International Business Lecture Notes

International Marketing

Research

- Research is very important when marketing in your own country, but it is even more
important in foreign markets. This is because in your own country you can rely on
some combination of research results and your own intuition (i.e. your sense of how
people think, how they use your products, and how they will respond to certain
messages). In foreign markets, you do not have the same kind of personal familiarity
with the markets, and therefore need to make up for it with more extensive research.
- The results of this research should then be considered in light of what the firm can
deliver.
- Doing detailed research is costly; a firm would typically only do detailed research on
the countries believed to be the most promising.

A. Demand Analysis
- The firm needs to analyze and segment its customers. It should clearly identify
who are the accessible, target customers. It should understand how the country's
culture might affect demand for its product. Consider income levels,
demographics, education levels, distribution of incomes, urbanization,
consumption patterns. Moreover, consider trends in each of these issues. (e.g.
How fast are income levels rising? Is the population aging? etc.)
- Essentially, you want to spot an emerging demand for your product. It is often
easier to break into emerging markets than into saturated markets.
- Determine existing demand (based on the data and on expert opinion).
- Determine future demand (based on trends).
- Determine latent demand (demand for products not currently available in the
country).
- Determine responsiveness to marketing.
- Determine spillover effects to neighbouring countries.
- Determine what adaptations to the product customers may prefer.
- Determine customer bargaining power. (The fewer or larger the customers, the
more they will be able to bargain down the selling price)

B. Competitor Analysis
- Identify existing competitors.
- Identify potential competitors.
- Identify close substitutes to your own product.
- Anticipate competitors' responses. Price war? Calls for government intervention?

C. How to Collect Data

- Ideally, data should be collected by people who know the firm and industry, and
who have a strong familiarity with the country of study.
- Often such people are not available, so there is a risk that the data is
misinterpreted or misdirected.

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 - There are many external sources of data: home government, other governments,
international organizations, service organizations, trade associations, databases,
other firms.

D. Issues Internal to the Firm

- The firm should consider its own competencies. How will the firm's
competencies fare in the foreign market?
- How transferable are the firm's competencies? If a key function must be done
overseas, can the firm's advantages be transferred to that location?
- What risk is there of giving away competencies if marketing can only be done
through a joint venture or licensing?
- COSTS.

- Can you think of any examples of poor research in foreign markets? Can you think of
any foreign products that failed in our markets (or in your country’s markets if you
are an international student)? Do you think the foreign company could have avoided
its mistakes through better research?

Product Design

- “Product design” refers to the characteristics of the product. We think of a product in

broad terms to include the service and warranty elements.
- One of the issues often considered is whether to use a standard product or to adapt the
product to the local market. This perhaps unduly simplifies the question of what
product the firm should sell in the foreign market, but for the purposes of a general
discussion we’ll focus on this issue.
- There are some important reasons why a company might want to sell a standardized
product. One is that standardized products typically cost less, because this strategy
exploits economies of scale more. A second reason is that the firm's competency may
be in that product as is and not in a different product.
- Many companies, however, do in fact adapt their products to local markets for a
variety of reasons. Often the adaptations are small, are relatively inexpensive and do
not cause the firm to deviate from its competencies. There are many reasons why
products might need to be modified for the foreign market. Differences in products
result from differences across countries.

Environmental Differences
- Geography
- Geography, for example, affects people's mode of transportation. For
example, trucks in mountainous countries need stronger axles.
- Climate
- e.g. does the product need to withstand cold winters?
- Population density
- In densely populated areas products typically need to be more compact. For
example, refrigerators need to be smaller because people’s kitchens are
smaller.

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 - Population density can affect products indirectly as well. For example,
smaller refrigerators make their owners less likely to buy groceries in bulk.
Thus population density indirectly affects how food product companies
package their products.

Individual Composition
- Income
- Sellers of luxury goods need to consider how many high income people there
are.
- (Note that GDP per capita is not necessarily a good measure of this. In one
country everyone might have about the same income, while another country
with the same average income could have a wide range of income levels.)
- Age
- Age affects demand for products associated with certain stages of the human
life cycle. For example, populations with many children may have different
needs in automobiles versus elderly populations.
- Of course, tastes also tend to differ across age groups.
- Education
- Illiterate people may require product designs that allow use without reading.
- Educated people tend to be better informed on certain issues.
- Religion
- Some religions place restrictions on people’s consumption patterns or may
influence them.
- Examples include restrictions on alcohol, beef, pork or certain types of attire.
- Religions may also discourage materialism.

Group Interaction
- Formal standards (codified by law or regulations)
- Examples include what side of the road you drive on, safety standards and
pollution standards.
- Informal standards
- The classic example is the QWERTY keyboard, which is slightly different in
some European countries.
- Symbols
- Symbols in one country may be meaningless in another, or may mean
something quite different.
- For example, yellow apparently symbolizes cowardice in Anglo-Saxon
cultures, but symbolizes royalty in China.
- Manners
- Behaviour that is acceptable in one country might be unacceptable in another
country. For example, in some cultures it might be rude for a pizza-delivery-
person to knock on the door.

Tastes
- Other differences across countries are hard to classify, and could just be attributed to
taste differences.

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- Examples include:
- North American preferences for sweeter foods.
- Different countries’ preferences for different beverages.

Cost of Adaptation
- There usually are plenty of reasons to adapt a product for a local market, but a firm
also needs to consider the costs of doing so.
- Some types of costs of adaptation are listed below:
- Research and development costs
- In some cases the costs of a new design may be small (such as
Cadbury’s cost of changing its proportions of ingredients), or may be
substantial.
- Market cultivation costs
- Some product variations may necessitate a substantially different
approach to promotion.
- Line costs
- A new product line may require additional machinery or workers to
produce the new product.
- Switching costs
- In some cases, firms use the same production line to produce different
types of products. Nevertheless, there are costs associated with
frequent retooling within a plant. This process is costly both in terms
of money and time.
- On the other hand, some firms have cut such costs substantially
through flexible manufacturing processes.
- Input costs
- If the modified product requires a new input, costs could go up simply
because the firm is buying more expensive inputs.
- (Of course, in some cases, product modifications could reduce the
production cost, if the modified product uses cheaper inputs.)

Other Considerations
- Trends
- Some of the differences (such as education and tastes) can change over time.
Others (such as geography and climate) do not.
- Niche markets
- Even though a majority of people may be of one type, a company may be able
to sell an unaltered product to a niche minority.
- For example, a European chocolate producer may choose to sell an unaltered
product in the U.S. (i.e. they don’t add more sugar) to target the segment of
U.S. consumers who prefer less sweet chocolates.

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Pricing

- For homogenous products, the market sets the price.

- For differentiated products, firms choose price to maximize their earnings. When
different markets have different elasticities of demand, a firm maximizes profit by
practising price discrimination. Price is determined where MR=MC1 in each market.
What is the difference between elastic demand and inelastic demand? What are some
reasons that demand might be more elastic in one country than in another?
- For example, suppose a firm sells in two markets (1) & (2). The marginal cost of the
product is 1 for either market. The demand function in market 1 is Q1=5-P1 (where
Q1 is the quantity sold in market 1 and P1 is the price in market 1). So revenue from
market 1 would be P1(5-P1). The marginal revenue is the derivative of this
expression, so it is -2P1+5. If we set this expression equal to the marginal cost of 1,
we get a price of P1=3. Now suppose in market 2 the demand function is Q2=6-2P2.
This demand function would yield an optimum price of p2=2.
- However, a MNE entering a new market must also consider long-run effects of its
pricing decisions today.
- Pricing can affect future demand (e.g. effect on potential competitors,
consumer/distributor awareness, network externalities, habits and addictions, signal
of quality).
- It is possible that a firm might employ predatory pricing to drive out competitors so
that afterward the firm can enjoy high profits. In most developed countries, this is
illegal.
- Firms also need to be wary of antidumping rules.
- Sometimes markets can’t be segmented so easily. For example, many West European
manufacturing companies sell their goods at a lower price in Eastern Europe than in
Western Europe. So some Western retail chains are able to buy the goods from
wholesalers in Eastern Europe at a lower cost than if they bought the goods directly
from the manufacturing company. This is often called the grey market. It is called
the grey market because the legality of this is not always clear. Ordinarily, when a
manufacturer sells its goods, it gives up its right to have a say on who may or may not
buy the product. However, it may have the right to limit warranties and servicing.
The legality of this practice will therefore normally depend on what agreements are in
place, and on whether the retailer is making true or false representations as to what
warranties and servicing the manufacturer will provide.
- Do you think price discrimination between countries is ethical?

Place (i.e. Distribution)

- Like a purely domestic firm, a MNE may sell its products directly to consumers or
else to a wholesaler or retailer. When goods cross international borders additional
issues arise, such as exchange rate risk, overseas shipping and customs clearance, and
navigating the foreign environment. The firm has to decide whether to handle its own
distribution or contract part of the distribution function to other firms.

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i.e. marginal revenue = marginal cost

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A. Import Agents
- Some agents, such as trading houses, will purchase for their own account. They
usually require exclusivity if they must invest resources into market development.
- Other agents simply handle exports for a fee and do not actually buy the product.

B. Advantages of Contracting
1. They have expertise about distribution in the particular market.
2. They can realize economies of scale.
3. Export agents can match currencies and realize lower foreign exchange costs
as well as risks.

C. Disadvantages of Contracting
1. You have to pay them (or sell your product to them at a discounted price).
2. The manufacturer might lose control over market development and customer
service.
3. The manufacturer might disclose some proprietary information.
4. Incentive problem - the foreign distributor might have other agendas than just
pushing your product.

D. Factors Influencing Choice

1. Characteristics of distribution
(a) retail concentration: whether retailing is dominated by a few large
retailers or is spread out among many small retailers. How does retail
concentration affect an exporter’s choice of how to distribute its
product?
(b) channel length: number of intermediaries between producer and
consumer (usually the channel length is smaller if there is high retail
concentration). How does channel length affect an exporter’s choice
of how to distribute its product?
(c) channel exclusivity: where it is difficult for new firms to secure shelf
space in retail stores. How does channel exclusivity affect an
exporter’s choice of how to distribute its product?
2. Economies of scale and volume - more sales make an investment more
feasible
3. Product characteristics - more technical products might best be distributed by
the manufacturer, to ensure adequate service and promotion.
4. Characteristics of the other party - Other party may have a conflict of
interests.

Promotion (Advertising)

- The advertising task is the same in most markets - to communicate information and
persuade.

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- There are many reasons why advertising might need to be modified for the foreign
market.
- Consumer Tastes and Preferences - Usually culture related.
- Source Effects
- Consumers’ opinion of a producer can matter. e.g. Japanese and
German-made goods are often perceived as of high quality.
- Consumers in some countries either like or dislike certain countries.
Or they simply prefer domestic manufacturers. How can a company
get around this problem?
- Regulation
- Another decision to make is whether to use a global brand name, or to develop a new
local brand name.
- Advantages to a global brand name include:
- promotes global recognition
- economies of scale in brand development
- media coverage may cross borders (e.g. in PEI we see Boston ads)
- enables standardized advertising
- Disadvantages of using a global brand name include:
- need to ensure quality remains high in foreign location
- grey market
- local prejudice against foreign brands
- names may not work well in some languages