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CHAPTER ONE
AN OVERVIEW OF INTERNATIONAL MARKETING
1.1. Introduction
The corporate context of international marketing involves understanding how the firm responds
to environmental opportunities and threats in markets of very different configurations and
underlying behavior. In such circumstances the firm responds by developing new products or by
adapting existing products to the needs of consumers in domestic and international markets.
International marketing means deciding which market to enter and develop the sequence and
timing of entry. The most important issue is the firm’s decision as to how to enter international
markets. The nature of international marketing, the benefits and barriers of international
marketing and the stages of international marketing involvement for the firm are described in this
unit. This unit includes a brief discussion of the reasons of internationalization and the macro
factors underlying international business. Dear learner, at the end of this unit, attempts will be
made to discuss the role of the key facilitating agencies and relate their relevance to the nation-
state and the individual firm.

After you study this particular chapter, you will be able to:
 Explain the concept of international marketing
 Distinguish between domestic marketing exporting, international marketing and global
marketing
 Recognize the benefits and barriers of international marketing
 Discuss the phases of international marketing involvement
 Describe the roles of various facilitating agencies to international marketing

1.2. Introduction to International Marketing

There are many different definitions of international marketing. When a company crosses its
national frontiers to market its product, it is entering international marketing. As defined by
Phillip Cateora and John M. Hess (2006) "International marketing is the performance of
business activities that direct the flow of a company's goods and services to consumers or
users in more than one nation."

Yes, the definition sounds very similar to that of marketing, for it is meant to be, the only
difference being that marketing task is carried out in more than one nation. This fact by itself
adds many complexities to the marketing task (as we shall see later on). As per the definition'
given by the American Marketing Association, " Marketing is the process of planning and
executing the conception, pricing, promotion and distribution of goods, services and ideas to

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create exchanges that satisfy individual and organizational objectives." This definition can be
extended to define international marketing as “The process of planning and executing the
conception, pricing, promotion and distribution of goods, services and ideas to create exchanges
that satisfy individual and organizational objectives, in more than one nation". It means in
international marketing, activities are undertaken in several countries and such activities should
be coordinated across nations. Thus international marketing is the coordinated marketing process
undertaken is several countries.

In the common parlance, the terms international marketing and foreign trade are used
interchangeably. But actually they are different and deal with different issues. The term foreign
trade is used when we want to talk about trade between nations. It has a macro perspective
whereas international marketing (IM) has a managerial perspective. IM deals with issues which
concern a firm and not the nation as a whole and therefore the questions raised in each area are of
a different nature as we shall see later.
What do you think are the basic differences between domestic marketing, exporting, international
marketing, multinational marketing and global/transnational marketing?

We have just now discussed in detail the meaning and scope of international marketing. In the
context of international marketing, you come across several terms such as domestic marketing,
export marketing, multinational marketing, global marketing, etc. Before we proceed further, it
is necessary for you to understand these concepts, their interlinkage and differentiation. Now let
us study these concepts in detail one by one.

Domestic marketing: is marketing that is targeted exclusively at the home-country market. A

purely domestic company operates only domestically. A company engaged in domestic marketing
may be doing this consciously as a strategic choice or it may be unconsciously focusing on the
domestic market in order to avoid the challenge of learning how to market outside the home
country.

Export marketing: Is the first stage when the firm steps out of the domestic market and explore
market opportunities outside the home country. The export marketer target markets outside the
home country and relies upon home country Production to supply product for these markets. In
the export marketing, the main aim of the firm is to expand the market size. Firm produces all its
goods in the home country and exports the surplus production to other countries.
International marketing: here the focus changes from just exporting to marketing in foreign
countries. Company establishes subsidiaries in the foreign countries to undertake marketing
operations. These subsidiaries may be working either through direction from the headquarters in
the domestic country or independently, but the key positions in such concerns are managed by
citizens of domestic country.

When the firm decides to pursue market opportunities outside the home country, it extends
marketing, manufacturing, and other activities outside the home country. The marketing strategy
of the firm is an extension; that is, products, promotion, pricing, and business practices developed
for the home-country market are ‘extended’ into markets around the world. The underlying
philosophy is that within given limited resources and experience, companies must focus on what
they do best. When a company decides to go international, it makes sense at the beginning to
extend as much of the business and marketing mix (product, price, promotion, and place or
channels of distribution) as possible so that learning can focus on how to do business in foreign
countries.

Multinational Marketing: As you know, in international marketing the firm extends the
domestic marketing mix to all countries. The firm realizes that the extension of domestic
marketing mix is not effective as the business environment in other countries differ from
domestic country. The differences in markets across the countries necessitate modification of the
marketing mix suitably to the environment in each country. Therefore, marketing mix should be
unique for respective country in which the firm conducts its business. This is multinational
marketing approach. Thus multinational marketing is the adaptation of the domestic marketing
mix suitable to the market differences in market environment in each country of operation. The
guiding philosophy of multinational marketing is that markets and ways of doing business around
the world are so unique that the only way to succeed internationally is to adapt to the different
aspects of each national market. Subsidiaries are formed in each country or group of countries to
handle all marketing operations in that country/region. Each foreign subsidiary is managed as if
it were an independent unit. The subsidiaries are part of an area structure in which each country
is part of a regional organization that reports to world headquarters in the domestic country. It
makes no distinctions in its personnel policy between national and non-national. The role of
headquarters in such concerns is that of coordination among the subsidiaries.

Global marketing, strictly speaking, global marketing is where a company has recognized that
customers belonging to similar segments exist in a number of different national markets. As a
result marketing activities are directed at standardizing as much as possible of the product or
service and reaching the customers with similar communication, pricing and distribution
strategies.

Activity 1
As companies become involved in marketing in two or more countries, what are the basic similarities and
differences between the domestic and global marketing?
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1.3. Benefits and Barriers of International Marketing

1.3.1. Benefits of Entering into International Markets
Although profit is the underlying motive, most of the firms are going into international markets
because of any of the following most common reasons as identified by Vern Terpstra(2001):
 Product Life Cycle: product may be at the end of its life cycle in one market and not
even introduced in another. The unwillingness of the firm to write off its productive assets
may force it into international markets.
 Competition: In an effort to avoid competition which may be intense in the domestic
market and less intense in the overseas market, the firm may choose to go international.
 Excess Capacity: In an effort to minimize its fixed cost per unit and utilize its capacity
fully, the firm may undertake foreign orders.
 Geographic Diversification: This has to do with the strategy that a firm may adopt.
Instead of extending its product line the firm may just choose to expand its market by
going international.
 Increasing the Market size: In an effort to expand its operation a firm may choose to go
international.
 Saturated Home market: If the home market for an organization’s products or service is
saturated or completion is so intense that it can no longer gain any significant market
share improvement, it might consider extending its market activity to oversee market.
 Comparative advantage in product, skill or technology: The organization may
discover, when analyzing overseas market opportunities, that it has a comparative
advantage against local competition in the foreign market. This advantage might be in
product, skill or technology. Comparative advantage is often the case when organizations
are based in advanced countries and consider marketing internationally to lesser
developed countries.
 Financial reasons: There are a range of financial reasons why an organization may
decide to take the international route to its business and these might include investment
incentives in overseas markets and the availability of venture capital as well as the option
to maximize profits or minimize losses through international rather than simple domestic
operations.

1.3.2. Barriers of International Marketing

The following are some of the major international marketing barriers:
a) Protection Logic and Illogic
International business must face the reality that this is a world of tariffs, quotas, and nontariff
barriers designed to protect a country’s markets from intrusion by foreign companies. Although
the General Agreement on Trade and Tariffs has been effective in reducing tariffs, countries still
resort to protectionist measures. Nations utilize legal barriers, exchange barriers and
psychological barriers to restrain entry of unwanted goods. Businesses work together to establish
private market barriers while the market structure itself may provide formidable barriers to
imported goods.
Countless reasons are espoused by protectionists to maintain government restriction on trade, but
essentially all arguments can be classified as follows:
 Protection of an infant industry
 Protection of the home market;
 Need to keep money at home
 Encouragement of capital accumulation
 Maintenance of the standard of living and real wages
 Conservation of natural resources
 Industrialization of a low-wage nation
 Maintenance of employment and reduction of unemployment
 National defense
 Increase of business size; and
 Retaliation and bargaining

There might be a case for temporary protection of markets with excess productive capacity or
excess labor when such protection could facilitate an orderly transition. Unfortunately, such
protection becomes long term and contributes to industrial inefficiency while detracting from a
nation’s realistic adjustment to its world situation. Even the admission of these protectionist
arguments is severe and applies only in limited circumstances.

Proponents of protectionism are also likely to call on the maintenance –of-employment argument
because it has substantial political appeal. When arguing for protection, the basic economic
advantages of international trade are ignored. The fact that the consumer ultimately bears the
cost of tariffs and other protective measures is conveniently overlooked.

b) Trade Barriers
To encourage development of democratic industry and protect existing industry, governments
may establish such barriers to trade as tariffs, quotas, boycotts, monetary barriers, and market
barriers. Barriers are imposed against imports and foreign businesses as well. Even though the
inspiration for such barriers maybe economic or political, typically they are encouraged by local
industry. Whether or not the barriers are economically logical, the fact is that they do exist.
Trade barriers can broadly be classified as tariff and non-tariff. A discussion of the two major
barriers to trade is in order in the following sub section.
Tariffs
The tariff is a tax imposed by a government on products that moves across borders. Tariffs are
used as a revenue generating tax to discourage the importation of goods or both.
In general tariffs increase inflationary pressure, special interest privilege, government control and
political consideration in economic matters. On the other hand, tariffs weaken balance of
payment position, supply and demand patterns, and international trade.
Non-tariff Barriers
Imports can also be restricted in a variety of ways other than tariffs. These nontariff barriers
include quality standards on imported products, sanitary and health standards, quotas, voluntary
export restraints, monetary barriers, embargoes, and boycotts. Let us discuss each:

a) Standards: Nontariff barriers of this category includes standards to protect health, safety,
and product quality. The standards are sometimes used in an unduly stringent or
discriminating way to restrict trade, but the sheer volume of regulations in this category is
a problem in itself.
b) Quotas: A quota is a specific unit or Birr limit applied to a particular type of goods. The
trade distortions caused by a quota is even more severe than a tariff because once the
quota has been filled, the market price mechanisms are not allowed to operate. Its goal is
the conservation of scarce foreign exchange and/or protection of local production in the
product lines affected.
c) Voluntary Export Restraints: Similar to quotas are the voluntary export restraints
(VER) or orderly market agreement (OMA). Common in textiles, clothing, steel,
agriculture, and automobiles, the VER is an agreement between the importing country and
the exporting country for relation on volume of exports and VER called voluntary because
the exporting country sets the limits, however, it is generally imposed under the threat of
stiffer quotas and tariffs being set by the importing country if a VER is not established.
d) Boycotts: A government boycott is an absolute restriction against the purchase and
importation of certain goods from other countries. A public boycott may be formal or
informal and may be government sponsored or sponsored by an industry. It is not unusual
for the citizens of a country to boycott goods of other countries at the urging of their
government or civic groups.
e) Monetary barriers: The government can effectively regulate its international trade
position by various forms of exchange-control restrictions. A government may enact such
restrictions to preserve its balance-of-payments position or specifically for the advantage
or encouragement of particular industries. There are three barriers to consider: blocked
currency, differential exchange rate, and government approval requirements for securing
foreign exchange.
 Blocked currency is used as a political weapon or as a response to difficult balance of
payments situation. In effect, blockage cuts off all importing or all importing above a
certain level. Blockage is accomplished by refusing to allow importers to exchange
national currency for the seller’s currency.
 The differential exchange rate is particularly ingenious method of controlling
imports. It encourages the importation of goods the government does not want. The
essential mechanism requires the importer to pay varying amounts of domestic
 currency for foreign exchange with which to purchase products in different categories.
For example, the exchange rate for a desirable category of goods might be one unit of
domestic money for one unit of a specific foreign currency. For a less-desirable
product, the rate might be two domestic currency units for one foreign unit. For an
undesirable product, the rate might be three domestic units for one foreign unit. An
importer of an undesirable product has to pay three times as much for the foreign
exchange as the importer of a desired product.
 Government approval to secure foreign exchange is often used by countries
experiencing severe shortages of foreign exchange. In such situations, importers who
want to buy a foreign good must apply for an exchange permit, that is, permission to
exchange an amount of local currency for foreign currency. The exchange permit may
also stipulate the rate of exchange, which can be an unfavorable rate depending on the
desires of the government. In addition, the exchange permit may stipulate that the
amount to be exchanged must be deposited in a local bank for a fixed period prior to
the transfer of goods.

Activity 2
Write your answer for the questions in the space provided. List down the major kinds of trade
barriers by classifying them into categories.
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1.4. Phases of International Marketing Involvement

Once a company has decided to be international marketer, it has to decide the degree of
marketing involvement and commitment it is prepared to make. These decisions should reflect
considerable study and analysis of market potential and company capabilities. Many companies
enter uncertainly in international marketing, however they grow as they gain experience and
gradually they change strategy and tactics as they become more committed. Others enter in
international marketing after they conduct much research and with fully developed long-range
plans, to make investments and to acquire a marketing position.

Although the stages of international marketing involvement are presented here in a linear order,
you should not infer that a firm progresses from one stage to another. Quite to the contrary a firm
may begin its international involvement at any one stage or be in more than one stage
simultaneously. For, example, because of a short product life cycle and a thin but widespread
market for many technological products, many high-tech companies large and small see the entire
world, including their home market, as a single market and strive to reach all possible customers
as rapidly as possible.

No direct foreign marketing: In this stage a company does not actively cultivate customers
outside national boundaries; however, this company’s products may reach foreign markets. Sales
may be made to trading companies as well as other foreign customers who come directly to the
firm or products reach foreign markets via domestic wholesalers or distributors who sell abroad
on their own without explicit encouragement or even knowledge of the producer.

Infrequent foreign marketing: Temporary surpluses caused by variations in production levels

or demand may result in infrequent marketing overseas. The surpluses are characterized by their
temporary nature. Therefore, sales to foreign markets are made, as goods are available, with little
or no intention of mainlining continuous market representation. As domestic demand increases
and absorbs surpluses, foreign sales activity is withdrawn. In this stage, there is little or no
change in company organization or product lines. Nowadays, it seems that few companies fit
this model as customers seek long-term commitments and there are companies that offer this
option.

Regular foreign marketing: At this level, the firm has permanent productive capacity and
devoted to the production of goods to be marketed on a continuing basis in foreign markets. A
firm may employ foreign or domestic overseas middlemen or it may have its own sales force or
sales subsidiaries in important foreign markets. The primary focus of operations and production
is to serve domestic market needs. However, as overseas demand grows, production is allocated
for foreign markets. Profit expectations move from being seen as a bonus to regular domestic
profits to the position where the company becomes dependent on foreign sales and profits to meet
its goals.

International marketing: Companies at this stage are fully committed and involved in
international marketing activities. Such companies seek markets all over the world and sell
products that are a result of planned production for markets in various countries. This generally
entails not only the marketing but also the production of goods outside the home market. At this
point, a company becomes an international or multinational firm.

Global marketing: At the global marketing level, the most profound change is the orientation of
the company towards markets and its planning. At this point, a company treats the world,
including their home market, as one market. In contrast to the multinational or international
company that views the world as series of country markets (including their home market) with
unique sets of market characteristics for which marketing strategies must be developed, a global
company develops a strategy to reflect the existing commonalities of market needs among many
countries to maximize returns through global standardization of its business activities-whenever it
is cost-effective and culturally possible. The entire operations, its organization structure, sources
of finance, production, marketing, and so forth, take on a global perspective.
International operations of businesses in global marketing reflect the heightened competitiveness
brought about by the globalization of markets, interdependence of the world’s economies, and the
growing number of competing firms from developed and developing countries vying for the
world’s markets. Global companies and global marketing are terms frequently used to describe
the scope of operation and marketing management orientation of the companies.

Activity 3
List down the different stages of international marketing involvement?
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1.5. Facilitating Agencies of World Trade

As the global marketplace evolves, trading countries have focused attention on ways of
eliminating tariffs, quotas, and other barriers to trade. The following are the ongoing activities to
support the growth of international trade.

World Trade Organization (WTO)

The World Trade Organization was referred to as GATT (General Agreement on Tariffs and
Trade) until 1995. GATT was founded in 1947 in line with many of the other international
organizations following the Second World War. The political thinking of the age was far
reaching and enlightening as the alternative was descent into national rivalries and enormous
economic depression. The purpose of GATT was to reduce tariffs and other obstacles to trade via
a series of regular meetings between member countries (actually called ‘rounds’). It was reported
that with eight rounds taking place between 1947 and 1986 tariffs to trade between industrial
nations fell from an average of 40 percent to 50 percent. Furthermore 90 percent of disputes
between trading nations were settled. During this same period, the volume of trade increased
twenty-fold.
The eighth round began in 1986 in Uruguay and was concluded in 1995. Despite considerable
animosity and hard bargaining, the outcome was dramatic. Tariffs were reduced further and new
ground rules were established for trading among industrialized nations.
The WTO is an authority with power. It can compel nations to conform whereas the previous
arrangement was that GATT acted as a pure facilitator. WTO is now judging the arguments set
before it. The role and contribution of GATT/WTO has been extremely important to world trade
and although the organization has from time been derided, it will very likely gain in power and
influence to the benefit of nations, companies and customers. It expands in membership currently
120 or so with further associate members.
The World Bank
The role of the World Bank, is multifunctional but it is best known as the provider of soft loans to
governments to assist economic development frequently through the creation of infrastructure
system such as airports, hydroelectric schemes and railroads. The billions of dollars and other
currencies provide the springboard for thousands of businesses, both international and local, to
develop. International competitive bidding is a requirement and such is the prudence and
reputation of the World Bank. This brings confidence to the marketplace and the international
business community.
Many of the activities and policy aims of the Bank have implications for the broader economic
environment within which international markets find themselves operating. If more of the
world’s countries can be brought out of poverty, then the potential for an increase in trade and
prosperity is there. Likewise, by supporting exporters and by acting against corruption, the Bank
helps to build an environment of trust and confidence for exporters.

International Monetary Fund (IMF)

This organization was founded in 1945 at a conference held in Bretton Woods, in USA. From an
initial membership of 39, it has grown to around 200 member countries. In essence, the IMF
exists because the member countries see the value of maintaining a stale system of buying and
selling their currencies, so that payments in foreign money can take place between countries
smoothly and without delay. The IMF is the hard man of world governance and is frequently
referred to as the ‘bank nations love to hate’. Its purpose includes:
 To foster orderly foreign exchange arrangements
 To foster convertible currencies, and
 To stabilize and reduce balance of payment disequilibrium

Its most frequent contribution is to offer financial support and advice to nations whose economics
and currencies are in turmoil and crisis. However, like any prudent banker, the IMF can impose
draconian conditions on borrowers leading to temporary unpleasant experience to the politicians
and the citizens of a country.

The United Nations (UN)

The UN is unquestionably the best known worldwide organization. Its high profit is that of
international peacekeeping between warring groups or nations but it does have a role and
responsibilities in fostering and developing projects in less developed countries. It undertakes and
underpins technology transfer in the fields of irrigation, education, health agriculture and
commodity extraction from developed countries to underdeveloped ones. The specialized agency
that is responsible for the transfer of knowledge and expertise is UNCTAD (The United Nation
Conference on Trade and Development).
The European Union (EU)
The EU is perhaps the best known of all the trading blocs(unions). Its headquarters is in Brussels,
Belgium and it has a number of important institutions including the European Commission, the
Council of Ministers, the European Court of Justice, the European Parliament, the European
Council and the Economic and Social Committee.

The aim of the EU is to achieve one set of trade rules i.e. a single tariff and a single set of
administrative procedures, took a huge step forward in 19992 with the creation of the Single
Market. This allowed for a number of important measures including the free movement of
people, capital, and open access to public sector contracts for all EU firms.

CHAPTER TWO
THE INTERNATIONAL MARKETING ENVIRONMENT
2.1. Introduction
Developing a marketing strategy to compete effectively in the world market is one of the most
critical challenges that the firm facing today, Firms that market their products only in their home
countries are influenced by the environmental forces to operate in the domestic market only.
However in today’s global economy, most corporations must anticipate and respond to
opportunities and threats presented by forces in both the domestic and foreign environment.
Whether the firm concentrates on a few markets close to home or target many markets throughout
the world, a long run dynamic strategy should, at the same time, enable the firm to anticipate,
respond and adapt to the complexity and rapid pace of environmental changes takes place in the
global market . Since no business firm can by itself control the forces in the international
marketing environment, it must take the environmental factors as given and adapt its business
strategy to suit the environmental factors. In this unit, we shall broadly discuss various
components of international marketing environment particularly socio-cultural, Political, legal
and economic factors and analyze the implications of this factors in formulating global marketing
strategy.

After you study this chapter, you are expected to:

 Discuss culture and its importance to as international marketer
 Describe the elements of culture & their influence to international marketing,
 Comment on how best to manage cultural interactions
 Describe the main aspects of international political & legal environment
 Explain how the political & legal system affects the international marketer
  Identity the different economic variables that must be considered in estimating market
Potential
 Illustrate the impact of physical, demographic and behavioral variables on international
marketing activities
 Explain the marketing implications of these environmental forces.

2.2. The Socio- Cultural Environment

The socio-cultural environment consists of those physical, demographic, and behavioral
variables which influence business activities in a given country.

The socio – cultural environment influences the behavior of customers who comprise markets,
the managers who plan and implement international marketing programs, and the marketing
intermediaries who participate in international marketing process. Culture should not be simply
considered as an obstacle to doing business across cultures. Culture provides tangible benefits
and can be used as a competitive tool or as a basis of a competitive strategy. In short, cultural
differences can, and should be managed. It is when they are mismanaged that problems arise and
profits are adversely affected.

The buying decision process of buyers whether consumer or industries is influenced by the socio-
cultural characteristics of buyers and these socio-cultural characteristics are influenced by
external stimuli. The set of factors included in socio-cultural characteristics are such things as
material culture, language, education, values and attitudes, social organization, political-legal
structure, and philosophy. This set of factors found in socio-cultural characteristics is very
important.

On a more general level, consumer in each nation is different from consumer in every other
country. There are major cultural differences among these consumers of different nations which
can affect purchase behavior. International marketing managers often lack cultural awareness
which can lead to errors or loss of potential gains in marketing process. The process of
acculturation i.e. adjusting and adapting to a specific culture other than one’s own – is one of the
keys to success in international marketing.

The Nature of Culture

Cultural factors exert the major influence on consumer behavior as it is the most fundamental
determinant of a person’s wants and behavior. The success of international marketing operations
depends upon the understanding of culture.

What is Culture?
Culture can be defined as the specific learned norms of the society based on attitudes, values, and
beliefs. Or it may be described as the way of living built up by a group of human beings
transmitted from one generation to another. In a real sense, culture is human-made. It is learned
and, as such, is communicated from one generation to another. To understand a culture one must
understand its origin, history, structure, and functioning.

Culture undergoes change over time, with change typically being slow to occur. Sometimes
“rapid changes” occur due to outside pressures like government, but not due to natural reasons.
For example, Iran after the fall of Shah changed into theocratic culture from that of earlier liberal
culture.

International marketing managers need to know how the culture changes, and how their decisions
interact with and sometimes serve as a change agent in the culture. Leaning about cultures is
made even more difficult because societies or groups may share certain common cultural traits
but there are many possible subcultures with characteristics that explain variation in behavior
within cultures. Major subcultures may be based on nationality, religion, race, and location.

With regards to international marketing management, it seems best to study cultures not only
from a broad perspective to learn about relevant patterns and themes, but also from a narrow
perspective as behavior relates specifically to certain products or marketing efforts. This
approach of studying culture can lead to information that will guide international marketing
efforts. In general culture has the following characteristics.

 Culture is learnt. It is not present at birth but is acquired over a period of time.
 Culture is passed from one generation to another. Inculcation involves not only the
passing on of techniques and knowledge but also discipline the child’s instincts and
impulses in order to adjust him or her to social life.
 Culture prescribes the kinds of behavior considered as acceptable in the society. This
simplifies a consumer’s decision making process by limiting product choices to those
which are socially acceptable.
 Culture is socially shared, arising out of necessity and is based on social interaction and
creation. It cannot exist by itself, thus acting to reinforce culture’s prescriptive nature.
 It facilitates communication. Since culture imposes common habits of thought and feeling
among people, it makes it easier for people to communicate with one another. At the same
time, culture may also impede communication across groups because of a lack of shared
common cultural values. This is the reason why a standardized advertisement may not be
equally effective in all countries.

Culture and Communication

Every culture reflects in its language what is of value to the people.
Language whether written, spoken, or silent become the embodiment of culture and is a means
whereby people communicate to other people either within their own culture or in other cultures.
The language capability serves four distinct roles in international marketing. First, language is
important in information gathering and evaluation efforts. Second, language provides access to
local society. Third, language capability is increasingly important in company communications
whether within the corporate family or with channel members. Finally, language provides more
than the ability to communicate. It extends beyond mechanism to the interpretation of contexts.
Behavior itself is a form of communication, and is known as silent language.

Broadly, communication includes any behavior that another person perceives and interprets. That
means, it is one person can understand of what another person mean. The major dimensions of
the silent language as they operate within international marketing as being: (1) Time; (2) space;
(3) material things; (4) Friendships, and; (5) agreements. These five dimensions can form the
basis of real understanding of foreign cultures.

Finally, the international marketer needs to recognize that doing business in foreign markets
involves cross-cultural communication in all aspects of the relationship. When the person from
the other culture does not receive the sender’s message in the manner intended, cross-cultural
miscommunication occurs. The greater the differences between the cultures of the seller and the
buyer ,the greater the probability for cross-cultural miscommunication to occur or to take place.
Miscommunication involves misunderstanding due to misperception, misinterpretation, and
misevaluation. Thus, in becoming involved in cross cultural situation, the international marketer
should need the advice: ‘assume difference until similarity is proven.

Self – Reference Criterion

James Lee coined the term ‘self-reference criterion’ as a useful concept to avoid cultural bias. He
suggested that problems should be first defined in terms of the cultural traits, habits, or norms of
the home society. Then they should be redefined without value judgments, in terms of the
foreign cultural traits, habits, and norms. He indicated that the difference between these two
specifications is an indication of the likely cultural bias, or self-reference criterion effect. Self-
reference criterion effect can then be isolated and carefully examined to see how it influences the
problem. Following this examination the problem is redefined with the bias removed.

2.3. The Political Environment

The political environment of international marketing includes any national or international
political factor that can affect its operations. A factor is political when it derives from the
government sector.

For the international marketers, political environment is complex owing to the interaction among
domestic, foreign and international politics. If a product is imported or produced overseas,
political groups and labor organization accuse the marketers of taking jobs away from the people
in the home country. On the other hand, foreign governments are not always receptive to overseas
capital and investment because of suspicious about the marker’s motives and commitment. When
both the host country and the home country have different political and national interests, their
conflict in politics can complicate the problem further. Marketing decisions are, therefore,
affected by political considerations. Because of the dynamic nature of politics in general,
companies should prepare contingency plans to cope with changes that occur in the political
environment. Further to minimize political risk, companies should attempt to accommodate the
host country’s national interest by stimulating the economy, employing citizens and sharing
business ownership with local firms. Simultaneously, to protect their economic interests,
companies should maintain political neutrality and quietly lobby for their goals. A company
should introduce a monitoring system that allows it to systematically and routinely evaluate the
political situations.

The political environment comprises three dimensions: (1) the host-country environment, (2) the
international environment, and (3) the home-country environment.

Surveys have shown that dealing with problems in the political arena is the number one challenge
facing international managers, and occupies more of their time than any other management
function. Yet international managers’ concerns are different from those of the political scientist.
Managers are concerned primarily about Political Risk that is the possibility of any government
action affecting adversely (or favorably) their operations.

Host-Country Political Environment

By definition, the international firms are a guest or, a foreigner in all of its markets abroad.
Therefore, international managers are especially concerned with nationalism and dealings with
governments in host countries.

I. Host-Country National Interests

One way to get a feeling for the situation in a foreign market is to see how compatible the firm’s
activates are with the interests of the host country. Nationalism and patriotism refer to citizens’
feelings about their country and its interests. Such feelings exist in every country.

All countries wish to maintain and enhance their national sovereignty. Foreign firms,
individually or collectively, may be perceived as a threat to that sovereignty. The larger and
more numerous the foreign firms, the more likely they are to be perceived as a threat – or at least
an irritant. In times of turmoil, foreign firms or foreign embassies may be targets.

Countries with to protect their national security, although the foreign firm is not a military threat
as such, it may be considered as potentially prejudicial to national security. Governments
generally prohibit foreign firms from involvement in “sensitive” industries, such as defense,
communications, and perhaps energy and natural resource. If the firm is from a country deemed
unfriendly to the host country, it may have difficulty in operating or even be denied admission.
All countries want to enhance economic welfare generally, this means increasing employment
and income in the country. Foreign firms contribute to this by the employment they generate.
They can contribute further by using local suppliers and having local content in their products.
They can contribute further by exporting from the country and generating foreign exchange.
They can contribute in a different way by supplying products, services, and/or training that
enhances productivity.
 II. Host-Country Controls

Host countries don’t depend entirely on the goodwill of the foreign firms to help them to achieve
their national goals. To achieve their goals, the host countries use a variety of tools/controls over
the firm such as entry restrictions, price controls, quotas and tariffs, exchange control, and even
expropriation. These national interests and controls constitute the political environment of an
international marketing firm.

III. Political –Risk Assessment

The international marketing firm needs to evaluate the host-country environment and assess its
own political risk. Then it needs a plan for managing host country relations, before and after
entering in to the country. While evaluating the political environment of the foreign market, the
firm can include a preliminary analysis of its political vulnerability in a particular host country.
Elements in such an analysis include External and Company factors.
A) External Factors:
 The firm’s home country: other things being equal, a firm has a better reception in a
country that has good relations with its own country.
 Product or industry: sensitivity of the industry is an important consideration. Generally,
raw materials, public utilizes, a communication pharmaceuticals and defense-related
products are most sensitive.
 Size and location of operations: the larger the foreign firm, the more threatening it is
perceived to be. This is especially true if the firms large facilities and is located in
prominent urban area, as the capital. This serves as a constant reminder of the foreign
presence.
 Visibility of the firm: The greater the visibility of the foreign firms, the greater is its
vulnerability. Visibility is a function of several things. Two are the size and location of
the firm’s operations in the country. Another is the nature of its products. Consumer
products are more visible than industrial products. Finished goods are more visible than
components or inputs that are hidden in the final product. Heavy advertisers are more
visible than non-advertisers. International brands are more provocative than localized
brands.
 Host-country political situation: The political situation in the host country can affect the
firm. The country’s political risk should be evaluated before the firm starts marketing
operations in that host country.
B) Company Factors
 Company behavior: Each firm develops some record of corporate citizenship based on
its practices. Some firms are more sensitive and responsive to the situation in the host
country than others. Goodwill in this area is a valuable asset.
 Contributions of the Firm to the host country: Many of these contributions are
objective and quantifiable. Contributions could be regarding how much tax has been paid,
 how much employment created, how many exports generated or what new skills or
resources the firm brought in.
 Localization of operations: Generally, the more localized the firm’s operations, the
more acceptable it is to the host country. There are several dimensions to localization,
including having local equity, hiring local managers and technical staff, using local
content in the products, including local suppliers of goods and services, and developing
local products and brand names.
 Subsidiary dependence: This factor is somewhat in contradiction to the preceding point.
The more the firm’s local operation depends on the parent company, the less vulnerable it
is. If it cannot function as a separate, self-contained unit but is dependent on the parent
for critical resources and/or for markets, it will be seen as a less rewarding takeover target.
This is so because it cannot operate on its own without support of its parent for critical
resources and so would be seen as a less rewarding takeover target. Political environment
and analysis are continuing tasks for the firm. The information that these analyses
provide must be used to manage the firm’s political relations.

International Political Environment

The international political environment involves political relations between two or more
countries. The international firms almost inevitably become somewhat involved with the host
country’s international relations, no matter how neutral it may try to be. It does so, first because
it is a foreigner from specific home country, and second, because its operations in a country are
frequently related to operations in other countries, either on the supply or demand side or both.
One aspect of a country’s international relations is its relationship with the firm’s home country.
For example, US firms abroad are affected by the host nation’s attitude toward the United States.

A second critical element that affects the political environment is the host-country’s relations
with other countries. For example, if a country is a member of a regional group such as EU, that
fact influences the firm’s evaluation of the country. If a nation has particular friends or enemies
among other nations, the firm must modify its international logistics to comply with how that
market is supplied and to whom it can sell. For example, the United States limits trade with
various countries.

Another clue to a nation’s behavior is its membership in international organizations.

Memberships in international organizations affect a country’s behavior. Membership in WTO
reduces the likelihood that a country will impose new trade barriers. Membership in IMF or the
World Bank also puts constraints on the country’s behavior. Many other international
agreements impose rules on their members. These agreements may affect patents,
communication, transportation, and other items of interest to the international marketer. As a
rule, the more international organizations a country belongs to the more regulations it accepts,
and the more dependable is its behavior.

Home –Country Political Environment

The firm’s home-country political environment can constrain its international as well as its
domestic operations. Home-country political environment can limit the countries in which the
international marketing firm may enter. The United States for example, prohibits its firm’s from
dealing with North Korea. Sometimes, restrictions are even occasionally exercised against
foreign firms, such as Toshiba, which was penalized by U.S. for selling the Russians technology
that allowed their submarines to move more quietly.
The best-known example of the home-country political environment affecting international
operations used to be South Africa. Home-country political pressures induced more than 200
American firms to leave South Africa altogether.
A more recent example occurred when pressure from American human rights groups induced
some American firms to leave Myanmar. Pepsico, for example, pulled out of a joint venture even
though it had 85 percent of the soft drinks market there.
Once challenge facing multinational companies is that they have a triple-threat political
environment. Even if the home country and the host country give them no problems, they can
face threats in third markets. Firms that do not have problems with their home government or the
host government, for example, can be bothered or boycotted in third countries. For example,
Nestlé’s problems with its instant formula controversy were most serious, not at home, in
Switzerland, or in African host countries, but in a third market-the United States.

Activity 5
Answer the following questions before continuing to the next section
1. How might an international company handle the cultural issues connected with both its
customers and its employees?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2. The political environment comprises three dimensions. Outline them.
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________________
3. Why is working knowledge of political party philosophy so important in a political
assessment of a market? Discuss.
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________________
4. What are the most frequently encountered political risks in foreign business? Discuss.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2.4. The Legal Environment
The legal environment is emanated from the cultural attitudes towards business enterprise and the
political conditions, that is, the nation’s laws and regulations pertaining to business. In addition to
the political environment in a nation, the legal environment, that is, the nation’s laws and
regulations pertaining to business also influence the operations of a foreign firm.
A firm must know the legal environment in each market because these laws constitute the “rules
of the game”. At the same time, the firm must know the political environment because it
determines how the laws are enforced and indicates the direction of new legislation. The legal
environment of international marketing is complicated, it has three dimensions. For a
domestic/Ethiopian firm, the dimensions are (1) local/Ethiopian laws, (2) international laws, and
(3) domestic laws in each of the firm’s foreign markets.

Local Law and International Marketing

The local laws that affect international marketing operations of a local firm differ from country to
country. These local laws may relate to exporting antitrust/monopoly, organization, and
ownership arrangements. For example, USA has export controls, antitrust controls, and laws
against bribery by US firms.

International Law and International Marketing

International law could be defined as the collection of treaties, conventions, and agreements
between nations that have, more or less, the force of law. International law involves some
mutuality, with two or more countries by participating in the drafting and execution of laws or
agreements.

IMF and WTO

The agreements between IMF and WTO identify acceptable and non-acceptable behavior for
member nations. Their effectiveness lies in their power to apply sanctions. The IMF can
withhold its services from members who act “illegally” that is, contrary to the agreement. WTO
allows injured nations to retaliate against members who have broken its rules.
International marketers are interested in both IMF and WTO because of a shared concern in the
maintenance of a stable environment conducive to international trade. The legal reach of WTO
and the IMF does not extend to the international marketer’s behavior but rather to the behavior of
the nations within which the firm is marketing. The environment for international marketing is
more dependable because of these two organizations.

UNCITRAL
The United Nations established a Commission on International Trade Law (UNCITRAL) with a
goal to promote a uniform commercial code for the whole world. The commission works with
government and private groups, such as the International Chamber of Commerce. Its first output
(in 1983) was the Convention on Contracts for the International Sale of Goods. The purpose of
the convention is to bridge the communications gap between countries having different legal
systems as well as minimize contract disputes and facilitate the task of selling goods between
countries.

ISO
International Standards Organization (ISO) has been working through its technical committees to
develop uniform international standards. ISO creates standards for international products that the
firm must incorporate into its products planning. But standardization is a slow task because
changing nation standards often hurts vested interests.

Differing Legal Systems

Most countries derive their legal system from either the common law or the civil code law
traditions.

a) Common Law
Common law is English in origin and is found in the United State and other countries (about 26)
that have had a strong English influence, usually a previous colonial tie. Common law is
tradition oriented, that is, the interpretation of what the law means on a given subject is heavily
influenced by previous court decisions as well as by usage and custom. If there is no specific
legal precedent or statute, common law requires a court decision. To understand the law in a
common law country, one must study the previous court decisions in matters of similar
circumstance, as well as the statutes.
b) Civil code Law
Civil code law is based on an extensive presumably, and comprehensive set of laws organized for
subject matter into a code. The intention in civil law countries is to spell out the law on the all
possible legal questions rather than to rely on precedent or court interpretation. The “letter of the
law” is very important in code law countries. However, this need to be all inclusive i.e.may lead
to some rather general and elastic provisions, permitting an application to many facts and
circumstances.

Because code law countries do not rely on previous court decisions, various applications of the
same law may yield different interpretations. This can lead to some uncertainty for the marketer.
Code law is a legacy of Roman law and is predominant in Europe and in nations of the world that
have not had close ties with England. Thus, code law nations (about 70) are more numerous than
common law nations.

c) Islamic Law
Islamic law represents the third major legal system. About 27 nations follow Islamic law in
varying degrees, usually mixed with civil common, and/or indigenous law. The Islamic
resurgence in recent years had led many nations to give Islamic law, Shari ‘a, a more prominent
role. Shari’ a, governs all aspects of life in areas where it is the dominant legal system, as in
Saudi Arabia. Rules not defined by Shari’ a are left to decision by government regulations and
Islamic judges. Although it has harsh penalties for adultery and theft, Islamic law is not
dramatically different from other legal systems so far as business is concerned.

Foreign Laws and Marketing Mix

Foreign laws influence the four P’s of marketing of the international marketer.
Product
The international marketer will find many regulations affecting the product. The foreign laws
affect all aspects of product policy, including the physical product itself, the package and the
label, the brand name, and the use of warranty. The physical and chemical aspects of the product
are affected by laws designed to protect national consumers with respect to its purity, safety, or
performance. Although consumers should be protected, different safety requirements are not
necessary for the consumers of every country. One reason nations persist in particular legal
requirements is that they protect their own producers. For example, German nose standards kept
British lawnmowers off German lawns.
Labeling is subject to more legal requirements than the package in international marketing.
Labeling items covered;
 The name of the product
 The name of the producer or distributor,
 a description of the ingredients or use of the product,
 The weight, either net or gross, and
 The country of origin. As to warranty, the firm has relative freedom to formulate a
warranty in all countries.
Brand names and trademarks also face different national requirements. Most of the larger nations
are members of the Paris Union or some other trademark convention, which ensures a measure of
international uniformity. However, differences exist between code law countries (ownership by
priority in registration of a brand) and common law countries (ownership by priority in use) in
their treatment of the brand or trademark.

Pricing
Price controls are pervasive in the world economy. Resale-price maintenance is a common law
relating to pricing. Many nations have some legal provisions for resale-price maintenance, but
with numerous variations. Another variable is the fact that some countries allow price
agreements among competitors.
Some form of government price control is another law in a majority of nations. The price
controls may be economy wide or limited to certain sectors. Generally, price controls are limited
to “essential” goods, such as foodstuffs. The pharmaceutical industry is one of the most
frequently controlled. Control here sometimes takes the form of controlling profit margins.

Distribution

Distribution is an area with relatively few constrains on the international marketer. The firm has
a high degree of freedom in choosing distribution channel among those available in the market.
Of course, one cannot choose channels that are not available. One major question is the legality
of exclusive distribution. Fortunately this option is allowed in most markets.
Promotion

Advertising is one of the most controversial elements of marketing and is subject to more control
than some of the others. Many nations have some law regulating advertising. Advertising
regulations take several forms. One form pertains to the message and its truthfulness. In
Germany, for example, it is difficult to use comparative advertising and the words better or best.
Another form of restriction relates to control over the advertising of certain products. For
example, Britain does not allow any cigarette or liquor advertising on television. In many nations
there are restrictions on sales promotion techniques like discounts, contests, deals, or premiums.
Enforcement of the Laws
The firm needs to know how foreign laws will affect its operations in a market. For this it is not
sufficient to know only the laws; one must also know how the laws are enforced. Most nations
have laws that have been forgotten and are not enforced. Others may be enforced haphazardly,
and still other may be strictly enforced.
An important aspect of enforcement is the degree of impartiality of justice. Does a foreign
subsidiary have as good a standing before the law as a strictly national company? Courts have
been known to favor national firms over foreign subsidiaries. In such cases, biased enforcement
makes it one law for the foreigner and another for the national. Knowledge of such
discrimination is helpful in evaluating the legal climate.

Domestic laws govern marketing within a country. Questions of the appropriate law and the
appropriate courts may arise, however, in cases involving international marketing.

When commercial disputes arise between principals of two different nations, each would
probably prefer to have the matter judged in its own national courts under its own laws. By the
time the dispute has arisen, however, the question of jurisdiction usually has been settled by one
means or another. One way to decide the issue before hand is inserting jurisdictional clause in to
the contract. When the contract is signed, each party agrees that the law of a particular nation
governs.

Arbitration or Litigation
The international marketer must be knowledgeable about laws and contracts. Contracts identify
two things: (1) the responsibilities of each party and (2) the legal recourse to obtain satisfaction.
Actually, international marketers consider litigation as a last resort and prefer to settle disputes in
some other way. For several reasons, litigation is considered as a poor way of settling disputes
with foreign parties. Litigation usually involves long delays, during which inventories may be
tied up and trade halted. Further, it is costly not only in money but also in customer goodwill and
public relations. Firms also frequently fear discrimination in a foreign court. Litigation is thus
seen as an unattractive alternative to be used only if all else fails.
Arbitration is the process by which both parties agree to submit their cases to a private individual
or body whose decision they will honor. Arbitration generally overcomes the disadvantages of
litigation. Decisions tend to be faster and cheaper. Arbitration is less damaging to good will
because of the secrecy of the proceedings and their less hostile nature.

Activity 6
Answer the following questions before continuing to the next section

1. Explain how foreign laws influence the four P’s of marketing in the international marketing
______________________________________________________________________________
______________________________________________________________________________
2. Discuss some of the reasons why it is probably best to seek an out-of court settlement in
international commercial law?
______________________________________________________________________________
______________________________________________________________________________

2.4. The Economic Environment

The economic environment includes a complex of all factors such as economic development,
gross national product, per capital income, expenditure patterns, and infrastructural facilities.
Besides it includes global trade, interest rate, inflation, foreign exchange and exchange rates.
Marketing is an economic activity affected by the economic environment in which it is
conducted. A major characteristic of the international marketer’s world is the diversity of
marketing environments in which they conduct their operations.. In particular, the economic
dimensions of the world market environment are of prime importance.
Economic forces, affect the international marketer by the impact that they have on market
potential and, at any point in time, market actualization. The economic environment includes
factors and trends related to income levels and the production of goods and services.
In international marketing a firm just closely examines the economic conditions in a particular
country. The international marketer must study each country’s economy. A nation’s
infrastructure and stage of economic development are key economic factors that affect the
attractiveness of a market and suggest what may be an appropriate strategy.

Infrastructure
A country’s capacity to provide transportation, communications, and energy is its infrastructure.
The economic forces in a country may be influenced strongly by the infrastructure that exists,
including the communications, energy, and transportation facilities. Infrastructure is a critical
consideration in determining whether to try to market to a country’s consumers and
organizations. Depending on the product and the method of marketing, an international marketer
will need certain levels of infrastructure development. For example, an internet marketer such as
etoys.com selling low-priced toys requires a warehouse and transpiration system that will permit
widespread distribution.

Regarding communications, many firms may require telephone essential for conducting their
business and some other firms may require print media for advertisements so as to contact their
customers. The international marketer should never take infrastructure in foreign markets for
granted and assume that they would get the same infrastructure abroad as is provided in the
domestic market. The international marketer must assess what infrastructure is needed for
efficient operations and whether that infrastructure is available in that overseas market.

The World Bank has a different classification for categorizing countries regarding economic
development. The World Bank (1996) groups countries on the basis of gross national product per
capital as follows:
 Low-income economies (for example, Vietnam, Ethiopia, Haiti)$490
 Lower middle-income economies (for example, Guatemala, Philippines, Turkey)
$1740
 Upper middle-income economies (for example Mexico, Malaysia, Greece) $4600
 Upper-income economies (for example. USA, Japan, Germany) $25,870
As a separate class, the newly industrialized countries (NICs) of Asia such as Singapore and
Taiwan are recognized.
Use of Classifications
These types of classification are only of limited usefulness to an international marketer and
should not be used as the sole basis for deciding whether to enter foreign markets or not and how
to market to such markets. Any classification scheme assumes certain homogeneity among
markets in the same category, which often is not correct. Even the more traditional countries may
have groups of people who, due to their income and other sets of values will be a market for
sophisticated products and services, while some of the developed countries still have portions of
their population to some extent outside the of active involvement in the economy.

Note that a classification like the above can be useful, but its simplicity may make it misleading.
Some smaller countries, such as the United Arab Emirates and Kuwait, have large GDPs relative
to their small populations, although their overall level of economic activity is small in comparison
with the larger countries. Consumers in these countries may have a lot of purchasing power, but
there are not that many of them.
Conversely, many developing countries have large populations relative to their economic
strength; that is, individual customers do not have much purchasing power. However, subgroups
within these countries may have substantial purchasing power, or economic growth may offer
substantial opportunities in the future. India, for example, has a large and growing population but
a low per capital income. Within this relatively poor country, there are are 250 million middle-
class consumers. This is larger than the total U.S. market.
Many companies including Coca-cola, Walt Disney, and Motorola have recently started
operations in India to take advantage of this opportunity. Thus, when analyzing a given foreign
market, management must also consider other indications of development.

Common economic indicators include:

(1) distribution of income,
(2) rate of growth of buying power, and
(3) extent of available financing.
Useful non-economic indicators are:
(1) Infant mortality rate,
(2) percent of the population that lives in urban areas and
(3) the number of daily newspapers.

Activity 7
Answer the following questions before continuing to the next section
1) What is the significance of the level of economic development to international marketing?
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________

2) How does the distribution of the income of people affect international marketing?
_______________________________________________________________________________
_______________________________________________________________________________

2.5. THE ROLE OF REGIONAL ECONOMIC INTEGRATIONS

2.5.1. Concepts and Definition
Economic integration comprises legal arrangements among nations for economic transactions and
activities across national boundaries. Whereas international economic integration is synonymous
to globalization, regional economic integration limits economic integration to a particular region.
The concept of regional economic integration implies that nations of a geographic region come
together in some type of partnership to foster trade and development. Regional economic
integration can be manifest as a free trade area, a customs union, a common market, an economic
union, or in its most extreme form, as a political union.

Some economists define regional economic integration as ‘state of affairs or process involving
the combination of separate economies into larger economic regions’. This include all
measures that aim at abolishing discrimination among the member countries of the unit, with the
formation and application of coordinated and common economic policies to achieve various
economic and welfare objectives.

There are different benefits to be derived from economic integration; these gains can yield greater
economic development benefits through multilateralism rather than unilateral use of economic
resources and policies. Theoretically there are effects and benefits economic integration effects
from two perspectives: Static effects and dynamic effects.

Static effects are mainly in terms of productive efficiency and consumer welfare (increase in
consumption). The static effects gains of regional economic integration are mainly in terms of
production efficiency and increase in consumption.

Dynamic effects relate to member countries’ long term growth rates. These include more uniform
prices, lower transaction costs, certainty for investors, economies of scale, factor productivity and
enhanced competition.
1. Trade development and diversification
 Regional economic integration will enhance deeper intra-regional trade and grow trade
diversification in the member countries.
 This could result in efficiency gains regionally enlarged markets
2. Economies of scale
  Economic integration will rationalize economies and expand them.
 This will enhance investment flows and integrate production to achieve economies of
scale.
 Economies of scale will be realized through large cost savings and rationalization of
projects through regionally coordinated investment resources and social and institutional
infrastructure in the region.
 Economic integration will also exchange public savings from rationalization of
investments in various sectors
3. Benefits arising from externalities
 Greater benefits could be realized with the existence of expanded markets and a stronger
new currency being used by the member countries.
 Exchange rate shocks and balance of payment instabilities could easily be managed by the
super- national structures of the regional formation
4. Greater economic competitiveness
 Regional economic integration, especially financial integration, enhances financial
robustness which has spill over benefits to the regional economy in terms of its
competitiveness in a number of areas like the currency, trade, exports, employment skills
and market prices.
5. Inflow of foreign direct investment
 Regional economic integration, particularly a customs union, can encourage investors to
engage in tariff jumping, i.e. investing in one member country in order to trade freely with
all members.
 When economies are integrated, foreign investors will be attracted to invest because of
economies of scale, a larger market, and because the risk is spread over a wide area.

6. Better policy coordination

 Better policy coordination through regional synchronization institutions could yield
overall welfare gains and minimize welfare costs across member states.

2.5.2. Levels of economic integrations

Different levels of economic integration exist, namely a preferential trade area, a free trade
area, a customs union, a common market, an economic union and a political union.
1. A free trade area (FTA)
o A free trade area is described by the non-existence of tariffs on goods and services
from other members leaving open the possibility of each members structuring and
applying its own regime of tariffs to goods or services imported from outside the FTA
o All barriers to trade are removed among members.
o Each member retains its own barriers to trade with non-members.
o There is need for rule of origin to protect deflection possibilities from nonmembers.
o European Free Trade Area (EFTA) is an example; NAFTA another example.

2. A custom union
  A custom union involves free trade among member countries but applies uniformed
external tariffs with members ceding sovereignty to a single unified customs
administration or applying their own different tariff regimes alongside a common external
tariff.
 No tariff or other barriers on contracting members
 Common external tariff (CET) on the rest of the world by custom members

3. Common Market
 no barriers to trade between member countries, a common external trade policy, and the
free movement of the factors of production
 This type of integration can be difficult to achieve and requires significant harmony
among members in fiscal, monetary, and employment policies
 Examples include MERCOSUR (between Brazil, Argentina, Paraguay, and Uruguay)
hope to achieve this status

4. Economic union
 Involves the free flow of products and factors of production between members, the
adoption of a common external trade policy, and in addition, a common currency,
harmonization of the member countries’ tax rates, and a common monetary and fiscal
policy
 This level of integration involves sacrificing a significant amount of national sovereignty
 Examples include the European Union (EU)

5. Political Union
 independent states are combined into a single union
 This requires that a central political apparatus coordinate economic, social, and foreign
policy for member states
 The EU is headed toward at least partial political union, and the United States is an
example of even closer political union

2.5.3. The Case for & against Regional Integration

a) What are the Case for Regional Integration
There are both economic and political arguments supporting regional economic integration.
Generally, many groups within a country oppose the notion of economic integration.

The Economic Case for Integration

 Regional economic integration is an attempt to achieve additional gains from the free flow
of trade and investment between countries beyond those attainable under international
agreements such as the WTO
 Since it is easier to form an agreement with a few countries than across all nations, there
has been a push toward regional economic integration
 The Political Case for Integration
 Politically, integration is attractive because by linking countries together, making them
more dependent on each other, and forming a structure where they regularly have to
interact, the likelihood of violent conflict and war will decrease. And also by linking
countries together, they have greater clout and are politically much stronger in dealing
with other nations
b) The Case Against Regional Integration
 Regional economic integration only makes sense when the amount of trade it creates
exceeds the amount it diverts
 Trade creation occurs when low cost producers within the free trade area replace high
cost domestic producers
 Trade diversion occurs when higher cost suppliers within the free trade area replace
lower cost external suppliers

Impediments to Integration
 Integration is not easy to achieve or maintain
 There are two main impediments to integration
 it can be costly - while a nation as a whole may benefit from a regional free trade
agreement, certain groups may lose
 it can result in a loss of national sovereignty and control over domestic issue
Example: Great Britain remained using its British currency instead of the Euro

2.5.4. Implications for International companies

Why is regional economic integration important to international companies?
 Opportunities
Formerly protected markets are now open to exports and direct investment. Because of the free
movement of goods across borders, the harmonization of product standards, and the
simplification of tax regimes, firms can realize potentially enormous cost economies by
centralizing production in those locations where the mix of factor costs and skills is optimal

 Threats
The business environment within each single market will become more competitive. A further
threat to non-Member firms arises from the likely long-term improvements in the competitive
position of many European and North American companies. A final threat to firms outside of
trading areas is the threat of being shut out of the single market by the creation of a “trade
fortress.”

2.5.5. Existing Regional Integrations

1. The European Union
After world war II, the idea of European integration was conceived to prevent such killing and
destruction from ever happening again. First proposed by the French FM, Robert Schumann, in a
speech on 9th May 1950, (celebrated as Europe day, the birthday of present EU. Initially, the EU
consisted of just six countries: Belgium, Germany, France, Italy, Luxembourg, and the
Netherlands. Denmark, Ireland, and the United Kingdom joined in 1973. In 2004, the biggest ever
enlargement took place with 10 new countries joining. As of January 2010, the EU has 28
member countries.

In the early years, much of the cooperation between EU countries was about trade & economy,
but now the EU also deals with citizens’ rights; ensuring freedom, security and justice; job
creation; regional development; environmental protection; and promoting globalization.

There are five EU institutions, each playing a specific role

a) European Parliament: elected by the Peoples of the member states
b) Council of the European Union: representing the governments of the member states
c) European Commission: driving force and the executive body
d) Court of Justice: ensuring compliance with the law: &
e) Court of Auditors: controlling and managing the EU budget

The first direct elections of European Parliament were held in June 1979. The 1992 Maastricht
Treaty & the 1997 Amesterdam Treaty have transformed the European Parliament from a purely
consultative assembly into a legislative parliament exercising powers similar to the national
parliament.. Primary goal of the EU is to create a single market without internal borders for goods
and services, allowing member countries to better compete with markets like the U.S.
Developing a basic understanding of regional trading blocs in GSCM (including international
marketing) as it influences decisions related to selection of international markets, mode of entry,
determining market competitiveness, and pricing strategies have a crucial importance.

EU has developed the following policies or standards:

1) ISO 9000
 ISO 9000, a series of management and quality assurance standards in design,
development, production, installation and service.
 The European Union in 1992 adopted a plan that recognized ISO 9000 as a third-party
certification; the result is that many European companies prefer suppliers with ISO 9000
certifications.
 Thus, for example U.S. companies wanting to sell in the global marketplace are
compelled to seek ISO 9000 certifications.
2) Single European Sky Policy
 Safety is a non-compromising issue in international aviation system
 As a result of serious safety concern in Africa, EU started banning African carriers to fly
over Europe sky(measures including Blacklisting).
 Negatively affecting passenger & cargo traffic originating from Africa to Europe

2. North American Free Trade Area (NAFTA)

The world’s largest free trade area among the USA, Canada, and Mexico came in to effect on 1
January 1994. Since then, it created a market of 360 million people with a combined purchasing
power of about US$ 6.5 trillion.

The Goal of NAFTA is to remove trade and investment barriers. Trade barriers related to
industrial goods and services were eliminated besides separate agreements on agriculture,
intellectual property rights, labor adjustments, and environmental protection. Under the NAFTA
country of origin rules, most products should have 50% of North American content while for
most automobiles, the stipulated local content requirement is 62.5%.It has resulted in the shift of
US investment from Asian countries to Mexico. Consequently, the international marketing
strategies of firms operating in NAFTA have been re-oriented to shift their labor intensive
production to low-cost locations in Mexico. In aggregate terms, directly and indirectly, GSCM
deals with international trade.

How does NAFTA benefit trade?

First, it eliminates tariffs. This reduces inflation by decreasing the costs of imports.
Second, NAFTA creates agreements on international rights for business investors. This
reduces the cost of trade, which spurs investment & growth especially for small business.
Third, NAFTA provides the ability for firms in member countries to bid on government
contracts.
Fourth, NAFTA also protects intellectual properties
U.S. Industries and Supply Chains
Many economists and other observers have credited NAFTA with helping U.S. manufacturing
industries, especially the U.S. auto industry, become more globally competitive through the
development of supply chains. Much of the trade between the United States and its NAFTA
partners occurs in the context of production sharing as manufacturers in each country work
together to create goods. The expansion of trade has resulted in the creation of vertical supply
relationships, especially along the U.S.-Mexico border. The flow of intermediate inputs
produced in the United States and exported to Mexico and the return flow of finished products
greatly increased the importance of the U.S.-Mexico border region as a production site.U.S.
manufacturing industries, including automotive, electronics, appliances, and machinery, all rely
on the assistance of Mexican manufacturers. One report estimates that 40% of the content of U.S.
imports from Mexico and 25% of the content of U.S. imports from Canada are of U.S. origin.
In comparison, U.S. imports from China are said to have only 4% U.S. content. Taken together,
goods from Mexico and Canada represent about 75% of all the U.S. domestic content that returns
to the United States as imports.

3. Central American Common Market (CACM)

Central American Common Market (CACM) Was established on December 15, 1960. It
associates five Central American nations that was formed to facilitate regional economic
development through free trade and economic integration.
These five nations are;
  Guatemala
 Honduras
 El Salvador
 Nicaragua
 Costa Rica
Its original goals included the establishment of a Central American regional:
 free-trade area,
 a customs union, and
 the integration of the industrialization efforts of its member countries.

4. Caribbean Community and Common Market (CARICOM)

The States Parties to the Treaty Establishing the Caribbean Community and Common Market
established on 4 July, 1973. Members of the Community consist of:
(a) Antigua and Barbuda (b) The Bahamas
(c) Barbados (d) Belize
(e) Dominica (f) Grenada
(g) Guyana (h) Jamaica
(i) Montserrat (j) St. Kitts and Nevis
(k) St. Vincent and the Grenadines (l) Saint Lucia
(m) Suriname (n) Trinidad and Tobago

The Community shall have the following objectives:

 achieve sustained economic development based on international competitiveness,
 coordinated economic and foreign policies
 enhanced trade and economic relations with third States

5. Association of Southeast Asian Nations

The Association of Southeast Asian Nations (ASEAN) was institutionalized in August 1967 by
the five founding member countries, namely Indonesia, Malaysia, the Philippines, Singapore and
Thailand.
According to the provisions of the ASEAN Declaration, the aims of this organization include;
 acceleration of economic growth
 social progress
 cultural development in the region
 the protection of regional peace and stability
 promoting active collaboration and mutual assistance on matters of common interest in
the economic, social, cultural, technical, scientific and administrative fields

6. Asia Pacific Economic Cooperation (APEC)

APEC was formed in 1989 as a forum to facilitate economic growth, cooperation, trade and
investment in the Asia-Pacific region. It aims to help improve trade and economic performance
and regional links for the prosperity of the people in the region.
APEC is a politico-economic organization in South-East Asia which was set up in 1967 and it
have 10(ten) member nations;
- Brunei - Cambodia
- Indonesia - Laos
- Myanmar - Malaysia
- Philippines - Singapore
- Thailand and - Vietnam.

The Goal of APEC includes but not limited to:

 One of its main goals (referred to as the Bogor Goal) is for free and open trade and
investment in the Asia-Pacific for developed economies and for developing economies.
 The three areas of focus for APEC are:
a) Trade and Investment Liberalization – reducing and eliminating tariff and non-
tariff barriers to trade and investment, and opening markets.
b) Business Facilitation – reducing the costs of business transactions, improving
access to trade information and bringing into line policy and business strategies to
facilitate growth, and free and open trade.
c) Economic and Technical Cooperation (ECOTECH) – assisting member
economies build the necessary capacities to take advantage of global trade and the
New Economy.

7. Common Market for East and Southern Africa (COMESA)

COMESA was formed 1994 from PTA 19 member states with a population: 400 million
population million -COMESA trade, us$7.5 billion (2006 Est.). US$3.0 billion (about 40%) of
trade is food and agricultural raw materials

Agricultural commodities are major drivers for growth in intra intra-COMESA trade.Agriculture
is basis for viable agro agro- processing industry and value addition. The elements of efficient
and transparent governance have been emphasized on for governments to improve on service
delivery and accountability. COMESA has therefore developed a regional e-Government
framework and developed a portal to help harmonize e-Government efforts in the region and to
assist the Member States in implementing e-Government. The United Nations Public
Administration Network (UNPAN) is a key partner in the implementation of the e-Government
program for COMESA.

8. The Economic Community Of West African States (ECOWAS)

The Economic Community Of West African States (ECOWAS) is a regional group of fifteen
countries, founded in 1975. Its mission is to promote economic integration in "all fields of
economic activity, particularly industry, transport, telecommunications, energy, agriculture,
natural resources, commerce, monetary and financial questions, social and cultural matters ....."
The Institutions of the Economic Community Of West African States (ECOWAS)
 The Commission
 The Community Parliament
 The Community Court OF Justice
 ECOWAS Bank for Investment and Development (EBID)

Trade in goods and services between EU and ECOWAS of exports and imports to/from
ECOWAS account for around 1.5 % of the total extra-EU-27 export and import. ECOWAS
accounts for 18 % of exports to Africa and 16 % of the imports from Africa. The Department of
Transport and Telecommunications have the responsibility to carry out the following functions in
conformity with Articles 32 and 33 of the ECOWAS Revised Treaty:
 Develop Common Transport and Telecommunications policies, laws and regulations;
 Develop an extensive network of all weather highways within the Community;
 Formulate programs for the improvement and integration of railway networks;
 Formulate programs for the improvement of coastal shipping services and inter-state
inland waterways and for the harmonization of maritime transport policies and services;
 Promote the development of regional air transport services and implement air transport
safety and security programs;
 Encourage the establishment and promotion of joint ventures and the participation of the
private sector in the areas of Transport and Telecommunications.

CHAPTER THREE
INTERNATIONAL MARKETING RESEARCH

1.1. Introduction
Dear Learner! You have already studied in detail the concepts of international marketing and
marketing environment. Needless to state that, information is a critical ingredient in formulating
and implementing marketing strategies concerning all the 4 Ps (product, price, distribution and
promotion). Thus, information is the key component in developing successful international
marketing strategies. A marketer must know how to get the most accurate and reliable data
possible within the limits imposed by cost and time. Marketing research equip you with all tools
and techniques required in this regard. Marketing research is the systematic gathering, recording,
analyzing and presenting of data to provide useful information in making marketing decision .
The measure of a competent researcher is twofold: (1) the ability to utilize the most sophisticated
and adequate techniques and methods available within these limits; and (2) the effective
communication of insights to the decision makers in the firm. The latter often requires senior
executives directly involving in the research process . Thus, this unit has three parts: the scope of
international marketing research, international marketing research process, and alternative
marketing strategies.
After you study this particular unit, you are expected to:
 Define marketing research
 Discuss the role of marketing research in the development & implementation of
international marketing strategy.
 Apply the research process in identifying problems and recommend solutions in
your organization
 Identify & discuss the different methods of data collection,
 Describe the sources of marketing information’s
 Identify the different entry modes to the international market
 Explain the important factors for each alternative market - entry strategy.

1.2. Breadth or Scope of International Marketing Research

Marketing research is a management tool of growing importance in general, in the area of
international marketing also, research plays a vital role. This role is becoming more and more
crucial with the growing complexity of international business. Confronted by fast changes in
environment, companies no longer like to depend fully on gut feeling or take chances while
dealing with overseas customers. They prefer to base their operations on professionally drafted
plans and such plans are based on the solid foundation of research, carried out in-house or by
professional marketing research organizations.

What is Marketing Research?

Marketing research is defined as the systematic gathering, recording, analyzing and presenting of
data to provide useful information in marketing decision making. While the research processes
and methods are basically the same, international marketing research covers a wide range of
phenomena. In essence it fulfills the international marketing manager’s need for knowledge of
the international market. International marketing research is a systematic collection and analysis
of data and information relevant to international marketing operations. The required data and
information may, in most cases, not be always readily available. If it is available, it may not be
in the form in which you require. Therefore, considerable efforts need to be put in by the
company in the collection of relevant information before the same analysis is undertaken. Thus,
international marketing research may be defined as “the systematic and objective process of
collecting, recording and analyzing data for aid in making international marketing decisions”.

International marketing research involves two additional complications. First, information must
be communicated across cultural boundaries. Second, the environments within which the
research tools are applied are often different in foreign markets. Rather than acquiring new and
exotic methods of research, international marketing researchers must develop the ability for
imaginative and skillful application of tried and tested techniques in sometimes totally in strange
situation.
The mechanical problems of implementing foreign marketing research often vary from country to
country. Within a foreign environment, the frequently differing emphases on the kinds of
information needed, the often limited variety of appropriate tools and techniques available, and
the difficulty of implementing the research process constitute the challenges facing most
international marketing researchers.

The basic difference between domestic and foreign marketing research is the broader scope
needed for foreign research. Research can be divided into three types based on the information
needed: (1) general information about the country, area, and/or market; (2) information necessary
to forecast future marketing requirements by anticipating social, economic, consumer, and
industry trends within specific markets or countries, and (3) specific market information used to
make product, promotion, distribution, and price decisions and to develop marketing plans. In
domestic operations, most emphasis is placed on the third type, gathering specific market
information because the other data are often available from secondary sources.

A country’s political stability, cultural attributes, and geographical characteristics are some of the
kinds of information not ordinarily gathered by domestic company marketing research
departments but which are required for a sound assessment of a foreign market. This broader
scope of international marketing research calls for collecting and assessing the following types of
information:
i) Economic: General data on growth of the economy, inflation, business cycle trends,
and the like: profitability analysis for the division’s products, specific industry
economic studies, analysis of overseas economies and key economic indicators for
major foreign countries.
ii) Sociological and political climate: A general non-economic review of conditions
affect the division’s business. In addition to the more obvious subjects, it also covers
ecology, safety, leisure time, and their potential impact on the division’s business.
iii) Overview of market conditions: A detailed analysis of market conditions the
division faces, by market segment, including international.
iv) Summary of the technological environment: A summary of the “state of the art”
technology as it relates to the division’s business carefully broken down by product
segments.
v) Competitive situation: A review of competitors’ sales revenues, methods of market
segmentation, products, and apparent strategies on an international scope.
Such in-depth information is necessary for sound marketing decisions. For the domestic
marketer, most of the information has been acquired after years of experience with a single
market, but in foreign markets this information must be gathered for each new market.

Importance of International Marketing Research

International marketing research plays a very important role in shaping marketing strategies of
the international firm. In this era when assumptions are being replaced by solid facts and the
pace of political, social and economic changes is parallel to the pace of the changes observed in
the business world, sound knowledge of the present and practical assumptions regarding the
future are essential inputs to any good business plan.
Considering the nature and extent of inter-dependence and inter-linkages among almost all the
countries nowadays, any major change in any country today had its impact on the market for
many products and services. The change may be political, economic, cultural, social or
technological. For instance, a change in the ruling parties of the Government in a particular
country may mar or boost the prospects of export from another country. Formation of a trade
bloc in one region of the world may close or open up the market in that region for products from
outside the region. Technological changes affect product, packaging and servicing prospects.
Change of consumer preferences in favor of eco-friendly items has benefited some exporters and
hit some others hard. The Internet is shaping and reshaping a number of businesses.
International marketing research, if properly carried out, can help a firm sense, to some extent at
least, the impact of such changes on the export prospects of its products and help it frame
appropriate strategies to take maximum advantage of the positive developments and reduce to the
minimum, the impact of the negative changes.

1.3. The International Marketing Research Process

Marketing research is undertaken in order to improve the understanding level about a marketing
situation or problem and improving the quality of decision-making. But much depends on how
well the whole research process has been planned and carried out. International marketing
research is a systematic series of steps necessary for collection and analysis of data and
information on international market. Regardless of foreign countries at which the research
program is conducted, the research process should follow these steps.
i. Define the research problem and establish research objectives
ii. Determining research design
iii. Collection of data and information
iv. Analysis and interpretation of data and information
v. Report preparation and presentation

i. Defining the Problem and Establishing Research Objectives

The first step in the research process is a clear definition of the research problem and the
establishment of specific research objectives. Unless the research problems and objectives
are clearly defined, it will be rather difficult to identify the nature and sources of information
and data or to select the right techniques of information collection. Thus, problem
identification and definition is the first step in marketing research and should be carried out
very carefully. The major problem here is converting a series of often ambiguous business
problems into tightly drawn and achievable research objectives.

ii. Determining Research Design

Once the problem has been correctly and precisely defined and the research
objectives/information needs clearly stated, the next step is to determine the research design. A
research design is a plan of action that guides the conduct of an investigation and collection of
needed information. The decisions concerning data sources, data collection methods and specific
research instrument and sampling plan that you will use for collecting the data come under the
preview of the research design.

iii. Collection of Data and Information

This is the stage where the research design has to be converted from the planning stage to that of
implementation. This involves planning the field work to contact the respondents personally or
via mail or telephone, drafting of questionnaire and actual collection of information. Great care
should be taken to collect reliable, updated and relevant information during this stage, since the
quality of research will ultimately depend on the quality of the information collected.

a) Data Sources

Data is required to make a decision in any business situation. The researcher is faced with one of
the most difficult problems of obtaining suitable, accurate and adequate data. Utmost care must
be exercised while collecting data.
There are two important sources of data viz., secondary data and primary data. Secondary data
are the data that have been already collected in the past and you can make use of them in solving
your marketing problem. Primary data on the other hand is the data which is collected for the
first time for a specific purpose at hand.

Sources of Secondary Data

The breadth of many foreign marketing research studies and the marketer’s lack of familiarity
with a country’s basic socioeconomic and cultural patterns result in considerable demand for
information like that generally available from secondary source in the home country. The sources
of secondary data are the following:

Government agencies in the importer and exporter country or any other countries provide
periodic censuses country population, major competitors in the market, total industry sales and
market shares of different competitors and type of distribution and marketing support services
available in a market. Data compiled by international organization: WTO, UNCTAD,
international Labor Organization, World Bank and International Monetary Fund. Commercial
sources, trade associations, embassies and high commissions of concerned countries, and the
Internet provide the researcher with additional sources of detailed market information.
The Internet, a large system of many connected computers around the world which people use to
communicate with each other, is rapidly becoming the favorite tool for accessing secondary
information. Its breadth and depth of searching has really made it possible for small and medium
enterprises to discover previously impossible to access data about overseas customers and
competitors. It is transforming companies’ knowledge of the international environment. For
many companies the Internet provides a new and increasingly important medium for conducting a
variety of international marketing research.

There are certain distinct advantages in using secondary data in any marketing research study.
The key advantages are: relatively low cost of data collection, used as a reference base to
compare research findings, and the required time to obtain the data is much less as compared to
the time required to collected primary data. However, the researcher must be cautious in using
secondary data. The reason is that such type of data may be full of errors, inadequate size of the
sample, errors of definitions etc . Hence before using secondary data, you must examine the
following points.

 Availability of Data: Much of the secondary data of a local marketer is accustomed to

know about home country markets might not be available for many countries. For example,
detailed data on the numbers of wholesalers, retailers, manufacturers, and facilitating
services are unavailable for many parts of the world, as data on population and income.
Most countries simply do not have governmental agencies which collect on a regular basis.
If such information is important, the marketer must initiate the research or rely on private
sources of data.

 Reliability: Available data may not have the level of reliability necessary for confident
decision making for many reasons. Official statistics are sometimes too optimistic, reflecting
national pride rather than practical reality, while tax structures and fear of the tax collector
often adversely affect data. Although not unique to them less-developed countries are
particularly prone to being both overly optimistic and unreliable in reporting relevant
economic data about their countries. Seeking advantages or hiding failures, local officials,
factory managers, rural enterprises, and other filed fake numbers on everything from
production level to birthrate.

 Comparability of data: Comparability of available data is the third shortcoming faced by

foreign markets. In industrialized countries, current sources of reliable and valid estimates
of socioeconomic factors and business indicators are readily available. In other countries,
especially those less developed, data can be many years out of date as well as having been
collected on an infrequent and unpredictable schedule. Naturally, the rapid change in
socioeconomic features being experienced in many of these countries makes the problem of
currency a vital one. Further, even though many countries are now gathering reliable data,
there is generally no historical series which to compare the current information. Further,
data from different countries are often not comparable.

 Adequacy of the data: adequacy of secondary data is to be judged in the light of the
objectives of the research. For example, our objective is to study the growth of industrial
production in a country. But the published report provides information on only few states,
 and then the data would not serve the purpose. Adequacy of the data may also be considered
in the light of duration of time for which the data is available. For example, for studying the
trends of per capital income of a country, we need data for the last 10 years, but the available
information is only for the last 5 years only, which would not serve our objectives.

Hence, you must always check whether any secondary data are available on the subject matter
into which you are researching and make use of it since it will save considerable time and money.
But the data must be scrutinized properly because these were originally collected perhaps for
another purpose. The data must also be checked for reliability, relevance and accuracy.

Sources of Primary Data

If, after seeking all reasonable secondary data sources, research questions are still not adequately
answered, the market researcher must collect primary data, that is, data collected specifically for
the particular research project at hand. One decision that must be made at this stage is whether to
make or buy the information. In other words, the question to be answered is whether to recruit
outside agencies such as marketing research firms should be used to collect the information
needed or the firm should use its own personnel for this purpose. Field research is actually
carried out to get first-hand information to answer specific questions like ‘what kind?’, ‘what
size’, ‘what flavor’, whereas the desk research answers questions such as ‘how much’, ‘how
many’, ‘from where’ . In other words, information of a personalized nature can be obtained only
through primary sources while information of a macro nature can be obtained through secondary
sources. Primary data may be collected through any of the three methods: observation,
interviewing, questionnaire.

Observation is the process of recording relevant information without asking specific questions to
any one and in some cases, even without the knowledge of the respondents. This method is
generally used to observe buyer behavior, impact of shelf placement, and point of purchase
promotional materials, turnover of various brands, observe what brands the customers buy and
their views on product quality, price, service, packaging etc. Which television programmes the
customer’s view, what the newspapers and magazines they subscribe to and etc. This mode of
data collection is highly effective in consumer surveys where the respondents are unwilling or
unable to provide the information asked. Data collection by observation is generally accurate
and quicker to process; especially it is more effective if consumers’ emotions and subconscious
determine the buying decision. The most limiting factor in the use of the observation method is
the inability to examine things like attitudes, motivations and plans. It is more expensive and
time consuming.

Interviewing method is used when one wants to collect information about consumer motives,
perceptions, attitudes, past behaviors and future intentions , all of which are not observable. The
interview method can also yield information about the socio-economic profile of your customers.
The interview can be conducted on either small group of persons or a large group of persons.
Questionnaire:
It is appropriate when your sampling units are distributed over a wide geographical area and the
cost of reaching them personally is very high. In such case you can send a questionnaire (list of
questions), which the respondents fill and send back by mail. However, the return rate of mail
questionnaires is usually very low, ranging between three to seven percent. Another drawback is
that you have no way of checking the authenticity and accuracy of the response. The respondent
may fill totally wrong information and you may never be able to detect it.

b) Research Instrument
In the observation method, the researcher may use a camera, tape recorder or tally sheet (that is a
sheet in which the number of times an event occurs is recorded). The researcher must ensure that
the instrument is appropriate to the occasion and is reliable.
In the survey method, the commonly used instrument is the questionnaire. This is a written and
organized format containing all the questions relevant to seek the required information along
with the spaces provided to record the answers. The preparation of a questionnaire requires great
skill. It should, moreover, be kept in mind that when asking questions about qualitative aspects it
is better to use open - ended questions rather than close ended questions. Open ended questions
are the ones where respondent is free to give answer in his own words. “How would you describe
the taste of this toothpaste?” is an example of open-ended question. But question like “Would you
describe the taste of this toothpaste as tingling? Yes/No” is a close-ended question because
respondent is not free to provide answer in his own words.
c) Sampling Plan
After selecting your research instrument for observation or preparing a questionnaire for survey,
you need to identify the source of your information. The source is also known as the ‘population’
or ‘universe’. For conducting marketing research, you would rarely gather information from the
entire population because it is neither feasible nor practical for a researcher to contact all
members of the population. Rather you would select a small groups or units referred to as a
sample. A sample is, therefore, a small group of persons or units which has all the characteristics
of the population used for conducting the research.

A marketing researcher has to decide as to which sampling method he would use for selecting the
given number of units from the universe. The choice is between two broad types of sampling
methods: probability sampling and non-probability sampling. In the former, each item of the
universe has a known and non-zero chance of being selected as a sample unit. In non-probability
sampling on the other hand, researcher selects the units on the basis of his or her judgment. This
means that if the investigator thinks that certain units are not representative such units may not
get equal chance of being included. Non-probability sampling is mostly used in exploratory
research where a representation of the universe is not important. But where true representation is
important, probability or random sampling is used. Random sampling enables the researcher to
make an accurate estimate of the population characteristic but it is more expensive than non-
probability sampling. The cost that you can bear and the degree of accuracy which you require
have to be weighed to arrive at a decision.

iv. Analysis and Interpretation of Data and Information

After you have collected the data, you need to process, s, organize and analyze the raw data so as
to make them easy to understand and use in decision-making process. It is highly important that
analysis and interpretation of information are done in a totally objective manner and no element
of subjectivity is allowed to creep in. There are four phases involved in data analysis: Editing: -
is the process of reviewing the data to ensure maximum accuracy and un ambiguity and removal
of overlapping duplication and inconsistencies.

Tabulation and Graphical Representation: to draw inferences for use in decision making, data
are tabulated and presented in terms of graphs. Tabulation is the process of counting the
responses (the data) given in a survey according to the categories selected. Individual observation
or data are placed in suitable classes in which they occur and then counted. Thus we know the
number of times or the frequency with which a particular event occurs. Such tabulation leads to a
frequency distribution as indicated in the table
Frequency distribution

No. of units sold in June No of shops which

2010 achieved this sale

Up to 100 18

101 – 120 25

121 – 140 33

Data summarization: - the existing frequency distribution may not yield any specific result or
inference. What we want is a single representative figure which can help us to make useful
inferences about the data and also provide yardstick for comparing different sets of data.
Data conversion: it is the process of transforming data from a research project to computer.
Dates back, key punch machines have been utilized to put the data on computer cards.

v. Report Preparation and Presentation

Having analyzed and interpreted the data, the next and the last major step is to put it in the form
of a report. Report writing is the function through which findings of research are communicated
to decision makers. Hence, the researcher, while writing the report, must ensure a fine balance to
the effect that the report conforms to the objectives of the research at the same time the executive
gets convinced of the value of the report to his organization. The content, quality and
presentation of the report determine how effectively the results of the market research are
communicated to the company or government executive who is expected to act on its
conclusions. There is no ideal format for a report. A report must use the format that best fits the
needs and wants of its readers on the one hand and the subject matter of the research, on the
other. The report format, which has sufficient flexibility to meet most situation, can be structured
into four parts: the preamble ( title page, table of contents, introduction; executive summary of
findings and conclusion & recommendation), main body of the report (description of research
methods, general background information about the market, description of market itself, and
conclusion and recommendation), and the appendices (tables, charts, questionnaire form, names
and addresses of sources and contacts, relevant details of sample, etc.) .

A meeting is arranged with the marketing managers and an oral presentation of the report is made
to enable the marketing managers understand the findings of the study and its implication to
decision making.
Activity 8
Answer the following questions in the space provided below each question
1. What are the problems encountered by companies carrying out international market
research in developing countries?
______________________________________________________________________________
______________________________________________________________________________
2. List down the problem areas associated with secondary data sources
_____________________________________________________________________________________
_____________________________________________________________________________________

3.4. Alternative Market Entry Strategies

Once the firm has taken the decision to enter into the field of international business it must
analyze the basic strategies/methods of entry.
There are basically five different strategies available for entry into a foreign market. They are
exporting, licensing, joint venture, manufacturing and management contracts.
a) Exporting
This is most commonly used methods for entering in foreign markets. Commonly used in India,
this method involves production of goods and services in the home country followed by
distribution into foreign market. This method is commonly adopted by countries entering into the
foreign market for- the first time since it minimizes the financial risks involved.
b) Licensing
When the company wants to protect its patent and trade mark rights, it simply licenses the
production of its product in the foreign market to another company in return to a fixed royalty.
This is done when either the market has developed very fast or export barriers have been
erected.
 c) Joint Venture

When a company does not possess the capacity to analyze and handle a particular market, it
enters into a joint venture. The primary reason for sharing the control of the market is to protect
itself against political and economic risks. Joint ventures are increasingly seen in the world
market because of this very reason. The other reasons for its existence and growth are
a) When the company does not possess competent personnel to handle foreign market or when it -
is short of capital
b) When a company feels that it would be good for their mutual advantage to enter in joint
venture because of specific resources possessed by the other partner (e.g. distribution
network, knowledge of culture).
c) Where wholly owned activities are not permitted by the foreign governments.

d) Manufacturing
When the company moves along its life cycle (with reference to international business) it
develops an international orientation. This motivates it to invest in foreign market and develop its
own manufacturing and marketing systems within that market.
The primary reason for this is to reduce the additional costs involved in foreign marketing.
It has to pay no duties on products produced within a foreign country. The transportation cost is
also minimized. It can take advantage of low cost labor and thereby minimize its production
costs. In an effort to become competitive in the world markets increasing number of firms are
undertaking this mode of entry. Nestle India and Hindustan Lever are illustrations of this mode of
entry.
e) Management Contracts
A country may not possess the required managerial or technical talent and therefore may not be in
a position to exploit its imported assets procured in aid or assets maintained by an expropriated
company in such a situation a company may sign a management contract with such country’s
government /company to manage the assets until such time that it has the available to resources
necessary for managing the assets. Example, foreign companies managing refineries/
petrochemical plants in the Middle East.

It is not a common phenomenon in international business but for some technologically oriented
firm it does represents an entry mode.

CHAPTER FOUR
INTERNATIONAL/GLOBAL MARKET SEGMENTATION, TARGETING
AND POSITIONING

1.1. Introduction

In unit three, you have learned international marketing research which will help you in providing
important information that can enable you to make international market segmentation, targeting
and positioning.

A company or firm should not attempt to serve all the customers in the market, since there are too
many customers in a market whose specific requirements are different. However these customers
and markets tend to exhibit some resemblance in their buying behavior. Hence a firm should, take
into account its own strengths and limitations , select the market(s) that it can serve most
effectively and draw up operational plans for marketing the product or service in the selected
markets. After identifying the segments, the next step is targeting, wherein the identified
segments are evaluated and compared, and the segments with greatest potential are selected.
Finally companies must plan ways to penetrate their chosen target market(s) by determining the
best Positioning for their product offerings. Here, marketers should devise an appropriate
marketing mix to set the product in the mind of the potential buyers in the target market.

Dear learner! Thus, this unit tries to address issues related to the bases of market segmentation,
the criteria and strategies for evaluating and selecting target markets, and ways international
marketers can position their products in the minds of their customers.

After you study this particular chapter, you are expected to:
 Define international market segmentations, targeting and positioning;
 Identify the benefits of international market segmentations;
 Discuss the different bases of market segmentation;
 Identify the criteria & strategies for evaluating and selecting target markets; and
 Describe the different ways of international product positioning.
 Evaluate different market segments

1.2. International/Global Market Segmentation

Dear learner, in this section we will look at the concepts of market segmentation, its benefit and
the base of market segmentation.
What is international market segmentation?
As you know, a market refers to a set of all actual and potential buyers of a product. It means that
buyers in the same market seek products broadly for the same function. But different buyers have
different evaluative criteria about what constitutes the right product for performing the same
function. Thus, within the same market there are submarkets that differ significantly from one
another. This lack of homogeneity within the same market may be due to the differences in
buying habits, the ways in which the product is used, motives for buying, etc. Therefore, it is
necessary to divide the market in to homogeneous submarkets for successfully marketing the
product.

Market segmentation is the process of identifying groups or set of potential customers at

national or international level who exhibit similar buying behavior. According to Philip Kotler
(2001), “market segmentation is dividing in to distinct groups of buyers with different needs,
characteristics, or behavior who might require separate products or marketing mixes”.
International market segmentation therefore is the process of dividing the total market in to
one or more parts (submarkets or segments) each of which tends to be homogeneous in all
significant aspects. A market segment refers to a submarket (a part) of the market which is
homogeneous in all significant aspects.

Benefits of Segmenting International Markets

Market segmentation allows a marketer to take a heterogeneous market (a market consists of
customers with diverse characteristics, needs, wants, and behavior), and carve it up in to one or
more homogeneous markets (markets made up of individuals or organizations with similar needs,
wants and behavioral tendencies). Segmenting helps in designing the market mix as per the
requirements of the customers which is beneficial not only to the marketers but also to the
customers.

The main benefits of market segmentation lies in a better understanding of the consumer needs
and behavior. In brief, market segmentation helps to:
 Understand potential consumers better
 Pay better attention to specific areas of marketing strategy
 Formulate marketing programmes more effectively
 Understand competition better
 Deploy marketing resources efficiently
 Promote the products more effectively
 Appropriate designing of the marketing mix
 In general, serve the customer better

Bases of Market Segmentation

International marketers must identify appropriate macro variables in segmenting markets. There
are three reasons why it is important to identify appropriate macro variables to segment
international markets, the reasons are:
 International markets vary each other with regard to the degree of sophistication required,
  Separating countries into different categories allows the firm to customize its marketing
strategies and
 A consistent umbrella strategy or positioning can be used across a number of markets.

Broadly, countries fall into three groups:

Primary markets: This is where high attractiveness coincides with high degree company
strengths. This might lead to the company investing heavily within the country (ies).
Secondary markets: These are riskier but there is still significant business to be gained
albeit through a lower level of strategic investment.
Tertiary markets: These are business gained through short-term, ad hoc and opportunist
activity with no serious commitment in an operational sense. However, good profit may
be earned here and there is no reason not to do business providing the level of financial
investment and risk to exposure is low.

Once key markets/countries have been identified and prioritized, further market research is
necessary to identify customer segments within the chosen countries using the recognized and
standard quantitative and qualitative research techniques. This further research is critical as the
key to successful international marketing is discovering clusters or segments of customers.
International companies are likely to segment world markets according to several key criteria,
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 using key dimensions of their business and market
environments-for example, government regulation to establish groupings. Let us see each as
follows:

a) Demographic Segmentation
Demographic segmentation is based on measurable characteristics of populations such as age,
gender, income, education, and occupation. For most consumer and industrial products, national
income is the signal most important segmentation variable and indicator of market potential. A
traditional approach to demographic segmentation involved clustering countries into segments of
high, middle and low income.

International markets should also consider the size of the population in market segmentation. For
example, the U.S. market with per capital income of $25,000, over $6 trillion income, and a
population of over 250, million people, is enormous. Other industrialized countries with similar
per capital income are nevertheless quite small in terms of total annual income. Many global
companies also realized that for products whose price is low enough-for example, cigarettes, soft
drinks, ball points pens, and transistor radios population is a more important segmentation
variable than income. There are also high-income segments in each of these countries that are
quite large and fast growing. Marketers should never be blinded by averages. It is also important
to point out that the preceding average income figures 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 to
determine the purchasing power of the local currency. In all cases for low-income countries, the
purchasing power of the local currency is much higher than the exchange value of the currency.

A more contemporary approach to demographic segmentation involves variables besides national

income – age, for example. One global segment based on demographics is global teenagers,
young people between the ages of 12 to 19. Teens exhibit consumption behavior that is
remarkably consistent across borders by virtue of their exposure to and interest in fashion, music,
and a youthful lifestyle. 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, trendy and image-oriented products)
makes it possible to reach the global teen segment with a unified marketing program.

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.
Technological change in telecommunications makes it easier to reach the global elite segment.
This segment’s needs are spread over various product categories: durable goods (prestigious
automobiles such as Mercedes Benz), non-durables, and financial services.
b) Psychographic Segmentation
Psychographic segmentation is the process of grouping people in terms of their attitudes, values,
and lifestyle. Commonly, psychographic segmentation is performed by dividing the market into
sections according to lifestyles or personality factors. Life style segmentation methods classify
people into different groups characterized by their opinions, activities and interests. It begins
with people, their lifestyles and motivations, and then determines how various marketing factors
fit into their life style. Data are obtained by means of questionnaires that require respondents to
indicate the extent to which they agree or disagree with a series of statement.
c) Behavior Segmentation
Behavior segmentation focuses on whether or not people buy and use a product as well as how
often and how much they use it. Behavioral variables such as occasions, user status, usage rate,
loyalty status, and buyer readiness stage enables the companies to segment the market
accordingly. Consumers can be categorized in terms of usage rate for example, heavy, medium,
light, and nonuser. Consumer can also be segmented according to user status that is potential
users, nonusers, ex-users, regular, first timers, and users of competitors’ products.
d) Benefit Segmentation
Markets could also be classified according to the benefits that the consumers seek from a
particular product. People buy products for their perceived benefits. Different product attributes
provide different customer benefits. The benefits demanded by customers vary by country,
culture and market segment. Companies attempt to provide differentiated products and services
for different market segments, each with its own distinctive or unique customer benefit. 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, decay
prevention seekers had large families, were heavy tooth paste users and were conservatives. Each
segment favored certain brands. A toothpaste company can use these findings to focus its brand
better and to launch new brands.
Activity 9
Answer the following questions in the space provided below.
Describe the reasons why marketers search for similarities more than differences in market
segmentation?
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________

1.3. Global Targeting

What is targeting?
Targeting is the act of evaluating and comparing the identified groups and 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 simultaneously creating the maximum
amount of value to consumers. A discussion of the criteria and strategies for evaluation and
selection of international marketing segments is in order.

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 market segment and anticipated growth potential,
competing, and the compatibility of the target with the company’s overall objectives and the
feasibility of successfully reaching it.

a) 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
company’s long-term strategy? Indeed, one of the advantages of targeting a market segment
globally is that while 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.
b) Potential competition: A market or market segment characterized by strong competition
(present and potential) may be a segment to avoid.
c) Compatibility and feasibility: If a global target market is large enough, and strong
competitors are either absent or not deemed to represent undefeatable obstacles, then the final
 consideration is whether a company can and should target that market. To be sure, reaching
global market segments requires considerable resources for advertising, distribution and other
marketing expenditures. Another question is whether the pursuit of a particular segment is
compatible with the company’s overall goals and established sources of competitive
advantage.

Targeting strategies
After evaluating the identified segments in terms of the three preceding criteria, marketers must
next decide on the appropriate targeting strategy. There are three basic categories for target
marketing strategies: Undifferentiated marketing, concentrated marketing, and differentiated
marketing.
 Undifferentiated global marketing: Undifferentiated global marketing is analogous to
mass marketing in a single country. Strictly speaking, it involves creating the same
marketing mix-product, price, distribution, and communications for a broad mass market
of potential buyers. The appeal of undifferentiated global marketing is clear:
Standardized products mean lower production costs. The same is true of standardized
global communications. Undifferentiated global marketing is a strategy that calls for
extensive distribution on the maximum number of retail outlets.
 Concentrated global marketing: This second global targeting strategy involves devising
a marketing mix to reach a single segment of the global market. Here the customer is seen
as unique and the product and/or service may also be seen in this manner. Members of an
aerospace industry, for example, might tie their efforts to a single customer.
 Differentiated global marketing: The third target marketing strategy represents a more
ambitious approach than concentrated target marketing. It entails targeting in to two or
more distinct market segments with multiple marketing mix offerings. This strategy
allows an organization to achieve wider market coverage.

In general, homogeneous markets are best exploited by undifferentiated marketing. The

differentiated or concentrated marketing is adopted in the case of heterogeneous markets. The
stage of the product in its life cycle is also a relevant factor in this regard. Undifferentiated
marketing or concentrated marketing may be adopted to develop primary demand at the stage of
introduction. Even the strategy of concentrated marketing may be employed at this stage. At the
saturation stage, the differentiated marketing becomes necessary.

Activity 10
Write the answer of the following questions on the space provided below each question.
1) List down the criteria that could be used to evaluate international market segments
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________
2) List down the strategies in selecting a global target market.
 _______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________

1.4. International/Global Product Positioning

What is positioning?
Positioning is a process whereby a company establishes an image for its product in the minds of
consumers relative to the image competitors’ product offerings. Product positioning is a
marketing strategy that attempts to occupy an appealing space in consumers’ mind in relation to
spaces occupied by the other competitive products.
That is your position the product in the mind of the prospective customer. Well known products
generally hold a distinctive position in consumer’s minds. For example: Coca-Cola as world’s
largest soft drink company and Porshe as one of the world’s best sports cars. These brands own
these positions and it would be difficult for a competitor to claim the same positions.
Studies suggest that global positioning is most effective for product categories that approach
either end of a “high-touch or high-tech” continuum. Both ends of the continuum are
characterized by high levels of customer involvement and a shared “language” among consumers.
1) High-Tech Positioning
This kind of positioning works well in situations where buyers already possess or wish to acquire
considerable technical information, Personal computers, video and stereo equipment, and
automobiles are examples for product categories where high-tech positioning has proven
effective. Such products are frequently purchased on the basis of concrete product features,
although image may also be important. High-tech products may be divided into three categories;
technical product, special interest products, and demonstrable products.
a) 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 who share a common “language”. For example, computer buyers in Russia
and the United States are equally knowledgeable about the different types of computers.
Marketing communications for high-tech products should be informative and emphasize
features.
b) Special interest products: While 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, Addis sports equipment, and Canon
cameras are said to be examples of successful global special-interest products.
c) Products that demonstrate well: Products that “speak for themselves” in advertising of
features and benefits can also travel well.
2) High-touch Positioning
Marketing of high-touch products requires less emphasis on specialized information and more
emphasis on image. Like high-tech products, high-touch categories are highly involving
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 that solve a common problem, global village products and products with a
universal theme.
a) 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 “life’s little moments”.
Advertisements that show friends talking over a cup of coffee in a café 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.
b) Global village products: Designer fashions, mineral water, and pizza are all examples of
products whose positioning is strongly international in nature. Fashions have traveled as a
result of growing worldwide interest in high-quality, high visible, high-price products that
often enhance social status. However, the lower-priced food products just mentioned show
that the global village category encompasses abroad price spectrum.
In global markets, products may have global appeal by virtue of their country of origin.
In consumer electronics, for example, Sony is a name synonymous with vaunted Japanese
quality, in automobiles, Mercedes is the embodiment of legendary German engineering.
c) 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-being or status), heroism
(themes include rugged individuals or self-sacrifice), play (leisure/recreation), and
procreation (images of courtship and romance).
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 sophisticated camera, for
example, could simultaneously be classified as technical and special interest. Other
products may be positioned in a “bi-polar” fashion, that is, as both high-tech and high-
touch.

SUMMARY
Before a company pursues market expansion opportunities by entering new geographic markets,
it must first analyze the global environment. The company exists in operation in a number of
countries and territories and each of which differs from all the others in some respects. At the
same time, there will be ways in which various countries, and the people who live there resemble
each other as well. Global market segmentation is defined as the process of identifying groups or
sets of potential customers at either the national or sub national level who are likely to exhibit
similar buying behavior. After marketers have identified segments, the next step is targeting, that
is, evaluating the segments and focusing marketing efforts on a country or group of people that
has significant potential to respond. Targeting reflects the reality that a company should identify
those consumers that it can reach most effectively and efficiently. Finally, companies must plan a
way to reach their chosen target market(s) by determining the best positioning for their product
offerings.

Positioning means finding a way to fix the product in the minds of potential buyers in the target
market by devising the appropriate marketing mix.

CHAPTER FIVE
THE INTERNATIONAL PRODUCT MIX
5.1. Introduction
Dear learner! You have come across the product concept in your basic marketing courses. In this
chapter, remember you will come across that product is one of the marketing mix. Marketing mix
is the set of marketing tools that the firm uses to pursue its marketing objectives in the target
market. The four elements of the marketing mix namely the four P’s are: Product, Price, Place
and Promotion.
Product is the important component of the marketing mix. A product is anything that is offered to
satisfy a need or want. A sound product policy needs to be developed for the optimum
satisfaction of the consumers.
Dear learner! This unit is classified into five sections. The first section presents the planning and
development of products. The second section deals with producing quality products. The third
section deals with developing global brands for the product developed. In section four and five
product and culture as well as physical and mandatory requirements and adaptations of product is
dealt respectively.
After you study this particular chapter, you are expected to:
 Discuss the arguments for & against product standardizations & adaptations in
product planning & development.
 Explain the importance of quality & how quality is defined.
 Discuss the country of origin effect on product image
 Appreciate the physical, mandatory, & cultural requirement for product
evaluation & adaptations.

5.2. Product Planning and Product Development

Dear learner, it is the considered view of many that though product is only one of the controllable
variables and there are other variables such as price, distribution and promotion in marketing,
product decisions are more basic than decisions in respect of other variables. This is because a
product, which is “good” which effectively meets customer requirements, is known to reduce, to
a great extent, problems in areas pertaining to other variables such as pricing, distribution,
promotion, etc. On the other hand a poorly conceived product in terms of market requirement,
adds to the problems in other decision areas.
What is a Product?
The first question for which the correct answer has to be found by the producer is; what is a
product? Is it physical attributes like shape, dimension, components, form, etc. or services? The
product may be defined as a bundle of utilities or satisfaction. It refers to the total offering by the
marketer. It may be physical dimension, characteristics, services, etc. Thus, the successes of the
company in the policy depends on how far it is able to understand the customer requirements in a
product in terms of its various attributes, and second, on how it is able to adjust its capabilities
and resources, on the one hand, and to the complex of these variables, on the other.
Standardization Verses Adaptation
There is a recurring debate about product planning and development that focuses on the question
of standardized or global products marketed worldwide versus differentiated products adapted, or
even redesigned for each culturally unique market. A firm may begin exporting the products it
sells in the domestic market. Alternatively, it may recognize the significant difference in
customer needs, conditions of product use, etc., and may plan for exporting different products or
product versions to meet the specific needs of each of its different products or product versions to
meet the specific needs of each of its different global market segments. In the latter case, the
exporting firm would thus offer a large product mix. Given the relative merits and demerits of
each of the available options, the basic question on international product policy relates to whether
the exporting firm should standardize or adapt the product for the export market. Let us learn
them in detail.
Standardization refers to offering a common product on a worldwide basis. Underlying arguments
offered by the proponents of standardized products is the premise that global communications and
other worldwide socializing forces have fostered a homogenization of tastes, needs, and values in
a significant sector of the population across all cultures. This has resulted in a large global market
with similar needs and wants that demands the same reasonably priced products of good quality
and reliability.

In support of this argument, a study made found that products targeted for urban markets in less-
developed countries needed few changes from products sold to urban markets in developed
countries. Modern products usually fit into life-styles of urban consumers wherever they are.
Other studies identify a commonality of preferences among populating segments across countries.
For instance, families in New York need the same dishwashers as families in Paris, and families
in Rome make similar demands on a washing machine as do families in Toledo.

Although recognizing some cultural variations, advocates of standardization believe that price,
quality, and reliability will offset any differential advantage of a culturally adapted product.
Product standardization leads to production economies and other savings that permit profits at
prices that make a product attractive to the global market. Economies of production, better
planning, more effective control, and better use of creative managerial personnel, savings on
common costs of research and development, product and package design, high cost of adaptation,
universal image etc. are the advantages of standardization. Such standardization can result in
significant cost savings but it makes sense only when there is adequate demand for the
standardized product.
To the contrary those who hold the opposing view i.e., adaptation, stress that the economic,
social, cultural, political and legal environment vary from country to country. This requires
making changes in the product to satisfy the local needs. Moreover, customization of product is
one of the important marketing strategies to succeed in the international market. Factors such as
the following and their implications influence the exporting firms’ decision in favor of product
adaptations and extreme cases even for new product development. These factors and their
implications on the product design are shown in table 4.1.
Table 5.1: Factors influencing product adaptation

Factor Implication for product design

Customer Orientation
(purchasing power, habit preferences, soico- Product range, size, brand name/mark, label,
cultural characteristics, literacy and education package color and instructions.
levels),

Stage of market development

 (Availability of infrastructure support Product form, packing, product simplification,
facilities, level of technical skills and change in tolerances, service after-sale.
maintenance).

Legal Consideration
(Patent safety standards, commercial terms, Brand name/mark, label, language,
control requirements). measurement units and sizes, instructions, and
packaging.

Climatic conditions and physical Environment

(Hot, cold climate, plains, hilly areas, living Packaging protections, package size, and
environment in home, etc.). product storage.

While the listed factors explain the scene of global product adaptation, the extent of product
adaptation is governed by cost-benefit accruing to the exporting firm, the state of competitors in
the host country market, and the nature of the product- mere adaptation is needed in consumer
non-durable goods for reason of varying tastes and preferences of consumer than in durable and
industrial goods. Some illustrations of product adaptations are: McDonaldd’s sell cheese burgers
in Australia to one segment of the market as a low-calorie diet food. Electrical system of 220-volt
for European market and 110-volt for North America. Coca-cola Corporation did not use the
brand name in China as Chainese translation of “Coca-Cola” means phonetically “bit the wax
tadpole”. Instead, it chose an idiomatic brand name meaning, “pleasure in the mount”.

The issue between these two extremes cannot be resolved with a simple either/or decision
because the prudent position probably lies somewhere in the middle. Most astute marketers
concede that there are definable segments across country markets with some commonalty of
product preferences and that substantial efficiencies can be attained by standardizing, but they
also recognize there may be cultural differences that remain important. The key issue is not
whether to adapt or standardize, but how much adaptation is necessary and at what point a
product can be standardized.
Most products are adapted to some degree, even those traditionally held up as examples of
standardization. Although the substantial portion of its product is standardized worldwide,
McDonald’s, a known fast food producer, includes vegetarian and lamb burgers in its India stores
to accommodate dietary and religious restrictions, and wine and beer in European stores. Pepsi
cola is said to reformulate its diet cola to be sweeter and more syrupy, and changed its name from
Diet Pepsi max to appeal to international markets where the idea of “diet” is often shunned and a
sweeter taste is preferred.
Even if different products are necessary to satisfy local needs, it does not exclude a standardized
approach. A fully standardized product may not be appropriate, but some efficiency through
standardizing certain aspects of the product may be achieved. Although complete standardization
could not be achieved, standardizing the platform (the core product) and customizing other
features to meet local preferences may attain efficiencies.
As companies gain more experience with the idea of global markets, the approach is likely to be
standardize where possible and adapt where necessary. To benefit from standardization as much
as possible and still provide for local cultural differences, companies are using an approach to
product development that allows such flexibility.
The idea is to develop a core platform containing the essential technology, and then base
variations on this platform. For example, Sony of Japan has used this approach for its walkman.
The basic walkman platform gives Sony the flexibility to adjust production rapidly to shifts in
market preference. It is interesting to speculate on the possibilities of using this approach for
standardizing the refrigerators discussed above.
Going even further to ensure that products meet the needs of local market regions and maintain
maximum benefits of globalization, companies are establishing research and development centers
within regions, to identify important product trends that can be incorporated into their product
lines. After the product concept is developed, then the product is offered to all units for
adaptation to local testes.
Neither to differentiate for the sake of differentiation nor adaptation for the sake of adaptation is
not a solution. Realistic business practice requires that a company strive for uniformity in its
marketing mix whenever and wherever possible, while recognizing that cultural differences may
demand some accommodation if the product is to be competitive. Later in the unit, various ways
of screening products to determine the extent of necessary adaptation will be discussed.
International Product Life Cycle
Dear learner you have learnt the concept of product life cycle which is important for product
planning in the pervious marketing courses. The different stages of life cycle may be managed in
such a way that the product attaining the maturity or declining stages may be introduced in
foreign market. Based on efficient use of factors of production in a particular country, the product
may be exported or imported among different countries. Let us learn the international product life
cycle in detail.
International product life cycle discusses the consumption pattern of the product in many
countries. This concept explains that the products pass through several stages of the product life
cycle. The product is innovated in country usually in a developed country to satisfy the needs of
the consumers. The innovator country wants to exploit the technological breakthrough and starts
marketing the products in foreign country. Gradually foreign country starts production and
becomes efficient in producing those commodities. As a result, the innovator country starts losing
its export market and finds the import of the product advantageous. In this way, the innovator
country becomes the importer of the products. Terpstra and Satayhy(2001) have identified four
phases in the international product life cycle. Let us learn them.
1) Export strength is evident by innovator country: Products are normally innovated in the
developed countries because they possess the resources to do so. The firms have the technological
knowhow and sufficient capital to invest on the research and development activities. The need of
adaptation and modification also forces the production activities to be located near the market to
respond quickly towards the changes. The customers are affluent in the developed countries that
may prefer to buy the new products. Thus, the manufacturers are attracted to produce the goods in
the developed country. The goods are marketed in the home country after meeting exporting
goods to them. This phase exhibits the introduction and growth stage of the product life cycle.
2) Foreign production starts: The importing firms in the middle income country realize the
demand potential of the product on the home market. The manufacturers also become familiar in
producing the goods. The growing demand of the products attracts the attention of many firms.
They are tempted to start production in their country and gradually start exporting to the low
income country. The large production in the middle income country reduces the export from the
innovating country. This shows the maturity stage of product life cycle where the production
activities start shifting from innovating country to other countries.
3) Foreign production becomes competitive in export market: The firms in low income
country also realize the demand potential in the domestic market. They start producing the
products in their home country by exporting cheap labor. They gain expertise in manufacturing
the commodity. They become more efficient in producing the goods due to low cost of
production. Gradually they start exporting the goods to other countries. The export from this
country replaces the export base of innovating country, whose export has been already declining.
This exhibits the declining stage of product life cycle for the innovator country. In this stage, the
product gets widely disseminated and other countries starts imitating the product. This is the third
phase of product life cycle where the products starts becoming standardized.
4) Import competition begins: The producers in the low income importing country gain
sufficient experience in producing and marketing the product. They attain the economies of scale
and gradually become more efficient than the innovator country. At this stage, the innovator
country finds the import from this country advantageous. Hence, the innovator country finally
becomes the importer of that product. In this stage of the product life cycle the product becomes
completely standardized.
In simple words, the theory of international product life cycle brings out that advanced (initiating)
countries play the innovative role in new product development. Latter for reasons of comparative
advantage or factor endowments and costs, such a product moves over to other developed
countries of middle income countries and ultimately gets produced and exported by less
developed countries.
The International product life cycle theory presents the following implications for international
product planners:
- Innovative products carry significant export potential;
- The marketer whose products face declining sales in one foreign market may find another
foreign market with encouraging demand for his product; and
- Innovative products improve the staying power of the international firm.
Product Development
Product development is an important way of satisfying the growing requirements of the
customers. The company should always try for “product development”. This means that even if
the sales turnover of the company’s product(s) in a market is reasonable, the firm should not
become complacent, but should be constantly looking for opportunities to improve the items in
terms of customer perception. In other words, the company should accept the premise that there is
always scope for improvement and be continuously attempting to make the product more and
more “knowledge intensive”.
Product development does not necessarily imply technical/quality improvement: it may mean
changes in quality, or making alternations in terms of size, shape, color, design, packaging,
branding, labeling, etc.
One of the biggest advantages of product development is that it offers, at least, a temporary
monopoly to a firm, which can be taken advantage of by the company for widening profit
margins. It must be realized by the firm that competitors will always be making attempts to copy
a successful product. If a company is continuously undertaking product development, the
competitors will find it difficult to keep pace with their “me too” products because, by the time
the competent firm succeeds in copying the company’s original product, the company would have
come out an improved version of the product.
Product development is not, and cannot be uniform for all types of products, all companies, all
times and under all circumstances. Hence, it would be very difficult to suggest any successful
formulas for product development. Each firm should decide, on its own, its road to product
development taking in to account the strengths and weaknesses and the opportunities and threats
in the environment in which it has to operate. Let us discuss a useful frame of reference for a step
by step process in product development in a hypothetical firm.
Idea Generation: The initial step in product development process as in many cases is collection
of new ideas. It should be the endeavor of the firm not only to look for opportunities to collect
new ideas but also, if possible, positively encourage new ideas through a formal set up within the
company. Ideas can come from any source within and from outside. Tthe possible sources of
product ideas could be competitors, suppliers, sales forces, distributors.
Idea Evaluation: All new ideas that are generated must be carefully evaluated from a number of
angles and discussed with as many different interests as possible with the objective of exploring
the possibility of converting the ideas into successful products. At this stage, some ideas may be
totally rejected, some may be accepted with modifications and some others may find acceptance
in to.
Engineering development: During the next stage the technical people, i.e., the engineering
department must work on converting the approved ideas into an improved product. At this stage
there are possibilities of failure in the sense that attempts to produce the product may not succeed.
It is also quite likely that some modifications need to be made in the ideas to suit the realities of
the manufacturing process.
Test Marketing: Once the engineering department comes out with the sample of the
new/improved product, it should be test marketed. Test marketing is selling the product under
conditions in a market which, to the extent possible, reflects the conditions likely to prevail in the
target market at the time of commercial sales. In a simple word, a new tangible product may be
given to a sample of people to use in their households (in the case of consumer goods) or their
organization (a business good). Results including sales and repeat purchases are monitored by the
company that developed the product.
Commercialization: Test marketing is the last stage where the company still has time to decide
as to whether any more modifications are required in the product or it can go ahead with
commercial production or altogether drop the idea. Once it is decided to go ahead with
commercial production, the firm may initiate action in this regard. Thus commercialization is a
stage where full-scale production and marketing programs are planned and finally, implemented.
5.3. Quality Products
Global competition is placing new emphasis on some basic tenets of business. It is reducing time
frames and focusing on the importance of quality, completive prices, and innovative products.
The power in the marketplace is shifting from a seller’s market to customers, who have more
choices because there are more companies competing for their attention. More competition, more
choices put more power in the hands of the customer, and drive the need for quality. Today the
customer knows what is best, cheapest, and best quality. It is the customer who defines quality in
terms of his or her needs and resources.
Certain countries products, like Japanese and American products have always been among the
world’s best, but competition is challenging them to make even better products. In most global
markets the cost and quality of a product are among the most important criteria by which
purchases are made. For consumer and industrial products alike, the reason often given for
preferring one product brand to another is better quality at a competitive price. Quality, as a
competitive tool, is not new to the business world but many people believe that it is the deciding
factor in world markets. However, we must be clear about what we mean by quality.
Quality can be defined on two dimensions: market-perceived quality and performance quality.
Both are important concepts but consumer perception of a quality product often has more to do
with market-perceived quality than performance quality. Take, for example, an airline’s delivery
of quality. If viewed internally from the firm’s perspective (performance quality), an airline has
achieved quality conformance with a safe flight and landing. But because the consumer expects
performance quality to be a given, quality to the consumer is more than compliance (a safe flight
and landing). Rather, cost, timely service, frequency of flights, comfortable seating, and
performance of airline personnel from check-in to baggage claim are all part of the customer’s
experience that is perceived as being of good or poor quality.
For example, considering the number of air miles flown daily, the airline industry is almost
approaching zero defects in quality conformance yet who will say that customer satisfaction is
anywhere near perfection? These market-perceived quality attributes are embedded in the total
product, that is, the physical or core product and all the additional features the consumer expects.
In a competitive marketplace where the market has choices, most consumers expect performance
quality to be given. Naturally if the product does not perform up to standards, it will be rejected.
When there are alternative products, all of which meet performance quality standards, the product
chosen is the one that meets market-perceived quality attributes.
Maintaining performance quality is critical, but frequently a product that leaves the factory at
performance quality is damaged as it passes through the distribution chain. This is a special
problem for many global brands where production is distant from the market and/or control of the
product is lost because of the distribution system within the market. In short, quality is not just
desirable, it is essential for success in today’s competitive global market, and the decision to
standardize or adapt a product is crucial in delivering quality.

5.4. Global brands

Hand in hand with global products are global brands. A global brand is defined as the worldwide
use of a name, term, sign, symbol, design, or combination thereof intended to identify goods or
services of one seller and to differentiate them from those of competitors. Much like the
experience with global products, there is no single answer to the question of either or not to
establish global brands. There is, however, little question of the importance of a brand name.
A successful brand is the most valuable resource a company has. The brand name encompasses
the years of advertising, good will, quality evaluation, product experience and the other beneficial
attributes the market associates with the product. Brand image is at the very core of business
identity and strategy. Customers everywhere respond to images, myths, and metaphors that help
them define their personal and national identities within a global context of world culture and
product benefits. Global brands play an important role in that process. The value of Kodak, Sony,
Coca-Cola, McDonald’s, Toyota, and Marlboro is indisputable. One estimate of the value of
Coca-Cola, the world’s most valuable brand, places it at over $35 billion. Naturally, companies
with such strong brands strive to use those brands globally. Even for products that must be
adapted to local market conditions, global brands can be successfully used.
A global brand gives a company a uniform worldwide image that enhances efficiency and cost
savings when introducing other products associated with the brand name, but not all companies
believe a single global approach is the best. Some companies like Kodak, Coca-Cola, and
Caterpillar use the same brands worldwide, while other multinationals such as Nestle and Gillette
have some brands that are promoted worldwide and others that are country specific.
Companies that already have successful country-specific brand names must balance the benefits
of a global brand against the risk of losing the benefits of an established brand. The cost of
reestablishing the same level of brand preference and market share for the global brand that the
local brand has must be offset against the long-term cost savings and benefits of having only one
brand name worldwide. In those markets where the global brand is unknown, many companies
are buying local brands of products that consumers want and revamping, repackaging, and finally
re-launching them with a new image.
Multinationals must also consider a rise in nationalistic pride that occurs in some countries and
impacts on brands. In India, for example, an international company, Unilever, considers it critical
that its brands, such as surf detergent Lux and Lifebuoy soaps, are viewed as Indian brands. Just
as is the case with products, the answer to the question of when to go global with a brand is, “It
depends-the market dictates.” Use global brands where possible and national brands where
necessary.
As discussed earlier, brands are used as external cues to taste, design, performance, quality,
value, prestige, and so forth. In other words, the consumer associates the value of the product
with the brand. The brand can convey either a positive or a negative message about the product to
the consumer and is affected by past advertising and promotion, product reputation, and product
evaluation and experience. In short, many factors affect brand image. On factor that is of great
concern to multinational companies that manufacture worldwide is the country-of-origin effect on
the market’s perception of the product.

Country-of-origin effect (COE) can be defined as any influence that the country of manufacture
has on a consumer’s positive or negative perception of a product. Today a company competing in
global markets will manufacture products worldwide and, when the customer becomes aware of
the country of origin, there is the possibility that the place of manufacture will affect
product/brand image.
The country, the type of product, and the image of the company and its brands influence whether
or not the country of origin will engender a positive or negative reaction. There are a variety of
generalizations that can be made about country-of-origin effects on products and brands.
Consumers tend to have stereotypes about products and countries that have been formed by
experience, hearsay, and myth. The following are some of the more frequently cited
generalization.
Consumers have broad but somewhat vague stereotypes about specific countries and specific
product categories that they judge “best”. English tea, French perfume, Chinese silk, Italian
leather, Japanese electronics, Jamaican rum, and so on. Stereotyping of this nature is typically
product specific and may not extend to other categories of products from these countries.
Countries are also stereotyped on the basis of whether they are industrialized, in the process of
industrializing, or developing. These stereotypes are less country-product specific; they are more
a perception of the quality of goods in general produced within the country. Industrialized
countries have the highest quality image, and there is generally a bias against products from
developing countries.
In Russia, for example, it is said that the world is divided into two kinds of products: “ours” and
“imported.” Russians prefer fresh, homegrown food products but imported clothing and
manufactured items. Companies hoping to win loyalty by producing in Russia might have been
unhappily surprised as consumers remain cool towards locally produced items. For Russians,
country-or-origin is more important than brand name as an indicator of quality. It is said that
South Korean electronics have difficulty in convincing Russians that they are as good as
Japanese.
One might generalize that the more technical the product, the less positive is the perception of
one manufactured in a less-developed or newly industrializing country. There is also the tendency
to favor foreign-made products over domestic-made in less-developed countries like our county,
Ethiopia. Foreign products do not charge equally well since consumers in developing countries
have stereotypes about the quality of foreign made products even from industrialized countries. A
survey of consumers in the Czech Republic found that 72 percent of Japanese products were
considered to be of the highest quality, German goods followed with 51 percent, Swiss goods
with 48 percent, Czech goods with 32 percent, and the United States with 29 percent.
One final generalization about COE involves fads that often surround products from particular
countries or regions in the world. These fads are most often product specific and generally
involve goods that are faddish in nature. In china, for example, anything that seems western to be
the fad. If it is western, it is in demand even at prices three and four times higher than domestic
products.
There are exceptions to the generalizations presented here but it is important to recognize that
country of origin can affect a product or brand’s image. Further, not every consumer is sensitive
to a product’s country of origin. A finding in a certain study shows that more knowledgeable
consumers are more sensitive to a product’s COE than less knowledgeable. The multinational
company needs to take this factor into consideration in product development and marketing
strategy since a negative country stereotype can be detrimental to a product’s success unless
overcome with effective marketing.
Once the market gains experience with a product, negative stereotypes can be overcome. It is said
that nothing would seem less plausible than selling chopsticks made in Chile to Japan, but it
happened. It took years for a Chilean company to overcome doubts about the quality of its
product, but persistence invitations to Japanese to visit the Chilean poplar forests that provide the
wood for the chopsticks, and a quality product finally overcame doubt; now the company cannot
meet the demand for chopsticks.
Country stereotyping can be overcome with good marketing. To maintain market share, global
brands will have to be priced competitively and provide real consumer value. Global marketers
must examine the adequacy of their brand strategies in light of such competition. This may make
cost and efficiency benefits of global brands even more appealing.

5.5. Products and Culture

To appreciate the complexity of standardized versus adapted products, one needs to understand
how cultural influences are interwoven with the perceived value and importance that a market
places on a product. A product is more than a physical item; it is a bundle of satisfactions (or
utilities) the buyer receives. This includes its form, taste, color, odor, and texture, how it
functions in use, the package, the label, the warranty, manufacturer’s reputation, the country of
origin, and any other symbolic utility received from the possession or use of the goods. In short,
the market relates to more than a product’s physical form and primary function.
The values and customs within a culture impute much of the importance of these other benefits.
In other words, a product is the sum of the physical and psychological satisfactions it provides to
the user.
Its physical attributes generally are required to create the primary function of the product. The
primary function of an automobile, for example, is move passengers from point A to point B.
This ability requires a motor, transmission, and other physical features to achieve its primary
purpose. The physical features or primary function of an automobile are generally in demand in
all cultures where there is a desire to move from one point to another other than by foot or animal
power. Few changes to the physical attributes of a product are required when moving from one
culture to another. However, an automobile has a bundle of psychological features as important in
providing consumer satisfaction as its physical features. Within a specific culture, other
automobile features (Color, size, design, brand name, price) have little to do with its primary
function, the movement from point A to B, but do add value to the satisfaction received.
The meaning and value imputed to the psychological attributes of a product can vary among
cultures and are perceived as negative or positive. To maximize the bundle of satisfactions
received and to create positive product attributes rather than negative attitude, adaptation of the
nonphysical features of a product may be necessary.
Adaptation may require changes of any one or all of the psychological aspects of a product. A
close study of the meaning of product shows to what extent the culture determines an individual’s
perception of what a product is and what satisfaction that product provides.
The adoption of some products by consumers can be affected as much by how product concept
conflicts with norms, values, and behavior patterns as by its physical or mechanical attributes. A
novelty always comes up against a closely integrated cultural pattern, and it is primarily this
determines whether, when, how, and in what form it gets adopted. For instance, it was said that, it
has been difficult to introduce insurance into Moslem countries because the pious could claim
that it partook of both usury and gambling, both explicitly vetoed in the Koran. The Japanese
have always found all body jewelry repugnant. The Scots have a resistance to pork and all its
associated products, apparently from days long ago when such taboos were decided by
fundamentalist interpretations of the bible.
When analyzing a product for a second market, the extent of required adaptation required
depends on cultural differences in product use and perception between the market where the
product was originally developed for and the new market. The greater these cultural difference
between the two markets, the greater the extent of adaptation that may be necessary.
The problems of adapting a product to sell abroad are similar to those associated with the
introduction of a new product at home. Products are not measured solely by their physical
specifications. The nature of the new product is in what it does to and for the customer-to habits,
tastes, and patterns of life.
What significance, outside the intended use, might a product have in a different culture? When
product acceptance requires changes in patterns of life, habits, tastes, the understanding of new
ideas, acceptance of the difficult to believe, or the acquisition of completely new tastes or habits,
special emphasis must be used to overcome natural resistance to change.
Innovative Products and Adaptation
An important first step in adapting a product to a foreign market is to determine the degree of
newness perceived by the intended market. How people react to newness and how new a product
is to a market must be understood. In evaluating the newness of a product, the international
marketer must be aware of that many products successful in a certain country, having reached the
maturity or even decline stage in their life cycles, may be perceived as new in another country or
culture and, thus, must be treated as innovations. From a sociological viewpoint, any idea
perceived as new by a group of people is an innovation.
Whether or not a group accepts an innovation and the time it takes to do so depends on its
characteristics. Products which are new to the social system are innovations, and knowledge
about the diffusion (i.e., the process by which innovation spreads) of innovation is helpful in
developing a successful product strategy. Marketing strategies can guide and control to a
considerable extent of the rate and extent of new product diffusion because successful new
product diffusion is dependent on the ability to communicate relevant product information and
new product attributes.

Diffusions of innovation
The goal of a foreign marketer is to gain product acceptance by the largest number of consumers
in the market in the shortest span of time. However, new products are not always readily accepted
by a culture: indeed, they often meet resistance. Although they may ultimately be accepted, the
time it takes for a culture to lean new ways to learn to accept a new product, is of critical
importance to the marketer since planning reflects time frame for investment and profitability.
Solutions to the problems of whether or not the probable rate of acceptance can be predicted
before committing resources and, more critically, if the probable rate of acceptance is too slow,
whether it can be accelerated from examining the work done in diffusion research. A diffusion
research is a research on the process by innovations spread to the members of a social system.
Knowledge of the process may provide the foreign marketer with the ability to assess (lie time it
takes) for a product to diffuse-before it is necessary to make a financial commitment. It also
focuses the marketer’s attention on features of a product that provoke resistance, thereby
providing an opportunity to minimize resistance and hasten product acceptance.
At least three extraneous variables affect the rate of diffusion of an object, the degree of
perceived newness, the perceived attributes of the innovation and the method used to
communicate the idea. Each variable has a bearing on consumer reaction to a new product and the
time needed for acceptance. An understanding of these variables can produce better product
strategies for the international marketer.
As perceived by the market, varying degrees of newness categorize all new products. Within each
category, numerous reactions affect the rate of diffusion. In giving a name to these categories,
one might think of (1) congruent innovations, (2) continuous innovations, (3), dynamically
continuous innovations, and (4) discontinuous innovations.
A congruent innovation is actually not an innovation at all because it causes absolutely no
disruption of established consumption patterns. It is where the market perceives no newness, such
as cane sugar versus beet sugar.
A continuous innovation has the least disruptive influence on established consumption patterns.
Alteration of a product is almost involved rather than the creation of a new product. Generally the
alterations result in better use patterns perceived improvement in the satisfaction derived from its
use. Examples include toothpaste, disposable razors, and flavors in coffee.
A dramatically continuous innovation has more disruptive effects than a continuous innovation,
although it generally does not involve new consumption patterns. It may mean the creation of a
new product or considerable alteration of an existing one designed to fulfill new needs arising
from changes in life-styles or new expectations brought by change. It is generally disruptive and
therefore resisted because old patterns of behavior must change if consumers are to accept and
perceive the value of the dynamically continuous innovation. Examples include electric
toothbrushes, electric hair curlers, central air-conditioning, cellular telephones, and freeze-dried
foods.
Finally, a discontinuous innovation involves the establishment of new consumption patterns and
the creation of previously unknown products. It introduces an idea or behavior pattern where
there was none before. Example includes television, the computer, the internet, ATMs (automatic
teller machines), and microwave ovens.
The extent of a product’s diffusion and its rate of diffusion are partly functions of the particular
product’s attributes. Each innovation has characteristics by which it can be described, and each
person’s perception of these characteristics can be utilized in explaining the differences in
perceived newness of an innovation. The adjustment of these attributes or product adaptation can
lead to changes in consumer perception and thus to altered rates of diffusion. Emphasis given to
product adaptation for local cultural norms and the overall brand image created age critical
marketing decision areas.
Analysis of characteristics of innovation
The more innovative a product is perceived to be, the more difficult it is to gain market
acceptance. However, the perception of innovation can often be changed if the marketer
understands the perceptual framework of the consumer.
Analyzing the five characteristics of an innovation can assist in determining the rate of
acceptance or resistance of the market to a product including the products:
 Relative advantage (the perceived marginal value of the new product relative to the old);
 Compatibility (its compatibility with acceptable behavior, norms, values, and so forth);
 Complexity (the degree of complexity associated with product use)
  Trial ability (the degree of economic and/or social risk associated with product use): and
 Observability (the ease with which the product benefits can be communicated) affect the
degree of its acceptance or resistance.

In general, it can be postulated that the rate of diffusion is positively related to relative advantage,
compatibility, trial ability and observability, but negatively related to complexity.
By analyzing a product within these five dimensions, a marketer can often uncover perceptions
held by the market, which if left unchanged, would slow product acceptance. Conversely, if these
perceptions are identified and changed, the marketer may be able to accelerate product
acceptance.
The evaluator must remember it is the perception of product characteristics by the potential
adopter, not the marketer that is crucial to the evaluation. A market analyst’s self-reference
criterion (SRC) may cause a perceptual bias when interpreting the characteristics of a product.
Thus, instead of evaluating product characteristics from the foreign user’s frame of reference,
analyzing from the marketer’s frame of reference, leads to a misinterpretation of the cultural
importance.
Once the analysis has been made, some of the perceived newness or cause for resistance can be
minimized through skilful marketing. The more congruent product perceptions are with current
cultural values, the less resistance there will be and the more rapid product diffusion or
acceptance will be.
A product can often be modified physically to improve its relative advantage over competing
products, enhance its compatibility with cultural values, and even minimize its complexity. Its
relative advantage and compatibility also can be enhanced and some degree of complexity
reduced through advertising efforts. Small sizes, samples, packaging and product demonstrations
are all sales promotion efforts that can be sued to alter the characteristics of an innovative product
and accelerate its rate of adoption.
The marketer must recognize not only the degree of innovativeness a product possesses in
relation to each culture, but also marketing efforts relied an understanding of the importance of
innovativeness to product acceptance and adoption. One of the values of analyzing characteristics
of innovations is that it focuses on the efforts or the marketer issues that influence the acceptance
of a product concept. It is possible to accentuate the positive attributes of an innovation, thus
changing the market’s perception to a more positive and acceptable attitude.

5.6. Physical or Mandatory Requirements and Adaptations

A product may have to change in a number of ways to meet physical or mandatory requirements
of a new market, ranging from simple package changes to total redesign of the physical core
product. A study reaffirmed that mandatory adaptations were more frequently the reason for
product adaptation than adapting for cultural reasons. Some changes are obvious with relatively
little analysis: a cursory examination of a country will uncover the need to rewire electrical goods
for a different voltage system, simplify a product when the local level of technology is not high or
print multilingual labels where required by law.
Legal, economic, political, technological, and climatic requirements of the local marketplace
often dictate product adaptation. For example, during a period in India when the government was
very anti-foreign investment Pepsi-cola hanged its product name to Lehar-Pepsi (in Hindi lehar
means wave) to gain as much local support as possible. The name returned to Pepsi-Cola when
the political climate turned favorable. Laws that vary among countries usually set specific
package sizes and safety and quality standards to make a purchase more affordable in low-income
countries; the number of unit per package may have to be reduced from the typical quantities
offered in high-income countries.
Changes may also have to be made to accommodate climatic differences. For instance, it was
reported that the general motors’ of Canada, experienced major problems with several thousand
Chevrolet automobiles shipped to a Mideast country, it was quickly discovered they were unfit
for the hot, dusty climate. Supplementary air filters and different clutches had to be added to
adjust for the problem. Even crackers have to be packaged in tins for humid areas.
Product Alternatives
When a company plans to enter a market in another country, careful consideration must be given
to whether or not the present product lines will prove adequacy in the new culture. Will they sell
in quantities large enough and at prices high enough to be profitable? If not, what other
alternatives are available? The marketer has at least four viable alternatives when entering a new
market:
Sell the same product presently sold in the home market (domestic market extension strategy);
Adapt existing products to the tastes and specific needs in each new country market (multi-
domestic market strategy);
Develop a standardized product for all markets (global market strategy); or acquire local brands
and reintroduce.
An important issue in choosing which alternative to use is whether or not a company is starting
from scratch (i.e., no existing products to market abroad), whether it has products already
established in various country markets, or whether there are local products that can be more
efficiently developed for the local market than other alternatives.
For a company starting fresh, the prudent alternative is to develop a global product. If the
company has several products that have evolved over time in various foreign markets, then the
task is one of repositioning the existing products into global products. In some case, a company
encounters a market where local brands are established and the introduction of a company brand
would take too long and be more costly than acquiring the local brand.
The success of these alternatives depends on the product and the fundamental needs it fulfill, it’s
characteristics, perception within the culture, and the associated costs of each program. To know
that foreign markets are different and different product strategies may be needed is one thing; to
know when adaptation of your product line and marketing program is necessary is another, more
complicated problem.
Evaluating a product for marketing in a country market requires a systematic method of screening
products to determine if there are cultural resistances to overcome and/or physical or mandatory
changes necessary for product acceptance. Only when the psychological (or cultural) and physical
dimensions of the product, as determined by the country market, are known can the decision for
adaptation be made.
Before entering a market, the international marketer can analyze the components of a product to
determine what features need to be adapted to ensure that the product meets both the market-
perceived quality and performance quality.
Analysis of Product Components
A product is multidimensional, and the sum of all its features determines the bundle of
satisfactions (utilities) received by the consumer. To identify all the possible ways a product may
be adapted to a new market; it helps to separate its many dimensions into three distinct
components. The components are core component, packaging component, and support services
component. These components includes all product’s tangible and intangible elements and
provide the bundle of utilities that the market receives from the use of the product.
A) The Core Component
The core component consists of the physical product- the platform that contains the essential
technology-and all its design and functional features. It is on the product platform that product
variations can be added or deleted to satisfy local differences.
Major adjustments in the platform aspect of the core component may be costly because a change
in the platform can affect product processes and thus require additional capital investment.
However, alterations in design, functional features, flavors, color, and other aspects can be made
to adapt the product to cultural variations.
Functional features can be added or eliminated depending on the market. In markets where hot
water is not commonly available washing machines have heaters as a functional feature. In other
markets, automatic soap and bleach dispensers may be eliminated to cut costs and/or to minimize
repair problems. The physical product and all its functional features should be examined as
potential candidates for adaptation.
B) Packaging Component
The packaging component includes style, features, packaging, labeling, trademarks, brand name,
quality, price, and all other aspects of a product’s package. As with the core component, the
importance of each of these elements in the eyes of the consumer depends on the need that the
product is designed to serve. Packaging components frequently require both discretionary and
mandatory changes. For example, some countries require labels to be printed in more than one
language, while others forbid the use of any foreign language.
Care must be taken to ensure that corporate trademarks and other parts of the packaging
component do not have unacceptable symbolic meanings. Particular attention should be given to
translations of brand names and colors used in packaging elements. The packaging component
may incorporate symbols, which convey an unintended meaning and thus must be changed. For
example, Yellow flowers used in another company as trademark were rejected in Mexico, where
a yellow flower symbolizes death or disrespect.
Package size and price have an important relationship in poor countries. Companies find that they
have to package in small units to bring the price in line with spending norms.
There are a countless reasons why a company might have to adapt a product’s package. For
example, a poorly packaged product conveys an impression of poor quality to the Japanese. It is
also important to determine if the packaging has other uses in the market. Size of the package is
also a factor that may make a difference to success in Japan. Soft drinks are sold in smaller-size
cans than in the United States to accommodate the smaller Japanese hand. In Japan, most food is
sold fresh or in clear packaging, while cans are considered as dirty.
Labeling law varies from country to country and does not seem to follow any predictable pattern.
In Saudi Arabia, for example, product names must be specific. Prices are required to be printed
on the labels in Venezuela, but in Chile it is illegal to put prices on labels or in any way suggest
retail prices. It was reported that Coca-Cola ran into a legal problem in Brazil with its Diet Coke
had to get special approval around this restriction, with the new Chinese labeling law, however,
food products must have their name, contents, and other specifics listed clearly in Chinese printed
directly on the package.
Marketers must examine each of the elements of the packaging component to be certain that this
part of the product conveys the appropriate meaning and value to a new market otherwise they
may be caught short. For example, a U.S. soft-drink company that incorporated six-pointed stars
as decoration on its package labels faced a severe problem from as Arab customers. It was only
when investigating weak sales did they find they had indecently offended some of their Arab
customers who interpreted the stars as symbolizing pro-sraeli sentiments.
C) Support Service Component
The support services component includes repair and maintenance, instructions, installation,
warranties, deliveries, and the availability of spare part. Otherwise many successful marketing
programs might ultimately fail if little attention is given to this product component.
In some countries, the concept of routine maintenance or preventive maintenance is not a part of
the culture. As a result, products may have to be adjusted to require less-frequent maintenance.
Literacy rates and educational levels of a country may require a firm to change product’s
instructions. A simple term in one country may be incomprehensible in another. It was said that
the Brazilians have successfully overcome low literacy and technical skills of users of the
sophisticated military tanks it sells to Third world countries. They include videocassette players
and videotapes with detailed repair instructions as part of the standard instruction package. They
also minimize spare parts problems by suing standardized, off-the-shelf parts available
throughout the world.
While it may seem obvious to translate all instructions into the language of the market, many
firms overlook such a basic point. “Danger,” or “Use No oil”, have little meaning to those parts
of the world unfamiliar with the English language.
The product component model can be a useful guide in examining adaptation requirements of
products destined for foreign markets. A product should be carefully evaluated on each of the
three components for mandatory and discretionary changes that may be needed.
Activity 11
How can problems created by labeling laws be solved by companies selling products in various
markets with different labeling laws?
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Summary
The firms required to understand the perception of the product in the domestic market and the
international market. It should strive to place a product that matches consumers’ perception.
Besides, the creation of favorable perception among the customers, the firm has to decide about
the standardization or adaptation of the product. Economics of scale, common R&D cost,
universal image of the product, etc. makes strong case for standardization of the product. The
social, political, economic, cultural and legal requirements demand adaptation of the product.
The product strategies may be devised keeping in view the concept of the product life cycle.
Depending on the nature of the product and the market, a number of alternate strategies may be
considered for stretching the life cycle of a product. The various stages of life cycle like
introduction, growth, maturity and decline may be properly analyzed for effective product
planning. The concept of international product life cycle throws light on the consumption pattern
of the product in many countries. Product development is another important way of satisfying the
growing requirements of the customers. The marketer requires improving or developing the
products in terms of customer perception. The development of new product may offer temporary
monopoly of the firm in the market. The major steps of product development includes: idea
generation, idea evaluation, engineering development, test marketing and the commercialization.
The product development or improvement should be a continuous process of the firm.
Understanding that an established product in one culture may be considered as an innovation in
another is critical in planning and developing consumer products for foreign markets. Analyzing
a product as an innovation and using the product component model may provide the marketer
with important leads for adaptation.
 CHAPTER SIX
THE INTERNATIONAL PRICING MIX

6.1. Introduction
Dear learner, welcome to the second marketing mix, i.e., international product pricing. This unit
assumes that you are already aware of the basic pricing decisions that companies must make in a
single-country or domestic environment. In this unit, we focus on the unique aspects of
international pricing.
You might have noticed when you were traveling abroad that the price of the same branded
product (for instances, tooth paste, shaving cream, shampoo, soft drink etc.) varies from country
to country. In some cases, the price of an imported product in a country may be less than that in
the country of manufacture for the same product. You might have also come across cases of local
manufacturers complaining of items being “dumped” in to the country by an overseas firm. There
are also cases of firms charging low prices as “initial offer” for some items, offering seasonal
discounts on some products, selling expensive items on credit or arranging finance to buy
products like cars etc. You might also felt that the prices of some products are very high and
perhaps cannot be justified on cost of production considerations alone. What are the reasons for
all these? Is there any philosophy behind these? Do firms follow a well planned strategy in regard
to Pricing? In this unit, you will learn the meaning and objectives of pricing, factors to be
considered in setting price, methods and practices, strategy, procedures and calculation of price
for international product.
After you study this particular chapter, you are expected to:
 Define pricing products
 Explain pricing objectives in international operatives
 Identify factors affecting pricing
 Describe approaches to international product pricing
 Discuss global pricing strategies

6.2. Definition and Objectives of Pricing

Price is the amount of money charged to the customer for services or products delivered to them.
Or it is the amount of money and /or other items with utility needed to acquire a product. Utility
is an attribute that has the potential to satisfy wants.
The success in international marketing in the present circumstances depends, among other things,
on right pricing of the product. But it has not been considered independent of other elements of
international marketing mix such as product, placement and promotion. Price is the only element
of the marketing mix that is revenue generating; all of the others are costs. It should therefore be
used as an active instrument of strategy in the major decision making areas of marketing.
The main objective of pricing in international marketing should be to meet the customer demand
in a competitive situation in such a way that sales and profit are maximized. The pricing
objectives may vary depending up on the stage of product lifecycle and a country specific
situation. However, the following other objectives of pricing are also pursued in relation to
specific products and markets.
Penetration: A new entrant to a foreign market may quote a low price to divert demand from a
regular channel of supply or to generate new demand as low priced quotation may bring these
about. The image disadvantage of the new comer and the nature of his/her product may also
necessitate quoting low price.
Skimming: After an exporter has gained a strong foothold in a foreign market and has built up a
good image for himself/herself and his/her product, he/she may charge premium price to
maximize gain and can continue so long as the highest possible price does not affect adversely
the market demand. The image advantage of the firm and the nature of the product, for example,
vanity item may also be the reasons for quoting high price.
Holding Market Share: The objective is pursued by those companies that want to maintain their
share in the market, usually in relation to single country marketing. They react to price
adjustment by completion and exchange rate fluctuations. They have to take in to consideration
their competitive position as well as the ability and willingness of their customers to pay.
Enhancing Share: This pricing objective is allied to the preceding one with the only difference
that the companies, in this context, try to out-price their competitors either by improving their
cost efficiency or by quoting price based on direct costs and not on total costs.

6.3. Factors Affecting International Pricing

After reviewing the objectives of pricing in international marketing, let us briefly look in to the
factors affecting pricing decision. The three basic factors which determine pricing decisions in
international marketing are:
a) Cost of the Product: cost means the amount of expenditure incurred to produce a job or a
product or to render a particular service. Therefore, understanding the various cost elements
can be considered a prerequisite for a successful international pricing strategy. According to
standard accounting practice, costs are divided into two categories. Fixed costs and variable
costs. Fixed costs do not vary over a given range of output, where variable costs change
directly with output. The element of cost includes production costs, international transfer
costs, such as tariffs, transportation, insurance, taxes, and local channel costs. Such costs
frequently make exported products more expensive than domestic ones, and this fact must be
taken into consideration if a company wants to compete effectively.
b) Competition in the Foreign Market: The nature and size of competition can significantly
affect price levels in any given market. A firm acting as the sole supplier of a product in a
given market enjoys greater pricing flexibility. The opposite is true if that same company has
 to compete against several other local or international firms. Therefore, the number and type
of competitors greatly influence pricing strategy in any market. For example, the public
postal, telephone, and telegraphy services of most countries including our country, Ethiopia
are monopoly, allowing them to charge high rates with no threat of competition.
Also the nature of the completion is important. Local competitors may have different cost
structures from those of foreign companies, resulting in different prices. Market prices for the
same product may vary from country to country based on the competitive situation.
c) Demand for the Product in the Foreign Market: The overall demand for the product also
affects pricing. In pricing a company may estimate the total demand for the product. It is
easier to do for an established product than for a new one.
In addition some other specific factors, mentioned below, are to be considered in pricing for
international marketing.
 Exchange rate changes in relation to target market
 International transportation costs- keeping in view the mode of transport used
 International channel of distribution costs in respect to the product concerned
 Nature of international market in terms of trade practices and marketing environment,
both at micro and macro levels
 Governing trade policies and price regulations including anti-dumping legislation
 Varying inflation rates and interest rates in different countries
 Global marketing requirements which may warrant charging the same price in all overseas
markets.
These factors should be kept in view while formulating and adjusting prices in relation to
international marketing.
d) Managerial Issues in Global Pricing
Dear learner, we have seen factors to be considered while setting international product pricing.
Let me direct your attention toward managerial issues such as transfer pricing, quoting in foreign
currencies, export price escalation, price arbitrage, and gray-market pricing. These recurring
issues require constant management attention: they are never ‘really considered solved. These
helps you to realize how managers determine transfer pricing, describe how managers quote
prices in a foreign currency, and how managers deal with parallel imports and export price
escalations.
e) Determining Transfer Prices
The cost to the importing or buying subsidiary depends on the negotiated transfer price agreed on
by the two involved units of the international firm. Let us see first the concept of transfer pricing.
In international marketing, different units under the same corporate body but located in different
foreign countries exchange goods and services among themselves. The pricing of such exchange
(of goods and services) is known as transfer pricing. In simple words transfer pricing is pricing of
goods and services exchanged between a company and its foreign affiliate/subsidiary. How these
prices are set continues to be major issues for international companies and governments alike.
Because negotiations on transfer prices do not represent arm’s-length negotiations between
independent participants, the resulting prices frequently differ from free market prices.
Companies may deviate from arm’s-length prices for two reasons. They may want to (1)
maximize profits or (2) minimize risk and uncertainty. To pursue a strategy of profit
maximization, a company may lower transfer prices for products shipped from some subsidiaries,
while increasing prices for products shipped to other. The company will then try to accumulate
profits in subsidiaries where it is advantageous and keep profits low in other subsidiaries.
Different tax, tariff, or subsidy structures by country frequently invite such practices by
accumulating more profits. Likewise, tariff duties can be reduced by quoting low transfer prices
to countries with high tariffs. In cases where countries use different exchange rates for the
transfer of goods as opposed to the transfer of capital or profits, at less advantageous rates. The
same is true for countries with restrictions on profit repatriation. Furthermore, a company may
want to accumulate profits in a wholly owned subsidiary rather than in one that is minority owned
by using the transfer price mechanism. It can avoid sharing profits with local partners.
Companies may also use the transfer price mechanism to minimize risk or uncertainty by moving
profits or assets out of a country with chronic balance-of-payment problems and frequent
devaluations. Since regular profit remittances are strictly controlled in such countries, many firms
see high transfer prices as the only way to repatriate funds and thereby to reduce the amount of
assets at risk. The same practice may be employed if a company anticipates political or social
disturbances or a direct threat to profits through government intervention.
Rigorous use of the transfer pricing mechanism to reduce a company’s income taxes and duties
and to maximize profits in strong currency areas can create difficulties for subsidiary managers
whose benefits are artificially reduced. It is generally agreed that a transfer price mechanism
should not seriously impair either morale or resource allocations, since gains incurred through tax
savings may easily be lost through other inefficiencies. In fact, governments do not look
favorably on transfer pricing mechanisms aimed at reducing their tax revenues.
f) Quoting Price in a Foreign Currency
For many international marketing transactions, it is not always feasible to quote in a company’s
domestic currency when selling or purchasing merchandise. Although the exporters may tend to
quote prices in their own local currency, there are situations in which customers may prefer
quotes in their own national currency. For most import transactions, sellers usually quote the
currency of their own country. When two currencies are involved, there is the risk that a change
in exchange rates may occur between the invoicing data and the settlement date for the
transaction. This risk, the foreign exchange risk, is an inherent factor in international marketing
and clearly separates domestic from international business. In such circumstances, special
techniques are available to protect the seller from the foreign exchange risk.
The tools used to cover a company’s foreign exchange risk are either (a) hedging in the forward
market or (b) covering through money markets. Foreign exchange futures or options are also
available but still it represents only a small fraction of the total volume. These alternatives are
given because of the nature of foreign exchange. For most major currencies, international foreign
exchange dealers located at major banks quote a spot price and forward price. The spot price
determines the number of dollars to be paid for a particular foreign currency purchased or sold
today. The forward price quotes the number of dollars to be paid for a foreign currency bought or
sold 30, 90, or 180 days from today. The forward price, however, is not necessarily the market’s
speculation as to what the spot price will be in the future. Instead, the forward price reflects
interest rate differentials between two currencies for maturities of 30, 90, or 180 days.
Consequently, there are no firm indications as to what the spot price will be for any given
currency in the future.
A company quoting in foreign currency for purchase or sale can simple leave settlement until the
due data and pay whatever spot price prevails at the time. Such an uncovered position may be
chosen when exchange rates are not expected to shift or when any shift in the near future will
result in a gain for the company. With exchange rates fluctuating widely on a daily basis, a
company will expose itself to substantial foreign exchange risks. Since many international firms
are in business to make a profit from the sale of goods rather than from speculation in the foreign
exchange markets, managements generally protect themselves from unexpected fluctuations.
One such production lies in the forward market. Instead of accepting whatever spot market rate
exists on the settlement in thirty or ninety days. The corporation can opt to contract for future
delivery of foreign currency at a firm price, regardless of the spot price actually paid at that time.
This allows the seller to incorporate a firm exchange rate into the price determination. Of course,
if a company wishes to predict the spot price in ninety days and is reasonably certain about the
accuracy of this prediction, a choice may be made between the more advantageous of the two: the
expected spot or the present forward rate. However, such predictions should only be made under
the guidance of experts familiar with foreign exchange rates.
An alternative strategy, covering through the money market, involves borrowing funds to be
converted into the currency at risk for the time unit settlement. In this case a company owes and
holds the same amount of foreign currency resulting in a corresponding loss or gain when settling
at the time of payment. Acceptance for hedging through the forward market depends on the
expected spot rate at the time the foreign payment is due. Again, keep in mind that the forward
rate is not an estimate of the spot rate in the future.
g) Dealing with Parallel Imports or Gray Markets
One of the most perplexing problems international companies face is the phenomenon of different
prices between countries. When such price differentials become large, individual buyers or
independent entrepreneurs step in and buy products from low- price countries to re-export to
high-price countries, profiting from the price different. This arbitrage behavior creates what
experts call the “gray market” or “parallel important because these imports take place outside of
the regular trade channels controlled by distributors or company-owned sales subsidiaries. Such
price differences can occur as a result of company price strategy, margin differences, or currency
fluctuations.
International companies can deal with parallel, or gray-markets at two levels. Once such practices
occur, a firm may use a number of strategies in a reactive way. This may range from confronting
the culprit to price-cutting, supply interference, emphasis of product limitations, all the way to
acquisition of the diverter involved. A number of proactive strategies may be implemented to
prevent the practice from occurring at all. A company may provide product differentiation solely
to prevent gray markets from developing. Strategic pricing may be used to keep prices within
limits. Cooperation may be achieved with dealers willing to cooperate. And finally, companies
may use strict legal enforcement of contracts and even resort to lobbying governments with the
aim of adding regulations that may prevent the practice.
Product arbitrage will always occur when price differentials get too large and when transport
costs are low in relation to product value. International companies will have to monitor price
differentials more closely for standardized products in particular. Products that are highly
differentiated from country to country are also less likely to become parallel traded.
h) Managing Export Price Escalation
The additional costs described earlier may raise the end-user price of an exported product
substantially above its domestic price. This phenomenon called export price escalation, may force
a company to adopt any one of two strategic patterns. First, a company may realize its price
disadvantage and adjust the marketing mix to account for its “luxury” status. By adopting such a
strategy, a company sacrifices volume to keep a high unit prices.
Alternatively, a company may grant a “discount” on the standard domestic prices to bring the
end-user price more in line with prices paid by domestic customer. Such discounts may be
justified under marginal-contribution pricing methods. Because of reduced marketing costs at the
manufacturer’s level, particularly when a foreign distributor is used, an export price equal to a
domestic price is often not justified. Legal limits such as antidumping regulations prevent price
reductions below a certain point. Customary margins, both wholesale and retail, may differ
considerably among countries, with independent importers frequently requiring higher margins
than domestic intermediaries do.
6.4. Approaches to International Product Pricing
Price is an important element of marketing mix. It affects the firm’s ability to stay in the market.
Therefore the price of the product must reflect the value which the consumer perceives in the
product. In fact, setting the price for the product may be the key to success or failure in the
market. Main methods of pricing in international marketing are: Cost-plus method, Marginal cost
pricing methods, Differential pricing, Probe pricing, Penetration pricing, skimming pricing and
Competitive pricing. They are briefly described below:
a) Cost plus Method: This technique implies charging the total costs plus profit. Costs include
all the special costs incurred in international trade such as special packing marketing, labeling
according foreign market requirements, transportation, insurance, handling ,taxes and levies
at different stages from the place of origin in the exporting country to the destination on
foreign market, depending on terms of sale. In this pricing method the exporters try to recover
all costs along with the profit from overseas customers. So, it may lead to high prices for the
 end users. It must be realized that the market situation and the nature of completion vary from
country to country; hence it may not always be possible to apply this method.
b) Marginal Cost Pricing: Charging full costs plus profit may not possible in all international
transactions. Hence, depending on the nature and extent of completion, less than full cost,
sometimes only the variable costs or even less than that may have to be charged. In a stringent
situation, exporters may charge price to cover only prime costs or just material cost-plus
packing and other direct export marketing cost. This is known as Marginal Cost pricing
Method. This pricing strategy is followed to penetrate the foreign markets and maintain the
market share of the firm.
c) Differential Pricing: This is the most pricing practice in international marketing. As nature
and extent of competition and business environment vary from country to country and from
segment to segment , differential pricing may be followed for the same product in different
markets according to the principle, ‘what the traffic can hear’ . In fact depending on the
market situation, price, along with other elements of marketing mix, is to be adopted for
effective and gainful international marketing.
d) Probe Pricing: A new entrant to a foreign market, who may not have full knowledge of the
market and the mature and strength of competition tries to probe the prospective market by
quoting price approximation relating to sales volume and value. Concessions on invoice price
may be offered to attract the customer. Cost plus profit and competitor’s prices usually
constitute the parameters of probe pricing.
e) Penetration Pricing: In order to penetrate in to a new market lower than the ruling market
price may be charged. This penetration price may yield managerial surplus over the full cost
or in some cases even the total cost may not be realized. This method is considered feasible
only when more gainful prices may be possible to be realized in future.
f) Skimming Pricing: This type of pricing is restored to by an exporter who has gained a strong
foothold (a near monopoly position) in a foreign market and has acquired a highly
competitive position with an image of a dependable supplier of quality product. With the help
of a well thought-out promotion programme, emphasizing the value deliverable from the
product, higher price may be charged to maximize gain. Vanity items or items that involve
high research development expenditure for manufacturing and marketing or items that are
unique to a particular company or country which cannot be easily copied by competitors are
amenable to skimming pricing.
g) Competitive Pricing: In international marketing a watchful and seasoned marketer always
keeps track of prices quoted by competitors. He/she tries to adjust and adapt his/her prices to
remain in the market. This type of pricing is known as competitive pricing. Alternate pricing
and motivating pricing are other methods of pricing in international marketing. Usually the
beginners apply cost-plus method or probe pricing and follow the techniques, employed by
the leading firms in the market where as the other methods are applied by the established
marketer who have a clear understanding of the market behavior and the customers response
to price variations.

6.5. Global Pricing Strategies

As international companies deal with market and environmental factors, they face two major
strategic pricing alternatives. Essentially, the choice is between the global, single-price strategy
and individualized country strategy.
To maximize a company’s revenues, it would appear to be logical to set prices on a market-by-
market basis, looking in each market for the best maximum profit. For many products, however,
noticeable price differences between markets are taken advantage of by independent companies
who see a profit from buying in lower-price markets and exporting products to high-price
markets. For products that are relatively similar in many markets and for which transportation
costs are not significant, substantial price differences will quickly result the emergence of the
gray market. As a result, fewer companies have the possibility of pricing on a market-by-market
basis. As the markets become more transparent, the information flows more efficiently, and as
products become more similar, the trend away from market-by-market pricing is likely to
continue.
Employing a uniform pricing strategy in a global scale requires that a company which can
determine its prices in local currency, will always charge the same price everywhere. In reality,
this becomes very difficult to achieve whenever different sales, trade margins, and customs duties
are involved. As a result, there are likely to be price differences due to those factors that are not
under control of the company. Keeping prices identical aside from those non-controllable factors
is a challenge. Firms may start out with identical prices in various countries but soon find that
prices have to change to stay in line with often substantial currency fluctuations.
Although it is becoming increasingly clear for many companies that market-by-market pricing
strategies will cause difficulties, many firms have found that changing to a uniform pricing policy
is rather like pursuing a moving target. Even when a global pricing policy is adopted, a company
must carefully monitor price levels in each country and avoid large gaps that can cause problems
when independent or gray market forces move in and take advantage of large price differentials.

Activity 12
1. Describe the approaches to lessening prices escalation.
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2. What are the overall objectives of the transfer pricing system? Describe
______________________________________________________________________________
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6.6. Methods of Payment in International Trade
To succeed in today’s global marketplace and win sales against foreign competitors, exporters
must offer their customers attractive sales terms supported by the appropriate payment methods.
Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate
payment method must be chosen carefully to minimize the payment risk while also
accommodating the needs of the buyer. As shown in figure 1, there are five primary methods of
payment for international transactions. During or before contract negotiations, you should
consider which method in the figure is mutually desirable for you and your customer.

This section examines the ways in which companies are paid for their exports. It focuses on
developing payment policies and procedures that suit the company’s best interests. Various
payment options are compared, with a step-by-step analysis of the documentary collection and
letter of credit transactions. Instructing the buyer on opening a letter of credit, as well as careful
screening of them is included. Other topics include: document preparation, how to handle non-
payment of the letter of credit, the draft transaction and the preparation and presentation of
collection letters.

It is imperative for all companies engaging in international trade to fully understand the standard
methods of collecting their money from foreign importers and distributors. The standard methods
of payment used in international trade are:
 Cash in advance
 Open account,
 Documentary collection
 Commercial Letters of Credit

Each payment method carries certain risks and costs, which often are the responsibility of the
exporter. These costs and risks should be analyzed, evaluated and negotiated before shipping in
order to price your product accordingly and satisfy all parties involved in the transaction.

Least Secure Less Secure More Secure Most Secure

Exporter Consignment Open Documentary Letters of Cash-in-

Account Collections Credit Advance

Importer Cash-in- Letters of Documentary Open Consignment

Advance Credit Collections Account
Figure 1: Payment Risk Diagram

Key Points
 International trade presents a spectrum of risk, which causes uncertainty over the timing of
payments between the exporter (seller) and importer (foreign buyer).
 For exporters, any sale is a gift until payment is received.
 Therefore, exporters want to receive payment as soon as possible, preferably as soon as an
order is placed or before the goods are sent to the importer.
 For importers, any payment is a donation until the goods are received.
 Therefore, importers want to receive the goods as soon as possible but to delay payment as
long as possible, preferably until after the goods are resold to generate enough income to
pay the exporter.
There are many variations of each of these payment terms that must be understood, since each
transaction will need to be evaluated on its own merit. This section will include examples of the
variations in basic payment terms.

6.6.1. Selecting the Correct Payment Method

A company can often use the same methods of checking the buyer’s credit worthiness as in the
U.S. Sometimes, complete and accurate information is not available, so the exporter needs to
make a credit decision based on the available information. The seller also has an additional credit
decision to make in international trade that is not considered when selling within the U.S. That is
to evaluate the credit worthiness of the country in which the buyer resides. The most important
factors to consider are the availability of exchange and the political and economic stability of the
country. At a minimum, deciding on which payment terms you will offer or agree to with your
overseas customers should include the following:

The country risk: The buyer’s country has the ultimate control over the exchange and release of
dollars, which of course is what an exporter would like in exchange for their goods. Many
developing nations implement import regulations and exchange control mechanisms that can
make a payment, in a hard currency like the dollar, difficult at times. This is because they like to
hold onto certain minimums of hard currencies, like the dollar, to be able to pay off foreign debts
and obtain other financing.

The buyer’s bank’s reputation: If the payment is by a letter of credit, or draft with the bank as the
drawee, or if the bank is in any way obligated to pay you, their reputation and financial stability is
an issue. Again, proper research done on the buyer’s bank and advice from your own
international banker can assist you in deciding whether to work with them or not. Occasionally,
an exporter’s strategy includes requiring the buyer to use a bank recommended by your own bank
in order to complete the transaction.
The credit worthiness of the buyer: In some rare cases, international credit reports on foreign
firms are vague, difficult to obtain, too expensive or non-existent. This is why you should ask for
both trade and financial references in your potential distributor evaluation form, and insist on
adequate credit and credit history before ever selling on open account. If the buyer has good
credit, they usually are readily able to prove it.

The competition: It is difficult to compete for business if others interested in selling similar
products are offering more favorable credit terms. Naturally, most importers are interested in
obtaining open account status if they are able to. If the business is promising and you can
properly insure your receivables, you might consider it. However, if there is any doubt in your
mind about the risk of non-payment, consider holding your ground or even passing on the
business. If the buyer really wants the product they might agree to your terms over the
competition. Your international bank can be of great assistance in guiding you in those decisions.
The volume and value of the shipment: In most cases, the larger the shipment, the higher the
value. That means most of the costs associated in exporting the goods are also more expensive.
Lower value shipments, less expensive to ship may call for a more lenient credit position, such as
cash in advance, or open account. But if the value of the shipment is going to have an adverse
effect on your daily operations, you need to carefully consider asking for cash in advance, at least
partially by deposit, or a letter of credit.

6.6.2. Classification of international payment methods

6.6.2.1. Consignment Controlled Shipments
Consignment control refers to keeping the export documents, which are title to the goods, out of
the hands of the buyer until you have either been paid, or have the assurance from the buyer’s
bank or your bank that you will be paid. This is done by obtaining cash in advance, but also by
other means, such as use of a collection, either a “sight’ draft or “time draft,” or by using a letter
of credit, which also uses a draft, either on a sight or time basis.

These payments involve the title documents being relayed through international banks, who are
either obligated under International Chamber of Commerce guidelines to collect the monies for
you, or make other arrangement to pay you at a later date, depending on the type of payment you
use. The bank will not turn over the documents to the buyer until either the sight or time
requirements have been executed. Without title documents, your buyer is unable to recover the
goods and clear them through customs.
 6.6.2.2. Payment Methods Other Than Letters of Credit

a) Payment by Cash in Advance

Cash in advance, a wire transfer or bank draft, is often used on lower value shipments. It is a
sensible option because International open account can average nearly 90 days until payment on a
worldwide basis. Paying someone to manage a small open account for 3 months might result in
losing money on the sale.

Cash in advance opportunities for export payments exist, usually when the buyer has significant
interest in obtaining product from the seller, access to the preferred method of currency and is
quite fiscally sound. Otherwise, it is the least preferred method of payment for the buyer,
although the most attractive for the seller. It should also be pointed out that both the wire transfer
and payment by foreign check are also used on open account payments.

Cash in advance is also used in cases, when the value is higher, say $25,000 to $50,000 or
beyond, and you are custom-making the product. Reselling the product to another buyer might be
difficult, if not impossible. In this case, you would need at least a significant deposit to cover the
cost of raw material and labor in order to protect yourself. If you are selling stock items that you
can resell and are comfortable with the buyer or control the title of the goods, then you might
consider other options.

b) Payment by Wire Transfer

Payment by wire transfer is a fully electronic means of payment and the fastest way for the seller
to be paid. It is also easier to trace the movement of the funds between banks and uses pin
numbers to allow authorized use and frequent transfers between the same accounts. An exporter
can be paid this way in U.S. dollars or other currencies if they prefer. A common payment policy
for an exporter using cash in advance by wire transfer is to release the shipment to the
international freight forwarder or carrier once the transfer has been deposited into their account.

There are fees for this service method, by both the buyer’s and seller’s banks, which are usually
split between them. Occasionally, a transfer can get lost or be delayed and there are some steps
involved in establishing the correct information between parties, so it is more complicated than
making electronic payments within a country. The buyer may be concerned that it is not possible
to stop the payment once it has been executed. In order to ensure accurate routing and processing
of wire transfer, the seller should provide the buyer with the following details:
 Name and address of the receiving bank and branch
 The receiving bank’s electronic identification codes, such as SWIFT, Telex and ABA
numbers (SWIFT is the acronym given to the Society of Worldwide International
 Financial Telecommunications, an EDI technology, telex communications are still used in
the international banking industry and ABA is the American Bankers Association Routing
Number)
 The seller’s name, address, bank account title and account number

c) Payment by Foreign Check

Payment by check is convenient when the routing details for payment are unknown or do not
exist. It is not a preferred method of payment for an exporter as it is easy for the buyer to stop
payment, the transit time can be slow and it cannot clear until the funds have been obtained by the
buyer’s bank. If it is paid in another currency, the value may change during the collection period
due to currency fluctuations.

d) Payment by Open Account

While we commonly use this term domestically, it has a slightly different connotation in
international trade. The seller must determine what open account means to the buyer and gain a
clear understanding of when to expect payment under this method. Also you may want to back up
this method of payment, when the buyer demands it, with a bank guarantee from the buyer’s
bank. A bank guarantee means that the buyer’s bank is willing to guarantee that you will be paid
in the event that the buyer fails to pay. Another backup would be foreign credit insurance on your
receivables that would pay in the event of non-payment for either commercial or political losses.

Open account is not uncommon between international traders. It actually represents nearly 70%
of all trade transactions by recent estimate. Many of those business relationships did not start out
on open account. As an exporter, you not only have to decide on which payment methods should
be implemented in different countries for different buyers and at different amounts of credit, but
how your payment methods should be managed after you have experienced timely payments by
your customers.
Many firms may start out by mandating cash in advance or letters of credit and then move to a
more flexible form of payment, such as the use of a collection or open account. The key is using a
“consignment controlled” payment method until you are comfortable working with the buyer on
open credit. You might even change payment methods between shipments based on the size and
amount of value, method of shipment or time of season.

Reasons for Seller to Offer Open Account Terms

 Existing customer with good credit history
 Customer’s preference
 A competitive advantage

Reasons for the Buyer to Request Open Account Terms

 No risk to the buyer (the seller bears all the risk)
  Documents are expedited to the buyer’s control
 Inspection of the goods prior to paying may be possible

e) Payment by Draft (or Documentary Collection)

This payment method is most often used in international trade in the exchange of merchandise for
money. With this method, the goods are shipped to the foreign country, but the documents are
sent to the buyer’s bank. The buyer’s bank will release possession of the documents once the
buyer has made payment arrangements (sight), or signed a promise to pay at a later date (time).
It is also important to note that documentary collections are used on their own as payment
mechanisms as well as in support with letters of credit. An exporter can be paid on a sight draft or
time draft as stand-alone methods, or be paid on a sight or time letter of credit, which indicates
what type of draft is to be presented along with the L/C and documents for payment.

Important Vocabulary for Drafts

i. Draft Collection Procedure
Under this method, goods are shipped to the foreign country, but generally not consigned to the
buyer. Bills of lading are usually consigned to the order of the shipper or the buyer’s bank, (with
their permission) which will release their possession once the buyer has made payment
arrangements or signed a promise to pay at a later date.

The exporter, their bank or their international freight forwarder, prepares a draft drawn on the
buyer or their bank, and submits the draft together with the documents and instructions to the
buyer’s bank. If drawn on the buyer, the buyer’s bank notifies the buyer to come in to the bank
and either pay or accept the draft. Once completed, the documents are turned over and the buyer
can make clearance arrangements. If a sight draft, the remitted amount would be wired to the
seller’s bank, which credits the seller’s account after collecting their fee.
ii. Risk of Non-Payment
Payment by documentary collection is not as expensive as a letter of credit, but leaves the seller
at risk if the buyer refuses to honor the draft. The exporter’s advantage with a sight draft is that
the bank still controls the documents and notifies you of the nature of the problem, waiting for
your instructions. Options then include re-negotiating with the buyer to accept the draft, locating
another possible buyer in that country or one near it or having the goods returned at the exporter’s
expense.
The only thing worse than an unaccepted sight draft is one that is accepted on a time basis, and
then left unpaid when it matures, or becomes due. In this case, your recourse for collection is only
an endorsed draft from the buyer, so it is quite similar to open account. Many experts in this field
recommend that you never draw a time draft directly to the buyer, but rather the buyer’s bank,
with the bank’s approval. They also recommend avoiding consigning the bill of lading directly to
the buyer, but rather to their bank or “to order of shipper,” making it negotiable.
Although the consignment is controlled and the costs are less than a letter of credit, the bank’s
involvement is restricted in protecting you, unless the drafts are drawn on them. They are under
no obligation to pay you as they are with a letter of credit, and these processes are governed by
their own International Chamber of Commerce guidelines. Before using these instruments, you
should become familiar with the specifics or obtain consultation on the details.

iii. Rules on the use of Draft Collections

These rules are published by the International Chamber of Commerce (ICC), located in Paris, but
with an office in New York. The title of the rules is “The Uniform Rules for Collection, ”
publication number URC 522, revised January 1, 1996. The rules are revised from time to time
and when they are revised, those who use drafts need to apprise themselves of any changes.

6.6.2.3. Commercial Letter of Credit

If not required by the foreign government, the letter of credit (L/C) is commonly used when the
risk of non-payment is too great to allow any other form of payment except for cash in advance,
and the buyer is unwilling or unable to pay that way. The letter of credit is an electronically
generated contract between the buyer’s bank and the exporter. The buyer’s bank substitutes the
credit of the buyer with their own, at a fee and with a set of instructions to accomplish in order to
secure payment.

Under this term, the buyer’s bank enters into a letter of credit contract with the seller, stipulating
them as the beneficiary. The buyer’s bank then (usually) contacts a bank in the United States and
asks them to either advise the letter of credit to the seller in the U.S. or to add their confirmation.
By adding their confirmation, the U.S. bank agrees to pay the beneficiary even if they are unable
to collect from the issuing (buyers) bank. The most important aspect of a letter of credit is that the
banks involved have no obligation to pay in the event of serious discrepancies on the documents
supplied by the beneficiary (seller).

i. Why Use Letters of Credit?

For the seller, the L/C allows for minimal risk exposure. Although not a guarantee of payment,
the issuing bank is obligated to pay if all of the terms and conditions have been met. This
payment method may also allow for financing from Federal, State or private financial institutions,
which may provide working capital and advance partial payment, as an incentive to export from
the United States.
The buyer may use the L/C for financing and protection against delayed shipment, improper
insurance coverage or incorrect amount or type of products being shipped. The issuing bank is
not obligated to pay the seller if there are any discrepancies in the document that would indicate
that the terms and conditions have not been met. The method of payment is designed to protect
both parties to the transaction.
ii. Basic Types of Letters of Credit
There are three basic features of letters of credit, each of which has two options. These are
described below. Each letter of credit has a combination of each of the three features.

a) Sight Or Term/Usance
Letters of credit can permit the beneficiary to be paid immediately upon presentation of specified
documents (sight letter of credit), or at a future date as established in the sales contract
(term/usance letter of credit).

b) Revocable Or Irrevocable
Letters of credit can be revocable. This means that they can be cancelled or amended at any time
by the issuing bank without notice to the beneficiary. However, drawings negotiated before notice
of cancellation or amendment must be honored by the issuing bank. An irrevocable letter of credit
cannot be cancelled without the consent of the beneficiary.

c) Unconfirmed Or Confirmed
An unconfirmed letter of credit carries the obligation of the issuing bank to honor all drawings,
provided that the terms and conditions of the letter of credit have been complied with. A
confirmed letter of credit also carries the obligation of another bank which is normally located in
the beneficiary’s country, thereby giving the beneficiary the comfort of dealing with a bank
known to him.

iii. The Rules on Letters of Credit

The International Chamber of Commerce (ICC) writes the guidelines for using letters of credit.
The most current publication of these rules is the “Uniform Customs and Practice for
Documentary Credits,” revised July 2007, publication UCP 600. It is the exporter’s responsibility
to understand these rules and to prepare documents as stipulated in the rules. For this reason,
most exporters use their international export assistance agencies and service providers, such as
freight forwarders and international departments of banks, to help them prepare for payment
under letters of credit. Copies of this publication can be obtained from an international banker or
purchased from the ICC Publications located at www.iccwbo.org.

iv. Parties to the Letter of Credit Transaction

There are multiple names for the same parties in the letter of credit transaction. This is because it
combines banking terms with international shipping terms. Although a little confusing at times, it
is imperative to understand what the letter of credit says and to whom it refers at each point.
Letters of credit often use one or more terms to describe the same business entity in different
areas. Understanding the vocabulary used in letters of credit is essential to a successful payment.

v. Instructions for the Buyer on Opening a Letter of Credit

Prior to the letter of credit being issued, the exporter should send a clear set of instructions
detailing what elements to include in it, based on their ability to perform the responsibilities. This
should be sent along with the pro forma invoice, which indicates the payment method. The
exporter needs to clearly indicate what they can and cannot do and to which bank the letter of
credit should be sent. It is to the exporter’s advantage to work with a bank they know in their
region rather than one who has no knowledge of their business or industry.
The instructions should be combined with other letter of credit requirements that are decided
upon between the seller and the bank in the foreign country prior to opening the L/C. The letter of
credit is an agreement between the seller and his bank, and the bank issuing the letter of credit
will place requirements in it that protect their interest. However, it is a very wise choice to advise
the buyer, and therefore the buyer’s bank, of the verbiage and requirements that you find
acceptable. By doing this, the exporter will avoid the obligation to produce documents that are
typically not applicable to the industry or other requirements that cannot be fulfilled.

vi. Main Differences between Drafts and Letters of Credit

 Obligation to pay: With a collection, the obligation to pay is with the buyer only, and
with an L/C the obligation is with the issuing/confirming bank.
 Risk to seller: The risk to the seller is usually greater with payment by collection and
usually less with a L/C.
 Documentation: Documentation is not checked for accuracy on a collection, but is under
a L/C.
 Role of the bank: The bank’s role is passive on a collection; with a L/C, it is very active
as the issuing/confirming bank has substituted its credit for that of the buyer.

vii. Terminology and Procedure of the Letter of Credit

The following list describes the usual course of action for payment under an exporter letter of
credit, whether advised or confirmed:
1) The pro forma invoice and the terms of sale and payment are agreed upon.
2) Instructions on opening the L/C are sent to the buyer.
3) The buyer establishes a line of credit with his bank.
4) The buyer’s bank issues a letter of credit to either the branch, correspondent or nominated
bank.
5) The bank may or may not authorize confirmation, even if requested.
6) The advising bank forwards a letter of credit to the seller.
7) The seller carefully analyzes the L/C and coordinates shipment with a freight forwarder who
assists with the pro forma invoice quotation.
8) The seller proceeds to ship if all terms are acceptable.
9) The freight forwarder arranges shipment and completes required documentation evidencing
compliance with the terms and conditions of the credit.
10) Documents required by the L/C, demonstrating compliance, are sent to the advising or
confirming bank that carefully checks against terms and conditions.
11) If using a confirmed letter of credit, the draft is drawn on the confirming bank on either a
sight or time basis; at sight payment is made within two business days, while a time draft is
accepted by the confirming bank and payment is made within terms of the draft.
12) If using an advised letter of credit, documents are sent to the issuing bank for secondary
review, and the draft is drawn on either the issuing bank or applicant at sight or on time basis.
13) The buyer is notified by the issuing bank of compliance.
14) The issuing bank then pays the confirming or advising bank, which has paid or will pay the
beneficiary based on the terms and conditions of the draft.
15) Documents are released to buyer or customs broker who makes arrangement for clearance.
16) The buyer takes title to goods to use or resell in their market.

viii. Screening the Letter of Credit

Letters of credit are not a “guarantee” of payment, just an assurance of payment, once the seller
has shipped the correct goods in the correct amount at the correct time, by the correct mode of
transport and can prove it in their documentation. The exporter should always send clear
instructions for issuance, analyze the L/C carefully upon receipt and prepare the documents
exactly as the L/C states, sometimes even when it makes no sense. Banks pay on the strength of
the documents, not on your good word. The best advice is to never guess, ask all the questions
you need to and ask for help. Many export service and a assistance providers are available to help
in this area.
Seller’s Responsibility
Once the exporter has received the letter of credit, the first thing they need to do is take the time
to screen it very carefully. If the exporter has any questions or concerns, they should consult with
either their freight forwarder or advising/confirming bank in order to clear up any confusion. The
exporter needs to, at a minimum, examine for accuracy and completion of each detail:
 Verify that the L/C is drawn in irrevocable form and subject to the UCP 600, published by
the International Chamber of Commerce
 Spelling – make sure all of the company, product and other information that will appear
on your documentation is correct
 Shipping information – origin, destination and method need to match your quotation
 Merchandise description – spelling is important as well as what the L/C is “covering,”
which is what they are paying for, as it needs to match what you are selling them
 Terminology – anything unfamiliar to your company needs to be cleared up as it might
delay or prevent payment if not addressed properly
 Match with pro forma invoice – does the L/C match your quotation, especially in regards
to the amount to be paid and trade term?
 Dates – the issuing date, latest shipment date, latest date for presentation of documents to
the bank and expiry date all need to be noted and considered
 Insurance – the requirement for coverage, type of coverage and cost should all be noted
 Costs – check for unfamiliar costs and responsibilities for paying for services that you
have offered in your quote, or perhaps not been aware of
 Documents – check the required documents carefully and make sure they can be obtained,
prepared and presented correctly to the bank for payment
 Trade terms – most L/C’s are based on a specific trade term, such as “FOB” or “CIP” and
this should match your pro forma invoice and also be correct as far as prepaid or collect
freight charges

ix. Document Preparation

Correct preparation of documents is necessary for prompt payment. The following list should be
used to ensure that documents have been prepared in accordance with the letter of credit
requirements.
a) The Draft:
 Must be signed on the front.
 Must be drawn on the correct party (Drawee – to whom the draft is addressed – usually
the paying bank, in letter of credit transactions).
 Amount should be spelled out, and in figures, both of which should agree.
 Tenor must be correct (i.e. “at sight” – “at 90 days from sight”).
 Must be endorsed on the reverse, if payable to drawer (Drawer – person making the draft
– in letter of credit transactions, the beneficiary or seller).
  Must agree with the invoice amount.
 Must not be altered, i.e. no corrections or erasure.
b) The Commercial Invoice:
 Must show the terms of sale – i.e. CIF, FOB and EXW.
 Must be addressed to the buyer.
 Must be signed by the beneficiary as required by the L/C.
 The amount of freight charges must agree with those shown on the bill of lading (if
shown).
 The exact merchandise description as shown in the letter of credit must match the invoice.
The invoice may show other information but must contain the letter of credit merchandise
description.
c) The Bill of Lading:
 Must be “clean.” (A clean bill of lading is a bill of lading showing no defects in the goods
or packaging).
 May not be acceptable if issued by a forwarding agent. If transshipment is prohibited in
the letter of credit, a bill of lading evidencing transshipment is not acceptable. In cases
where shipment is to be made by air, it is advisable to have transshipment allowed in the
letter of credit.
 Must show shipment “on board” a named vessel and the on board date must be noted on
the bill of lading.
 The bills of lading must show the number of original bills of lading issued, and if more
than one original has been issued all the originals must be presented.
 Amount of freight charges shown in the bill of lading must agree with those on the
invoice.
 Weight and number of packages shown on the bill of lading must agree with those shown
on weight lists of packing lists (if any).
 Merchandise description must be consistent with that shown on the commercial invoice
and the letter of credit. Ports of loading and destination, consignee, notify party, must
coincide with those shown in the letter of credit.
 Must be presented to the paying bank within 21 days from the on board date, unless
otherwise specified in the letter of credit.
d) Insurance Policy:
 Unless otherwise stipulated in the credit, insurance must be issued for the total invoice
value of the goods, including freight and insurance charges, plus 10%.
 Must not be dated later than the on board date shown on the bill of lading, unless the
merchandise has been insured with coverage to start prior to shipment on board (i.e.
coverage from warehouse to warehouse).
 The insurance must be issued in the same currency as the letter of credit.
 If the insurance is payable to the shipper, then he must endorse the insurance policy on the
reverse.
 Insurance documents must be as specified in the credit and must be issued and/or signed
by insurance companies, their agents or by underwriters.
  Coverage must be adequate to cover all the risks required on the letter of credit.
e) Packing List:
 The packing list must show the number of packages, etc., and be consistent with other
documents.
f) The Certificate of Origin or Consular Invoices:
 Must agree in form with invoice, bill of lading and the letter of credit.
 Description of merchandise must agree with L/C, invoice and other documents.
 Weight shown must match bill of lading and other documents.
 Value shown (if applicable) must match all other documents.
 The Chamber of Commerce or the buyer’s consulate must approve it with their stamp,
unless otherwise specified in credit.

The best way to avoid discrepancies in the documents is to prepare them in great detail, matching
the letter of credit perfectly and in accordance with the UCP 600. Again, international freight
forwarders, especially the ones who help the exporter with the original quote and prepare the final
document package for bank negotiations, as well as their advising/confirming bank can be of
great assistance in this area.

x. Discrepancies
Sending a letter of instruction to the buyer before opening the credit and carefully screening the
letter of credit after obtaining it is important. These steps prevent any discrepancies, which could
delay or even prevent payment on the export sale. Simply put, a discrepancy is a mistake in the
documents compared to what the letter of credit has indicated.
Discrepancies usually come in two forms. Those you can fix before they are sent to the overseas
bank, and those you cannot possibly repair. They are often referred to as repairable and
irreparable discrepancies.
The most common discrepancy in the U.S. is a difference in the description of the merchandise
between the L/C and the commercial invoice. That is why the commercial invoice needs to be
prepared perfectly in accordance with the L/C. It is always required first as the primary document
for payment and is reviewed the most carefully. If the L/C has indicated it is “Covering: 500
cases of Bold & Brave Meat Snack Sticks,” and the invoice describes your product as “Stix,” then
the exporter may be found discrepant. For a slight delay in payment and a discrepancy fee, the
exporter can repair and resubmit, but that could easily be avoided with careful checking.
If the L/C indicated shipment was to be by air transport and the goods were shipped by sea, then
you may have violated the terms of the contract, and the issuing bank reserves the right not to
pay, even though the goods are on the way. You would most likely have to do some deep
discounting to fall in good graces and get paid.

6.6.3. Payment Options and Major Discrepancies

If there is a major discrepancy, the issuing bank often makes the final decision on whether to pay.
Major differences often void the entire letter of credit. This is a potentially serious problem. The
seller will either find himself on open account with the buyer, or the equivalent of sight draft
terms, depending on how the bill of lading was consigned. The process of dealing with
discrepancies is as follows: Was the bill of lading consigned “to order” or consigned directly to
the buyer’s bank? If either of these statements is correct, can the exporter be assured that the
buyer cannot take possession of the goods without creating an obligation for the foreign bank to
pay regardless of the discrepancies? If the bill of lading was consigned directly to the buyer,
immediate steps should be taken with the carrier to see if the exporter can block possession by the
buyer until the discrepancies can be resolved.
Determine the nature of the discrepancy. It is very important to determine the nature of the error,
what rule in the UCP 600 was violated, and how the error occurred. This provides three valuable
insights: a) the exporter or forwarder will learn how to prepare future documents properly; b) the
exporter may determine that the error can be corrected because the offending document can be
corrected, and c) the exporter will become more familiar about how the UCP 600 is used for
interpretation of letters of credit and the documents submitted as evidence of performance. In the
instance that the U.S. bank has checked the documents and discovers the discrepancies, they must
contact the exporter or the freight forwarder to determine if the documents are to be sent on an
approval basis. Discuss with your bank the degree of risk that you will encounter if the
documents cannot be corrected. These risks will be dependent on the ability to control the
possession or title to the goods that are covered under the letter of credit.
The exporter must decide to: accept the collection risk, recover the goods and have them returned
to the United States at their expense, or sell the goods to another customer in the same country or
same region of the world. The final options would be to have them destroyed or abandoned.

CHAPTER SEVEN
THE INTERNATIONAL PROMOTION MIX

1.1. Introduction
Dear learner: welcome to promotion which is marketing communication. Marketing
communication one of the 4 ps of the marketing mix which refers to all forms of communications
that the organizations use to influence buying behavior of present and potential customers. The
principal forms of marketing communication are advertising, personal selling, publicity, and sales
promotion. All these elements can be utilized in global marketing also. However, the
environment in which marketing communication programmes is implemented varies from
country to country. In this unit we will discuss the definition and objectives of promotion, and the
major communication tools in international marketing communication. Remember, customers do
not buy products but the benefits that accrue from them. These benefits are often mostly
intangible. Marketing communication must ensure that all aspects of communication are
compatible with the expectation and desires of the customer. Dear learner: you have come across
about promotional tools in your pervious courses. In this unit we are going to give much of our
attention to the two most important promotional tools such as personal selling and advertisement.
But we will deal in its nut shell the two remaining promotional tools such as sales promotion and
publicity.
After you study this particular chapter, you are expected to:
 Identify the elements of international promotion mix or communication tools,
 Discuss the international promotion mix,
 Identify the role of interpersonal selling in international marketing,
 Explain the challenges in international advertising,
 Understand how to select appropriate media,
 Identify the different sales promotional tools ,and
 Explain the importance of publicity.
1.2. What is Promotion?
Communication has a very important place in marketing. It is the function of marketing which is
charged with the task of informing the target customer about the nature and types of the firm’s
product and services, their unique benefits, uses and features as well as the price and place at
which those would be available in the market place. Since marketing communications aims at
influencing the consumer behavior in favor of the firm’s offerings, these are persuasive in nature.
These persuasive communications are more commonly called “promotion” and constitute one of
the ‘four Ps’ of the marketing mix. Thus in the context of marketing, promotion refers to the
applied communication used by the marketers to exchange persuasive messages and information
between the firm and its customers, both present and prospective. In short, promotion is defined
as communication by the firm with its various audiences, with a view to informing and
influencing them.
Therefore, a study of marketing communication is a study of the promotion function of
marketing. Notwithstanding the continuing debate whether promotion is the first element of the
marketing mix or the last, the fact remains that sound management of the marketing function is
dependent on the effective management of its promotion function,. With growing competition in
the market place as well as the customers becoming better informed and more choosy, it is
imperative now that marketing communications of the right kind only are made to the right group
of target buyers.
Marketers engage in international marketing communications with the following objectives in
mind:
 Introduction of new products
 Inducing potential customers to buy
  Reminding users about an existing product/service
 To create an international brand image
 To intimate international brand image
 To intimate international customers about new uses of a product
 To highlight brand character internationally
 Dealer support in local markets in different countries
 Increasing retail trade through special promotional offers
 To introduce brands in foreign markets and
 To introduce a marketer in new international markets.
1.3. Promotion Mix Elements
In our daily life we are all exposed to various tools of promotion aimed at communicating one
thing or the other to us. To illustrate, while at home we come across advertisements when reading
a newspaper, watching TV, listening to radio or even examining the water, electricity or
telephone bills. On our way to the office similar communications are present on bus panels,
roadside hoardings, posters and banners, etc. At retail shop these take the shape of traffic
builders, product displays, hangers, bins etc., all sharing information relating to a specific product
of a company. These are just a few examples of promotion tools.
There are four major components of marketing communications. These are: advertising, personal
selling, sales promotion and publicity. These four elements of marketing communication put
together are referred to as ‘promotion mix’. There is no way that an individual activity, say
advertising, can be managed fully without considering its relationship with the other elements.
Therefore, business enterprises normally adapt all the four elements though the relative
importance’s placed on different elements of the promotion mix differ from enterprise to
enterprise. These promotional tools include:
 Personal selling
 International advertising
 Sales promotion in international market
 International public relations
1.4. Personal Selling in International Marketing
1.4.1. What is Personal Selling?
Personal selling is the most ancient technique of marketing. When large scale of production was
unknown and the market size was limited, and the producer himself/herself was the promoter and
distributor, he/she had to resort to personal selling to persuade the customer to accept his/her
offer. But even today, when the original producer and the final consumer hardly get to know each
other, personal selling plays an important role in the marketing of certain types of products and in
dealing with certain types of customers.
The American Marketing Association defines personal as an “oral presentation in conversation
with one or more prospective purchasers for the purpose of making sales”. It may be noted that
personal selling involves one-to-one communication between the salesman and the intending
buyer, which provides an opportunity to both the buyer and the seller to seek clarification on a
number of points as well as convey views which is not the case in other forms of promotion such
as advertising.
1.4.2. Conditions to Apply Personal Selling
Personal selling plays a crucial role in clinching sales under the following conditions;
Sale of high unit value, infrequently purchased products, such as machinery and durable
consumer goods, warrant personal attention. Since buyers generally would like to be convinced
about the product’s quality and the facilities available for product or service sellers often have to
educate them on their offer. Personal selling alone can provide such an education. This is also
true of the custom made products.
When large volume purchases are involved by a single buyer, it is better to supplement the other
marketing efforts by personal selling. Even if the unit value of a product like industrial fastener,
may not be very high, when the size of a single order is substantial, involving huge payment,
personal efforts of a sales person may help bag the order in favor of the firm.
Personal selling has also proved very effective when a market is concentrated. It has noticed that,
due to various reasons, market for certain types of products such as garments, electrical and
electronic items and gift items tend to get concentrated in selected parts of a city and/or country.
Under such circumstances personal selling tends to help a company instill a certain degree of
confidence among the customers about the company and it offer.
When a product is first introduced in the market, it almost becomes inevitable for a firm to
heavily use personal selling to gain a reasonable market share. By their very nature, most of the
consumers are found to be reluctant to try out new products. It then becomes necessary for the
company’s salesmen to meet as many distributors and consumers as possible and convince them
about the positive aspects of their offer.
Personal selling, in any case, plays a very important role in international marketing. Again
majority of consumers, by their very nature, have been found to be rather reluctant to buy
imported products, when local substitutes are available. This is more so in the case of high unit
value, infrequently purchased products , which warrant after sales service and raw materials,
components and spares, where product quality is the overriding consideration in purchase
decisions.
1.4.3. Steps in Personal Selling
The personal selling process has the following number of detailed steps;
Prospecting: The first step in the selling process is prospecting – identifying the potential
customer. It is a proven fact that a salesperson needs to approach many prospects to clinch a few
sales. Identification of prospects may be done by building a referral source that may includes
current customers dealers, bankers, chambers of industry and trade and associations, directories,
journals, newspapers, etc.
Qualifying: The next step is to qualify the leads- that is to identify the good prospects and screen
out the poor ones. Sales people will have to depend mostly on their subjective judgment and skill
to “qualify” the prospects. Some of the yardsticks they may use in this exercise include the
financial position, location and special needs of the prospect, the expected volume of business
and the possibilities of business growth.
Pre-approach: This step involves collection of as much information and data about the prospect
before the sales person calls on the prospect. If the prospect happens to be a company, the sales
person should learn practically everything about the company, its history, size product line,
buying pattern, financial record, etc. If the prospects are individual consumers, information must
be collected about their age, sex, profession, income, buying patterns, factors influencing
purchase decisions, profile of the decision maker in the family etc. Another task that is to be
completed at this stage is to decide about the objective of the call i.e. whether to gather further
information or judge the prospect or to affect the sale. The final job to be done is to select the
type of approach i.e. phone call, e-mail, personal visit, letter, etc.
Approach: During this stage, the aim of the salesperson should be to get off to a good start. This
is largely ensured by the pleasing appearance and positive attitude of the salesperson and his
success in attracting the buyer’s attention and curiosity.
Presentation and Demonstration: The approach step is followed by “presentation” where the
sales person ‘presents’ and his/her success in attracting the buyers the offer to the prospect,
highlighting as to how his/her offer will be better than competitors’ offers, in terms of customer
benefits. The presentation can be done by a memorized or scripted talk, which can be effective in
telephone selling situations Where maximum facts have to be conveyed, in a logical sequence,
within a limited time or, the salesperson may first identify the prospect’s attitudes, needs, the
buying style and then make a formula presentation or, the prospect may be first allowed to do
most of the talking and then the salesperson may tailor his presentation accordingly. Presentation
should be strengthened and followed up by demonstration with aids such as charts, booklets,
slides, videotapes and product samples.
Handling Objections: Customers more often than not, will not be fully satisfied by presentation
and demonstration. They may or may not speak out their objections. It is the job of the
salesperson even to seek out unspoken objections and clarify them.
Closing the Sales: The salesperson should try to close the sale now. For this, he should
recognize the closing signals from the prospect and, at the right moment, close the sale and ask
for the order, even helping the prospect in writing the order, if necessary.
Follow-up: This final step is extremely important for repeat business. Since marketing begins
much before and continuous long after a sale is effected, it is the responsibility of every company
after an order is secured, to ensure that the product is delivered as per contractual terms. At all the
same time all services such as installation, maintenance and after sales service are attended to at
the right time, place and cost.
 1.4.4. International Sales People
The job of international sales person includes four major tasks. These are:
Trade selling: The primary responsibility here is to increase the volume of exports to foreign
distributers. This is done by motivating them and catering to any additional merchandising and
promotional assistance they seem to require.
Missionary selling: The international sales person will spend some time with large end-users
abroad along with the foreign distributor’s salesperson. The end-users will be given with the
product information including information on new products which may be in the pipeline which
may be encouraged to produce additional quantities.
Technical selling: This is akin to management consulting in that the ability to identify, analyze
and solve customer problems is vitally important. Technical selling is necessary for many
industrial products, especially in industries such as chemicals, plastics, machinery and heavy
equipment. It is done by international salesperson who provides important end-users with
technical and engineering information and assistant during a visit.
Business selling: It consists of visiting potentially large new customers and enduring them to
give trial orders. In addition the international salesperson supplies information to international
marketing management at the head office on the foreign markets in the territory and on marketing
programme control steps that need to be taken.

1.5. International Advertising

Dear learner: you have already studied in the previous section of this unit that advertising is one
of the four elements of promotional mix. Advertising is defined as any sponsored, any paid
communication of ideas, goods or services placed in mass medium vehicle. Advertising always
involves an identified sponsor who pays for the advertisement and he/she is called the advertiser.
In advertising, message is communicated through mass media like radio, TV, newspaper,
magazine, direct mail, hording etc. Of all the elements of the promotional mix, decisions
involving advertising are those most often affected by cultural differences among country
markets. Consumers respond in terms of their culture, style, feeling, value systems, attitudes,
beliefs, and perceptions. Thus, an advertisement must coincide with cultural norms if it is to be
effective.
This is by far the most culturally sensitive of marketing communication tools. Since culture
differs by country (and frequently within countries), decoding the message internationally
becomes more difficult, is wrongly decoded or is irrelevant. So it is hardly surprising that
sometimes controversy rages over international advertising.
There are three central issues in developing international advertising are:
Message. What do we need to change in our advertising (from our domestic campaign) in order
that foreign customers can decode the message?
Media. Having solved that specific question we have then to decide what is the appropriate
medium to communicate the message.
Control. Finally, will we coordinate the various activities across countries?
1.5.1. Challenges in International Advertising
a) Cultural Diversity
The problems associated with communicating to people in diverse cultures present one of the
great creative challenges in advertising. Communication is more difficult because cultural factors
largely determine the way various phenomena are perceived. If the perceptual framework is
different, perception of the message itself differs.
b) Language
Language is one of the major barriers to effective communication through advertising. Language
translation encounters innumerable barriers that impede effective, idiomatic translation and
thereby hamper communication. This is especially apparent in advertising materials.
Communication is impeded by the great diversity of cultural heritage and education which exists
within countries and which causes varying interpretations of even single sentences and simple
concepts. In addition to translation challenges, low literacy in many countries seriously impedes
communications and calls for greater creativity and use of verbal media. Multiple languages
within a country of advertising area pose another problem for the advertiser.

c) Regulation
Each country has its own rules, laws and codes of practice. What you can say, when you can say
it, where you can say it and how you can say it varies across national boundaries. Muslim
countries forbid campaigns showing scantily clad females or consumption of alcohol (although it
varies by country). Advertising to children is another culturally sensitive area. Some countries do
not allow commercials concerned with ‘violent’ toys. Others forbid the use of children in
commercials; others permit their employment but restrict them to certain categories of products.
The list is formidable.
d) Media Limitations
Media are discussed later, so here we maintain only that limitation on creative strategy imposed
by media may diminish the role of advertising in the promotional programs and may force
marketers to emphasize other elements of the promotional mix.
1.5.2. Media Selection
Although nearly every sizable nation essentially has the same kinds of media, there are a number
of specific considerations, problems, and differences encountered from one nation to another. In
international advertising, an advertiser must consider the availability, cost, and coverage of the
media. Local variations and lack of market data require additional attention.
a) Media Availability
One of the contrasts of international advertising is that some countries have too few advertising
media and others have too many. In some countries, certain advertising media are forbidden by
government edict to accept some advertising materials. Such restrictions are most prevalent in
radio and television broadcasting. In many countries, there are too few magazines and
newspapers to run all the advertising offered to them. Conversely, some nations segment the
market with so many newspapers that the advertiser cannot gain effective coverage at reasonable
cost.
It is impossible to cover the subject of media availability in depth: it is sufficient to acknowledge
its wide variability in terms of type of media and the degree of penetration and influence in the
marketplace.
b) Cost
Media prices are susceptible to negotiation in most countries. However, the cost of media is
increasing time to time. Among other things, shortage of advertising time on commercial
television in some markets have cause substantial price increase.
c) Coverage
Closely akin to the cost dilemma is the problem of coverage. Two points are particularly
important: one relates to the difficulty of reaching certain sectors of the population with
advertising and the other to the lack of information on coverage. In many world marketplaces, a
wide variety of media must be used to reach the majority of the markets.
d) Lack of Market Data
Verification of circulation or coverage figures is a difficult task. Even where advertising coverage
can be measures with some accuracy, there are questions about the composition of the market
reached. Lack of available market data seems to characterize most international markets;
advertisers need information on income, age, and geographic distribution, but such basic data
seems chronically elusive except in the largest markets.
1.5.3. International Control of Advertising
Whatever the strategic choice, domestic, local or central, international advertising has to be
controlled both in terms of the message and in budgetary terms. This requires management
expertise at the marketing headquarters (usually at the domestic base). While decentralization has
its distinct advantages – the locals are closer to the customers – the danger is fragmentation, with
country managers pursuing their own agendas frequently to the overall detriment to international
brand values – imperceptibly at first but, over time, shifting consumer recognition and
understanding away from the corporate goals. Decentralization requires very careful handling and
control in terms of guidelines relating to advertising claims, tone of voice, logo, colors, etc. and in
terms of scale of the budget and scheduling of the campaign. Conversely, heavy-handed
centralized control can be equally destructive, stifling creativity if over prescribed.
Activity 13
1. Should an international advertising theme be standard or non-standard? Why?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
2. Examine the implications of variations in media availability, media cost and audience coverage
on a company wishing to develop a standardized media approach to its many international
markets.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

1.6. Sales Promotion in International Market

1.6.1. What is Sales Promotion?
Sales promotion comprises short term incentives to encourage purchase/sales of a product or
service. Since sales promotion offers reasons to buy now, the techniques employed should be
considered temporary in nature and not self -sustaining. The purpose of sales promotion is to
supplement and not supplant other promotion tools such as advertisement, personal selling and
publicity.
The objectives of sales promotion are many and varied. They may include persuading consumers
to buy a new product or stick to an old product, luring consumers away from the competitor’s
product, rewarding loyal customers, getting retailers to carry more inventory and/or new items
and allot more shelf space, getting more support from support from the sales force for the
company’s sales effort etc.
1.6.2. Consumer Promotion
Following are the main consumer promotion tools:
 Samples: Samples are offers either free of cost or for a small amount, or a trial amount of
a product. Samples are considered to be the most effective way of introducing a new
product.
 Coupons: coupons are certificates that give buyers a saving when they purchase specified
products. Coupons are considered very useful in stimulating sales of a mature brand and
are promoting early trial of a new brand.
 Rebate: These are cash refunds after the purchase of a product.
 Price Packs: These offer savings to the consumers off the regular price of a product. The
reduced prices are marked on the label or package. For instance reduced price for two
related products if bought together( such as a toothpaste and a toothbrush) are instance of
the above technique.
 Premiums: When goods are offered either free or at low cost as an incentive to buy a
product, it is called premium. Premium may be inside or outside the package. If a reusable
package is specially offered, it is also a case of premium.
 Advertising specialties: Articles, with the company’s name on them, given as gifts to
customers such as pens, key chains purses, caps, coffee mugs, etc. come in this category.
These can prove effective in helping customers easily recall the name of the company.
  Patronage Rewards: Rewards given in cash or kind by a company to the regular users of
its products/services are patronage rewards. “Frequent flyer plans” of airlines are good
examples of such rewards.
 Point- of – purchase (pop) promotions: These include displays and demonstrations that
take place at the point of purchase/sale that one normally finds in retail shops. Along
supermarket aisles etc. Contests, Sweepstakes and Games: These provide the consumers
with the chance to win something like cash, goods, trips etc. This tool is very widely
deployed nowadays as will be evident from the number of such events being organized all
over the country.
1.6.3. Trade promotion
More money nowadays spent on directing sales promotion to retailers and wholesalers than to
consumers. This is because shelf space is very scarce these days that manufacturers often have to
give incentives to the distributers to stock their products. Manufactures use many trade promotion
tools. In addition to contests, premiums, displays, etc., which are used in consumer promotions
also given. Advertising and display, allowances, free goods, cash and gifts are common.
1.6.4. Business promotion
In addition to promoting their products to individual consumers and distributor, company’s these
days spend substantial amount on promotion to industrial customers and their own salespeople.
Conventions and trade shows (exhibitions and trade fairs) are the most important means of
promotion aimed at industrial customers since for certain types of products i.e. high unit value
durable consumer goods and industrial machinery, buyers would like to physically examine and
test the product, discuss with sellers, collect literature etc. For such products trade shows have
proved to be a very successful way of sales promotion. Trade shows are becoming increasingly
popular and specialist organizations are available internationally and in many countries to
organize such shows.
1.7. International Public Relations
Like advertising and sales promotion, public relation /publicity is an important marketing tool.
Not only must the company relate constructively to its customers, suppliers and dealers, but it
must also relate to a large set of interested publics.
“A public is any group that has an actual or potential interest in or impact on a company’s ability
to achieve its objectives. Public relation/publicity refers to activities that are undertaken to
promote a company and/or its offer by planting news about it in media, not paid for by the
sponsor. Publicity differs from advertisement in the following ways:
While, in advertisement the company, by and large, has control over how the message will be
used by the media but, in advertisement, it has less control.
In publicity, the media is not paid for the presentation of the message, while in advertisement, the
sponsor bears the cost.
This promotion technique is particularly useful in countries where it is difficult or impossible to
buy commercial time offers. They include:
  Releasing news in media about the company, its plant, products, people, etc.
 Delivering speeches about the company and its products, etc.
 Organizing special events such as news conferences, games, star nights, beauty contests,
etc.
 Sponsorship of civic and social service activities like maintaining a public park, planting
trees, free health checks, etc.

Summary
Promotion is the function of marketing which is charged with the task of informing the target
customer about the nature and types of the firm’s product and services, their unique benefits, uses
and features as well as the price and place at which those would be available in the market place.
It is one of the marketing mix elements. And it aims at influencing the consumer behavior in
favor of the firm’s offerings, these are persuasive in nature. The promotional tools that are called
promotional mix includes personal selling, Advertising, sales promotion, and publicity.
Personal selling is “oral presentation in conversation with one or more prospective purchasers for
the purpose of making sales”. The companies employ sales force to sell their products,
particularly high unit value products, and to benefit by bulk purchase. In any case when a new
product is introduced and to sell to overseas customers, an effective sales force is necessary.
Personal selling involves a number of steps including identifying prospects, evaluating them,
collecting information about them, handling them and finally clinching the sale.
Advertising is defined as any sponsored, paid communication of ideas, goods or services placed
in mass medium vehicle . The objective of international advertising includes introduction of new
products in new markets, inducing potential international customers to buy, reminding users
about an existing product or services, creating an international brand image, intimating
international customers about new uses of a product or services, highlighting brand character
internationally, attracting dealer support in local markets in different countries, increasing retail
trade through special promotional offers , introducing a brand in foreign markets and introducing
a marketer in new international markets. There are different challenges in international
marketing. The main challenges include diversity in culture, language, regulation of different
countries and media limitations. In international advertising, an advertiser must consider the
availability, cost, and coverage of the media, local variations and lack of market data required in
selecting an appropriate media.
Sales promotion comprises short term incentives to buyers to persuade them to buy now. It can be
aimed at consumers, distributers, and the company’s own sales forces. It takes the form of
samples, coupons, rebates, price packs premiums, rewards, contests, games, etc. as far as
consumers are concerned. Distributers are generally offered cash, gifts, advertising and display
allowances and price discounts. Conventions and trade fairs are aimed at buyers and distributers.
Sales contests are another sales promotion technique to motivate sales force and dealers. As, in
the case of all other promotion techniques, it is highly important that every firm carefully
develops a sales promotion programme.
Publicity involves gaining favorable image for the company and its offer. There are a number of
ways such as news releases, speeches, special events and sponsorships, by which a company can
get publicity.