants of ex-clusivity). As a matter
of fact, in the case of automobiles, the Commission has determined that exclusive distribution limited trade between
the member countries and that manufacturers thus had less
incentive to price cars on a competitive basis. It has directed
the manufacturers to allow the distributors to sell to other
dealers and con-sumers throughout the EU.
Its the Law

Cross-Border Pricing
Yves Rocher a French cosmetic company and cata-loger sent a catalog
direct-mail offer that made use of price comparisons to German
consumers. The promotion showed a slashing of the old price, and the
cheaper price was shown in big red type. Because the technique used was
eye catching, it was considered illegal in Germany and was thus
challenged under Germanys unfair competition laws, which restrict sales
promotion techniques.
Although Yves Rochers advertisement was translated into German and
prices into deutsche marks, the promotion originated in France. The
company ap-pealed the ruling and the European Court of Justice ruled
that, according to Article 30 of the EEC Treaty, the German decision
was a barrier to trade. The court stated that, since the advertisement was
not mislead-ing, the ban would affect advertising without any misleading
under consideration. In such cases, limited product exposure

is not an impediment to market success.
Another case involved Inno-GB. A large super -market based in Belgium.

The company sent an un-ad-dressed promotion in French across the
Luxembourg border to generate store traffic. However, Luxem-bourg and
German laws prohibit promotions from be-ing run outside a specific period
of the year. But EU courts have ruled that Inno-GM did not do anything
il-legal. Luxembourg could not use its different laws to keep out
advertising material from another country.
One should always remember that products are dynamic, and

the specialty goods to today may be nothing more than the
shopping or even convenience goods of to morrow.
Consider computers, which were once an expensive specialty
product that required a direct and exclusive channel. Since the
early 1980s, computers have become more of a shopping
good, necessitating a longer and more intensive channel.
2. Product Image
The product image desired by a manufacturer can dictate the
manner in which the product is distributed. A product with
a low- rice image requires intensive distribution. On the
other hand, it is not necessary nor even desirable for a
prestigious product to have wide distribution. Cliniques
products are sold in only sixty-four department stores in
Japan. Waterford Glass has always carefully nurtured its posh
Image by limiting its distribution to top-flight department
and specialty stores. At one time it did not take on any retail
accounts for a period of a year. Its effort to create an air of
exclusivity has worked so well that Waterford Glass
commands a quarter of the U.S. market, easily making it the
best-selling fine crystal.
Although intensive distribution may increase sales in the
short run, it is poten-tially harmful to the products image in
the long run. This is problem faced by Aprica as If moves its
-strollers beyond department and specialty stores into massmar-ket outlets such as J.C. Penney and Sears. Tiffany & Co.
lost many upper-class customers when it broadened its
clientele bas; artier, trying to restore its esteem, has pared its
retail its distribution network, which- it had proliferated
unwisely, by 50 per-cent in the United States and 25 percent
worldwide.
3. Product Characteristics
The type of product determines how that product should be
distributed. For low- high-turnover convenience products,
the requirement is for an intensive distribution network. The
intensive distribution of ice cream is an example walls
(formerly Foremasts) success in Thailand can be attributed in
part to its intensive distribution and channel adaptation
tailored its distribution activities to the lo-cal Thai scene by
sending its products (Ice cream, milk, and other dairy
products) into market in every conceivable manner. Such
traditional channels as wholesalers and such new channels as
company-owned retail outlets (modern soda fountains) and
push-carts are also used. Pushcarts are supplied by the
company and manned by indepen-dent retailers (i.e.,
sidewalk salesmen) who keep a 20 percent margin.
However, tra-ditional channels employing wholesalers, small
stores, restaurants, hotels, and schools still account for a
majority of sales.
For high unit value, low turnover specially goods, a
manufacture can shorten and narrow its distribution channel.
Consumers are likely to do some comparison-shopping and
will more of less actively seek information about all brands
This change in the nature of the product serves to explain

why such American com-puter makers as Nixdorf, ICL, and
Philips were anything but successful when they persisted in
using a direct sales force as their primary channel of
distribution abroad. As an indication of how dramatically
the distribution of computers has changed. Hyundais
personal computer for Blue Chip (a U.S. distributor) is sold
like a TV set in such up-scaled discount stores as Target and
Caldor instead of through computer specialty stores.
4. Middlemens Loyalty and Conflict
One ingredient for an effective channel is satisfied channel
member. As the channel widens and as the number of
channels increases, more direct competition among channel
members in inevitable. Some members will perceive large
competing member and self-service members as being
unfair. Some members will blame the manufacturer for being
motivated be greed when setting up a more intensive
network. In effect for being motivated by greed when setting
up a more intensive network. In effect intensive distribution
reduces channel members. Cooperation and their loyalty as
well as Increases channel conflict Michelin has been accused
of undercutting its own dealers in the U.S: market by not
only expanding its dealer network by 50 percent but also
adding a direct channel to take national accounts away from
dealers. Both actions increased price competition and reduced
dealers loyalty. Apples problems in Japan owed in part to its
addition of new channels even though it already had a big
distributor.
5. Local Customs
Local business practices, whether outmoded or not, can
interfere with efficiency and productivity and may force a
manufacturer to employ a channel of distribution that is
longer and wider than desired. Because of Japans
multitiered distribution system, which relies on numerous
layers of middlemen, companies often find it necessary to
form a joint venture with Japanese firm, such as Pillsbury
with snow Brand, Xerox with Fuji, and KFC with
Mitsubishi Japan many layered distribution system is not
entirely unique in that part of the world, since the custom in
many Far Eastern countries is to have multiple intermediary
markups on imported goods. Yet the rule of thumb in
Hong Kong is that there should be no more than two layers
between a U.S. exporter of finished goods and Hong Kong
consumers, usually consisting of an importer agent retailer,
or distributor.
Domestic customs can explain why a particular channel is in
existence. Yet cus-toms may change or may be overcome,
305
nature comparing actual prices. Which can be very useful to a consumer

when making his choice with all the facts in hand.
especially if consumer tastes change. For ex-ample, there are

some 82,00 British pubs, 50,000 of which are owned by
brewing companies; the problem they faced the trend toward
beer consumption at home. The pubs have had to adjust by
emulating trendy American bars, selling more wine and such
food as hamburgers.
6. Power and Coercion
The least dependent person hypothesis, mentioned earlier,
states that the one party with resources and alternatives can
demand more because it needs the other party less. As such,
the least dependent member of the channel has more power
and may be able to force to the channel member to accept its
plan. This hypothesis explains why it has been difficult for
Japanese and Korean semiconductor manufacturers to recruit
U.S. distributors to reach customers who are too small to
buy directly from computer chip manufacturers. The major
U.S. semiconductor manu-facturers have long adopted a tacit
policy of not allowing their distributors to sell Japanese
competitors products. Avnet Inc., the largest distributor in
the United States, had to stop buying chips from Japans
NEC Corp. Samsung Semiconductor was ini-tially happy
when Arrow Electronics Inc., the nations second-largest
distributor of semiconductors, agreed to sell its products.
Arrow abruptly terminated the agreement a few weeks later,
citing changing business conditions. What happened was
that In-tel Corp. and Texas Instruments reduced the amount
of business conducted with Ar-row. It is thus not surprising
that only one of the electronics industrys top ten distributors distributes Japanese or Korean chips.
Contrary to a prediction made by reciprocal action theory,
dealers in a devel-oping country do not retaliate against the
manufacturers use of coercive influence strategies.
Apparently, dealers in sellers markets are so highly dependent
on manu-facturers that they have fewer equity concerns and
higher tolerance than dealers in other channel contexts. In the
industrial product channel, the model holds up very well in
the empirical analysis.
One must be careful in applying Western models overseas
because their impact may differ in LDCs. The applicability of
those models may vary from country to country as well. A
survey of Japanese distributors of U.S. products examined
how perceptions of influence affect control and conflict in
the relationship. The findings indicated that aggressive
influence evoked resistance and conflict but that more sub-tle
influence strategies appeared to reduce conflict. Therefore,
influence, as practiced in Western channels, may not be
effective in relationships with Japanese firms.
7. Control
If it has a choice, a manufacturer that wants to have better
control over its product distribution may want To both
shorten and-narrow its distribution channel- One study of
Bntaills machine tool importers-f6imd that, in light of the
EU integration and com-petitive pressures, there has been an
increase in the number of sales subsidiaries as compared
with distributors or agents. Apparently, manufacturers want
to get closer to final customers.
306
One study employed a model based on transaction cost

analysis to explain ex-porters vertical control selections.
Exporters of specialized products should establish channel
structures that require a greater commitment of resource.
Such structures, however, require larger fixed costs.
Conversely, in the case of a relatively competitive market with
large numbers of buyers and sellers, an exporter may want to
give up some control and switch to a looser structure by
contracting in the market place for the provision of
marketing functions.
In conclusion, there are a number of factors that affect
channel decisions. Some of these factors are interrelated.
Empirically, it has been shown that overseas distri-bution
channel choice is affected by culture and other product
constraints. Entering firms, for example, tend to use
intermediaries when introducing products to non-West-ern
markets. A recent study of 269 manufacturers also found
that a choice between foreign-based agents and distributors
is affected by mark-et-diversity, type of transac-tion-specific
asset; and production cost economies. Agents are used only
to find cus-tomers when manufacturers want to safeguard
technology by self-performing most of the export functions.
The A.T. Cross Company

Francine Newth
Providence College
The Legacy
As stated in the A.T. Cross Company 1986 annual report, Everything
begins with quality. Cross pens and pencils are known worldwide as
standing for the ultimate expression of excellence. The story began in
1846 with the companys founder, Alonzo T.Cross. Mr. Cross, an
immigrant inventor and craftsman, started his business in his Rhode
Island home with a goal to manufacture and market elegant, hand-tooled
gold and silver filigree casings for wooden pencils. Today, The A.T.
Cross Company is as devoted to design perfection and craftsmanship as
Alonzo T.Cross was in 1846, which explains the enduring legacy of
A.T. Cross. In fact, Cross offers a full perpetual warranty.
The Cross Profile
With ambition, vision, and a commitment to excellence, the A.T.Cross
Company has grown into a major international manufacturer of fine
writing instruments. The company has two plants, one in Lincoln, Rhode
Island, and one in Ballinasloe, Ireland. Cross products are sold to the
consumer gift market through selected stores (jewelery, department,
stationary, gift, and book stores). They are also sold to the business gift
market through selected companies specializing in recognition programs.
The Industry
The fine writing instrument industry is truly an international industry
with different market leaders in all parts of the world. The major
international competitors are A.T. Cross, Schaeffer, Parker, Waterman,
Pelikan, and Montblanc. As of 1996, Parker and Waterman are owned
by the Gillette Company and Montblanc is owned by the Vendome
Holding Company.
Writing needs vary throughout the world. For example, in Europe,
fountain pens are very popular; in the Far East, most writing instruments
must include finepoint catridges. However, packaging, advertising, and
Most international manufacturers of writing instruments have established

either networks of distribution. Therefore, the distribution choices of a
new entrant in a particular country are very limited.
International Expansion For A. T. Cross
In the early 1960s, the A.T.Cross Company began to receive several
foreign inquiries concerning the availability of the Cross pens and pencils
overseas. More specifically, businesses from Europe and the Far East
were asking where, in their country, they could acquire Cross-pens. These
inquiries and demands for the fine writing instruments led the A.T. Cross
Company to pursue the overseas marketplace.
A.T.Cross was particularly interested in distributing its products in
Spain, France, the United Kingdom, and Germany. However, there were
some strong existing competitors with well-established distributors in these
countries. Furthermore, many distributors had exclusive arrangements
with existing manufacturers.
Ideal foreign distributors should be small enough to want to take on a new
manufacturer but large enough to advertise. More European countries have
their own national brand of writing instruments manufactured in each
respective country. The following manufacturers of fine writing instruments have substantial market share in these countries: Inoxchrome
(Spain), Waterman (national brand in France), Parker (national brand in
the United Kingdom), and MontBlanc/Pelikan/Lamy (Germany).
There were also some other imported writing instruments within each one
of these countries. As a result, the overseas marketplace was highly
competitive. Regardless, A.T. Cross decided to enter these markets. At
first it could not find suitable distributors, so it began considering other
distribution channels.
A.T. Cross Global Distribution Profile Update
In response to growing international demand for its products, A.T. Cross
decided to establish its own distribution subsidiaries by acquiring existing
distributors in Spain, France, the United Kingdom, Germany, Italy, and
Japan. The decision to pursue an acquisition strategy in these markets was
primarily based on market size and market potential. In addition, a
network of independent distributors was developed by negotiating a mix of
exclusive and nonexclusive agreements to ensure proper market
penetration in this mature and fragmented global market. The A.T.
Cross global-distribution strategy reaches approximately 50 percent of the
world (100 countries). As a result, in 1995, 42 percent of A.T.Crosss
sales were from non-U.S markets compared to 25 percent in 1989,
representing an increase of 68 percent in non-U.S. sales, constituting an
average yearly growth rate of 11 percent.
Questions:
1. What are the global distribution issues now faced by A.T. Cross?
2. What factors should A.T.Cross consider in the development of its
regional distribution strategy in emerging markets (i.e., Eastern Europe),
within the context of its global distribution strategy?
Automotive Components, Inc.

Dirk Wassenaar
Pat Small, the newly appointed assistant export manager for Automotive
Components, Inc; looked out of his office window while contemplating the
responsibilities of his new job. As a graduate with a major in international business, he was delighted to have found this challenging, well
paying position. Yet, in taking a closer look at his new assignment, he kept
wondering about the direction of the company.
Automotive Components, Inc; (ACI) was started over fifty years ago,
designing and building automotive components, including electrical systems
and gauges of various types. The companys innovative, high quality
products had gained it a first class reputation, a healthy growth rate, and
excellent profitability.
ACIs founder and his sons, who took over the business upon their fathers
retirement, managed to develop close relationships with the leading car and
truck builders in the U.S. the result was that the company became a
leader in many of the market niches in which it competed. As far as
participating in the international markets was concerned, the company had
been very cautious. ACIs founder, in particular, liked to point out that
the U.S. market was by far the most important one in the world and
offered plenty of opportunities for growth.
ACIs international involvement had largely been limited to the licensing
of a British firm to make certain proprietary products and exporting
products from the U.S. through an Export Management Company
(EMC). The EMC assumed full responsibility for the marketing of
ACIs products outside the U.S. ACIs management had been very
pleased with the growth of the companys exports and licensing income.
Currently, foreign sales revenues accounted for almost 20% of total sales
and were growing at a faster rate than the domestic business. In addition,
as the president liked to point out, these export sales are very profitable,
requiring little investment and effort on the part of the company since the
EMC handles most marketing activities. Although it would be difficult to
calculate an accurate rate of return on resources invested in this area,
everyone agrees that the number must be very attractive.
Pat Small, as the new assistant export manager, was hired to work closely
with the EMC in trying to increase exports at an even faster pace. While
contemplating this responsibility, Pat could not help thinking back to an
international business course he took in college not too long ago. There he
learned about companies, which had gone far beyond simple exporting as a
way to increase their business in foreign markets. Many of these
companies had their own sales offices and even production facilities
abroad. Sometimes they would work with local foreign companies in joint
ventures. Such an aggressive approach in foreign markets obviously
required substantial investments and involved various risks. However,
based on other companies experiences, it seemed that the potential of
many foreign markets fully warranted these investments and efforts.
Suddenly Pat knew what he should do. He would conduct some research,
review his old international business texts and, if his first impression was
confirmed, write a memo to his boss summarizing as concisely and
forcefully as possible (1) why ACI should more aggressively pursue foreign
markets, and (2) how ACI could best enter various markets abroad. To
do the latter, he would list all possible entry strategies in an appendix to
his memo and summarize the major advantages and disadvantages of
each.
307
promotion truly constitute the major change elements in international

markets rather than any change in the product per se.
Your Assignment
1. You are Pat Small. Write a memo which clearly addresses the following
issues: (1) why should ACI become more aggressively involved in foreign
markets, and (2) how should ACI do so?
Prepare a complete list of the various entry strategies ACI can use to
enter foreign markets. List the advantages and disadvantages of each.
308
The first stage in the planning process is a preliminary country

analysis. The marketer needs basic information to (1) evaluate a
country-markets potential; (2) identify problems that would
eliminate a country from further consideration; (3) identify
aspects of the coun-trys environment that need further study;
(4) evaluate the components of the marketing mix for possible
adaptation: and (5) develop a strategic marketing plan. One
further use of the information collected in the preliminary
analysis is as a basis for a country notebook.
Many companies, large and small, have a country notebook for
each country in which they do business. The country notebook
contains information a marketer should be aware of when
making decisions involving a specific country-market. As new
information is col-lected, the country notebook is continually
updated by the country or product manager. Whenever a
marketing decision is made involving a country, the country
notebook is the first database consulted. New product introductions, changes in advertising programs, and other marketing
program decisions begin with the country notebook. It also
serves as a quick introduction for new personnel assuming
responsibility for a country-market.
This section presents four separate guidelines for collection and
analysis of market data and preparation of a country notebook:
(1) guideline for cultural analysis; (2) guideline for economic
analysis; (3) guideline for market audit and competitive analysis; and (4) guideline for preliminary marketing plan. These
guidelines suggest the kinds of information a marketer can
gather to enhance planning.
The points in each of the guidelines are general. They are
designed to provide di-rection to areas to explore for relevant
data. In each guideline, specific points must be adapted to reflect
a companys products. The decision as to the appropriateness
of spe-cific data and the depth of coverage depends on
company objectives, product character-istics, and the countrymarket. Some points in the guidelines are unimportant for
some countries and/or some products and should be ignored.
Preceding chapters of this book provide specific content
suggestions for the topics in each guideline.
1. Cultural Analysis
The data suggested in the cultural analysis include
information that helps the marketer make market-planning
decisions. However, its application extends beyond product/
mar-ket analysis to an important source of information for
someone interested in understand-ing business customs and
other important cultural features of the country.
The information in this analysis must be more than a
collection of facts. Whoever is responsible for the
preparation of this material should attempt to interpret the
meaning of cultural information. That is, how does the
information help in understanding the ef-fect on the market?
For example, the fact that almost all the populations of Italy
and Mexico are Catholic is an interesting statistic but not
nearly as useful as understanding the effect of Catholicism
on values, beliefs, and other aspects of market behavior. Furthermore, even though both countries are predominantly
Catholic, the influence of their individual and unique
interpretation and practice of Catholicism can result in
important differences in market behavior.
Guidelines
1. Introduction.
Include short profiles of the company, the product to be
exported, and the country with which you wish to trade.
2. Brief discussion of the countrys relevant history.
3. Geographical setting.
A. Location.
B. Climate.
C. Topography.
4. Social institutions.
A.
Family.
1. The nuclear family.
2. The extended family.
3. Dynamics of the family.
a. Parental roles.
b. Marriage and courtship.
4. Female/male roles (are they changing or static?).

B. Education.
1. The role of education in society.
a. Primary education (quality, levels of
development, etc.).
b. Secondary education (quality, levels of
development, etc.).
c. Higher education (quality, levels of
development, etc.).
2. Literacy rates.
C. Political system.
1. Political structure.
2. Political parties.
3. Stability of government.
4. Special taxes.
5. Role of local government.
D. Legal system.
1. Organization of the judiciary system.
2. Code, common, socialist, or Islamic-law country?
309
LESSON 34:
A GUIDE FOR DEVELOPING A MARKETING PLAN
executive summary is to give the reader a brief glance at the

critical points of your report. Those aspects of the culture a
reader should know to do business in the country but would
not be expected to know or would find different based on
his or her SRC should be included in this summary.
3. Participation in patents, trademarks, and other

conventions.
E. Social organizations.
1. Group behavior.
2. Social classes.
3. Clubs, other organizations.
4. Race, ethnicity, and subcultures.
F. Business customs and practices.
9. Sources of information.
10. Appendixes.
2. Economic Analysis
The reader may find the data collected for the economic
analysis guideline are more straightforward than for the
cultural analysis guideline. There are two broad categories of
information in this guideline: general economic data that
serve as a basis for an eval-uation of the economic
soundness of a country; and, information on channels of
distri-bution and media availability. As mentioned earlier, the
guideline focuses only on broad categories of data and must
be adapted to particular company/product needs.
6. Religion and aesthetics.

A. Religion and other belief systems.
1. Orthodox doctrines and structures.
2. Relationship with the people.
3. Which religions are prominent?
4. Membership of each religion.
5. Are there any powerful or influential cults?
B. Aesthetics.
1. Visual arts (fine arts, plastics, graphics, public art,
colors, etc.).
2. Music.
Guidelines
I.
Introduction.
II. Population.
A. Total.
3. Drama, ballet, and other performing arts.
1. Growth rates.
4. Folklore and relevant symbols.
2. Number of live births.
6. Living conditions.
A. Diet and nutrition.
3. Birthrates.
B. Distribution of population.
1. Meat and vegetable consumption rates.
1. Age.
2. Typical meals.
2. Sex.
3. Malnutrition rates.
3. Geographic areas (urban, suburban, and rural density

and concentration).
4. Foods available.
B. Housing.
1. Types of housing available.
2. Do most people own or rent?
3. Do most people live in one-family dwellings or with
other families?
C. Clothing.
4. Migration rates and patterns.

5. Ethnic groups.
III. Economic statistics and activity.
A. Gross national product (GNP or GDP).
1. Total.
2. Rate of growth (real GNP or GDP).
1. National dress.
B. Personal income per capita.
2. Types of clothing worn at work.
C. Average family income.
D. Recreation, sports, and other leisure activities.
D. Distribution of wealth.
1. Types available and in demand.
1. Income classes.
2. Percentage of income spent on such activities.
2. Proportion of the population in each class.
E. Social security.
F. Health care.
7. Language.
3. Is the distribution distorted?

E. Minerals and resources.
F. Surface transportation.
A. Official language(s).
1. Modes.
B. Spoken versus written language(s).
2. Availability.
C. Dialects.
3. Usage rates.
8. Executive summary.
After completing all of the other sections, prepare a twopage (maximum length) summary of the major points and
place it at the front of the report. The purpose of an
310
4. Ports.
G. Communication systems.
1. Types.
3. Usage rates.
H. Working conditions.
1. Employer-employee relations.
2. Employee participation. .
3. Salaries and benefits.
I. Principal industries.
1. What proportion of the GNP does each industry
contribute?
2. Ratio of private to publicly owned industries.
B. Percentage of GNP invested in research and

development.
C. Technological skills of the labor force and general
population.
V. Channels of distribution (macro analysis).
This section reports data on all channel middlemen
available within the market. Later, you will select a specific
channel as part of your distribution strategy.
A. Middlemen.
1. Retailers.
a. Number of retailers.
J. Foreign investment.
b. Typical size of retail outlets.
1. Opportunities?
c. Customary markup for various classes of goods.
2. Which industries?
d. Methods of operation (cash/credit).
K. International trade statistics.
e. Scale of operation (large/small).
1. Major exports.
f. Role of chain stores, department stores, and

specialty shops.
a. Dollar value.
b. Trends.
2. Wholesale middlemen.
2. Major imports.
a. Number and size.
a. Dollar value.
b. Customary markup for various classes of goods.
b. Trends.
c. Method of operation (cash/credit).
3. Balance-of-payments situation.
3. Import/export agents.
a. Surplus or deficit?
4. Warehousing.
b. Recent trends.
5. Penetration of urban and rural markets.
4. Exchange rates.
a. Single or multiple exchange rates?
b. Current rate of exchange.
c. Trends.
L. Trade restrictions.
1. Embargoes.
VI. Media.
This section reports data on all media available within the
country/market. Later, you will select specific media as part
of the promotional mix/strategy.
A. Availability of media.
B. Costs.
2. Quotas.
1. Television.
3. Import taxes.
2. Radio.
4. Tariffs.
3. Print.
5. Licensing.
4. Other media (cinema, outdoor, etc.).
6. Customs duties.
M. Extent of economic activity not included in cash income
activities.
1. Counter trades.
a. Products generally offered for counter trading.
b. Types of counter trades requested (i.e., barter,
counter purchase, etc.).
2. Foreign aid received.
N. Labor force.
1. Size.
2. Unemployment rates.
O. Inflation rates.
IV. Developments in science and technology.
A. Current technology available (computers, machinery,
tools, etc.).
C. Agency assistance.
D. Coverage of various media.
E. Percentage of population reached by each of the media.
VII. Executive summary.
After completing the research for this report, prepare a twopage (maximum) summary of the major economic points
and place it at the front.
VIII. Sources of information.
IX. Appendixes.
3. Market Audit and Competitive Market Analysis
of the guidelines presented, this is the most product- or
brand-specific. Information in the other guidelines is general
in nature, focusing on product categories, whereas data in
this guideline are brand-specific and are used to determine,
competitive market condi-tions and market potential.
311
2. Availability.
1. Competitors product(s).
Two different components of the planning process are

reflected in this guideline. In-formation in Parts I and II,
Cultural Analysis and Economic Analysis, serve as the basis
for an evaluation of the product-brand in a specific country
market. Information in this guideline provides an estimate
of market potential and an evaluation of the strengths and
weaknesses of competitive marketing efforts. The data
generated in this step are used to determine the extent of
adaptation of the companys marketing mix necessary for
suc-cessful market entry and to develop the final step, the
action plan.
I.
b.
Features.
c.
Package.
3. Competitors promotion and advertising methods.

4.
Competitors distribution channels.
C. Market size.
1. Estimated industry sales for the planning year.
2. Estimated sales for your company for the planning
year.
D. Government participation in the marketplace.
1. Agencies that can help you.
2. Regulations you must follow.
IV. Executive summary.
Introduction.
Based on your analysis of the market, briefly summarize

(two-page maximum) the major problems and
opportunities requiring attention in your marketing mix,
and place the summary at the front of the report.
II. The product.

A. Evaluate the product as an innovation as it is perceived
by the intended mar-ket.
1. Relative advantage.
V.
2. Compatibility.
VI. Appendixes.
3. Complexity.
4. Preliminary Marketing Plan
4. Trial ability.
5. Observability.
B. Major problems and resistances to product acceptance
based on the preceding evaluation.
III. The market.
A. Describe the market(s) in which the product is to be
sold.
1. Geographical region(s).
2.
Forms of transportation and communication

available in that (those) re-gion(s).
3. Consumer buying habits.

a.
Product-use patterns.
b.
Product feature preferences.
c.
Shopping habits.
Sources of information.
Information gathered in Guidelines I through III serves as

the basis for developing a marketing plan for your productbrand in a target market. How the problems and opportunities that surfaced in the preceding steps are overcome
and/or exploited to produce maximum sales/profits is
presented here. The action plan reflects, in your judgment,
the most effective means of marketing your product in a
country market. Budgets, ex-pected profits and/or losses,
and additional resources necessary to implement the proposed plan are also presented.
Guidelines
I. The marketing plan.
A.
4. Distribution of the product.
Marketing objectives.
1.
Target market(s) (specific description of the

market).
2.
Expected sales 20-.

Profit expectations 20-.
Market penetration and coverage.
a.
Typical retail outlets.
3.
b.
Product sales by other middlemen.
4.
5. Advertising and promotion.

a.
Advertising media usually used to reach your

target market(s).
b.
Sales promotions customarily used

(sampling, coupons, etc.).
B.
a.
Customary markups.
b.
Types of discounts available.
B. Compare and contrast your product and the

competitions product(s).
Product adaptation, or modification-Using the

product component model as your guide, indicate how
your product can be adapted for the market.
1.
Core component.
2.
Packaging component.
3.
6. Pricing strategy.
312
Brand name.
2. Competitors prices.
The detailed information needed to complete this guideline

is not necessarily avail-able without conducting a thorough
marketing research investigation. Thus, another pur-pose of
this part of the country notebook is to identify the correct
questions to ask in a formal market study.
Guidelines
a.
C.
Support services component.
Promotion mix.
1.
Advertising.
a.
Objectives.
b.
Media mix.
Message.
d.
Costs.
2. Sales promotions.
d. Scale of operation for each type (small/large).

2. Wholesale middlemen.
a. Type and number of wholesale middlemen.
a.
Objectives.
b. Markup for class of products by each type.
b.
Coupons.
c. Methods of operation for each type (cash/credit).
c.
Premiums.
d. Scale of operation (small/large).
d.
Costs.
3. Personal selling.
4. Other promotional methods
D. Distribution: From origin to destination.
1.
2.
Port selection.
3. Import/export agents.
4. Warehousing.
a. Type.
b. Location.
F. Price determination.
a. Origin port.
1. Cost of the shipment of goods.
b. Destination port.
2. Transportation costs.
Mode selection: Advantages/disadvantages

of each mode.
3. Handling expenses.
a. Pier charges.
a. Railroads.
b. Wharfage fees.
b. Air carriers.
c. Loading and unloading charges.
c. Ocean carriers.
4. Insurance costs.
d. Motor carriers.
5. Customs duties.
3. Packing.
6. Import taxes and value-added tax.
a. Marking and labeling regulations.
7. Wholesale and retail markups and discounts.
b. Containerization.
8. Companys gross margins.
c. Costs.
9. Retail price.
4. Documentation required.
a. Bill of lading.
b. Dock receipt.
c. Air bill
G. Terms of sale.
1. Ex works, fob, fas, c&f, cif.
2. Advantages/disadvantages of each.
H. Methods of payment.
d. Commercial invoice.
1. Cash in advance.
e. Proforma invoice.
2. Open accounts.
f. Shippers export declaration.
3. Consignment sales.
g. Statement of origin.
4. Sight, time, or date drafts.
h. Special documentation.
5. Letters of credit.
5. Insurance claims.
6. Freight forwarder.
If your company does not have a
transportation or traffic management department, then consider using a freight
forwarder. There are distinct ad-vantages and
disadvantages to hiring one.
E. Channels of distribution (micro analysis).
This section presents details about the specific
types of distribution in your marketing plan.
1. Retailers.
II. Proforma financial statements and budgets.

A. Marketing budget.
1. Selling expense.
2. Advertising/promotion expense.
3. Distribution expense.
4. Product cost.
5. Other costs.
B. Pro forma annual profit and loss statement (first year and
fifth year).
III. Resource requirements.
a. Type and number of retail stores.
A. Finances.
b. Retail markups for products in each type

of retail store.
B. Personnel.
c. Methods of operation for each type (cash/

credit).
c.
C. Production capacity.
4. Executive summary.
313
After completing the research for this report, prepare a twopage (maximum) summary of the major points of your
successful marketing plan, and place it at the front of the
report.
5. Sources of information.
6. Appendixes.
The intricacies of international operations and the
complexity of the environment within which the
international marketer must operate create an extraordinary
demand for information. When operating in foreign
markets, the need for thorough information as a substitute
for uninformed opinion is equally as important as it is in
domestic mar-keting. Sources of information needed to
develop the country notebook and answer other marketing
questions are discussed in Chapter 8 and appendix.
Summary
Market-oriented firms build strategic market plans around company objectives, markets, and the competitive environment.
Planning for marketing can be complicated even for one country,
but when a company is doing business internationally, the
prob-lems are multiplied. Company objectives may vary from
market to market and from time to time; the structure of
international markets also changes periodically and from country
to country; and the competitive, governmental, and economic
parameters af-fecting market planning are in a constant state of
flux. These variations require international marketing executives
to be spe-cially flexible and creative in their approach to strategic
market-ing planning.
314
Distribution is a necessary as well as costly activity. According to

one executive at Procter & Gamble, the average time required to
move a typical product from farm to shelf is four to five
months. Although it takes only about seventeen minutes to
actually produce a product, the rest of the time is spent in
logistical activities- storage, handling, transportation, packing
and so on.
Modes of Transportation
The availability of transportation is one important factor
affecting a companys site selection. To move a product both
between countries and within a country, there are three fundamental modes of transportation: air, water (ocean and inland),
and land (rail and truck). Ocean and air shipments are appropriate for transportation between countries, especially when the
distance is con-siderable and the boundaries are not joined.
Inland water, rail, and highway are more suitable for inland and
domestic transportation. When countries are connected by land
(e.g., -North America), it is possible to use rail and highway to
move merchandise from locations, such as from the United
States to Canada. In Europe, rail (train) is an important mode
because of the contiguity of land areas and the availability of a
mod-em and efficient train system.
The appropriate transportation mode depends on (1) market
location, (2) speed, and (3) cost. A firm must first consider
market location. Contiguous markets can be served by rail or
truck, and such is the case when goods are shipped from the
United States to Canada or Mexico. To move goods, between
continents, ocean or air trans-portation is needed.
Speed is another consideration. When speed is essential, air
transport is with-out question the preferred mode of distribution. Air transport; is also necessary when the need is urgent or
when delivery must be quickly completed as promised. For perishable items, a direct flight is preferable because a shorter
period in transport reduces both spoilage and theft.
Finally, cost must be considered as well. Cost is directly related to
speed-a quick delivery costs more. But there is a trade-off between
the two in terms of other kinds of savings. Packing costs for air
freight are less than for ocean freight because for air freight the
merchandise does not have to be in transit for a long period of
time, and the hazards are relatively lower. For similar reasons, the
air mode reduces the in-ventory in float (i.e., in the movement
process). Thus, there is less investment cost because the overall
inventory is minimized and inventory is turned over faster.
A firm must understand that there is no one ideal transportation mode. Each mode has its own special kinds of hazards.
Hazards related to the ocean/water mode include wave impact,
navigation exposures, water damage, and the various vessel motions (rolling, pitching, heaving, surging, swaying, and yawing).
Hazards related to the air mode include ground handling and
changes in atmospheric pressure and tem-perature. Hazards
related to the rail and highway modes include acceleration/deceleration (braking), coupling impact, swaying on curves, and
shock and vibration.
1. Land
Land transportation is an integral part of any shipment,
whether locally or internationally. Some type of land
transportation is necessary in moving goods to and from an
airport or seaport. The land transportation mode involves
Tail and truck. When goods in a large quantity must be
moved over a long distance over land. Rail can prove to be
quite economical. Europe and Japan have modern train
systems that are capable of moving merchandise efficiently.
On the other hand, trucks are capable of going to more
places. In addition, trucks may be needed to take cargo to
and from a railway station. When countries have joint
boundaries, moving cargo by truck or train is often a practical
solution. As a matter of fact, the U.S. trucking industry is
quite concerned about a NAFTA agreement, which allows
Mexican drivers to drive their trucks into the United States. It
is debatable whether the real issue is a safety concern or a
trade barrier.
Less developed countries generally rely on road transport. In
sub-Saharan Africa, road transport is the dominant form of
transport. This form of transport accounts for 80 to 90
percent of the regions passenger and freight movements.
Unfortunately, the nearly two million kilometers of roads in
Africa have been greatly damaged due to years of neglect. In
any case, road transport may be the only access to most rural
communities-a situation common in Africa as well as other
developing economies.
Asian Distribution
Soft drinks produced by Coca-Colas 29 percent-owned bottler, Swire
Bottlers Ltd., account for 70 per-cent of Hong Kongs $400 million
market. Because of Hong Kongs limited spaces, Coca-Colas plant there
is odd-looking. Inside the seventeen-story building, con-veyor belts take
cans; and bottles from floor to floor. Massive lifts hoist delivery trucks
from street level to loading docks high above the street.
7 -Eleven Japan employs a very efficient delivery system. Each customers
purchase, sex, and approxi-mate age are immediately recorded in a
computer that keeps records for the just-in-time delivery system. Each
store receives twelve deliveries daily and allows no ex-cess products on the
shelves. The government at one time felt that convenience store delivery
trucks con-tributed to traffic jams and air pollution. A government panels
study. however, later applauded the system since each truck was filled to
capacity carrying goods for several stores.
315
LESSON 35
PHYSICAL DISTRIBUTION & DOCUMENTATION
2. Air
Of all the various transportation modes, air accounts for
only 1 percent of total in-ternational freight movement. Yet
it is the fastest-growing mode and is becoming less confined
to expensive products. Air transport has the highest absolute
rate, but ex-porters have discovered that there are many
advantages associated with this mode. First, air transport
speeds up delivery, minimizes the time the goods are in
transit, and achieves great flexibility in delivery schedules.
Second, it delivers perishables in prime condition. Harris
Ranch uses a 747 jumbo jet to fly live cattle from the United
States to Japan. A premium price commanded by highquality beef in Japan makes it possible to use airfreight.
Third, it can respond rapidly to unpredictable and urgent
demand. For instance, quick replacement of broken
machinery, equipment, or a component part can be made by
air. Fourth, it reduces to a minimum damage, packing, and
insurance costs. Fi-nally, it can help control costly inventory
and other hidden costs, including ware-housing, time in
transit, inventory carrying cost, inventory losses, and the
paperwork necessary to file claims for lost or damaged
goods. These costs will increase as the time in transit
increases. Furthermore, opportunity costs (e.g., lost sales and
customer dissatisfaction) also adversely affect profit, especially
in the long term. All of these costs can be minimized with
air transport.
Traditionally, the appropriateness of airfreight was
determined solely by a value-to-weight equation, which
dictated that air cargo should be confined to high value
products. One reason for that determination was that
transport cost is a small proportion to such products value.
Another reason was that the amount of capital tied up with
these products while in transit is high and should be released
as soon as possible.
The dominant form of the international transportation of
merchandise has al-ways been ocean transport. Its main
advantage is its low rate, though the savings achieved for
many products are not necessarily greater than other
transport modes on an overall basis. This helps explain why,
when all the hidden costs related to ocean transportation are
considered, air transportation is growing at a very rapid rate.
3. Water
Bulk shipping is important in international trade because it is
one of the most prac-tical and efficient means of
transporting petroleum, industrial raw materials, and agricultural commodities over long distances. About 51 percent
of the global bulk fleet consists of oil tankers, while dry bulk
carriers account for 43 percent. The remainder of the fleet is
made up of combination carriers, which are capable of
carrying either wet (crude oil and refined petroleum products)
or dry (coal, iron ore, and grain) bulk cargoes. The bulk
shipping industry, being highly fragmented, has no one
organisation, which holds more than 2 percent of the total
world fleet.
Quotations for ocean shipping can be obtained from a
shipping company of freight forwarder. Steamship rates are
316
commonly quoted on weight and measurement. Goods are

both weighed and measured, and the ship will use the
method that yields a higher freight charge. Less-than
container shipments carry a higher rate than full -container
shipments.
There are three basic types of shipping company: (l)
conference lines, (2) in-dependent lines, and (3) tramp
vessels. An ocean freight conference line is an association of
ocean carriers that have joined together to establish common
rules with re-gard to freight rates and shipping conditions.
Consequently the operators in the group charge identical
rates. The steamship conference has also adopted a dual rate
system, giving a preferential treatment to contract exporters.
A contract exporter agrees to ship all or a large portion of its
cargo on a regular basis on vessels of conference member
lines in exchange for a lower rate than charged for a
noncontract shipper. Nevertheless, the contract exporter is
allowed to use another vessel, after obtaining the conferences
permission, when no conference service is available within a
reasonable period of time.
An independent line, as the name implies, is a line that
operates and quotes freight rates individually and
independently without the use of a dual-rate contract.
Independent lines accept bookings from all shippers. When
they compete with con-ference lines for noncontract shippers,
they may lower their rates. In general, inde-pendent lines do
not offer any special advantage for a contract shipper because
they do not have significant price advantage. Furthermore,
their services are more limited and not as readily available.
Finally, a tramp vessel is a ship not operating on a regular
route or schedule. That is, tramp steamers do not have the
established schedules of the other two types of carriers.
Tramp vessels operate, on a charter basis whenever and
wherever they can get cargo. They operate mainly in carrying
bulk cargoes.
Cargo or Transportation Insurance

Inland carriers generally bear the responsibility for any damage
to goods while in their possession. The same thing cannot be
said for ocean carriers. Their reluctance to accept responsibility is
due to the numerous unavoidable perils found at sea. Such
perils include severe weather, seawater, stranding, fire, collision,
and sinking. As a result, ocean carriers refuse to accept any
liability for loss or damage unless a ship-per can prove that they
were purposefully negligent-a difficult task indeed. To pro-tect
against loss or damage and to avoid disputes witi1 overseas
buyers, exporters should obtain marine insurance.
Marine cargo insurance is an insurance that covers loss or
damage at sea, though in practice it also applies to shipments by
mail, air, and ship. It is similar to domestic cargo insurance but
provides much broader coverage. The purpose of this insurance
is to insure export shipments against loss or damage in transit.
The insurance may be arranged by either a buyer or seller,
depending on the terms of sale.
There are two basic forms of marine insurance: (1) special (one
time) coverage and (2) open (blanket) coverage. A special policy
is a one-time policy that insures a single specific shipment. One
An open policy is an insurance contract issued to a firm in order

to cover all its shipments as described in the policy within
named geographic regions. The pol-icy is open in the sense that
it is continuous by automatically providing coverage on all cargo
moving at the sellers risk. The policy is also open in the sense
that the val-ues of the individual shipments cannot be known
in advance. Under this policy, no reports of individual shipments are required, although the insured must declare all
shipments to the underwriter. The underwriter agrees to insure
all shipments at the agreed rates within the terms and conditions of the policy. Open marine cargo poli-cies are written only
for a specified time period. A single premium is charged for this
time period, based on the insureds estimated total value of
goods to be shipped un-der the policy during the term of the
contract. The contract has no predetermined ter-mination date,
though it may be cancelled by either party. A firm can also insure
profit through a Valuation Clause in the cargo policy, which
insures exports and con-tains a fixed basis of valuation. The
following is an example of a typical valuation clause in a marine
policy: valued at amount of invoice, plus 10 percent.
Packing
Packaging may be viewed as consisting of two distinct types: (l)
industrial (exterior) and (2) consumer (interior). Consumer
packaging is designed for the purpose of af-fecting sales
acceptance. The aim of industrial packaging is to prepare and
protect merchandise for shipment and storage, and this type of
packaging accounts for seven cents of each retail dollar as well as
30 percent of total packaging costs. Packing is even more critical
for overseas shipment than for domestic shipment because of
the longer transit time and a greater number of hazards.
Consumer packaging is covered extensively in Chapter Eleven;
this section concentrates instead on industrial packing.
Packing Problems
There are four common packing problems, some of which are
in direct conflict with one another: (1) weight, (2) breakage, (3)
moisture and temperature, and (4) pilfer-age and theft.
Weight Over packing not only directly increases packing cost but
also increases the weight and size of cargo. Any undue increase
in weight or size only serves to raise freight charges. Moreover,
import fees or customs duties may also rise when import duties
are based on gross weight. Thus, overprotection of the cargo
can cost more than it is worth.
Breakage Although overpacking is undesirable, so is under
packing because the lat-ter allows a product to be susceptible to
breakage or damage. The breakage problem is present in every
step of ocean transport. In addition to normal domestic
handling, ocean cargo is loaded aboard a vessel by use of a sling
(with several items together in a net), conveyor, chute, or other
methods, all of which put added stress and strain on the
package. Once the cargo is on the vessel, other cargo may be
stacked on top of it, or packages may come in violent contact
during the course of the voyage. To complicate matters,
handling facilities at an overseas port may be unsophisticated.
The cargo may be dropped, dragged, pushed, and rolled during

unloading, moving in and out of customs, or in transit to the
final destination. In China, primitive methods (i.e., carts,
sampans, junks, and so on) are used to move a great deal of
cargo, There-fore, packing must be prepared to accommodate
rough manual handling.
To guard against breakage it may be desirable to use such
package-testing equip-ment as vibration; drop, compression,
incline-impact, and revolving drum. The cargo must riot exceed
the rated capacity of the box or crate. Attempts should be made
to make certain that internal blocking and bracing will distribute
the cargos weight evenly. Cushioning may be needed to absorb
the impact. Cautionary markings, in words and symbols, are
necessary to reduce mishandling because of misunder-standing.
One universal packing rule is Pack for the toughest leg of the
journey, To ac-commodate this rule, cargo should be unitized
or palletized, whenever possible. Pal-letizing is the assembly of
one or more items into a compact load to a pallet base and the
securing of the load to the pallet. Unitizing is the assembly of
one or move cargo load, secured together and provided with
skids and cleats for ease of handing. These two packing
methods force cargo handlers to use mechanical handling
equipment to move cargo.
Moisture and Temperature-Certain products can easily be
damaged by moisture and temperature. Such products are
subject to condensation even in the hold of a ship equipped
with air conditioning or dehumidifying equipment. Another
problem is that the cargo may be unloaded in the rain. Many
foreign ports do not have covered stor-age facilities, and the
cargo may have to be left in the open subject to heat, rain, cold,
or other adverse elements. In Morocco, bulk cargo and large
items are stored in the open. Mozambique does the same with
hazardous, bulk, and heavy items. Cargo thus needs extra
strong packing, containerization, or unitization in order to have
some mea-sure of protection under these conditions.
One very effective means of eliminating moisture is shrinkwrapping, which involves sealing merchandise in a plastic film.
Waterproofing can also be provided by using waterproof inner
lines or moisture-absorbing agents and by coating finished
metal parts with a preservative or rust inhibitor. Desiccants
(moisture-absorbing ma-terials), moisture-barrier or vaporbarrier paper, or plastic wraps, sheets, and shrouds will also
protect cargo from water leakage or condensate damage. Cargo
can be kept away from water on the ground if placed on skids,
pallets, or dunnage while having drain holes for crates.
Materials Handling
Japan and Europe, major mail order firms have imported the most
advanced materials-handling technology (in terms of bar-coding,
automated warehouse- and radio-frequency technology) when building new
contribution systems.
Regarding warehousing, instead of using conven-tional lift trucks to insert
and remove stock from bulk rage racks, computers direct automated and
semi automated cranes to move along rails between the rage racks. Barcoded labels affixed to incoming stock during receiving/inspection are read
by fixed optical scanning devices as the stock moves via conveyor the
317
time insurance is relatively inexpensive because the risk cannot

be spread over a number of shipments. Nevertheless, it is a
practical insurance solution if a sellers export business is
infrequent.
storage area. To move stock out of the authored storage area to the picking
and packing areas, control computers direct the stacker cranes to do so.
Automated warehousing systems can be differ-entiated by the unit load
that they handle (i.e., pallet, (or case). Pallet systems employ pallet-rack
story- and are best suited for long-term storage of a sin item per pallet.
System efficiency is reduced when system involves more than one item per
pallet or replenishing picking or shipping areas with less-than- pallet-load
quantities. In order to remove a few cases few cases on the pallet must be
off-loaded because there is usually no efficient method to replace the pallet
with the remaining cases back onto the rack.
Tray systems use trays to store merchandise and are effective for shortterm storage and in the frequent movement of less-than-pallet-load
quantities. Unlike pallet systems, tray systems allow for the picking up of
partial trays. The tray with the remaining cases can eas-ily be returned to
the storage rack.
Case systems use case racks to store merchan-dise and are well suited for
a distribution center that has a high number of stock-keeping units with
low ac-tivity per SKU. The case system can be reasonably ef-fective in
bulk picking, single-item shipments directly from the storage area.
The high degree of automation found in these systems significantly reduces
the labor requirements as-sociated with the warehousing function. Also the
rack structures are considerably higher (i.e., 20 to 30 me-ters) than
conventional storage racks and thus have su-perior capacity.
There are several steps to ensure the proper way of packing to

minimize mois-ture and breakage problems. These steps are
1. Place water-barrier material on interior of sides and roof.
2. Use vertical sheathing.
3. Block, brace, and tie down heavy items.
4. Use new, clear, dry lubber and provide adequate diagonals:
5. Unitize multiple similar items.
6. Use waterproof tape to seal fiberboard boxes.
7. Palletize shipping bags.
8. Use proper gauge, type, and number of straps.
Pilferage and Theft- Cargo should be adequately protected
against theft. Studies have fixed such losses in all transportation
modes in a range from $1 billion to in ex-cess of $5 billion.13
In the United States alone, the annual value of cargo stolen in
transit exceeds $2.5 billion. Annual loss through theft is well
over 100 million pounds in Great Britain, with employees
criminal activity being the main contributing fac-tor.14 Pilferage
levels are consistently high in Bangladesh and substantial in
India. There are a few techniques that can be used as deterrents.
One method of discourag-ing theft is to use shrink wrapping,
seals, or strapping. Gummed sealing tapes with patterns, when
used, will quickly reveal any sign of tampering. Also, only wellconstructed packing in good condition should be used.
Another area of concern is marking. The main purpose of
marking is to iden-tify shipments so that the carrier can forward
the shipment to the designated con-signee. Markings thus
should not be used to advertise the contents, especially when
they are valuable or highly desirable in nature. A firm is also
wise to avoid men-tioning the contents, trade names, consignee
names or shippers names on the pack-age because these
318
markings reveal the nature of the contents. Because markings

are still a necessity, they should be permanent, though called
blind marks should be used. To avoid handlers becoming
familiar with the markings, blind marks should be changed
periodically. Bright color-coding helps in spotting the pieces.
Packing alone should not be expected to eliminate theft. Packing
should be used in conjunction with other precautionary
measures. One of the most effective means of reducing
exposure to theft, pilferage, and hijacking is to insist on prompt
pickup and delivery. Another good idea is to avoid shipping the
cargo if it will arrive at its destination on a weekend or holiday.
One Chicago importer of jewelry found on Mon-day when he
went to pick up his merchandise at OHare airport that the cargo
had already been claimed by someone else over the weekend.
Container
An increasingly popular method of shipment is containerization. A container is a large box made of durable material such as
steel, aluminum, plywood, and glass reinforced plastics. A
container varies in size, material, and construction. Its dimensions are typically 8 ft high and 8 ft wide, with lengths usually
varying in multiples of 10 ft up to a maximum of 40 ft
A container can accommodate most cargo but is most suitable
to packages of standard size and shape. Some containers are no
more than truck bodies that have been lifted off their wheels
and placed on a vessel at the port of export. These containers
then are transferred to another set of wheels at the port of
import for inland movement. This type of container can be put
on a ship, or can become a bar car when placed on a rail-way
flatcar, or can be made into a trailer when provided with a
chassis. Containers are ordinarily obtained from either carriers or
private parties.
Containers can take care of most of the four main packing
problems. Because of a containers construction, a product does
not have to have heavy packing. The container by itself provides
good protection for the product against breakage, mois-ture, and
temperature. Because breaking into a container is difficult, this
method of shipment discourages pilferage and theft as well.
It is important to select the right container because containers
come in varying sizes and types. Two basic types of container
can be identified: (1) dry cargo con-tainers and (2) special purpose
containers. Some of the various types of dry cargo containers are
end loading, fully enclosed; side loading, fully enclosed; and
open top, ventilated, insulated. Special purpose containers come
in different types for refriger-ated, liquid bulk, dry bulk, flat rack,
auto, livestock, and sea shed.
Exporters may have to plan for the return of secondary
packaging or the con-tainer or both. Argentinas inefficient
exports force those who do business with Ar-gentina to ship
most containers back empty. One U.S. automaker, after experimenting with containers, resumed shipping parts in wooden
crates instead Japanese firms have partially solved the Argentina
problem by using collapsible racking and shipping systems so
that items can be more densely packaged for return shipment.
Shipments by air do not usually require e heavy packing that
ocean shipments require. Standard domestic packing should
prove sufficient in most cases. When in doubt, however, a
Freight Forwarder and Customhouse

Broker
There are two intermediaries whose services are quite essential in
moving cargo for their principals, across countries as well as
within countries: freight forwarders and customhouse brokers.
Freight forwarder generally works for exporters whereas the
customhouse broker generally works for importers. Because
the functions are similar, freight forwarders sometimes act as
customs brokers and vice versa.
A freight forwarder is a person responsible for the forwarding
of freight locally as well as internationally. He or she is an
independent businessperson who handles, shipments for
compensation. The kind of freight forwarder of concern here is
the for-eign or international freight forwarder who moves
goods destined for overseas desti-nations.
A foreign freight forwarder is an exporters agent who performs
virtually all as-pects of physical distribution necessary to move
cargo to overseas destinations in the most efficient and
economic manner. This freight forwarder can represent shippers
in both air and ocean freight shipments because the procedures
and documents required are very similar.
The freight forwarders major contribution to the exporter is his
or her ability to provide traffic and documentation responsibilities for international freight move-ments. This middleman
handles the voluminous paperwork required in international
trade, and is highly specialized in (1) traffic operations (methods
of shipping), (2) government export regulations, (3) overseas
import regulations, and (4) documents connected with foreign
trade and customs clearances. Ill brief, the freight forwarder
arranges all necessary details for the proper shipping, insuring,
and documenting of overseas shipments. An exporters need
for the freight forwarders services varies ac-cording to the
exporters exporting effort or life -cycle. As the exporters
business grows, the exporter tends to perform more of the
forwarding function itself.
The freight forwarder can assist an exporter from the very
beginning in getting a shipment ready for overseas. Once the
exporter receives an inquiry, it can turn to the freight forwarder
for assistance in preparing its quotation. The freight forwarder
can advise the exporter on freight costs, port charges, consular
fees, cost of special documentation, insurance costs, and the
forwarders handling fees, as well as recom-mend the degree of
packing needed or arrange to have the merchandise packed or
have it containerized.
The freight forwarder also prepares ocean bills of lading and any
special con-sular documents -and reviews letters of credit,
packing lists, and so on to ensure that all procedures are in
order. After the shipment is made, the freight forwarder
forwards all documents to the customers paying bank with
instructions to credit the exporters account.
The freight forwarder can assist the exporter .in other areas. This
person can re-serve space aboard an ocean vessel. He or she may
consolidate small shipments into full container loads and, by

doing so, can receive a lower rate from the carrier and pass on
the savings to the shipper. The freight forwarder can arrange to
clear goods through customs and to have the goods delivered
to the pier in time for loading. This middleman then handles
the goods from exit port to destination. If desired, the freight
forwarder can further move goods inland in a foreign country
through various affili-ates. According to one study, freight
forwarders feel that the United Kingdom is the easiest and
China is the most difficult with regard to arranging international
freight operations.
The freight forwarder receives a fee from exporters. The service
cost is a legit-imate export cost and should be figured into the
contract price charged to buyers. In addition, this person may
receive brokerage fee and/or rebates from shopping companies
for booked space. In such cases, the freight forwarders commission is paid by the ship lines. Because freight forwarders control
most of the smaller shipments and because the less-thancontainer (LTC) traffic accounts for 17-18 percent of the
business, carriers woo freight forwarders with extra rebates.
The counterpart of the freight forwarder for an exporter is the
customhouse bro-ker for an importer. As an individual or firm
-licensed to enter and clear goods through customs, a customhouse broker is a person or firm employed by an importer to
take over the responsibility of clearing the importers shipments
through customs on a fee basis, A licensed customhouse broker
named in a Customs Power of Attorney can make entry. This
broker is bonded, and the brokers bond provides the required
cov-erage to carryon the responsibilities of the job. A customhouse broker may also act as freight forwarder once the
shipment is cleared. A customs broker must be li-censed by the
Treasury Department in order to perform these services.
The customhouse broker is indispensable in the receipt of
goods from overseas. The services are valuable because the
requirements for customs clearance are com-plicated. For
example, U.S. Customs requires that entry documents must be
filed within five days after the goods have reached the United
States. To make entry, a person must have evidence of right to
make entry (carriers certificate), in addition to the commercial
invoice, packing list, and surety. For infrequent entry, a single entry bond must be obtained from a U.S. surety company to cover
potential duties and penalties incurred, but the surety may also
be posted in the form of cash. Moreover, the person must fill
out forms with regard to dutiable status and must also have the
goods examined under conditions that safeguard the goods
before they are released. Overall, entry is a two-step processgetting goods released and providing informa-tion for duty assessment and statistical purposes. The customhouse broker is
in the best position to provide for these requirements.
Documentation
It is not an exaggeration to say paper moves cargo. To move
cargo, docu-mentation is a necessity. American firms used to
complain about the cost of docu-mentation and shipping in
the European Community. Documentation alone added 3 to 5
percent of the total cost of goods sold. Cabot age rules, for
example, prevented a trucker from returning with a loaded truck
after delivery.
319
company should consult the carrier or a marine insurance

company for the best packing strategy. For a case in which a firm
is not equipped to do its own packing, there are professional
firms that package for export.
In many or perhaps most cases, marketers may find that it is

much more prac-tical to leave the physical distribution activities
to specialists. Dell Computer Corp., for example, sells computers in 115 countries. It has -arranged for Roadway Services Inc.
to handle Dells worldwide shipping. Earlier, Dell had to deal
with dozens of carriers and found that it would have to hire
1,000 to 2,000 additional workers to meet the projected growth.
Roadway, as a single-source provider, subcontracts and manages
all customer shipments-both inbound and outbound .
International direct marketers need to make certain that their
delivery methods are convenient for their customers. As in the
case of Wear Guard Work Clothes, a U.S. company, it had four
options to fill orders for Canadian customers: U.S. Postal
Service parcel post, courier companies, bulk shipment, and local
fulfillment. In the end it chose TNT Mail fast to bring Wear
Guards parcels into Canada, clear them at customs, and give
them to Canada Post for local delivery. This method allows
Cana-dian customers to receive the merchandise without having
to pay duties or additional fees. The company also has a
Canadian address so that Canadian customers can con-veniently
mail packages in case of customer returns.
Product transportation in the European Union has become
easier and more efficient. Systematic stops at customs posts
were replaced by spot checks, and multi-ple customs forms were
replaced by a Single Administrative Document (SAD). As of
1993, border controls were removed, and the SAD had been
eliminated. Border stops are limited to checking on legal matters
such as illegal immigration and drug trafficking. In 1995, some
EU states had begun to allow people to move freely within the
EU without having to show their passports.
To facilitate cargo movement, nations have been working
toward automated customs-paperless international customs
procedures. The Customs Cooperation Coun-cil, representing
more than 130 nations, has approved a plan by which customs
ad-ministrations around the world can work toward electronic
data interchange. The main standards body for international
electronic messages is a United Nations-backed group called
Edifact (Electronic Data Interchange for Administration,
Commerce, and Trans-port). While Japanese companies do
business with one another electronically, they use their own
standards, which force outsiders wanting to establish computerized links to engage in expensive programming and translation
efforts. Edifact, however, works everywhere. Japan has finally
agreed to join with Singapore to create a regional Ed-ifact board.
By sending standardized digital messages at computer speeds,
importers can bypass piles of bureaucratic paperwork. Use of
paperless trading technology should significantly improve the
speed and efficiency of data and global trade.
Exporters may want to consider purchasing export-automation
software. Some IWO dozen companies sell such programs,
which start at $5,000 and run on personal computers. More
expensive programs may cost more than $250,000 and run on
mini-computers. Some of the export automation software
incorporates the electronic data interchange (EDI) technology,
making it possible for exporters to send computer-gen-erated
forms electronically\ rather than mailing the documents to
freight forwarders, customers, banks, and government agencies.
320
To fill out the required documents, a company must insert the

proper identification number for its product. All products must
be shoehorned into some kind of category. If a product is
constructed out of several materials, it may be classified b) the
material that gives it its essential character. Prior to 1989, the
Standard Industrial Classification (SIC) was the most common
classification of products and services in the United States, and
it was similar to the Standard Industrial Trade Classification
(SITC) used by international organizations and a number of
countries. On January 1, 1989, the Harmonized Tariff Schedule
(HS) went into effect. The new system, de-signed to replace
previous systems for classifying exports, contains logically structured nomenclature. There are twenty-one sections and
ninety-nine chapters to arrange commodities according to
general economic activity. The sections and chapters are arranged
according to levels of processing, with primary commodities
classified first, followed by the technically more complex
products. The HS number consists of six digits, which are used
by all participating countries. To meet each countrys statisti-cal
and tariff requirements, the remaining digits are countryspecific. Certain coun-tries also use either alphabetical
subdivision after the six digits or combined al-phanumerical
systems. As an example, if the HS code for widgets is
12.34.56.78.90, the breakdowns are 12 (chapter), 12.34 (heading), 12.34.56 (subheading), 12.34.56.78 (tariff item), and
12.34.56.78.90 (HS Classification Number)
There are many kinds of documents, and they can be grouped
under two broad categories: (1) shipping documents and (2)
collection documents. Shipping documents are prepared to move
shipment through customs, allowing the cargo to be loaded,
shipped, and unloaded. Collection documents, in contrast, are
submitted to a customer or the customers bank for payment.
Shipping Documents
There are several kinds of shipping documents. Such documents include export li-censes and shippers export declaration
forms, among others.
1. Export License An export license is a permit allowing
merchandise to be exported. It is needed for all exports
being shipped from the United States, except for shipments
going to Canada and U.S. territories and possessions.
International Harvesters sale to the Soviet Union of a $300
million industrial plant to make combines was thwarted
when the companys license was revoked. This action was
taken because of the United States unhappiness with Soviet
political involvement in Poland.
In the case of the United States, there is two broad categories
of export li-censes: general and validated. The difference
between the two has to do with whether a particular license
requires prior, written approval from the U.S. Department of
Com-merce. The type of license required depends on the
sophistication of the product, the destination country, the
end use, and the end user. 24
A general license is a license for which no application is
required and for which no document or written
authorization is granted. It is a general authorization permitting the export of certain commodities and technical data
without the necessity of ap-plying for a license document A
If an exporter does not qualify for a general license, the

exporter may apply for a validated export license, which, in
effect, is a formal authorization document. The United States
requires this kind of licensing for reasons of national security
(strate-gic significance), short supply, or foreign policy.
National security controls were necessary to prevent the
export of strategic commodities and technical data to the Soviet Union and other Warsaw Pact countries. Foreign policy
controls, such as the re-strictions placed on exports to South
Africa and Namibia, are instituted by such li-censing to
promote U.S. foreign policy. In the case of short-supply
controls, the licenses are granted with an eye to preventing
the depletion of scarce materials (e.g., western red cedar and
petroleum).
Many of the products shipped under individual validated
licenses (IVLs) and special licenses need pre export
paperwork (e.g., a foreign consignee/purchaser state-ment or
a government-issued import certificate) to obtain the
necessary license. IVLs authorize individual sales of a certain
product to a certain customer in a certain coun-try. Special
licenses (e.g., project and distribution licenses) authorize the
sale of a range of products to many customers if exporters
can show that they have imple-mented a strict control
process.
The following are some possible indicators that an illegal
diversion might be planned by an export customer:
The customer or purchasing agent is reluctant to offer

information about the end use of a product.
The products capabilities do not fit the buyers line of

business: for example, an order for several sophisticated
computers for a small bakery.
The product ordered is incompatible with the technical level

of the country to which the product is being shipped.
Semiconductor manufacturing equipment would be of little
use in a country without an electronics industry.
The customer is willing to pay cash for a very expensive item

when the terms of the sale call for financing.
The customer has little or no business background.
The customer is unfamiliar with the products performance

characteristics but still wants the product.
Routine installation, training, or maintenance services are

declined by the customer.
Delivery dates are vague, or deliveries are planned for out-ofthe-way destina-tions.
A freight-forwarding firm is listed as the products final

destination.
The shipping route is abnormal for the product and

destination.
Packaging is inconsistent with the stated method of

shipment or destination.
When questioned, the buyer is evasive and especially unclear

about whether the purchased product is for domestic use,
export, or re-export.
Shippers Export Declaration (SED) Form SEDs are required

to be filed for virtu-ally all shipments, including hand-carried
merchandise, and they must be deposited with an exporting
carrier regardless of the type of export license. Exemptions
apply to shipments to certain countries when the value is $2,500
or less and when the shipment is not moving under a validated
export. For foreign merchandise that has entered the United
States and that is be-ing re-exported, the form used is Form
7513-SED for in-transit merchandise.
The SED is a multipurpose document. One of its purposes is
to serve as an export control document. It declares the proper
authorization for export by making reference to either a General
License symbol or the license number of a validated li-cense.
The SED thus makes it possible to administer the requirements
of the Export Administration Act.
Another purpose of the SED is to aid the Bureau of Census in
compiling basic statistical information on export shipments.
These data are compiled and published monthly and show the
types of commodities exported and the countries that imported them.
Report of Request for Restrictive Trade Practice or
Boycott (Form IT A-621P) The restrictive trade practice report
is a form used to report illegal requests regard-ing boycott
practices received from one country against another. This form
must be submitted to the U.S. Department of Commerce when
a company receives an illegal or legal reportable request regarding
a companys business practices as outlined in the Restrictive
Trade Practices, Bulletin 369.
Certificate of Registration (Customs Form 4455) The
certificate of registration is used to register a shipment with U.S.
Customs. This registration is desirable for shipments that were
originally imported and are now being returned. to the country
of origin for repair, replacement, alteration, or processing. If the
shipment reenters the United States within one year of the date
of export, it will reenter duty-free.
Hazardous Certificate To export hazardous cargo, an exporter
must use a ship-pers certification or declaration of dangerous
cargo. This document, required for all hazardous shipments, is
used to describe the contents by providing the details and
qualities of the items being shipped, their proper classification,
required labels, and so on. This declaration must always be
completed by the shipper (preferably on the shippers letterhead) and signed by the shipper. There is no prescribed form
for ocean shipment; of hazardous materials at the present time.
For all hazardous shipments moving via airfreight, a shippers
declaration of dangerous cargo (air cargo) must be submitted to
the airline.
Packing List A packing list is a document that lists the type
and number of pieces, the contents, weight, and measurement
321
general license allows the export through the Ex-port

Administration Regulations of all goods published in an
authorization list and covers the export of nonstrategic
goods (commodities not under restriction or con-trol).
Products that meet specific conditions can be shipped by
merely inserting a cor-rect General License symbol on the
export control document known as a Shippers Export
Declaration.
of each, as well as the marks and numbers. Its purpose is to

facilitate customs clearance, keep track of inventory of goods,
and assist in tracing lost goods. For insurance purposes the
packing list can be used in de-termining the contents of a lost
piece. Furthermore, it is also useful in estimating ship-ping cost
prior to export.
Dock Receipt A dock receipt is proof of delivery for goods

received at the dock or warehouse of the steamship line. This
document is required for the pro forma invoice in order to be
able to apply for an import license and/or a let-ter of credit.
A commercial invoice is a document that provides an itemized
list of goods shipped and other charges. As a complete record
of the business transaction
between two parties, it provides a
complete description of merchandise, quantity, price, and shipping
and payment terms. It is desirable
that this invoice contains a
breakdown of charges such as
those related to inland transportation, loading, insurance, freight,
handling, and certification. Because
the invoice is required to clear
goods through customs, all
necessary information required by
the buyers government must be
included.
The requirements of the exporters
country must be satisfied a well.
The United States prohibits certain
goods from being diverted to
countries such as North Korea and
Cuba. Therefore, the invoice may
have to be prepared so it includes
an anti di-version clause or
destination control statement.
According to sec- shipments sailing
from ports on the U.S. East and
Gulf coasts. Six copies of the dock
receipt must be lodged at the
receiving warehouse before freight
can be accepted.
Shippers Letter of Instructions The shippers letter of

instructions is a form pro-vided to the freight forwarder from
the shipper giving all pertinent information and instruction
regarding the shipment and how it is to be handled. When
signed by the shipper, it also authorizes the forwarder to issue
and sign documents on behalf of the shipper
322
Foreign Customs Invoice -A customs invoice

is a special format invoice required by customs
officials in some countries in lieu of the
commercial invoice, as those of-ficials may not
recognize the commercial invoice for customs
purposes. This type of invoice gener-ally
contains the same information as the commercial invoice and may also contain certifications
with regard to value and origin of the shipment.
Consular Invoice- In addition to the regular
commercial invoice, several countries, notably
those in Latin America, require legalized or
visaed documents that often in-clude a special
kind of invoice known as a consular invoice. A
consular invoice is a detailed document prepared
by a seller in the importing countrys language
on an of-ficial form supplied by the importers
government. Its purpose is to monitor merchandise and capital flows.
A consular invoice must have an official stamp,
seal, or signature affixed to it. This is the
responsibility of the consulate general, which is a
representative of the gov-ernment of the
importing country. The resident consul is
supposed to verify the con-tents of the invoice
(e.g., value, quantity, and nature of shipment)
and to certify its authenticity and correctness.
Usually, there is a fee for this service. Bolivias
con-sular fees for the notarization of invoices are
1 percent of the FOB value.
Collection Documents
Before a seller can request payment, the seller must provide the
buyer with a num-ber of documents showing that the terms
agreed upon have been fulfilled. The buyer requires such
documents to protect itself and to satisfy its governments
requirements.
Commercial Invoice To collect payment, an invoice is needed.
There are two kinds of invoices: (1) pro forma and (2) commercial. A pro forma invoice is an invoice provided by a supplier
prior to the shipment of merchandise. The purpose of this invoice is to inform the buyer of the kinds and quantities of
goods to be sent, their value, and important specifications
(weight, size, and so on). The buyer may also need the proforma invoice in order to be able to apply for an import license
and/or a letter of credit.
A commercial invoice is a document that provides an itemized
list of goods shipped and other charges. As a complete record
of the business transaction between two parties, it provides a
complete description of merchandise quantity, price, and
shipping and payment terms. It is desirable that this invoice
contain breakdown of charges such as those related to inland
transportation, loading, insurance, freight, handling, and
certification. Because the invoice is required to clear goods
It is significant to keep in mind that the consulate is not

obligated to facilitate imports by approving the submitted
documents quickly. Because the consul may take his or her time
in returning the visaed documents, an exporter should allow
reason-able time for the processing of a consular invoice. It can
be a frustrating experience to rush the consulate for the
documents while the shipment is waiting.
Because a consular invoice is a legal document, any errors noted
later require special consideration. An exporter cannot simply
make corrections on a consular in-voice that has been certified.
Such corrections are considered forgery, and the crim-inal penalty
can be quite severe.
Although a consular invoice usually contains the same information as a com-mercial invoice, the actual information required by
the consulate depends on where the shipping is to be made.
The best way to find out what is specifically required is to speak
directly with the consulate or consult one of the reference
manuals available, such as Dun and Bradstreet or the International Trade Reporter of the Bureau of Na-tional Affairs
(BNA).
323
through customs, all necessary information

required by the buyers government must be
included.
For international use, this document is generally notarized and

chamberized.
Inspection Certificate An
inspection certificate is a document
certifying that the merchandise was
in good condition immediately
prior to shipment. Many foreign
buy-ers protect themselves by
requiring a shippers affidavit or an
independent inspection firm to
certify quality and quantity and
conformity of goods in relation to
the order, as well as to ensure that
the goods contracted for have
actually been shipped. This
certificate is normally prepared by
an independent firm other than
the exporter, attesting to the
quality or quantity of goods being
shipped.
Special Purpose Documents As
in the case of an inspection
certificate, an importer may request
other special documents, such as a
certificate of weight/measurement
and certificate of analysis in order
to protect the importers interests.
A certificate of weight/measurement is issued by an independent
party attesting to the weight or
measurement of the merchandise
to be shipped. A certificate of
analysis contains an ex-perts report
on the findings or grading have
the substance or composition of
the prod-uct shipped. The
document assures the buyer that
the goods are those that an
exporter contracted for shipment.
Certificate of Origin A certificate of origin is a document

prepared by the exporter and used to identify or declare that the
merchandise originated in d certain country. It assures the buyer
or importer of the country of manufacture. This document is
nec-essary for tariff and control purposes. Some countries may
require statements of ori-gin to establish possible preferential
rates of import duties under the Most Favored
Nation arrangements. This certificate also prevents, the inadvertent importation of goods from prohibited or unfriendly
countries. The forms can vary, ranging from a shippers own
letterhead certificate to a countersigning by the Chamber of
Commerce. In some cases, such forms must be visaed by an
importing countrys resident consul. The United Nations
provides and recommends the use of Form A for this purpose.
324
Insurance Certificate A certificate

of insurance is a negotiable document issued to provide
coverage for a specific shipment. It briefly describes the transaction and its coverage. Usually, an insurance certificate is issued as
an open-coverage policy to protect any and all shipments and
transportation as long as a certificate is filed for each shipment.
Generally, the policy will cover most losses sustained during
transit. Not restricted only to ocean shipments is a marine
insurance policy, which covers all modes of transportation.
Air Waybill. An air waybill is basically a bill of lading issued by
air carriers for air shipments. This transport instrument is not a
negotiable document. As a result a car-rier will release goods to a
designated consignee without the waybill.
Bill of Lading A bill of lading is a document issued to record
shipment trans-portation. Usually prepared by a shipper on the
shippers car-riers forms, this document serves three useful
functions. First, as a document of ti-tle, it is a certificate of
ownership that allows a holder or consignee to claim the

merchandise described. Second, as a receipt of goods, it is
issued by the carrier to the shipper for goods entrusted, to the
carriers care for transportation. A bill of lading is thus proof of
the carriers possession of the freight. Third, as a contract of
carriage, the bill of lading defines the contract terms between the
shipper and his carrier. The conditions under which the goods
are to be carried and the carriers responsibility for the deli very
are specified.
Bills of lading can be issued for inland (overland), ocean, or air
transport. An inland and bill of lading is issued by railroad or
truck lines. It authorizes movement of goods from the
shippers warehouse to the port or point of export. An ocean
bill of lading, in contrast, applies to goods shipped by water
and is issued by steamship lines. When the document is issued
by an air carrier, it becomes an air waybill. In these of a so-called
through bill of lading, shipment is provided for two or more
trans-portation modes for delivery to a final destination.
Another kind of bill of lading is the NVQCC, which is issued
by a nonvessel operator common carrier that consol-idates
freight into a container for shipping by regular liner vessels.
According to the International Chamber of Commerce, the bill
of lading is ac-ceptable only when it is marked clean and on
board. The bill of lading is clean when the carrier sees no
evidence of damage to the packing or condition of the cargo.
The cargo thus must be received in good order and condition
without exception or irregularity. A bill of lading is foul when
there is indication of damage to the goods re-ceived. For an onboard bill of lading to be issued, the cargo must be loaded
aboard the named vessel on the specified date of loading. In
comparison, even though a re-ceived for shipment bill of lading
also mentions a particular vessel, this document only implies
that the goods have been received by the steamship company.
In such a case, because the goods are not yet loaded on board a
particular vessel, it is possible that the goods may end up on
another vessel instead.
In addition to being classified as clean or foul and by types of
transportation carriers, a bill of lading can be straight or
negotiable. A straight bill of lading, un-der international law, is
nonnegotiable. It is consigned directly to a consignee rather than
to order. As such, it allows delivery only to the consignee or
party named on the bill. The carrier must be certain that the
party receiving goods is actually the named party. To obtain
possession of the shipment, the foreign buyer simply shows
ones proof of identity.
A shippers order or negotiable bill of lading is a negotiable
instrument that is consigned to order. When endorsed, it
allows transfer of title to the holder of docu-ments, and
delivery can be made to a named party or anyone designated.
Both the straight and order bills of lading serve as collection
documents. The buyer must pay for the goods, post bond, or
meet other specified conditions before obtaining the bill of
lading to claim the goods. The shipper endorses the bill and
pre-sents it to the bank for collection as evidence of satisfying
the conditions stated in the letter of credit.
325
UNIT VI
LESSON 36:
GLOBAL E-MARKETING
The following lesson tries to make the students understand the

following topics:
1. The Death of Distance
2. Communications
UNIT 9
the explosion of information technology and the World Wide

Web. In this chapter we will review the known and speculate
about the unknown impact of the Web and information
technology on global marketing.
9. Components of the Electronic Value Chain
In this chapter, we look at some of the basic elements of the

new technological environment and discuss how the changes we
are experiencing impact the way global marketing is conducted.
The chapter opens by considering some of the key drivers of
the ICT revolution, most importantly the Internet. Subsequently, we discuss the in-fluence of these fundamental changes
on competitive strategies. Finally, we consider the changes the
technological environment brings to the configuration of the
global value chain.
Concepts and Definitions
The Death of Distance
3. Targeting the Individual Customer: Beyond Segmentation

4. Relationship Marketing
5. Interactivity
6. Speed to Market
7. Living in an Age of Technological Discontinuities
8. New Technologies Change the Rules of Competition
E-marketing
Internet
Intranet
Extranet
World Wide Web
Portals
Web Browser
Virtual Reality
E-Commerce
The integration of information technology (IT) and the Internet into

marketing
The largest computer network in the world, which links over 130
million people. By 2003, this number is projected to grow to 350
million users, split between North America-35 percent; Europe-30
percent; Asia Pacific-21 percent; South America9 percent; and the
rest of the world-about 5 percent.
A computer network that links users in a single company or organization. Access to an intranet is limited to authorized users who
are company or organization employees or members.
A computer network that links authorized users. In contrast to the
Internet, it is not open to the general public and, in contrast to the
intranet, it is not limited to members of a single organization or
company.
Makes the Internet more accessible and easier to use by non-experts.
Technically it is a system of hypermedia linking text, graphics,
sounds, and video on computers spread across the globe.
Context suppliers that attract millions of Web users with a wide
swath of information, search services, e-mail and chat rooms.
Among the most important context providers are Internet online
services such as America Online, Web browsers such as Netscape
Communicator, and search engines such as Yahoo!
Software used to navigate the hyperlinks that make up the World
Wide Web.
Imaginary "worlds" created by cutting edge computer technology.
For example, wearing special headsets, consumers might get the
impression of walking through a house and visualizing and
experiencing the rooms before the house is actually built.
Selling goods and services over the Internet, both business to
consumer (B2C), consumer to consumer (C2C), and business to
business (B2B). The latter is sometimes also referred to as ebusiness.
Introduction
E marketing is a term that can be used to label the potential of
information technol-ogy (IT) and the Internet, and the impact
on marketing. E marketing is perhaps the single most important new development in technology in the entire history of
market-ing, particularly in its ability to leap over distance. It is
clear that marketing is undergo-ing a revolution as a result of
326
Distance was, in the pre modern world, a

variable of the greatest marketing significance. As the real estate maxim has it, the
three rules of real estate valuation are
location, lo-cation, and location. In global
marketing, strategies and practice reflected
the importance of distance. The most
important variable impacting trade
behavior, for example, is distance. The
primary trading partners of every county are
the proximate neighbors: for the United
States they are Canada and Mexico, for
Canada and Mexico it is the United States.
For France it is Germany, and for Germany
it is France, and so on around the world.
There has always been a positive correlation
between trade and proximity. However, the
internet is totally independent of distance.
Electrons traveling at the speed of light get
to anywhere in the world in the same time
and at the same cost. If I send an e-mail, it
does not make a difference in time or cost
whether the mail is addressed to my next
door neighbor or to someone halfway
around the world. The same thing is true
of a Web site: The location of the site does
not affect the cost or speed of access.
For the first time in history, the world has

become a level playing field. Anyone, anywhere in the world can communicate with
anyone else in the world in real time with no premium charged
for distance.
These long standing historical patterns of trade are a reflection
of the importance of physical distance in global marketing. The
improvement of transportation and com-munications
technologies has been a major driver pushing the world toward
For example, until the Internet, the aftermarket for motorcycle

accessories was frag-mented by country. The only way an
accessory would cross national boundaries was if the manufacturer set up marketing and distribution operations in overseas
or foreign mar-kets. Today, this is no longer necessary. Motorcycle Consumer News, a reader-sponsored magazine, which does
not accept paid advertising, reviews new accessories and
products for motorcyclists. For the past year, the magazine has
included reviews of products that are marketed in other
countries with the telephone number, and Web and e-mail
addresses of the manufacturer. Readers of the magazine
anywhere in the world can communicate directly with the
supplier, who can receive payment via credit card with card
authoriza-tion and ship anywhere in the world via express
delivery. The dramatic decline in com-munications and shipping
costs and the decline of both tariff and no tariff barriers to
trade have opened up world markets to companies that were
formerly too small to par-ticipate in world markets.
Communications
E-mail is a major new communications tool that supplements
the fax and telephone to eliminate the barrier of distance. It is
instant, cheap (free to most users), and insensitive to time zone.
You can read e-mail when you wish regardless of time zone
considerations. E-mail is a marketing communications-tool that
offers unprecedented power for one--on-one messages for both
B2B and B2C communications. Remarkably, it has emerged as a
universal communications tool in a mere five years.
Targeting The Individual Customer:

Beyond Segmentation
The aim of marketing segmentation has always been to create a
unique value offer for as many customers as possible. Before
the Internet, this meant, in practice, creating an offer for a
segment of the market that was an aggregation of customers.
Almost over-night, the World Wide Web has emerged as a
powerful new tool for accomplishing what in the past was only
a theoretical possibility in marketing: creating marketing
programs that target a segment of one. With the Internet, that
theoretical possibility has become a reality. Indeed, the whole
notion of segmentation has to be reconsidered. Segmenta-tion
was a goal in marketing because it was too expensive to address
the individual cus-tomer. With the available tools of the
Internet and IT, it is now possible to respond to the individual
customer regardless of where the customer is located.
Relationship Marketing
Another major thrust of marketing in recent years has been
relationship marketing. The Internet has opened up immense
new possibilities for creating a relationship with global customers, potential customers, suppliers, and channel members. The
end of segmenta-tion means that marketers can now focus on
delivering value to the individual customer. The best way to do

this is to create a win-win relationship with the customer. The
com-pany should offer the customer a unique value, and
serving the customer should be prof-itable for the company.
The relationship should be mutually beneficial. Whel1ever the
benefit is one sided, the relationship is threatened.
Interactivity
Before the emergence of the Internet and IT, communications
between companies and their customers were generally limited
to one-way communications. Companies made offers, and
customers voted in the marketplace. The possibility of an
interactive relation-ship between customers and prospects has
new emerged. This is particularly true for on-line retailers who
can use customer purchase behavior information to uniquely
tailor communications to their customers. A customer who
purchases sun screen skin protection from an on-line retailer can
be advised of other products that also provide sun protection.
Speed To Market
Globalization has unfolded in stages. The first stage was the
move of companies to make sure that their products were sold
in global markets. Before the Internet and IT created a new
world of instant global communications, the pace of information and company communications traveled slowly. Products
were introduced in one country at a time or at best one region at
a time. Today, that has changed.
The Web is causing the Hollywood movie industry to rethink
its America-First policy. Take Mel Gibsons epic Brave-heart, for
example. It was released in the United States on May 24, 1995,
and it crept around the world. Some countries, such as Portugal,
waited seven months to see the movie.
When Mel Gibson returned to the screen with a new movie, The
Patriot, on June 28,2000, the studio rolled it out around the
world in two months:
What happened? The Internet. As Warren Lieberfarb, president
of Time Warner Inc.s Warner Home Video put it, The world
is discovering movies on the weekend they open in the U.S.
One of the pressures for global releases of new films is the
DVD version. Consumers are modifying DVD players to
enable players to play DVD disks from anywhere in the world;
defeating the effect of a regional coding system designed to
stop consumers from playing DVD disks that were purchased
from outside their region. When the DVD version of a film
goes on sale in the United States, it can be played any-where in
the world on a modified player.
The solution to this problem is to move to a global release of
new films. This offers a number of advantages. It helps movies
that bomb in the United States because, when this happens,
it has no effect on the international market, which makes an
independent judgment on a new release. It also has opened up
new costs savings since there is no time to develop expensive,
customized marketing programs for each country. Studios are
simply recycling art and photos from the US campaign to create
a global campaign with the same look around the world.
327
greater globalization. Costs have come down and service has

improved steadily and dramati-cally since the end of World War
II. The Internet and IT have been major new drivers of
globalization since the beginning of the 1990s. A Web presence
is instantly global. The global reach of credit card issuers,
package delivery services, and the Internet has cre-ated a whole
new level of possibilities for global retail and business-tobusiness mar-keting by even the smallest firms.
Living In An Age of Technological

Discontinuities
1. Price Plunges Indicate Speed Of Technological Progress
So what are the drivers of the technology revolution we are
witnessing? Arguably, the changes with the most dramatic
impact on globalization occurred in two fields: transportation and communication. Dicken refers to these two
areas as enabling technolo-gies. In transportation, key
advances have been made in air travel and the speedier
loading and unloading of container shipments. On the
communication side, the reduced cost of long-distance
telecommunication is most remarkable. Today, a threeminute tele-phone call between New York and London costs
about $0.30; in 1930 it would have cost about $250 when
expressed in todays prices. That is an 83,333 percent decrease
in prices in 70 years. (This is a reminder that When it comes
to technology, prices decline instead of increase.) Market
liberalization is expected to bring down international rates by
as much as 80 percent over five years. Cambridge Strategic
Management predicts that by 2005, a transatlantic
videophone call will cost only a a few cents an hours
Already, about two thirds of the worlds new telephone
subscriptions are for mobile phones and, in some developed
countries, this share is as high as 75 percent.
A second important cost reduction is the dizzying decline in
the cost of computer processing power: It now costs only 1
percent of what it did in the early 1970s. Expressed
differently, If cars had developed at the same pace as
microprocessors. a typical car would now cost less than $5
and do more than 250,000 miles to the gallon. These price
reductions reflect the breathtaking speed of technological
change; indeed never before have such dramatic price falls
been-observed.
2. Technological Convergence And The Ubiquity Of Technology
In information and communication technology, it is not
only the improved speed and reliability of devices that have
brought about the rapid technological change but also the
convergence between the transmission of information and
the processing of infor-mation. Moreover, it is expected that
the next few years will witness a convergence of different
types of information and communication technologies into
one common In-ternet standard.
A second development has been labeled technological
ubiquity. Andersen Consulting describes it as a world in
which information technology is an integral part of
everything we see and do in the workplace and at home.
Thus, every kitchen device, car, or exercise machine will be
packed with easy-to-use electronics that will add value to the
product, for example, by tailoring it to personal preferences,
enabling remote communication, and so on.
3. Explosive Growth of The Internet
Arguably, the Internet represents one of the most important
drivers of the technologically revolution because it has led to
the development of an entirely new form of doing busi-ness
called e-commerce or e-business. The history of the Internet
can be traced back to 1969, when the U.S. Department of
328
Defense introduced ARPANET. Apart from enabling access

to remote computers, the network also permitted the
transfer of electronic mes-sages (e-mail). At this stage, the
users were restricted to a few military researchers. Although
subsequent years witnessed an extension of users and the
development of simi-lar networks springing up from a
cooperative effort among NASA, IBM, and MCI, the true
breakthrough occurred as recently as 1992. In this year, Tim
Berners-Lee at the Con-seil Europeen pour la Recherche
Nucleaire (CERN), a European research institute in
Switzerland, introduced the World Wide Web (WWW). For
the first time, this-protocol permitted the graphic
representation of information in the Internet. In connection
with Web browsers used to navigate the network of
hyperlinks that make up the World Wide Web, this
development is widely seen as the origin of the explosive
growth of the Inter-net. Today, the World Wide Web is
often used synonymously for the entire Internet, al-though
the latter also hosts traditional Internet services such as
Telnet, Gopher.
Web access is still very much skewed toward developed
countries. Moreover, a number of countries connected to the
Internet offer only e-mail and are, consequently, cut off from
the wealth of information available on the Web. Despite the
fact that cur-rent developments and growth rates, particularly
in China and South America, will help ease the problem of
geographically unequal access, there is still concern. Richard
Jolly, author of the latest development report of the United
Nations, notes that technology is a double-edged sword,
opening new ways for many but also cutting off access for
others.12 In Bangladesh, for example, a computer costs eight
times the average annual income.
Technological change as such, of course, is nothing new.
What is remarkable today is the speed of change. For
example, although it took some 38 and 25 years, respectively,
for the radio and telephone to reach 50 million U.S.
consumers, television only needed 13 years and cable
television 10 years to reach the same threshold. The Internet
with the World Wide Web achieved the same penetration
level in less than 5 years. On a worldwide basis, the Internet
has expanded by about 2,000 percent in the last decade and is
doubling in size every 6 to 10 months. By 2003, there are
projected to be 350 mil-lion users, split between North
America (35 percent), Europe (30 percent), Asia Pacific (21
percent), S0uth America (9 percent), and the rest of the
world (about 5 percent). Other forecasts expect the Internet
to reach the 1 billion-user mark by 2008; to appreci-ate the
magnitude of this growth note that it took until 1999 for
telephone users to reach the 1 Million mark. Freeing Internet
access from the confines of computer keyboards and
enabling access via mobile phones, pagers AND so on will
fuel this growth.
Another revolution, voice recognition technology, is just
round the corner. Render-ing keyboards largely superfluous
and, thus, finally fulfilling the science fiction notion of
commanding it machine through the human voice, this
technology will dramatically ac-celerate the use of computers
4. The Development Of E-commerce

Technology, particularly information and communication
technology (ICT), is more than merely an enabler. It has
become the basis for an entirely new business model.
Starting with electronic data exchange (EDI, i.e., the transfer
of standardized data be-tween corporations), the Internet
has undergone a metamorphosis from a medium pri-marily
used to advertise a product or service to e-commerce
platform combining information, transactions, dialogue, and
exchange. In short, the Internet has given birth to an entirely
new business model and opened completely novel
opportunities for global marketing.
The scope for new developments arising from the new
technologies is considerable. Consider the example of the
well-known electronic bookseller Amazon.com. Using a
virtual network that seamlessly connects suppliers and
customers, the firm has changed the way in which books are
traded. Over 30,000 associated Web sites are recommend-ing
the company for a commission and provide links to the
Amazon site. Of course, Amazon not only offers books but
also informs customers about new publications and
encourages readers to post reviews of books they have read.
Virtual chat rooms and meetings with authors also foster the
formation of an Amazon community. More than half the
business Amazon conducts is with loyal customers.
Further examples of companies that developed their
business around the possibil-ities offered through ecommerce are Dell Computers, which shows growth rates
that exceed those of conventional computer manufacturers
by a factor of four, E *Trade, an on-line brokerage with
annual growth rates of 200 percent, and eBay, which offers
on-line auc-tions and has an annual transaction volume of
more than $300 million. At eBay, customers provide the
entire content, starting from the goods on offer up to the
chat rooms in which they exchange background information
on these goods.
Although most media attention has focused on consumer
marketing on the Internet, more of Internet transactions ate
generated in the business-to-business field. Forester Research
puts the relationship between business-to-business (B2B)
and business-to- consumer (B2C) e-commerce at 5:1
Rapid technological change does not only affect high-tech
companies that like to in-clude an e in their name. Michael
Hruby presents the example of sport shoes. Thirty years ago,
he argues, such shoes were inexpensive, made out of canvas,
and came in two designs and three colors. Today, their hightech descendants boast inflatable air bladders and gel inserts.
They come in dozens of styles, colors, and materials, and, of
course, are different for each sport. They are not athletic
shoes any longer, they are equipment. And they are not
cheap. Moreover, some of the household names in the
business, such as Nike, do not produce a single shoe.
Instead they use outsourcing to get the shoes manufactured
in low -labor-cost countries and concentrate on what they can

do best, that is, global marketing.
For a global marketer, rapid technological advances in general
and the unprece-dented speed of change in ICT in particular
have resulted in numerous new challenges; virtual
organizations, symbiotic relationships, electronic markets,
new forms of co-option, blurring corporate boundaries, and
flatter organizational hierarchies are among the most
important.
Although these challenges open entirely new business
opportunities, they also rep-resent fundamental threats to
established organizations. Companies have to learn how to
live with a high degree of volatility. John Stopford of the
London Business School elo-quently pointed to the reduced
value of incumbency. Companies that were success stories
only a few years ago are now fighting to survive;
Westinghouse or DEC spring to mind. On the other hand,
there are companies that have appeared virtually overnight.
In this context, the author coined the phrase mushroom
companies. A well-known char-acteristic of mushrooms is, of
course, that they grow virtually overnight but then often
disappear rather quickly. Consider Yahoo!, which provides
the largest search engine on the Internet. Only a few years
ago, Yahoo!s cofounder, David Filo, was a relatively poor exstudent. Today, his on-line service leads the field in both
traffic and advertising rev-enues. But while Internet search
companies such as Yahoo!, Infoseek, Lycos, and Excite raised
$170 million by going public in 1996, Internet search facilities
have become a com-modity. There are now hundreds of
ways to find and retrieve information on the Web. The
Internet search business, in which a number of engines
compete for a pool of will-ing advertisers, may soon take
some casualties. However, Yahoo! might well survive. It has
three times the market share of any of its competitors and
has the advantage of being the first kid on the block.
Another example is Netscape, which was founded in 1994 as
Mosaic Communica-tions. It offered the first version of its
Internet navigator one year later and. at its peak in the first
quarter of 1997, generated revenues in excess of $150 million
per year. How-ever, since October 1997, the companys stock
has lost value on fears that it will be the big loser in its
browser war with Microsofts Internet Explorer.
Given these dramatic business histories, it is not surprising
that Microsofts CEO Bill Gates supposedly said, We are
always two years away from failure, and Intels CEO Andy
Grove coined the motto, Only the paranoid survive.
New Technologies Change The Rules of

Competition
In addition to increasing volatility, the move from an industrial
to a postindustrial e-econ-omy also presents the global marketer
with a new set of business rules. Long established principles,
such as the emphasis of retailers on location, location,
location, are passe. Why should a busy executive spend her
valuable time and fight traffic to buy some books or videos for
her children in town? She can do the same in much greater
comfort from home via the Web.
329
and drive information and communication technology (ICT)

into completely new applications: objects we talk to, drive
with, touch, or wear.
In a similar vein, Andersen Consulting stated that the new

economy will force com-panies to adopt some new game plans.
Among the most important follow.
1. Secure a dominant market position as quickly as possible.
2. Form alliances based on their potential for market access and
synergies.
3. Anticipate very high start-up investments.
4. Defend positions through an ongoing process of
innovations.
We will look next at some of these issues in more depth.
1. Importance Of Dominant Market Positions
In the industrial environment, scale advantages have their
limits. This is referred to as decreasing returns to scale.
Although a large factory might be more cost-efficient than a
small one, there is a point at which adding capacity at the same
location will be uneconomical. The cost of adding labor and
material will exceed the added returns. This effect permits
smaller competitors to compete against those with larger
market shares, providing they can achieve production sizes that
yield optimal efficiency. Under the new technological regime,
the rule of decreasing returns to scale no longer holds
universally. In many cases, the optimal output is not
determined by the factory size but is based on the point of
market saturation. This can be observed in markets in which
fixed costs are much higher than variable costs. Examples are
computer software or pharmaceutical products, which demand
a high degree of intellectual factor input. The same holds for
products or services that become more valuable when used by
more people, that is, prod-ucts that develop into de facto
standard and profit from the frequently mentioned net-work
effect. Microsoft Office is an example that shows how useful it
is to use the same product used by many other people. In all
these cases, the returns achieved through in-creasing market
shares do not diminish over time but grow in a reversal of the
law of decreasing returns.
Being placed in such a technological environment, it is
important for companies to gain market share quickly and, as
Rangaswamy states, to achieve strategic control. This explains
why America Online (AOL) distributes; its disks through all
sorts of available media (e.g., glued into journals and handed
out at supermarkets). New subscribers are lured with
irresistible trial offers. Netscape pursued a different strategy.
It gave its prod-uct away in the hope of earning money with
follow-up deals. The new technological en-vironment has
increased the importance of achieving market share.
Conversely, the global marketer can no longer afford to
tolerate even small attacks from competitors and must be
prepared for a vigorous defense of its market position.
Global Perspective
U.S. Airlines Handoffs Raise Safety Concerns
A burgeoning practice of sharing or combining flights, known as codesharing, allows airlines to create market-ing alliances that give passengers
almost seamless travel around the globe. But the scramble for partnerships
into regions such (IS Asia and Africa-with some of the worlds least safe
airlines, has begun to trouble some airline exec-utives and federal officials.
330
China Airlines of Taiwan, for example, is an Ameri-can Airlines and

Continental Airlines code- share partner. Airclaims Ltd. of London, ,
which tracks airline accidents, lists three China Airlines crashes with
465 deaths in the past decade. And a 1996 Conde Nast survey listed
China Airlines as having an accident rate throughout its exis-tence of
11.43 fatal accidents per 1 million flights, com-pared with a 0.15 rate
for American and a 0.29 rate for Continental.
A person flying from Dallas to Taipei tonight for in-stance, would depart
on American Flight 691 and transfer in San Francisco to American
Flight 6123. At least thats what the ticket would say. But American
Flight 6123, which leaves shortly after midnight, is really China Airlines Flight 3, American Airlines has been quietly work-ing with the
Taiwanese airline on safety in the past few months, officials said
Under code sharing, one airline buys a block of tick-ets on another
airlines flight and lists the flight in reser-vation systems under its name,
or code. The tickets will read as if the passengers are flying on a U.S.
carrier even though they actually transfer to a plane flown by another
airline. Passengers are supposed to be notified, but many pay little
attention until they show up at the gate and find themselves boarding a
plane of a different color. Code--sharing is attractive for airlines because
it increases feeder traffic on domestic routes and makes an airlines
interna-tional reach seem much greater.
2. Importance of Strategic Alliances

The postindustrial e-economy is more and more
characterized by a dilution of tradi-tional corporate structures
and boundaries in favor of a move toward symbiotic
alliances with external partners. Companies involve legally
and economically independent firms to fulfill various tasks.
Technology is important in this context, since the use of ICT
leads to a reduction of transaction costs and, thus, promotes
the market and alliances orien-tation of companies.
Videoconferencing, electronic data exchange, extranets, and
other technologies offer companies involved in symbiotic
alliances cost-efficient means of communication.
Three types of alliances can be distinguished. Vertical
cooperation describes partner-ships between companies
active in different stages of the value chain, such as a collaboration between a manufacturer and a retailer in the marketing
of an innovative product. Horizontal cooperation involves
companies in the same industry, such as research and development cooperation of two or more microelectronic
companies. Diagonal coopera-tion, finally, refers to situations
in which companies from different industries collaborate.
While cooperation and alliances as such are not a new
phenomenon, the changes in the technological environment
have not only- made cross-country alliances easier to manage
but have also influenced the motivation behind the alliances.
Besides the desire to increase efficiency, it is now primarily the
desire to gain market access and market share that drives
cooperation. The desire to utilize network effects and to
achieve syn-ergies in products and services, for example, was
behind the cooperation between the American Broadcasting
Company (ABC), the New York Times, and America Online
(AOL). Indeed, the benefit of gaining access to its customers
allowed AOL to bill the other two companies $1 billion.
Airlines can serve as another example of strategic al-liances.
E-commerce permits airlines to utilize their brand names in
on-line reservations through so called code-sharing. This,
3. Importance Of Anticipating High Start-up Investments

Increasing returns to scale in many e-based industries
necessitate high start-up costs in order to achieve the desired
market share. A substantial part of the investment must be
committed for years before the revenues eventually exceed
the costs. AOL, for example, had to invest $500 million per
year into marketing and sales before it reached its current
position as market leader. Toys { Us recently announced
that it planned to update its Web site organized as a separate
company in order to fight increasing Web competi-tion in
the toy industry. The anticipated costs for this Web site
update are $80 million. Many e-based companies need the
backing of well-established, financially strong corpo-rations
or are forced to turn to the stock exchange to raise the
required capital. The high stock market valuation of the socalled Internet stocks in comparison to the stocks of traditional companies shows that the market, contrary to its
reputation as being too short -term oriented, is willing to
take a long-term view.
4. Importance of Ongoing Innovations
In the traditional technical environment, innovations were
primarily a means to gain a few points of market share. It
was a rare event that consumers changed allegiances in
droves. Information about goods and services diffused
relatively slowly and there were significant gaps between lead
and lag countries in the adoption of technology.
In todays technological environment, the situation is
drastically different. Not only has the diffusion speed
increased significantly (70 percent of the computer industrys
rev-enue, for example, comes from products that did not
exist two years ago), but also the penal-ties for falling behind
the latest world-class technological standard are quick and
sharp. Consider WordPerfect, which for a long time was the
worlds leading word-processing package. When Microsoft
Word offered a more up-to-date technological standard,
WordPerfect suffered a drastic fall.
Increasing use of ICT is leading to greater efficiencies in all
stages of the new-product development process. Many
companies are encouraging their employees, customers, and
suppliers to submit ideas for new products or
improvements through interactive Web sites or e-mail.
Toyota, for example, generated over 2 million suggestions
for improvements from its employees alone. After new ideas
are generated, expert systems can be used in the evaluation
of these ideas. At the design stage, computer-aided design
(CAD) and design teams that work in parallel in different
time zones substantially speed up this stage. lCT
applications such as virtual reality further aid the
development process. To achieve a better fit between product
features and customer needs, customers are increasingly involved in the design of the product. Smart, a European
automobile marque, for example, permits customers to
design their own version of the car on the Web.
Digital economy valuations

(1998)
Annual
Market
Traditional Economy Valuations

(1998)
Market Annual
Revenue
Cap
s
($m)
($m)
Company
149,800 14,700
Pfizer
Revenues
Cap
Company
AOL
($m)
2600.0
($m)
149800
Yahoo!
EBay
Amazon
Priceline
@Home
203.3
47.4
610.0
35.2
48.0
34500
24000
23000
17900
16800
34,700
24,300
23,000
17,700
15,100
18,400
15,500
15,900
16,900
26,300
E* Trade
CMGI
Real
Networks
285.0
91.5
64.8
12900
11200
5700
13,500
11,400
19,200
8,300
Allied Signal
J.P. Morgan
Alcoa
FedEx
Lockheed
Martin
AMR
Ingersoll Rand
5,500
11, 200
Toys" 5!" Us
Business and marketing analyses, running concurrently with the

technical develop-ment of new-product ideas, may use ICT in
the form of data mining to identify whether there is a likely
demand for the new product from existing customers. Finally,
simulated test markets again speed up the new-product
development process. Such approaches use mathematical
modeling of marketing mix data to gauge the likelihood of the
new prod-ucts success and may render real-life test marketing
superfluous.
Components of The Electronic Value

Chain
For global marketers, one of the most dramatic and relevant
effects of technological changes has been the death of
distance. As Frances Cairncross of the Economist put it: The
death of distance as a determinant of the cost of communications will probably be the single most important economic
force shaping society in the first half of the [21st] century. It will
alter, in ways that are only dimly imaginable, decisions about
where people live and work, concepts of national borders,
patterns of international trade. Its effects will be as pervasive as
those of the discovery of electricity. Some effects are already
emerg-ing in the shape of a reconfiguration of the value chain.
A major part of the attractiveness and dynamics of the new
technological environ-ment stems from the ability to
modularize, segment, or fragment the value chain into
small and distinct customer-oriented processes. ICT facilitates
the coordination between these modules in largely
nonhierarchical systems and increases the scope for outsourcing
specific modules. Closely related to the modularization within
companies is the trans-formation of linear value chains into
multidimensional networks. For the customer, it is often not
transparent which part of a transaction is carried out by which
particular member of the network For example, the customer
usually does not know which reser-vation system a travel agency
uses to book a flight. Indeed, most often the customer does
not care as long as the required goods or services are delivered as
requested. What ap-pears to emerge under the new technological regime is a network of specialists, which per-mits
participants to focus on their respective core values.
1. Context Suppliers
Context suppliers, also called portals, support the use of the
electronic channel both for customers and suppliers. Their
331
in turn, eventually results in higher market shares for the

globally networked partner airlines.
key functions are to offer access to the channel and reduce the
complexity of the electronic environment. Among the most
important context providers are Internet on-line services
such as America Online, Web browsers such as Netscape
Communicator and Microsoft Explorer, or search engines
such as Yahoo! and Lycos. In 1998, the top nine portals
generated approximately 15 percent of all Internet traf-fic.
However, their growth appears to be slowing down, and it
has been estimated that by 2003, the Internet traffic flowing
through the top nine portals will plateau at 20 percent.
2. Sales Agents
Sales agents support suppliers primarily through offering
high-quality address banks of potential customers. Metro-mail
provides an example. It offers suppliers carefully sifted address
banks of potential customers that typically contain a wealth of
information about customer preferences, demographics, and
other data. One of the latest services is referred to as the
firefly technique. It helps companies to target consumer
groups and provide special product offerings based on profiles
of musical and reading preferences.
Penop: Signing Up For E - Commerce

One of the last hurdles facing the introduction of e-com-merce and a
paperless business culture is the need for a signature on documents such as
contracts, loans, and gov-ernment-related forms. But Penop, a British
company, has achieved considerable success with its electronic sig-nature
technology that legally binds a handwritten digi-tal signature to electronic
documentation. Penop now has 60,000 users worldwide, mostly in the
United States, ranging from the Food and Drug Administration (FDA)
and judges in Georgia to insurance salespeople. Penops software is linked
to the personal computer either as an integral software kit or used via an
electronic signature pad now commonly found on laptops, dedicated PC peripherals, and Palm Pilots. When a manager writes his or her signature
on the pad, Penop notes 30 different phys-ical aspects of the action,
including pressure of the pen and its angle of elevation. The rhythm of
the action is recorded 100 times per second, as well as the exact symmetry in the curves of the script. The signatures elec-tronic profile is then
automatically encrypted.
To deter fraud, the date and time of the event are also logged. This
element delivers evidential force to the signature, says Christopher
Smithies, who founded the company with Jeremy Newman, and can be
used in future audit trails or forensic examinations. The software also
includes a ceremony box to remind the writer that a legally binding act
under common law is taking place. Even more important, Penops software
prevents the content of that document from being altered after it has been
signed. Penops chief financial officer, Robert Levin, says, Our
technologys security is much stronger than paper. . . . With paper, a buyer
can subsequently re-pudiate an order for whatever reason, but with secure,
ir-refutable electronic signatures this isnt so easy.
In the United States it is estimated that 2.8 million signatures are written
on paper every minute, and the total cost of printing and postage can cost
$50 each. But using Penop, the FDA has set up on-line drug trial forms
that open the way to a completely electronic application pro-cess for
pharmaceutical companies. In Gwinnett County, Georgia, where distances
are large, judges who once had to be visited in person by police officers to
sign off-hours arrest and home search warrants are now connected via PCs
332
to local police stations. A video conference link en-ables the judges to

discuss the Warrant and, if theyre sat-isfied, sign it using the Penop
system, which no one at the police station can tamper with, says Mr.
Levin. In Ten-nessee, the First American Bank offers insurance at its
retail branches using Penop software to verify signatures, and a local
insurance company with a sales force of 7,000 uses it to collect signatures
for policy application forms. American General Life and Accident, the
insurer, has saved $2 to $3 million in costs, cut its error rate to nil, and
accelerated the dispatch of policy certificates.
With the cost of peripheral digitizers falling from $200 to as little as
$30 Penop believes the market is ready to explode. Its an end-solution
that removes paper com-pletely,? says Mr. Levin. We think its the last
mile in en-abling e-commerce. Recently, the software has been made
compatible with Windows CE technology. In the United Kingdom, Penop
has been used at DSS offices in Liverpool to combat fraud based on
impersonation. When three dole claimants saw that they had to sign on a
computer, they left quickly, says Mr. Smithies. Penop also expects
digitizers to become widespread for the checking of signatures on credit
card transactions. Credit card companies charge retailers more when no
signature is involved in the transaction, says Mr. Smithies. And, by
contrast, identification via smart cards does not provide proof of intent.
Ours does. Soon, Penop will launch a second patented product that
combines its technology with that of IriScan, a U.S. company. James
Cambier, chief technology officer at IriScan, says his system will provide
confirmation of the persons identity while Penop will secure legal proof of
intent by the author as well as the bonding of the signature to the
document. In stream-lining the signatory process, whether across the
Internet, intranets, or extranets, Penop believes it can remove an
important and unnecessary bottleneck hindering the de-velopment of ecommerce.
3. Purchase Agents
On the customers side, electronic purchase agents help the
Internet shopper to find the desired goods or services.
Auto-By- Tel, for example, is a service that helps customers
find the right car for the right price. Similarly, search robots
such as Price SCAN permit con-sumers to find the best price
on thousands of computer hardware and software products.
Such programs automatically travel the Web and gather data
from magazine ads and vendor catalogs. Web robots are also
sometimes referred to as Web crawlers or spiders.
Companies such as BizBots are developing a real time 24 by
7 (24 hours a day, 7 days a week) automated market of
markets that link multiple sites in various business sectors
(such as chemicals) to provide complete transparency for
buyers and sellers.
4. Market Makers
Market makers are mediators that bring together buyers and
sellers and increase market efficiency. Typical examples are the
numerous auction sites that have sprung up on the Web.
According to its Web site, on sale, for example, had more
than 160,000 visitors per day and in excess of 1 million
registered users. And the need to innovate can also be felt in
this part of the supply chain. eBay, with some 5.6 million
registered users as the worlds leading person-to-person online trading community, recently announced the availability
of pagers featuring eBay a-go-go, a new service that allows
users to receive updates on their eBay auctions via pagers.36

PlasticNet.com for plastics, Metals.com for steel, and var-ious
other sites bring together buyers and sellers in business-tobusiness markets.
5. Payment And Logistic Specialists
Currently, one of the main stumbling blocks for the use of
electronic markets continues to be the means of payment via
the Internet. However, the development of efficient electronic payment systems is advancing rapidly. It is expected
that by the year 2005, some 30 percent of all consumer
payments will be based on digital payment systems.37 In the
meantime traditional credit card companies such as VISA are
managing the transfer of payments and the associated risks.
The box Penop: Signing Up for E-Commerce pro-vides
some insights on how a British company helps to overcome
one of the last hurdles facing a paperless business culture,
namely the need for a signature on documents.
Physical distribution via the Internet is only possible for
software products or in-formation services (e.g., investor,
stock market, and database information). All other products
have to be shipped via traditional channels. Nevertheless, the
Internet and the Web offer a completely new view of the
traditional distribution function. Although phys-ical
distribution was one of the core functions for the traditional
retail/ commerce sys-tems, this aspect can be unbundled and
outsourced using international distribution experts (e.g.,
UPS). Moreover, the logistic functions of warehouses get
outsourced to lo-gistic experts and software companies.
333
ODYSSEUS. INC. (THE DECISION TO GO.INTERNATIONAL.)
She faced him waiting. And Odysseus came, debating inwardly

what he should do; embrace this beautys knees in supplication
or stand apart and use honeyed speech, inquire the way to town
and beg some clothing? In his swift reckoning, he thought it
best to trust in words to please her-and keep away; he might
anger the girl, touching her knees.
-HOMER
The Odyssey, Book Six, The Princess
at the River, Robert Fitzgerald Trans.
In early 1991, Mr. Donald R. Odysseus, president of the
Odysseus Manufacturing Company of Kansas City, Kansas,
was actively considering the possibilities of major expan-sion
of the firms currently limited international activities and the
form and scale such expansion might take.
Odysseus was founded in 1926 by Edward Odysseus as a small
machine shop. By 1991, the head office and production facilities
of the company were located in a 500,000-square-foot modem
factory on a 30 - acre site near the original location. Odysseus
products were sold throughout the United States and Canada.
In1990, net sales were over $83,800,000 while after-tax profits
were about $4,835,000. In early 1990, Odysseus employed just
over 1,000 people, and its stock was held by 1,000 shareholders.
(The com-panys 1990 income statement and balance sheet are
given in Exhibits 1 and 2.)
Odysseus produced a line of coupling and clutches in-cluding
flange, compression, gear type, flex pin, and flexible disc
couplings, and overrunning and multiple disc clutches.
In all, the company manufactured about 600 different sizes and
types of its eight standard items. The companys single most
important product was the Odysseus Flexible Cou-pling, which
its research department had developed in 1985 and which,
produced in about 70 different sizes and combi-nations, and
now accounted for one third of Odysseuss sales. Odysseus
held patents throughout the world on its flexible coupling as
well as several other devices. By 1991, Odysseus had carved
itself a secure niche in the clutch and couplings market, despite
the competition in this market of larger firms with widely
diversified product lines.
Exhibit 1. Consolidated Income Statement, Year Ending
December 31, 1990 (In $ Thousands)
334
Income
Net sales
Royalties, interest, and other income
Costs and expenses
Cost of goods sold
Depreciation
Selling, administrative, and general expense
Interest on long term debt
Income before income taxes
Federal taxes on income (estimated)
Net income
$84700
174
$84874
$54019
1773
18845
219
$74856
$84874
$74856
10018
5157
$4861
Exhibit 2 Balance Sheet, December 31, 1990 (In $ Thousands)

Assets
Cash
5667
Marketable securities
3688
Accounts receivable
6399
Inventories
25578
Total current assets
41332
41332
Investments and other assets
1351
Property, plant, and equipment (net)
23177
Total assets
65860
Liabilities
Accounts payable
Dividends payable
Accruals
Federal income tax liability (estimated)
Installment on long terms debt
Total current liabilities
Ling term debt (20 year 67/85 notes final
maturity 1987)
Preferred stock
Common stock and retained earnings
Total liabilities
2015
745
3394
3752
277
10183
10183
5051
6370
44256
65860
Odysseus was not dependent on any single customer or

industry. Sales were made through distributors to origi-nal
equipment manufacturers for use in small motor drives for a
wide range of products including machine tools, test gear,
conveyors, farm implements, mining equipment, hoist-ing
equipment, cranes, shovels, and so on. No more than 10
percent of its output went to any single industry; its largest
single customer took less than 4 percent of production.
Speaking generally, Odysseus couplings and clutches were used
more by small- and medium-sized producers of general-.
The companys commercial objective was to operate as a

specialist in a product field in which its patents and dis-tinctive
skills would give it a strong competitive position. In the past,
the company had experimented with various products outside.
Its coupling and clutch line; it had tried to make components
for egg-candling machinery, among other things. The investment in these products was initially considered a means of
more efficiently utilizing the com-panys forging and machining
capacity, but the firm had not been particularly successful. The
Odysseus management had come to the conclusion that it
should concentrate its ef-forts on its line of couplings and
clutches; and in 1991, Mr. Odysseus stated the companys
corporate objectives ex-plicitly as being a coupling and clutch
manufacturer. New investments were made to develop better
products within this field, and to open new markets for
Odysseus products.
Odysseuss production and assembly facilities were lo-cated in
its modern-factory near Kansas City, Kansas. The site offered
ample room for expansion and was well 10-cated for both rail
and highway transportation. The com-pany maintained
warehousing facilities in Boston, Jersey City, Atlanta, Columbus, Ohio, and Oakland, California. The scale economies
stemming from concentrating pro-duction in one factory can be
seen from the following ex-amples. One of the companys
largest selling items, product K-2A (a flexible coupling component) produced in lots of 750, cost $5.19 each; in lots of 1,200,
$4.22 each. The incre-mental 450 units produced after the initial
750, therefore, cost only $2.6 each. Put differently, on this
particular prod-uct, a 50 percent cost saving could be realized on
the mar-ginal production from the 750-unit level to the 1,200unit level. Although specific cost savings from higher volume
varied among its products, a fundamental characteristic of
Odysseuss cost structure was that marginal cost typically was
significantly less than average cost and that importance economies of scale could be obtained by achieving larger lot sizes and
longer production runs.
Odysseuss cost structure was of course, dictated by its manufacturing process. In the first of three major steps m the
manufacture of couplings or clutches, steel bars or -tubing were
.cut and forged. Apart from the unit cost re-ductions stemming
from more complete utilization of the existing forging facilities,
economies of scale in this dependent were limited. Second, the
forged steel pieces were ma-chined to close tolerances in the
machine shop. Here cost varied significantly with lot sizes. For
most products, the choice among two or three alternative
methods of produc-tion depended on the lot size. If a large lot
size were indicated, special-purpose automatic machines with

large setup costs and lower variable unit costs were used.
Smaller lot sizes were produced on general-purpose turret and
engine lathes where setup time was less but unit costs were
higher.
Typically, production of smaller lot sizes was more labor
intensive than the larger runs. For example, one operates;
running three automatic machines could perform all the boring
and cutting operations on 300 2 12 inch coupling flange units in
an hour. The same output on general-purpose lathes and
boring machines would require about six personhoods. To set
up the automatic machines required a day and a half, however,
while the lathes could be set up in about two hours. Furthermore, the burden charge on the automatics was considerably
higher. On the other hand, of the third step, assembly did not
vary under different -sizes. (Exhibit 3 presents a breakdown of
the costs of some representative components.)
Mr. Odysseus regarded Odysseuss U.S. and Canadian market
position as a strong one. The -patented OdysseusExhibit 3 Typical Variation Of Production Costs With Lot
Sizes Product N 15 D
Operation
I. Foundry
II. Machine Shop
1. Boring
2. Turning
3. Facing
4; Drilling
5. Turning
6. Facing
7. Finishing
8. Finishing
Lots of 150
$51.67
Lots of 400
$51.6
55.67
14.17
19.79
32.23
18.95
19.95
18.76
17.95
32.
11.4
16.25
26.30
15.41
14.76
18.76
18.24
III. Assembly
7.96
257.10
7.96
$213.49
Product L-36G:
Lots of 3: $108.6 each
Lots of 4: $90.6 each
Flexible Coupling possessed unique characteristics that no other

coupling device duplicated, and many other Odysseus products
served special functions not performed by com-petitive devices.
Of course, other coupling and clutch sys-tems competed with
Odysseus, but no single company could be said to compete
directly by introducing an identical prod-uct line. Mr. Odysseus
estimated that Odysseus accounted for roughly 10 percent of
total sales of its products in the American market and that was
ample room for Odysseus to expand its sales in this domestic
market as the total market grew and through an increase in its
share of industry sales. Odysseus products were sold by distributors who generally, but not always, carried the entire line of
Odysseus couplings and clutches. These distributor organizations
were comple-mented by a 45-person Odysseus sales force.
In 1990, export sales were $1,353,862, on which the company
made a $161,174 operating profit. Although ex-port sales had
never been actively solicited, a small but steady stream of orders
for export trickled into the Kansas City sales office. These orders
335
purpose equipment than by large manufacturers pf highly

automated machines. Odysseuss sales manager believed that
demand for the companys couplings and clutches would benefit
from continuation of a long-term trend toward in-creased
installation of laborsaving equipment in medium enterprises.
This trend and the breadth of its market had provided some
protection against cyclical fluctuations in business activities.
During the period 1977 to 1990, sales had increased from $32
million to over $84 million; the largest annual decline during the
period had been 8 percent, while in the most recent recession year
sales had actually increased by 5 percent.
were always filled expedi-tiously, but the active exploitation of

export markets was considered too difficult in view of the
barriers of language, custom, and currency. Furthermore,
although he recognized that foreign wages were increasing more
rapidly than those in the United States, Mr. Odysseus had
always believed that Odysseus could not compete in export
markets because its costs in Kansas City were too high. Also,
tariffs imposed on Odysseus products by foreign governments
were typically 10 percent ad valorem or higher.
Odysseus sold all products on flat price basis (FOB warehouse)
to all customers. In-competing with other sup-pliers of similar
products, Odysseus stressed delivery time, quality, service, and
merchandising, but not price.
In its managements view, improvements in its products or in
delivery or service promised more than temporary competitive
advantage. Price-cutting moves, in contrast, would likely be
matched by competitors the same day. No added sales would be
gained, and total revenues would be cut. The companys export
pricing policy was identical to its domestic policy. This meant
that the foreign importer paid the U.S. free-on-board (FOB)
price plus freight and im-port duties.
Along with filling orders, Odysseuss activities outside the
United States and Canada consisted of a licensing agree-ment
with an English coupling manufacturer. In 1985, on a vacation
trip in England, where Odysseuss vice president in charge of
engineering had spent his youth, he met the chair-person of
Siren Ltd. of Manchester. Siren, a manufacturer of related
equipment with sales of $14.6 million in 1984, was anxious to
diversify by adding other power transmission products.
Consequently, Siren became interested in several Odysseus
patents, particularly those on the Odysseus Flex-ible Coupling.
In late 1985, Odysseus granted the English concern an exclusive
15-year license to manufacture and sell all present and future
Odysseus products in the United Kingdom. The licensing
arrangement specifically defined the United Kingdom to include
England, Scotland, Wales, and Northern Ireland. Siren was
granted also a nonexclu-sive license to sell products produced
from Odysseus pa-tents in all other countries except the United
States, Canada, Mexico, and France. The terms of the license
agreement stip-ulated a 1.5 percent royalty on the ex-factory sales
price of all products in which devices manufactured from
Odysseus patents were incorporated. The 1990 royalty income
from Siren amounted to $128,939 and was expected to rise to
$161,174 in 1991
especially interested in the German market for couplings and

clutches and was a licensee of a German brake shoe manufacturer.
In addition, Odysseus had a licensing agreement on the same
terms (1.5 percent royalty) with Scylla, S.A. Scylla was a mediumsized French manufacturer of clutches and com-plementary
lines located near Paris. The company was fi-nancially sound and
well headed by a young and aggressive management team. Scylla
had been granted an exclusive license in France and a nonexclusive license In Belgium to sell products incorporating
Odysseus-patented devices. Odysseus had entered the agreement during 1989 for an ini-tial period of 10 years. Royalty
income in 1990, the first full year of operation in France, had
totaled roughly $32,200. Odysseus expected a doubling of this
figure in 1991.
In February 1991, M. Scylla, the president of the French firm,
had proposed to Mr. Odysseus a closer asso-ciation of their
two companies. M. Scylla was anxious to expand his operations
and needed capital to do this. He, therefore, proposed that
Odysseus form a joint venture with Scylla. According to the
terms of the proposal, Odys-seus would bring $645,000 into
the joint venture, paid in cash, while Scylla would provide a
40,000-square-foot plant, equipment, a national distribution
system, and man-agerial personnel. Scylla S.A. would cease to
exist as a cor-porate entity; its expanded organization and plant
would become Scylla Odysseus, S.A. (SOSA). The original
owners of Scylla, S.A. (the Scylla family) would own 60 percent
of SOSA, and their return would be in the form of dividends
plus salaries of members of the Scylla family employed by
SOSA. Odysseus would own 40 percent of SO SA and, for tax
reasons, would receive fees and royalties rather than dividends
totaling 5 percent of the ex-factory price of all products
incorporating Odysseus patents.
Mr. Odysseus thought that he should give this proposal
serious attention. The French market for couplings looked very
attractive. Moreover, the geographical location of SOSA within
the European Community would make it possible to supply
the even larger German market from the SOSA piant near Paris.
M. Scylla had indicated that he con-sidered Germany a primary
target for future expansion.
Mr. Odysseus had noted Sirens success with consid-erable

interest. The royalty payments were a welcome ad-dition to
Odysseus income, especially since they had not necessitated any
additional investment. Mr. Odysseus felt that the licensee was
receiving very generous profits from this deal, as Siren had
almost tripled its sales (which by 1990 were equivalent to $35.5
million) during its five-year association with. Odysseus and its
equity had appreciated many times the total royalties of about
$483,522 that Odys-seus had received.
So far, Odysseus had not actively pursued business leads in

Germany in spite of several inquiries about li-censing from
German companies. Odysseus even had the possibility of
acquiring an existing German manufacturer of couplings,
Charybdis Metallfabrik GmbH (CMF) of Kassel. Mr. Odysseus
had learned that CMFs aging owner managers were anxious to
sell their equity interest in the company but would stay on in
managerial capacity. Odys-seuss British licensee, Siren, had made
it clear, however, that although it had no sizable business in
Germany, it con-sidered this market to be in Sirens sales
territory and a move into Germany by Odysseus without Siren
an un-friendly act. In the light of Odysseuss growing royalty
income from Siren, Mr. Odysseus did not wait to antago-nize
the British licensee.
During the five years Odysseus and Siren had worked together,
however, the English firm had made it under-stood that in
general it considered its territory to be the Eastern Hemisphere,
while Odysseuss was in the Western Hemisphere. Siren was
Mr. Odysseus had no ready means of precisely quan-tifying the

market potential for clutches and couplings in Germany and in
France. He knew, however, that the total market for Odysseuss
type L couplings in the United States was $72.5 million in.
336
In 1991, the European market with its accelerating pace of

industrial development and mechanization ap-peared to offer
great opportunities for Odysseus. Mr. Odys-seus was therefore
most anxious to capitalize on these opportunities, presumably
by manufacturing in Europe in cooperation with a European
firm. He saw three reasons why Odysseus should expand its
foreign operations.
First, the corporate objectives of focusing on a single line of
products sold in as large a market as possible-the policy of area
instead of products diversification-dictated expansion into
markets outside the United States and Can-ada. The nature of
the demand for Odysseuss products appeared to limit nearterm sales potential in less devel-oped areas but especially in
Europe. Odysseus couplings and clutches appeared to find
ready acceptance. Proof of this seemed to be contained in
Sirens success in the United Kingdom.
Second, an important improvement on the Odysseus multiple
disc clutch had been the result of European re-search. Mr.
Odysseus felt that by becoming an active par-ticipant in the
European market, the company could obtain valuable recent
innovations that would be important to its competitive position
in the United States. There was con-siderable activity in the clutch
and coupling field in Europe, and Mr. Odysseus wanted to be in
touch with the latest de-velopments in the industry.
Third, Mr. Odysseus was seriously worried about the trend of
costs in his Kansas City plant. He had heard that a French firm
was planning to invest in a manufacturing plant in Mexico
where wages were 16 percent of those in the United States.
How could Odysseus compete against this kind of cost
advantage? Ultimately, Odysseus might have to follow the lead
of US. watch and bicycle firms and perform much of its
manufacturing abroad and import parts, or even finished
products, into the United States. At the present time, Mr.
Odysseus felt that there was some reluctance on the part of
American manufacturers to buy foreign cou-plings and clutches,
and foreign competition was virtually nil in this market in 1991.
But Mr. Odysseus was worried about the future and wanted to
preserve Odysseuss com-petitive position by assuring a foreign
source of supply. Also, the company would be in a better
position to with-stand exorbitant demands from the local labor
union if it possessed alternative manufacturing facilities.
Before definitely deciding whether Odysseus should become

more deeply involved in foreign operations, Mr. Odysseus
wanted to review the ways this might be. done. First, Odysseus
could establish foreign markets by expand-ing export sales. Mr.
Odysseus believed, however, that Odys-seuss costs might be
too high for it to compete successful on this basis. Second, the
company could enter into addi-tional licensing agreements. This
it had done with Siren in England and Scylla in France, but there
was a definite ceiling on the possible profit potential from
exclusive use of this method. Third, the company could enter
joint venture with a firm already established in foreign markets.
Presum-ably, Odysseus would supply capital and know-how
and the foreign firms would supply personnel (both local
manage-rial skill and a labor force), market outlets, and familiarity with the local business climate. This approach appeared
particularly promising to Mr. Odysseus. Finally, the company
could establish wholly owned foreign subsidiaries. Mr
Odysseus saw formidable barriers to such action, since
Odysseus lacked managerial skill in foreign operations. They
were unfamiliar with foreign markets and business practices.
They did not have executives to spare from the Kansas City
operations who might learn the intricacies foreign business, and
the development of wholly owned operations from scratch
would require significant investment of time and money.
As he reflected on these issues, he looked at a set of tables on
global income and population, productivity, wages, exports/
imports, and trade and investment (Exhibits 4-9 on the
following pages) and decided to attempt to comprehend what,
if any, significance the data in these tables had for Odysseus. Mr.
Odysseus recognized that certain deep-seated ideas of his
tended to make him predisposed toward active development of
overseas business. These included a view that his business
should not shrink from difficult tasks- organizations, he
believed, couldnt stand still-the choice was one of moving
forward or falling backward. He considered taking the plunge
into less familiar areas and learning from the experience was
generally preferable to long-extended and expensive inquiry
before taking action.
Nonetheless, he wanted to be sure that the most basic issues
related to expansion overseas by Odysseus were thought
through before firm decisions were made.
337
1990, or 14 percent of the US. market. Odysseus assumed that

the coupling market in France was correlated with sales of durable
equipment in France, which were 12 percent of the US. total. The
French type-L coupling market, therefore, would be $8.7 million a
year, of which SOSA should expect to capture 14 percent, or
$1,218,000. Similarly in Germany, durable equipment sales were
20 percent of those in the United States. The type-L coupling
market could, therefore, be expected to be about $14.5 million,
of which a company using Odysseus patents and know-how
should obtain between 10 percent and 15 percent. Sales of
comparable lines by both Scylla, S.A. and CMF appeared to justify
these estimates; Scylla had sold $870,000 of a device closely
comparable to the type-L coupling, or 10 percent of the assumed
French market, and CMF had sold $1,160,000 of virtually the
same device, or 8 percent of the assumed German market.
Exhibit 4 (cont.)
Exhibit 4 Global Income and Population 1992

Global Income and
Population
1992
%01
GNP per
GNP
Populati
World
GNP
($ billion) Capita
on
Populati
($)
(million)
on
Country Summary
World Total
1,427.1
High Income
17,110.0
Triad Total
16,573.6
United States and
6,379.1
Canada
Japan
3,403.8
European Economic
6,790.7
Area
Other High Income
536.4
Upper-Middle Income 2,469.4
Lower-Middle Income 1,318.2
Low Income and
529.5
Unavailable Data
Expansion of High17,110.0
Income Countries
GNP per Capita
>$12,000
United States
Canada
Japan
EC
Belgium
Denmark
France
Germany
Italy
Luxembourg
Netherlands
Portugal
Spain
United Kingdom
EFTA
Austria
Finland
Iceland
Norway
Sweden
Switzerland
Asia
Hong Kong
Singapore
338
3,905
20,906
21,127
100.0 5,486.98
79.9 818.44
77.3 784.49
100.0
14.9
14.3
22,540
29.8
283.01
5.2
27,233
15.9
124.99
2.3
18,037
31.7
376.49
6.9
15,800
2,708
668
2.5
11.5
6.2
33.95
912.03
1,974.37
0.6
16.6
36.0
307
2.5
1,782.13
32.5
20,906
79.9
818.44
14.9
5,799.9
579.2
3,403.8
5,851.4
159.0
118.3
1,148.7
1,642.3
1,017.8
11.8
22,657
21,433
27,233
17,717
15,848
23,008
20,186
21,328
17,603
31,172
27.1
2.7
15.9
27.3
0.7
0.6
5.4
7.7
4.7
0.1
255.99
27.02
124.99
330.26
10.04
5.19
56.91
77.00
57.82
0.38
4.7
0.5
2.3
6.0
'0.2
0.1
1.0
1.4
1.1
0.0
268.7
17,820
1.3
15.08
0.3
53.8
456.4
974.5
843:2
153.3
139.3
5.7
104.4
211.1
229.5
114.7
76.3
38.4
5,123
0.3
10.50
0.2
11,514 2.1
39.64
0.7
16,886
4.5
57.71
1.1
25,883
3.9
32.58
0.6
20,012
0.7
7.66
0.1
27,763
0.7
5.02
0.1
21,652
0.0
0.26
0.0
24,381
0.5
4.28
0.1
24,536
1.0
8.60
0.2
33,971
1.1
6.76
0.1
13,138
0.5
8.73
0.2
12,845
0.4.
5.94
0.1
13,763
0.2
2.79
0.1
Global Income
and Population
GNP
($ Billion)
1992
GNP
% Of
Populati
per
World
on
GNP
Populat
Capita
(Million
ion
($)
)
16,771 0.0
0.17
0.0
24,365 0.0
0.06
0.0
12,798 0.0
0.11
0.0
16,865 1.7
20.98
0.4
17,662 1.4
17.52
0.3
12,834 0.2
3.46
0.1
Caribbean
2.9
Bermuda
1.4
Virgin Islands, U.S.
1.4
Oceania
353.8
Australia
309.4
New Zealand
44.4
Oil-Producing
4.07
0.1
65.0
15,977 0.3
Countries
Kuwait (est.)
35.3
15,136 0.2
2.33
0.0
United Arab
29.7
17,1 07 0.1
1.74
0.0
Emirates
Exhibit 5 Productivity and investment in the world Economy, 1971
1990 (Thousand of 1980 Dollars)
Gross Product per

Worker
Developed market
economies
Eastern Europe and
USSR
Developing Countries of
which:
Africa
Asia, excluding West
Asia
Latin America and
Caribbean
World
Investment per Worker
Developed market
economies
Eastern Europe and
USSR
Developing Countries of
which:
Africa
Asia, excluding West
Asia
Latin America and
Caribbean
World
1971-75
1976-80
1981-85
1986-90
20.2
22.2
23.0
25.8
6.0
7.3
8.2
9.2
1.5
1.7
1.8
1.9
1.8
2.0
1.8
1.8
0.6
0.8
0.9
1.2
5.4
6.0
5.9
5.8
5.5
6.0
6.2
6.6
5.1
5.2
5.1
6.2
1.9
2.3
2.3
2.4
0.3
0.4
0.5
0.5
0.4
0.5
0.4
0.3
0.2
0.2
0.3
0.4
1.2
1.5
1.1
0.9
1.4
1.5
1.5
1.6
Indexes of Hourly Compensation Costs for Production

Workers in Manufacturing Selected Countries: 1975 to 1989
United States = 100. Compensation costs include pay for time
worked, other direct pay, employer expenditures for legally
required insurance programs, and contractual and private
benefits plan, and for some countries, other labor taxes. Data
adjusted for exchange rates. Area averages are trade-weighted to
account for difference in countries relative importance to U.S.
trade in manufactured goods. The trade weights used are the
sum of U.S. imports of manufactured products for consumption (customs value) and U.S. domestic exports of
manufactured products (x.a.s. value) in 1986; see source for
detail.
Area or Country
1975 1980 1985 1987 1988 1989
United States
Total
OECD
Europe
Asian newly indo
economies
100 100 100 100 100

62 70 54 75 82
75 83 85 91 99
82 103 63 101 105
100
82
97
100
12
13
16
19
23
Canada
91
85
83
89
98
103
Brazil
Mexico
Australia
Hong Kong
Israel
Japan
South Korea
New Zealand
Singapore
Sri Lanka
China: Taiwan
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
14
31
67
12
35
48
6
50
13
4
6
68
101
99
72
71
100
27
47
73
100
103
107
25
41
113
96
14
30
66
15
39
57
10
54
15
2
10
87
133
111
84
91
125
38
60
81
122
123
119
21
61
127
113
9
16
63
13
31
50
10
34
19
2
12
56
69
63
62
58
74
26
45
56
59
69
82
12
37
75
75
10
12
70
16
47
81
13
51
17
2
17
98
112
109
100
93
126
34
60
91
97
116
129
19
59
113
127
11
14
81
17
55
92
16
59
19
NA
20
101
112
115
113
94
131
36
70
93
100
117
136
19
64
121
130
12
16
85
19
54
88
25
55
22
NA
25
95
106
106
116
89
123
38
66
92
NA
109
131
19
64
122
117
United Kingdom
52
76
49
67
76
73
Exhibit 8 20 Leading Exporters And Importers In World

Merchandise Trade In 1990
Imports (CIF)
1. United States [1]
2. Germany [2]
3. Japan [3]
4. France [5]
5. United Kingdom
[4]
6. Italy [6]
7. Netherlands [8]
8. Canada [7]
9. Belgium [9]
10. Spain [11]
11. Hong Kong [10]
12. Korea [13]
13. Switzerland [12]
14. Sweden [16]
15. China, P.R. [15]
16. Singapore [14]
17. Austria [18]
18. Australia [17]
19. Thailand [20].
20. Denmark 119]
1990 '90/'89 Exports (FOB)

516,987 4.88 1. Germany [2]
346,153 28.35 2. United States [1]
235,368 12.23 3. Japan [3]
234426 21.47 4. France [4]
5. United Kingdom
2,22,777 12.67
[5]
18984 18.94 6. Italy [6]
12698 -20.86 7.Netherlimds [8]
124,422 3.87 8. Canada [7]
119,971 21.83 9. Belgium [9]
87,696 22.70 10. Hong Kong [10]
82,474 14.30 11. Korea [11]
69,640 13.61 12. Switzerland [14]
58,194 -16.49 13. China, P.R. [12]
54,435 11.15 14. Sweden [13]
52,275 -10.31 15. Spain [16]
49,667 -18.44 16. Singapore [15]
49,146 26.08 17. Austria [18]
42,\)32 -6.46 18. Australia [17]
33,379 29.52 19. Denmark [19]
31,760 19.00 20. Norway [20]
1990 '90/'89
410,104 20.18
393,592 8.19
287,581 4.98
216,580 20.73
185,160
21.54
170,348
131,802
131,665
118,156
82,160
64,956
63,784
60,920
57,574
55,642
52,752
41,265
39,837
35,065
34,030
21.20
22.22
9.50
18.14
12.33
4.21
23.79
18.00
11.69
25.06
18.11
29.34
5.78
24.76
25.75
Note: Figures in brackets indicate rank in 1989.

Exhibit 9 Trade and investment Exports and imports of the
world to and from the Areas Listed
Exports (FOB) Imports (CIF)
1988
Areas
IFS World Total (US$ Bi) 2,699.3
DOTS World Total
2,693.4
Ind. Countries (US$ Bi)
1,958
Africa
Asia
Europe
Middle East
Western Hemisphere
USS and selected other
Countries n.i.e.
Memorandum Items
EEC (US$ Bi)
Triad** (US$ Bi)
Oil-Exporting Countries
Nonoil Developing
Countries
Annual Percent Change
World
Industrial Countries
Africa
Asia
Europe
Middle East
Western Hemisphere
USSR and selected other.
Countries n.i.e.
1989
1990
1988
1989
1990
2,913.8 3,325.0 2,774.8 3,009.4 3,455.0

2,912.8 3,339.6 2,773.8 3,002.2 3,450.6
2,118. 2,449 2,016.1 2,160.9 2,500.1
935,95
689,839 744,726 835,509 746,592 832,674
4
64,507 65,103 73,846 66,131 74,466 86,196
342,136 381,836 433,172 362,822 403,131 456448
80,139 83,095 95,105 84,684 85,714. 86,086
150,38
99,008 100,572 105,801 103,082 124,568
7
156,83
104,048 114,120 127,585 129,874 144,794
7
81,676 86,095 73,905 78319 78,997 68,476
1,043
1,740
1,125
1,881
1,357 1,058 ' 1,122 1,359

2,182 1,780 1,909 .2,208
195,41
96,543 98,488 108,864 132,497 160,121
9
740,53
593,296 646,238 726,646 614,095 672,553
5
14.4
13.2
18.1
12.1
29.0
5.7
7.4
11.4
8.1
8.2
8.0
0.9
11.6
3.7
1.6
9.7
14.7
15.7
12.2
13.4
13.4
14.5
5.2
11.8
14.6
14.9
14.1
5.9
22.5
11.4
-3.1
15.1
8.2
7.2
11.5
12.6
11.1
1.2
20.8
11.5
14.9
15.7
12.4
15.8
13.2
0.4
20.7
8.3
14.8
5.4
-14.1
8.5
0.9
-13.2
339
Hourly Compensation Costs-Industrial Structure
1. Should. Odysseus expands international business
operations?
2. Rightly or wrongly, Odysseus management has. decided in

the affirmative. What form should these operations take?
What scope will be required for Odysseuss international
activities to achieve suc-cess? Possible forms, which in turn
may be combined, include (a) exporting, (b) licensing, (c)
joint ventures, and (d) wholly owned subsidiaries, either by
starting them from scratch or by acquiring one or more
existing companies. This decision should take into account
Odysseuss capabilities (as determined, for example, by its
products, its capital and labor strength, and its marketing
and research needs) as well as the industrys competitive
requirements and foreign conditions, such as trade and
business barri-ers, the number and sizes of countries to be
covered, and political and business risk.
4. Evaluate the Scylla, S.A. proposal and the Charybdis

possibility.
5. Recommend a global strategic plan to Mr. Odysseus
3. Evaluate the arrangement with Siren, particularly the

following questions:
a. What assumptions were in Mr. Odysseuss mind when he
concluded the licensing arrangement
with Siren?
b. Do you consider it a success?
c. How does the timing of this arrangement fit into Odysseuss
overall business strategy?
340
Babe Ruth toured Japan with an All Star team in 1931. Pro
baseball resumed in Japan after the war in 1950. Japanese teams
play each other all the time. There are 12 professional teams,
divided into two leagues, the Pacific and the Central. The
champion from each league plays in an end of season
playoff, a Japanese World series. The teams are:
million. It can draw on a population of nearly 30 million in a

100 square mile radius (due to Japans excellent and fast public
transportation system). The 56,000 seat arena also hosts track
meets, bicycle races (on which big bets are placed in Japan),
rugby matches, and events that have been as diverse as Michael
Jackson concerts and Mike Tyson boxing matches.
To combat the greater financial strength of the Central League,
the Pacific League began importing U.S. players. The practice is
now standard in both leagues. Each team can have two active
foreign players, with an additional imported player in the
minor leagues who can be called up in case of injury. Japanese
baseball now offers an opportunity for the young U.S. ballplayer
who almost makes the U.S. major league teams. An example is
Jim Paciorek, who played in the Milwaukee Brewer farm club
organization for five years. Unable to make the Brewer team, he
moved to Japan to play for the Taiyo Whales in Yokohama.
Central League
Pacific League
Yomiuri Giants
Nippon Ham Fighters
Yakult Swallows
Lotte Orions
Taiyo Whales
Seibu Lions
Chunichi Dragons
Nankai Hawks
Hanshin Tigers
Kintetsu Buffaloes
Hiroshima Carp
Hankyu Braves
Four of these teams are located in Tokyo and four in Osaka; all
teams are owned by corporations. The Yomiuri Giants are
owned and run by Japans leading newspaper chain, the
Yomiuri. The Chunichi Dragons are owned by another
newspaper chain. Five teams are owned by railroads: Seibu,
Hankyu, Kintetsu, and Nankai, all ion the Pacific League, and
the Hanshin Tigers in the Central. Other team owners include
Taiyo, a fish producer; Nippon Ham, a meat producer; Lotte, a
chewing gum manufacturer; Yakult, a soft drink company ;
and Maxda, which owns the Hiroshima Carp. The Central
League is stronger, with an attendance of 12million compared
with 7 million for the Pacific League in 1987. The Yomiuri
Giants alone are on TV five or six nights a week, and all 65 of
their home games and most of their away games are covered.
Similarly, Taiyo and Yakult both have separate TV contracts and
hence strong fan loyalty, and home attendance is high.
The Japanese players are smaller in size. They come up the
traditional way: through high school baseball and then into
Japans only minor league or through four years of college.
Once in college, they cannot be drafted for four years. Japanese
players know that the Americans are better paid and stronger,
and accept that the current generation of U.S. players is bigger,
stronger, and faster and hits with more power than most
Japanese players. Mike Lum, a hitting coach with Kansas City
who played in Japan, noted, however, that Japanese pitching is
good. It helps that the Japanese strike zone is wider and deeper,
from below the belt to the armpits.
As in the United States, TV is a strong influence on baseball.
The Yomiuri Giants have a national following because of TV
and with Sadaharu Oh (who has 868 home runs to his name)
they won nine straight national championships between 1965
and 1973. They play in the new Tokyo Dome, modeled after the
Metrodome in Minnesota, which they share with the Nippon
Ham Fighters.
Built by the Korokuen Corp. for about $280 million, the new
Tokyo Dome produced first year revenues of over $325
The foreign players, gaijin sanshu, are well paid, with the
appreciating yen making Japanese salaries look even better. For
example, Mike Easler signed with the Nippon Ham Fighters in
May 1988 for $975,000 for one year. He had been cut by the
Yankees and, at age 37, saw Japan as his only chance to continue
playing in the majors. Others signing the same year were Doug
DeCinces, Bill Madlock, and Bill Gullickson. The transition was
made easier by playing in the Tokyo Dome, the only real major
league facility in Japan. It may have helped that Easler had
played 10 seasons of winter ball in Mexico and Venezuela, thus
becoming more comfortable with foreign cultures. Salaries for
U.S. baseball players are high when compared with the following average 1988 salaries for Japanese players: $93,680 for
pitchers, $76,160 for catchers, and between $112,000 and
$113,000 for infielders and outfielders in the Central League.
But for the Japanese player, the pay difference is not a major
bone of contention: The player is ultimately a company
employee who knows that the company that owns his team will
absorb him into the company culture and find him a position
if he quits baseball.
The pay is good, but life is not easy for the U.S. ballplayer in
Japan. For one thing, the entire team relies heavily on him. For
another, although teams hire inter
Prater who works the player nonstop he and his family must
adjust to the culture, the scarce housing and the expensive way
of life. The there are the playing fields them selves. The Tokyo
dome is fine, as are three other stadiums that have artificial turf.
But the remaining clubs have all dirt infields and grass outfields,
or even all dirt fields. When it rains, the field can be a swamp,
and playing during the hot season has been compared to
playing during the hot season has been compared to playing on
a basketball court. The work ethic, quintessentially Japanese,
often is the undoing of the aging U.S. baseball player who
comes to Japan expecting some easy money. It is not surprising
341
CASE STUDY 1
BASEBALL: THE JAPANESE GAME
that, faced with the demand to believe that the company or

team is what matters and that the manager must be listened to,
many U.S. players quit after a year.
Questions
Randy Basss story is an example of the culture gap. He became

Japans leading slugger, winning the triple crown in Japan, but
he left the hashing tigers for San Francisco in may 1988 when
his son was hospitalized. He was contravening the Japanese
cultural code that puts loyalty to the company above personal
considerations. When he did not return by June 17, as he had
agreed, he was released.
2. How would an aging U.S. baseball player market himself to a

Japanese team?
Unlike U.S. baseball, Japanese teams play each other frequently

because there are only six teams in each league. Pitchers watch
and learn about batters. The pitchers chief weapons are the
curve, the slider, and the forkballin other words, control.
After facing a hitter so many times during the Japanese season
(and studying him like a hawk), the better pitcher has a distinct
advantage. As washer puts it, what you cant before the
everything in great detail. The practice habits and work habits
here are just exceptional. Its like spring training every day.
One other difference is the stress on pitching completed games.
Easler thinks that this builds confidence because the pitcher
learns to bail him out. : patience is the key to hitting in Japan.
You are definitely going to have to hit the ball to be a dead pull
hitter, has returned to the spray hitting style that he learned
under Walter Harinhiak with the Boston Red sox. As a result,
he was hitting 3.12 after 39 games by mid July 1988.
Will There Be A True World Series Some

Day?
What of the future? Because of the strong yen, Japanese clubs
can bid more dollars for better U.S. players if they so choose.
The concentration of teams in Tokyo and Osaka may hinder
attempts to expand baseball in Japan by adding new teams in
other cities. On the other hand, the success of the Tokyo Dome
points to the possibility of moving franchisees and creating
expansion teams linked to new major league quality stadiums.
And now that baseball is an Olympic sport, on the horizon is
the possibility of Japanese U.S. world series, with the
Japanese champions challenging the U.S. World Series winners.
This means raising the quality of Japanese baseball, increasing
the size of the roster from the present 25 men, and perhaps
raising he current three man ceiling for foreign players.
Baseball Trade Opportunities

Selling U.S. baseball to Japan is an export possibility.
Growing TV revenues in the United States may indicate that a
similar high paying market might exist in Japan. TV rights for
baseball games to be shown on Japanese TV might bring yen
based revenues for U.S. entrepreneurs. Promotional opportunities for ballplayers in Japan are under exploited, being currently
under control of the company owning the team. There are no
Japanese baseball cards. And if baseball can be exported, can
ownership rights be far behind? Would Sony buy up a U.S.
baseball team? After all, the owner of Nintendo was given
permission by U.S. baseball team owners to purchase the Seattle
Mariners when the team was for sale. If the two richest markets
in the world are baseball crazy, there are surely opportunities for
further trade in baseball between these nations.
342
1. How is Japanese baseball marketed? In what ways does it

differ from the selling of U.S. baseball?
3. How is the growing popularity of baseball in Japan likely to

affect U.S. baseball?
4. Does U.S. Japanese collaboration change the market for U.S.
baseball players? How should the Major League Players
Association ( the union ) react to protect its member
interests?
5. Why would U.S. entrepreneurs and agents be interested in
Japanese baseball players?
6. Why would someone in Japan want to buy a U.S. baseball
team? What are the implications of an internationalization
of the baseball scene?
7. How can trade in baseball be seen as an example of trade in
services?
CASE STUDY 2
SONY CORP
Sony has ling been known for its innovative consumer electronics products, such as the pioneering Walkman. It is an
international corporation with 70 percent of its sales coming
from outside Japan and non Japanese owner owning 23
percent of its stock. Sony manufactures about 20 percent of its
output outside Japan. As of 1986 its sales mix was video
equipment 33 percent, audio equipment 22 percent, TVs (the
Trinitron) 22 percent, and other products (recorded, floppy disk
drives and semiconductors) 17 percent Sony has always
emphasized R & D spending about 9 percent of sales on it.
The Betamax Experience

Sony has been facing increasing competition form other
Japanese companies and from countries with lower labor costs,
such as Taiwan and South Korea. Its strategy of inventing new
advanced technology products and then waiting for the market
to buy seemed to be faltering. Sony biggest failure was the
Betamax, however. Having invented the Betamax format for
VCRs it effused to license the technology to other manufacturers. Betamax was higher priced, and recording times were
somewhat shorter than those of the competing VHS format,
although quality of the images was better.
Sony competitors such as Matsushita (Panasonic), Hitachi and
Toshiba, all banded together around the VHS format. They
licensed the format to any manufacturer who wanted it.
Consequently the total number of VHS set produced and sold
was far higher than the Betamax format volume and resulting
economies of scale. Also, far more software was available for
the VHS format; that is movie producers were more likely to
make home video copies of their films available for purchase
and rental on VHS tapes. This further increased demand for
VHS format VCRs. The net result was that Betamax gradually
faded, and Sony stopped its production in 1988.
Rethinking Basic Strategy

The difficulty of selling advanced technology coupled with the
speed of imitation and the impact of low wage country competitors led Sony to change its basic corporate strategy. The CBS /
Sony Group, Inc. a 50-50 joint venture between Sony and CBS,
Inc. has grown dramatically over a 20 year period to become an
industry leader in the multibillion yen Japanese music industry. It
release recordings in Japan Hong Kong and Macau on compact
disk and other format by popular Japanese artists such as Seiko
Matsuda and Rebecca, as well as foreign artists.
Sony Diversification into the

Entertainment industry
Sonys diversification into the global music industry is, there
fore, not unexpected in January 1988 it agreed to buy CBS
Records worldwide for $2billion. But subsequent moves have
dramatically transformed Sony as it moves to become more a
service company. Table 1 summarizes the major entertainment
industry acquisitions made by Sony since 1988.
Table 1
Form Electronic To Entertainment : Sony Acquisitions
Since 1988
Date
October 1989
September 1989
January 1989
January 1989
Company Acquired
Guber peters productions
Solumbia pictures
Tree international country
music publishers
CBS Records
Price
$200 millions
$3.4 billion
$30 millions
$ 2 billion
The acquisitions themselves are large totaling over $5 billion or

about half of Sonys total assets. More interesting is the
reasoning behind Sonys decision to acquire a slew of entertainment companies. A summary of the acquisitions follows:
CBS Records For $2 billion, Sony was able to acquire control
of the worlds largest record company, CBS Records. CBS
Records, Inc. consists of CBS Records (Domestic), CBS
Masterworks. CBS Records International, CBS/Sony, Columbia
House, and CBS Musicvideo. The Acquisition gave Sony an
immediate international presence in the music industry.
Traditionally selling music hardware, Sony was one of the
worlds largest producers of compact disk players (CDs), tape
recorders (including the phenomenally successful Walkman),
and stereo television. But all of these products were subject to
competition because innovative ideas could be imitated and
prices cut. Sony realized that being in the music business
allowed it to take advantage of the entire installed base of
compact disk players around the world, not just those it alone
manufactured. Imitation was impossible because each musical
performance was unique; however, managing such a creative
business required great cultural sensitivity and the use of local
managers rather predominantly Japanese management.
The music industry is a fast-growing business. In 1988 over 150
million CDs were sold in the United States alone, and there
were over 11 million CD players in households.
Columbia Pictures: The major attraction of Columbia Pictures
was its large library of movies that continue to earn revenues
every time they are shown at cinemas and on video around the
world. Columbia also had a profitable TV production and
syndication business. Thus, the acquisition gave Sony products
to sell to owners of TV sets and VCRs in a manner analogous
to providing music on record and tape for owners of CD
players and tape recorders.
There are two other reasons that Sony might have found
Columbia Pictures attractive. First, TV in Japan is being
liberalized, with a doubling in the number of TV stations and
on airtime because of the launch of satellite television. There
will be a sudden increase in demand for product, such as films
343
and TV shows, to fill airtime on Japans satellite stations. Sony

will be in a position to supply such product for premium prices
in yen at a time when demand will be increasing.
The other reason is hardware related. Sony has been trying to
establish its 8 mm camcorder format, again in compensation
with a VHS-C- based format from competing Japanese
producers. This standards battle is reminiscent of Sonys
experience with Betamax. This time, however, Sony realizes the
need to build the installed base. Hence, it has licensed the 8 mm
technology to other producers and is willing to manufacture the
camcorders for sale by others under their brand names. Sony is
thus making sure that volume sales of the 8 mm camcorder will
be achieved, resulting in economies of scale and lower prices
The next step is to stimulate demand by making available a
variety of movies in this format. Sony can do this by putting
the entire Columbia Pictures catalog on 8 mm video, thus
giving consumers a reason to buy the camcorder, which can also
be used as a video player. This availability will be crucial to the
success of Sonys newly introduced 8 mm video walkman, a
pocket-sized portable color TV set that will appeal to the extent
that videos are available for use with the video walkman.
company. The ownership of rights to several generations of his

country songs guarantees a steady stream of revenue, especially
as the catalog becomes a popular around the world and in Japan
through Sonys music and video production divisions. This is a
minor acquisition, but it may point to a trend toward acquiring
other music publishing companies as a means to further control
the software end of the entertainment business.
Sonys Future
Looking to the future, Sonys heavy involvement in new
hardware technologies such as advanced high-definition TV,
computer workstations, and compact disk interactive technology
will require further research and development; but their
acceptance by consumers will depend equally on the availability
of software products that showcase the new hardware products.
Sonys long-term plans focus more on services and entertainment; paradoxically, this will help it to become a stronger
hardware company and to reduced risk by smooth fluctuations
and providing the stability of recurring earnings from sales of
music film and videotapes.
Questions
Thus, with the CBS Records and Columbia Pictures acquisition,

Sony becomes one of the worlds major producers of entertainment hardware and software: record producer and CD player
producer; a leading manufacturer of TV sets and an owner of a
library of classic films.
1. What were the threats facing Sony?
Guber-Peters Productions When Sony purchased Columbia

Pictures; it obtained a film library as well as a studio for film
production. Columbia had gone through four producers in five
years, however, and needed more capable film production
management. The logical step was to take over one of
Hollywoods most successful film production companies,
Guber-Peters (G-P) (formerly Barris Productions), which had
been responsible for Batman, one of Warner Communications
all-time best selling films. In fact, G-P had signed a five-year
exclusive agreement with Warner to produce movies on its
behalf. G-Ps expertise lay in spotting hot properties, signing
them, and then convincing major studios to bankroll the films
and distribute them. G-P had a unique culture-specific talent for
working in and with Hollywood, producing successful films for
the huge U.S TV and film audience. Sony acquired G-P for over
$200 million, or about five times G-Ps latest year revenues. The
two key producers, Peter Guber and Jon Peters, received about
$50 million for their stock in G-P, a 10 percent stake in future
profits at Columbia Pictures, 8 percent of the future appreciation of Columbia Pictures market value, and about $50 million
in total deferred compensation.
3. What are the risks of Sony strategy of buying US

entertainment companies?
Warner immediately sued Sony for acquiring G-P. Warner

refused to release Peter Guber from a long-term contract. Of
course, Sony and Warner ultimately settled out of court,
exchanging valuable assets such as a share of the movie studio,
video rights, and so on. Clearly, Sony wanted the management
talent, Americans who knew Hollywood and could hire the
right people, had the appropriate financial and creative contacts,
and, most important, knew how to make hit films.
Tree International Sony also acquired, through CBS Records,
the ownership of Tree, the premier country music publishing
344
2. Trace the various entertainment industry acquisitions made

by Sony. Why did Sony make these acquisitions? Have they
helped the company compete more effectively in
international markets?
4. What would you recommend that Sony do next? And how

do you think Sony Japaneses competitors might respond to
its action?
5. Is Sony becoming a global company, or is it becoming a
company with products adapted for each specific country
market?
6. What generalizations can you make about the global service
industry from Sonys experience?
In December 1994 Sony announced that it was taking a $ 2.7

billion write off in connection with its 1980 acquisition of
Columbia pictures. Furthermore, Sony pictures reported a loss
of $500 million for the year; the combined losses of $3.2
billions were dome of the largest losses incurred in
Hollywoods shortly there after, Matsushita, which had copied
Sony by buying MCA, announced that it was selling MCA to
Seagram, incurring a large loss in the process. MCAs top
management had threatened to leave MCA because Matsushita
did not wish to invest additional funds into MCA, MCA a
main film producing partner Steven Spielberg, would have
accompanied MCAs management and stopped distributing his
films through MCAs.
Back in Japan meanwhile, an appreciating yen made Sony
consumer electronics products more expensive in its sport
markets. It was facing competitions from producers in south
Korea and Taiwan that could offer a basic VCR in U.S. were such
as Circuit City for $ 99 a price at which Sony could compete.
Changes at the Top

Major changes occurred within top management ranks at Mr.
Morita, Sonys founder, had suffered a stoke and withdrawn
form management involvement Mr. Ohga the CEO who had
himself undergone a by pass operation missed being able to
chat with his mentor, and the gradual decline in Sonys fortunes
led him to think carefully about what sort of person should
lead Sony into the 21st century. Both Morita and Ohga had
agreed years earlier that they would step down as president of
Sony at age 65. It had been widely assumed that an engineer,
Mr. Minoru Morio, the president of Sony audiovisuals
products and head of Sonys digital video disc (DCD) efforts,
would step in. Ohga, however, turned to a marketer, Mr.
Nobuyuki Idei as Sonys next president. Mr. Idei as Sony next
president. Mr. Idei had worked for Sony in overseas locations
and been in charges of marketing Sonys design center, responsible for songs merchandising and products promotions and
corporate communications. As such, he represented Sony across
the world at major trade shows and industry gatherings. His
appointment signaled a major change in Sonys strategic
directions and visions of itself. Mr. Idei was an enthusiastic
proponent of digital video, and saw opportunities for Sony in
the convergence of entertainment, consumer electronics
products, and PCs.
The Digital Video Era

Digital video could be to VCRs and films on videotape what
CDs were to the older analog LPs (long playing records). Digital
video allows entire films to be stored on CD-ROM sized disks
and accessed at any point, manipulated and reused.
Sony had been working with the Dutch company Philips in
developing a DVD standard that would be used in digital video
devices. Sonys standard called for a single-sided disk containing
about 3.7 gigabytes of information, equal to about 135 minutes

of video.
Establishing an industry standard can be enormously profitable, as can be seen in the examples if Intel and Microsoft- Sony
(and Philips0 earned a nickel in royalties for each CD sold. But
in 1993 Sony found out that Toshiba and Time Warner were
working on a DVD standard of their own. Their super-density,
or SD, format would use both sides of the disk and store five
gigabytes on each side; Time Warner also found it easier to get
the attention of movie studios in Hollywood and get them to
clarify what performance criteria they expected from DVD. (Mr.
Morio, who headed Sonys DVD effort, in contrast, spoke little
English and came from an engineering, not marketing,
background.) With mounting compensation form Toshiba and
Time Warner, Mr. Idei was asked to formulate a new DVD
strategy, which he crafted by stressing the role of DVD as a
format for multimedia PCs. By January 1995, Matsushita had
joined Hitachi, pioneer, JVC, Thomson, and Mitsubishi in
supporting the Toshiba SD standard. With the Betamax fiasco
possibly in mind, Sony ultimately compromised and agreed to
work out a unified DVD standard.
New Business Directions

One of Sonys successes has been the Sony Playstation, which
competed against the Nintendo and Sega 16-bit game machines,
but offered superior video and sound and faster speed through
32-bit processors. Planning for the playstation began in 1988
when Ken Kutaragi, who was designing Sony workstations
using advanced chips, realized that the prices of these chips
would fall to the point that it made sense to build game
machine around these 32-bit semiconductors, with added
features such as a CD-ROM input device and superior graphics
screen. However, game machines sell because their customers
want the hit games that are exclusive to that platform. Hence an
executive from Sony Music, which was a distributor on
Nintendo machines, suggested that Mr. Kutaragi think about
building reusable modules that programmers could use to
quickly create entertaining and impressive new games. Based on
this, Mr. Kutaragi built a dictionary of images that could be
combined on the fly to build game characters that could exhibit
subtle and lifelike movements, while cutting game development
time by half. Sony also created a joint venture with in the
company with Sony Music to focus on selling both hardware
(the Playstation) and software (that is, newly developed games).
This allowed the Playstation to be priced at $299 in the United
States, a full $100 below the competing Sega Saturn (with the
expectation that a growing installed base offered a fertile and
captive market for the sale of high-margin hit games, the typical
Nintendo owner purchased 6 to 12 games for a machine).
Sonys Playstation became the best-selling 32-bit game machine
in Japan and the United States in 195. About a year later,
Nintendo introduced its N64 machine and both companies
345
CASE STUDY 3
SONY IN 1996
reduced their game machine prices to under $150. Loyal

Nintendo fans brought its new machine in large numbers, but
Sonys lead and larger number of games available ensured that it
continued to hold a larger market share over Nintendo in the
new generation video game segment of the market.
Under Mr. Ideis leadership, Sony entered into an alliance with
Intel to make multimedia PCs, what he termed Intelligent
TV. He visualized the intelligence of computers, the access
power of on-line communications, and the visual power of
full-motion video integrated into a new form of viewing
experience. Other new products that Sony targeted for the age
of digital TV included wide-screen living room televisions that
could access the Internet using Web browsers, eyeglasses onto
which TV and E-mail could be projected using wireless
technology, as well as low-cost computers acting a Web browsers The new Sony PCs could include Sony Playstation
game-playing abilities as well as the ability to access digital TV
programs, and use screensavers featuring images and sound
from Sony films and Sony music acts. Moreover, Sonys library
of 3,000 films and over 35,000 hours of TV programs would
be a valuable resource for an age of digital TV.
Outside the United States, Sony saw strong growth possibilities
in satellite TV. It formed a joint venture with Singapore-based
Argos Communications to launch a Hindi-language satellite TV
channel beamed to India. The channel would feature locally
produced Indian shows and movies, as well as films and
programs from Sonys library. Initially, the channel would be
offered free to cable TV operators who would redistribute it;
Sony expected to generate revenues from sale of advertising
time. Sony also became a partner in HBO OIC, a Spanishlanguage service aimed at Latin America.
Management Shake-up in the United

States
Mr. Schulhof, a physicist and jet pilot (like Mr. Ohga), was the
head of U.S operations and a close ally of Morita and Ohga. He
had authorized the payment of $200 million to buy GuberPeters Entertainment and to buy out their contract with Warner
Brothers. He allowed Guber and Peters to choose their
managers, sometimes resulting in the appointment of friends
and associates (Guber named his lawyer as the number two
executive). This may have resulted in an atmosphere where
politics and whom one knew became important.
Guber and peters had little management experience in running
studio, but spent lavishly, updating the gulver city studios at a
cost of $200 million. There were no cost controls, and several
new films released were expensive failures such as the last action
hero, Hudson hawk, geranium, and Frankenstein. Mr. Schulh
of also backed Sonys entry into programs for radio syndication
and into theme parks featuring Sony characters and goods. He
did not agree with the move into PCs, which he characterised as
allow margin business with very rapid change and short product
cyscles an environment with which Sony had no experience. By
the end of 1995 he had resigned form Sony, as Mr. Idei moved
to reestablish Japanese headquarters control over Sony pictures
and U.S. operations.
346
Sony Finances
Table 1 summarizes Sonys financial performance between 1996
and 1995. Sales grew dramatically, from $707 billion to over $46
billion in decade. 1995 sales were nearly evenly distributed across
Japan, the United States, and Europe, with sales of $ 13.9 and $
10.2 billion respectively. However, net income was at half the
profitability levels of 1986, and long-term debt grew tenfold.
Sony had to choose in allocating its cash flow between the
entertainment division and the support of R&D in the hardware
divisions. In 1995, sales of TV, audio, and video equipment were
about 58 percent of total sales, compared to about 20 percent
form music of films. In 1995, U.S. consumer electronics
revenue3s actually exceeded U.S. music and film revenues.
Alternatives for Sonys entertainment

operations
Matsushitas sale of MCA immediately raised questions as to
whether Sony should do the same. Mr. Idei remarked that
matsushita was shortsighted in selling its film division. In a
digital age, content and copyrights can be distributed in myriad
formats, and the large film library that came with the co. there
are few Hollywood film studios left to buy for any media
company eager to enter into the software or content generation
side of the businesss when Mr. Idei took over as his entertainment division in the united states. His priority, wanted to see
more pictures made with lower budgets, stressing cost controls.
When Mr. Schulhof, head of Sony U.S. operations, mentioned
that Sonys market share was rising. Me Idei remarked that he
was more interested in profits.
If Sony were to sell, several choices existed. Should it sell all of
to entertainment business? If so, whom should it sell to?
Mindful that it did not want to create a strong competitor
down the road. Interested parties included GE. Which owns
NBC-TV. News corp., which already has the fox studios, and
overseas buyers such as ploy gram and Bertelsmann, neither of
which had a major Hollywood studio. Another alternative was
to sell only part of the US. Entertainment business, perhaps
selling a portion in a U.S. pubic stock offering, or, selling a stake
in the company to a strategic partner.
Mr. Idei had specific ideas on how Sony should be run. He
expressed little interest in buying media channels as Disney did
with ABC buying a network in a digital age with so many
channels wont bring any benefits to us. He disliked the idea
of selling the U.S. music and film business and the taking on
of a partner for fear of losing control and having to put up
with interference from U.S. owners with different perspectives.
I also want to set a new future direction for our R&D. so that it
is not merely trying to extend our current business, but
attempting to identify new opportunities for the
Table 1
Sony Corporation: 1986-1995 Financial Statements ($ Billions)
Sales
Operating
income
Net income
Long term debt
Net worth
1986
7.700
0.200
.0245
0.880
3.700
1987
10.700
0.400
0.269
1.580
5.200
1988
17.100
1.200
0.562
1.670
6.900
1989
20.500
2.100
.0717
4.100
9.100
1990
26.100
2.100
0.827
4.910
10.400
1991
29.600
1.400
0.904
6.650
11.600
1992
32.200
1.00
0.292
7.650
12.400
1993
34.800
0.900
0.143
9.360
12.600
1994
40.40
-1.70
-2.97
10.49
11.70
1995
46.200
2.300
0.683
8.470
10.700
21st century, and of course DVD is a very high priority because

setting a format standard energizes the company.1
Question
1. Evaluate the performance of Sonys U.S. entertainment
division. Why did they do poorly?
2. What are the challenges facing Sony in 1996? Assess its
strategy for coping with these challenges.
3. Looking back would Sony have been better off not buying
into the U.S. film and music businesses?
4. What do you thing of Mr. Ideis approach to running Sony?
347
CASE STUDY 4
ENRON: SUPPLYING ELECTRIC POWER IN INDIA
Rapid economic growth in emerging nations, principally in
Southeast Asia, has taxed their existing infrastructure. Their
future growth is dependent on resolving bottlenecks in critical
infrastructure industries such as electricity generation and
transmission, roads, telecommunications, port facilities, rail
roads, and airline service. A particularly pressing need is to
increase electricity power GENERATION AND AVAILABILITY. Table 1 set out the relationship between GDP per capita
and energy production as well as energy consumption. Both
energy production and consumption rise with growing
incomes, and the current levels of energy consumption in
countries such as India and China are far below levels in
countries such as the United States. Chinas consumption
(below 600 kwh per capita) is at about one-quarter of the world
average, while Indias (below 300 kwh per capita) is at about
one-eighth of the world average.
There is no question that energy consumption and production
must rise if these emerging nations are to continue their rapid
growth. If not, energy shortages will pose bottlenecks, impeding and arresting growth and putting a damper on the rising
prosperity of people all across Asia. The World Bank estimates
that Asia will need 290,000 megawatts (mw) of new generating
capacity until 2004, which works out to new capacity coming on
line at the rate of 2,000 to 2,400 mw a moth! Such a pace of
new capacity build-up will require investments of $35 billion a
year; emerging nations cannot finance the level of investment
needed by them. A typical 300-mw plant could cost $500
million, and China alone might require around 300 plants over
the next decade, implying $150 billion for investment in
electricity generation in China alone!
Therein lie the promise and the risk of international energy
investments for private sector, independent power producers
(IPPs) and energy multinationals. The high growth potential
markets of Asia offer electric utilities (and other firms) the
opportunity of significantly increase sales and profits.
Table 1 Electricity Consumption, Production, and GDP
per Capita
Country
United
States
Japan
India
China
Indonesia
South
Korea
Philippines
Thailand
Hong
Kong
348
GDP
per
Capita
(US$,
1991)
22,449
3,079.0
Energy
Consumption
(Kg. Oil
Equivalent per
capita, 1990)
6,971
27,005
350
600
620
6,540
857.0
286.0
671.0
44.0
119.0
2,904
217
569
211
1,731
720
1,623
14,500
22.5
50.1
28.4
210
516
1,240
Electricity
Production
(Billions
KWH, 1991)
Enrons Dabhol Power Project in India.

Enron, a Texas based utility, launched a separate subsidiary to
begin to sell its power generating expertise in international
markets. One of its first major projects was in India. India has a
great need for power, with per capita consumption of only 270
kwh per capita, capacity shortages of 23 percent at peak utilization, and transmission and distribution losses of 22 and 24
percent. While installed capacity in India was at 80,000 mw in
1994 (a doubling of capacity since 1985), an additional 142,000
mw is forecast to be needed by 2005 to keep pace with demand
growing at 8 to 10 percent a year; this implies invest-ments of
around $165 billiol1, of which over half has to come from
outside India.
The Indian government announced policies that would allow
IPPs to receive pr1ces four electricity such that full costs would
be recovered with a 16 percent rate of return at a 68.5 present
load factor. Foreign participation has been welcomed, and
Indias central government has offered counter-guarantees
concerning power purchase agreements by local State Electricity
Boards (SEBs) to eight fast-track sole-source pro-jects, Enron
being one. Enron those to receive an Indian gov-ernment
guarantee covering the price -it would be paid for fuel during
the first 12 years, hoping to earn returns in excess of 16 percent
on capital by operating above 90 percent of capacity and
achieving higher thermal efficiency.
Enron announced a $2.8 billion, 2,015-megawatt (mw) gasfired plant to be built in Dabhol in Maharashtra state on the
west coast of India. The build-operate-transfer (BOT) plant
was to be operated by Enron for 20 years, - with power sold at a
fixed rate of 7.47 US$ cents per kW hour. Enron holds 80
percent of the equity, with 10 percent each held by GE and
Bechtel. The project was to be implemented in two stages,
based on fuel availability and growth in demand for energy,
with the plant switching to imported liquefied natural gas
(LNG) in the second stage. Enron hoped to supply the LNG
from its fields in Qatar in the Persian Gulf. Debt is70"percent
of the project, to be supplied by the U: S. Eximbank, IFC, and
others, including Indian financial institutions. The project attracts opposition from the start, includ-ing a
negative report by the World Bank, which refused to par-ticipate
in financing the project. More important, the opposi-tion party
began campaigning against the Enron project during the run-up
to state government elections in 1994,-1995 They alleged that
Enron had indulged in bribery to win the -contract and that the
project was costly and not in the best in-terests of the state of
Maharastra. Several major criticisms of the Enron project (see
Table 2) existed
1. High capital cost of the project. Enron justified the cost by
citing the need to create special additional infrastructure, for,
Example, new port facilities to handle imports of LNG
(needed in the second, stage). Enrons cost to produce energy
2. High price of energy. To be sold at 7.47 cents per kw hour, the

price of energy was also criticized as high, being above the
existing electricity prices charged by the-MSEB (Maharashtra
State Electricity Board). Further, since the capital recovery
charge was backloaded, rates would increase as the capital
charge was added to the electricity tariff down the road.
Market pricing of energy may have salutary effects on the
efficient use of energy (the OECD average is about 8 cents
per kw hour). However, market-driven price increases in the
price of a basic input such as electricity may be politically
unpalatable. The problem is political readiness of the market
to accept higher market prices for a good that has long been
subsidized. The Indian government has been subsidizing
energy for farmers for 40 years, and a sudden withdrawal is
not in the cards. Indian electricity tariffs are among the lowest
in the world, presenting a problem for private power
production.5 In 1994-1995, electricity rates were about Indian
rupees (Rs.) 1.74 per kw hour against the Rs. 2.40 that MSE:
would have to charge in 1997. It is conceivable that Indian
inflation, however, could raise current rates to the Rs. 2.40
level anyway.
3. A poor bargain for the MSEB. The MSEB is committed to

buying electricity up to a plant load factor (PLF) of 90
percent, and it has been suggested that such a volume is
greater than -that required by consumers; 6 as a result, MSEB
would have to rut back purchases of energy from older
plants with cheaper electricity. Moreover, LNG-based plantswhich is what Dabhol-is-are more suited to be run as peakload plats, adding energy to the grid during periods Of
high demand (that is, in peak hours); however, the 90
percent PLF means that Dabhol will be operated
continuously as a base-load-supplying plant, and other older
plants would have to be turned on and shut down to
accommodate peak demands, with deleterious consequences
on their efficiency and economic life.
4. MSEB bears the foreign exchange risk. Guaranteeing the price
of electricity in foreign currency has insulated Enron fromthe problem of local currency electricity tariffs not keeping
pace with local inflation. MSEB would be paying Enron for
its electricity at a rate guaranteed in U.S. dollars, but might
not be able to Pass on foreign exchange rate increases
through higher tariffs, thus facing the prospect of absorbing
exchange rate rises and increasing its losses.
In March 1995 the opposition party won the election, somewhat unexpectedly. One of their first acts was to repudi-ate the
contract with Enron. Enron had spent about $300
mil-lion and almost a year working on the project.
Table 2 E nrons Debhol Power Project in India
Enron pro-ceeded to place the case before arbitraPerceived Negatives
Enrons Rebuttal
High capital cost, averaging about
Due to additional infrastructure,
tors in London while continuing to negotiate with
$1.4 million per mw.
including a port facility to handle
the newly elected government. The cultural backLNG, new roads, schools, hospital,
ground to this opposition was the adherence by
High cost of power to MSEB, fixed water supply, and housing.
many political parries and intellectuals to the
in US$ 7.47 cents, forcing MSEB to
Gandhian ideals of swadeshi- self-reliance-who
reduce power intake from older
Inflation will bring up power costs
are both to depend on and allow entry of multinacheaper plants
from older plants to the 7.47-cent
tionals into spheres such as elec-tricity. Local
level; also relevant are the greater
business interests can also hide behind such popProduce power in excess of MSEB
inefficiency and environmental cost
ulist appeals as a way of avoiding strong foreign
base load requirements.
of the old plants.
competition.
Plants inflexible design, leading to
Maharashtra is expected to receive
Given that construction had begun and that
uneconomical load dispatch,
about 1/3 of all FDI in India; hence
contracts had been signed, a cancellation of the
financial burden on MSEB.
its power needs will grow
Dabhol project would have had serious impact on
sufficiently over time to use up
the willingness of other foreign IPPs to enter the
Technology: Why not use coal, even plant capacity.
Indian energy market. A walkout by Enron would
imported coals, rather than oil and
Older obsolete plants are wasteful
also have kept it from participating in future
imported LNG?
and would have to be upgraded at
development of the Indian energy sector. Hence,
some point.
Enron announced a willingness to renegotiate some
Favoritism and corruption in
granting the project to Enron Cost of a coal fired plant with of the terms of the Dabhol project, while preservwithout
competitive
bidding; scrubbers would be higher; if such ing its rights to seek mediation in London as agreed
opposition politicians suggested the pollution control were to be upon at the time of project negotiations.
collusion of the Maharashtra State ignored, there could be negative In January 1996, Enron and the local state governgovernment, controlled by the environmental Impact on an ment settled their differences, allowing the project
Congress Party then in power.
agricultural region.
to restart. Enron made concessions by lowering the
Exhaustive investigation conducted selling price of energy to 53 cents (a 22.5 percent
by the U.S. government prior to reduction), increasing the size of the project to
granting Eximbank financing, to 2,450 mw, and lowering the capital cost by $300
ensure that the U.S. Foreign million. Enron also reduced its equity stake to 50
Corrupt Practices Act has been percent, selling 30 percent ownership of the project
to the state owned MSEB. The renegotiated
scrupulously adhered to.
349
has been judged to be high. It is estimated, for example, that

Daphols power will cost around $1,300 per k.w, while a
new-technology, combined-cycle gas-fired plant should cost
between $l700 and $800 per kw.4
terms, which probably lower Enrons return from the project,

also demonstrate the increased willingness of nation states to
drive hard bargains as more Western suppliers seek to participate in the high potential Asian energy markets.
Questions
1. What are the opportunities for electricity generation in
emerging markets such as Asia?
2. Discuss the terms Enron agreed to initially in starting its
Dabhol project in India. Were these terms fair to India? To
Enron?
3. Are the criticisms of the Enron Dabhol project in India
valid?
4. Do you agree with Enrons decision to renegotiate with the
state government? What is your assessment of the
renegotiated deal?
5. What lessons can be learned from Enrons experience in
India about the advisability of participating in the markets
for electricity generation in Asia and elsewhere?
350
UNIT VI
MANAGING GLOBAL PROGRAMS
LESSON 37:
SOURCES OF FINANCING AND
INTERNATIONAL MONEY MARKETS
-John Maynard Keynes
Marketing Illustration
Money Is an Emotional Subject
To win a project in a developing nation, an exporting country
may provide tied aid which is concessionary financing terms
conditioned on the purchase of the equipment and services
from the donor country. Trade-motivated tied aid may thus
persuade a buyer to lean in the direction of the donor-not
necessarily on the merit of product quality and true price,
Ellicott Machine Corp. International, a small U.S. company, lost
market share in Indonesia where the Indonesian government
has been the companys largest single customer for dredging
equipment for over 100 years. The market-share loss was due to
European competitors use of tied aid soft loans.
To win back market share, a team of trade promotion agenciesExport-Import Bank, the Department of Commerce, the
Department of Transportation, the U.S. em-bassy, and IDAjoined forces. Export-Import Bank approved a $22 million direct
loan to Ellicott. The Secretary of the Department of Transportation wrote a letter to the In-donesian Minister of
Communications. Further more, IDA hosted a reverse trade mission, which allowed Indonesian officials to visit the United States
to learn about Amer-ican-made equipment. As a result, Ellicott
was able to sell five split barges, one tugboat, and spare parts to
P.T. Runkindo, Indonesias state-owned dredging company.
Amway Asia Pacific Ltd., a Hong Kong-based company, is the
exclusive distrib-utor for about 175 products of its parent [um,
Amway Corp (see Exhibit 18-1). Amway Asia Pacific distributes
the products in Australia, Hong Kong, Macao, Malaysia, New
Zealand Taiwan and Thailand. To raise capital to finance its
operations, Amway Asia Pacific made an initial public offering
in late 1993. Its stock was valued at $18 11 share. The stock
opened on the New York Stock Exchange at $26.50 and moved
up to $35.625 by mid-1994. One reason why the companys
stock is attractive is that it gives investors an opportunity to
profit from the burgeoning market in China.
The examples in the marketing illustration demonstrate the
critical role that financ-ing plays in securing overseas projects.
Financing is important to the operations of both importers
and exporters. Importers seek financing for the purchase of
merchan-dise. Exporters likewise need financing for the
manufacturing of their products and the maintenance of their
inventories. Furthermore, overseas buyers attempt to shift the
financing function to their suppliers. If an exporter agrees to
extend credit, the exporter must in turn obtain financing for
this purpose. Financing is not a problem only for small firms.
In fact, in the case of international multi-million dollar projects,
sellers financing is usually expected, and financing terms often

separate winners from losers.
Trade finance arises from the export of goods and services,
when the buyer and seller negotiate the amount, time, and
terms of payment. The financing needs of the seller and buyer
almost always differ, and sometimes conflict Naturally, the
buyer desires a competitive price and a payment arrangement
that does not tie up ones credit line, whereas the seller wants a
financing arrangement that offers quick payment and protection
against default. The method of trade finance attempts to accommodate these differences. Trade finance can be supplied by
parties in the private sector (e.g., the buyers cash in advance
payment) or by parties in the public sector.
The purpose of this chapter is to discuss the various aspects of
financing. The chapter covers both the local and international
sources of financing that are available to public and private
buyers, including the various private and nonprofit financial institutions. The chapter also examines such offshore financial
centers as the Euro market and the Asian Dollar Market.
Any business, no matter how large or small, domestic or
international, always requires some kind of financing for its
operations. Because international financing must deal with
financial and economic conditions in more than one country,
this ac-tivity involves more uncertainty and complexity than
domestic financing. The greater complexity of international
financing, however, is accompanied by a greater, number of
financing options. In addition to the standard channels, there
are also other sources available almost exclusively for international business. These sources include:
1. Non-financial institutions
2. Private financial institutions
3. International agencies
4. Government agencies
5. The International Monetary Fund (IMF)
6. The Euro-market
Nonfinancial Institutions
1. Self-Financing and Debt Financing
There are several non-financial institutions that can provide
financing. First, there is self-financing because a business can
use its own capital or can withhold dividends so that profits
can be plowed back into the organization for further
business expan-sion. Second, retailers and manufacturers
alike may be able to seek trade credit and financial assistance
from certain middlemen, such as export merchants and
trading companies. Third, when joint ventures are formed,
foreign partners can also lend a helping hand. Fourth,
subsidiaries of MNCs may borrow from affiliated firms as
well as from the employee retirement fund.
351
Owe your banker a thousand pounds, and you are at his mercy.
Owe him a mil-lion, and the position is reversed.
Finally, the business may decide to raise equity capital by selling

stocks, or it may depend on debt financing by selling commercial paper or bonds. Bond buyers or holders are the firms
creditors rather than its owners. U.S. firms can sell bonds in
either the United States or foreign countries, with Eurobonds
as a prime example. Treasurers of U.S. firms must decide
whether their bonds to be sold abroad are to be denominated
in the dollar or in foreign currencies. In any case, it should be
noted that debt financing requires the services of investment
banks. Virtually every multinational bank or multinational
brokerage house has a division that acts as an investment bank.
Another source of financing is venture capital. Venture capitalists invest funds in a firm in exchange for a share of ownership.
Although known for their investments in high-technology
firms, venture capitalists have diversified their portfolios. There
are about six, hundred venture capital firms in the United
States. Private investors. However, fund most ventures. Venture
Capital Network in Durham New Hampshire is a nonprofit
service affiliated with the University of New Hampshire.
Attempting to match entrepreneurs with investors, the
Network charges investors $200 a year and those seeking capital
$500 annually for registration.
When self-financing is used, a company should take advantage
of a tax shelter for its export profit. A foreign sales corporation
(FSC. pronounced fisk) is a special kind of corporation in the
eye of tax authorities making it possible for a FSC to gain a corporate tax exemption from 15 to 32 percent of the earnings
generated by the sale or lease of exported goods (50 percent U.S.
content) and a limited number of services.
Credit Clubs
One method of financing is to borrow money from credit clubs or
rotating credit associations. Such clubs popular among Asians have
long existed in Asia. especially in villages or rural areas where banks
usually do not exist. Probably originating in China some eight hundred years
ago the system later spread to other Countries. The clubs are called kye
(pronounced kay) by Koreans. tontines by Cambodians. and share by
Thais. Such clubs are attractive because they allow members to borrow
money at a lower rate than what they pay banks while also allowing investors
to receive a higher return than what they can get from their banks. These
highly informal and sometimes secretive credit clubs rely on the honor system
and allow members to get quick loans without collateral. Club members pool
their money each putting a set amount into a monthly pool. A club operates
for as many months as there are members. Each month a different member
gets the pool. Members bid for the pool which goes to the low-est bidder.
Those who win the early pools contribute more to the club while also receiving
less money than those receiving later pools. Those who wait thus make more
profits though at a higher risk. Having no writ-ten contracts members
nevertheless usually consider their investments safe because they know each
other. In reality horror stories abound, as it is a fairly com-mon practice for
early bidders to disappear with the pool. In the United States, rotating clubs
have flour-ished because recent Asian immigrants, without a credit history,
have difficulty obtaining conventional bank loans. Members may meet at
homes or restau-rants and use these social gatherings for the purpose of
carrying out bids.
352
In general, a FSC must maintain a foreign presence. That is, it

must have a for-eign office maintaining books and records. The
board and shareholders must meet outside the United States,
and one of the directors must be non-American. Another
requirement is foreign economic substance. The office must
perform business activ-ities that result in business income. A
minimum percentage of orders for goods must be procured
through the foreign office, which must carry out such normal
business operations as billing. This office must also account for
at last 50 percent of five of the direct transaction costs (i.e.,
advertising, order processing, transportation, invoic-ing, and
credit risk assumption).
Equity Financing
With regard to other means of self-financing, it is a common
practice for MNCs to use both equity and debt financing. A
company can raise equity capital by selling stock, both in its own
country and in foreign markets. U.S. stocks, for example, are
traded in London. GSS Electronics Ltd. (Thailand), a manufacturer of electronic parts and assemblies for computer hard disk
drives, was the first U.S.-owned high-tech-nology company to
be listed on the Securities Exchange of Thailand when the firm
sought new funding to complete a large plant expansion. Israel
has sixty-two com-panies quoted on U.S. exchanges, second
only to Canada.
It is not surprising that international exchanges like to attract
new listings. The New York Stock Exchange, with 234 foreign
firms, has been trying to get newly pri-vatized companies in
Europe to list in New York. 3 The London Stock Exchange has
524 foreign companies. It claims that it is less expensive to list
in London than in New York because its regulatory branch is
not as strict as the Securities and Exchange Commission. Also a
new European Union rule, which took effect in 1996, allows
brokers licensed in one country to deal directly on other
European Union exchanges.
American investors interested in buying foreign securities,
instead of working through foreign securities firms and
exchange currencies should consider American Depository
Receipts (ADRs). Issued by U.S. banks, ADRs represent
ownership of a set amount of the respective security on deposit
in a foreign branch. Behetton, for ex-ample, offers eight million
to nine million (ADRs) worth approximately $150 mil-lion On
the New York Stock Exchange. Those wanting to own foreign
securities when ADRs are not available, they may find it easier to
deal with mutual funds that invest in a particular country or
region of the world.
Although many firms limit the listing of their securities to their
domestic ex-changes, the growing internationalization of capital
markets suggests that more and more firms perceive that the
benefits of listing their stocks on foreign exchanges out-weigh
the related costs. A study of 459 internationally traded MNCs,
with at least one foreign listing on one of nine major stock
exchanges, found strong evidence that financial disclosure levels
and the level of exports to a given foreign country signif-icantly
influenced foreign listing locations.
Equity markets appear to have a life cycle consisting of four
distinct stages as an equity market becomes more developed and
has some degree of credibility, mar-ket liquidity increases. In the
Emerging stock markets vary greatly in terms of the number of

firms listed, the number of new listings per year, market
capitalization, etc. Naturally such markets carry significant risk.
But emerging stock markets are likely to play an increasingly
important role in financing companies growth. During the last
decade, the total value of stocks listed in all of the worlds stock
markets increased from $4.7 trillion to $15.2 trillion. The share
of total word capitalization represented by the emerging
markets has more than tripled from 4 percent to 13 percent At
the same time, trading in the emerging markets has surged
from less than 3 percent of the world total (in terms of the
value of shares traded) in 1985 to 17 percent in 1995
Its The Law 1

Better Safe Than Sorry
The Jardine Group is a British firm based in Hong Kong, and its wide
range of businesses includes retailing and real estate. In the 1840s, the
companys drug trade was responsible for starting the Opium Wars. When
China was defeated by the Western powers, it was forced to open the
country to foreigners. Not surprisingly, al-most 150 years later, China
has not forgiven Jardine.
In the 1980, the British group, instead of trying to please China,
appeared to anger China even more. First, it shifted its legal domicile
from Hong Kong to Bermuda, showing a lack of confidence in Chinas
abil-ity to run Hong Kong after 1997. In 1994, China blamed a Jardine
director for allowing Hong Kong Governor Chris Pattens electoral reforms
to pass. Moreover, Jar-dine upset China by quitting the Hong Kong Stock
Ex-change. First, Jardine Matheson and affiliate Jardine Strategic
Holdings made the 3nnouncement. Later, other affiliates (Hongkong
Land Holdings, Mandarin Oriental International, and Dairy farm
International) announced similar moves. Because of the Jardines moves,
about 10 percent of the Hang Seng Index will be delisted.
It is understandable why Jardine has to take ac-tions to protect the
companys interests. After 1997, securities rules will be set by China,
and new rules may make the firm vulnerable to an unfriendly takeover.
On the other hand, some criticize Jardine concerning whether its moves to
minimize political risks are rea-sonable and whether other actions should
have been taken instead.
Because of various regulatory and traditional barriers to entry,

stocks have his-torically played a relatively minor role in
corporate financing in many European coun-tries. In the case of
German equity markets, for example, until recently, the largest
banks that had a monopoly on brokerage effectively controlled
access to the stock ex-change. Small firms, being kept from
issuing equity, remained captive loan clients. Additionally, the
integration of banking and commerce in Germany has contributed to large German firms traditional reliance more on bank
credit and bonds than on equity to finance growth. German
firms use their equity holdings to exert ownership control over
industrial firms. As could be expected, stock exchanges were

small, in-efficient, and illiquid.
Financial Institutions
International companies have several options in financial
institutions that have the ca-pability of dealing in international
finance. The most common alternative is banks (and non-bank
banks), both domestic and overseas. In addition to the well-k
nown gi-ant banks that operate globally, there are many
medium-sized banks that have international banking departments. The multinational banks can make arrangements to
sat-isfy all kinds of financing needs.
Other than making loans, banks are also involved in financing
indirectly by dis-counting (i.e., factoring) letters of credit and
time drafts. Some factoring houses buy accounts receivable with
or without recourse at face value and then provide loans at
competitive rates on 90 percent of the factors acquired but notyet-collected receiv-ables. In general, factors help clients eliminate
several internal credit costs by pro-viding credit guarantee of
receivables, by managing and collecting accounts receivable, and
by performing related bookkeeping functions. The industry
average factor-ing commission for these services is 1 percent.
Factoring is a substantial part of the business for a company
such as Heller International. In 1991 export factoring accounted
for 6 percent (or $15-16 billion) of the total $266 billion in
worldwide factoring.
An exporter usually initiates a factoring arrangement by
contacting a factor offering export services. This factor then
Requests a credit undertaking on the importer from an affiliate
(import) factor, through an international correspondent factor
net-work. After local approval of credit, the exporter ships the
goods on open account and submits the invoice to the export
factor. The export factor then sends it to the import factor for
credit risk assumption and administration and collection of the
re-ceivables. Typically, the exporter does not deal with the
import factor. In any case, factoring export receivables allows
small- and medium-sized exporters to be com-petitive since it is
a hassle-free method of financing export sales and collecting
pay-ment from buyers.
Another familiar financing tool for European exporters but
rather an unknown tool for American firms is forfaiting, which
finances about 2 percent of all world trade. Forfaiting originates
from the French term a forfait which means to surren-der or
relinquish rights to something. When used, an exporter
surrenders possession of export receivables by selling them at a
discount. The cost depends on country risk. For sales to Japan
and France the discount rate may be 6.75 percent, and terms
may reach five years, whereas sales to Pakistan may boost the
discount rate to 7.75 per-cent with a one-year term limit.
Generally, an exporter consults with a forfaiter be-fore incorporating the discount rate into the final selling price.
353
final (mature) stage, the- most active stocks are just as liquid as
those listed on industrial country exchanges. There is strong
evidence that greater stock market liquidity supports (or
precedes) economic growth.
Emerging Stock Markets
According to the Emerging Stock Markets Factbook, 1992 published by
the International Finance Corpora-tion (IFC) eight of the worlds top ten
performing stock markets (in terms of price appreciation) were emerging
markets. Unfortunately, six of the ten worst performers in 1991 were
also emerging markets.
The top performer was Argentina rising by al-most 400 percent in U.S.dollar terms. In second place was Colombia, which was up 174 percent.
Other top performers were: Pakistan (160 percent), Brazil (152 percent)
and Mexico (100 percent). The only two in-dustrial-country markets in
the top ten were Hong Kong and Australia, which were up 43 percent and
29 percent, respectively.
The worst performing market was Zimbabwe, which was down 55 percent.
Other poor performers included: Turkey (-53 percent), Indonesia (-43 percent) and Greece (-22 percent). Korea and Taiwan were the two largest
emerging markets in terms of market capitalization, and they also
declined.
Interestingly in the year ending June 1993, Turkey went from being a poor
performer to become the worlds top-performing stock market (up III percent in U.S.-do liar terms). The next best performers were Brazil (up 83
percent) and Indonesia (up 29 per-cent).
Export factoring and forfaiting are similar since both involve

selling export re-ceivable to a third party at a discount. There are
a few differences, however, between the two parties. First,
factors like a large percentage of an exporters business, but
forfait houses do not mind working on a one-shot basis.
Second, while factors spe-cialize in short-term receivables (up to
180 days), forfaiters tend to work with medium--term receivables. Finally, forfaiters are more willing to deal with high-risk
countries. To protect themselves, forfait houses require a
guarantee from a reputable commer-cial bank in the importers
country. The guarantee is in the form of an aval (bank guarantee). An endorsement with the words PER AVAL or
GUARANTEED PER AVAL is stamped directly onto the
notes or bills by the guarantor bank.
Banks may provide equipment leasing as another alternative
form of financ-ing. The most attractive benefit of leasing is its
low cost while allowing an exporter to conserve capital and
improve cash flow. Leasing may involve 100 percent financing
with no down payment. It can be used in con-junction with
conventional lending sources.
In the United Kingdom, companies have a number of financial
institutions to contact for loans. These institutions include
foreign banks, British clearing banks, merchant banks (factor
houses), finance houses, investment trust companies, pension
funds and insurance companies, leasing firms, and development capital and other spe-cialist venture-capital organizations.
In Germany, companies may be able to obtain short-term loans
from German and foreign banks, usually by overdraft.
Government Agencies
It is not unusual for governments to provide concessionary
financing. Such public loans, as a rule, carry lower-than-market
interest rates, and their terms are more fa-vorable than those of
354
private financial institutions. Governments role in financing can

also be indirect but significant. Japan for example, uses
qualification for public loans as an inducement for private banks
to confidence. The qualification carries this significance by
implying that any investment would be in the national interest
and that the firm in question is financially sound.
The United States has several government agencies that provide
financial assistance. One of them is the Small Business Administration (SBA). In addition to its regular SBA loans, this agency
can assist small firms in their export activities through its
Export Revolving Line of Credit Loan (ERLC), which is under
the SBAs guar-antee plan.
Another agency is the Overseas Private Investment Corporation
(OPIC). Al-though best known for its Insurance Departments
political risk insurance programs, OPIC also makes direct loans
through its Finance Department. Its Direct Investment Fund
(DIF) is for projects too small to interest large institutional
lenders or for pro-jects too short for institutional lending but
too long for commercial banks.
A major source of funding for U.S. firms is the U.S. ExportImport Bank (Eximbank), which is responsible for the
promotion of exports through financial as-sistance. Among its
activities are direct loans, protective guarantees for banks loans
and export credit insurance. Eximbank has several financial
assistance programs. Its Working Capital Guarantee program
allows exporters to obtain pre export financing by providing
repayment protection for U.S. bank loans. Another kind of
payment pro-tection is through the Foreign Credit Insurance
Association (FCIA) Export Credit In-surance policy, which
protects those exporters that extend credit to foreign customers.
In addition to providing direct loans, Eximbank may induce
commercial banks to make loans by guaranteeing payment in
case of default. The process is a simple one: An exporter applies
to a bank for the financing of export sales, and the bank then
applies to Eximbank for guaranteed coverage of both commercial and political risks. In addition, Eximbank may buy the
banks export loans at a discount through its Discount Loan
Program so that banks can acquire funds for further lending.
European governments have been offering mixed or blended
credit. This type of financing package combines an official,
conventional loan with either outright grants or foreign aid
grants at below-market rates, in effect reducing the actual interest rate based on the condition that donor countries
products are bought. France the heaviest user of this technique
won Malaysias contract for a $200 million turnkey power plant
by disguising its thirty-year loan .at a 4.5 percent rate as an aid
grant, which made up almost half of the financing package.
Mixed credit is particularly im-portant in the sale of hightechnology capital goods, and the indiscriminate use of this
technique in foreign aid/export financing packages has fostered
a built-in expectation for it on the part of buyers.
The United States, considering the use of mixed credit as unfair
export credit subsidies, has again fought back by making
financing more costly for OECD mem-bers. The new OECD
guidelines, which took effect in July of 1988, require mixed credit
to include at least 50 percent grants, up from the internationally
agreed 25 per-cent. Furthermore, the United States has begun to
Another technique used to create a built-in disincentive for

cheap credit is for the United States to retaliate against its
European competitors with longer payback terms. Knowing
that European governments have difficulty raising money for
fifteen years even on a very selective basis, the U.S. Eximbank is
able to win out over for-eign competitors by simply offering
fifteen- to twenty-year loans. The Europeans are no match for
the United States in the maturity contest because the U.S.
Treasury rou-tinely borrows money for twenty or thirty years by
auctioning Treasury bonds.
This discussion should illustrate to international marketers that
a low price by itself does not necessarily provide advantages,
especially in the case of expensive pro-jects. Government
financing is a necessity, and this involves more than just a low
in-terest rate. The effective rate can be greatly moderated by the
amount to be financed, outright grants, varying maturity dates,
and other financing techniques.
International Financial Institutions /

Development Banks
One major source of financing is international nonprofit
agencies. There are several regional development banks, such as
the Asian Development Bank, the African De-velopment Bank
and Fund, and the Caribbean Development Bank. The primary
purpose of these agencies is to finance productive development
projects or to promote economic development in a particular
region. The Inter-American Development Bank, for example,
has as its principal purpose the acceleration of the economic
develop-ment of its Latin American member countries. The
European Bank for Reconstruc-tion and Development
(EBRD), located in London, is funded by thirty-nine countries
and two European Community organizations. The United
States, with a 10 percent share, is the largest single shareholder.
The bank targets 60 percent of its loans for the private sector in
Central and Eastern Europe. The five multilateral development
banks (World Bank, Inter-American Development Bank, Asian
Development Bank, African Development Bank, and the
European Bank for Reconstruction arid Devel-opment) have
annual commitments topping $45 billion. They are active in all
major economic sectors and offer good long-1erm export
opportunities for equipment sup-pliers, contractors, and
consultants. Therefore, they are an important financing source.
In general, both public and private entities are eligible to borrow
money from such agencies as long as private funds are not
available at reasonable rates and terms. Although the interest
rate can vary from agency to agency, these loan rates are very
attractive and very much in demand.
Of all the international financial organizations, the most
familiar is the World Bank, formally known as the International
Bank for Reconstruction and Development (IRD). The World
Bank has two affiliates that are legally and financially distinct
entities, the International Development Association (IDA) and

the International Fi-nance Corporation (IFC). All three
organizations have the same central goal: to pro-mote economic
and social progress in poor or developing countries by helping
to raise standards of living and productivity to the point at
which development becomes self sustaining.
Toward this common objective, the Bank, IDA, and IFC have
three interrelated functions, and these are to lend funds, to
provide advice, and to serve as a catalyst in stimulating investments by others. In the process, financial resources are
channeled from developed countries to the developing world.
The hope is that developing coun-tries, through this assistance,
will progress to a level that will permit them, in turn, to
contribute to the development process in other less fortunate
countries. Japan is a prime example of a country that has come
full circle. From being a borrower, Japan is now a major lender
to these three organizations. South Korea is moving in a direction similar to that of Japan nearly a quarter century ago.
1. World Bank
The World Bank is owned by the governments of the 178
countries that have sub-scribed to providing its capital. Only
countries that are members of the International Monetary
Fund can qualify for World Bank membership. The United
States, with 22.4 percent of the subscribed capital and 20.6
percent of the voting power, is the banks largest
shareholder. By tradition, the World Banks president is an
American. The members are quite diverse in their
characteristics, ranging from China, the most populous, to
Vanuatu, which has a population of slightly more than
100,000, and from the United Arab Emirates, with a per
capita GNP of more than $30,000, to Bhutan, which has a
$180 per capita GNP. Eritrea joined in 1996.
The IBRD obtains most of its funds through borrowing in
the capital markets of the United States, Europe, Japan, and
the Middle East the process is not unlike a private firms
seeking debt financing through the sale of securities. Such
funds, in turn are made available only to creditworthy
borrowers, mainly for those projects that have high real rates
of economic return. The banks decisions are based on economic considerations only, and the political character of a
member country is irrele-vant. As a result, the World Bank
does not make loans in support of military or po-litical
goals. Financial assistance is otherwise restricted in the sense
that it may be used to purchase goods and services from any
member country as well as from Switzer-land, which is not a
member.
IBRD loans are usually repayable over fifteen to twenty years,
with a grace pe-riod of three to five years. Each loan must be
made to, or be guaranteed by, the gov-ernment concerned.
The interest rate that IBRD loans carry depends on the cost
at which the Bank raises funds in capital markets.
In order not to expose the World Bank to excessive interestrate risk, a pool -based variable-rate lending system was
initiated in 1982. Interest charges applicable to the
outstanding balance on all loans are uniformly adjusted every
six months up or down, in accord with the average cost of
the pool of IBRD borrowings. A spread of fifty basis
355
play the same game by offering some unusually low-interest

loans. For example, it assisted General Electric with a $30 million
gas-turbine project in India with a 32.5 percent aid grant. GE had
the lower bid, but credit assistance from Eximbank was nevertheless crucial in securing the project. In another case, the Eximbank
offered a $100 million mixed credit line to Thailand for the
purchase of U.S. high-technology products.
points is added to the World Banks own cost of

borrowings. Because the new lending system has added a
potential element of votality to borrowers costs, the bank
strives to find a point at which there is a balance between the
susceptibility of the lending rate to change and the pursuit
of the banks other important objectives. In any case a degree
of volatility is inevitable, though the World Bank attempts
through its policies to reduce the impact of these variations.
2. International Development Association (IDA)
Because very poor countries may have difficulty in borrowing
on IBRD terms, the IDA was established specifically to assist
such countries. IDA has 158 nations as members, with
Eritrea and Azerbaijan Republic being the latest. By
definition, a very poor country is generally one with an
annual per capita GNP of $696 or less (in 1993 dollars), and
approximately fifty countries fall under this classification. In
practice, most of the IDA loans go to those countries that
barely exceed half of the specified annual per capita GNP,
and most of these countries are located in Africa south of
the Sahara and in South Asia. These countries, though very
poor, must still have suffi-cient economic, financial, and
political stability to qualify for IDA loans.
Whereas the World Bank makes loans, the IDA provides
credits. These credits are made only to governments even
though these governments routinely re-lend funds to their
private and public enterprises. The credits must be repaid
over fifty years, and there is a ten-year grace period before the
beginning of the repayment of the principal. IDA credits
carry no interest, but there is an annual commitment charge
of 0.5 percent on the un-disbursed portion and a service
charge of 0.75 percent on the disbursed amount of each
credit. These charges are intended to cover the adminis-trative
costs of running the IDA program.
3. International Finance Corporation (IFC)
Although the IDA shares the World Banks staff, the IFC
has its own operating and legal staff. Unlike the bank and the
IDA, which have many operating aspects in com-mon, the
IFC works closely with private investors. In addition to
providing convert-ible debentures, underwriting, and
standby commitments, the IFC invests in com-mercial
enterprises within developing countries and is able to take
equity positions. By functioning in this area, the IFC
complements the work of the Word Bank by providing
assistance in business areas that are impractical for the bank
to operate. As of 1996, the IFCs total membership has
become 165 countries.
The IFCs main function is to assist in the economic
advancement of LDCs by promoting growth in the private
sector of their economies and by helping to mobi-lize
domestic and foreign capital for this purpose. The IFC
provides financial, legal, and technical advice and contributes
an element of confidence to the venture of the parties. Its
special role is to mobilize resources on commercial terms for
business ven-tures and financial institutions where a marketoriented approach is both applicable and preferable. It will
not, however, provide financing if sufficient capital can be
ob-tained on reasonable terms from other sources. Its
356
lending criteria include foreign ex-change earnings, increased

employment, skill improvement and acquisition, higher
productivity, and development of a countrys natural
resources on reasonable terms.
The International Finance Corporation has become more
active in helping companies in developing countries raise
financing through international offerings of in-vestment
funds and individual corporate securities. Toward this goal,
the International Securities Group (ISG) was established in
1989 to provide investment-banking ser-vices to corporate
clients in developing countries.
4. Multilateral Investment Guarantee Agency (MIGA)
The activities of the World Bank IDA and IFC are
supplemented by those of a new affiliated international
organization-the Multilateral Investment Guarantee Agency
(MIGA). Established in 1988, MIGA has a specialized
mandate: to encourage equity investment and other direct
investment flows to developing countries through the mitigation of noncommercial investment barriers. To encourage
international corporate investment so that developing
countries can attract qualified investors, MIGA offers
investors guarantees against noncommercial risks (especially
risk of war or repatria-tion); advises developing member
governments on the design and implementation of policies,
programs, and procedures related to foreign investments;
and sponsors a di-alogue between the international business
community and host governments on in-vestment issues.
Industrialized countries should also benefit from MIGAs
augmen-tation of the existing capacity to insure their
overseas investors, from its innovative types of guarantees,
and from the efficiency derived from the free flow of
investment resources.
International Monetary Fund (IMF)

During the Great Depression of the 1930s, many countries
resorted to competitive currency devaluation and trade restrictions to maintain domestic income, resulting in lower trade and
employment for everyone. Concern over these beggar-thyneighbor policies led to a July 1-22, 1994, conference at Bretton
Woods, New liampsh1re, at-tended by delegates from fortyfour countries. The IMP was born there on Decem-ber 27,
1945, to institute an open and stable monetary system.
The IMF is a cooperative apolitical intergovernmental monetary
and financial institution. As a pluralist international monetary
organization, its multiple activities encompass financing,
regulatory, and promotional purposes. It acts as a source of
balance-of-payments assistance-cum-adjustment to members,
as a source and creator of international liquidity, as a reserve
depository and intermediary for members, as a trustee, and as a
catalyst. The use of the IMFs resources is based on balance-ofpayments need, on equal and nondiscriminatory treatment of
members, and on due regard for members domestic, social,
and political systems and policies.
Guided by its charter (Articles of Agreement), the IMF has six
prescribed ob-jectives:
1. To promote international cooperation among members on
international monetary issues.
3. To promote exchange stability and orderly exchange

arrangements while avoiding com-petitive currency
devaluation.
4. To foster a multilateral system of payments and transfers
while eliminating exchange restrictions.
5. To make financial resources available to members.
6. To seek reduction of payment imbalances.
IMF has 180 members, with Brunei Darussalam being the
latest. Membership in the IMF is open to any nation that
controls its own foreign relations and is will-ing and able to
fulfill the obligations of membership. Each member has a
quota based on its subscription contribution to the fund. This
quota determines the members vot-ing power and access to the
IMFs financial resources. The-IMF employs a system of
weighted voting power that combines a basic allotment with a
variable allotment.
To recognize the sovereign equality of nations, each member
has a basic allotment of 250 votes. To protect the interest of
members with a greater magnitude of inter-national trade and
financial transactions as well as to account for the differences in
subscriptions, variable allotment is used as well, resulting in one
vote for each part of the members quota that is equivalent to a
special drawing right (SDR) of 100,000. The United States
accounts for some 19 percent of the total.
SDR
In former times, gold and foreign exchange were the major
reserve assets, and there was some concern that an increase in
the rate of such assets might not be adequate to sustain trade
and maintain full employment. Furthermore, deficits in the
balance of payments of reserve-currency countries could
interfere with the confidence in the reserve currencies. In
response to this apprehension, the First Amendment to the Articles of Agreement was created and took effect on July 28,
1969, and the special drawing right (SDR) was established.
Created by the IMF as a new asset, SDR is a composite fiduciary
reserve asset to supplement existing reserve assets. It is the unit
of account in which the fund expresses the value of its assets.
The value of the SDR is generally more stable than that of any
single currency in the basket because movement in the exchange
rate of one of the component currencies tends to be partly or
fully offset by movements in the exchange rates of the other
currencies. The SDR basket consists of the five members with
the largest exports.
The term special drawing rights partly emphasizes the similarity
with members drawing rights on the General Resources
Account, whereas special conveys the no-tion of SDRs
uniqueness and difference from other existing drawing rights in
the IMF. From a historical perspective, SDR is the first kind of
an interest-bearing re-serve asset created by international
consensus. Unlike commodity money, the value of SDR as an
asset is derived from the commitments of voluntary participants to hold and accept SDRs rather than from any intrinsic
properties. SDR has been allocated to its members since 1970 in

proportion to their respective quotas.
Some Facts About the SDR

The special drawing right (SDR) is an international reserve asset created
by the IMF in 1969 to supplement existing reserve assets. The SDR
serves as a unit of account for the IMF and a number of other
international and regional organizations. In addition, a few countries peg
the exchange rates of their currencies to the SDR. While the SDR has
been used at times to denominate financial instruments and transactions
outside the IMF by the private sector and some governments, the market
for such private SDRs is limited.
Valuation. The SDR was initially valued by the IMF in terms of a
fixed quantity of gold and was redefined in June 1974 as a basket of 16

currencies. Since 1981, the SDR basket has consisted of fixed
quantities of the currencies of the five IMF members that are the largest
exporters of goods and services. The basket is revised every five years,
most recently on January 1, 1996. The weights in the basket reflect the
relative shares of countries in exports of goods and services and the
relative shares of the five curren-cies in official reserve holdings. For the
current basket, the weights, in percent, are 39 for the U.S. dollar, 21 for
the deutsche mark, 18 for the Japanese yen, and 11 each for the French
franc and the pound sterling. As of March 12, 1996, one SDR was
worth $1.46 at market exchange rates.
Allocations. Since the adoption of the First Amendment of the
IMFs Articles of Agreement in 1969"the IMF has been authorized to

allocate SDRs to member countries. Decisions to allocate (or cancel)
SDRs require an 85 percent-majority vote of the Board of Governors
and are made for basic periods, which, unless otherwise decided, run for
five consecutive years. Cumulative allocations to date total SDR 21.4
billion SDR al-locations are distributed in proportion to IMF members
quota shares. Because of con-siderable expansion in the IMFs
membership since SDRs were last allocated in 1981,38 of the IMFs
181 member countries have never received SDR allocations. Another 37
members have participated in some, but not all, allocations. The current
Articles of Agree-ment do not authorize the IMF to allocate SDRs
selectively among members or to itself.
Share of Global Reserves. SDRs are counted as a part of a
countrys interna-tional reserves, along with official holdings of gold,

foreign exchange, and reserve position In the IMF. The share of SDRs in
global holdings of non-gold reserves has declined from 8.4 percent at the
end of 1972, to 6.5 percent at the end of 1981, and to 2.3 percent at
the end of 1995.
Functions
Among intergovernmental organizations, the IMF is unique in
its combination of reg-ulatory, consultative, and financial
functions.
1. Regulatory Function Reflecting its objective of avoiding
disruptive fluctuations and the rigidity of rates, the IMF
administers a code of conduct with respect to ex-change rate
policies and restrictions on payments. Having the authority
to influence some of its members practices, the IMF must
exercise firm surveillance over their policies. Toward this end,
the fund has adopted three principles, spelled out in the
document entitled Surveillance Over Exchange Rate Policies,
357
2. To facilitate the balanced growth of international trade and

to contribute to high levels of employment, real income, and
productive capacity.
to guide members in their conduct and to specify their rights

and obligations. First, members are obligated to refrain from
manipulating exchange rates to gain an unfair competitive
advantage. Second, members must intervene if necessary to
counter disorderly conditions that disrupt short-term
movements in the exchange rates of their currencies: Last but
not least, members should consider the interests of other
members in their intervention policies.
2. Consultative Function A number of countries are
handicapped in the effort to de-sign suitable foreign
exchange programs by the scarcity of reliable statistical data
add of personnel with suitable skills in economic analysis
and management. This is the area in which the IMF can be
of assistance for such members. Because of the nature of
the work, the IMF has built up a body of practical
knowledge of balance-of payments statistics, analysis, and
policy, and of associated fields. The IMFs research in these
topics makes it well qualified to offer advice.
Financial Function The IMFs primary financial purpose, as
set out in Article I, sections v and vi to give confidence to
members by making the general resources of the Fund
temporarily available to them under adequate safeguards,
thus providing them with opportunity to correct
maladjustments in their balance of payments with-out
resorting to measures destructive of national or international
prosperity and to shorten the duration and lessen the
degree of disequilibrium in the international bal-ances of
payments of members.
The IMFs financial resources are made available under a
spectrum of policies and facilities that differ mainly in the
type of balance-of-payments need and in the degree of
conditionality. Access to resources is open to members in
amounts related to their quotas, and the rules governing
access apply uniformly to all members. Based on guidelines
related to the economic indicators of the external position of
a coun-try, the fund assesses both a members balance-ofpayments need (the magnitude of financing) and the
adequacy of measures to correct the underlying balance-ofpay-ments disequilibrium (adjustment program). Need is
a function of the members balance-of-payments position,
its foreign reserve position, and the developments in its
reserve position. Even though the three elements are
considered distinct and sep-arate and each one alone can
represent the members need, it is the IMFs judgmen-tal
consideration of all three in combination with which it
justifies that need.
Financial Centers
MNCs have made it an increasingly common practice to raise
capital offshore. There are four broad types of offshore financial
centers: primary, booking, funding, and col-lection. A primary
center (e.g., London, New York) is an international financial center located in a highway developed industrial country. With
financial systems highly de-veloped, these centers serve worldwide clients by offering all kinds of financial services.
A primary center is at one extreme; a booking center (e.g.,
Nassau) is at the other. International banks may wish to take
advantage of a countrys highly favor-able tax regulatory system
358
by opening a shell branch there that may be nothing but one

small room or a post office box. The purpose is to serve the
financial needs of those outside the country by booking
Eurocurrency deposits and international loans.
A funding center (e.g., Singapore) collects funds from outside a
region for that regions internal use. A funding center can thus
be characterized by inward intermediation of offshore funds. In
contrast, outward financial intermediation is a charac-teristic of a
collection center (e.g., Bahrain). This type of center has low
absorptive capacity of the regions economies, resulting in excess
savings accumulated in the collection center for international
banks to invest.
According to the results of one study, the growing integration
of major domes-tic and international offshore financial markets
in the 1980s has resulted in an increase in the efficiency of
international capital markets. However, structural changes in financial markets may have influenced the effectiveness of
monetary and fiscal policies created new systemic risks associated
with increased asset price variability, and re-duced the certainty
of developing-country access to international capital markets.
Euro-market
One place where governments and business can go to borrow
money of a desired cur-rency at a competitive rate is the Euromarket. This international market of foreign currency deposits
in Europe has no fixed physical boundary, though London, as a
hub, is its main location. Actually, the Euro-market is simply a
telephone and telex network run by a few dozen international
giant banks. Citicorp, for example, oper-ates through its foreign
branches in dozens of countries to provide global banking services to MNCs in any type of currency.
Unlike American banks, which accept nothing but U.S. dollars
for deposit, Eu-ropean banks are relatively liberal and routinely
accept all types of money, which do not have to be converted
into any specific local currency. When a depositor needs funds
and must withdraw them, no conversion is required, and the
depositor will get back the same currency as deposited earlier.
Traded on the Euro-market are Eurocurrencies, which the
worlds major banks bid for and employ. Eurocurrencies are
monies traded outside of the country of their origin. A Belgian
franc becomes a Eurocurrency (i.e., Euro Belgian franc) when it
is traded anywhere outside Belgium. Despite the Euro prefix, a
Eurocurrency is not nec-essarily restricted to denominations of
European and American currencies. Repre-senting a claim
against North American, Asian, and Caribbean banks, the
currency can be a European, for example, held by a Hong Kong
bank in the Caribbean.
The Eurodollar, just one of many Eurocurrencies, is simply dollars
deposited in banks outside of the United States (e.g., in Europe,
Canada, and Japan). When Hong Kong or Singapore banks accept
deposits and make loans in U.S. dollars, such dol-lars become
Asian dollars. The Eurodollar once commanded more than 90
percent of the Euro-market, with the German mark in second
place, holding about 10 percent of the Euro-market.
Eurocurrency deposits have continued to grow rapidly. Because
it is easier and cheaper than issuing corporate bonds in Japan,
the Japanese are the biggest issuers of Eurobonds.
percent of $400 bil-lion in capital. The decline there of 3,836

points was four times the previous single-day drop of 831
points. Sydney lost 25 percent, or $39 billion of _e value of
Australian stocks. London followed suit, with a plunge of 250
points, or 12 percent of the Financial Times In-dex of I 00
stocks, bringing the two-day loss to 500 points, or 22 percent.
Sharp declines were recorded on exchanges in Taiwan, South
Korea, Malaysia, Thai-land, and Singapore. The same thing
happened in Frankfurt and Dusseldorf, Amsterdam, Toronto,
and Mex-ico City. The Hong Kong market was closed for the
rest of the week.
Asian Dollar Market
The panic repeated itself the following week. On October 26,

the Hong Kong market reopened and promptly lost 33 percent
of the stock value. The losses elsewhere were as follows: Tokyo
(5 percent), London (6 percent), and Frankfurt (6 percent). Then
it was New Yorks turn-a loss of 8 percent or 156 points of the
DJIA. The problem seemed to go around and around like an
echo. In all, the world witnessed a loss of $1.6 trillion in global
stock-market value within days.
Since inception in 1968, the Asian Dollar Market has grown at a

rapid rate. The need for this offshore financial market in Asia is
the result of the time zone differences among East Asia.
Europe, and the United States, making it difficult for Asian
bankers to complete transactions within the same day. The
growth was decided by the liberal-ization of regulations in
Singapore.
The Asian Dollar Market is a group of banks in Singapore and
Hong Kong that accept deposits and make loans in U.S. dollars.
Their deposits are time, rather than checking accounts. The two
major centers, through different, complement each other. Hong
Kong serves as the major center for syndicated loans in- the Far
East, whereas Singapore dominates the funding side of the
market. Put simply, Singapore gathers deposits- from various
sources while Hong Kong deploys them.
Case Study
Too Close For Comfort
Because of the technology that allows international trading
hookups and because of the existence of multi-national
investment banks, it is quite easy to trade stocks, bonds,
currencies, futures, and options on a twenty-four-hour basis
and move money across the world in minutes. Because of the
industrialized worlds laissez-faire approach, there is virtually no
authority to control the flow of capital. As a result, for better or
worse, some $2 trillion move around among securities markets
every day. Although some people applaud the liberalization of
world capital markets, just as many people would like to have
more government supervi-sion and control.
Bad news travels fast. In the case of financial mar-kets, it can be
a matter of seconds. The speed of in-formation transmission
was most evident on Black Monday of October 19, 1987. It was
a day of financial meltdown. In two sessions during the week
preceding Black Monday, the Dow Jones Industrial Average
(DJIA) stock index dropped 95 points and 108 points. When
world trading resumed on Monday, Hong Kong recorded a
420-point drop. When the New York mar-ket opened, waves of
selling began. At the end of the day, the DJIA had a record oneday decline of 508 points, which wiped out 23 percent of the
indexs value or the equivalent of $1.1 trillion. The plunge,
when compared to the 1929 stock market crash, was worse in
terms of percentage and speed.
Other markets soon followed the New York Stock Exchangedown. There were sell signals every-where. Tokyo, the worlds
largest capitalized market, saw a drop in stock value of 14
There is no question of the chain reaction, like knocking over

domino pieces. Not so clear however, were the causes of the
panic. The various explanations were the Reagan administrations
apparent willingness to let the dollar fall, the U.S. trade deficits
fear of global economic recession, mutual funds massive selling,
and computerized program trading.
Also unclear was whether the financial markets in the United
States led the declines of the others or whether it was the other
way around. Did New York lead Hong Kong, or did Asian
markets influence Euro-pean markets before affecting the New
York and Chicago markets that would open later on the same
day? At one time, the dominance of the United States was
obvious. When the United States sneezed, others caught the cold.
But today, Japan has nine of the worlds ten leading banks, and
its own financial force allows it to act on its own. What is
obvious is the interrelat-edness of the various markets. They all
can quickly act and react to the developments in other markets.
Another piece of the puzzle is the reactions of consumers and
investors in the short run and long run. Consumers who lost
their wealth on the stock mar-kets may decide to curb their
spending. The decline in consumption may then lead to a cut in
production and employee layoffs. The group that took the
immediate brunt, ironically, was the people employed in the securities industry.
Some experts think that the globalization of fi-nancial markets is
inevitable because of the common denominator-money. The
global economy has already been closely linked with the aid of
technology. Conse-quently, each financial market is not and cannot
be in-dependent. In reality it is more like a single global se-curities
exchange with branches in other countries. This reality provides
investors and MNCs with more flexibility-so much flexibility that
any individual coun-try will find it exceedingly difficult to impose
capital controls. The price of this flexibility is a greater degree of
market volatility and perhaps chaos in global equi-ties.
Questions
1. Can an event like that of Black Monday happen again?
2. At the time of those difficult weeks in October
359
One unique feature of the Euro-market is its stateless financial

system. Although governments place restrictions on the
operations of their national money markets, such restrictive
measures do not apply to the Euro-market in spite of the fact
that it shares the same locations and facilities, as do the national
markets. There is no central bank to control, and the Euromarket has no international authority to which it must answer.
As an independent market of its own, it has its own interestrate structure, and anyone can invest or trade in it. Because it
has no reserve requirements, it is able to of-fer high rates on
deposits and also to make loans at lower rates.
1987, former West Germany was in better eco-nomic shape

than the Unites States, which had record trade deficits and
budget deficits. West Ger-many planned just before Black
Monday to sell its 16 percent stake in Volkswagen. Should
the crash of the U.S. markets have- any impact on West Germanys plan?
3. Because of the globalization of financial markets, some
financial experts predict that the international stock indices
(based on stock prices of companies worldwide) may
eventually replace such national in-dices as the DJIA and S&P
500 in representing the equity investment sentiment. The
Salomon-Russell Global Equity Index and the SalomonRussell Non--U.S. Equity Index is examples of this
development. Do you agree with the prediction? Why or why
not?
360
A Japanese Aisatsu
It is not so much that speaking only Englishs is a disadvantage in
international business. Instead, its more that being bilingual is a huge
advantage. Observations from sitting in on a Aisatsu (a meeting or formal
greeting for high level executive typical in Japan) involving the president of
a large Japanese industrial distributor and the marketing vice president of
an American machinery manufacturer are instructive. The two companies
were typing of reach an agreement of a long-term partnership in Japan.
Business cards were exchanged and formal introduced made. Even though
the president spoke and understood English, one of his three subordinates
acted as an interpreter for the Japanese president. The president the
president asked everyone to be seated. The interpreter sat on a stool
between the two senior executives. The general attitude between the parties
was friendly but polite. Tea and a Japanese orange drink were served.
The Japanese president controlled the interaction completely asking
questions of all American through the interpreter. Attention of all the
participants was given to each speaker in turn. After this initial round of
question for all the Americans. The Japanese president focused on
developing a conversation with the American vice president. During this
interaction an interesting pattern in non-verbal behavior developed. The
Japanese president would ask a question in Japanese. The interpreter then
translated the question for the American attention (gaze direction) was
given to the interpreter. However, the Japaneses president gaze direction
was at the American. Thus the Japanese president could carefully and
unobtrusively observer the Americans facial expressions and non verbal
response. Alternatively, when the American spoke the Japanese president
had twice the response time. Because he understood English, he could
formulate his responses during the translation process.
What is this extra response time worth in a strategic conversation? What
is it worth to be able to carefully observe the nonverbal responses of your
top-level counter part in a high stakes business negotiation?
Face-to-face negotiations are an omnipresent activity in international commerce. Once global marketing strategies have been
formulated, once marketing research has been conducted to
support those strategies, and once products, pricing, promotion, and place decisions have been made, then the focus of
managers turns to implementation of the plans. In international business such plans are almost always implemented
through face-to-face negotiations with business partners and
customers from foreign countries. The sales of goods and
services; the management of distribution channels, the contracting for marketing research and advertising services, licensing and
franchise agreements, and strategic alliances all require managers
from different cultures to sit and talk with one another to
exchange ideas and express needs and preferences. Executives
must also negotiate with representatives of foreign governments who might approve a variety of their marketing actions
or in fact be the actual ultimate customer for goods and services. In many countries governmental officials may also be
joint venture partners, and in some cases vendors. For example,

negotiations for the television broadcast rights for the 1998
Winter Olympics in Nagano, Japan, included CBS, the International Olympic Committee, and Japanese governmental
officials.
One authority on international joint ventures suggests that a
crucial aspect of all in-ternational commercial relationships is the
negotiation of the original agreement. The seeds of success or
failure often are sown at the negotiation table, vis-a-vis (face-to face), where not only are financial and legal details agreed to, but
perhaps more impor-tant, the ambiance of cooperation is
established. Indeed, the legal details and the struc-ture of
international business ventures are almost always modified over
time, and usually through negotiations. But the atmosphere of
cooperation initially established face-to-face at the negotiation
table persists-or the venture fails.
Business negotiations between business partners from the
same country can be difficult. And the added complication of
cross-cultural communication can turn an al-ready daunting task
into an impossible one. On the other hand, if cultural differences are taken into account, often times wonderful business
agreements can be made that lead to long-term, profitable
relationships across borders. The purpose of this final chapter
is to help prepare managers for the challenges and opportunities
of international business negotiations. To do this, we will
discuss the dangers of stereotypes, the impact of culture on
negotiation behavior, and the implications of culture for
managers and negotiators.
The Dangers of Stereotypes

The images of John Wayne, the cowboy, and the samurai, the
fierce warrior, often are used as cultural stereotypes in discussions of international business negotiations. There is almost
always a grain of truth to such representations-an American
cowboy kind of competitiveness versus a samurai kind of
organizational (company) loyalty. One Dutch expert on
international business negotiations argues, The best negotiators are the Japanese because they will spend days trying to get
to know their opponents. The worst are Americans because
they think everything works in foreign countries as it does in the
USA. There are, of course, some Americans who are excellent
international negotia-tors and some Japanese who are ineffective. The point is that negotiations are not con-ducted between
national stereotypes; negotiations are conducted between people
and cultural factors often make huge differences.
Recall our discussion on the cultural diversity within countries,
and consider its relevance to negotiation. For example, we
might expect substantial differences in negotiation styles
between English-speaking and French-speaking Cana-dians.
The genteel style of talk prevalent in the American Deep South
is quite differ-ent from the faster speech patterns and pushiness
361
LESSON 38:
NEGOTIATING WITH INTERNATIONAL CUSTOMERS,
PARTNERS AND REGULATORS
more common in places like New York City. Experts tell us that
negotiation styles differ across genders in America, as well. Still
others tell us that the urbane negotiation behaviors of Japanese
bankers are very different from the relative aggressiveness of
those in the retail industry in that country. Finally, age and
experience can also make important differences. The older Chinese executive with no experience dealing with foreigners is apt
to behave quite differ-ently from her young assistant with
undergraduate and MBA degrees from American uni-versities.
The focus of this chapter is cultures influence on international
negotiation behav-ior. However, it should be clearly understood
that individual personalities and back-grounds also heavily
influence behavior at the negotiation table-and it is the
managers responsibility to consider these factors. Remember:
Companies and countries do not negotiate, people do. Consider the culture of your customers and business partners, but
treat them as individuals.
The Pervasive Impact of Culture on

Negotiation Behavior
The primary purpose of this section is to demonstrate the
extent of cultural differences in negotiation styles, and how
these differences can cause problems in international business
negotiations. The material in this section is based on a systematic study of the topic over the last two decades in which the
negotiation styles of more than 1,000 businesspeople in 16
countries (18 cultures) were considered. The countries studied
were: Japan, Korea, Tai-wan, China (northern and southern),
Hong Kong, the Philippines, Russia, the Czech Re-public,
Germany, France, the United Kingdom, Spain, Brazil, Mexico,
Canada (English- speaking and French-speaking), and the
United States. The countries were chosen because they comprise
Americas most important present and future trading partners.
Looking broadly across the several cultures two important
lessons stand out. The first is that regional generalizations
usually are not correct. For example, Japanese and Korean
negotiation styles are quite similar in some ways, but in other
ways they could not be more different. The second lesson
learned from this study is that Japan is an ex-ceptional place: On
almost every dimension of negotiation style considered, the
Japan-ese are on or near the end of the scale. Sometimes,
Americans are on the other end. But actually, most of the time
Americans are somewhere in the middle. The reader will see this
evinced in the data presented below. The Japanese approach,
however, is most dis-tinct, even sui-generis.
Cultural differences cause four kinds of problems in international business negotia-tions-at the levels of:
1. Language
2. Nonverbal behaviors
3. Values
4. Thinking and decision-making processes
The order is important; the problems lower on the list are more
serious because they are more subtle. For example, two
negotiators would notice immediately if one is speaking
Japanese and the other German. The solution to the problem
may be as simple as hiring an interpreter or talking in a common third language, or it may be as difficult as learning a
362
lan-guage. Regardless of the solution, the problem is obvious.

Cultural differences in nonverbal behaviors, on the other hand,
are almost always hidden below our awareness. That is to say, in
a face-to-face negotiation participants nonverbally-and more
subtly-give off and take in a great deal of information. Some
experts argue that this information is more important than
verbal information. Almost all this signaling goes on below our
levels of conscious-ness. When the nonverbal signals from
foreign partners are different, negotiators are most apt to
misinterpret them without even being conscious of the
mistake. For example, when a French client consistently
interrupts, Americans tend to feel uncomfortable without noticing exactly why. In this manner, interpersonal friction often
colors business relationships, goes on undetected, and,
consequently, uncorrected. Differences in values and thinking
and decision-making processes are hidden even deeper and
therefore are even harder to cure. We discuss these differences
below, starting with language and nonverbal behaviors.
Differences in Language and Nonverbal

Behaviors
Americans are clearly quite near the bottom of the languages
skills list, although Aus-tralians assert that Australians are even
worse. It should be added, however, that American undergrads
recently have begun to see the light and are flocking to language
classes. Un-fortunately, foreign language teaching resources in
the U.S. are inadequate to satisfy the increasing demand. In
contrast, the Czechs are now throwing away a hard-earned
competi-tive advantage: Young Czechs will not take Russian
anymore. It is easy to understand why, but the result will be a
generation of Czechs who cannot leverage their geographic
advan-tage because they will not be able to speak to their
neighbors to the east.
The language advantages of the Japanese executive in the
description of the Aisatsu that opened the chapter were quite
clear. However, the most common complaint heard from
American managers regards foreign clients and partners breaking
into side conver-sations in their native languages. At best, it is
seen as impolite and, quite often, Ameri-can negotiators are
likely to attribute something sinister to the content of the
foreign talk - Theyre plotting or telling secrets or. . .
This is a frequent American mistake. The usual purpose of such
side conversations is to straighten out a translation problem.
For instance, one Korean may lean over to an-other and ask,
Whatd he say? Or, the side conversation can regard a
disagreement among the foreign team members. Both circumstances should be seen as positive signs by Americans, because
getting translations straight enhances the efficiency of the interactions, and concessions often follow internal disagreements.
But because most Ameri-cans speak only one language, neither
circumstance is appreciated. By the way, people from other
countries are advised to give Americans a brief explanation of
the content of their first few side conversations to assuage the
sinister attributions.
Japan. Consistent with most descriptions of Japanese negotiation behavior, the results of this analysis suggest their style of
interaction is among the least aggressive (or most polite).
Threats, commands, and warnings appear to be deemphasized
Korea. Perhaps one of the more interesting aspects of the

analysis is the contrast of the Asian styles of negotiations.
Non-Asians often generalize about the Orient; the find-ings
demonstrate, however, that this is a mistake. Korean negotiators used considerably more punishments and commands than
did the Japanese. Koreans used the word no and interrupted
more than three times as frequently as the Japanese. Moreover,
no silent periods occurred between Korean negotiators.
China (Northern). The behaviors of the negotiators from
Northern China (i.e., in and around Tianjin) are most remarkable in the emphasis on asking questions at 34 per-cent. Indeed,
70 percent of the statements made by the Chinese negotiators
were classi-fied as information-exchange tactics. Other aspects of
their behavior were quite similar to the Japanese, particularly the
use of no and you and silent periods.
Taiwan. The behavior of the businesspeople in Taiwan was
quite different from that in China and Japan but similar to that
in Korea. The Chinese on Taiwan were exceptional in the time
of facial gazing-on the average almost 20 out of 30 minutes.
They asked fewer questions and provided more information
(self-disclosures) than did any of the other Asian groups.
Russia. The Russians style was quite different from that of any
other European group, and, indeed, was quite similar in many
respects to the style of the Japanese. They used no and you
infrequently and used the most silent periods of any group.
Only the Japanese did less facial gazing, and only the Chinese
asked a greater percentage of questions.
Germany. The behaviors of the western Germans are difficult
to characterize because they fell toward the center of almost all
the continua. However, the Germans were ex-ceptional in the
high percentage of self-disclosures at 47 percent and the low
percentage of questions at 11 percent.
United Kingdom. The behaviors of the British negotiators are
remarkably similar to those of the Americans in all respects.
Spain. Diga is perhaps a good metaphor for the Spanish
approach to negotiations evinced in our data. When you make a
phone call in Madrid, the usual greeting on the other end is not
hola (hello) but is, instead, diga (speak). It is not surprising,
then, that the Spaniards in the videotaped negotiations likewise
used the highest percentage of commands (17 percent) of any
of the groups and gave comparatively little information (selfdisclosures, 34 percent). Moreover, they interrupted one another
more frequently than any other group, and they used the terms
no and you very frequently.
France. The style of the French negotiators is perhaps the
most aggressive of all the groups. In particular, they used the
highest percentage of threats and warnings (together, 8 percent).
They also used interruptions, facial gazing, and no and you
very fre-quently compared to the other groups, and one of the
French negotiators touched his partner on the arm during the
simulation.
Brazil. The Brazilian businesspeople, like the French and

Spanish, were quite aggres-sive. They used the second highest
percentage of commands of all the groups. On average, the
Brazilians said the word no 42 times, you 90 times, and
touched one another on the arm about 5 times during 30
minutes of negotiation. Facial gazing was also high.
Mexico. The patterns of Mexican behavior in our negotiations
are good reminders of the dangers of regional or languagegroup generalizations. Both verbal and nonverbal behaviors are
quite different than those of their Latin American (Brazilian) or
continen-tal (Spanish) cousins. Indeed, Mexicans answer the
telephone with the much less de-manding bueno (short for
good day). In many respects, the Mexican behavior is very
similar to that of the negotiators from the United States.
French-Speaking Canada. The French-speaking Canadians
behaved quite similarly to their continental cousins. Like the
negotiators from France, they too used high percentages of
threats and warnings, and even more interruptions and eye
contact. Such an aggressive interaction style would not mix well
with some of the more low-key styles of some of the Asian
groups or with English speakers, including English-speaking
Canadians.
English-Speaking Canada. The Canadians who speak English
as their first language used the lowest percentage of aggressive
persuasive tactics (threats, warnings, and pun-ishments totaled
only 1 percent) of all 14 groups. Perhaps, as communications
re-searchers suggest, such stylistic differences are the seeds of
interethnic discord as wit-nessed in Canada over the years. With
respect to international negotiations, the English-speaking
Canadians used noticeably more interruptions and nos than
nego-tiators from either of Canadas major trading partners, the
United States and Japan.
United States. Like the Germans and the British, the Americans fell in the middle of most continua. They did interrupt
one another less frequently than all the others, but that was
their sole distinction.
These differences across the cultures are quite complex, and this
material by itself should not be used to predict the behaviors
of foreign counterparts. Instead, great care should be taken with
respect to the aforementioned dangers of stereotypes. The key
here is to be aware of these kinds of differences so the Japanese
silence, the Brazilian no, no, no. ., or the French threat are not
misinterpreted.
Differences in Values
Four values-objectivity, competitiveness, equality, and punctuality - which are held strongly and deeply by most Americans,
seem to frequently cause misunderstandings and bad feelings in
international business negotiations.
Objectivity. Americans make decisions based upon the
bottom line and on cold, hard facts. Americans dont play
favorites. Economics and performance count, not peo-ple.
Business is business. Such statements well reflect American
notions of the im-portance of objectivity.
The single most important book on the topic of negotiation,
Getting to YES, is highly recommended for both American and
foreign readers. The latter will learn not only about negotiations
363
in favor of the more positive promises, recommendations, and

commitments. Particularly indicative of their polite conversational style was their infrequent use of no and you and
facial gazing, as well as more frequent silent periods.
but, perhaps more important, about how Americans think

about negotiations. The authors are quite emphatic about
separating the people from the problem, and they state,
Every negotiator has two kinds of interests: in the substance
and in the relationship. This advice is probably quite worthwhile in the United States or perhaps in Germany, but in most
places in the world such advice is nonsense. In most places in
the world, personalities and substance are not separate issues
and cannot be made so.
For example, consider how important nepotism is in Chinese
or Hispanic cultures. Experts tell us that businesses dont grow
beyond the bounds and bonds of tight fam-ily control in the
burgeoning Chinese Commonwealth. Things work the same
way in Spain, Mexico, and the Philippines by nature. And, just
as naturally, negotiators from such countries not only will take
things personally but will be personally affected by ne-gotiation
outcomes. What happens to them at the negotiation table will
affect the busi-ness relationship regardless of the economics
involved.
Competitiveness and Equality. Simulated negotiations can be
viewed as a kind of experimental economics wherein the values
of each participating cultural group are roughly reflected in the
economic outcomes. The simple simulation used in the study
represents the essence of commercial negotiations-it has both
competitive and cooper-ative aspects. At least 40 businesspeople
from each culture played the same buyer-seller game, negotiating
over the prices of three products. Depending on the agreement
reached, the negotiation pie could be made larger through
cooperation (as high as $10,400 in joint profits) before it is
divided between the buyer and seller.
The Japanese were the champions at making the pie big. Their
joint profits in the simulation were the highest (at $9,590)
among the 18 cultural groups. The American pie was more
average-sized (at $9,030), but at least it was divided relatively
equitably (51.8 percent of the profits went to the buyers).
Alternatively, the Japanese (and others) split their pies in strange
ways, with buyers making higher percentages of the profits
(53.8 percent). The implications of these simulated business
negotiations are completely con-sistent with the comments of
other authors and the adage that in Japan the buyer is kinger.
By nature, Americans have little understanding of the Japanese
practice of giv-ing complete deference to the needs and wishes
of buyers. That is not the way things work in America.
American sellers tend to treat American buyers more as equals,
and the egalitarian values of American society support this
behavior. Moreover, most Ameri-cans will, by nature, treat
Japanese buyers more frequently as equals. Likewise, Ameri-can
buyers will generally not take care of American sellers or
Japanese sellers. The American emphasis on competition and
individualism represented in these findings is quite consistent
with the work of Geert Hofstede, which indi-cated that
Americans scored the highest among 40 other cultural groups
on the individu-alism (versus collectivism) scale.
Finally, not only do Japanese buyers achieve higher results than
Americans buyers, but compared to American sellers ($4,350),
Japanese sellers also get more of the com-mercial pie ($4,430),
as well. Interestingly, when shown these results, Americans in
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ex-ecutive seminars still often prefer the American sellers role.

In other words, even though the American sellers make lower
profits than the Japanese, many American man-agers apparently
prefer lower profits if those profits are yielded from a more
equal split of the joint profits.
Time. Just make them wait. Everyone else in the world
knows no negotiation tactic is more useful with Americans,
because no one places more value on time, no one has less
patience when things slow down, and no one looks at their
wristwatches more than Americans do. The material on P-time
versus M-time is quite pertinent here. Edward T. Hall in his
seminal writing is best at explaining how the passage of time is
viewed differently across cultures and how these differences
most often hurt Americans.
Even Americans try to manipulate time to their advantage
however. As a case in point, Solar Turbines Incorporated (a
division of Caterpillar) once sold $34 million worth of
industrial gas turbines and compressors for a Russian natural
gas pipeline pro-ject. Both parties agreed that final negotiations
would be held in a neutral location, the south of France. In
previous negotiations, the Russians had been tough but
reasonable. But in Nice, the Russians were not nice. They
became tougher and, in fact, completely unreasonable, according
to the solar executives involved.
It took a couple of discouraging days before the Americans
diagnosed the problem. but once they did, a crucial call was made
back to headquarters in San Diego. Why had the Russians turned
so cold? They were enjoying the warm weather in Nice and
werent interested in making a quick deal and heading back to
Moscow! The call to California was the key event in this negotiation. Solars headquarters people in San Diego were so-phisticated
enough to allow their negotiators to take their time. From that
point on, the routine of the negotiations changed to brief, 45minute meetings in the mornings, with afternoons at the golf
course, beach, or hotel, making calls and doing paperwork.
Crossing Borders 1
Changing Your Internal Clock
Vincente Lopez spent five years making the Tijunan to san Diego
commute. Each time he crossed the order, it felt like a button was pushed
inside him. When entering the united states, he felt is whole being switch
to rapid clock time mode: he would walk faster, drive faster, talk faster,
and meet deadlines, when returning home, his body would relax and slow
the moment he saw the Mexico customs agent. There is a large group of
people like me who move back and forth between the times. Lopez
observes many, he believes; insist on keeping their homes on the Mexican
side precisely because of its slower pace of life.
Finally, during the fourth week, the Russians began to make

concessions and to ask for longer meetings. Why? They could
not go back to Moscow after four weeks on the Mediterranean
without a signed contract. This strategic reversal of the time
pressure yielded a wonderful contract for Solar.
Differences in Thinking and DecisionMaking Processes

When faced with a complex negotiation task, most Westerners
(notice the generalization here) divide the large task up into a
series of smaller tasks. Issues such as prices, deliv-ery, warranty,

and service contracts may be settled one issue at a time, with the
final agreement being the sum of the sequence of smaller
agreements. In Asia, however, a different approach is more
often taken wherein all the issues are discussed at once, in no
apparent order, and concessions are made on all issues at the
end of the discussion. The Western sequential approach and the
Eastern holistic approach do not mix well.
For example, American managers report great difficulties in
measuring progress in Japan. After all, in America, you are half
done when half the issues are settled. But in Japan, nothing
seems to get settled. Then, surprise, you are done. Often,
Americans make unnecessary concessions right before agreements are announced by the Japanese. For example, one
American department store buyer traveling to Japan to buy six
differ-ent consumer products for his chain lamented that
negotiations for his first purchase took an entire week. In the
United States, such a purchase would be consummated in an
afternoon. So, by his calculations, he expected to have to spend
six weeks in Japan to complete his purchases. He considered
raising his purchase prices to try to move things along faster.
But before he was able to make such a concession, the Japanese
quickly agreed on the other five products in just three days. This
particular businessman was, by his own admission, lucky in his
first encounter with Japanese bargainers.
This American businessmans near blunder reflects more than
just a difference in decision-making style. To Americans, a
business negotiation is a problem-solving activ-ity, the best deal
for both parties being the solution. To a Japanese
businessperson. on the other hand, a business negotiation is a
time to develop a business relationship with the goal of longterm mutual benefit. The economic issues are the context, not
the con-tent, of the talks. Thus, settling anyone issue really is
not that important. Such details will take care of themselves
once a viable, harmonious business relationship is estab-lished.
And, as happened in the case of our retail goods buyer, once
the relationship was established-signaled by the first agreementthe other details were settled quickly.
American bargainers should anticipate such a holistic approach
and be prepared to discuss all issues simultaneously and in an
apparently haphazard order. Progress in the talks should not be
measured by how many issues have been settled. Rather,
Americans must try to gauge the quality of the business
relationship. Important signals of progress can be:
Higher-level foreigners being included in the discussions.
Their questions beginning to focus on specific areas of the

deal.
A softening of their attitudes and position on some of the

issues- Let us take some time to study this issue.
At the negotiation table, increased talk among themselves in

their own language, which may often mean theyre trying to
decide something.
Increased bargaining and use of the lower level, informal,

and other channels of communication.
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Lesson 39:
Implication of Negotiations Differences for Managers
Implications for Managers and
Negotiators
Considering all the potential problems in cross-cultural
negotiations, it is a wonder that any international business gets
done at all. Obviously, the economic imperatives of global trade
make much of it happen despite the potential pitfalls. But an
appreciation of cultural differences can lead to even better
international commercial transactions-it is not just business
deals but highly profitable business relationships that are the
real goal of international business negotiations.
Four steps lead to more efficient and effective international
business negotiations. They are: (1) selection of the appropriate
negotiation team; (2) management of prelimi-naries, including
training, preparations, and manipulation of negotiation
settings; (3) management of the process of negotiations, that
is, what happens at the negotiation table; and (4) appropriate
follow-up procedures and practices. Each is discussed below.
Negotiation Teams
One reason for global business successes is the large numbers
of skillful international negotiators. These are the managers
who have lived in foreign countries and speak for-eign languages. In many cases, they are immigrants to the United States
or those who have been immersed in foreign cultures in other
capacities (Peace Corps volunteers and Mormon missionaries are
common examples). Thankfully, more business schools are
beginning to reemphasize language training and visits abroad.
Indeed, it is interesting to note that the original Harvard
Business School catalogue of 1908-09 listed German, French,
and Spanish correspondence within its curriculum.
The selection criteria for international marketing and sales
personnel are applicable in selecting negotiators as well. Traits
such as maturity, emotional stability, breadth of knowledge,
optimism, flexibility, empathy, and stamina are all important,
not only for marketing executives involved in interna-tional
negotiations, but also for the technical experts who often
accompany and support them. In studies conducted at Ford
Motor Company and AT&T, three additional traits were found
to be important predictors of negotiator success with international clients and partners: willingness to use team assistance,
listening skill, and influence at head-quarters.
Willingness to use team assistance is particularly important for
American negotia-tors. Because of a cultural heritage of
independence and individualism Americans often make the
mistake of going it alone against greater numbers of foreigners.
One American sitting across the negotiation table from three or
four Chinese negotiators is unfortu-nately an all too common
sight. The number of brains in the room does make a difference. Moreover, business negotiations are social processes, and
the social reality is that a larger number of nodding heads can
exercise greater influence than even the best argu-ments. It is
366
also much easier to gather detailed information when teams are

negotiating rather than individuals. For example, the Japanese
are quite good at bringing along ju-nior executives for the dual
purposes of training via observation and careful note taking.
Compensation schemes that overly emphasize individual
performance can also get in the way of team negotiating-a
negotiation team requires a split commission, which many
Americans naturally eschew. Finally, negotiators may have to
request the accom-paniment of senior executives to better
match up with clients and partners negotiation teams. Particularly in high-context, hierarchical cultures rank speaks quite
loudly in both persuasion and the demonstration of interests
in the business relationship.
The single most important activity of negotiations is listening.
The negotiators primary job is collecting information with the
goal of enhancing creativity. This may mean assigning one team
member the sole responsibility of taking careful notes and not
worrying about speaking during the meetings. This may also
mean that knowing the lan-guage of clients and partners will be
crucial for the most complete understanding of their needs and
preferences. The importance of listening skills in international
business negotiations cannot be overstated.
Bringing along a senior executive is important because influence
at headquarters is crucial to success. Indeed, many experienced
international negotiators argue that half the negotiation is with
headquarters. The representatives lament goes something like
this, The better I understand my customer, the tougher time I
have with headquarters. Of course, this misery associated with
boundary spanning roles is precisely why interna-tional
negotiators and sales executives make so much money.
Finally, it is also important to reiterate a point made in: Gender
should not be used as a selection criterion for international
negotiation teams. This is so despite the great differences in the
roles of women across cultures. Even in countries where
women do not participate in management, American women
negotiators are treated as foreigners first. For obvious reasons it
may not be appropriate for women managers to participate in
some forms of business entertainment-common baths in
locker rooms at Japanese golf course club houses, for example.
However, it is still important for women executives to establish
personal rapport at restaurants and other informal settings. Indeed, one expert on cross-gender communication suggests that
women may actually have some advantages in international
negotiations:
In general, women are more comfortable talking one-an-one.
The situation of speaking up in a meeting is a lot closer to
boys experience of using language to establish their position in
a large group than it is to girls experience using language to
maintain intimacy. Thats some-thing that can be exploited.
Dont wait for the meeting; try to make your point in advance;
one-to-one. This is what the Japanese do, and in many ways
Negotiation Preliminaries
Many companies in the United States provide employees with
negotiations training. For example, through his training
programs, Chester Karrass24 has taught more people to
negotiate than any other purveyor of the service-see his ads in
almost all in-flight mag-azines of domestic air carriers. However, very few companies provide training for nego-tiations with
managers from other countries. Ford Motor Company is an
exception.
Crossing Borders 2
Ford Trains Executives for Negotiations with Japanese
Proactive and direct is the approach ford uses to develop competence in
employees who interact with the Japanese. This occurs through a variety of
practices, including programs that help ford personnel better understand
the Japanese culture and negotiating practices, and by encouraging the
study of the spoken language. By designing training that highlights both
the pitfalls and the opportunities in negotiations, ford increases the change
to expand the negotiation pie.
Back in 1988 the key personnel on Fords minivan team attended one of
the first sessions of a managing Negotiations Japan (MNJ) program at the
ford Executive Development Center. Its negotiations with the Nissan
Team improved immediately. But perhaps the best measure of the
usefulness of the MNJ program is the success of the Nissan joint venture
product itself. Reflected in the villager / quest are countless hours of
effective face-to-face meetings with fords Japanese partner.
Not everyone negotiating outside the US has the advantages of in house
training. However, many sources of information are available books
(particularly, on Japan), periodicals, and colleagues with first hand
experience. To succeed negotiators have to be truly interested in and
challenged by the international negotiating environment structuring
negotiations to achieve win win results and building a long term
relationship takes thoughtful attention and commitment.
Ford does more business with Japanese companies than any

other firm. Ford owns 33 percent of Mazda, it built a successful
minivan with Nissan, and it buys and sells component parts
and completed cars from and to Japanese companies. But
perhaps the best measure of Fords Japanese business is the
8,000 or so U.S. to Japan round-trip air-line tickets the company
buys annually! Ford has made a large investment in training its
managers with Japanese responsibilities. More than 1,500 of its
executives have at-tended a three-day program on Japanese
history and culture and the companys Japanese business
strategies. More than 1,000 Ford managers who work face-toface with Japan-ese have attended a three-day program,
Managing Negotiations: Japan (MNJ). The MNJ program
includes negotiation simulations with videotape feedback,
lectures with cultural differences demonstrated via videotapes of
Japanese/American interactions, and rehearsals of upcoming
negotiations. The company also conducts similar programs on
Korea and the Peoples Republic of China.
In addition to MNJ, the broader Japan training efforts at Ford
must be credited for their successes in Japan. Certainly, MNJ
alumni can be seen exercising influence across and up the ranks

regarding Japanese relationships. But the organizational
awareness of the cultural dimensions of the Japanese business
system was quickly raised as well by their broader, three-day
program on Japanese business strategies. Remember the story
about the Russians in Nice? Two critical events took place. First,
the Solar Turbines (Inc.) negotiators diagnosed the problem.
Second, and equally important, their Califor-nia superiors
appreciated the problem and approved the investments in time
and money to outwait the Russians. So it is that the Ford
programs have targeted not only the nego-tiators working
directly with the Japanese but also their managers who spend
most of their time in the companys Detroit headquarters.
Negotiators need information specific to the cultures in which
they work. Just as critical, their managers back in the United
States need a basic awareness and appreciation for the importance of culture in interna-tional business so that they will be
more apt to listen to the odd-sounding recommen-dations
coming from their people in Moscow, Rio, or Tokyo.
Any experienced business negotiator will tell you that there is
never enough time to get ready. Given the time constraints of
international negotiations, preparations must be accomplished
efficiently the homework must be done before the bargaining
begins. We recommend the following checklist to ensure proper
preparation and planning for international negotiations:
1. Assessment of the situation and the people.
2. Facts to confirm during the negotiation.
3. Agenda.
4. Best alternative to a negotiated agreement (BATNA).
5. Concession strategies.
6. Team assignments.
Preparation and planning skill is at the top of almost everyones
list of negotiator traits, yet it seems many Americans are still
planning strategies during over-ocean flights when they should
be trying to rest. Quick wits are important in business negotiations, and ar-duous travel schedules and jet lag dull even the
sharpest minds. Obviously information about the other sides
goals and preferences should be sought ahead of time. Also
im-portant are clear directions from headquarters and detailed
information about market conditions.
No matter how thorough the preliminary research, negotiators
should always make a list of key facts to reconfirm at the
negotiation table. Information gathered about for-eign
customers and markets almost always includes errors, and
things can change dur-ing those long airline flights. Next,
anticipate that managers from other cultures may put less
emphasis on a detailed agenda, but it still makes sense to have
one to propose and help organize the meetings.
The most important idea in Getting to YES is the notion of
the best alternative to a negotiated agreement (BATNA). This is
how power in negotiations is best measured. Even the smallest
companies can possess great power in negotiations if they have
many good alternatives and their large-company counterparts
do not. It is also important to plan out and write down
concession strategies. Concessions can often snowball, and
367
American womens style is a lot closer to the Japanese style than

to American mens.
writing them down ahead of time helps negotiators keep them

under control.
to communicate with clients and partners in places like Mexico

and Malaysia.
Finally, specific team assignments should be made clear-who

handles technical details, who takes notes, who plays the tough
guy, who does most of the talking for the group, etc. Obviously
this last consideration presumes a negotiation team is involved.
Finally, it is important to manipulate time limits. Recall the

example about the Rus-sians and Americans in Nice. The
patience of the home office may be indispensable, and major
differences in time orientation should be planned for when
business negotiations are conducted in most other countries.
There are at least seven aspects of the negotiation setting that

should be manipu-lated ahead of time if possible:
1. Location.
2. Physical arrangements.
3. Number of parties.
4. Number of participants.
5. Audiences (news media, competitors, fellow vendors, etc.).
6. Communications channels.
7. Time limits.
Location speaks loudly about power relations. Traveling to a
negotiating counterparts home turf is a big disadvantage, and
not just so because of the costs of travel in money and fatigue.
A neutral location may be preferred-indeed; many trans-Pacific
business negotiations are conducted in Hawaii. The weather and
golf are nice and the jet lag is about equal. Location is also an
important consideration because it may determine legal
jurisdictions if disputes arise. If you must travel to your
negotiating counterparts city then a useful tactic is to invite
clients or partners to work in a meeting room at your hotel.
You can certainly get more done if they are away from the
distractions of their offices.
Physical arrangements can affect cooperativeness in subtle ways.
In high-context cultures the physical arrangements of rooms can
be quite a source of embarrassment and irritation if handled
improperly. To the detriment of their foreign business relationships Americans tend to be casual about such arrangements.
Furthermore, views about who should attend negotiations vary
across cultures. Americans tend to want to get everyone together
to hammer out an agreement even if opinions and positions
are divergent. Japanese prefer to talk to everyone separately, and
then once everyone agrees more inclusive meetings are scheduled.
Russians tend toward a cumulative approach, meeting with one
party, reaching an agreement, then both the first two call on a
third party, and so on. In addition, the importance of not being
outnumbered in international business negotia-tions has already
been mentioned.
Audiences can have crucial influences on negotiation processes.
Purchasing execu-tives at PetroBras, the Brazilian national oil
company, were well known for putting competitive bidders in
rooms adjacent to one another to increase competitive pressures on
both vendors. Likewise, news leaks to the press played a crucial role
in pushing along the negotiations between General Motors and
Toyota regarding a joint-venture production agreement.
As electronic media become more available and efficient, more
business can be con-ducted without face-to-face communication. However, Americans should recognize that their
counterparts in many other countries do not necessarily share
their attraction to the In-ternet and teleconferencing. Indeed, a
conversation over a long dinner may be the most effi-cient way
368
At the Negotiation Table

The most difficult aspect of international business negotiations
is the actual conduct of the face-to-face meeting. Assuming that
the best representatives have been chosen, and assuming those
representatives are well prepared and that situational factors
have been manipulated in ones favor, things can still go sour at
the negotiation table. Obviously, if these other preliminaries
have not been managed properly, things will go wrong during
the meetings. Even with great care and attention to preliminary
details, managing the dynamics of the negotiation process is
almost always the greatest challenge facing Americans seeking to
do business in other countries.
Going into a business negotiation, most people have expectations about the proper or normal process of such a meeting.
Based on these expectations, progress is measured and appropriate bargaining strategies are selected. That is, things may be
done differently in the latter stages of a negotiation than they
were in the earlier. Higher risk strategies may be employed to
conclude talks-as in the final two minutes of a close soccer
match. But all such decisions about strategy are made relative to
perceptions of progress through an expected course of events.
Differences in the expectations held by parties from different
cultures are one of the major difficulties in any international
business negotiation. Before these differences are discussed,
however, it is important to point out similarities. Everywhere
around the world we have found that business negotiations
proceed through four stages:
1. Non-task sounding.
2. Task-related exchange of information.
3. Persuasion.
4. Concessions and agreement.
The first stage, non-task sounding, includes all those activities
that might be described as establishing a rapport or getting to
know one another, but it does not include informa-tion related
to the business of the meeting. The information exchanged
in the second stage of business negotiations regards the parties
needs and preferences. The third stage, persuasion, involves the
parties attempts to modify one anothers needs and preferences through the use of various persuasive tactics. The final
stage of business negoti-ations involves the consummation of
an agreement, which is often the summation of a series of
concessions or smaller agreements.
Despite the consistency of this process across diverse cultures,
the content and du-ration of the four stages differ substantially.
For example, Exhibit 1 details such pro-cedural differences in
Japan and the United States, as well as differences in language,
nonverbal behavior, and values.
such time almost always is used to size up ones clients. Depending on the results of this process, proposals and arguments are
formed using dif-ferent jargon and analogies. Or it may be
decided not to discuss business at all if clients are distracted by
other personal matters or if the other person seems untrustworthy. All this sounds like a lot to accomplish in five to ten minutes,
but thats how long it usually takes in the United States. This is
not the case in other high-context countries like China or Brazil;
the goals of the non-task sounding are identical, but the time
spent is much, much longer.
Exhibit 1 Summary of Japanese and American Business Negotiation Styles
Category
Japanese
Americans
Language
Most Japanese executives

understand English, although
interpreters are often used.
Nonverbal
behaviors
The Japanese interpersonal

communication style includes less
eye contact, fewer negative facial
expressions, and more periods of
silence.
Indirectness and face saving are
important Vertical buyer/seller
relationships with sellers
depending on goodwill of buyers
(amae) is typical
Americans have less time to

formulate answers and observe
Japanese nonverbal responses
because of a lack of knowledge of
Japanese.
American businesspeople tend to
"fill" silent periods with arguments
or concessions.
Values
1.Non-task sounding"
2.Task-related exchange
of information
3. Persuasion
4. Concessions and
agreement
Speaking one's mind is important.

Buyer/seller relationships are
horizontal.
Considerable time and expense

devoted- to such efforts is the practice, in Japan.
This the most important step high
first offers with long explanations and
in-depth clarifications.
Persuasion is accomplished primarily
behind the scenes. Vertical status
relations dictate bargaining outcomes.
Concessions are made only toward
the end of negotiations a holistic
approach to decision making.
Progress is difficult to measure for
Americans.
Very short periods are typical.

Information is given briefly and
directly. "Fair" first offers are more
typical.
The most important step: Minds are
changed at the negotiation table and
aggressive persuasive tactics are
often used.
Concessions and commitments are
made throughout-a sequential
approach to decision making.
Four Stages of Business Negotiations

Learning about a clients background and interests also provides
important cues about appropriate communication styles. To the
extent that peoples backgrounds are similar, communication
can be more efficient. Engineers can use technical jargon when
talking to other engineers. Sports enthusiasts can use sports
analogies. Those with chil-dren can compare the cash drain of
putting a kid through college, and so on.
During these initial stages of conversation, judgments, too, are
made about the kind of person(s) with whom one is dealing:
Can this person be trusted? Will he be re-liable? How much
power does she have in her organization? All such judgments
are made before business discussions ever begin.
There is a definite purpose to these preliminary non-task
discussions. Although most people are often unaware of it,
Crossing Borders 3
Fishing for Business in Brazil
How important is non-task sounding? Consider this description about an
American bankers meeting in Brazil, as told by an observer.
Introductions were made. The talk began with the usual How do you like
Rio? questions-Have you been to Ipanema, Copacabana, Corcovado, etc?
There was also talk about the flight down from New York. After about
five minutes of this chatting, the senior American quite conspicuously
glanced at his watch, and then asked his client what he knew about the
banks new services.
A little, responded the Brazilian. The senior, American whipped a
brochure out of his briefcase, opened it on the desk in front of the client,
and began his sales pitch.
369
Non-task Sounding. Americans always discuss topics other

than business at the nego-tiation table (for example, the
weather, family, sports, politics, and business conditions in
general), but not for long. Usually the discussion is moved to
the specific business at hand after five to ten minutes. Such
preliminary talk, known as non-task sounding, is much more
than just friendly or polite; it helps to learn how the other side
feels that par-ticular day. One can determine during non-task
sounding if a clients attention is focused on business or
distracted by other matters, personal or professional.
After about three minutes of fewer forms, electronic transfers, and

reducing ac-counts receivables, the Brazilian jumped back in, Yes, that
should make us more com-petitive. and competition is important here in
Brazil. In fact, have you been follow-ing the World Cup football (soccer)
matches recently? Great games. And so the reel began to whir, paying out
that monofilament line right there in that hot high-rise office.
After a few minutes dissertation on the local futbol teams, Pele, and why
football isnt popular in the United States, the American started to try to
crank the Brazilian back in. The first signal was the long look at his
watch, then the interruption, Perhaps we can get back to the new services
we have to offer.
The Brazilian did get reeled back into the subject of the sale for a couple
of minutes, but then the reel started to sing again. This time he went from
efficient banking transac-tions to the nuances of the Brazilian financial
system to the Brazilian economy. Pretty soon we were all talking about
the world economy and making predictions about the U.S. presidential
elections.
Another look at his Rolex, and the American started this little sport
fishing ritual all over again. From my perspective (I wasnt investing time
and money toward the success of this activity), this all seemed pretty
funny, every time the American VP loaded at his watch during the next
45 minutes, I had to bite my cheeks to keep form laughing out loud. He
never did get to page two of his brochure. The Brazilian just wasnt
interested in talking business with someone he didnt know pretty well.
In the United States, firms resort to the legal system and their
lawyers when theyve made a bad deal because of a mistake in
sizing up a customer or vendor. In most other countries the
legal system cannot be depended upon for such purposes.
Instead, execu-tives in places like Korea and Egypt spend
substantial time and effort in non-task sound-ing so that
problems do not develop later. Americans need to reconsider,
from the for-eigners perspective, the importance of this first
stage of negotiations if they hope to succeed in Seoul or Cairo.
Task-Related Information Exchange. Only when non-task
sounding is complete and a trusting personal relationship established, should business be introduced. American executives are
advised to let the foreign counterpart decide when such substantive
nego-tiations should begin, to let them bring up business.
A task-related information exchange implies a two-way
communication process. However, observations suggest that
when Americans meet executives from some cul-tures across the
negotiation table, the information flow is unidirectional.
Japanese, Chi-nese, and Russian negotiators all appear to ask
thousands of questions and to give lit-tle feedback. The
barrage of questions severely tests American negotiators
patience, and the latter causes them great anxiety. Both can add
up too much longer stays in these countries, which means
higher travel expenses.
Certainly it is an excellent negotiation tactic to drain information
from ones negoti-ation counterparts. But the oft-reported
behaviors of Chinese, Japanese, and Russians may not necessarily
represent a sophisticated negotiation ploy. Indeed, in careful
studies of conversational patterns of Americans negotiating with
Japanese, the Americans seem to fill the silent periods and do
most of the talking. These results suggest that American
370
negotiators must take special care to keep their mouths shut and
let foreign counterparts give them information.
Exchanging information across language barriers can be quite
difficult as well. Most of us understand about 80-90 percent of
what our same-culture spouses or room-mates say-that means
10-20 percent is misunderstood or misheard. That latter
percent-age goes up dramatically when someone is speaking a
second language, no matter the highest fluency levels and length
of acquaintance. And when the second language capa-bility is
limited, entire conversations may be totally misunderstood.
Using multiple communication channels during presentations
writing, exhibits, speaking, repetition works to minimize the
inevitable errors.
In many cultures negative feedback is very difficult to obtain. In
high-context cul-tures like Mexico and Japan, speakers are
reluctant to voice objections lest they damage the all-important
personal relationships. Some languages themselves are by
nature indi-rect and indefinite. English is relatively clear, but
translations from languages like Japanese can leave much to be
understood. In more collectivistic cultures like China, negotiators may be reluctant to speak for the decision-making group
they represent, or they may not even know how the group feels
about a particular proposal. All such prob-lems suggest the
importance of having natives of customer countries on your
negotia-tion team and/or spending extra time in business and
informal entertainment settings trying to understand better the
information provided by foreign clients and partners. Alternatively, low-context German executives often complain that
American presentations include too much fluff -they are
interested in information only, not the hyperbole and hedges so
common in American speech. Negative feedback from Germans
can seem brutally frank to higher-context Americans.
A final point of potential conflict in information exchange has to
do with first offers. Price padding varies across cultures, and
Americans first over tend to come in relatively close to what they
really want. A million dollars is the goal, lets start at $1.2
million, seems about right to most Americans. Implicit in such
a first offer is the hope that things will get done quickly. Americans do not expect to move far from first offers. Negotiators in
many other countries do not share the goal of finishing quickly,
however. In places like China, Brazil, or Spain the expectation is
for a relatively longer period of haggling, and first offers are more
aggressive to reflect these expecta-tions. If the goal is one
million, we better start at two, makes sense there. Americans
react to such aggressive first offers in one of two ways: They
either laugh or get mad. And when foreign counterparts second
offers reflect deep discounts, Americans ire in-creases.
Crossing Borders 4
Who Adapts to Whom?
It depends on the capabilities on both sides of the table and power
relationships.
For their discussions over construction of the tunnel under the English
Channel, British and French representatives agreed to partition talks and
alternate the site between Paris and London At each site, the negotiators
were to use established, local ways including the language The two
approaches were thus clearly punctuated by time and space. Although each
At the outset of a meeting: to discuss the telecommunications policies of

Frances Ministry of Industry and Tourism, the ministers chief of staff
and his American visitor each voiced concerned about speaking in the
others native language. They expressed con-fidence in their listening
capabilities and lacked immediate access to an interpreter, so they agreed
to proceed by each speaking in his own language. Their discussion went on
or an hour that way, they American speaking in English to the Frenchman, and the Frenchman speaking French to the American.
A good example of this problem regards an American CEO

shopping for a Euro-pean plant site. When he selected a $20
million plot in Ireland, the Spanish real estate developer he had
visited earlier called wondering why the American had not asked
for a lower price for the Madrid site before choosing Dublin. He
told the Spaniard that his first offer wasnt even in the ball
park. He wasnt laughing when the Spaniard then of-fered to
beat the Irish price. In fact, the American executive was quite
mad. A poten-tially good deal was forgone because of different
expectations about first offers. Yes, numbers were exchanged,
but information was not. Aggressive first offers made by foreigners should be met with questions, not anger.
Persuasion. In Japan, a clear separation does not exist between
task-related informa-tion exchange and persuasion. The two
stages tend to blend together as each side defines and refines its
needs and preferences. Much time is spent in the task-related
exchange of information, leaving little to argue about during
the persuasion stage. Alternatively, Americans tend to lay their
cards on the table and hurry through the information ex-change
to persuasion. After all, the persuasion is the heart of the
matter. Why hold a meeting unless someones mind is to be
changed? A key aspect of sales training in the U.S. is handling
objections. So the goal in information exchange among
Americans is to quickly get those objections out in the open so
they can be handled.
This handling can mean providing clients with more information. It can also mean getting mean. Americans make threats
and issue warn-ings in negotiations. They do not use such
tactics often, but negotiators in other cultures use such tactics
even less frequently and in different circumstances. For example,
no-tice how infrequently the Mexican and English-speaking
Canadians used threats and warnings in the simulated negotiations. In China the use of such aggressive negotiation tactics
can result in the loss of face and the destruction of important
personal relation-ships. Such tough tactics may be used in Japan
but by buyers only and usually only in informal circumstancesnot at the formal negotiation table. Americans also get mad
during negotiations and express emotions that may be
completely inappropriate in for-eign countries. Such emotional
outbursts may be seen as infantile or even barbaric be-havior in
places like Hong Kong and Bangkok.
The most powerful persuasive tactic is actually asking more
questions. Foreign counterparts can be politely asked to explain
why they must have delivery in two months or why they must
have a 10 percent discount. Chester Karrass, in his still useful
book The Negotiation Game, suggests that it is smart to be a

little dumb in business negotiations. Repeat questions, for
example, I didnt completely understand what you meant-can
you please explain that again? If clients or potential business
partners have good answers, then perhaps it is best to compromise on the issue. Often, however, under close and repeated
scrutiny their answers are not very good. When their weak
position is exposed, they are obliged to concede. Questions can
elicit key information, being the most powerful yet passive
persuasive devices. Indeed, the use of questions is a favored
Japanese tactic, one they use with great effect on Americans.
Finally, third parties and informal channels of communication
are the indispensable media of persuasion in many countries.
Meetings in restaurants and/or with references and mutual
friends who originally provided introductions may be used to
handle diffi-cult problems with partners in other countries. The
value of such informal settings and trusted intermediaries is
greatest when problems are emotion laden. They provide a
means for simultaneously delivering difficult messages and
saving face. Although American managers may eschew such
behind the scenes approaches, they are stan-dard practice in
many countries.
Concessions and Agreement. Comments made previously
about the importance of writing down concession-making
strategies and differences in decision-making styles-se-quential
versus holistic-are pertinent here. Americans often make
concessions early, ex-pecting foreign counterparts to reciprocate.
However, in many cultures no concessions are made until the
end of the negotiations. Americans often get frustrated and
express anger when foreign clients and partners are simply
following a different approach to concession making, one that
can also work quite well when both sides understand what is
going on.
After Negotiations
Contracts between American firms are often longer than 100
pages and include carefully worded clauses regarding every aspect
of the agreement. American lawyers go to great lengths to
protect their companies against all circumstances, contingencies,
and actions of the other party. The best contracts are ones
written so tightly that the other party would not think of going
to court to challenge any provision. The American adversarial
system requires such contracts.
In most other countries, particularly the high-context ones, legal
systems are not de-pended upon to settle disputes. Indeed, the
term disputes does not reflect how a busi-ness relationship
should work. Each side should be concerned about mutual
benefits of the relationship, and therefore should consider the
interests of the other. Consequently, in places like Japan written
contracts are very short two to three pages-are purposely loosely
written, and primarily contain comments on principles of the
relationship. From the Japanese point of view, the American
emphasis on tight contracts is tantamount to planning the
divorce before the wedding.
In other countries such as China contracts are more a description of what business partners view their respective
responsibilities to be. For complicated business relation-ships
they may be quite long and detailed. However, their purpose is
371
side was able to use its customary approach some of the time, it used the
script of the other culture the rest of the time.
different from the American understanding. When circumstances change, then responsibilities must also be adjusted,
despite the provisions of the signed contract. The notion of
enforcing a con-tract in China makes little sense.
Informality being a way of life in the United States, even the
largest contracts be-tween companies is often sent through the
mail for signature. In America, ceremony is considered a waste of
time and money. But when a major agreement is reached with
foreign companies, their executives may expect a formal signing
ceremony involving CEOs of the respective companies. American
companies are wise to accommodate such expectations.
Finally, follow-up communications are an important part of
business negotiations with partners and clients from most
foreign countries. Particularly in high-context cul-tures, where
personal relationships are crucial, high-level executives must stay
in touch with their counterparts. Letters, pictures, and mutual
visits remain important long after contracts are signed. Indeed,
warm relationships at the top often prove to be the best
medicine for any problems that may arise in the future.
Conclusions
Despite the litany of potential pitfalls facing international
negotiators, things are getting better. The innocents abroad
and cowboy stereotypes of American managers are be-coming
less accurate. Likewise, we hope it is obvious that the stereotypes of the reticent Japanese or the pushy Brazilian evinced in
the lesson may no longer hold so true. Experience levels are
going up worldwide, and individual personalities are important.
So you can find talkative Japanese, quiet Brazilians, and effective
American negotiators. But culture still does, and always will,
count. Hopefully, it is fast becoming the natural behaviour of
American managers to take it into account.
English author Rudyard Kipling said some one hundred years
ago: Oh, East is East, and West is West, and never the twain
shall meet. Since then most have imbued his words with an
undeserved pessimism. Some even wrongly say he was wrong.
The problem is that not many have bothered to read his entire
poem, The Ballad of East and West:
1. Define:
a.
BATNA
b.
Non task sounding
c.
Task related information exchange
2. Why can cultural stereotypes be dangerous? Give some

examples.
3. List three ways that culture influences negotiation behaviour.
4. Describe the kinds of problems that usually come up during

international business negotiations.
Oh, East is East, and West is West, and never the twain shall
meet,
Till Earth and Sky stand presently at Gods great Judgement
Seat;
But There is neither East nor West, border, nor breed, nor
birth,
When two strong men stand face to face, though they come
from the ends of the earth.
The poem can stand some editing for these more modern
times. Now should be included the other directions, North is
North and South is South. And the last line properly should
read, When two strong people stand face to face. But
Kiplings positive sentiment remains. Differences between
countries and cultures, no matter how difficult, can be worked
out when people talk to each other in face-to-face settings.
Kipling rightly places the responsibility for international
cooperation not on companies or governments, but instead
directly on the shoulders of individual managers, present and
future, like you.
372
5. Why are foreign language skills important for international

negotiators?
11.
Name three aspects of negotiation situations, which

might be manipulated before talks begin. Suggest how
this might be done.
7. Why is time an important consideration in international

business organization?
12.
Explain why Americans spend so little time on nontask

sounding and Brazilians so much.
8. What can be different about how a Japanese manager might

address a complex negotiation compared to an American
negotiator?
13.
Why is it difficult to get negative feedback from

counterparts in many foreign countries? Give examples.
9. What are the most important considerations in selecting a

negotiation team? Give examples.
14.
Why wont getting mad work in Mexico or Japan?
10.What kinds of training are most useful for international

business negotiators?
6. Describe three cultural differences in nonverbal behaviours

and explain how they might cause problems in international
business negotiations.
________________________________________________________________________________________________________________________________________________________________________________________________________________________
15.
Why are questions the most useful persuasive tactic?
373
LESSON 40:
LEADING, ORGANIZING, AND MONITORING
THE GLOBAL MARKETING EFFORT
It seems incredible, and yet it has happened a hundred times,
that troops have been divided and separated merely through a
mysterious feeling of conventional manner, without any clear
perception of the reason.
-carl Von Clausewitz, 1780-1831
Vom Kriege (1832-1837) Book Ill,
Chapter Xl, Assembly of Forces in Space
Leadership in this new landscape is not about controlling
decision-making. We dont have time anymore to control
decision-making. Its about creating the right environment. Its
about en-ablement, empowerment. It is about setting guidelines
and boundaries and parameters and setting the people free.
Carleton Carly S. Fiorina
Commencement Address, Massachusetts
Institute of Technology, June 2, 2000
This lesson focuses on the integration of each element of the
marketing mix into a total plan that addresses expected
opportunities and threats in the global marketing environment.
Bill Gates of Microsoft, Rupert Murdoch of the News Corporation, Jack Welch of General Electric (GE), Richard Branson of
Virgin, Percy Barnavik of ABB, and Hank Green burgh of AIG
are just a few of the global leaders who by their example and
the success of their organizations illustrate the critical role of
leadership in a global firm. Leaders must be capable of articulating a coherent global vision and strategy that inte-grates local
responsiveness, global efficiency, and leverage. The challenge is
to direct the efforts and creativity of everyone in the company
toward a global effort that best uti-lizes organizational resources
to exploit global opportunities.
Leadership
Global marketing demands exceptional leadership. As we have
said throughout this book, the hallmark of a global company is
the capacity to formulate and implement global strategies that
leverage worldwide learning, respond fully to local needs and
wants, and draw on all of the talent and energy of every
member of the organization. This is a heroic task requiring
global vision and a sensitivity to local needs. Members of each
operating unit must address their immediate responsibilities
and at the same time cooperate with functional, product, and
country experts in different locations
As Carly Fiorina put it so eloquently in her MIT commencement address:
Leadership is not about hierarchy or title or status: it is about
having influ-ence and mastering change. Leadership is not
about bragging rights or battles or even the accumulation of
wealth; its about connecting and engaging at multiple levels. Its
about challenging minds and capturing hearts. Leadership in
this new era is about empowering others to decide for themselves. Leader-ship is about empowering others to reach their
374
full potential. Leaders can no longer view strategy and execution

as abstract concepts, but must realize that both elements are
ultimately about people.
1. TEAMS
The practice of using self-directed Work teams to respond to
competitive challenges is becoming more widespread. Reports
vary as to how widely teams are being used today. One study
found that 47 percent of Fortune 1000 companies used teams
with at least some of their employees. With the increased usage
of e-mail, team members can even I be located on different
continents.
Jon Katzenbach and Douglas Smith believe teams will become
the primary unit of performance in high-performance organizations. The implementation of self-directed work teams is
another example of the need for organizational innovation to
maintain competitiveness. They represent another corporate
response to the need to flatten the organization, to reduce costs
and overheads, and to be more responsive.
Companies are looking to reduce bureaucracy and hierarchy to
improve responsiveness and to reduce costs. As Tom Peters put
it, you cant survive, let alone thrive, in a time-competitive
world with a six- to eight-layer organization structure. The timeobsessed organization is flat-no barriers among functions, no
borders with the outside.
Philip J. Quigley, president and chief executive officer (CEO) of
Pacific Bell, sees two kinds of organizations: the large, powerful,
yet cumbersome organization that is like an elephant; and the
agile, quick, but weaker, small organization that is like a rabbit.
Neither, however, is completely suited to compete in todays
competitive global market- I place. Quigleys answer is a new
form of organization, the rabbiphant, which combines I the
strength and agility of the two present types of organizations.
2. Mind-set
A major role of top management is to instill important values
necessary for success in a global marketplace throughout their
organization. One critical value vital to an effective global
organization is to have the proper mind-set for both the
leadership and the orga-nization. Gupta and Govindarajan
suggest that the following be reviewed:
Composition of the board of directors-mix of nationalities,
international experience, language skills.
Choice of locations for board meetings.
Background of the chief executive, executive committee and
business unit managers in terms of international experience and
language skills.
Distribution of time spent by the chief executive in various
regions.
Choice of locations for business unit headquarters.
Executive career ladders that reward international experience.

Performance measurement and incentive system that motivate
senior managers to optimize not only local but also global
performance.
Organization
The goal in organizing for global marketing is to find a structure
that enables the com-pany to respond to relevant market
environment differences while ensuring the diffu-sion of
corporate knowledge and experience from national markets
throughout the entire corporate system. The pull between the
value of centralized knowledge and coordination and the need
for individualized response to the local situation creates a constant tension in the global marketing organization. A key issue in
global organization is how to achieve balance between autonomy
and integration. Subsidiaries need autonomy in order to adapt to
their local environment. However, the business as a whole needs
integration to implement global strategy.
When management at a domestic company decides to pursue
international expan-sion, the issue of how to organize arises
immediately. Who should be responsible for this expansion?
Should product divisions operate directly or should an international division be established? Should individual country
subsidiaries report directly to the company president or should
a special corporate officer be appointed to take full-time
responsibility for international activities? Once the first decision
of how to organize initial in-ternational operations has been
reached, a growing company is faced with a number of reappraisal points during the development of its international
business activities. Should a company abandon its international
division and, if so, what alternative structure should be
adopted? Should an area or regional headquarters be formed?
What should be the relationship of staff executives at corporate, regional, and subsidiary offices? Specifically, how should
the marketing function be organized? To what extent should
regional and corporate marketing executives become involved in
subsidiary marketing management?
It is important to recognize that there is no single correct
organizational structure for global marketing. Even within an
industry, worldwide companies have developed very different
strategic and organizational responses to changes in their
environments.
Still, it is possible to make some generalizations. Leading-edge
global competitors share one key organizational design
characteristic: Their corporate structure is simple and flat, rather
than tall and complex. The message is clear: The world is
complicated enough; there is no need to add to the confusion
with a complex internal structuring. Simple struc-tures increase
the speed and clarity of communication and allow the concentration of organizational energy and valuable resources on
learning, rather than on controlling, monitoring, and reporting?
According to David Whitwam, CEO of Whirlpool, You must
create an organization whose people are adept at exchanging
ideas, processes, and systems across borders, people who are
absolutely free of the not-invented-here syndrome, people
who are constantly working together to identify the best global

opportunities and the biggest global problems facing the
organization
A geographically dispersed company cannot limit its knowledge
to product, function, and the home territory. Company
personnel must acquire knowledge of the complex set of social,
political, economic, and institutional arrangements that exist
within each international market. Most companies, after initial
ad hoc arrangements-for example, I all foreign subsidiaries
reporting to a designated vice president or to the president
establish an international division to manage their geographically dispersed new busi-ness. It is clear, however, that the
international division in the multi product company is an
unstable organizational arrangement. As a company grows, this
initial organizational structure frequently gives way to various
alternative structures.
In todays fast-changing, competitive global environment,
corporations have to find new and more creative ways to
organize. New forms of flexibility, efficiency, and responsiveness are required to meet the market demands. The need to be
cost-effective, to be customer driven, to deliver the best quality,
and to deliver that quality quickly are some of todays market
realities.
Several authors have described new organizational designs that
represent responses to the competitive environment of the 21st
century. These designs acknowledge the need to find more
responsive and flexible structures, to flatten the organization,
and to employ teams. There is also the recognition of the need
to develop networks, to develop stronger relationships among
participants, and to exploit technology. They also reflect an
evolution in approaches to organizational effectiveness. At the
beginning of the twentieth century, Fredrick Taylor claimed that
all managers had to see the world the same way. Then came the
contingency theorists who said that effective organizations
design themselves to match their conditions. These two basic
theories are reflected in todays popular management writings.
As Henry Mintzberg has observed, To Michael Porter,
effectiveness resides in strategy, while to Tom Peters it is the
operations that count-executing any strategy with excellence.
Successful companies, the real global winners, must have both:
good strate-gies and good execution.
Patterns of International Organizational

Development
Organizations vary in terms of the size and potential of
targeted global markets and local management competence in
different country markets. Conflicting pressures may arise from
the need for product and technical knowledge, functional
expertise in marketing, finance, and operations, and area and
country knowledge. Because the con-stellation of pressures that
shape organizations is never exactly the same, no two organizations pass through organizational stages in exactly the
same way, nor do they arrive at precisely the same organizational
pattern. Nevertheless, some general pat-terns have developed.
Most companies undertake initial foreign expansion with an
organization similar to that in Figures 1. When a company is
organized on this basis, foreign sub-sidiaries report directly to
375
Proportion of middle and senior managers who are members

of cross border teams.
the company president or other designated company officer,

which carries out his or her responsibilities without assistance
from a headquarters staff group. This is a typical initial arrangement for companies getting started in international marketing
operations.
International Division Structure

As a companys international business grows, the complexity of
coordinating and di-recting this activity extends beyond the
scope of a single person. Pressure is created to assemble a staff
group that will take responsibility for coordination and
direction of the growing international activities of the organization. Eventually, this pressure leads to the creation of the
international division.
Four factors contribute to the establishment of an international
division. First, top managements commitment to global
operations has increased enough to justify an organizational
unit headed by a senior manager. Second, the complexity of
interna-tional operations requires a single organization unit
whose management has sufficient authority to make its own
determination on important issues such as which market entry
strategy to employ. Third, an international division is frequently
formed when the firm has recognized the need for internal
specialists to deal with the special de-mands of global operations. A fourth contributing factor arises when management
exhibits the desire to develop the ability to scan the global
horizon for opportunities and competitive threats rather than
simply respond to situations that are presented to the company.
FIGURE 1 Functional corporate structure Domestic corporate
staff orientation, Pre-international division
President
Corporate Staff
Regional management can offer a company several advantages.

First many regional managers agree that an on-the-scene
regional management unit makes sense when there is a real need
for coordinated, pan-regional decision making. Coordinated
regional plan-ning and control is becoming necessary as the
national subsidiary continues to lose its relevance as an independent operating unit. Regional management can probably achieve
the best balance of geographic, product, and functional
considerations required to im-plement corporate objectives
effectively. By shifting operations and decision making to the
region, the company is better able to maintain an insider
advantage.
A major disadvantage of a regional center is its cost. Even a
two-person office could cost in excess of $600,000 per year. The
scale of regional management must be in line with scale of
operations in a region. A regional headquarters is premature
whenever the size of the operations it manages is inadequate to
cover the costs of the additional layer of management. Thus,
the basic issue with regard. to the regional headquarters is,
Does it contribute enough to organizational effectiveness to
justify its cost and the complex-ity of another layer of management?
Geographic Structure
The geographic structure involves the assignment of operational responsibility for geographic areas of the world to line
managers, the corporate headquarters retains responsibilities for
world wide planning and control, and each area of the world
including the home or base market-is organizationally equal.
For the company with French origins, trance is simply another
geographic market under this organizational arrange-ment. The
most common appearance of this structure is in companies
with closely related product lines that are sold in similar end-use
markets around the world. For ex-ample, the major international oil companies utilize the geographic structure.
Global Product Division Structure

Marketing
Manufacturing
Research
Finance
Planning
Personnel
Foreign subsidiaries
United
kingdom
Mexico
West
Germany
Regional Management Centers

Another stage of organizational evolution is the emergence of
an area or regional head-quarters as a management layer between
the country organization and the international division
headquarters. When business is conducted in a single region
that is characterized by similarities in economic, social, geographic, and political conditions, there is both justification and
need for a management center. The center coordinates decisions
on pricing, sourcing, and other matters. Execu-tives at the
regional center also participate in the planning and control of
each countrys operations with an eye toward applying company
knowledge and optimal utilization of corporate resources on a
regional basis.
376
When an organization assigns worldwide product responsibility

to its product divisions the product divisions must decide
whether to rely on an international division, there by dividing
their world into domestic and foreign, or to rely on an area
structure with each region of the world organizationally treated
on an equal basis. In most cases in which a divisional company
shifts from a corporate international division to worldwide
product divisions, there are two stages in the internationalization of the product divisions. The first stage occurs when
international responsibility is shifted from a corporate international division to the product division international
departments. The second occurs when the product divisions
themselves shift international responsibility from interna-tional
departments within the divisions to the total divisional
organization. In effect, this shift is the utilization of a geographic structure within each product division. The product
structure works best when a companys product line is widely
diversified, when products go into a variety of end-use markets,
and when a relatively high-technological capability is required.
The Matrix Strucure

The most sophisticated organizational arrangement brings to
bear four basic compe-tencies on a worldwide basis. These
1. Geographic knowledge. An understanding of the basic

economic, social, cultural, political, and governmental market
and competitive dimensions of a country is essential. The
country subsidiary is the major structural device employed
today to enable the corporation to acquire geographic
knowledge.
2. Product knowledge and know-how. Product managers with
a worldwide responsi-bility can achieve this level of
competence on a global basis. Another way of achieving
global product competence is simply to duplicate product
management organizations in domestic and international
divisions, achieving high competence in both organizational
units.
3. Functional competence in such fields as finance,
production, and especially market-ing. Corporate
functional staff with worldwide responsibility contributes to
the development of functional competence on a global basis.
In a handful of companies, the appointment of country
subsidiary functional managers is reviewed by the corporate
functional manager who is responsible .for the development
of his or her functional activity in the organization on a
global basis.
What has emerged in a growing number of companies is a
dotted-line rela-tionship among corporate, regional, and
country staff. The dotted-line relationship ranges from
nothing more than advice offered by corporate or regional
staff to regional country staff to a much heavier line
relationship in which staff activi-ties of a lower
organizational level are directed and approved by higher-level
staff. The relationship of staff organizations can become a
source of tension and conflict in an organization if top
management does not create a climate that encourages
organizational integration. Headquarters staff wants to
extend its control or influence over the activities of lowerlevel staff.
For example, in marketing research, unless there is
coordination of research design and activity, the international
headquarters is unable to compare one market with another.
If line management, instead of recognizing the potential
contribution of an integrated worldwide staff, wishes to
operate as autonomously as possible, the influence of
corporate staff is perceived as undesirable. In such a
situation, the stronger party wins. This can be avoided if the
level of management to which both line and staff report
creates a climate and structure that expect and require the
cooperation of line and staff and that recognize that each has
respon-sibility for important aspects of the management of
international markets.
4. A knowledge of the customer or industry and its needs.
In certain large and very sophisticated international
companies, staff with a responsibility for serving industries
on a global basis exists to assist the line managers in the
country organizations in their efforts to penetrate specific
customer markets.
In the fully developed, large-scale international company,

product, function, area, and customer know-how are simultaneously focused on the organizations worldwide mar-keting
objectives. This type of total competence is a matrix organization. In the matrix organization, the task of management is to
achieve an organizational balance that brings together different
perspectives and skills to accomplish the organizations
objectives. Under this arrangement, instead of designating
national organizations or product divi-sions as profit centers,
both are responsible for profitability: the national organization
for country profits and the product divisions for national and
worldwide product profitabil-ity.
This organization chart starts with a bottom section that
represents a single-country responsibility level moves to
representing the area or international level, and finally moves to
representing global responsibility from the product divisions to
the corporate staff, to the chief executive at the top of the
structure.
The key to successful matrix management is the extent to which
managers in the organization are able to resolve conflicts and
achieve integration of organization pro-grams and plans. Thus
the mere adoption of a matrix design or structure does not
create a matrix organization. The matrix organization requires a
fundamental change in man-agement behavior, organizational
culture, and technical systems. In a matrix, influence is based on
technical competence and interpersonal sensitivity, not on
formal authority.
In a matrix culture, managers recognize the absolute need to
resolve issues and choices at the lowest possible level and do
not rely on higher authority.
Relationship Among Structure, Foreign

Product Diversification, And Size
John Stopford and Louis T. Wells, Jr., have hypothesized the
relationship among struc-ture, foreign product diversification
(defined as sales of a firm outside its major product line
expressed as a percentage of the total sales), and size. This
formulation posits that when size abroad grows, the emergence
of an area division develops so that whenever size abroad is 50
percent of total size or more, several area divisions will probably
be adopted. On the other hand, as foreign product diversification increases, the likelihood that product divisions will operate
on a worldwide basis increases. In a company in which there is
both worldwide product diversity and large-scale business
abroad as a percent-age of total business, foreign operation will
tend to move toward the matrix structure. Companies with
limited foreign product diversification (under 10 percent) and
limited size, as a percentage of total size will utilize the
international structure.
Organizational Structure and National

Origin
Before 1960, the American multidivisional structure was rarely
found outside the United States. This structure was introduced
in the United States as early as 1921 by Alfred P Sloan at General
Motors. The multidivisional structure in the United States had
three distinctive characteristics. First, profit responsibility for
operating decisions was assigned to general managers of self-
377
competencies are as follows:
contained business units. Second, there was a corporate headquarters that was concerned with strategic planning, appraisal,
and the allocation of resources among the business divisions.
Third, executives at the corporate headquarters were separated
from operations and were psychologically committed to the
whole or-ganization rather than the individual businesses.
During the 196Os, European enter-prises underwent a period
of unprecedented reorganization. Essentially, they adopted the
American divisional structure. Today, at the overall level, there is
little difference be-tween European and American organizations.
The organizational structure of Japanese and other Asian
companies is quite dif-ferent from the U.S. model. Japanese
organizations, for example, rely on generalists as opposed to
functional specialists and make greater use of project teams to
design and manufacture products. They also form much closer
relationships with suppliers than do American companies, are
in a different relationship to sources of capital: and have a fundamentally different governance structure than U.S. companies.
The success of Japan-ese companies has recommended their
organizational structure and design for careful evaluation, and
many non-Japanese companies have successfully adopted
Japanese organizational design features.
Foreign
Product
Diversification 10
(%)
Worldwide
Product
Divisions
Grid or Matrix
Global Brand Managers: This position is at a high level of

seniority and functions
in the role of brand champion.
Starbursts: As new products and services are developed, the
entrepreneurial enterprise is spun off from the parent company
and is encouraged to grow into a separate subsidiary. An
example is Thermo Electron.
Cluster Organizations: Individual members may work on
different enterprises within the company as and when their
particular skills are required. General Electric and Volvo are
examples.
Strategic Alliances, Joint Ventures, Mergers and Acquisitions: These structures - form a continuum and collectively are
termed hybrid, inter organizational relationships. Examples are
Hewlett-Packard and Matsushita.
Network Structures: Although known in various forms, at the
heart of each structure is the fundamental principle that a
number of different organizations, companies, and individuals
work together on a common business project.
Implications For Changing

Organizational Structure
Based on their research, Hankinson and Hankinson identified
the following eight im-plications for management in global
companies.
1. Declining profitability and shareholder value are greater
motivators of change than increasing economic turbulence.
Boundary
Stage II
International
Divisions
2. A charismatic or transformation style of leadership is helpful.

Area
Divisions
0
50
Size Abroad (as % of Total Size)
The Relationship Among Structure, Foreign Product Diversification, and Size, Abroad (as a % of total size)
Structuring For Global Brands

P. Hankinson and G. Hankinson conclude that the organizational structure necessary for global brands requires a much
greater emphasis on integrating and/or globalizing the
marketing process at a worldwide level as well as promoting and
embedding within the corporate culture inter- and intraorganizational cooperation. They identified eight new organizational arrangements to support global brand management:
Global Co-ordinations Groups: Similar to discussion groups
but with the focus on implementation. They are task oriented
and instrumental in the establishment of a corporate culture.
Strategic Planning Groups: These involve multidisciplinary or
cross-functional brand management teams whose purpose is to
implement centrally developed policies and strategies with a
local focus,
Lead Country Concept: Different countries take leadership
responsibility for a particular brand or aspect of marketing
378
policy. In the case of Mars Candy, Snickers is led from Germany,

M&Ms from Holland, Twix from France, and Galaxy and
Bounty from the United Kingdom.
3. Those who implement change need a firm grasp on all

aspects of the business.
4. A correct balance between long-term strategic objectives and
short-term atten-tion to shareholder value.
5. Loose-tight balance. (The balance of power shifts back and
forth from the headquarters to the regional offices.)
6. Employees need to learn to behave differently and a learning
culture helps to achieve this.
7. Knowing when the strategic imperative is strong enough to
require changes to the organizational structure.
8. A loose organizational structure requires a common
understanding of the mea-sures of success.
Gettlng Off The Reorganization Merrygo-round

Bartlett studied 10 U.S.-based multinational corporations
(MNCs) that, according to the theory outlined earlier, should
have moved from the international division to the worldwide
product division, area, or matrix structure but did not. He
found that these successful companies avoided the myth of the
ideal organizational structure and instead concentrated on
building and maintaining a complex decision-making, resourcetransfer, and information-sharing process. For example,
Coming Glass Works TV tube marketing strategy required local
decision making for service and delivery and global decision
making for pricing.
In the third stage, the company develops norms and values

within the organization to support shared decisions and
corporate (as opposed to country or product) perspec-tives. The
highest value is placed on corporate goals and cooperative effort
as opposed to parochial interests and adversarial relationships.
Many Japanese companies fit this description perfectly, which is
why they have been so successful.
The important task of top management is to eliminate a onedimensional approach to decisions and encourage the
development of multiple management perspectives and an
organization that will sense and respond to a complex and fastchanging world. By thinking in terms of changing behavior
rather than changing structural design, compa-nies can free
themselves from the static nature and limitations of the
structural diagram and instead can focus on achieving The best
possible results with available resources.
Global Marketing Management Audit

Global marketing presents formidable, problems to managers
responsible for marketing control. Each national market is
different from every other market. Distance and differences in
language, custom, and practices create communications problems. As noted earlier in the chapter, in larger companies, the
size of operations and number of country subsidiaries often
result in the creation of an intermediate headquarters. This adds
an organizational level to the control system. This section
reviews global marketing control practices, compares these
practices with domestic marketing Control, and identifies the
major factors that influence the design of a global control
system.
In the managerial literature, control is defined as the process by
which managers ensure that resources are used effectively and
efficiently in the accomplishment of or-ganizational objectives,
Control activities are directed toward marketing programs and
other programs and projects initiated by the planning process.
Data measures and eval-uations generated by the control
process in the form of a global audit are also a major input to
the planning process.
The Global Marketing Audit

A global marketing audit can be defined as a comprehensive,
systematic, and periodic examination of a companys or
business units marketing environment, objectives, strategies,
programs, policies, and activities, which is conducted with the
objective of identifying existing and potential problems and
opportunities and recommending a plan of action to improve a

companys marketing performance.
The global marketing audit is a tool for evaluating and improving a companys global marketing operations. The audit is an
effort to assess effectiveness and efficiency of marketing
strategies, practices, policies, and procedures vis-a-vis the firms
opportu-nities, objectives, and resources.
A full marketing audit has two basic characteristics. The first is
that it is formal and systematic. Asking questions at random as
they occur to the questioner may bring about useful insights,
but this is not a marketing audit. The effectiveness of an audit
normally increases to the extent that it involves a sequence of
orderly diagnostic steps, as is the case in the conduct of a public
accounting audit.
The second characteristic of a marketing audit is that it is
conducted annually. Most companies in trouble are well on their
way to disaster before the trouble is fully appar-ent. It is,
therefore, important that the audit be conducted periodically
even when there are no apparent problems or difficulties
inherent in the companys operations.
The audit may be broad or it may be a narrowly focused
assessment. A full mar-keting audit is comprehensive. It
reviews the companys marketing environment, competition,
objectives, strategies, organization, systems, procedures, and
practices in every area of the marketing mix including product,
pricing, distribution, communications, cus-tomer service, and
research strategy and policy.
Audits are either independent or internal. An independent
marketing audit is con-ducted by someone who is free from
influence of the organization being audited. The independent
audit mayor may not be objective: It is quite possible to
influence a con-sultant or professional firm that you are paying.
The company that wants a truly inde-pendent audit should
discuss with the independent auditor the importance of
objectivity. A potential limitation of an independent marketing
audit is the lack of understanding of the industry by the
auditor. In many industries, there is no substitute for experience, because if you do not have it, you are simply not going to
see the stable clues that any pro would easily recognize. On the
other hand, the independent auditor may see obvi-ous
indications that the experienced pro may be unable to see.
An internal or self-audit may be quite valuable because it is
conducted by the com-panys marketing personnel who
understand the industry. However, it may lack the ob-jectivity
of an independent audit. Because of the strengths and
limitations of the two types of audit, we recommend that both
be conducted periodically for the same scope and time period,
and that the results be compared. The comparison may lead to
insights on how to strengthen the performance of the marketing team.
Setting Objectives and Scope of the

Audit
The first step of an audit is a meeting between company
executives and the auditor to agree on objectives, coverage,
depth, data sources, report format, and time period for the
audit.
379
The successful companies, Bartlett found, developed in three

stages. The first was to recognize the diversity of the world. In
other words, the companies made the transition from ethnocentric and polycentric orientations to a geocentric orientation.
The second stage involved building channels of communication between managers in various parts of the organization. An
example of a communications channel-building move I might
be a world meeting of executives at a conference center where,
for the first time, executives in the companies businesses from
all over the world get a chance to meet each other and to learn
about the business strategies of their counterparts in other
coun-tries and businesses.
1. Gathering Data One of the major tasks in conducting an

audit is data collection. A de-tailed plan of interviews,
secondary research, review of internal documents, and so forth
is required. This effort usually involves an auditing team.
A basic rule in data collection is not to rely solely on the
opinion of people being audited for data. In auditing a sales
organization, it is absolutely essential to talk to field sales
personnel as well as sales management; and, of course, no
audit is complete with-out direct contact with customers and
suppliers.
Creative auditing techniques should be encouraged and
explored by the auditing team. For example, if you are
auditing an organization and you want to determine whether
the chief executive or operating officer of the organization
unit is really in touch with the organization and all of its
activities, send an auditor into the mailroom. Find out if the
chief executive has ever visited the mailroom. If he or she
has never been there, it tells you volumes about the
management style and the degree of hands-on management
in the organization. If an organization has developed an
elaborate marketing incentive program that is purported to
generate results with customers, an audit should involve customer contact to find out if indeed the program is actually
having any impact. For ex- j ample, you can be certain that 99
percent of the material that is associated with frequent flier
plans is never read or noted by fliers who have got better
things to do with their time than read complicated rules and
announcements.
2. Analyzing the Data A library is filled with data, but just like
the marketing audit, unless that data is properly analyzed it is
useless. In fact, many companies assume that just gathering
data is sufficient to the process (Hey-look at this 100-page
report did) or that the more data the better. Despite the
abundance of information available about the mar-keting
environment, this abundance does not directly provide value
in making decisions.
When a marketing audit involves international markets, the
data should be analyzed by both local employees who are
familiar with the specific implications of the data and also by
headquarters staff who are aware of corporate strategic issues
and similar experiences in other countries.
3. Preparing and Presenting the Report After data collection
and analysis, the next step is the preparation and
presentation of the audit report. This presentation should
restate the objectives and scope of the audit, present the
main findings, and present major recom-mendations and
conclusions as well as major headings for further study and
investigation.
Components of the Marketing Audit

There are six major components of a full global marketing
audit:
1. Marketing environment audit
2. Marketing strategy audit
3. Marketing organization audit
4. Marketing systems audit
380
5. Marketing productivity audit

6. Marketing function audit
Problems, Pitfalls, and Potential of the

Global Marketing Audit
The marketing audit presents a number of problems and
pitfalls. Setting objectives can be a pitfall, if indeed the objectives are blind to a major problem. It is important for the
auditor to be open to expand or shift objectives and priorities
while in the conduct of the audit itself.
Similarly, new data sources may appear during the course of an
audit, and the au-ditor should be open to such sources. The
approach of the auditor should simultaneously be systematic,
following a predetermined outline, and perceptive and open to
new di-rections and sources that appear in the course of the
audit investigation.
4. Report Presentation One of the biggest problems in
marketing auditing is that the ex-ecutive who commissions
the audit may have higher expectations about what the audit
will do for the company than the actual results seem to offer.
An audit is valuable even if it does not offer major new
directions or panaceas. It is important for all concerned to
recognize that improvements at the margin are what truly
make a difference between success and mediocrity. In major
league baseball, the difference between a batter with a .350
batting average (3.5 hits out of 10 times at bat) and a .250
(2.5 hits out of 10 times at bat) is the difference between a
major league hitter and someone who is not even good
enough for the minor leagues. Major league marketers
understand this fact and recog-nize it in the audit. Do not
look for dramatic revolutionary findings or panaceas. Accept
and recognize that improvement at the margin is the
winners game in global marketing.
Global marketers, even more than their domestic
counterparts, need marketing audits to assess far-flung
efforts in highway diverse environments. The global
marketing audit should be at the top of the list of programs
for strategic excellence and implementation excellence for the
winning global company.
Planning and control are intertwined and interdependent. With
the information from the global marketing audit, the planning
process can begin and result in a more ef-fective document. The
planning process can be divided into two related phases. Strategic planning is the selection of opportunities defined in terms
of products and markets, and the commitment of resources,
both human and financial, to achieve these objectives. Operational planning is the process in which strategic market
objectives and resource commitments to these objectives are
translated into specific projects and programs. The relationship
among strategic planning, operational planning, and control is
illustrated in Figure 17-11.
For companies with global operations, marketing control
presents additional chal-lenges. The rate of environmental
change in a global company is a dimension of each of the
national markets in which it operates. At the beginning of this
book, we examined these environments; each is changing at a
When company management decides that it wants to develop a

global strategy, it is essential that control of the subsidiary
operations of the company shifts from the sub-sidiary to the
headquarters. The subsidiary will continue to make vital inputs
into the strategic planning process, but the control of the
strategy must shift from subsidiary to headquarters. This
involves a shift in the balance of power in the organization and
may result in strong resistance to change. In many companies, a
tradition of subsidiary auton-omy and self-sufficiency limits the
influence of headquarters. Three types of mechanisms are
available to help headquarters acquire control: (1) data management mechanisms,
(2) Managers management mechanisms that shift the perception of self-interest from subsidiary autonomy to global
business performance, and (3) conflict resolution mecha-nisms
that resolve conflicts triggered by necessary trade-offs.
Planning and Budgeting

Planning and budgeting are two basic tools of monitoring the
global marketing effort. Planning involves expressing planned
sales, profit objectives, and expenditures on mar-keting
programs in unit and money terms and these are translated into
a budget. The budget spells out the financial objectives and
necessary expenditures to achieve these objectives. Monitoring
consists of measuring actual sales and expenditures. In the case
of no variance or a favorable variance between actual and
budget, no action is usually taken. An unfavorable variancelower unit sales than planned, for example-acts as a red flag that
attracts the attention of line and staff executives at regional and
interna-tional headquarters. They will investigate and attempt to
determine the cause of the un-favorable variance and what
might be done to improve performance.
Evaluating Performance
In evaluating performance, actual performance is compared with
budgeted perfor-mance, as described in the previous section.
Thus, the key question is, How is the budget established?
Most companies in both domestic and global operations place
heavy re-liance on two standards: last years actual performance
and some kind of industry av-erage or historical norm. A more
normative approach is for headquarters to develop an estimate
of the kind of growth that would be desirable and attainable in
each national market. This estimate can be based on company
studies of national markets.
Larger companies may have sufficient business volume to
justify staff product spe-cialists at corporate headquarters who
follow the performance of products worldwide. They have staff
responsibility for their product from its introduction to its
termination. Normally, new product is first introduced in the
largest and most sophisticated markets and then sequentially
introduced in smaller and less developed markets. As a result,

the companys products are typically at different stages of the
product life cycle in different markets. A major responsibility of
staff specialists is to ensure that lessons learned in more
advanced markets are applied to the management of their
products in smaller, less developed markets. Wherever possible,
the specialists try to avoid making the same mis-take twice, and
they try to capitalize on what they have learned and apply it
elsewhere. They also ensure that useful ideas from markets at
similar stages of development are fully applied. Smaller
companies focus on key products in key markets. Key products
are those that are important to the companys sales, profit
objectives, and competitive position. They are frequently new
products that require close attention in their introductory stage
in a market. If any budget variances develop with a key product,
headquarters intervenes directly to learn about the nature of the
problem and to assist local management in dealing with the
problem.
Influences On Marketing Plans and

Budgets
In preparing a budget or plan, the following factors are
important.
Market Potential
How large is the potential market for the product being
planned? In every domestic market, management must address
this question in formulating a product plan. A com-pany that
introduces a product in more than one national market must
answer this ques-tion for each market.
Competition
A marketing plan or budget must be prepared in light of the
competitive level in the market. The more entrenched the
competition, the more difficult it is to achieve market share and
the more likely a competitive reaction will occur to any move
that promises significant success in the target market. Competitive moves are particularly important as a variable in
international market planning because many companies are
moving from strong competitive positions in their base
markets to foreign markets in which they have a minor position
and must compete against entrenched companies. Domestic
market standards and expectations of marketing performance
are based on experience in mar-kets in which the company has a
major position. These standards and expectations are simply
not relevant to a market in which the company is in a minor
position trying to break into the market.
Impact of Substitute Products

One of the sources of competition for a product in a market is
the frequent existence of substitute products. As a product is
moved into markets at different stages of develop-ment,
improbable substitute products often emerge. For example, in
Colombia, a major source of competition for manufactured
boxes and other packaging products is woven bags and wood
boxes made in the handicraft sector of the economy. Marketing
officials of multinational companies in the packaging industry
in Columbia report that the garage operator producing a
handmade product is very difficult competition because of low
costs of materials and labor.
381
different rate, and each exhibits unique char-acteristics. The

multiplicity of national environments challenges the global
marketing control system with much greater environmental
heterogeneity and, therefore, greater complexity in its control.
Finally, global marketing can create special communications
problems associated with the great distance between markets
and headquarters and dif-ferences among managers in
languages, customs, and practices.
Process
The manner in which targets are communicated to subsidiary
management is as impor-tant as the way in which they are
derived. One of the most sophisticated methods used today is
the so-called indicative planning method. Headquarters
estimates of regional I potential are disaggregated and communicated to subsidiary management as guidance. The subsidiaries
are in no way bound by guidance. They are expected to produce
their own plan, taking into account the headquarters guidance
that is based on global data and their own data from the
market, including a detailed review of customers, competitors,
and other relevant market developments. This method
produces excellent results because it combines a global perspective and estimate with specific country marketing plans that are
developed from the objective to the program by the country
management j teams themselves.
Headquarters, in providing guidance, -does not need to
understand a market in depth. For example, it is not necessary
that the headquarters of a manufacturer of electrical products
know how to sell electric motors to a French buyer. What
headquarters can do is gather data on the expected expansion in
generating capacity in France and use experience tables drawn
from world studies that indicate what each megawatt of
additional generating capacity will mean in terms of the growth
in demand in France for electrical motors. The estimate of total
market potential together with information on the competitiveness of the French subsidiary can be the basis for guidance in
terms of expected sales and earnings in France. The guidance
may not be accepted by the French subsidiary. If the indicative
planning method is used properly, the subsidiary educates the
headquarters if its guidance is unrealistic. If headquarters does a
good job, it will select an attainable but ambitious target. If the
subsidiary does not see how it can achieve the headquarters goal,
discussion and headquarters involvement in the planning
process, will either lead to a plan that will achieve the guidance
objective or it will result in are vision of the guidance by
headquarters.
Share of Market
Another principal measure of marketing performance is share
of market. This is a valu-able measure because it provides a
comparison of company performance with that of other
competitors in the market. Companies that do not obtain this
measure, even if it is an estimate, are flying blind. In larger
markets, data are reported for subsidiaries and, where significant
sales are involved, on a product-by-product basis. Share-ofmarket data in larger markets are often obtained from
independent market audit groups. In smaller markets, share-ofmarket data are often not available because the market is not
large enough to justify the development of an independent
commercial marketing audit ser-vice. In smaller markets, it is
possible for a country manager or agent to hide a deterio-rating
market position or share of market behind absolute gains in
sales and earnings.
Informal Control Methods

In addition to budgeting, informal control methods play an
important role. The main in-formal control method is the
transfer of people from one market to another. When people
382
are transferred, they take with them their experience in previous

markets, which I will normally include, some standards for
marketing performance. When investigating a new market that
has lower standards than a previous market, the investigation
will lead to revised standards or to discovery of why there is a
difference. Another valuable in-formal control device is face-toface contact between subsidiary staff and headquarters staff as
well as contact among subsidiary staff. These contacts provide
an opportunity for an exchange of information and judgment
that can be a valuable input to the plan-.
We describe our emerging culture by an awkward but descriptive

name: boundary less. It is the soul of our integrated diversity
and at the heart of everything we do well. It is the smallcompany culture weve been after for all these years.
E-business is the final nail in the coffin for bureaucracy at GE.
The utter transparency it brings about is a perfect fit for our
boundary less culture and means everyone in the organization
has total access to everything worth knowing.
-JOHN F. WELCH, JR.
Chairman of the Board and Chief Executive
Officer, General Electric Company
The world economy has undergone revolutionary changes
during the past 50 years. Perhaps the greatest and most
profound change is the emergence of global markets, global
competitors, and winners and losers in global competition.
Six Major Changes

The changes continue. Six major changes that will continue well
into this century are listed next.
1. World growth. Many of the poor countries of the world,
which have always been poor, are getting richer faster than
the rich countries of the world, which are also getting richer.
Most of the world is in a stage of economic growth. The
geographic exception to this world growth Is Africa south of
the Sahara where many countries are economically stagnant or
in economic decline.
2. The world economy dominates. The world economy is the
dominant economic unit. The macroeconomics of the
nation-state no longer control economic outcomes in
countries, and even the large superpower countries such as
the United States can no longer dictate to poorer countries
how they should behave.
3. End of the so-called trade-cycle decision rule. The old
trade-cycle model, which implied to a generation of
managers that as a product matures, the location of
production must shift to low-wage countries, has been
clarified. The location of production is not dictated
exclusively by wage levels. Wages are simply one ele-ment of
the cost equation. For any product in which labor is less
than, say, 15 per-cent to 20 percent of total costs, the location
of production of mature products may be anywhere in the
world. Factors such as transportation costs, availability of
skilled labor, market responsiveness, and market access and
high levels of innovation in product design and
manufacturability may all indicate that the best location for
production is a high-income, high-wage country.
4. Free markets rule the world. The 75-year contest
between capitalism and com-munism is over. The clear
success of the capitalist market-driven system over the
communist centrally controlled model has led to the collapse
of communism as a model for the organization of

economic- activity and as an ideology. Markets are in control
of the allocation of resources all over the world with the
exception of the two autocratic national anachronisms, Cuba
and North Korea.
5. Accelerating growth of global markets. Global markets
will grow at rates that were one thought impossible. The
engine behind this accelerating growth is the high rate of
growth in both the high- and low-income countries. The
high- income county growth leadership has shifted from
Japan to the United States. Low- and lower-middle-income
country growth leadership has been concen-trated in
Southeast Asia and southern Asia with China as a unique,
high-growth, large country in the region and the world, and
Singapore, Taiwan, and South Korea at the vanguard of the
small countries in the region. The driving forces of this
growth are technology, deregulation, global integration, and
the triumph of marketing.
6. The rise of the Internet and information technology. As Jack
Welch, CEO of GE suggests in the quotation at the
beginning of this chapter, e-business is revolutionizing the
way the world does business. We are now seeing the payoff
for the huge investments in information technology over the
past two decades. These investments are transforming the
strategy and structure of every com-pany in the world.
World Growth
The first change is that most of the worlds poor Countries are
getting richer. The emergence of the newly rich countries from
among the ranks of the formerly less developed group breaks
the long monopoly of Western Europe, the United States,
Canada, and Japan on the rich-nation status. These countries are
proving that it is not necessary to be European, North American (north of the Rio Grande), or Japanese to be rich. Countries
such as Singapore and Hong Kong are already high-income
countries; eastern Asia in par-ticular is home to many countries
that have been growing at annual rates of 7 percent or higher. A
7 percent real growth rate will double real income in a decade.
The emerging rich countries include smaller countries such as
South Korea as well as the largest coun-tries in the world, China
and India, which have begun to develop a middle class.
The exception to this growth in the emerging markets is Africa
south of the Sahara, where the promise of economic progress
has been set back by incompetent leadership and fundamentally
by widespread ignorance, poverty, and disease. With the
exception of South Africa, the economic progress in Africa
south of the Sahara has been disap-pointing and discouraging.
Nevertheless, with the exception of Africa, for the first time in
the history of the world, there is the very real likelihood of a
much broader global prosperity in the first half of this century.
383
LESSON 41:
THE FUTURE OF GLOBAL MARKETING
The population within the developed economies of the world

is continuing to gray (see Table 1). The change from 1995 to the
year 2050 will be quite dramatic. In 1995 nine countries had
between 14.0 and 17.5 percent of their populations over the age
of 65. In 2050 in the six countries of Spain, Hong Kong, Italy,
Greece, Japan, and Germany, 30.0 percent or more of their
populations will be over the age of 65. What impact will this
graying shift have on marketing? Certainly, it will impact medical
markets, but not all opportunities will be in medicines and
adult diapers. The older populations are living more active,
healthier lives and will be a major market for goods and services
across a broad spectrum of consumer products.
Hand in hand with older populations, the birthrate in the highincome countries is collapsing. In fact, Peter Drucker claims that
this is the most important, single, new cer-tainty for the future
of business.2 In Japan and many European countries, the
number of births has dropped to below population equilibrium level. The combination of low birthrates and wealth will
drive a continuation of the global movement of people from
poor, undeveloped countries to the rich, developed countries.
The World Economy Dominates

The second major change is the emergence of the world
economy as the dominant eco-nomic unit. Companies and
countries that recognize this fact have the greatest chance of
success. The United States is still a superpower, but it is no
longer in a position to tell other successful nations how to
behave in matters of internal affairs. As the poor countries
grow richer, they assume that their values are responsible for
their success, and they do not listen to lectures from their less
successful former world leaders. Indeed, they start giving the
lectures. Wealth creates the foundation for political and military
power and the basis for an assumption of moral superiority.
The attitude of politicians and businesspeople
Table 1
1995(% of total)
Sweden
Norway
Germany
United Kingdom
Switzerland
Belgium
Denmark
Greece
France
Austria
Japan
United States
17.5
16.0
16.0
15.7
15.7
15.7
15.4
15.2
15.1
15.0
14.0
12.7
Spain
Hong Kong
Italy
Greece
Japan
Germany
Austria
Slovenia
Portugal
Netherlands
Switzerland
Belgium
2050(Prj.)
(%of total)
34.6
34.5
34.3
31.4
30.2
30.0
26.4
26.3
25.9
25.6
25.3
24.8
from rich countries and from countries that are successfully

developing is that if we are rich or fast growing, we must be
doing something right. The United States has long lec-tured the
world from the pulpit of its economic success, and Southeast
Asia was quick to join in with lectures on Asian values when it
was growing at 7 percent plus per annum.
The Asian Flu that began in 1997 and continued into 1998
(the sudden collapse of currency values, employment, and
economic output and the realization that many of the compa-
384
nies of the region were insolvent because of their dollardenominated debt), which infected Southeast Asia, did not
impact only the economic well-being of countries in Asia. It
clearly threatened the growth rate and economic well being of
the rest; of the world, including the high-income countries. It
also underlined the vulnerability of smaller countries to currency
fluctuations and capital outflows and the urgent need for
economic and political reform at the national, regional, and
global levels. Most of the countries that were hit by the Asian
Flu in 1997 to 1998 have resumed economic growth. In
Indonesia, the crisis led to the emergence of a popular movement for more democratic expression and a move from the
autocratic rule of the Suharto regime to and elected head of
state.
Trade - Cycle Model Clarified

The trade-cycle model, which suggested to many managers that as
a product matures, its production location would shift to lowerincome countries, has been clarified. In the early 21st century, it is
clear that product maturity is a concept that must be carefully
defined in a dynamic world. The automobile is a mature product
in -the sense that growth has leveled in all of the high-income
countries of the world. Does this mean that it is stan-dardized?
Far from it, the automobile is a highly differentiated, incredibly
complicated, increasingly sophisticated, high-value product, and
the way cars are designed and manufactured has been revolutionized. The result is that automobiles continue to be designed
manufactured, and assembled in high-income countries. The
reason is simple: Labor is a factor in the production cost of an
automobile, but as a percentage of total cost, it is not high
enough to determine the location of all automobile production.
Automobiles today are produced in countries at every stage of
development, but 98 percent of world pro-duction is from highand upper-middle-income countries.
In the 1980s, the Swiss banks concluded that Switzerland was
finished in the low end of the watch business. One man,
Nicolas Hayek, disagreed. He formed the company Swatch and
demonstrated that in spite of the high wage costs in Switzerland, the co entry could compete in world watch markets not
only in the luxury watch segment but also in the low-priced
segment of fashion accessory watches. The Swiss understand
the watch business, and they have been creative innovators in
the design, manufacturability, and marketing of watches. All
luxury watches; which account for a small percentage of volume
in units but more than half of the value of world watch
production, are made in Europe, and over 95 percent of
European luxury watch production is in Switzerland.
In the meantime, there are mature products that have become
relatively standardized in their manufacture and continue to
require a relatively high percentage of labor to produce. These
products today are made almost exclusively in lower-income
countries. A good example of a product in this mature category
is athletic footwear. The entire industry has shifted its production to low-income countries, and no company has been able to
reverse this trend. This has offered employment opportunity
for the lower-income countries and a challenge for the higherincome countries to shift labor to other industries in which the
Changes in global competition are bringing companies into

more direct competi-tion with economic rivals in other parts of
the world than was the case in the past. Yesterdays global f9rces
were founded on exports of products and services not available
to competing nations. In the past, countries would export
agricultural products others could not grow, raw materials
others did not have, and high-tech products others could not
build. Today, companies in the same industries in different
countries and regions compete ferociously with each other in
manufactured goods, agricultural products, nat-ural resources,
and services.
Is Competitiveness
A Dangerous Obsession?
Stanford University economist Paul Krugman wants every student of
international trade to reflect carefully on the following proposition:
Today, America is part of a truly global economy. To maintain our
standard of living, America must learn t9 compete in an ever tougher
world marketplace. Thats why high productivity and product quality have
become essential. We can only be competitive in the new global economy if
we forge a new partnership between government and business.
To many, this proposition will sound reasonable. In style and substance, it
echoes assertions being made in the 19905 by such well-known figures as
economist Lester Thurow, presidential advisor Ira Magaziner, and U.S.
Sec-retary of Labor Robert Reich. KruglJ1an, however, says that the
proposition is baloney. In his words, it repre-sents the rhetoric of
competitiveness, in which the United States is likened to a large
corporation such as General Motors (GM). According to the rhetoric of
com-petitiveness, America-like GM-is suffering because of global
competition, and the nations standard of living has stagnated as a result.
In numerous articles and a recent book, Krugman offers a painstaking
analysis of what he believes to be a mistakenly held proposition. In sorting
out the salient issues, Krugmans reasoning flies in the face of positions
held by Thurow, Magaziner, Reich, and others; Krugman calls these
individuals strategic traders and-policy entre-preneurs. Surprisingly,
Krugmans critiques are not based on partisan politics; he himself is a
liberal. His complaint is that fundamental economic conceptsespecially
comparative advantage-are being misinterpreted, misap-plied, or ignored
altogether in the name of public policy.
First, Krugman disputes the assertion that America is part of a truly
global economy. The reason: Approx-imately 90 percent of the goods
and services produced in the United States are for domestic consumption;
only 10 percent are destined for world markets. Indeed, 70 per-cent of the
U.S. economy is based on services, and services are less likely than
manufactured products to be marketed abroad. Thus, despite all the talk
about global integration, the global economy is not as interconnected as
people might think.
Next, Krugman attacks the notion that America itself competes in the
global marketplace. Krugman argues that Japan, the United States, and
other nations of the world are not in competition with each other in the
sense that, say, Coca-Cola and PepsiCo or Reebok and Nike are. Few
Coca-Cola employees buy Pepsi products, and vice versa. Thus, a company
is not like a nation: No company sells 90 percent of its output to its own
em-ployees. In the cola wars, PepsiCo can only win by taking customers
away from Coca-Cola. The same can-not be said of nations, Krugman
asserts. The worlds major industrial nations can be successful without

caus-ing harm to each other because they are not just com-petitors; trading
partners also represent export markets and sources of imports. In other
words, every potential problem also presents opportunities, and those
opportu-nities may outweigh the problems.
Third, Krugman objects to linking the issue of higher U.S. productivity
with international trade. Contrary to the message coming out of
Washington; the fact that produc-tivity improvement rates in other nations
exceed those in the United States does not make the United States less
competitive or lessen Americans standard of living. Krugman asserts
quite simply that America needs to be productive to produce more. That
may sound tautologi-cal, but it is a plain and simple economic truth that
would be valid even if the United States did not engage in in-ternational
trade. In his writings, Krugman reviews the basics of comparative
advantage to demonstrate that, in fact, no special problems are created for
a country that is less productive than its trading partners.
Finally, Krugman argues that the issues relating to the rhetoric of
competitiveness are not simply academic ones. If the strategic traders
rhetoric of Competitiveness message is heeded, the results could have farreaching, undesirable consequences. First, it could lead to wasteful
government spending in a misguided effort to enhance competitiveness. In
the interest of competitiveness, gov-ernment support might be directed at
manufacturing. Yet it is the service sector, which is not a major part of
inter-national trade, where productivity is lagging. Second, it could lead to
protectionism and trade wars. Finally, it could lead to poor public policy
decisions in a variety of areas -health care, for example-that are
unrelated to trade.
The Triumph of Markets

After almost a century of debate in the world about the merits
of markets and market-ing versus a state-controlled system of
allocating resources and controlling production, the capitalist/
marketing model has clearly won. Markets are king the world
around, with the exception of Cuba and North Korea. The big
issue today is whether economic I democracy (the market
allocation of resources, one dollar, yen, or rupiah /one vote)
must be combined with political democracy. This debate will
continue. What is no longer de-bated is the global emergence of
the acceptance of markets and marketing.
The Rise of Global Markets

The fifth trend that will change the future of global marketing
is the rise of global market segments. Today more than ever
before, there are global segment opportunities. In cat-egory after
category, global efforts succeed. For example, the soft-drink
industry was first successful in reaching a global cola segment
and has now moved to address the fast- growing fruit-andflavor segment.
There are global segments for luxury cars, wine and spirits, every
type of medical and industrial product, teenagers, senior
citizens, and enthusiasts of every stripe and type, from scuba
divers to snowboarders.
The rapidly growing diffusion of Internet access combined with
the rapidly ex-panding bandwidth and capacity of the global
Internet itself will playa major role in supporting the growth of
global markets and global marketing. Amazon.com can reach
customers in Taiwan and Tokyo just as easily as it can reach
385
cost of labor is not such a significant factor in the production

lo-cation decision.
customers in Boston. Cus-tomers anywhere in the world are

only a click away from the book of their choice. With express
mail service, customers are only two days away from delivery
wherever they live, and with credit cards they can pay for goods
and services in any currency.
These are the new economic realities. The rich are getting richer,
the poor in many countries are getting richer faster, and the
world economy is becoming more and more in-tegrated. This
means new opportunities and new challenges for companies
and countries.
What is the future for the average consumer? The possibilities
are unlimited. How about high-tech pets to care for the
elderly? Matsushita Electric has developed pets, which record
the number of times their owners talk to them or hold them.
This infor-mation is transmitted to an agency that monitors
these elderly. The pet can respond to a greeting, engage in
simple conversation and even express remorse when scolded. In
every field, from medicine and health care to transportation to
information technology to entertainment to retailing, there will
continue to be revolutionary changes.
The Rise of the Internet and Information

Technology
The sixth and perhaps the most significant of all of the changes
impacting global mar-keting is the rise of the Internet and
information technology (IT). Marketing, for the first time in
history, can address the individual customer. Before the
Internet, the small-est marketing segment was a group or
cluster of customers with similar needs. Today, marketing has
the tools to address the segment of one, the individual
customer and his or her needs.
This capability is available to address markets from local to
global. In addition, com-panies can for the first time really focus
on the customer. Today, small companies can act like large
companies, and large, giant companies can act like small
companies. This is energizing every sector of the global
economy, especially in the high-income countries that have the
resources to invest in IT. In addition to e-commerce, the
Internet revolu-tion is creating a new medium for information,
entertainment, communication, and ad-vertising and a new ecommerce retail segment.
Careers in Global Marketing

There has never been a better time to prepare for a career in
global marketing. Now that you are completing this book, the
author would like to offer a few suggestions on how to jumpstart your global marketing career.
First, remember that times have changed. Until very recently,
one sure way to put your career at risk in many companies
(especially U.S. companies) was to go overseas. There was
nothing wrong with being overseas per se, but the problem for
careers was that management did not recognize the value of
global experience and turned to exec-utives who were close at
hand when making promotions. Out of sight, out of mind
seemed to be the operative phrase.
Today, this is changing. Global experience counts. Only the truly
lost do not recog-nize that we are in a global market with global
competition, and those with global ex-perience have a definite
386
advantage. Top U.S. executives with international experience

include Samir F. Gibara, president and chief executive officer
(CEO) of Goodyear Tire & Rubber; Michael Hawley, president
and chief operating officer (COO) of Gillette; Harry Bowman,
chairman, president, and CEO of Outboard Marine; Lucio A.
Noto, chairman and CEO of Mobil; and Raymond G. Viault,
vice chairman of General Mills. 4 According to Cendant International, the most frequent locations for international em-ployees
are the United States, United Kingdom, Mexico, Canada,
Singapore, Saudi Arabia, Germany, France, China, and Japans
Ray Viault was a vice president of General Foods in charge of
the Maxwell House Coffee Division. When Philip Morris
acquired General Foods, it kept Viault on as pres-ident of the
Maxwell House division. Later, when Philip Morris acquired
Jacob Suchard, the Zurich-based chocolate and coffee company,
it chose Viault as the new CEO of the acquired company Viault
was able to take his grounding in the U.S. coffee market to Europe and did an outstanding job of leading the global
marketing effort of Jacob Suchard. Following this assignment,
Viault returned to the United States to become a vice chair-man
of General Mills.
How do you establish a career in global marketing? There are
two broad paths:
1. Go directly into a job outside your home country or into a
headquarters job in a global company.
2. Get experience with a company in an industry that prepares you
for promotion to a job with multi-country responsibility or to
an assignment outside your home country.
For many the second choice is better than the first. There is no
substitute for solid experience in a company in an industry. Your
best opportunity to get solid experience may be in your home
country. You speak the language, understand the culture, and are
trained in business and marketing. You are ready to learn.
Another option is to get this basic experience in a different
country. The advantage of this move is that you will learn a new
culture and language and broaden your inter-national experience
while you learn about a company and industry.
Summary
The future of global marketing will reflect five major changes in
world growth but with some major new directions. The growth
of Southeast Asia has been interrupted. That region now offers
exceptional risk and reward equations for global markets that are
willing to make a bet on the long-t6rm potential of the region.
The cost of market entry has dropped as dramatically as the
decline in values of national currencies. For compa-nies with a
stomach for risk, there is an opportunity to invest, building
market positions in countries that most experts believe will
soon return to long-term growth. In the mean-time, other
world regions will continue to grow, and world wealth will
become more evenly distributed.
The trade cycle has not eliminated manufacturing as a source of
employment and income in the high-income countries. By
investing in capital equipment and by design-ing products for
manufacturability, rich countries have proven that they can
continue to successfully compete as manufacturing locations.
Global markets will continue to grow in importance as global

marketers continue their quest to identify and serve global
segments. This growth will enhance and expand the value of
global experience for managers and executives worldwide.
Finally, marketing is at the threshold of a new and exciting era:
e-business, e-commerce, and e marketing, for the first time in
history, marketers have the tools to address the needs of the
individual customer.
1. Do you believe that economic democracy (free markets) will
inevitably lead to political democracy? Why? Why not?
4. How has the Internet changed marketing?
2. Why did markets and marketing win out in the competition

with communism?
3. Is the trade cycle relevant to companies today? Why? Why

not?
387
CASE STUDY
PARKER PEN CO. (A)
International Marketing Strategy Review

It is circumstance and proper timing that give an action its
character and make it either good or bad.
Agesilaus
Introduction
The meeting at sunny Palm Beach concluded with nary a
whimper of dissent from its participants. After years of being
run as a completely decentralized company whose managers in
all corners of the world enjoyed a high degree of flexibility,
Parker Pen Co., of Janesville, Wisconsin, was forced to reexamine itself. The company had enjoyed decade after decade of
success until the early 1980s. By this time, Parker faced strong
competitive threats and a deteri-orating internal situation. A
new management team was brought in from outside the
company-an unprecedented step for what had been until then
an essentially family-run business. At the March 1984 Palm
Beach meeting, this new group of decision makers would
outline a course of action that would hopefully set Parker back
on a path to success.
The men behind the new strategy were supremely confident of
its chances for success-and with good reason. Each was
recognized as a highly skilled practitioner of imitational
business and their combined extensive experience gave them an
air of invincibility. They had been recruited from larger companies had left high paying, re-, warding jobs, and each had come
to Janesville with a grand : sense of purpose. For decades,
Parker had been a domi-nant player in the pen industry. In the
early 19805, however, the company had seen its market share
dwindle to a mere 6 percent and, in 1982, net income plunged a
whop-ping 60 percent.
To reverse this decline, Parker recruited James Peterson, an
executive vice president at R. J. Reynolds, as the new president
and CEO. Peterson hired Manville Smith as president of the
writing instruments group at Parker. Smith, who was born in
Ecuador and had a broad international background, came from
3M where he had been appointed division president at the
tender age of 30. Richard Swart was vice president/marketing
of the writing instruments group. He spent 11 years at the
advertising agency BBDO and was an expert on marketing
planning and theory. Jack Marks was head of writing instruments advertising. Marks came to Parker from Gillette, where,
among other things, he assisted in the worldwide marketing of
Paper Mate pens. Rounding out the team was Carlos Del Nero,
manager of global marketing planning, who brought with him
considerable international experience at Fisher-Price. Each of
these men was convinced that Parker would right itself by
following the plan they unveiled at Palm Beach.
A Brief History of Parker Pen

The Rolls Royce of the Pen Industry
388
The Parker name has been identified with pens since 1888 when
George S. Parker delighted ink-splotched pen users everywhere
by introducing a leak proof- fountain model called the Parker
Lucky Curve. Parker Pen would eventu-ally blossom into
Americas, if not the worlds, largest and best-known pen
maker. Parkers products, which would eventually include
ballpoint pens, felt-tip pens, desk sets, mechanical pencils, inks,
leads, erasers, and, of course, the fountain pen, were also
known for their high price tags. In 1921, for example, Parker
introduced the Duo fold pen. The Duo fold, even though it
was comparable to other $3 pens on the market, was extravagantly priced at $7. Parker was able to charge a premium price
because of its reputation for quality and style, and its skill in
positioning products in the top p rice segment.
Parkers position as Americas leading pen maker was solidified
during the years when the pen was mainly viewed as a gift item.
High school and college graduates in the 19405 and 19505, for
example, were quite likely to receive a Parker 51 fountain pen
(priced at $1250) commemorating their achievement. Indeed, it
was with a 51 that Gen-eral Douglas Mac Arthur signed the
Japanese Peace Treaty in 1945. Parkers stylish products and
high profile name would keep it at the top of the pen market
until the late sixties when American competitors A. T. Cross
and Shaffer, as well as a few foreign brands, knocked them out
of first place once and for all.
Of course, Parker would not have lost its hold on the market
had it not made some oversights along the way. In addition to
a more competitive environment, Parker failed to come to terms
with a fundamental change in the pen market-the development
of the disposable, ballpoint market. When Parker unveiled the
$25 75 pen in 1963, it showed that it remained committed to
supplying high-priced pens to the upper end of the market. As
the 1960s wore on, a clear trend toward cheap ballpoint and
soft-tip pens developed. Meanwhile, Parkers only ultimately
suc-cessful addition to its product range in the late sixties was
the 75 Classic line, yet another high-priced pen.
A Brief Flirtation with Low-Priced Pens

Parker did, however, make an effort to compete in the lower
price segment of the market in the late 19605 only to see it fail.
In an attempt to capitalize on the trend toward inexpensive
pens, Parker introduced the T-Ball Jotter, priced at $1.98. The
success of the Jotter led it to move even further down the price
ladder when it acquired Ever sharp. Whereas the Jotter had
given Parker reason to believe it could make the shift from
pricey pens to cheap pens with little or no difficulty, the Ever
sharp experience proved to be different. George Parker, a
grandnephew of the companys founder and president of
Parker at the time, stated the rea-sons for the Ever sharp failure,
as well as its consequences:
The 1970s: The Illusion Of Success

Despite the difficulties Parker encountered when it left its niche
in the upper end of the pen market, the company ex-perienced a
healthy period of growth and profitability for most of the
19705. Demand for its products remained strong, and its
worldwide markets expanded significantly due to a rise in
consumer income and increasing literacy rates in much of the
Third World. Parker also chose to di-versify during this decade,
and its most noteworthy acqui-sition, Manpower, Inc., proved
to be a very strong asset. In 1975, when it acquired Manpower, a
temporary-help firm, Parker was the slightly more profitable of
the two. With the boom in temporary services in the late
seventies and early eighties, however, Manpower eclipsed Parker
in sales and earnings and eventually subsidized its parent
company during down periods.
Parkers Global Operations Before

Peterson
In addition to having a hand in manufacturing and product line
decisions, Parkers subsidiaries developed their own marketing
strategies. More than 40 different advertising agencies promoted
Parker pens in all the comers of the globe. When Peterson came to
Parker, he was proudly in-formed that the company was a
federation of autonomous geographical units. The downside to
the federation con-cept, Peterson thought, was that home
country management often lacked the information needed to make
and coordi-nate basic business decisions. Control was so completely de-centralized that Parker didnt even know how many pens
it was selling by the time Peterson and his group arrived.
On the other hand, decentralization obviously had its positive
aspects, most noticeably in the field of advertising. Pens mean
different things to different people. Whereas Eu-ropeans are
more likely to choose a pen based on its style and feel, a
consumer from a lesser-developed country in the seventies
viewed the pen as nothing less than a badge of lit-eracy. In
addition, tastes varied widely from country to coun-try. The
French, for example, remained attached to the fountain pen.
Scandinavians, for their part, showed a marked preference for
the ballpoint. The logic behind having so many different
advertising agencies was that, even if it ap-peared to be somewhat inefficient, in the end the company was better off from a
sales standpoint.
Why did Parker fall from its position of leadership in the

writing instrument market? There were many reasons, and one
of the most important was the weakening of the U.S. dollars.
At its peak, Parker accounted for half of all U.S. exports of
writing instruments and 80 percent of its total sales came from
154 foreign countries. Parker was es-pecially strong in Europe,
most particularly in the United Kingdom. When sales in the
strong European currencies were translated into dollars, Parker
earned huge profits.
Some of the individual advertising agencies were able to devise

excellent, imaginative campaigns that struck a re-sponsive chord
among their local audiences. One example was the Lowe
Howard-Spink agency in London. The Parker UK division
became the companys most prof-itable during the tenure of
the Lowe agency. An example of its creativity is an ad entitled
Rediscover the lost art of the insult. Gracing the ad is a
picture of a dead plumber, on his back, with a giant Parker pen
protruding from his heart. Part of the text is as follows:
The downside of a weak dollar, however, was that it gave Parker

the illusion that it was a well-run company. In fact, throughout
the 19705, Parker was a model of inefficiency; Manufacturing
facilities were dated and inefficient. Production was so erratic
that the marketing department often had no idea what type of
pens they would be selling from year to year or even month to
month. Under the lead-ership of George Parker, nothing was
done by company headquarters to update these facilities or to
develop new products. As a result, subsidiaries and distributors
around the world saw fit to develop their own products. By the
end of George Parkers reign, the companys product line included 500 writing instruments.
Do you know plumbers who never turn up?
That distant subsidiaries would have the leeway to make such

decisions was not at all unusual at Parker, for it had long been
known as One of the most globally de-centralized companies in
the world. Decentralization, in fact, was something that Parker
took pride in and consid-ered to be vital to its success as a
multinational. Yet it was this very concept that Peterson and his
new management team would hold to be responsible for much
of what ailed Parker Pen.
Hairdressers who missed their vocations as butchers?

Drycleaners who make your stains disappear-and your clothes
with them?
Today, we at Parker give you the chance to get your own back.
Not only are we offering a beautiful new pen called the Laque,
which owes its deep lustre to a Chinese technique 2000 years
old, but also we are attempting to revive something that went
out when the telephone came in.
The well-armed witty, malicious dart.
Although the Parker UK division was Ii success, how-ever, the
companys general inefficiencies, loss of market share, and lack
of strategic direction were finally revealed in the early 19805 with
the rise of the US dollar. Parkers financial decline was even
more precipitous than - the dollars increase. When the huge
1982 losses were regis-tered, Peterson was brought in from R. J.
Reynolds to try and turn things around for Parker. He decided
that every aspect of the company needed to be closely examined,
not the least of which was Parkers decentralization of global
operations.
389
All the market research surveys said go lower, go lower, and go

lower, thats where the business is. So I said, Go lower? Fine.
But we dont know how. We bought Ever sharp and tried to
run it ourselves, and we couldnt do it. Our people just couldnt
think in terms of big units, and they didnt know how to sell
people on the lower-priced end of the business-grocers,
supermar-kets, and rack jobbers. The result was, Bic and Paper
Mate were cleaning up in the lower-priced end, cross in the high,
and Parker was getting squeezed in the middle. Volume was
going up, but our costs went up faster, and our profits were
squeezed.
Discussion Questions (A)

1. What would you do if you were in James Petersons shoes in
January 1982?
2. What changes, if any, would you make in Parkers marketing
strategy?
3. Which aspects of Parkers structure would you dis-card?
Which would you keep?
4. Assume that you are James Peterson and you have just hired
a new management team composed of highly qualified
executives from outside companies. You and your new team
are convinced that you have the solution to Parkers
problems but there are many holdovers that disagree with
you. How would you implement your plan? To what extent
would you incorporate the views of Parker management into
your plan?
390
Parker Goes Global

We will be creating more news in the next two years than we
have in the past ten.
-JAMES PETERSON
July 1982
James Peterson relished the chance to be the top man at Parker
Pen. He spent 24 years at Pillsbury and had a taste of what it
was like to be at the helm of a corporation when he rose to the
rank of president, the number two power spot in the company.
At R. J. Reynolds, he was an execu-tive vice president-an
influential position, to be sure, but not one that afforded him
the freedom of movement that he would have liked. When he
was brought to Parker in January 1982, Peterson, then 54, had
finally had the chance I to run a company. All the theories he
held to be true would I be tested. All the lessons he had learned
after some 30 years of practical business experience-much of it
in international operations-would now are applied.
His years at R. J. Reynolds had convinced him of the superiority
of global marketing, which he understood to mean standardized product and promotion strategies the whole world over.
This view made him unalterably opposed to the loose structure
that had characterized Parker Pen before his arrival. In the
opinion of Peterson, there was ab-solutely no way that any
company operating in the modem world would be able to
survive such disarray. That a sub-sidiary thousands of miles
away could decide not only what products it would manufacture
but also how they would market them ran counter to everything Peterson believed.
Peterson quickly moved to remold Parker Pen in his own image;
In addition to too much decentralization, Peter-son thought
Parker lacked a good enunciation of business philosophy.
According to Peterson, every good company has to have one.
In order to correct this problem. Peter-son devised an eightpoint statement of his management philosophy and had it
translated into more than 40 lan-guages and sent in letterform
to Parker managers all over the world. The statement contained
such phrases as, There is no substitute for quality, and,
Like most managers, I dont like surprises. The letter
concluded by saying: As I get to meet each of you in the
months ahead, I will be dis-cussing this business philosophy
with you and asking you how you have used it.
The Dismantling of Decentralization:

From 40 Agencies To 1
The core of Petersons revitalization efforts would be di-rected
at dismantling the geographical organization that Parker had
evolved into over the years. He slashed the product line from
500 to the 100 most profitable items. The manufacturing
function was consolidated, greatly reducing the number of
units produced overseas. As for what prod-ucts would be
manufactured; that was to be strictly decided by the manage-
ment team at the Janesville headquarters. Of course, the

manufacturing facilities themselves would have to be updated,
for no longer could the production de-partment be allowed to
dictate to marketing executives ex-actly what kind of products it
would be selling. None of these measures in and of themselves
was startling-each addressed problem that needed to be
corrected. However, when Peterson decided to get rid of
Parkers 40-odd ad-vertising agencies in favor of one worldclass agency, more than a few eyebrows were raised.
The logic behind the decision to go with one adver-tising agency
(Ogilvy & Mather) was consistent with Pe-tersons desire to
make Parker Pen a global marketing corporation. With one
agency instead of 40, not only could money be saved, but also
strategies could be coordinated on a global scale. One problem,
however, was that formerly pro-ductive agencies such as Lowe
Howard-Spink in London were fired. This had a devastating
effect on morale at Parker U.K., the companys most profitable
subsidiary which had in effect been subsidizing the same
American di-vision that was now telling it how to advertise.
The Worlds No.1 Pen Company

Even though Parker had experienced many problems before
Peterson arrived, the company was still very proud of its
tradition as a leading producer of quality writing instruments.
Of course, this pride was sometimes trans-lated into overblown statements such as, Parker is the worlds No.1 pen
company. This indeed was the party line at Parker even though
it was paid little more than lip ser-vice. When Manville Smith
arrived in 1982, he commis-sioned a study to see just how
important Parker was. His findings shocked him: Parker had
only a 6 percent share of the global pen market and it didnt
even attempt to par-ticipate in a segment that was responsible
for 65 percent of all sales of pens in the world-that is, pens that
sold for less than $3.
The new management team wanted to make Parker more than
just a fictitious number-one company. In order to recapture
market share, Parker would have to partici-pate in the lower end
of the market-the same area that George Parker himself had so
hastily abandoned in the late 1960s. A new $15 million state-ofthe-art plant would be built whose main function would be to
manufacture the Vector, a roller-ball pen selling for $2.98. The
Vector was Manville Smiths pet project. Using a new automated
line at Parkers new plant, Smith calculated that the Vector could
be produced for 27 cents per unit and therefore gen-erate huge
profits for the company. After the Vector, Smith, planned to
plunge even deeper into the low-price market with the l13la, an
even cheaper model that would be Parkers first disposable pen.
The First Rumblings of Dissent:

George Parker
Although George Parker was still formally the chairman of
Parker Pen, he was expected to lead a quiet, charmed life in
391
PARKER PEN CO. (B)
Marco Island, Florida, and never to be heard from again. In fact,

George Parker was paying very close attention to the new
developments in the company that bore his name, and he was
none too happy. As his earlier remarks might suggest, he was
scornful of a strict market research approach to the pen
business. He also took pride in Parker Pens autono-mous
federation system that provided a high degree of flexibility to
the companys many subsidiaries. Even more disturbing to him
was the planned foray into the lower depths of the marketplace,
as he might put it. Cheap pens were beneath Parker Pen, in his
opinion, and nothing could be more disgraceful than a
disposable pen bearing his name. What were they manufacturing anyway, garbage bags?
Compounding George Parkers displeasure, was his sincere
dislike for James Peterson, whom he dubbed motor mouth.
To him, Peterson was the embodiment of everything that was
wrong with the new Parker Pen. The grandnephew of the
companys founder still had many well-placed friends in the
company, and his constant criticism of the new management
team probably did little to aid their cause.
Problems: Financial Losses, Smith Gets

Fired, One World Marketing Fails
Despite all the complaints from George Parker, Petersons
major problems lay elsewhere. The strong dollar that had
exposed so many of his companys weaknesses got even
stronger. Recession was a worldwide plague. The costs of new
plant development were not absorbed by profits and the
company lost $13.6 million in fiscal 1983 (as shown in Exhibit
1). Still, Peterson had the luxury of time on his side, since he
had little more than one full year under his belt. One more year
like 1983, however, and he was gone.
Exhibit 1
Year
Ended
Feb. 28
Net
Dividends
Income
(Millions)
Earnings (Per Share) Range
Revenues
1985
$843.7
$5.4
$0.32
$0.52
21-13
1984
1983
1982
1981
708.8
635.3
679.1
723.2
11.8
d13.6
15.7
37.7
0.70
D0.80
0.92
2.23
0.52
0.52
0.50
0.44
21-12
17-11
24-14
26-14
d = Deficit.
Balance sheet as of June 30, 1985:
Current assets: $284.5 million
Current liabilities: $239.5 million
Current ratio: 1.1-to-1
Long-term debt: $27.1 million
Common shares: 17,635,000
Book value: $7.65
In Petersons opinion, only a full-fledged global mar-keting
effort could save Parker. At the March 1984 Palm Beach
meeting, it was decided that Parker would partici-pate in every
viable segment of the writing instrument business. In
392
addition, it was declared that, The concept of marketing by

centralized direction has been discussed and consensus was
reached. The management team, filled with a sense of
purpose, then set out to achieve its lofty goals.
There remained one major problem: Parkers new plant was
proving to be a failure. The plant was not func-tional for the
1983 Christmas season, costing the company millions of
dollars in sales. Even as Peterson arid his group were working
round-the-clock to see its strategy through, the computerautomated plant which was supposed to spearhead Parkers
drive into the lower end of the market, broke down repeatedly.
With automation having failed, the r company was forced to
hire labor again and its costs sky-, rocketed. Manville Smith,
who had placed his name next to the fully automated Vector
project, was fired by Peter-son as a result.
Smiths departure was important because he was the only
member of the management team that held out for local
advertising flexibility. Smith had worked closely with Ogilvy &
Mather (O & M) on Parkers first worldwide ad-vertising
campaign. At Smiths urging 0 & M devised a campaign that
allowed for some degree of local. Flexibility -When Smith left,
however, Peterson took over the adver-tising reins and pushed
very hard for one-look advertis-ing and the results were
disastrous.
The fashion in which Peterson promoted his adver-tising policy
was enough to alienate once and for all those remaining
managers that supported his efforts. A procla-mation issued
from the Janesville office and sent across the globe headquarters
stated that: Advertising for Parker pens [no matter model or
mode] will be based on a common creative strategy and
positioning. . . . The world-wide advertising theme, Make your
mark with a Parker: has been adopted . . . . [It] will utilize
similar graphic layout and photography. It will utilize an agreedupon typeface. It will utilize the approved parker logo/graphic
design. It will be adapted from centrally supplied materials.
The new advertising campaign was indeed rigidly controlled.
Subsidiaries were sent their materials and told to get on with it.
Managers abroad were seen as simple im-plementers of the
global marketing strategy with little or no input. The problem
was that many of them realized right away that the new
advertising campaign wouldnt work in their markets. In fact,
the campaign really didnt work any-where. Jack Marks would
later qualify it as lowest common denominator advertising
that tried to say something to everybody, and didnt say
anything to anybody.
The last to admit failure was Peterson himself, who ignored all
evidence and tried to move forward with a second wave of global
advertising in January of 1985, this ~e for the Vector, which had
finally made it off the production line. By this time, however,
Petersons position was termi-nally weakened. Production
problems persisted, morale was low, resentment of the management team was high and reaction to yet another generic campaign
was so negative that Peterson felt compelled to resign.
Postscript: Global Marketing Is Dead

The successor to Peterson as CEO was Mitcheill Fromstein,
president of what once was Parkers Manpower subsidiary. Since
it was purchased in 1975 by Parker, Manpower con-tinued to

grow to the point where it was far more profitable than its
parent and, indeed, subsidized it for several years. Manpower
would wind up taking over Parker, finally sell-ing it to a group
of British investors in 1986.
Fromstein was an implacable foe of Petersons. Man-power was
as international as Parker Pen, and Fromstein had his own
views as to how an international business should be run. When
he assumed control of Parker in Jan-uary 1985, he gathered the
companys country managers in Janesville and told them:
Global marketing is dead. Youre free again.
Discussion Questions (B)

1. Why did Petersons global strategy fail?
2. What lessons can be drawn from the decline and fall of
Parker Pen?
393
PARKER PEN CO. (C)
Global Marketing Strategy: An Interview with Dr. Dennis

Thomas of the Berol Corporation
Charles Anderer: I would first like to thank you for taking the
time to share your views on global marketing and Parker Pen in
this interview.
Dennis Thomas: Its my pleasure.
CA: I would like to start out by asking you a question about an
agreement that we both have read.4 Do you agree with the
notion that the big issue today is not whether to go global but
how to tailor the global marketing concept to each business?
DT: If its an either-or proposition, I am broadly in agree-ment
with the proposition. I believe that there are rela-tively few
major markets where the local conditions are so self-contained,
so capable of being kept self-contained, and so different, either
for cultural or other kinds of reasons, that the underlying,
increasing level of similarity that is coming into most major
marketplaces, as opposed to the nuances of necessary local
difference, cannot form the bedrock of acceptable product
offerings, positioning and what you have. Also, the economies
of scale and the rela-tive size of self-contained markets, in and
of themselves, are of decreasing appeal other than for a small
business, which chooses to remain small. But in many industries and many marketplaces, the products which adequately
serve market needs increasingly have within them either outright commodities or commodity-like ingredients if they are
likely to be products that are positioned in a market-place over a
period of decades rather than over a few fash-ion cycles of a few
months or a few years. . . . The real ques-tion is: What is the
appropriate international scale for the business and what is the
appropriate international scale for the underlying marketplace?
CA: What forces do you see behind the increasing similarities of
markets? Telecommunications is one that comes to mind.
DT: Sure. We are much more aware, whether we are con-scious
of it or not, of what other parts of the world look like. . . .
Broadly speaking, people behave as consumers who may be
appealed to in the same kinds of ways. Whether they are at level
two or level four of a Maslow hierarchy or any kind of structure
you would like to adopt, we are becoming more steadily
accepting of the fact that they are likely to go through the same
kinds of progressions. The form that a status need may take in
one society as opposed to another may be somewhat different,
but status needs exist in both. How well developed they are,
whether people may exercise them, how many people, in what
kinds of ways, and what they will be looking for-those are all to
my mind subsidiary kinds of questions, but you know its
going to be there.
You do, also, have the fact of increasing international communities. People travel, they go from one culture and from one
history to another. The world is becoming more in-terrelated,
394
either directly through people transfer or indi-rectly through

visual transfer, on a much more regular basis. Something that
has already happened in Tokyo will be there for you to see on
the 6 oclock news. It sounds as though its a long way between
that phenomenon and whether or not you can sell the same
pen in Japan and the United States. But I dont think its as farfetched as many have historically supposed when you stop and
think about it.
There is no reason why the intervention of water I should be a
cutoff point between groups of people and their often similar
characteristics.
At the end of October 1995 the Board of Directors of CEAC

held a meeting in Barcelona. With the company approaching its
50th anniversary, CEACs directors were facing what could well
be one of the most far-reaching decisions in the companys
history: after almost two years of preliminary ne-gotiations,
they had to decide what action to take in China.
CEAC was an entirely Spanish, family-owned group of
companies that had been founded in 1946 and was ac-tive in the
closely related fields of vocational distance learning and
publishing
The Group had significant international experience. Starting in
Argentina in 1964, it had achieved a presence in practically all
Spanish-speaking countries. Subsequently, it had extended its
activities, either directly or indirectly, to other countries such as
Switzerland, Sweden, France and Portugal.
In the early 1990s-after the fall of Communism -CEAC had
commenced activities in the Polish and Hungar-ian markets and
had also begun exploring its possibilities in Romania and
Russia.
In April 1994, Juan Antonio Marti Castro, Group Managing
Director and founder of the FECEAI Founda-tion, had taken part
in a trade mission to China organized by the said Foundation.
The task of organizing the contacts that the delegates were to
make in China had been entrusted to Manuel Vallejo, a Spanish
citizen with almost ten years experience in China. At the end of
1993 he had joined Taxon, a com-pany with permanent head
offices in Beijing, to act as a commercial and business consultant
in China.
Thanks to Manuel Vallejos perseverance and dedica-tion, after a
number of tentative and unfruitful contacts, a possible Chinese
partner for CEAC had eventually been found: New WorldPublishing Co., a company belonging to the State-run Foreign
Language Publications Bureau. After several months negotiations, they had hammered out the fi-nancial and operational
details of an agreement to set up a joint venture, which,
curiously enough, would be formally set up as a consulting
company: Beijing New World-CEAC Consulting Co. Ltd.
By October 1995, the CEAC Group had invested around
US$100,OOO in trips, surveys and exploratory work for the
project. But now, if CEACs Board of Directors de-cided to go
ahead and sign the agreement negotiated with New World
Publishing Co., they would most likely have to invest a further
US$300,000 at least.
Everyone present at the board meeting fully realized that the
moment of truth had arrived and that if- they ap-proved the
signing of the agreement with New World Pub-lishing Co., they
would be putting an end to the sounding out and exploration stage and embarking upon a course that would involve far
more substantial commitments of financial, human and
technological resources. In fact, the decision could significantly
influence the CEAC Groups strategic development in the 21st

century.
Background
The CEAC Group originated in 1945, when Juan MartiSalavedra took the initiative of writing a course to prepare
students for the entrance exam to the Architectural Technicians
Colleges of Barcelona and Madrid. These courses were advertised in the press and the material was mailed to the students
home address and paid for, lesson by lesson, on delivery.
Those first mimeographed lessons bore the words Centro de
Estudios A.C. on the cover, which quite simply meant
Architectural Technicians by Mail (Aparejadorespor
Correspondencia).
Marti-Salavedra secured the help of his brother-in- law, and
subsequently that of Jose Menal Ramon, who was somewhat
younger than Marti, had a degree in busi-ness administration,
and worked in a construction com-pany. Jose Menal became
Martis chief collaborator and partner.
They gradually developed other vocational distance learning
courses: At first, these new courses were all on sub-jects
connected with the building industry (Draftsman, Reinforced Concrete Technician, Surveyor, etc.). Later on, they
started offering sold-by-mail courses for other pro-fessions,
such as machinist (Milling Machine Operator, Lathe
Operator, etc.) and automobile repairman.
The procedure for developing courses in each new specialty was
the same as for the building sector: they first produced a general
course (e.g. Automobile Repairs). If this were a success, they
would write other more highly spe-cialized courses on the same
subject (e.g. Automobile Electrical Circuits, Automobile
Mechanics, Body-works, etc.). They later went on to offer
distance learning courses on hobbies and artistic subjects, such
as Drawing, Oil Painting, and Photography.
Another significant development was the eventual separation of
their two lines of business: producing and marketing vocational
distance learning courses, on the one hand, and book and
magazine publishing activities on the other. The latter were later
consolidated in a new company: Grupo Editorial CEAC, S.A.
The growth of the company had been entirely self- financed.
We have never taken bills to the bank for discount, declared
Juan Marti Salavedra proudly in 1995. We have confined
ourselves to doing what we could finance out of our own
resources, and if we could not finance something, we simply did
not do it. This superbly sound financial po-sition has always
given us great peace of mind, and also lib-erty to experiment with
new ideas and to embark upon entrepreneurial innovations and
adventures, since if one of our new undertakings was unsuccessful, no damage was done. It was our own money, which we
395
CEAC-CHINA
ourselves had generated and which, therefore, obviously did not

have to be paid back to any financial institution.
Instructor Attention For Enrolled

Students
Selling Process For Distance Learning

Courses In Spain, Up To 1985
After the initial years, during which Juan Marti Salavedra or Jose
Menal personally attended to students queries and corrected
their exercises and exams, CEAC engaged an ever-expanding
team of collaborators to handle these tasks. Eventually, CEAC
created a Studies Department to cover two broad areas of
responsibility: the development 6f new courses, and attention
to and monitoring of enrolled students.
CEAC gradually developed distance-learning courses in a

number of different fields. When CEAC first started up,
students who signed up received one lesson a week by mail,
paying cash on delivery (C.O.D.).
As early as 1955, the company management decided to offerand, of course, by subsequently honors a total guar-antee on
their courses. Under this guarantee, students who had completed a course-and had done all the exercises- and were not
fully satisfied, would be entitled to a full refund of the amount
they had paid and, moreover, to keep all the teaching materials
they had received.
The selling process for a specific course began with advertisements in newspapers and magazines, or direct mail campaigns
targeted at certain segments of potential customers, which were
defined according to demographic criteria or the content of the
course.
Potential students sent CEAC a request for further in-formation, using the coupon from the advert or the coupon and
prepaid envelope included in the direct mail piece.
CEAC immediately sent them a full-colour glossy bro-chure of
several pages. The brochure emphasized the impor-tance of the
subject of the course for the students career and gave a detailed
description of the teaching programme, which was divided up
into a number of chapters or teaching units. It also explained
how the course would be carried out with the help of a teachertutor and gave CEACs guarantee of a refund should the
student not be fully satisfied at the end of the course. The
brochure came with a registration form, which gave the price of
each complete course.
If the potential students were persuaded, they would register by
completing and signing the registration form, and mailing it to
CEAC. A few days later, they would re-ceive a letter from
CEAC, congratulating them on their decision and enclosing, the
first lesson of the course, which was paid for on delivery. They
would subsequently receive the rest of the course, lesson by
lesson, paying for each one C.O.D., until the course and been
completed.
From 1974 onward, still faithful to their guarantee, Juan Marti
Salavedra and Jose Menal Ramon decided that students who
enrolled on a course would receive all the rel-evant material In
one go, immediately upon registration (all the teaching, units,
evaluation tests and other material), al-though they would
continue to pay for it month by month, against a simple
reimbursement card mailed to them.
Should a potential student who had shown interest and
received the brochure not register for the course, CEAC would
send him/her up to seven reminder letters. It should be noted
that at that time (1950s and 19608) all con-tact with students
was by mail.
396
The monitoring was done by an ample staff of teacher -tutors

specialists in their respective subjects. These tutors were
responsible for correcting tests and giving students guidance,
both on the content of the course and on study methods and
any difficulties that might arise during the learn-ing period. The
average length of a course was 15 months, the shortest being 6
months and the longest 36 months.
Each teacher-tutor was responsible for a certain num-ber of
students, whose progress he would monitor until the course
was concluded, at which time they received the ap-propriate
CEAC diploma.
Initial International Activities

In the early 1960s, by which time the company was quite well
consolidated in Spain, CEAC management began to think
about ways of selling their courses in other Spanish- speaking
countries. In 1964, with the help of the Ibero--American
Education Office (OEI) and UNESCO, they started promoting
the courses- in various Latin American markets starting with
Argentina. They decided to share the business with local
partners, one in each country. These partners were called
Licensees. CEAC gave its Licensees the benefit of the teaching
and business experience it had acquired in distance learning,
either by bringing the Licensee to Barcelona for training or by
having Juan Marti Salavedra do it on the spot.
The courses were designed and printed in Barcelona. The
Licensee would buy this material at cost, plus an in-dustrial
margin, and had one year in which to pay for it. The Licensee
would then, at its own expense, take care of all marketing
activities, as well as the support and moni-toring of enrolled
students. In addition to, buying the courses from CEAC, the
Licensee had to pay Barcelona a royalty of 10% on sales, to be
settled once the Licensee had received payment from its
students.
CEAC had to deal with certain surmountable prob-lems,
such as differences in terminology or in the words used for
certain materials in the different Latin American countries. The
real problem was finding Licensees who would put enough
effort into the business and were capa-ble of running it in a
professional and responsible manner and were reliable as far as
payments were concerned.
They also found that sudden, drastic devaluations of the local
currency, or a scarcity of convertible currency, often led to
situation where a Licensee was unable to pay its debts. However, in spite of these difficulties, CEAC at one time had up to
40,000 students enrolled with its Li-censees in Argentina,
Uruguay, Venezuela, Peru, Colombia, Bolivia, Costa RicaCentral America and Mexico. As Marti Salavedra admitted, on
the whole, it was very profitable for CEAC.
In the specific case of Portugal, an agreement was reached in

1965 with a local publishing company. The pub-lisher would act
as Licensee, although with certain special concessions, such as
that CEAC would assist in translating its courses into Portuguese. The Portuguese Licensee set up a separate company called
CETOP (Centro de Edu-cacion a Distancia de Portugal).
Juan Antonio Marti Castro

Joins The Company
In 1974, Juan Antonio Marti Castro, the only son among Juan
Marti Salavedras five children, obtained his degree in Business
Administration at ESADR He joined the com-pany after
graduation and over the following ten years held posts of
increasing responsibility in the different de-partments of the
companies belonging to the Group, whose activities by then
extended beyond vocational distance learning (with some
complementary activities w the field of direct classroom
teaching) to publishing, graphic arts and bookbinding.
In 1985 Juan Antonio Marti Castro was appointed Chief
Executive Officer of the CEAC Group, taking the reins from
his father, who, having reached the age of 65, stayed on as
President of the Group.
By 1989 the conversion rate of potential students (those who
had shown an interest in a specific course by re-plying to an
advertisement or direct mail) into fully en-rolled students had
fallen quite considerably, to reach a low of around 10%,
compared with 25-30% in the past. As a consequence the
advertising and promotional costs per fully enrolled student
increased significantly. At the same time, drop-out rates rose
alarmingly.
In view of the situation, Juan Antonio Marti Castro took a
number of decisions that radically changed the way CEAC
conducted its marketing in Spain:
First of all, whereas previously the company had always
promoted its courses through its own internal Advertising
Department, they now started to use an outside advertising and
direct marketing agency: Ogilvy & Mather Direct.
Secondly, and much more importantly, they started to build up a
company sales force, which was gradually extended throughout
Spain. The new sales force initiated a process of personal selling
to potential students who an-swered the adverts or direct mail.
Under to the new sales procedure, potential students who had

responded to an advert or direct mail were visited in their
homes by a cultural advisor from CEAC, who per-sonally
gave them all the details of the course and encour-aged them to
sign up and enroll. If the customer was convinced, the cultural
advisor himself would hand over all the material for the
course, and at the same time prepare the official payment
documents. The payment documents took the legal form of a
hire purchase agreement. Payment was no longer made through
cards submitted each month for payment in cash through the
Post Office but by means of a monthly direct charge to a
designated bank account. The student him or herself, or a
parent, would therefore autho-rize the necessary standing order
for monthly payments until the total cost of the course had
been paid. This new system of collecting payment through the
bank was much more formal and reliable than the earlier
arrangement by mail.
Lastly, the company went to great lengths to renew and update
the range of courses it offered, in part by re-vising and updating
the courses it planned to keep, in part by discarding certain
courses altogether and replacing them with totally new ones.
Similar efforts were being made in Latin America where, due to
the general economic difficulties during the lost decade of the
80s, in 1995 CEAC had some 10,000 enrolled students.
Implementing A New Approach To

International Activities
Although the Licensee in Portugal had set up CETOP as a
separate subsidiary, the company still had the mentality more of
a book publisher than of a distance learning company.
Consequently in 1990 CEAC took an unprecedented decision in
its international expansion: it purchased 100% of CETUOP
and terminated its relationship with the Li-censee. The name of
the company was changed to, CEAC Portugal and 49.9% of the
new company was sold to another Portuguese publishing
house (Pilatano Editora), which was already working with
CEAC in the field of pub-lishing. From then on, CEA-Spain
took full responsibility for the management of the Portuguese
firm and changed its operating policy: the subsidiary was to be
an exact replica of the Barcelona head office, except that the
courses would continue to be designed in Barcelona. But from
now on the courses were to be translated, adapted and printed
in Por-tugal. And, of course, all the marketing and everything
to do with assisting and monitoring students were to be done
there too.
CEACs management team then decided to adopt the Portuguese model as standard: from then on, no more Li-censees
would be appointed (although the existing ones would be
kept).
This new way of operating meant setting up local sub-sidiaries
in all new markets where CEAC planned to start selling its
courses. CEAC-Spain would be the majority shareholder in
these subsidiaries, but it was considered de-sirable to have a
local partner as a minority shareholder in each country. As in
Portugal, each local subsidiary would be an absolute replica of
CEAC-Spain, except that all the courses would be designed in
Barcelona.
397
Outside of Spanish America, instead of negotiating and

signing agreements with Licensees to sell the same courses as in
Spain, CEAC opted to sell the translation and sales rights for its
courses. This brought revenues from countries such as Switzerland, Sweden, France, Germany, Greece and Portugal. In some
cases, a local firm would take on the job of translating, printing
and selling the courses and moni-toring students. The local
firm would sell the courses to-gether with its own courses-or
courses acquired from other sources-under its own name on the
domestic market, so that the students never actually saw the
name CEAC or knew where the course came from. In some
cases, CEAC reached an agreement to exchange courses. In this
way, it also sold courses designed in other countries, duly
translated and revised, in Spain and Spanish-speaking countries.
This decision coincided in time with the fall of the Communist

regimes in Central and Eastern Europe. Thanks to the experience it had acquired in Latin America and Portugal, CEAC was
the first Western company in the field of vocational distance
learning to start operations in these countries.
Poland
In January 1990, a small trade mission of Spanish businessmen led by Josep Antoni Duran i Lleida-head of Union
Democratica de Catalunya, a Catalan political party -visited
Poland and held a meeting with Lech Walesa while he was still
leader of Solidarity.
After this initial contact, CEAC management entered into
collaboration with Merce Soley, a secretary at the Spanish
Embassy, who had been living in Poland for over 20 years and
was married to a Polish citizen. Merce Soley had set up an office
offering services to Spanish companies.
In September 1990 they carried out the first, very ten-tative,
market test, which consisted of placing advertise-ments in the
press offering courses that had not yet been translated into
Polish. It was soon discovered that there were hardly any
requests for further information on voca-tional training courses.
However, there was a lot of inter-est in the English Language
course.
Consequently, after writing to the interested students to tell
them that the course would be slightly delayed, within a month
CEAC was established in Poland and was selling the English
Language course. It was able to do this because the course it
sold in Spain was not in fact a Spanish- English course but a
progressive immersion course, written completely in English,
so that it could be sold in Poland in virtually the same form.
What was intended to be just an initial market test, therefore,
became the basis for setting up the new sub-sidiary in Warsaw.
CEAC invested some US$200,000 in the new sub-sidiary,
including the subsequent translation of several courses into
Polish. Initially, the subsidiary was managed by a Pole, a former
high-ranking civil servant in the Polish ministry of Education,
who spoke Spanish. Unfortunately, after a period of successful
growth in 1991 and 1992, sales leveled off in 1993 and began to
fall in 1994. Accordingly, a new manager was appointed in 1995,
a Spaniard, whose mission was to reorganize the company and
set up-as in Spain-a team of cultural advisors, who would
person-ally follow up all requests for information about
courses, with a view to clinching more sales.
At the end of 1995, CEAC management felt that Poland was
potentially a reasonably attractive market, al-though not the
gold mine they had originally though the market could
perhaps stabilize at around 5000 en-rollments per year. Nevertheless it should be pointed out that in view of the low
purchasing power of pointed out that in view, of the low
purchasing power of polish consumers, CEAC was selling at an
average price of around 50000 pesetas per course.
Hungary
Encouraged by the initial success in Poland. CEAC started to
sell its courses in Hungary in 1991 and six courses were
translated.
398
Unfortunately, after a promising start, the business quickly came

to a standstill and in 1995 the company de-cided to end its
activities in Hungary.
Russia
In 1991-92, members of CEACs management team con-tacted
a State-run university that had some distance learn-ing activities.
However, the discussions were cut short after a strange dinner at
which CEACs managers felt it was being suggested that the
project could not go ahead unless it had the protection of
certain unsavory-looking indi-viduals among the guests.
Romania
CEAC made contacts with a number of government institutions during 1994-95, but nothing came of them, so no
courses were translated.
The Ceac Group In Spain At The End Of

1995
The CEAC Group was expected to close the 1995 financial year
with a total turnover (all the companies throughout the world)
of approximately 13 billion pesetas. Of this figure, 10.5 billion
pesetas came from sales in Spain and 2.5 billion from CEAC
Group activities outside Spain.
a. Vocational Distance Training Activities

At the end of 1995, the CEAC Group was offering 58 different vocational distance-learning courses. The total num-ber
of courses available was stable since whenever a new course was
launched, one of the older courses was discon-tinued, in a
process of constant renewal and updating.
The General Manager, Tomas Blay estimated that by the end of
1995,25,000 new students would have enrolled. Since the
courses lasted an average of 15 months, the CEAC Group
would at anyone time be training some 32,000 stu-dents in
Spain. The record year for enrollments was 1991, with 41,000
new student registrations.
The average price of a course was around 125,000 pe-setas.
(Prices ranged from 75,000 pesetas for a course last-ing 6 month
to 175,000 pesetas for a 36-month course, which included
audio-visual material and videotapes.) The student could
choose between a numbers of different pay-ment options.
Each pupil was assigned a tutor, who was an expert in his/her
subject and an employee of the company. The tutor could be
consulted at any time, in person, by telephone, by letter, by fax
or on the Internet. The exercises that the pupil had to do at the
end of each teaching unit were reviewed by a teacher-reviewer,
who was not an employee of the company and who passed the
reviewed exercises on to the tutor. The reviewers were normally
specialists in their sub-ject who worked in the relevant sector.
The whole process of following up and monitoring the
progress of each student was highly computerized, so that if
any student failed to send in-his exercises on time, he was
automatically sent a reminder note.
On finishing the course, students had to take a final exam, also
by correspondence. If they passed the exam, they received the
appropriate CEAC diploma, which, al-though not officially
recognized, was held in high regard by Spanish companies.
According to company management, the main key suc-cess factors

in this vocational distance training activity in 1995 were the
following:
1. Juan Marti Salavedra, Group President, insisted in 1995 that
the company depended for its very exis-tence, and always
would depend, on the intrinsic quality of the courses, as well
as on the quality of the constant monitoring, attention and
support it gave to students.
Still sprightly at 75, Juan Marti Salavedras face lit up when he
said, with total conviction:
Our primary goal has to be prestige based on the quality of
our courses and the service we give our students. Over and
above any considera-tion of money and profit, we must
ensure that people think of CEAC first and foremost as a
centre of learning. The student must always come first.
Internally, we have to operate as a company, with an
organization chart, budgets, and all sorts, of economic and
financial calculations. But we would fail in our mission if our
students did not receive more than they expect from us. We
must ensure that the students feel they are getting more than
their moneys worth. We must be caring and encouraging and
convey warm-hearted understanding.
2. Juan Antonio Marti Castro, Chief Executive Officer, agreed
with his father; then, following the different steps in the
business process, he said that the next key success factor was
creativity in the advertising message. The advertisements in
the press and those sent by mail had to generate enough
serious requests for further information.
3. The key success factor, closely related to the previous one,
was to accurately monitor the cost of a request for further
information. CEAC had set up control systems and
mechanisms that told them exactly now many requests for
information had been generated by each press advert or direct
mail piece. Knowing the cost of each action in each medium,
it was possible to calculate the yield or cost in pesetas of
each request for information they received.
With this information it was possible to continu-ously
adjust and fine-tune a wide range of variables, such as the
advertising, message, the size of the reply coupon, whether a
fun-colour advert was more effective than a black-and-white
one, the size of the press advert, etc.
4. Ultimately, the most important thing was to effec-tively
monitor and control the cost per new student enrolled. Juan
Antonio Marti Castro emphasized that these two cost
variables (the cost per request for information received and
the cost per student enrolled) were not totally independent
of each other, but were interrelated. For example, an advert
for the guitar course published in the music maga-zine
Super Pop, which was read by youngsters, might generate a
large number of requests for fur-ther information, but few
actual enrollments. At the other extreme, adverts for certain
vocational courses, such as the Tax and Fiscal Advisor course,

which were inserted in more serious professional
publications and targeted at a more adult audience, usually
generated fewer requests for further infor-mation, but the
rate of conversion into actual en-rollments was higher. In
summary, a whole range of variables was involved, such as
the content of the course offered, the advertising medium,
the average age of the readers, etc.
5. Another key factor was the quality of the sales team, which
CEAC called the network of cultural advi-sors. At the end
of 1995, CEAC had a strong team of. sales representatives,
who visited prospective stu-dents in their homes to explain
the content of the course they had shown an interest in, the
teaching method, methods of payment, and other details.
They also filled in the enrollment forms.
The team covered the whole of Spain and was made up of a
sales manager, 8 area managers, 23 assistant area managers
and some 170 cultural advisors. The cultural advisors worked
full-time for the company; however, they were not actually
on the company payroll, but acted as mercantile agents. They
worked entirely on commission and none of their expenses
were covered by the company. In spite of this, the turnover
rate was relatively low and 120 of the 170 could be
considered to be working permanently for the company.
6. The last key-success factor was the payment default rate. In
1995, the companys internal accounts in-cluded a provision
for unpaid debts of 11 % of the total cross value of the
enrollment fees.
7. As a result of the above-mentioned key success ac-tors, the
breakdown of the companys profit and loss account in
Spain was as follows:
Gross sales 100% = average 125,000 pesetas per course
Cost of goods sold
6%
Marketing costs
22%
Sales force
20%
Personnel
10%
Bad debts
11%
Overheads
16%
Profits before tax
15%
Personnel expenses included the salaries of the tutors and the

approximately 120 general administrative em-ployees.
Overheads included the variable compensation of the correctors
of students exercises and exams, together with depreciation
and financial expenses.
b. Book Publishing Activities: Grupo Editorial CEAC, S.A.
This company published books. There were several trademarks or registered publishing names within the Group,
such as Ediciones CEAC, Timun Mas and Vidonima. Each
of them specialized in publishing a particular kind of book:
technical books, childrens and fantasy books, art books, etc.
In 1995 the Group was publishing around 250 new books
per year, with a turnover of approximately 1.8 billion
pesetas.
c. Other Business Activities
399
The profile of the students naturally varied according to the

subject matter of the course. Overall, however, they were
between 18 and 25 years old, of both sexes, of middle or
lower-middle class families, and they tended-though not to any
significant decree-to live in rural areas.
The CEAC Group held a substantial majority shareholding

in Home English, S.A., a company that sold language
courses by mail. In 1995 its turnover was expected to be
around 3,000 million pesetas.
Marti Castro came to the conclusion that CEAC should opt for
entering developing countries with large populations, where it
could establish a complete sub-sidiary, i.e. one that was
capable of operating just as CEAC did in Spain.
It also had a majority share holding in a company that sold

womens underwear, using direct selling methods.
During Marti Castros trip to China with the FECEA mission,

Vallejo arranged for him to visit five State-run uni-versities that
already had a distance-learning department or were active in that
field, though in a very badly orga-nized way. They all expressed
an interest in exploring ways of collaborating with CEAC.
Another group company was in partnership with the Caixa

dEstalvis i Pensions de Barcelona, Spains largest savings bank.
It had a team of some 500 female sales per-sonnel, working
under an agency agreement, who carried out cross-selling
activities to persuade customers of La Caixa to buy a wider
range of financial products and ser-vices from the bank.
Finally, other companies belonging to the CEAC Group were
involved in a variety of industrial activities, such as printing and
bookbinding, plastic lamination of published materials, etc.
Brief Background on The Peoples

Republic of China
Economic reforms had begun in china in 1978, after the death
of Mao Tse-tung. The first regulations on foreign investment
were issued in 1980. Step foreign investment was authorized in
the fields of oil prospecting and extraction, the hotel business,
and light industry.
In 1990 after the Tiananmen Square incidents, the pace of
foreign investment was to a certain extent frozen, to be
resumed with great momentum after Deng Xiaopings famous
voyage and speech at shenzhen in February 1992.
One of the main consequences was heavy investment in real
estate and major infrastructure. And the first stirrings of activity
on the stock exchange even so, investment was still severely
restricted in certain sectors, such as financial services (banking
and insurance), the media (radio and television) and publishing.
As in other countries, the defence and telecommunications
industries were closed to foreign investment.
Ceacs Activities In China

In January 1994, the FECEA foundation charged Manuel
Vallejo with the task of organizing the visits to be made by the
members of a trade mission that was due to visit China from
14 to 25 April of that year. Manuel Vallejo was a Spanish citizen
with considerable international experience, particularly in China
(see Exhibit 3 for a summary of his career up to 1994), where
he had just become a partner in the consultancy Taxon.
Juan Antonio Marti Castro had known Manuel Vallejo for
more than 25 years. They had both studied at ESADE,
although with a difference of two years.
At the beginning of 1994, Marti Castro was fully aware that
CEAC had achieved its highest sales peak In Spain back in 1991
and was now suffering from certain inertia in sales. In 1993, as a
result of what some called the post- Olympic shock; Spains
gross domestic product had fallen each quarter and the country
had entered the deepest and longest -lasting recession since the
oil crisis of the 1970s.
Moreover, the companys attempts to penetrate new markets,
such as Poland or Hungary, had not worked out.
400
My intuition told me that we would find a market there,

affirmed Marti Castro. Our incursions into some of the
countries of Central and Eastern Europe were not too successful, but I felt that it would at least be worth our while to tryout
the Chinese market; this was relatively easy to do, with Manolo
Vallejo working and living there for a good part of the year.
Therefore, in June 1994, after a few months reflection, Marti
Castro formally entrusted Vallejo with the task of carrying out
studies and surveys of the potential market, and making
contacts with a view to identifying, and possi-bly negotiating
with, a prospective local partner. Vallejo would not be working
exclusively for CEAC and would re-ceive a fixed monthly
retainer fee, plus a success fee, which would take the form of a
small share in the capital of the hypothetical future CEAC
subsidiary in China. The as-signment was for an initial minimum period of fifteen months, renewable for a further length
of time.
Vallejo started to work on the project in June 1994, with
occasional help from his Chinese partner in Taxon. He was fully
aware of the great difficulty of the undertaking:
I knew that CEAC had two main activities: voca-tional
distance training and book publishing. Both of these fields
were subject to strict State and ideologi-cal control in China.
CEACs Chinese partner would therefore have to be institutionally sound and to have good connections. So I patiently went
about visiting a number of colleges and universities in Beijing
and Tian-jing. I soon came to the conclusion that the universities would never be suitable partners for CEAC, for at least
1\\10 reasons: a) because their standard response was that
education in China could not be carried out by joint ventures,
nor could it be done for profit. At most there could be some
kind of institutional collaboration under a non-commercial
legal arrangement. And b) be-cause, naturally enough, the
people I dealt with at the Chinese universities belonged to the
academic world, not the business world. Some of them even
disapproved of commercial activities. . . .
Vallejo consequently decided to change his tactics and began to
focus his efforts on the publishing world. But, once more, the
contacts were unfruitful. One day he had dinner with a Colombian friend who worked as a transla-tor and copy editor for the
State-run firm New World Pub-lishing Co., which belonged to
the Foreign Language Publishing Group, formerly the International Publications Bureau of the Council of State. The
Colombian friend very kindly offered to introduce Vallejo to
some of the man-agers of New World Publishing Co.
The first contact was fruitless, because the person we visited
had no interest whatsoever in our proposal. However, the
Vallejo told Zheng Mou Da about CEAC and its activities in

Spain and other countries. The first meeting was followed by a
series of interviews-two or three a month between July and
December 1994-in which the two par-ties got to know each
other better.
Gradually, as we slowly built up a relationship of trust,
Zheng Mou Da told me that the Chinese government was
putting pressure on them to find new busi-ness opportunities.
A publishing operation for Taiwan for example. They also
realized that they needed to im-prove their business administration skills. Their interest in CEAC was completely centered on
book publishing activities. He also felt comfortable talking to
the repre-sentative of a small Spanish publishing company,
which did not have the same approach as the large American
and German publishing groups. Later, he confessed that they
had turned down proposals for collaboration with other large
Western publishing groups.
In October 1994, Zheng Mou Da gave Manuel Vallejo a draft
that outlined a possible operating agreement be-tween CEAC
and New World Publishing Co. This draft had in principle, been
approved by Zheng Mou Das su-periors. Vallejo analyzed the
document, added his own comments and sent it to Marti
Castro.
In November 1994, CEACs CEO, accompanied by Esteve
Julia, manager of the International Division, went to Beijing,
where they had several meetings with Zheng. This was a
preliminary direct contact, basically just so they could get to
know each other, since Vallejo had stressed how important it
was in China first and foremost to estab-lish good personal
relationships. It soon became clear that an atmosphere of trust
and understanding had built up be-tween Zheng Mou Da and
Juan Antonio Marti Castro. Among the various issues that were
dealt with, Marti Castro came to the conclusion that the Chinese
expected CEAC, should an agreement be reached, to appoint
one of its most experienced managers, one who had a thorough knowledge of the industry, to run the hypothetical future
operation in China.
During these meetings, they also started to work out some of
the details of a possible letter of intent.
Having made progress on both points, Marti Castro in-vited
Zheng Mou Da to visit CEAC in Barcelona, alone, with some
of his managers, so that they could see for themselves how the
company worked. Their expenses, in Spain would be paid by
CEAC.
In January 1995, Zheng Mou Da visited Barcelona with two of
his executives (future members of the Board of Di-rectors of
the hypothetical joint venture), where, with the help of an
interpreter hired locally by CEAC, they were given a comprehensive presentation of the companys activities. They were also
received by the President of the Cata-lan Parliament and had
dinner with the Chinese Consul in Barcelona. Vallejo had
recommended that CEAC show that it was well connected and

had good contacts. Finally, CEAC invited the visitors, accompanied by Vallejo, on a trip to Madrid and Granada, once the
Protocol of Intentions had been signed. This document
specified the objectives of a joint venture to be formed by the
two parties and the finan-cial and other contributions to be
made by each partner. It was stipulated that 70% or the capital
would be held by CEAC and 30% by New World Publishing
Co. All of this tal-lied with the framework mandate that had
previously been approved by Zheng Mou Das superiors.
The contract articles of association and operating pro-cedures
for the new joint venture were negotiated by Manuel Vallejo in
Beijing between February and June 1995 at the halfway point, in
April, Vallejo came to Barcelona to analyze the way the plan was
progressing with Marti Castro and his whole management
team.
By 25 June 1995, Zheng Mou Da and Vallejo had com-pleted
their work, in that they had prepared drafts of all the documents needed to set up the new joint venture and start
operations. Now it was up to New World Publishing Co. to
obtain approval from the relevant Chinese authorities.
Meanwhile, on the strength of the Protocol of Inten-tions
signed in Barcelona, CEAC had applied for an ECIP loan 9
from the European Community, which was to be ap-proved in
September 1995;for the amount of 250,000 ecus (approximately
41 million pesetas).
Finally, at the beginning of October 1995, Zheng Mou Da
informed them that everything had been ap-proved and that
New World Publishing Co. agreed to the contents of the draft
documents. It was now up to the CEAC Groups Board of
Directors to ratify the project. Then, if both parties agreed, the
new joint venture would be set up under the name: Beijing New
World CEAC Consulting Co. Ltd.
This Is All Very Well. But. . . Who Among The Ceac
Management Team Will Be Willing To Go To China
To Set It All Up?
This was a question that Marti Castro had been asking him-self
for some months. After signing the Protocol of Inten-tions in
Barcelona in January 1995, it was becoming more and more
crucial and urgent to find an answer.
Marti Castro was convinced that he would need to send a highranking CEAC manager to China to head the joint venture as
Managing Director. This post could not easily be occupied by
Manuel Vallejo-not because of any lack of personal ability but
because his consulting firm, Taxon, had other assignments to
fulfill. Furthermore, al-though Vallejo had gradually become
acquainted with the CEAC Groups business policy, he was far
from having the intimate operational knowledge required to
start up a sub-sidiary located so far away.
At the end of February 1995, Marti Castro was won-dering
whether he would have to resort to a headhunting company to
find a Managing Director for China from out-side the CEAC
Group. However, one day, while he was dis-cussing some
details of the China project quite informally, over lunch, with a
group of managers, it suddenly occurred to him to say, more as
401
second interview, held on the same day, was with a real gentleman, who spoke exquisite Span-ish and who, as he later told
me, had agreed to receive me purely for the pleasure of speaking
Spanish for a while. His name was Zheng Mou Da, and he
turned out to be a lucky find for our project.
a joke than 2S a serious proposition: Well, if any of you wants

to go to Beijing to he in charge of this project, speak up.
World-CEAC would offer PERSONALIZED training

courses.
Among the managers having lunch with Marti Castro was Jesus
Flores, Director of the Data Processing Depart-ment of all the
companies within the CEAC Group. He recalled that moment:
The potential students expected to receive some sort of officially recognized certificate at the end of the course.
I had made several trips to Portugal and had been to Poland a

couple of times. Naturally, when the Chi-nese delegation led by
Zheng Mou Da visited our com-pany in Barcelona in January
1995, I had explained the Groups data processing systems to
them. When Juan Antonio asked the question, I had to give an
evasive answer at the time, but the truth is that, from that moment on, I started thinking about it. I saw it as a com-pletely
new challenge. After a few days of thinking it over to myself, I
mentioned the idea at home. To my surprise, my wife Mireia
agreed.
A few days later Flores discussed the matter formally with Marti
Castro, who thought it a marvelous idea. Thus in April 1995,
the China project was assigned to Flores, once certain details
had been settled, such as his acceptance of the assignment for a
term of three years, which was the time it was expected to take
to start up the new company in China.
In July, husband and wife spent a fortnight in Beijing to sort
out everything to do with living there, especially housing and
schools for their children. When they saw that these matters
could be satisfactorily settled their decision to go to China was
confirmed, in spite of the fact that Mireia, who was an industrial engineer and a PDD gradu-ate from IESE, would have to
leave a good job.
During the following months, -Flores gradually de-voted more
of his time to the China project and handed over responsibilities to his replacement at the head of the Data Processing
Department. During that time, I was in contact with Vallejo
almost daily via the Internet.
Market Survey Carried Out By Ogilvy & Mather
Distance training, though of poorer quality, did exist in China

in traditional subjects such as accounting, fashion design,
English and medicine. However, there were no courses on
subjects such as finance, market-ing, automobile mechanics, airconditioning systems or childcare.
There was obviously a certain demand for courses like the
CEAC courses-that were not simply texts but a complete
system for independent distance learn-ing, taking the student
through the material step by step breaking it down into
manageable chunks, high- lighting the key features, so that . . .
pupils who are studying on their own do not feel that they are
left to their own devices, given that they are accompanied by the
text itself, the exercises and the teacher-tutor.
The participants in the focus groups were also asked about the
price they would be prepared to pay for a course of this type.
The conclusion was that they would be prepared to pay up to
100 yuan for each monthly lesson or teaching unit, i.e. about
1,500 pese-tas per month. This represented approximately 20%
of the average official wage of New World- CEACs target
market, which was around 500 yuan per month.
If it sold its courses at this price, New World-CEAC would
obtain income equivalent to about 30,000 pese-tas for a
complete course (1,500 pesetas per teaching unit x 20 monthly
teaching units), whereas the average price of a course in Spain
was around 125,000-130,000 pesetas. However, the economic
effort made by the Chinese students would be- relatively much
greater, since the average CEAC client in Spain could pay for the
whole course out of one months wages, whereas in China they
were willing to pay the equivalent of FOUR months wages for
a course!
In October 1995, Ogilvy & Mather carried out a market survey

by conducting a series of focus groups in Yantai (Shandong).
The aim was to get to know the initial reaction of the market,
that is, of the potential CEAC students in China. The participants in the focus groups were asked about their educational
needs, their opinions on vocational distance training in general,
their reactions to the type of courses that New World-CEAC
Consulting Co. would be offering both as regards content and
as regards the system for monitoring students progress by
means of tutors, the exercises, the final exam, etc.
This seemed to confirm .the view expressed by Manuel Vallejo

and the executives of Ogilvy & Mather that the average Chinese
citizen earns little, but nev-ertheless has money to spend,
perhaps partly from ac-tivities in the informal economy.
The opinions of about 50 participants were gathered. The

following is a summary of the conclusions:
Finally, contrary to what they had found in certain for-merly

Communist countries of Central and Eastern Europe, it
became apparent that in China people were anxious to do
things, to improve themselves, to build a better future, to make
money.
The focus group participants did not consider what New

World-CEAC was offering as distance training. For them,
distance training Was something quite dif-ferent, with much
lower quality materials and content, and without any real
monitoring of students at all. Dis-tance learning was seen as
archaic, and as a poor re-lation of the university, to the extent
that the very words distance learning made them nervous and
tense. They said: Everything you have been showing us and
telling us about is NOT distance training! It is something quite
different much better! It was there-fore decided that New
402
Curiously, the participants were convinced that any-thing to do

with education was a local issue. They found it difficult to
understand how anyone could pos-sibly offer educational
services from one city to an-other, or even across the whole
country. They thought that. . . a school in Beijing is designed
to serve the citizens of Beijing.
Sales Forecasts and Quantification of the

Project
In October 1995, using the information gathered by Manuel
Vallejo and bearing in mind the results of the focus groups and
CEACs experience in Spain and Poland, Jesus Flores prepared
forecasts of enrollments and sales (see Exhibit 4).
only 128 students would buy and pay for lesson No. 20 and so
complete the course.
Flores then applied high drop- out rates. He assumed that only
45.7% of those who enrolled on a course would actually
complete it. For example, of the first 280 students to enroll in
October 1996, he assumed that a certain proportion would
drop out each month, so that by May 1998-after 20 monthsExhibit 4 forecasts prepared by Jestic flares in oct
1996
January February
March
April. May June
July
Augt.
Print run (thousand

uriits) of media used
Response rate from
media adverts
Number of requests for
information
Conversion rate
requests/enrollments
Enrollments (new
students)
1997
Sept.
8,000
Oct.
Dec.
8,000
Nov.
8,000
Total
8,000 32,000
0.04% 0.07% 0.09% 0.09% 0.07%
Jan.
February
March
April
May
June
Print run (thousand

11,590 11,500
10,000 10,000 10,000
units) of media used
11,500
Replies from media
0.09% 0.09% 0.10% 0.10% 0.10% 0.10%
adverts
11,500 11,500
9,000 9,000 10,000
information
11,500
Conversion rate
10% 10% 10% 10% 10% 10%
Enrollments (new
900
900 1,000 1,150 1,150 1,150
students)
1998
Jan.
Feb.
April May June
March
Print run (thousand
18,000 20,000
16,000 16,000 18,000
units)' of media used
20,000
Response rate from
0.08% 0.08% 0.08% 0.08% 0.08% 0.08%
media adverts
14,400 16,000
12,800 12,800 14,400
information
16,000
Conversion rate
10% 10% 10% 10% 10% 10%
Enrollments (new
1,280 1,280 1,440 1,440 1,600 1,600
students)
July
2,800
5,600
7,;WO
0%
5%
7%
10%
6.60%
280
504
720
1,504
Sept.
October
Dec.
Nov.
Augut.
7,200 22,800
Total
11 ,500 11 ,500 13,000 13,000 13,000 13,000 139,500

0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
11,500 11,500 13,000 13,000 13,000 13,000 137,500
10%
10%
10%
10%
10%
10%
1,150
1,150
1,300
1,300
1,300
1,300 13,750
July
Aug.
Sept.
Oct.
Dec.
Nov.
10.0%
Total
22,000 22,000 22,000 22,000 22,000 22,000 240,000

0.08% 0.07% 0.07% 0.07% 0.07% 0.07% 0.08%
17,600 15,400 15,400 15,400 15,400 15,400 181,000
10%
10%
10%
10%
10%
10% 10.00%
1,760
1,540
1,540
1,540
1,540
1,540 18,100
403
Flores estimated that if the first adverts appeared in the press in

September 1996, the company could expect around 1,504
student enrollments in the last four months of that year. In
1997, the first full year of operations there would be 13,750 new
enrollments, and 18,100 in 1998.
Exhibit 5
Revenue
1996 % of DropOuts/
Total Enrollments January
Februar
March April
y
May
June
July
August
Sept. October
Students enrolled
,
Unit 1
3.44%
Unit 2
1.6.5 %
Unit3
8.25%
Unit4
4.81 %
Total
Amount in RMB
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Amount in Pesetas
Retail
Price:
280
270
Nov.
December
Total
504
720
1,504
695
1,452
406
632
207
207
0
0
550
1,216
2,029
3.796
53,936 1.19,209 1.98,815 371.960
784,770 1,734,493
5,412,025
2,892,762
0
487
226
0
98RMB
14.55
ptas.
1997 % of DropOuts/
Total Enrollments January February March April May
June
July August Sept. October
Nov.
December Total
Number
of
students enrolled 900
900 1,000 1,150 1,150 1,150 1,150 1,150 1,300 1,300
1,300
1,300 1.3,750
Unit I.
3.44% 869
869
966 1,110 1,110 1,110 1,110 1,1.10 1,255 1,255
1,255
1,255 1.3,277
Unit2
16.50% \ 581
726
726
806
927
927 927.
927
1,048
1,048
1,048
10,619
Unit 3
8.25% 373
533
666
666
740
851
851
851
1
851
962
962
9,154
Unit 4
4.81% 197
355
507
634
634
704
810
810
810
810
915
7,995
Unit 5
6.87%
0
1.84
331. 472
590
590
656
754
754
754
754
754
6,593
Unit 6
7.90%
0
1.69 304
435
544
544
604
695
695
695
695
5,378
Unit 7
2.06%
0
0
166
298
426
532
532
592
680
680
680
4,587
Unit 8
4.47%
0
0
0 158
285
407
509
509
565
650
650
3,732
Unit 9
2.75%
0
0
0
0 154
277
396
495
495
550
632
2,997
Unit
3.09%
0
0
0
0
0 149
268
383
479
479
533
2,292
10
Unit
0.35%
0
0
0
0
0
0 149
267
382
478
478
1,754
11
Unil12
1..03%
0
0
0
0
0
0
0 147
265
378
473
1,263
U
1.72%
0
0
0
0
0
0
0 0
145
260
372
776
nil.l3
Unil14
2.06%
0
0
0
0
0
0
0 0
0
142
255
396
Unit
1.72%
0
0
0
0
0
0
0 0
0
0
1.39
1.39
15
Unit
2.06%
0
0
0
0
0
0
0 0
0
0
0
0
16
Total
2,920 3,566 4,364 5,308 6,043 6,741 7,41.3 8,060 8,985 9,723
1.0,440
11,140 84,702
315,3
471,27
800,59
970.3
1,203,12
Amount in RMB
385,111
573,316 652,605 728,025
870,485
1,050,131 1,127,552
9,147,869
1.3
7
8
31
5
4,358,416 5,323,197 6.514,229 7,924,654 9,020,629 10,063,127 11,066,271 12,032,273 1.3,412,404 1.4,515'.431
Amount in Pesetas
1.5,585,593 16,630,200 126,446,423
Retail 1O8RM
Price:
B
lRMB = 13.82 Ptas.
lRMB =
404
Revenue
1998
% of Drop-Outs/
Total Enrollments
Number of
students enrolled
Unit 1 3.44%
Unit 2 16.50%
Unit 3 8.25%
Unit4 4.81%
Unit 5 6.87%
Unit 6 7.90%
Unit 7 2.06%
Unit 8 4.47%
Unit 9 2.75%
Unit 10 3.09%
Unit 11 0.35%
Unit 12 1.03 'X,
Unit 13 1.72%
Unit l4 2.06%
Unit 15 1.72%
Unit 16 2.06%
Unit 17 3.09%
Unil18 0.28%
Unit 19 1.50%
Unit 20 1.00%
January February March April May

1,280
1,236
1,048
962
915
853
695
680
650
632
612
531
473
465
364
250
136
0
1,280
1,236
1,032
962
915
853
785
680
650,
632
612
610
525
465
455
358
245
132
0
0
0
1,440
1,390
1,032
947
915
853
785
769
650
632
612
610
604
516
455
447
350
238
132
0
0
1,440
1,390
1,161
947
901
853
785
769
735
632
612
610
604
594
506
447
438
340
237
130
0
1,600
1,545
1,161
1,065
901
839
785
769
735
714
612
610
604
594
581
497
438
424
339
233
128
June
July
1,600
1,545
1,290
1,065
1,014
839
773
769
735
714
692
610
604
594
581
571
487
424
423
334
231
1,760
1,699
1,190
1,184
1,014
944
773
757
735
714
692
690
604
594
581
571
560
472
423
417
330
August September October November December

1,540
1,487
1,419
1,184
1,127
944
870
757
723
714
692
690
683
594.
581
571
560
542
470
417
413
1,540
1,487
1,242
1,302
1,127
1,049
870
852
723
703
692
690
683
671
'581
57]
560
542
541.
463
413
1,540
1,487
1,242
1,139
1,239
1,049
966
852
814
703
682
690
683
671
657
571
560
542
541
533
459
i
1,540
1,487
1,242
l,139
1,084
1,154
966
946
814
791
682.
679
683
671
657
646
560
542
541
533
527
1,540
1,487
1,242
1,139
1,084
1.010
1,063
946
904
791
767
679
672
671
657
646
633
542
541
533
527
Total
18,100
17,477
] 4,400
13,035
12.239
11,240
10,117
9,548
.8,867
8,375
7,962
7,701
7,422
7,098
6,659
6,149
5,525
4,742
4,188
3,592
3,029
13,42
14,052 14,485 15,163 15,137 ] 5 .344 15,546 ]5,742
15.933 171,913
4
1,402,0 1,463,18 1,548, 1,597 1,672, 1,723, 1,804, 1,801
1,849,9
20,457,
Amount in RMB
1,825,899
1 ,873,341 1,896,009
29
9
084 ,502 199 687 436 ,266
57
598
Amount in Pesetas 18,991,959 19,820,437 20,970,42421,639,840 22,651;685 23,349,154 24,442,980 24,400,045 24,733,721
25,059,604 25,376,368 25,683,428 277,119,644
Retail Price: 119RMB
1RMB = 13.55 ptas.
Total
11 ,782 12,296 13,009
Assuming gradually increasing selling prices and a gradually

decreasing Yuan /Peseta exchange rate, Flores es-timated that
total revenues from students would be around 5.4 million
pesetas in 1996 (3 months); 126.4 million in 1997; and 277.1
million in 1998. By the end of 1998, New World-CEAC would
be enrolling 1,540 new students per month. Taking into
account the estimated drop-out rates, by December 1998 the
company would be selling 16,000 lessons or teaching units per
month to students who had enrolled during the previous 20
months.
Flores used these sales figures to prepare the pro-jected profit
and loss accounts for 1996,1997 and 1998 (see Exhibit 6).
According to these projections, the new subsidiary would lose
around 14.4 million pesetas in 1996, but would earn 26.4
million pesetas before tax in 1997, and 72.8 mil-lion in 1998. In
theory, these profits were to be shared be-tween the partners in
proportion to the capital each one of them had put in, i.e. 70%
for CEAC and 30% for New World Publishing Co. However,
CEACs management felt that, for many years to come, all
profits should be plowed back into the business.
The action plan specified that students would pay for their
monthly lessons month by month. The lessons would be sent
and paid for on delivery, or could be picked up and paid for in
person at any of New World Publishing Co.s 2,300 retail
bookshops. The new company would initially launch three
courses, English Language, Marketing, and Accounting, with a
view to extending this number to six during the first full year of
operations.
The formal accounting procedures were as follows: CEACSpain would supply Beijing New World-CEAC Con-sulting Co.
Ltd. with business and teaching expertise in ex-change for a 6%
405
Exhibit 5 (cont.)
royalty on sales to students. New World Publishing Co., in cooperation with an adult education cen-ter, would take care of selling the
courses and collecting payment. From these sales revenues it would deduct its translation, adaptation, printing, advertising and
distribution expenses, as well as a commission for its services. The con-sulting company would then invoice New World Publishing
Co. for the amount of this gross margin arid from it deduct its own expenses (personnel, administration, communications, utilities,
financing), plus the 6% royalty on sales payable to CEAC-Spain. The remainder, after tax, was the amount available, in theory, to selffinance the development of the joint venture or, even more theoretically, to be dis-tributed to the partners in proportion to their
shareholdings.
The accounting procedure was clearly rather compli-cated, since the idea was to specify and take into account the contributions and
activities of each partner, allocating the costs incurred. There was a danger of disagreements in
Exhibit 6
1996
RMB
372
43
Gross sales
Taxes (VAT,
consumption)
Net sales
329
Cost of goods sold 86
Distribution costs
6
Sales commission
11
Marketing expenses 320
Cost of reviewing
3
students exercises
Depreciation
Overheads
(general expenses)
Office rental
Technology royalties
Profit before
Interest and tax
Interest
Profit before tax
Ptas.
5,412
623
1997
Percentage
of Sales
RMB
Ptas.
9,148 126,446
1,052 14,547
RMB
Ptas.
20,458 277,120
2,354 31,881
Percentage
of Sales
4,789
1,253
84
159
4,656
38
100
26.16
1.75
3.33
97.21
0.80
8,095 111,899
2,219
30,672
145
2,003
270
3,726
!,4V20,355
132
1,824
100
27.41
1.79
3.33
18.19
1.63
18,104 245,239
4,526 61,310
324
4,390
603
8,166
3,174 42,995
295
3,997
100
25.00
1.79
3.33
17.53
1.63
507
10,537
10.59
220.00
100
1,545
1,376
21,362
1.23
19.09
208
3,259
2,820
44,143
1.15
18.00
70
1,019
44
640
(969) (14,104)
21.27
13.37
-294.48
140
46
2,026
1,935
636
28,011
1.73
0.57
25.03
280
48
5,3"87
3,793
650
72,974
1.55
0.27
29.76
(25) (364)
(994) (14,467)
-7.59
-302.07
(115)
1,911
(1,590)
26,422
-1.42
23.61
(15)
5,372
(203)
72,771
-0.08
29.67
35
724
the future as to how it should be interpreted, but it seemed a

workable system for publishing and selling CEACs courses on
the Chinese market, with royalties payable to the Spanish
partner:
The Ceac Board Meeting at The End of

October 1995
In making their decision whether to sign the agreement with
New World Publishing Co., the members of CEACs Board of
Directors considered the following points in favour and against:
In Favour:
1. We have already invested around 100,000 dollars in the
project. If we decide to back out now, this sum will have to
be computed directly to losses.
2. Jesus Flores is willing to take charge of the project. It is very
important that we have our man on the spot, managing the
project.
3. We can also count on the continued collaboration of Manuel
Vallejo as a consultant and as a member of the Board of
Directors of the joint venture. Vallejo can back Flores in any
power relations with the Chinese partners.
406
Percentage
of Sales
4. The ECIP loan has been approved. by Brussels since

September 1995. This means not only that CEAC- Spain
Will have to put up less capital of its own, but alsoaccording to the rules governing ECIP loans-that if the
project eventually fails, the entire loan will be written off.
5. Manuel Vallejo-who attended the meeting with a right to
speak but not to vote-summed up his experience in the
Chinese market: If you want to get into China, you have to
do it gradually, step by step. There is an old Chinese proverb
that says you must cross a river slowly, feeling the stones
under your feet. It will be a process of trial and error.
Although at the moment we are not too sure about the
project, the important thing is to be there, to start doing
business, to start gaining the confidence of our local partner
and the Chinese authorities. They must see that we mean
business that we are loyal, cooperative partners. If we do
that, we may find that opportunities start to emerge,
sometimes even unexpectedly and in surprising ways.
6. And, of course, for its sheer size the Chinese market is every
entrepreneurs dream. More than 1.2 billion people, hungry
for knowledge and for good-quality services. CEACs
Against:
Other members of CEACs Board of Directors raised the
following points against the project:
1. My first objection is a question of priorities. China is very far
away and possibly more remote, culturally and politically, to
us in Spain than any other country. Why dont we give
priority to the Central and East European countries for the
time being? Once we have consolidated our position there, I
would be in favour of setting ourselves more ambitious
goals. Going to China now seems like too great a leap. We
should take a more gradual approach.
laws that govern this industry in China start to change. . .

assuming they do eventu-ally change, as we all expect we
must trust and rely on our local partner. They are
institutionally power-ful, and they seem to be ready to take
active steps to ensure that we are allowed to operate, maybe
under some exception to current legislation, or by finding
some unexpected way around it. Of course, every-thing will
be under the absolute control of the Chi-nese, to the extent
that they will even censor the text of the courses we sell. All
things considered, we do not know with any precision what
our starting point is, and there is no guarantees that we will
ever reach our target destination. . . and we have even less
idea where all this might lead.
2. I dont like the substance of the agreement. We will be too

dependent on our local partner. We are effec-tively placing
ourselves in the hands of New World Publishing Co., since
they are the ones who do the invoicing and collect payment
from the students.
3. If we give our approval, we had better prepare our-selves to
invest at least another 300,000 dollars in the project. And
what is worse, if we start the project and it does not work, it
could turn into a bottomless pit. The bigger our investment
becomes, the more diffi-cult it will be to abandon it if things
do not work out.
4. We know practically nothing about the market or the way it
might react. We hardly know what adver-tising media we
would use, or what the cost per newly enrolled student
might be. In fact, we do not even know whether the Chinese
will be remotely in-terested in the courses we sell in Spain. . .
5. New World Publishing Co. is in the publishing busi-ness. We
have an agreement with them to create a consulting company!
As things stand. If we sign documents, the only thing we
would really be authorized to do in China would be to
provide Consultancy services in areas connected with
publishing such as photocomposition software and desktop
publishing. Nowhere is it clearly stated that this new subsidiary can
sell vocational distance learning courses, because it is legally
FORBIDDEN for a joint venture with a foreign partner to
carry
out educa-tional activities. We have known for months that
what little vocational distance training there is in China is run
by State -owned universities in other words, non-profit
public corporations which naturally, do not have any foreign
shareholders. It is im-possible to guess how many years we
might have to wait for a change in the laws, in a Communist
coun-try like China!
6. Furthermore, the market research carried out through the
focus groups in Yantai clearly indicates that stu-dents will
expect to receive a diploma or certificate on completing their
studies. Not even New World Pub-lishing Co: is authorized
to issue such certificates -and it never will be authorized,
because it does not belong to the Ministry of Education but
to the Bureau of Publications. Our local partner is simply a
publishing house, not a university or a school
7. Manuel Vallejo warned: We are entering virgin ter-ritory,
taking the first steps in an environment so far unexplored by
foreign companies. We must maintain a presence, until the
407
vocational distance training courses would have practically no

competition.
NOKIA AND THE CELLULAR PHONE INDUSTRY
In the early spring of 1994, Mr. Jorma Ollila, CEO of the

Nokia group, looked back on a successful year where his
companys cellular phone sales had increased by more than 70
percent and his profits had more than doubled. In a growing
market, the Finnish company had managed to in-crease its
market share, moving from a global market share of 13 percent
in early 199210 20 percent at the end of 1993. Rapidly increasing
development costs had forced many of Nokias competitors to
shut down or sell out to large rivals. How could Nokia sustain
its growth in such a turbulent industry? How could the
management make de-cisions in light of such uncertainty?
Evolution Of The Industry

The mobile phone industry was born as a result of the need for
professionals to contact others on the move. With only a
restricted amount of the radio spectrum, it meant that an open
broadcast system needed to squeeze every conversation out on
the same limited bandwidth. The cellular break-through was
achieved at AT&Ts Bell laboratories in 1979, making it possible
for the same tiny bandwidth to be used by thousands of
individual, switched messages. By the beginning of 1993,
cellular service was in place in more than 90 countries.
There were several categories of products on the market for
wireless communication. Mobile communica-tion was, beside
cellular telephones largely represented by pagers, with an
estimated 50 million subscribers 1 world-wide in 1993. The
pagers can, like the cellular phones, also receive short messages
in both data and voice. Computer companies like Apple,
AT&T, IBM, and AST Research in-troduced personal digital
assistants (PDAs). These hand-held, pen-based computers
could send wireless facsimile and electronic mail and were
expected to include voice communication eventually. The mode
of communication used depended mainly on the complexity
and urgency of the message. E-mail, pagers., computers., or
facsimile did not provide instant Confirmation that the
message was re-ceived. This was possible only with the
telephone.
The cellular telephone industry consisted, like the tele-communication industry, of production of phones, infrastructure, and
operators of the infrastructure. Infrastructure refers to the
transmitting towers, and the many categories of switch-ing
technology used to establish the connections. Motorola,
Ericsson, and Nokia were manufacturers of both infrastruc-ture
and cellular phones. The interdependency between these two
sectors is very tight, as a feature developed for handsets only is
functional if the infrastructure can accommodate it (see
Appendix). Operators of the cellular networks were often also
those providing fixed wire telecommunication in a given area,
although competitors were starting to make ag-gressive moves
on that market. Well-known companies such as Sprint, AT&T,
McCaw cellular, and most of the national operators in Europe
were players in this arena.
408
The Nordic governments had chosen the NMT (Nor-dic Mobile

Telephone) 450 analog standard in 1981, when this region
became one of the first areas in the world to es-tablish cellular
services. Sparsely populated areas cost too much to connect by
fixed wire, and this posed a further in-centive for establishing
cellular services. Unique to the Nordic countries were the
roaming possibilities between the countries (see Appendix),
creating a system covering the entire Nordic area. Cellular users
roam as they move from the coverage of one service provider to
another. The existence of roaming agreements between service
providers/ operators of different areas widen the geographic
coverage provided to the users. By 1994 the fruits, resulting
from an early move into cellular communication along with a
common standard and a coherent set of roaming agree-ments,
had begun to show: Penetration rates in this region, of up to
10 percent, were the highest in the world. The NMT-450, and
the newer NMT-900 standard had also been adopted in many
other countries, such as the Netherlands, France, Belgium,
Spain, Austria, and Thailand, but roaming across borders was
only possible within the Nordic NMT system due to the
agreements existing between the gov-ernments in these
countries.
Several producers of cellular telephones existed in the Nordic
region. The dominant producers were Swedish L. M. Ericsson
and Nokia Mobile Phones, headquartered in Finland. These
were also the main providers of cellular infrastructure to the
system. Other European producers of cellular telephones were
Siemens, primarily focused on the German market, and
Technophone Ltd., the main pro-ducer of cellular phones in the
U.K. market. Several small, innovative companies were on the
scene in the industrys infancy, like Storno and Cetelco, and
major multinationals like Philips and Bosch were marketing
phones under OEM agreements.
Before the implementation of the European digital standard, as
described later, several analog standards pre-vailed in the area.
There were seven non-compatible analog standards in Europe,
led by the NMT-450 and NMT-900 standards, and the British
developed TACS standard.
Most of the European telecommunications services were state
owned, resulting in monopolistic situations with the effect of
slowing the growth in cellular phones and ser-vices due to the
high calling fees that were demanded. In 1993, the German
penetration rate was as low as 2.47 per-cent due also to a poorly
integrated cross-country coverage.
In the United States, commercial cellular telecommu-nications
began in 1983, with the implementation of the AMPS (American Mobile Phone System) standard. The Federal
Communications Commission (FCC) sets the rules for
The American structure was based upon regionally competing

companies/operators, which have made the overall network
differentiated and incoherent. Roaming possibilities were
technically possible, but agreements be-tween the operators
uncommon. Furthermore, the U.S. an-titrust laws complicated
the rise of nationwide agreements between competing entities.
The penetration rate in 1993 was approximately 6 percent, and
the American manufac-turer Motorola Inc. dominated this
market. At this point, the innovator of the technology, AT&T,
had only just started to manufacture cellular phones themselves.
Japan was the first country to license cellular service in 1981, but
the development of a nationwide service was not achieved until
1984. This service was offered by the Nippon Telegraph and
Telephone Corporation, who had a monopoly position on the
Japanese market. After 1985, NIT was to be privatized over a
five-year period and other private companies got access to
providing cellular services. The structure was controlled by the
government in such a way that NIT provided national services,
and the com-petitors had their own regional area, in which NIT
was the only other competitor. The structure caused a slow
growth in subscribers because of the high connection prices,
and a low level of geographical coverage. This manifested itself
with a base of only 1.7 million subscribers in 1993.
The Asian-Pacific countries, except for Japan, had adopted
diverse standards including NMT, TACS, and AMPS, and the
Latin American countries had chosen the AMPS. Growth
within the standards in these markets was relatively low
compared to the other regions, with a sub-scriber base accounting only for approximately 10 percent of the worldwide
number of both analog and digital sub-scribers in 1993.
In the middle of 1993, there were an estimated 27.3 million
analog subscribers worldwide, where the United States counted
for 48 percent, Europe 25 percent, and Asia-Pacific (including
Japan) 15 percent.
Change in Technology
By 1991, the limitations of the analog standards were becoming critical due to the high growth in subscribers,
prompting the emergence of the digital technologies. The
analog standards had less capacity within a given fre-quency
band and were also affected by wave interference thereby easily
absorbing noise.
The first standards employing digital technology were the panEuropean GSM and the American TDMA. The new systems
were based on digital transmission of signals (bits), eliminating
noise in the transmission. Digital take up less bandwidth in the
radio spectrum. Allowing a given allotted channel range to carry
more information -and as a result allowing more users on a
system than the analog technology. The digital standards also
made it pos-sible to transmit facsimile and computer files at far
higher speeds and higher quality, which opened up the prospects for these functions. The digital standards were, over a
period of time, likely to replace the analog standards but as has
been the case with the analog technology, several different
standards already existed within the digital tech-nology. As a
result, the global market was divided up into smaller segments

according to which standards (both analog and digital) prevailed
in the regional markets.
Some drastic changes occurred in the industry along with the
technological shift. In the initial stage of the digi-tal era,
development costs rose sharply, as the knowledge required to
develop a handset in a digital standard was far greater than the
same effort in the analog field. Developing an analog handset
took roughly 10 man-years of engineering, while, initially, a
model in the new digital standards re-quired 150 man-years, or
15 times the amount of work, posing far larger requirements
for the size of the develop-ment team. The development of
software was becoming an activity of importance, as much of
the functionality of hand-sets and networks would now
depend on this component.
A notable difference between the digital and analog technologies
was an overall shift in the production process. While the analog
standards were relatively low in knowl-edge content, they were
harder to mass-produce. The dig-ital standards required a lot of
development, increasing fixed costs, but were better suited for
mass production due to lower marginal costs. Moreover, the
pace of develop-ment grew and the number of standards on
the global market, as a whole, rose. As with the analog standards, having developed models in one of the digital standards
increased a companys knowledge base for entering the next
generation of standards, creating a springboard effect. Another
factor necessitating scale was the constant short-ening of the
model life spans. The PLC curve can be viewed as an aggregate
of the sales of all the cellu-lar phone models on the market at a
point in time. It is made up of the life-span curves of the
different models introduced over time.
The average market life of the various top models used to be
over a year. In early 1994, a premium model marketed six
months earlier was already moving into the discount segment,
having been replaced by a more sophis-ticated version.
Many of the small national producers were hit hard by this
change in the structural environment. At the time when these
firms had managed to develop a digital model, the three large
players were already promoting their second generation of
terminals. Some of the small players disap-peared, while others
were bought out by rivals. Meanwhile, entrants were trying to
acquire the competence to partici-pate on the scene. A fierce
battle was raging.
The Market Implications of the

Technological Change
The large potential for economies of scale did not, how-ever,
result in a convergence of the many standards. The establishment of the standards had not been controlled by
government intervention or voluntary international stan-dards
agreement, but rather resulted from innovations taking place in
the individual markets, and this was still the case as the digital
standards emerged.
Europe now had two digital standards, the Group Special
Mobile (GSM), promoted by the European Union (EU)
countries, and the DCS 1800, which is explained later. The
argument for implementing a pan-European digital standard
409
competition on the cellular communication scene in the United

States, and has given licenses to several re-gional operators.
was to promote the development of the European telecommunication industry and provide other industries with improved
communication and information possibili-ties. As was the case
with the NMT, the GSM was designed- as an open standard in
a collaborative effort between gov-ernments and industry-and
could thus be adopted by any producer capable of developing
the technology. The GSM was meant by the EU to replace the
existing analog stan-dards and was supposed to reach 13
million subscribers by 1997, but the analog systems were cash
cows for the opera-tors, so their life span was projected to reach
some that beyond the turn of the millennium.
The GSM roaming agreements stretched across bor-ders,
allowing, for example, the use of the GSM standard to
communicate to/from all EU countries and several nations on
the periphery, where a base-station was in reach. The vision of
the GSM system was technical compatibility com-bined with
roaming agreements to provide access within the system. A
system could conceivably also encompass two standards, if dual
standard terminals were made and roam-ing was agreed upon
between the two subsystems. The GSM networks in other areas
of the world can be said to have used the same standard, but
made up separate systems of roaming. To have access to cellular
communication, it was necessary to have both a handset and a
service agreement. In most cellular phones, the service agreement was identi-fied by an electronic code stored in the handset,
which would identify the caller and give her access to the
network. For the GSM standard, this caller ID was stored on an
elec-tronic card the size of a credit card, which was inserted in
the handset in order to make it operable. Thus, the same
phones could be used, but they required separate service
agreements (SIM cards). GSM had already been adopted by 62
countries at the end of 1993.
Another digital system, the Public Communication Network
(PCN), came about due to the recognized prob-lems of GSM
capacity limitations in highly populated areas. PCNs following
the DCS-1800 standard use a higher operating frequency than
the GSM standard, and each con-nection takes up only half the
bandwidth, thereby ensuring higher capacity. Each base station
covers an area of approx-imately 500-meter radius (or smaller).
The capacity is greatly increased, as each of the small cells is
capable of carrying twice the connections of the larger one, while
using only the same frequency width. Costs per connection were
also ex-pected to be much lower than for the larger radius
systems, resulting over time in lower calling fees. Because of the
shorter range required of the PCN terminals, battery time
would increase significantly. In all, PCN was directed at the mass
market, making quick reduction in unit costs possible, and
thereby also lower prices. PCN systems were installed in the
United Kingdom and Germany by the end of 1994.
In the United States, the FCC did not interfere in the implementation of the digital standards. The fight stood be-tween
the TDMA standard, which was largely provided by Swedish L.
M. Ericsson, and the CDMA standard, which was provided by
Motorola. These two standards could exist side by side, but
were not compatible. Implementation of digital standards in
the United States was based upon a co-existence with the
prevailing analog standards (quite the opposite of the Euro-
410
pean strategy of replacing the analog standards with the GSM

system). PCN systems were also to be installed in the United
States as a third digital standard.
Exhibit
Millions of Subscribers
End
End
1988
1992
End
1993
Europe"
1.5
6.0
8.3
United States
Japan
Asia-Pacific
Excluding Japan
Latin America
Others
Total subscribers
1.6
O4b
NA
0.9
15.0
1.7
NA
NA
NA
4.1
1.6
NA
NA
22.1
2.6
1.1
4.4
33.1
Exhibit 3
Segment
1994
Consumers
15%
Business
80%
Mobile data
5%
Source: Nokia Mobile Phones.
1998
40%
45%
15%
The analog standards were still profitable and had excess

capacity, which, together with the voluntary choice of transition
to digital standards, had set the pace of digi-tal implementation
to be slower than that in Europe. Crit-ics argued that this delay
would be problematic for the evolution of international
standards, where some (perhaps inferior) technologies get a
head start, and thereby hamper the introduction of superior
technologies.
In Japan, the analog systems were experiencing ca-pacity
overload, and implementation of a digital standard was
expected in 1994. By that time, another two service providers
had been licensed, but the licenses given to those other than
NTT were still only regional, therefore, creat-ing a poorly
developed nationwide net for cellular services, with a low
penetration rate as a result.
Market Growth and Expected Changes in

Segments
The cellular phone market growth rates from 1991 to 1992 and
1992 to 1993 were 60 percent and 50 percent, respec-tively. The
total number of subscribers amounted to 33 mil-lion by the
end of 1993. Predictions on the total number of subscribers in
the year 2000 range from 100 to 170 million, suggesting high
compounded annual growth rates (see Ex-hibits 2 to 5).
Up to 1994, market predictions had been mostly un-derstated.
There was no doubt that the number of sub-scribers would
rise sharply in the coming years, but the price level and, thus, the
market size would be shaped by conditions about which there
was great uncertainty. As-pects affecting growth were cost of the
terminals, the pric-ing of airtime, versatility of the product, ease
of use, and coverage of the service agreements.
The level of product differentiation was not high, al-though

special features were used to a certain degree, aiming to attract
the higher-priced business segment.
With investments made in the digital networks that had still
not borne fruit, and a still low base of subscribers, operators
deemed it necessary to boost sales in order to reach the degree
of utilization that would ensure returns on their investments.
This was often done by subsidizing the handsets when
consumers signed up for service agree-ments. The retail
promotions boosted demand from the op-erators
Nokia group M$
Net sales
Costs and expenses
Earnings excluding tax,
etc.
Taxes/minorities, etc.
1993
4,096
3,898
1992
3,463
3,493
1991
3,747
3,668
1990
6,103
5,907
198
-30
79
196
397
108
130
120
Net earnings
-199
-138
-51
76
focus toward telecommunications (see Exhibits 6 and 7), where

it ranked as the ninth largest telecommunications equipment
vendor globally. Total assets of the Nokia group were $3.9
billion, with a debt to asset ratio of approximately 50 percent.
Nokia Mobile Phones

Nokia Mobile Phones represented 26 percent of the group net
sales, corresponding to $1.1 billion (see Exhibit 8). Re-search
and development (R&D) expenditures were $50.3 million and
$73.6 million in 1992 and 1993, respectively. The productivity
within the cellular phone division increased dramatically after
1990, with an increase in sales per em-ployee of 138 percent.
The firm was shaped by vigorous rivalry because Fin-land has
one of Europes most innovative and competi1989
tive markets in telecommunications, with some
5627
52 communica-tions providers in 1991.
5478
149
110
39
Source: Nokia Annual Report 1993.
Operating profit nokia

Group M$
Telecommunications
Mobile Phones
1993
1992
1991
170
164
81
83
Consumer Electronics
-129
-149
Electronic Groups total a
-56
Cables and Machinery

Basic Industries b
Other Operations
Nokia Group
45
22
3
253
18
55
24
52
-43
-23
to the producers. Ability to deliver was key to the operators so

they pressured producers on delivery sched-ules rather than
price.
The larger part of the sales derived from the United States and
Europe, but other markets were rapidly starting to emerge.
Eastern Europe and China and other Asian countries were
starting to demand both infrastructure and handsets. Because
of the economic growth in the regions, the demand for
communications services was rising, and cellular technology was
a cost-effective and speedy alter-native to investing in a new
Exhibit
fixed wire7 network.
Nokia
Nokia started as a paper and pulp mill in 1865, where the first
ground-wood mill was situated on the Nokia River in Finland.
In 1967, the company expanded by merging with large rubber
and cable interests. Later on, through the 1970s and 1980s,
Nokia added plastic, metal products, chemicals, and electronics
to the group by acquisition. In 1994, Nokia con-sisted of five
business groups: Consumer Electronics, Tele-communications,
Cables & Machinery, Mobile Phones, and Other Operations
(e.g., tires), but had over a relatively short period changed its
1990
1989
In the beginning of the 1980s, the Nokia group

started producing analog infrastructure and
cellular phones for the NMT-450 standard. The
small home market meant that Nokia had to
export from day one in order to increase
volume. Soon, the company was manufacturing
multiple standards and had thus acquired a
wide base of knowledge and scale at an early
stage.
The firms main objective was to satisfy its

customers, and this was used as the guiding
principle on which all ac-tivities were focused.
An objective was to acquire 25 percent global
market share in 1995 (see Exhibit 9), emphasiz144
57
ing expansion on all markets. The importance
106
100
of not getting trapped producing low value68
86
added commodity products, and remaining
flexible in order to produce cellular phones to
-19
-2
many different standards, and being able to
299
241
market them, was emphasized. Priority was
placed on design, consumer adaptation, and user friendliness,
including a focus on size and weight of the cellular phones.
The firms strengths in fast development enabled them to be
the first supplier of the GSM network in Europe and the first
in the market with a commercial GSM portable phone. Furthermore, they delivered phones and network infrastructure to three
of the worlds four PCN systems. Nokia develops and markets
all cellular infrastructure through Nokia Mobile Phones. In all,
they had a broad well-developed knowledge base built upon the
competence gained from the many offered standards. Even so,
Nokia recognized the necessity of increasing the development
effort to meet future challenges.
The product range included all major analog and dig-ital
standards. They also had original equipment manufac-turer
(OEM) producer status for Philips, Hitachi, Swatch, and AT
&T. The agreement with AT&T was made in April 1994 and
valued by Nokia at $170 million a year. Joint ven-tures with
Japanese cellular companies like Mitsui and Kansai in developing digital cellular phones for the Japan-ese market has
improved access to this market. Nokias global market share
411
Nokia Mobile Phones forecast the increased impor-tance of

the consumer and mobile data market segment.
rose when they acquired the British cellular producer Techno

phone Ltd. in 1991.
United States was increasing with positive implica-tions for

Nokias prospects.
Production facilities were situated in Finland, Ger-many, the

United Kingdom, the United States, Hong Kong,
Nokia believed open communication to be indispens-able for

setting mutual targets, and each employee bore re-sponsibility
in this respect. Knowledge is a capacity only when it is shared.
The development of products employed the Concurrent
Engineering Process. This meant that, when designing new
products, the product development, market-ing, sourcing, and
production departments cooperated closely as a team, making
the developing process faster and more cost-efficient, and
cutting the products time to mar-ket. Nokias operations were
based on decentralized struc-tures and measured control. Fast
change in the environment and technology brought opportunities, which in turn pro-vided the firm with the possibility to
discover new abilities and resources within the organization.
The company con-sisted of young, flexible, and cooperative
employees, but the pressure on them was great, increasing the
risk of organi-zational defects. They were, however, equipped
with the strong fighting spirit expressed by the Finnish word
Sisu.
Exhibit
Market shares (and Ranks) of incumbents of the cellular phone
industry 1988, 1992 and 1993
Market shares
Motorola, Inc.
Nokia
L.M. Ericsson
Panasonic
May 1988
12.8%
13.4%
3.9%
NA
Feburary 1992
22.0%
13.0%(2)
NA
NA
End 1993
36.0%(1)
20.0%(2)
10.0%(3)
4.0%(4)
and Korea. Even though the main costs of producing a phone

derived from the components and development, there were still
cost advantages to assembling handsets in low-wage countries.
The attractiveness of these locations was often augmented by
the availability of government sub-sidized loans.
Nokia was not vertically integrated. Semiconductors were
bought mainly from AT&T, supplying also the essen-tial
Digital Systems Processor. Components were also bought from
Motorola. Nokia focused on designing the electronic components themselves, and out sourced the manufacturing to other
companies. They manufactured both cellular infrastructure and handsets providing the ability to offer complete packages to
operators, as well as technological spillovers.
Distribution channels to consumer markets were, however, not
yet well established. Nokia though had a rel-ative advantage
because of their Consumer Electronics Di-vision, which had
experience promoting products to the consumer segment, and
which had established access to distributions channels. Brand
identification was becoming increasingly important, with the
transition toward the mass market the firm was still struggling
with a low degree of recognition, but expected to intensify
marketing efforts.
A study made on this subject revealed that consumers had
positive opinions of Sonys cellular phone, eyen though it was
not yet marketed-where it became clear that the major players in
the cellular phone industry did not enjoy nearly the same degree
of recognition among the consumers. Nokia was often thought
of as a Japanese brand, which caused a problem due to still
lingering neg-ative images of Japanese producers, especially in
the U.S. market when up against an American firm. Nokia had
fur-thermore formed numerous alliances and agreements with
other firms such as Tandy Corporation in the United States in
1983;mainly to overcome some of the marketing hurdles.
Nokia cellular telephones were sold under the names Nokia,
Technophone, Mobira and, as mentioned, via numerous OEM
deals. The terminals were sold through specialized stores, retail
chains, and operators. Nokias market share in GSM phones
was higher than in analog phones. Sales in the United States
increased 73 percent in 1993, yielding a 19 percent United States
market share, while European sales only doubled. The
growth in cellular subscribers was smaller in these two regions
in 1993, meaning that Nokia gained overall market share. The number of potential users of the digital TDMA standard in the
412
Nokias Main Existing And Potential

Competitors
Motorola, Inc.
Motorola was founded in 1928 as Galvin Manufacturing
Corporation and was the leading company in the cellular phone
industry (see Exhibit 7). Furthermore, it held a strong position
in the field of cellular infrastructure, wire-less communications,
semiconductors, and advanced elec-tronic systems and services.
Of the turnover in 1993,54 percent was in wireless communications (including two- way radios, etc. Figures for cellular
communications can-not be isolated. See Exhibit 10). The total
assets were $13.5 billion, with a debt to assets ratio of 56
percent. They held a position as the third largest telecom
equipment provider on a global scale.
Motorola focused on gaining market share, and set a goal of
obtaining more than 50 percent of the global market for cellular
terminals. Another important factor was the concept of
constant renewal of technology and processes. Motorola stayed
close to four closely coupled sectors in-cluding communications,
components, computers, and con-trol and constantly sought to
create bridges between them. The company was characterized as
a huge venture capital outfit, constantly spinning off technology
and capita: into new businesses. The R&D expenditures for the
group were $1.5 billion in 1993. A prime example was
Motorolas am-bitious Iridium project, a low-orbit satellite
system that conceived with the objective of bringing wireless
phone ser-vice to the world by 1998. By 1994, they had spent 8
years and $100 million backing the Iridium system. However,
some analysts were skeptical of Iridiums profitability, as the
average connection price would be $3 per minute, and handsets
would cost approximately $3,000. Motorola aimed at 1 million
subscribers for this system by 2002, 2 percent of the projected
200 million users of wireless telephony. The wireless connection
charges in the United States were roughly one seventh of what
Iridium intended to charge.
Motorola, Inc.
M$
Net sales
Costs and
expenses
Earnings before
tax
Income taxes
1993
1992
1991
1990
1989
16,963 13,303 11,341 10,855
9,620
15,438 12,503 10,728 10,219
8,974
1,525
800
613
666
646
503
224
159
167
148
Net earnings
1,022
453
454
499
Source: Motorola Annual Report 1993.
498
High competence at mass production was core to the strategy at

Motorola. A quality program called Six Sigma had been
introduced and aimed at only three to four mis-takes per
million processes (not per million units produced). Motorola
produced cellular infrastructure equipment and competed in all
major analog and digital standards and had delivered. GSM
infrastructure equipment to seven countries, and several U.S.
operators had ordered the Motorola devel-oped CDMA digital
standard infrastructure. The company also produced the digital
systems processor (DSP), crucial to the digital standard terminal,
in contrast to other major cellular phone producers who had to
obtain this component from suppliers. Moreover, the company
held fundamental patents required for the GSM standard, but
was not able to deliver the complete range of infrastructure for
the GSM system due to a lack of the very sophisticated
switching tech-nology needed for the roaming function. The
takeover of the Danish company Storno in the early 1990s was a
step to gain more know-how in this area.
Motorola had a wide distribution network covering most of
the world. Its phones were sold through operators, mass
merchants, specialty retailers, direct sales, and as orig-inal
options on cars. The marketing activities stretched over more
than 80 countries either under the Motorola name or as parts of
OEM agreements with companies such as Bosch and Pioneer.
Motorola lacked experience in consumer mar-keting and focused
mainly on production and market shares.
Motorola opted for a policy of decentralization. Or-ganizational
boundaries were broken down, and coopera-tion between
personnel and management was promoted. The result was an
atmosphere of informality, where people contacted each other
across the former boundaries, creat-ing flexibility and a better
flow of information. This re-sulted in an increase in productivity (sales per employee) of 126 percent between 1986 and 1993.
L. M. Ericsson
L. M. Ericsson was founded in 1876 as a producer of wire based
network equipment. The company, with assets of $8.1 billion
manufactured equipment for both wired and mobile communication and also produced advanced elec-tronic defense systems
(see Exhibit 11 for key financials). Ericsson was positioned as
number five on the ranking of global telecommunications

providers.
Net sales of cellular telephones was $325 million in 1992, and
increased 2.5 times in 1993. With in cellular com-munications
the company controlled a leading 40 percent of the world
market for traditional analog cellular infrastruc-ture, and had
been able to acquire 60 percent of the surging market for digital
cellular infrastructure equipment.
The objective of L. M. Ericsson was to keep its strong position
in the cellular business, and to gain a part of the expected future
growth in the industry, especially within infrastructure equipment, and an important factor in real-izing these goals was
product development, a cornerstone at Ericsson. Concurrent
Engineering was an important fea-ture in achieving an effectively
short cycle from a products initial development stage to the
market launch. The impor-tance of R&D was emphasized by its
budget of $1.3 billion in 1993.
The firm produced semiconductors and a1so bad sup-pliers
such as General Electrics and Analog Devices firm which the
crucial Digital Systems Processor was acquired.
Ericsson focused on small production batches, having
traditions in ordinary telecommunications and phones. On the
cellular side, they concentrated on minor batches of ad-vanced
units.
The home market of Ericsson was rather small, necessitating
exports in order to get volume in sales. This forced the
company to be internationally oriented at an early stage, and it
already had an integrated distribution network around the
world due to sales of ordinary telecommunica-tion equipment.
Ericsson was also into several partnerships around the world,
such as with Alcatel and NEC and with Nokia in China. Heavy
spending on advertising in foreign markets provided the firm
with a degree of brand recognition in most markets.
At Ericsson, human capabilities took on a central role. Motivation of employees through personal responsibility, and a high
degree of freedom at work combined with cooperation and also
a degree of independence, explained some of the success of the
project-oriented organization.
L. M.
1993
Ericsson M$
Net sales
7,630
Costs and
7,207
expenses
Earnings
423
before tax
Tax/minoriti
82
es
Net earrings
341
1992
1991
1990
1989
6,770
8,395
7,702
6,130
6,492
8,019
6,883
5,424
278
376
818
576
210
216
NA
NA
68
160
NA
NA
The Japanese Competitors

Japan had about 20 companies selling cellular phones in 1991.5
Some had their own production, of which Matsushita (using
the brand name Panasonic) and NEC were the only ones with
significant sales of cellular phones outside Japan, though they
were still operating at a rather small scale com-pared to
413
Motorola had a large home market, which was an advantage in

the beginning when lag times between markets were still
significant. Every time a new product was intro-duced, it could
readily achieve higher volume in sales than companies in smaller
countries. With rapid international-ization, this advantage
decreased in significance.
Motorola, Nokia, and Ericsson (see Exhibit 7). Others had

signed OEM agreements with major producers outside Japan
such as Motorola and Nokia. The best known in this category
were Sony, Pioneer, and Hitachi.
Appendix: How Does Cellular

Communication Work?
The Japanese were trying to establish themselves in the fast growing cellular phone market. They were attracted by the high
future potential in the consumer segment, espe-cially because of
the high knowledge they possessed in this area due to their
consumer electronics. They were regarded as having an advantage in this area.
Discerning between the terms system and standard is important

in order to comprehend the different solutions to cellular
communications offered on the market. A system, in the
context of this case, is understood to be the network within
which a personal service agreement and terminal can be used.
This, in other words, is defined by the extent of the existing
roaming (see later) agreements and whether the same terminal is
compatible with the whole system. A standard defines the
specific; technology used for the contact to take place. In order
for a terminal to be used, it must be compatible in standard and
the user must have a service agreement with an operator within
the system.
The Japanese home market was large, providing potential for

high volume. The consumer electronics mar-ket, however, was
usually characterized by being pro-tected by import restrictions
with fierce competition raging between a large numbers of
national companies. These companies had access to low cost
capital, due to the favorable financial environment created by
the-culture, en-compassing longer perspectives, higher savings,
and high degrees of inter corporate lending. The Japanese
shareowners were traditionally less focused on high and immediate returns.
The Japanese generally had competence in large- scale, lowpriced, high-quality production, and a compre-hensive
distribution network all over the world, which they coupled
with strong brand names. This was particu-larly exhibited by
their position on the consumer elec-tronics market. However,
the speed of development and the many existing cellular
standards did not favor the use of reverse engineering, which
was a commonly used method of development.
By 1994, Matsushita had not yet launched a globally competitive
cellular terminal for the digital systems. With the industry
environment current at that time, the Japan-ese had some
difficulty entering the scene. The companies also lacked knowledge in cellular infrastructure.
Future Expectations In The Industry

In 1994, the industry was in turbulence, but this was ex-pected
to calm down with product standardization. A pre-diction of
when this would happen and which standard would become
dominant was not possible due to the many possibilities of
further systems innovations.
Development could also slow down within certain standards as
technologies stabilized, as was predicted to happen with the
GSM not far beyond 1994. This has pro-vided firms like the
Korean company Maxon with an op-portunity to enter the
field. Maxon planned to produce low price GSM phones to be
marketed in Europe and other regions employing the GSM
standard. In 1994, the highway innovative firms still had an
edge over late entrants, in handset technology and in their ability
to cover multiple standards. Two tendencies were predicted:
short-term high innovation and turbulence, and medium-term
maturity.
The major future objective of Nokia was to protect and expand
its position. This required awareness of changes in the environment and a continuous accumulation of re-sources and
capabilities inside the organization in order to establish the
capacity needed to cope with the expected growth in the cellular
phone market.
414
An illustrative example is used to explain the functioning of the

cellular technology
A person moving down the highway dials a number on a

cellular handset. The handset sends a signal, with a range of 10
to 30 km, that is received by a base station (Tower), as shown by
A in Exhibit 12. The base station has to use the same technological standard as the phone does. The base station with the
best contact to the cellular phone is chosen by the network and
the signal passes through the public fixed wire network to the
MTX (Mobile Telephone Ex-change, [B]).The MTX is the brain
in the system, constantly keeping track of the cellular phone on
stand-by, in order to track its position. The MTX sends the
signal back through the fixed public network, which, if the call
is to a stationary phone, connects the call to the dialed number
(C in exhibit). If the dialed number is to another cellular
telephone, the MTX locates the other terminal (the MTX tracks
this, if the terminal is on standby and within range of a base
station) and sends the signal to the base station-through the
fixed network (D)-closest to the receiving terminal, and final
contact is made (E). The second cellular phone does not have to
be covered by the same service provider as the one calling. If the
two service providers are different, the MTX of the first service
provider will simply connect through the fixed network to the
MTX of the second.
The people using cellular phones are often moving from one
area (cell) to another during a conversation. The MTX ensures
that seamless contact is sustained by switch-ing the transmission from one base station to another; this is referred to as the
hand-off function. The MTX will typi-cally serve the base
stations in one area. As the user moves into another area, her
conversation is handed off to the MTX serving that area and
this capability is referred to as roaming, and provides the user
with a wider area of use for her terminal.
The question of channel allocation and terminal iden-tification
also needs to be addressed. The telephone calling is registered
through a signal with an access code, in order to bill the calling
fee to the owner. The cellular system is closed, meaning that a
terminal will not be recognized and serviced without the access
code. Each operator is licensed to use a portion of the frequency
band allocated for the total system/standard in a given area.
This frequency por-tion is able to carry a certain number of
simultaneous contacts. The frequency used for transmission is
chosen in-dividually for each separate call by the MTX. Each
As the systems work now, the interconnect problem using the

public fixed wire lines, affects the prices charged by the operators. The national monopolies can use discrimina-tory pricing
on the connections used by the external cellu-lar operators. To
overcome this problem, there are examples of operators that
intend to use parabolic antennae between the base stations, in
order to avoid using the fixed wire net-work (at least when the
contact is cellular to cellular).
The Launch of Gsm Cellular Telephones In

South Africa
Driving to Jan Smuts Airport for yet another flight to Cape
Town, Vodacoms Managing Director, Alan Knott-Craig
contemplated the year ahead in anticipation of tomorrows
management strategy meeting. South Africas cellular in-dustry
had not only recorded the worlds fastest launch of a GSM
cellular subscriber base but had also become the worlds fastestgrowing cellular market and the second largest GSM cellular
subscriber base in the world in just one year. Such an achievement, during the transition to Mandela and De Klerks new
South Africa, surprised in-dustry experts around the world.
Solid market leaders with a 65 percent estimated share, KnottCraigs team would be contemplating the next phase of market
growth and competitive strategy.
The Cellular Communications Industry

South Africas cellular communications industry consisted of
four main players: network operators, service providers, dealers,
and equipment manufacturers.
Network Operators Vodacom and Mobile Telephone Networks
(MTN) were awarded the first two network operator licenses by
the gov-ernment regulator. The licenses empowered each
operator to set up and operate the network infrastructure
necessary to provide national GSM digital cellular coverage.
Although Europes GSM digital cellular standard was more
expensive than the analogue cellular standard most common to
the United States, Britain, and other countries, GSMs many advanced capabilities such as fax and data transmission were
leading to growing acceptance as a global standard. After many
debates, the South African government specified the GSM
standard. Vodacom and MTN were assigned separate frequencies for transmission and reception from the avail-able radio
frequency band. Some frequencies were reserved for a potential
third network in the future.
The ownership of both network operators included international firms, government or quasi-governmental bodies,
and local black business consortia. Vodacoms re-lationship to
Telcom, the state-owned, fixed-wire tele-phone monopoly,
almost assured it of appointment as the first network operator.
Licenses were awarded to both Vodacom and MTN on
September 30,1993 and they began building network infrastructure. However, due to the certainty that Vodacom or Telkom
would be awarded at least one of the licenses, MTN began
building network infrastructure later and was well behind on
April 1, 1994 when the test period began for a limited number
of subscribers. Although MTN had made gains by the official
launch date of June 1, 1994, it was clear that Vodacom remained
ahead in many important geo-graphic coverage areas.
The regulator leveled the playing field by requiring both
network operators to allow roaming during the test period
and the first 3 months of normal operations. Roam-ing
allowed an MTN subscriber to place calls in an area, where only
Vodacom base stations existed or where MTN base stations
were operating at capacity when a subscriber call was placed.
Similarly, Vodacom callers could place calls using MTN infrastructure if Vodacom coverage was not available. The two
networks agreed to cease roaming ahead of schedule in August
1994, except for emergency calls. Sub-scribers from either
network could make a 112 emer-gency call on any networkeven from phones without the Subscriber Identity Module
(SIM) card inserted in the cel-lular phone. The SIM card was a
smart card containing an integrated circuit chip to identify the
caller at network-level for billing and administrative purposes.
The regulator allowed the network operators to set up and
manage their own distribution channel. Following the international trend, both network operators appointed ser-vice
providers.
Service Providers
Service providers marketed network services and provided the
bulk of customer care. Exclusive service providers acted on
behalf of one network-dual service providers repre-sented
both: but in all cases a client wishing to subscribe to a cellular
network was required to sign a contract with one of the
network operators appointed service providers. The South
African Cellular Service Providers Association (SACSPA) was
established to promote the interests of ser-vice providers and
provided a forum for cooperating on matters of common
concern such as fraud and bad debt. Both network operators
encouraged service providers to become SACSPA members.
Service providers were responsible for the sale of handsets, car
kits and other cellular equipment, airtime sub-scriptions,
account billing and collection, and ongoing client service.
Customers did not have any direct relationship with the
network operators. The network operators billed service
providers for total calls made by each subscriber (airtime) less a
discount of approximately 25 percent to 30 percent (depending
on the number of subscribers enrolled by the service provider
and a loyalty bonus) plus a monthly sub-scription fee, which
varied according to the tariff the cus-tomer chose. Certain
incentive payments also were paid. Connection bonuses were
paid for net new subscriptions signed by a service provider.
Although these subsidies were confidential, the media regularly
speculated that subsidies ranged from Rs 500 to R2, 000. Most
media sources indicated that service providers used the subsidies to lower the price of cellular handsets. The loyalty bonuses
were designed to entice dual service providers to concentrate
business with one network and varied according to the proportion of a ser-vice providers total subscribers using a particular
network.
415
base station can utilize the whole allocated frequency band. The
MTX only has to ensure that adjacent towers do not trans-mit
two separate contacts using the same frequency, as this would
cause interference between the signals.
Network operators received and transmitted cus-tomer calls.

Every time a cell phone was turned on, the Vo-dacom system
would record the nearest base station(s). This allowed the
placement of a call from any telephone or cellphone to interconnect into the appropriate switches for ultimate transmission to
the cell user. Thus, a particular call might utilize not only
Vodacoms equipment, but also equip-ment of Telkom.
Vodacoms network equipment recorded the SIM card number,
the number called, the cellular hand-set IMEI identification
number, the starting and ending time of the call and the type
of call for every call as part of a call data record (CDR). The
network operators down-loaded the resulting CDRs, and
reports concerning calls, to service providers on multiple
occasions during the day via node-to-node links. Data were
formatted to be readable by the service providers billing
systems.
Service providers received the CDR transmissions and other
reports for use with internal accounting and management
software-the most important component being the billing
system. Billing systems performed the mission-critical function
of allocating CDRs to subscribers so subscribers were billed for
calls placed. In addition, some billing systems offered integrated
application pro-cessing capabilities that included issuance,
activation, and deactivation of handsets and SIM cards on the
network as well as performance of certain record-keeping in
custo-mer care centers. The software used was complicated and
most service providers procured the EPPIX billing system
marketed by a U.K. firm that specialized in cellular billing
systems. Other service providers formed strategic al-liances with
overseas service providers and adapted the partners administrative systems and business strategies to the local market. A few
service providers developed local administrative and billing
systems. There was little stan-dardization of billing systems
and even EPPIX installa-tions could be configured quite
differently. Vodacoms own information technology division
was headquartered in Cape Town.
There was little doubt that all service providers had experienced
administrative and financial difficulties that were exacerbated by
the short notice many had received concerning their appointments. As a result, some service providers did not have billing
systems up and running when the test period began.
operators licenses did not require them to use service providers,

but Vodacom believed that service providers had been proven
to speed market penetration around the world and the firm had
committed to contracts with 11 service providers.
Dealers
Service providers often appointed dealers to sell airtime
subscriptions on their behalf. Vodacom had gained an early
competitive advantage when Teljoy and Vodac signed dealer
agreements with certain major retail outlets and dealers. This
had resulted in fast growth. Teljoy, the leading national TV
rental chain with shops located in top retail sites, had become
the worlds second largest GSM cellular service provider and
captured over one third of the South African market, largely as a
result of its retail presence and exten-sive advertising prior to
and during the launch of cellular. Teljoy had been advertising
heavily in advance of the launch of national satellite TV in
recent months.
Many dealers had come and gone during the first year. For
some, this was an intentional strategy to take advan-tage of
short-term opportunities created by the explosive launch.
Others were undercapitalized, and service provider billing
system problems allegedly held up incentive pay-ments far too
long to allow dealer survival in many cases.
International and local fraud syndicates had pene-trated the
dealer network, and the police had made many arrests. Service
providers often used the full connection bonus payment and
other promotional funds to subsidize the price of equipment
sold on longer-term airtime sub-scriber contracts-often
comparing the sale of Rs 2,500 phones for little or nothing to
the sale of razors below cost to promote usage of blades.
Posing as legitimate clients, fraud teams either bought cellular,
phones at the low, subsidized prices or stole them and exported
them to other GSM countries. Theft of air-time represented a
far greater hazard. Many phone shops had been discovered in
urban areas where local and inter-national phone calls were sold
at reduced rates. Call charges exceeding many thousands of
Rands were sometimes com-pleted before service providers
became aware of the prob-lem. Customers were reporting their
cell phones stolen from restaurants, cafes, and even from their
bedside tables while they slept.
Service providers were hard hit by the faster than ex-pected

growth, especially the financial management and management
information departments. It was obvious that many were
having difficulties getting costs under control The first -year
results announced by the two publicly traded service providers
showed signs of the severe trading con-ditions: Knott -Craig
had heard rumors that the published results were typical,
perhaps better, than many privately held service providers, and
he had heard the reverse. In any case, the persistent rumors that
smaller service providers would not last 6 months had not been
fulfilled, and the in-dustry ended the first year with 17 service
providers-the same number that had begun the year.
Fraud team links to African and Asian drug syndicates had been
reported in the press. A phone shop could quickly run up a
Rs 10, 000 bill on a stolen SIM card in a weekend, offsetting the
total monthly airtime (calls) rev-enue of more than 65 average
subscribers. SACSPA had shared police evidence concerning the
infiltration of the country by international fraud syndicates in
anticipation of the 1995 Rugby World Cup (which South Africa
later won). A classic tournament watched by billions around the
world, this was the first time the World Cup had been held in
one country and experts wondered if the police force was up to
the challenge of international fraud teams.
Vodacom owned service provider- VODAC. MTNs major

shareholders controlled another service provider, M-TEL.
Suspicions of favoritism to these service pro-viders tainted
relationships with some service providers. The network
The Postmaster General was the official regulator of the

telecommunications industry Pallo Jordan, Minister of Posts,
Telecommunications, and Broadcasting, was responsible for the
governments overall communications strategy. The minister
416
Regulation
Knott-Craig was conscious that the Vodacom and Telkom

cultures were different due to the nature of the businesses but
felt that certain aspects of culture were shared. He was particularly pleased that he could draw on Telkom and Vodafone
technical expertise and business ex-perience when required.
However, the impression that Vodacom received special favors
either from Telkom or the Regulator, were a constant source of
irritation that Knott-Craig was tired of denying. He also tired
of rejecting alle-gations that Vodacom favored Vodac or Teljoy
over other service providers.
Equipment Manufacturers
Equipment manufacturers participated in the industry in two
ways: by supplying cellular base stations and infrastruc-ture to
network operators and by supplying cellular hand-sets and
accessories to service providers and dealers. Nokia, Ericsson;
Alcatel, Siemens, Panasonic, and Motorola were among the
leading brands participating in the latter. Voda-com sourced
base stations from Siemens and Alcatel while MTNs network
standardized on Ericsson equipment.
Service providers felt that the equipment manufac-turers were
becoming problematic. Consumer dissatisfac-tion with
manufacturers was a serious problem, according to the
SACSPA. Some manufacturers were taking up to 6 months to
repair handsets under warranty, and this necessitated significant
investments in loan phones. No doubt, Motorolas decision to
appoint major retailers as distribu-tors would affect service
providers, even though retailers would require a service provider
to connect their sub-scribers to a network operator.
There was also a constant threat of stock shortages as new
countries adopted the GSM standard. Many manufac-turers
shipped stock only after receiving q letter of credit and then
shipped amounts less than those ordered by the major service
providers. News of a Chinese consortium be-ginning the
manufacture of GSM handsets had appeared in the South
African business press. Manufacturers also were organized in a
trade association, the CTMIA.
Many skilled people were leaving the country and, paradoxically,

many were returning. Some po-litical parties spoke of privatizing state-run monopolies, such as Telkom, and the parastatals
controlling the trans-portation, iron and steel, and electrical
distribution indus-tries. Although these bodies represented a
comparatively high percentage of GNP compared to other
countries, ANC supporters such as the labor unions and the
Communist Party of South Africa voiced disapproval of
privatization schemes. Some political parties were advocating
that re-construction and development required nothing less
than a centrally planned Marxist/ Leninist economy.
Cellular telephony was viewed with suspicion by many parties
who viewed the proposed launch as a thinly dis-guised attempt
to keep the control of telecommunications in the hands of the
white minority. Thus, even though both licenses were awarded
on September 30, 1993, an agree-ment was reached with the
African National Congress only on October 22, 1993. Equipment purchases and service provider appointments could only
begin thereafter. South Africa traditionally comes to a standstill
during the mid--December to mid-January Christmas break,
and this cre-ated additional problems. Some service providers
had been appointed as late as a few weeks prior to the April
1994 roll-out to a limited subscriber base for testing.
Both licenses required the network operators to sub-sidize
cellular telephony in the historically disadvantaged communities.
Both networks had initiated projects in this regard and appointed black-owned service providers. In addition, Vodacom
and MTN were to engage in economic activities outside their
mainstream business to the value of R1 billion to the government at the end of five years. At-tempts to increase the
historically disadvantaged popula-tions access to telecommunications resulted in Vodacoms telephone shop, which was
designed to house up to 10 cel-lular pay telephones. The shops
also created much-needed jobs. MTN could take credit for the
invention of the worlds first working GSM cellular pay phone
in a similar project.
The Market
South Africas cellular industry received a baptism of fire in its

first year. Violence racked the country in the run-up to President
Nelson Mandelas election on April 29, 1994. When the
government announced that two network oper-ators would be
appointed, the appointment of a second network operator
became highly politicized, delaying the appointment of a
second network operator.
South Africa blends First and Third World characteristics. First

World shopping malls and business areas and Third World
squatter shacks often coexist within kilometers. Ur-banized
areas generally have high economic activity and income, but rural
areas are much poorer. Exhibit 1 highlights some indicators of
human and economic development.
Knott-Craig was concerned about the escalating vio-lence in the
country during early 1995. Violent crime had reached the levels
experienced prior to the election in some areas, and the police
were clearly experiencing diffi-culty in combating crime. Security
had positive and nega-tive impacts on cellular telephone usage.
Security was a popular reason for buying a cellular phone and
promotions featuring on-call security services by Auto page
Cellular and Teljoy both seemed to have done well. However, it
was fanoo early for reliable usage statistics to be available for
subscribers interested in security.
The first half of 1994 had been politically turbulent. There were
constant rumors right wing or left-wing forces would attempt
to sabotage the elections or overthrow the government if
Nelson Mandelas African National Con-gress (ANC) won.
The Government of National Unity was exceeding the expectations many held prior to the election. President Mandela was
especially popular. However, ANCs Recon-struction and
Development Programme was moving more
THE BUSINESS ENVIRONMENT
417
was rethinking telecommunications policy, and an extensive

Green Paper had been circulated for dis-cussion to the South
African public and all interested par-ties. The continuation of
Telkoms fixed wire telephone monopoly was debated in the
Green Paper but seemed un-likely to change. The regulator had
approved a number of Vodacom tariff plans. Service providers
could not charge I more than the regulated call tariffs, although
they were free to discount any tariff.
EXHIBIT 1 Selected development statistics for selected countries
Energy
use per
capita in
1992(per
capita
kilograms)
7662
Telephone
main lines
in 1990 (in
Thousand)
255.4
Gross
domestic
product
in 1992
in $US
million
5920199
3.4
41304
4284
1469
43.7
13.6
85.0
39.8
296136
41203
329011
103651
2569
837
1525
2487
184.3
25.7
119.3
126364
6884
41904
303
223
92
Population
in 1992 in
millions
United
states
New
Zealand
Korea
China
Mexico
South
Africa
Indonesia
Kenya
Pakistan
slowly than expected, and President Mandela had recently

ordered his cabinet to pursue economic growth with in-creased
vigor. The school system was a particular worry for many people
with school-aged children, and there was a perception that
managerial and professional people with kids were leaving the
country in record numbers, although official emigration
statistics did not confirm this perception. There was a possibility that the stringent exchange controls placed on emigrating
people may have had some impact on how many people
actually reported immigration.
Marketing
Achieving competitive advantage required careful analy-sis on
the network operator and-service provider tier. The nature of
government regulation often made it difficult to differentiate a
business in meaningful ways from ones competitor.
Product
Network coverage, that is, the area in which calls could be placed
and received by cellular users, was a common way to differentiate cellular networks. With the exception of a dif-ficult period
of over subscription during August and Sep-tember 1994,
Vodacom felt that its network covered a far larger area and
boasted superior quality. Network quality was measured by
counting calls dropped (disconnected due to some network
problem) and consumer complaints about the quality of the
audio transmission Although MTNs net-work started building
months after Vodacom, it was clear that MTN would catch up
to Vodacom within the short term.
Promotion
The coverage advantage had been the focus of Vodacoms
major selling effort masterminded by GM Joan Joffe and was a
major reason that two out of three subscribers had chosen
Vodacom. The award-winning Launch of GSM Cellular
Telephone in South Africa TV advertisement fo-cused on this
coverage advantage. The R21 million mea-sured ad spending
placed the combined TV, press, and radio spending in the top
20 South African companies ad spending for 1994-just behind
418
Crude
birthrate in
1992 (per
10000
population)
Human
development
index
16
.925
97
17
.907
13276
861
5355
3315
93
87
89
16
23
28
31
.859
.848
.804
.650
1069
183
843
34
49
72
25
37
40
.586
.434
.393
Access
to safe
drinking
water
(%)
136337
MTNs R23 million. Ser-vice providers also promoted network

brands in their own advertising and both networks enjoyed
widespread brand awareness. Exact figures were unavailable but
the com-bined advertising spend of the service providers
probably exceeded R20 million.
Joffe was particularly proud of the recent promotions connected to Vodacoms sponsorship of the Rugby World Cup.
Adverts had high recognition and had received high liking and
noting scores. Market research indicated that the TV advertisements were particularly well liked and \Toda-coms share of
purchase intent had increased significantly- Joffe could not say
whether this was due to MTNs ongo-ing coverage problems or
the promotional campaigns but believed it might be due to
both.
MTNs advertising also had been very effective. Fea-turing a
unique and humorous monotonic delivery by a male gravellyvoiced announcer, the TV and radio ad shared the advantages
of having the magic of MTNs mobile commu-nications at
ones disposal. MTN positioned its brand as the better
connection and achieved high recognition and branding. The
innovative use of an MTN airship also aided brand recognition.
Pricing
Government regulation affected pricing strategies most.
Consumers generally judged two costs when considering
adopting cellular telephony. Initial one-time costs included the
cost of the cellular handset and any accessories (such as a handsfree car kit), the cost of the SIM card (R65.00), and the cost of
activating the SIM card on the network (the connection fee
R125.00). Ongoing costs included the monthly subscription
(R125.00) and call charges (RUO per minute during peak hours
and R.65 during off-peak hours). The av-erage user received a
monthly bill of R250 to R300.
Call charge tariffs, monthly subscription fees, SIM card charges
and connection fees were regulated, and both net-work
operators charged the same amounts. Network oper-ators could
ask for new tariffs to be approved but the other network was
Both networks subsidized the cost of handsets. Initial

subsidies did not affect the price of handsets significantly but,
as competition heated up at the end of the first year, subsidies
had increased to a very significant level. The large subsidies
allowed service providers to sell low-end R1, 500 handsets for
almost nothing and to sell top range handsets for as little as R
2,000.00. Indeed, Auto page had bought up the total available
stock of a new Alcatel hand-set that was offered with an addedvalue emergency ser-vices package free of charge to qualifying
applicants. Free phones fueled rapid growth but also created the
problems noted earlier.
Distribution
The service provider distribution model was a cause of some
concern. Vodafone was experimenting with a direct-to -market
approach in the United Kingdom. The U.S. model featured
network operators and dealers. In the U.S. model, dealers were
marketing agents and the networks took total responsibility for
the billing and customer service functions. Both approaches had
been successful.
Most industry experts would attribute Vodacoms commanding
market share to its superior network cover-age and quality and
its exclusive presence in leading retail outlets. Teljoy sold cellular
subscriptions through its retail outlets located in most shopping mall locations across the country. In addition, exclusive
service providers-primar-ily Teljoy and Vodac-had tied up
exclusive dealerships with major retailers, office supply outlets,
and dealers. MTN had also tied up exclusive agreements, but
Knott- Craig was confident he had won the early rounds of this
fight as he approached a traffic jam on the R24.
The Current Situation

As he thought about tomorrows strategy meeting, Knott-Craig
became frustrated at the traffic jam ahead. It was not normally
so crowded at this time of day on the R24 and, as he changed
from the CD to hear the traffic report on Radio 702,
tomorrows strategy meeting continued to dominate his
thinking. The industry had exceeded forecasts of 100,000
subscribers and achieved 350,000 in its first year.
He sensed that new problems would require very dif-ferent
solutions to the past. It seemed certain that explo-sive growth
would not be repeated but that the industry could achieve 1
million subscribers by the end of the first three years. It seemed

certain that the quality of new subscribers (as measured by
average airtime and bad debt) would deteriorate as cellular usage
expanded. New sub-scriptions had declined dramatically since
both networks had reduced connection bonuses on April 1,
1995. Balanc-ing the desirability for growth against the profitability re-quired to satisfy shareholders and to make the RDP
payment was not going to be easy.
Technologically, Knott-Craig planned for Vodacom to stay
ahead. MTN had recently announced a host of value-added
network services that allowed users to use a cellular phone as a
pager or to call for a host of services, such as legal advice. Both
networks had launched fax and data services and paging services
at about the same time. Caller identifi-cation would also be
available soon on both networks.
Teljoy had already taken the initiative to launch a 112 emergency
service enhancement using the 911 number popularized by an
American TV series shown on South African TV. Fax services
were to be enhanced shortly. A fax would then be held similarly
to voice mail to be re-trieved later when desirable.
The traffic jam cleared as he passed a minor motorcar accident
on the freeway, and Knott-Craig could see the air-port in the
distance. He would arrive on time.
Harley-davidson Motor Co., Inc.:

Defending A Piece Of The Domestic Pie
Introduction
Throughout the 20th century, motorcycles have been produced
by a host of American companies. Names such as Indian, Yale,
Pope, and Minnesota can be found in the graveyard of defunct
American motorcycle producers. Today, only one company in
the United States is a manu-facturer of motorcycles-HarleyDavidson. Founded in 1903 by William S. Harley and a trio of
Davidsons, Harley -Davidson was for many years the unchallenged leader in American motorcycle sales. The companys
success was due to a combination of factors-innovative
engineering and product design and a company image that
inspired fierce loyalty on the part of its customers. In fact, few
American manufacturers have ever boasted a product as
ingrained in the countrys folklore as Harley-Davidson. Be it in
movies such as The Wild One or Easy Rider, or in real life with
mo-torcycle gangs like the Hells Angels, the Harley-Davidson
trademark has always evoked an image that is, for better or
worse, distinctly American Seen in this light, it is not so surprising that the first far-reaching piece of protectionist
leg-islation of the Reagan presidency was granted in favor of
none other than Harley-Davidson, the only remaining American
manufacturer of motorcycles.
On April 1, 1983, the President heeded the recom-mendations
of the International Trade Commission (ITC) that a five-year
tariff relief program be accorded Harley- Davidson. The ruling
culminated a six-year effort on the part of Harley for governmental help. Predictably, the com-pany felt it had been
vindicated by the Reagan administra-tion. Vaughn Beals,
chairman and CEO of Harley-Davidson had this to say: The
Presidents courageous action demon-strates his support for the
concept that free trade must also be fair trade. The
419
also free to apply to use the same new tariff immediately.

Service providers were allowed to discount call tariffs in order to
gain business. However, a discount of even 10 percent of the
call tariff would be reduced directly from the service providers
25 percent to 30 percent of the total call charge-thus, a 10
percent discount could result in almost a 40 percent reduction in
sales revenue at the ser-vice provider tier. SACSPA felt that such
discounting would seriously jeopardize the long-term survival
of the service provider tier, and there was some question as to
how dis-counts could be applied without infringing on the
network requirements for approval of new tariffs by the
regulator. Indeed, one firm that was alleged to discount tariffs
ran into financial trouble almost immediately. Some service
providers were devilry bundling packages with added value
emergency services and other augmented product offers that
were clearly legal.
administrations decision, on the merits of the case, tells our

trading partners that the U.S. fully sup-ports the concept of free
trade, but that does not mean that our government will tolerate
unfair competition.
Background To The Tariff Ruling

In the 1950s, Harley-Davidson possessed a share of the
American market of anywhere from 60 percent to 70 per-cent. It
produced powerful, uniquely styled motorcycles that inspired an
unusually high degree of brand loyalty. It was in this decade
that other American motorcycle makers ceased to exist. Harley
was totally unprepared for what it would call the Japanese
invasion of the 19608. The Japanese were able to produce
quality merchandise for cheaper prices because of their size and
efficient production techniques. These companies were also
willing to spend huge amounts on ad-vertising and they
successfully introduced millions of Amer-icans (and Europeans) to the joys of motorcycling.
Harley- Davidson, for its part, was bogged down with an image
problem that was largely of its own making. For years it had
catered to the rough-hewn biker because he was, after all,
Harleys most loyal customer. This strategy did not at all mesh
with the spirit of the 19608 most typified by Hondas, You
meet the nicest people on a Honda campaign. Unable to
capitalize on this huge new market for motorcycles sales
increased by 35 percent in 1962 and by an average of 1S per-cent
for 10 years afterward), Harley watched its market share drop
precipitously. In 1970, it claimed a mere 5 percent of the
American market (see Exhibit 1 for Current data)
AMF-Harley-Davidson
In 1969, Harley-Davidson was bought by AMF, a recrea-tional
equipment conglomerate. AMF proceeded to manage the
company in a way that only portfolio theory can em-brace.
Product lines that were deemed unprofitable were dropped
instead of improved and very little money was di-rected to
shore up Harleys position. By 1976, the company offered only
four models to consumers, whereas the four big Japanese
producers routinely offered 20 to 25 models. Harleys only
remaining strength was in large bikes (70Occ and up), and here
too they would lose a huge amount of market share. In 1972,
Harley-Davidson sold 99.6 percent of the heavy bikes purchased
in America. By 1975, this figure was down to 44.4 percent.
The companys initial reaction to these results was to accuse the
Japanese of dumping their products at unfairly low prices
and of copying some of the Harley-Davidson bigbike models.
A petition for some form of protection was un-successfully
submitted to the government in 1977. At the same time, Harley
did very little to extricate itself from its poor market position.
The company experienced a gradual decline both in terms of
share and product performance. Quality went to hell and labor
relations went to pot, CEO Beals would later say. Harley
continued to emphasize the emotional appeal of its machines
rather than stress their performance features: No other
motorcycle arouses the same pride, passion, even fanaticism,
proclaimed one ad? Later, they would direct much of their
energies toward the Japanese, giving their seal of approval to Tshirts bearing the message Id rather eat worms than ride a
Honda.3
420
Leveraged Buyout (1981)

Perhaps the most important development of the past decade
was the leveraged buyout of Harley-Davidson in 1981 led by
Vaughn Beals himself. Beals has since established himself as a
charismatic and dedicated manager. In fact, company lit-erature
describes him as providing the perfect blend of tech-nical
expertise and management skill required to spearhead the
new Harley-Davidsons aggressive revitalization pro-grams.
The most important feature of the buyout, beyond putting Mr.
Beals in charge, was- that it got the company away from the
short-term mentality that characterized the AMF years Freed
from the duty to annually present its per-formance to a group
of dividend-hungry shareholders, man-agement has been able
to concentrate on spending the necessary funds to put Harley
on its feet again.
The Tariff Ruling (1983)

Essential to the rebirth of Harley-Davidson, argued Beals, was a
tariff program that would allow time for its program to prove
successful. Particularly annoying to Beals was the way in which
each Japanese company would slash its prices whenever its
inventories built up due to faulty demand as-sessments or a
general economic slowdown. This practice irked Harley to no
end because its products were more ex-pensive to begin with.
The recession years of 1981 to 1982 were very bad for Harley.
The company, teetering near the edge of bankruptcy, decided to
once again petition for help from Washington. This time, it got
some.
The five-year tariff, which went into effect April 15, 1983,
provided an additional 45 percent tariff (on top of the existing
4.4 percent) on motorcycles having an engine dis-placement of
700cc or more, in the first year, with reductions to 35,20, 15, and
10 percent respectively, in the four suc-ceeding years. European
imports are effectively excluded from the surcharge through
tariff-rate quotas, which provide that only motorcycle exporters
of significant size (i.e., X number of units exported) have to
absorb the surcharge cost.
Without getting involved in a debate on the merits of free trade
versus protectionism, two basic arguments on this ruling have
been advanced. First, free trade purists would argue that the
tariff is unfair because it protects an inefficient producer of
motorcycles. Harley-Davidson is inefficient, they would say,
because it has shown itself incapable of offering the consumer
anything but overpriced bikes of second-rate quality. The proof
of this lies in the vote of the customers in the marketplace. On
the other hand, Harley-Davidson argues that the ruling is
necessary because the government has a duty to protect its only
remaining producer of motor-cycles, who, in addition to
competing in an unfair environ-ment, has showed itself to be
more than willing to make the financial commitment to
improve, but needs time to do so.
The New Harley-davidson (1981-1985)

Operational Improvements
The most remarkable aspect of Harleys new approach is how
heavily it borrows from the Japanese. Today, the com-pany
stresses employee involvement, uses just-in-time in-ventory
and manufacturing principles, and manages all of its processes
One of the first examples of HarIey-Davidsons will-ingness

to adopt innovative manufacturing techniques is in the
employee involvement area. Harley-Davidson was the second
U.S. manufacturing company to implement Quality Circles-back
in 1978. At this point, over half of the com-panys employees
in Wisconsin are active participants in this program. This
employee involvement and participation program permits
employees to contribute their ideas, do hands-on problem
solving, and improve the efficiency and quality of their work.
Doors that were previously closed to employees are now being
opened. For example, company policy now requires that
employees be consulted in the planning of any changes to an
employees workplace or layout, or where equipment or process
changes are being considered. Rapport and morale are up.
Grievances have been cut in half; absenteeism has been reduced
by 44 per-cent, and a job security committee (with representatives of both labor and senior management) meets regularlyThe second area of Harley-Davidson leadership is the Just-inTime manufacturing program. Since JIT is based on large
numbers of small parts runs, it is critical that machines set-up
times be held to an absolute minimum. This was one of the
first hurdles that were attacked. Set-up re-duction is being
approached aggressively and, to date has resulted in an average
of 75 percent reduction in the set-up times of the machines to
which the process has been ap-plied. These reductions have not
been achieved through major capital investments, but rather,
through team efforts. Usage of it has also helped reduce floor
space require-ments by 40 percent, required movement through
the com-plete production process by 62 percent.
In the Statistical Process Control (SPC) area, Harley- Davidson
is proving daily the premise that a continual improvement in
quality reduces overall operating costs, Essentially, SPC uses
statistics to identify variations in a process (be it in the office,
shop, or field) and thus pin-points items that need tighter
controls and improvement.
These three areas-Statistical Process Control, Just-in-Time
manufacturing, and Employee Involvement-are producing
dramatic quality and efficiency results, such as:
50 percent reduction in rejects rates;
40 percent reduction in warranty costs;
300 percents increases in defect free vehicles received by

dealers since 1982;
Consumers rating quality and reliability as excellent

increased by 25 percent from 1982 to 1984(Diagnostic
Research Inc. study);
Increasing inventory turns from 4.5 turns in 1982 to 16 turns

in 1984;
Improving productivity by 19.8 percent per employee, from

1982 to 1984,
Development of quality product line

Harley Davidson has increased the number of models it offers
to the consumer to 12 from the low point of 4 in 1976. More
importantly the new Harleys have been praised more for their
performance than for their trademark. Since the buyout in 1981
Harley Davidson has spent two and a half times the national
average for manufacturing companies on research and development, resulting in numerous product improvement. The single
most notable achievement has been the introduction of the
Evolution engine, the product of five years of intensive
engineering development. The evolution engine features all new
major components using the latest design techniques and
advanced materials. The result is an engine that produces 15
percent more using 10 percent less fuel. The engine is designed
for high reliability and durability with a minimum of scheduled
maintenance, making it simpler and less expensive to operate
and maintain.
Exhibit 3 Harley Davidson 1986 Model Year Price List
Model
code
FLHTC
Lib
FLHTC
FLHT
FXRD
FXRT
FXRT
FXST C
FXST
FXWG
FXRS
Lib
FXRS
FXRS
FXR
XLH Lib
XLH
XLH
Model name
Retail price
Electra Glide Lib.
$10474.00
Electra glide classic

Electra glide
Grand touring
Sport glide
Sport glide
Softail custom
Softail
Wide glide
Low Rider Lib.
Low rider
10224.00
9624.00
9474.00
Low rider special

Super Glide
Sportster 1100 Lib
Sportster 1100
Sportster
Sportster 883
8649.00
7549.00
5699.00
5399.00
4545.00
4195.00
8749
9499.00
8949.00
8899.00
8849.00
8499.00
Product Innovations
Harley-Davidson has also succeeded in, introducing a host of
product innovations:
1. 1984 introduction of a patent-pending anti-dive air
suspension system that keeps the front end of the
motorcycle stable during a hard stop to increase braking
efficiency and safety for the rider.
421
statistically. This, from a company that had said the Japanese

owed their success to unfair practices and the copy-ing of
Harleys own models. Intelligently, Harley-Davidson has
admitted that there might be something to the Japan-ese
approach after all. Says Thomas A. Gelb, Vice President/
Operations: Initially, our management attributed the price and
quality differences of Japanese motorcycles to culture, wage
rates, and illegal trade practices such as dumping. Only after
extensive research did it become apparent that a large part of the
competitive edge they enjoyed was achieved through a truly
different manufacturing approach, using im-proved and more
efficient manufacturing techniques.
2. Application of elastomer-isolated engines to reduce the

vibration previously associated with Harley Davidson
engines.
3. Introduction of a new-design, smooth shifting, five- speed
transmission.
4. The first application in the motorcycle industry of solid-state
electronic ignition (in 1979) to improve performance and
reliability, followed by the first computer-controlled ignition
system in 1983.
5. Changes in chassis design and steering geometries to improve
handling and increase rider comfort and safety, including
introduction of computer-designed frames in 1981.
These improvements have not gone unnoticed by longtime
Harley customers. Motorcycle gangs and police forces a like have
returned to buying Harleys. Michael OFarrell, president of the
Oakland Hells Angel chapter remarked in a recent article in The
New York Times: Its amazing, the difference. (The
motorcycles}dont beat you to death any more and your
kidneys are still intact
Development of new Harley image

Management has strived to make a break witl1 the past by
changing the companys image. Rather than continuing to
cultivate the impression that Harley-Davidson represents
quality because it is the motorcycle of choice for law-breaker and
lawman alike, the company now portrays doc-tors, lawyers,
craftsmen, and foremen as being the real Harley riders. In an
attempt to differentiate itself from others. in the crowded big
bike sector (which remains Harleys meal ticket), the company
cites market research data, which indicates that the Harley rider is
generally more educated and has a higher income and a more responsible job than Japanese motorcycle owners:
44 percent of Harley purchasers have attended col-lege,

versus 34 percent to 39 percent for the owners of Japanese
imports.
Only 11 percent of Harley owners do not have a high school

diploma versus 18 percent for Honda arid 30 percent for
Kawasaki owners.
Harley purch11sers have significantly higher incomes than

the owners of Japanese machines. A full 28Jper-cent of
Harley purchasers earn more.than$35,OQO, compared with
11 percent of Kawasaki owners. At incomes from $25,000 to
$35,000 the contrast is even sharper- 35 percent of Harley
purchasers earn in this range, with only 12 percent of 14
percent of the owners of Japanese motorcycles earning at
this level.
Reactions from Harley Dealers and

Riders
Harley-Davidsons efforts to improve its product have not at all
been in vain, those familiar with the company will tell you. In
Harleys New York City showroom a dealer points to a handful
of bikes and says that this is all that is left from the 1985 stock.
In general, the mood is upbeat concerning Harley-Davidson:
Here in New York City, at least, man-agements commitment
to quality is showing up both in sales figures and performance.
Vaughn Beals is the Lee Ia-cocca of the motorcycle industry.
422
In suburban White Plains, 42-year-old Richie Pierce, a long-time

cycling enthusiast, sells both Harley-Davidsons and Suzukis.
Pierce fully acknowledges all that Harley has done to improve
itself, yet he says that Harleys and Suzukis, or any other
Japanese bike for that matter, should never be compared. The
Harley is, and always has been, an image bike. Japanese bikes are
performance bikes. Even with the tariff Harleys sell at a
premium. This is because Harley- Davidsons are prestige bikes.
As for performance, Harleys just dont match up. The Japanese
can easily outspend them and it shows up in the type of
motorcycles they produce.
Even though there is a significant difference in per-formance,
Pierce feels there will always be a market for Harleys: I own
three bikes and one of them is a Harley. There is something
about Harley-Davidson that sets them apart from other bikes.
The Japanese have tried to copy the Harley look but it just
doesnt work. Thats why it is so much easier to resell a Harley
than a Japanese bike. If youre going to buy performance, why
buy used performance? Harleys have an inimitable style and
thats what keeps them going. Besides; the government would
never let the only American motorcycle company left go down
the tubes.
Harley-Davidsons do indeed seem to have that special something that other bikes lack. When asked to review one of
Harleys large touring bikes, -the FLTC, for the magazine Cycle
Guide, Marc Cook came back with these remarks: The Harley
makes me giggle. Out on the highway, with little else to do but
watch the white line, the FLTC makes me laugh out loud inside
my helmet. And Im not entirely sure why. Perhaps its the
seductive rhythm of the engine pulses, or the way that massive
vee-twin never seems to run out of torque. Or it could be the
uncanny directional sta-bility of the big Hog. Maybe its the
response of the young ladies at the local Haagen-Dazs But;
really, I dont think any of these is the answer. The truth is, the
Harley flat surprises me. It works so well on the open road-in
spite of its rough edges and idiosyncrasies-that I have a hard
time not watching the scenery.
Harleys Posttariff Performance

In spite of the preceding improvements, Harley-Davidson has
yet to return to profitability. The company is certainly in better
shape compared to 1981-1982 and yet manage-ment doesnt
forsee any substantial profits before 1987.
Demand for motorcycles has yet to bounce back from the
reversionary levels of 1982. A glimpse at new motorcycle
wholesale sales data reveals that sales in the big bike seg-ment
have declined sharply since 1981. As for Harley, its sales have
actually decreased since the petrify era. There have, however,
been gains made in terms of market share. In 1984, Harleys
share of the big bike seg-ment increased 3.2 percent, from 12.3
percent to 15.5 per-cent. Harley-Davidson has also succeeded in
reducing the gap between itself and Honda, the leader in the
heavy-weight segment. On the other hand, Harley-Davidsons
overall share of the American market has actually de-creased
since 1981, from 5 percent to 3.7 percent.
The impact of the tariff on the Japanese has been offset, in
part, by Honda and Kawasaki, who both have production
facilities in the United States. According to Beals, this has
International Sales/Global Strategy

Harley-Davidson, although it has made some key changes in the
areas of operations, design, and product image, has chosen to
remain an essentially domestic company. This point is underscored by the fact that, in 1984, Japanese motorcycle
manufacturers exported 660,484 units to the United States,
while a mere 1,046 Harleys made their way to Japan. European
export figures are similarly low. Is the passion American Harley
owners feet for their machines exportable? Alfred E. Eckes,
chairman of the ITC, hopes as much. Eckes wrote in his tariff
ruling that as exports become more competitive with the
depreciation of the dollar, it is reasonable to think that Harley. .
. will partic-ipate again in export sales.
The difference in size between Harley-Davidson and the four
Japanese companies means that it will continue to operate with
severe technological and cost disadvantages in relation to its
competitors. Tariff or no tariff, the Japan-ese were able to
produce 4,026,307 motorcycles in 1984, or one hundred times
as many units as Harley-Davidson pro-duced. The only other
surviving small motorcycle maker is BMW and it does so with
the benefit of the technological and production experience
gained through its large auto-mobile division.
When the tariff on large displacement motorcycles ex-pires in
1988, Harley Davidsons fate will be determined by the marketplace. What remains to be seen is if its reputation and history,
combined with some noticeable improvements
2. How does the size difference between Harley- Davidson and

its Japanese competitors affect Harley-Davidsons ability to
compete?
3. What are the basic strategic alternatives for Harley- Davidson?
What do you recommend? Why?
Appendix 4
AMF-Harley-Davidson
Contrary to your statement, AMF was most generous in their
investment in Harley-Davidson. In the period from 1969 to
1975 (prior to my association), they invested very heavily in
facility expansion and in new product develop-ment. Most, if
not all, the new product development effort was wasted.
From the period 1975 to 1981 they also met the vast majority
of our capital needs. That is not to say it wasnt a subject of
annual debate, but there was only one major cap-ital program
that they refused (and in hind-sight that wasnt a bad decision).
The Japanese copying of Harley styling did not com-mence
until after we filed the dumping suit in 1977 and re-ceived the
decision in 1978. It was in the late 1970s that the Japanese
started to copy our styling (Yamaha first), and it took them
until early in 1981 for them to copy our V-engine format (again
Yamaha). In fact, the time from the ITC de-cision to copying
correlates almost perfectly with the time to modify their
products.
Rest assured, we have not given our seal of approval to nasty tshirts. To the contrary, we undertook a trademark license
program three or four years ago. While this was par-tially
motivated by need to protect our trademarks by vigorously
defending them, it also served the key purpose of cleaning up
the offensive t-shirts, etc. which were em-blazoned with Harley
trademarks. We didnt believe then, and we dont believe now,
that insulting the rider of a com-petitive product is a good way
to convince him to switch to your product. Unfortunately, there
are still a large number
Exhibit - 8 U.S. motorcycle imports by country 1978-1984
Japan
Units
$ Value
European
Countries
Units
$ Value
All other
Units
$ Value
Total
Units
$ Value
1978
1979
1980
1981
1982
1983
1984
882038
$741232155
848959
$825909951
1072856
$1091699966
1032520
$1270949357
879861
$1079362753
522573
$666284854
417825
$482238238
50623a
$54297847
33824a
$40121247
40455a
$44199496
21112a
$39213065
16100a
$27977592a
13597a
$29266634
17397a
$38296805
2825a
$1737985
3969a
$4258537
6905a
$6036560
2081a
$3624403
3242a
$2827574
4043a
$1633326
6198a
$2851599
935486a
$797267987
886752a
$870289735
1120216a
$1141936022
1056713a
$1313786825
917203a
$1110167919
540213a
$697184814
441420a
$523386642
over the last five years, will enable it to survive on its own in the
face of stiff competition from companies much larger than itself.
1. Do you consider Harley-Davidson to be the victim of unfair
competitive practices or of its own lack of strategic vision?
423
enabled the Japanese to sidestep the tariff: The Japanese have

managed to duck the tariff on about two-thirds of the vehicles
that should have been subject to it, by stepping up their U.S.
final assembly operations and through the introduction 699cc
motorcycles which fall just below the 700cc tariff limit On the
other hand, statistics show dramatic de-creases both in the
number of Japanese-produced motorcy-cles entering the United
States since 1982 and in the number of Japanese-produced
motorcycles with an engine displace-ment larger than 790cc (see
Exhibits 5 and 6).
Exhibit 6 U.S. motorcycle imports by engine displacement 1978-1984
Under
191cc
Unit
$ Value
191 490cc
Unit
$ Value
491
790cc
Units
$ Value
Over 790cc
Units
Value
Unspecified
units
$ Value
Total
Units
$ Value
1978
1979
1980
1981
1982
1983
1984
410260
$163144748
390900a
$173583756
418829a
$189667483
313944a
$154771771
312891a
$152019038
175212a
$94634569
191856a
$97761171
203659
$173111295
166768
$167195874
316596
$307104651
249586
$259816032
182948
$198421920
75321
$82609565
67792
$78049993
226584
$301554886
224984
$326914082
240604
$372062671
369142
$639025333
298182
$532150565
215975
$362771480
141716
$256491632
76182
$153575906
93222
$198020881
127518
$266590704
120224
$258903692
119625
$226188672
65093
$153545173
34828
$88441983
18801
$5881152
10878
$4575142
16669
$6510513
3817
$1269997
3557
$1387633
8612
$3624017
5228
$2641863
935486a
$797267987
886752a
$870289735
1120216a
$1141936022
1056713a
$1313786825
917203a
$1110167919
540213a
$697184814
441420a
$523386642
of offensive t-shirts out there, but far less of them are now
displayed at our dealers and only rarely do they use our logo and
then illegally.
As part of our program to combat this, We have seized
merchandise under court order where trademark viola-tions are
involved.
Leyeraged Buyout (1981)

Your statement, putting Mr. Beals in charge, etc. is misleading. I was Deputy Group Executive (no. 2 responsible for
the Motorcycle Group) from 1975through 1977. From 1977 to
1981, I was Group Executive with full responsibility for the
Motorcycle Group and became CEO in June 1981. Basically,}
have, directed the organization since No-vember 1977.
The Tariff Ruling (1983)

You referenced faulty demand assessments by the Japan-ese
as a cause for price reductions. Unquestionably from time to
time they, like Harley misjudged the market. The facts surrounding our complaint in September, 1982 were that the
Japanese had increased production substantially (if I recall
correctly, it was. like 20 percent) at a time when the world
market for motor Cycles had been depressed for the better part
of two years.
Published Japanese production data only shows the segment
from above 25Occ. However because of the d0m-inance of the
U.S. in the world market for these large placement motorcycles,
it isnt a great leap of logic .0 correlate this with increases in the
heavyweight (700cc and up) category.
Harleys Posttariff Performance

Harley returned to profitability in 1983 and has remained so
since. The company was profitable in every year from the
depression through 1980. In fact, 1979-and 1980 were years of
record profit for the Motor Company. While these years were
424
records for Harley, they were not outstandingly high in an

absolute sense for a couple of reasons. During the late 1970s we
were making extraordinarily heavy investments in new product
development, which was reducing earnings; secondly, our basic
c9st structure prevented us from being high earners in competition against the Japanese who were steadily driving their prices
down.
In 1981 and 1982, we had record losses, but by down-sizing, we
were able to return the total corporation to prof-itability in 1983
and improve that a bit in 1984. Through October 1985, we were
a bit ahead of last year.
Our contract business, which is wholly performed at the York
plant, has grown significantly since 1982 in both revenue and
profit. This has been a vital contributor to the profitability of
the c0mpany. In the future, the benefits of an extensive cost
reduction program plus manufacturing productivity improvements will bring us pretty close to cost parity with the Japanese
on our basic motorcycle busi-ness. Even despite record losses in
1982, we generated a small positive cash flow as a result of our
downsizing of the company and our very tight control of raw
material and work-in-process. We have maintained a positive
op-erating cash flow (prior to principal repayment) in 1983,
1984, and 1985.
You indicated in the same paragraph Harley sales have actually
decreased since the pre-tariff era. In discussing sales it is
important to distinguish between retail and wholesale sales.
Since retail inventories vary from time to time, the focus should
be on retail sales. We measure these by daily reports from our
dealers whom we audit sev-eral times per year. Occasionally,
there are discrepancies between our estimated retail sales and
reported registra-tions. In most cases, we believe our data is
more reliable than that published by Polk.
Exhibit 7 Total motorcycle Registrations

1978 1979
1981
1982
1980
671
722
699
667
536
(000) Units
1981
1982
1983
1984
41.0
31.2
26.3
31.5
You commented on the decrease of Harleys market share in the

total market. That is correct, but the data is grossly distorted by
the tremendous growth of three and four wheeler (balloon tire)
off-road bikes plus scooters. We recently extracted this information from registration data with the results shown in Exhibit 7.
Let me reemphasize the data is for the first nine months of
each of those years. This study was just com-pleted and that
happened to be our frame of interest.
As you can see, there has been a significant drop in the total
motorcycle market. In this environment, Harleys share has been
increasing significantly. I believe this reflects the greater commitment of Harley riders to the sport, as well as the fact that the
destruction of used motorcycle values by Japanese pricing
practices in the last three or four years has removed many of
them from the market. We expect the de-mographics (which are
very favorable to motorcycling and Harley-Davidson), combined
with a firming up of Japanese prices when they liquidate their
excess inventories, to re-verse this downward trend in twowheelers. When that hap-pens, I would not expect Harleys
market share to hold the current levels. In short, we believe our
share improves in a shrinking market and worsens in an
expanding market.
International Sales-Global Strategy

I dont believe that Harley is operating with severe technological disadvantages versus our competitors today. This is
verified by the fact that we have been first to market with many
innovations (belt drive, computer ignition, true anti--dive
suspension, vibration isolation, etc.). Except for the last year we
have also been able to dominate dirt track racing. We temporarily
lost first position in 1984 and 1985 as a result of a massive
investment by Honda (probably 10 times Harleys investment).
By the end of the 1985 season, we showed the ability to beat
them on many occasions. With some updating to our race
engine, we expect to be fully competitive in 1986 or 1987 at the
latest.
While the above may represent the claims of a proud CEO, I
believe a quick reading of the last couple of years of motorcycle
press reviews of our product will provide third-party judgment
as to our technical ability.
We clearly are at a cost disadvantage versus our com-petitors.
Our entire manufacturing strategy, and more re-cently our cost
reduction strategy, has been aimed at eliminating this disadvantage. Our objective is to attain cost parity, which we think is
achievable.
It is interesting to observe, when you look at market share, that
Honda is clearly our only competitor of signifi-cance. Now all
of Hondas heavyweights are assembled in
Harley Volume (000) Units

44.7
48.0
35.6
H-D Market Share (000) Units
6.7% 6.6%
5.1%
1983
534
1984
458
1985
366
37.5
28.6
23.7
25.2
25.6
5.6%
5.3%
4.4%
5.5%
7.0%
the United States. We believe that Hondas labor rates in their

chassis plant are now higher than those in our chas-sis plant.
With the opening of a new motorcycle engine plant in Ohio
we expect to see increasing U.S. content in Hondas heavyweight
motorcycles. Thus, relatively soon we will both be using U.S.
employees and paying comparable rates to manufacture the bulk
of our products. Thus, the game with our critical competitor
degenerates to who can manage best. Today, we would acknowledge their lead, but we dont believe it is necessary or
appropriate to concede them the race in the long run.
The premise for your third paragraph is that the tariffs have
helped Harley in the marketplace. I would strongly argue that.
All the tariffs have done is to force the Japan-ese to finally
liquidate their excess inventories in the U.S. They are still way in
excess of current needs, despite the fact that they have been
substantially discounting the old product. In a recent analysis I
conducted, I picked one heavyweight model of each of our four
competitors and contrasted the original suggested retail price (in
1981 or 1982) to the current price of the same new motorcycle of
the same model year. (A quick check will confirm that you can
still buy 3- and 4-year-old new motorcycles at Japan-ese stores.)
This showed a range from 48 percent to 52 per-cent price
reduction-in itself, an interesting consistency in pricing practices.
, Harleys share increase in its heavyweight market and the entire
two-wheel market (as shown above) has been accomplished in
an environment of heavy discounting. Our large displacement
motorcycles (FX designation), which represent the largest of
our three generic product lines and also the most profitable, are
priced two to three times above comparable competitive
models. Despite this, our unit volume and share from this
segment of our business is slowly but steadily increasing.
(Effectively, were selling Mercedes versus Fords.)
Additionally, the Japanese have succeeded in evading virtually all
tariff payments. All Honda and Kawasaki heavy-weight
motorcycles are now assembled in the United States; previously
Kawasaki was virtually out of U.S. assembly. Nearly all 750cc
displacements (half of the heavyweight volume prior to the
tariffs) have been downsized to 695 to 699cc to evade, the tariff.
Thus, as a practical matter, only Suzuki and Yamaha, who do
not have U.S. assembly facili-ties, have been paying tariff and
then only on their motor-cycles of 1,000cc displacement and
above. Since the special tariff provides for a few thousand
(7,000 to 8,000, if I recall correctly) of tariff-free imports, my
guess is that this has cov-ered the vast majority of imported
Yamahas and Suzukis.
A final comment-an International Trade Commis-sion report
on the first year after the tariffs reported a 2 percent reduction in
the average retail price of heavy-weight motorcycles despite the
45 percent tariff increase. Realize, when reading that number,
that this included the period during which Kawasaki, in
425
In this context, our U.S. retail sales were as follows:
particular, and Honda to a lesser extent, were moving assembly

on - shore.
That finishes the comments on your specific draft. All in all, I
thought it was a very good effort. I hope the above will clarify a
few points.
To the above let me add the following-some thoughts I had
while reading your case study:
1. Lightweights: Harley was not asleep at the switch on
lightweights. If you go back in time, Harley has been in the
scooter business (in the 1960s), mopeds, lightweights, etc.
The company bought a 50% inter-est in Aermacchi, an
Italian lightweight motorcycle manufacturer, many years ago
and purchased the balance of that interest in the mid- to late
1960s. They made a good motorcycle, but basically could not
remain competitive with the Japanese. Market scale was the
difference. We had a plant in Italy making 25,000 motorcycles
with 500 people as contrasted-to a Honda plant making
985,000 motorcycles with 1,400 people.
Undoubtedly, we were too late in discovering that difference
or we would have taken action ear-lier. However, the capital
investment in tooling up for that large Honda scale
production plus the in-vestment in developing the
distribution system to sell that many products was orders of
magnitude beyond the ability of Harley-Davidson as a
private company, and I suspect would not-have been even
possible under AMF ownership. Frankly, I think thats an
area where the industrial banking relation-ships in Japan
make high risk taking possible. A book published a couple
of years ago on Honda re-ported on the tremendous
increases in investment and the resultant volume increases
during some of those periods. Frankly, I dont believe that is
possible in the United States in todays capital markets.
2. Product Quality: I think it would be helpful to elaborate on
Harleys quality/product situation in the early 1970s.
From 1969 to approximately 1973, the first four years of
AMF ownership, the companys unit volume increased by
three to four times and revenues quad-rupled. At the
beginning of that period you had a small manufacturing
company in which each functional head was a family member
who had run that function for literally decades. Systems were
appro-priate to a closely held family company that had a fairly
stable volume history. Manufacturing was characterized by
craftsmen knowing what to do without reference to
drawings.
The tremendous growth imposed upon the com-pany in
that state in the early 1970s caused utter chaos. They
converted from a craftsman to a pro-duction line
environment, and the systems utterly failed to keep the
company under control. The ultimate result was terrible
quality and worse labor relations. The whole thing came
unglued in 1974 with a 100-day plus strike. As a result,
management was changed and the rebuilding process which
is still going on was initiated.
A new group executive was brought in early 1974. (Im not
sure whether this was before or during the strike.) His first
effort was to quickly get manufacturing under control. He
426
then started a major effort in 1975 to expand the

Engineering De-partment staff and facilities and to totally
redesign the product line. As a practical matter, the last major
piece of that program was completed in June of 1985 when
we introduced our last new engine.
When those efforts were well underway in the late 1970s, we
then turned our attention to improving quality and then
productivity. Briefly then the 1975 to 1980 period could be
defined as getting the product line modernized and the
1980 to 1985 period getting manufacturing pointed in the
right direction.
As I noted above, the catch-up game in product
development is behind us. The manufacturing
improvements now have their own momentum and require
little input from senior management. The current focus in
the last year has been on strength-ening the dealer network.
We are already starting with a network that we believe is the
most effective and most profitable (albeit the smallest).
With our catch-up work well along in the engi-neering and
manufacturing area, we deemed it ap-propriate about a year
ago to really kick off a major effort to further strengthen our
dealer network. This is aimed at making them better
businessmen and improving their ability to close on sales.
As a result, we expanded the sales force by about 50% and
have started to invest more heavily in their training and later
in dealer training.
3. Contract Business: There has been a legacy of con-tract
business at the York plant for some years. This represented
only 2 to 3 percent of sales i1 1982, but now it is between 15
and 17 percent. This provides a source of profit, but more
importantly a source of jobs to absorb people freed up by
productivity improvements in the motorcycle business. We
are aggressively trying to expand that business at York and to
develop a similar ability to successfully per-form contract
business in our Wisconsin operations. It is our expectation
that this business will represent a quarter to a third of our
business in three or four years, thus, also giving us some
degree of internal diversification.
By adopting various Japanese manufacturing methods in our
motorcycle business, we are improv-ing our position relative
to the Japanese, but we are not there yet. However, when
these methods are ap-plied in domestic markets (which all of
our contract business represents), they give us an extremely
great competitive advantage which has been directly
responsible for our rapid growth in this area.
4. Parts and Accessories: The company has had a suc-cessful
parts and accessories business for many years. In late 1976 we
established this as a separate division, ultimately giving it its
own president, ad-ministrative staff, etc. As a result it grew
very rapidly in the late 1970s. Shortly after buying the
company in an effort to reduce our overhead, we
consolidated it back into the Marketing organization. As a
result of that and having to cherry pick some of our best
people out of that area we lost ground. About a year ago, we
again spun it off as a separate entity to give it greater senior
management focus.
As in most companies, the parts business is extremely

profitable. Because of the stability of Harleys designs as
opposed to the Japanese and also because of the very large
population of older Harleys in the field (most of the
Japanese motor-cycles dont last beyond three or four years
due to high repair costs in the context of a decreasing new
price), Harley represents a prime target for after-market
competitors. A couple of years ago we intro-duced a secondtier product line (Eagle Iron) to combat this. These products
are sourced in the orient (as are our aftermarket competitors
parts) rather than the United States, as are most of our
OEM parts. This new product line is growing rapidly, and
we expect it to recapture a significant part of the lost parts
business today.
We also have tried to become the motorcycle store for rider
apparel, helmets, etc. as a way of de-veloping floor traffic.
Large numbers of our dealers have set up apparel boutiques,
which are achieving this purpose as well as generating
considerable prof-itability for the individual dealerships.
5. Recreational versus Transportation Vehicles: In viewing
Harley-Davidsons position in the motor-cycle industry, it is
important to distinguish between a motorcycle as a
recreational vehicle and a trans-portation device. In the US.
Motorcycles are toys. While they are occasionally used for
transportation. It is rare indeed to find someone whose sole
means of transport is a motorcycle.
By contrast, in many less developed countries a motorcycle is
the first step above a bicycle. Classically, motorcycle sales drop
as the economy strengthens and people move into small
automo-biles. Only after they satisfy their need for four wheel transportation do they then come back to motorcycles
as toys.
As you know, Harleys displacement ranges until last June
started from 1,000cc and up; today. We start at 883cc and go
up. In the 1960s and 1970s. We of-fered a wide variety of
smaller displacement motor-cycles from 50cc to 3.50cc. As
noted above we could not remain cost competitive in that
area. Frankly we never expect to be able to reenter that
market.
427
The lesson content has been compiled from various sources in public domain including but not limited to the
internet for the convenience of the users. The university has no proprietary right on the same.
Jorethang, District Namchi, Sikkim- 737121, India

www.eiilmuniversity.ac.in

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INTERNATIONAL MARKETING

Subject: INTERNATIONAL MARKETING

Introduction to International Marketing

INTERNATIONAL MARKETING (MBA)

Today the corporate world cannot survive with restricting

international perspective is maintained throughout the text. The

themselves within the domestic boundaries. As the consumers

objective of the problems is to enhance the students under-

across countries become more universal in nature, the need to

standing of analytical techniques- more emphasis on policy and

look at the whole world as a market is growing. The aim of this

managerial implications of International Marketing. The

unit is to introduce the students to International Marketing,

module focuses on International skills required to be an

which explains how International Markets operate in an

effective manager. It will develop the students ability to identify

International Environment. An elementary approach is used in

and appreciate effective ways of getting the objective fulfilled. It

the module, which emphasizes the reasons for undertaking

also develops practical applications ability and knowledge and

International Market analysis and their interpretation. An

how these can be used in the decision-making process.

INTERNATIONAL MARKETING (MBA)

Introduction to International Marketing

Introduction to International Marketing-2

Economic Environment-The World Economy

Economic Environment- Foreign Economies

International Trade Theory

Social & Cultural Environment

Business Customs in Global Marketing

Business Ethics and Bribery

Trade Distortions and Marketing Barriers

Case 1 : Selling U.s. Ice Cream In Korea

Case 2 : Unilever And Nestle-an Analysis

Case 3 : Nestle-the Infant Formula Incident

Euro Disney (A)

Euro Disney (B)

Global Marketing Information Systems and Research

International Marketing Intelligence

Segmentation, Targeting and Positioning

Tutorial C : Swatch Watch U.s.a.: Creative Marketing Strategy

Entry and Expansion Strategies: Marketing and Sourcing

Planning Process & Entry Strategies

Cooperative Strategies and Global Strategic Partnerships

Competitive Analysis and Strategy

Strategic Positioning and Intent

Case 1 : Metro Corporation : Technology Licensing Negotiation

Case 2: Ascom Hasler Mailing Systems Inc. :

INTERNATIONAL MARKETING (MBA)

International Product Strategies

Moving Toward World Product

Branding and Packaging Decisions

Marketing Industrial Products

Nternational Marketing of Services

Basic Pricing Concepts

Dumping & Countertrade

Transfer Pricing and Other Pricing Approaches

Advertising School of Thoughts

Channel Development & Adaptation