Introduction

to international marketing

If you think about what you have been doing recently, what do you notice? How
many of the products and/or the services that you have consumed in the last period
originated solely from your own country? As you read this book, the computer on
your desk might be produced in Taiwan, the shoes you are wearing might be
obtained in Italy, the coffee you are drinking might originate from Latin America.
Whether if we talk about the clothes you wear, the music you listen to, the film you
have seen last week at the cinema, the soft drinks you drink, there is a good chance
that some of these to be produced by a company that is located somewhere else in
the world. Welcome to the new world! A global market place has emerged!
Consumers’ tastes in many regions are converging. People in different countries
welcome quality, service and value in the goods and services they purchase. At the
same time, there is a strong movement against globalisation of world’s markets
coming from different pressure groups that view globalisation as a way to obstruct
the development of the economies of developing countries. However, there is one
thing certain in international marketing, and this is the different environment that is
evolving and developing permanently. But let’s see first what international
marketing is!
 International Marketing

1.1 Definition of international marketing

This book assumes that the reader has a basic understanding of the principles of
marketing and that is why it concentrates more on the application of marketing to
international markets.
International marketing has been defined by many authors and box, no. 1.1
exemplifies some of these definitions. However, in the simplest way international
marketing can be defined as marketing across borders. But what is marketing? And
we will go back to the definition of marketing. One of the most well known
definitions of marketing was given by the American Association of Marketing that
defines marketing as “the process through which the company plans and executes
the concept, the price, the distribution and the promotion of goods, ideas, services,
in order to create exchanges that satisfy both individuals and organizations”.
Under a marketing perspective, the customer is the starting point. The business is
built around the customer as a point of reference. In a marketing oriented firm the
customer is the centre around which the business evolves.

International marketing is about the application of marketing skills and techniques

to markets beyond the domestic market. The marketing concepts, skills and
techniques are universal, but their application to different markets varies, because
of the environmental differences encountered. If marketing concepts, processes and
principles are universally applicable and the marketer’s task is the same, than, what
is the difference between domestic and international marketing? The concepts are
not different, but the environments in which marketing plans must be designed and
implemented are different. Foreign markets are unique due to the unfamiliar
problems that appear. Elements such as the legal system, government measures,
consumers with different tastes, are uncontrollable elements. They cannot be
controlled but instead the company must adjust or adapt to them.
Introduction to international marketing

BOX NO. 1.1 Definitions of international marketing

IM is the performance of business activities designed to plan, price, promote and direct
the flow of company’s goods and services to consumers or users in more than one nation
for a profit (Cateora et al., 2002).

IM is that segment of business concerned with the planning, promoting, distribution,

pricing and servicing of the goods and services desired by intermediate and ultimate
consumers (Albaum et al., 1998).

IM is the process of planning and conducting transactions across national borders to

create exchanges that satisfy the objectives of individuals and organizations. International
marketing has forms ranging from export-import trade to licensing, joint ventures, wholly
owned subsidiaries, turnkey operations and management contracts (Czinkota et al., 2001).

Actually the marketing’s task is to mould the controllable elements of marketing

decisions (product, price, promotion and distribution) within the framework of
uncontrollable elements of the market place (competition, consumer behaviour,
politics, etc) in such a way that marketing objectives are achieved.
At international level the environment in which the companies function (the
uncontrollable elements) can change dramatically from one country to another and
this is the international marketer’s primary concern: the difficulties created by
different environments and how to deal with them.

Cateora et al. (2002) present the fact that the international marketer’s task is more
complicated than that of the domestic marketer. This happens because the
international marketer must deal at international level with at least two levels of
uncontrollable variables instead of one (besides the domestic environment of the
home market, it is also the foreign environment of the foreign market).
Marketing controllable are the elements the marketer controls and he can change
at his own will (price, promotion, product, distribution).The controllable elements
can be altered in the long run and in the short run, to adjust to changing market
conditions, consumers’ tastes or corporate objectives.
 International Marketing

Domestic uncontrollable refer to the home country elements that can have a direct
effect on the success of a foreign venture and they are out of the immediate control
of the marketer. Among the domestic environment elements that can influence the
activity of a company abroad are:
¾ political decisions (such as the embargo imposed by USA against
Libya because of terrorism, that of USA against South Africa because of its
apartheid policy in 1970’s, the UN embargo against Yugoslavia at the beginning of
1990’s because of the civil war) in this country;
¾ domestic economic climate: the capacity to invest in plants either in
domestic or foreign markets, is a function of the economic vitality. A company has
to have the money first and than to spend it, to invest it home or abroad. So, if it is
a good economic climate in the home country, the company prospers and therefore
gains the money to invest either home and/or abroad;
¾ competition in the home market: when Kodak started to loose market
share on the USA market in favour of Fuji, its strategy was to defend its domestic
market, therefore investing a lot in this activity. As part of its funds went to defend
the domestic market and did not go to invest internationally. If a company has
problems in the domestic market the likely-hood to go international is small. High
competition in the home market affects a company’s domestic or international
plans, as the company has to invest heavily to protect its home market.
Foreign uncontrollable: refer to the elements outside the home country that are
not in the immediate control of the company (politics, technology, economic
climate). Some of the elements of the foreign environment worth taking into
consideration are:
¾ technology: the differences that exist between developed and
developing countries as far as technology is concerned determine different
understandings of concepts. For instance, the concept of preventive maintenance
for equipment means one thing in the developed countries and may mean a
different thing in developing countries due to the lack of adequate technical
knowledge. In these conditions the company has to take extra steps to make sure
that the importance or routine maintenance is understood and carried out
everywhere.
¾ political issues. An example of political problems that may appear in a
foreign country is the “alien status” of a company, the fact that the company
belongs to foreigners and they are seen as outsiders and the company may have an
unfair treatment coming from politicians and legal authorities.
Introduction to international marketing

The next chapters are dedicated to the study of the foreign environments and their
elements. It is important to study the foreign environments, as different solutions to
fundamentally identical marketing tasks will be put in place due to the
environmental differences. In other words a marketing strategy that is successful in
one country might be ineffective in another country, due to differences in political
climate, stages of economic development, cultures, level of technology and others.
Figure no. 1.1 presents synthetically the international marketer’s task.

Figure no. 1.1 The international marketing task

Foreign environment
(uncontrollable)

Political/legal 1 Economic
forces forces
Domestic environment
(uncontrollable)
2
7 Competitive
Political/
legal (controllable) structure Competitive
Cultural Forces
forces
forces Environmental
Price Product
uncontrollables
7 3 country market A
Channels of
Promotion
distribution
6

Geography Level of
Economic climate Technology
and
Infrastructure 4
5
Structure of
distribution

Source: Cateora Ph. and Graham J., 2002, International Marketing, McGraw Hill, p. 9.

1.2 Self reference criterion and how to deal with it

The self-reference criterion is the primary obstacle to success in international

marketing. Why? Because this is what we usually do: when we are confronted with
a set of facts or with a problem, we react spontaneously on the basis of knowledge
assimilated over a life time, we do not think, we simply react. Our reaction is based
on meanings, values, symbols and behaviours relevant to our own culture, that
usually is different from the ones of other countries. Such decisions are not usually
valid in a foreign environment. This is what the self reference criterion is. It was
defined by Cateora at al (2002) as being “un unconscious reference to one’s own
cultural values, experiences and knowledge as a basis for decisions”. The following
examples illustrate situations in which the self-reference criterion intervened.
 International Marketing

Example no. 1: Two students met in UK in Canterbury at the beginning of October

and were discussing about the weather during the winter. Canterbury is situated in
the S-E of UK next to the Channel, where due to the influence of the warm stream
of water, the weather is mild during the winter, rarely going below zero degrees
and very seldom snowing (once at 5 years). The student coming from Egypt who
lived in Britain for a couple of years at the time the discussion took place, was
explaining (according to his own past experience in the warm Egypt) to the new
comer from Romania that during the winter the weather is really very cold. That
winter the Romanian student did not wear the winter-coat at all, as the winter was
quite mild according to Romanian standards for winters (with many days bellow
zero and a lot of snow). Both of them, when judging the weather in UK were
making reference to their own past experiences in their own countries, that were
quite different. This was an example of how people encounter the self reference
criterion when interacting internationally.

Example no. 2: Unilever when went for the first time in Brazil with detergents,
noticed that people lack washing machines, consequently conceived a simpler soap
formula; it noticed that people at the country side still wash at the river,
consequently it packed the detergent in plastic bags, rather than paper boxes; it
noticed that people are poor and they are price conscious, consequently they
packed the detergent in small quantities, in small packages that would be low-
priced and affordable to the low income of the consumers.

The most effective way to control the influence of the self-reference criterion is to
recognize its existence in our behaviour. It is impossible for someone to learn every
culture in depth, but a person can be aware, can be open to differences and can also
ask questions when does not know the new environment.
One way to deal with the self-reference criterion in order to be successful in
international marketing is to develop global awareness.
According to Cateora et al., to be globally aware, means 1 :
/ to be objective in order to be able to correctly assess opportunities,
assess potential and respond to problems. Many Western companies
were very tempted by the one billion consumers of China considering
it as a huge opportunity, a huge market potential, without assessing
objectively the low income and purchasing power, the poor

1
Cateora Ph. and Graham J.,2002, International Marketing, McGraw Hill, pp. 18-19.
Introduction to international marketing

distribution, the inadequate media, the poor infrastructure, elements

that would diminish to a large extent the one billion consumers market
potential for many products.
/ to be tolerant towards cultural differences. This means to understand
and accept cultural differences and accept working with others whose
behaviour is different from yours. At the beginning of 1990’s a
Romanian student worked as a translator for a few business people
coming from an Arab country. At the end of her two weeks tour in
more Romanian cities with the Arab businessmen she was outraged by
their eating habits. In this way she showed lack of tolerance. You must
allow others to be different but equal.
/ to be knowledgeable of culture, history, markets potential and general
trends. Culture is important to be known in order to understand
behaviour in the market place. Culture is the element of the foreign
environment that influences to the larger extent the behaviour of the
consumers, the main target of the marketing activities. History is
important to be known because the way people think is influenced by
their present but especially past history. Looking back at history we
can understand why the British were reluctant about the channel tunnel
between Britain and France and why Greeks do not like Turkish
products. World market potentials must be known because they are
changing rapidly. At present all over the world some regions have
increasing potential. Some markets, from the developed countries
become saturated, while other markets are emerging. The present
emerging markets of Asia will become the large potential markets in
the next 20 years. General trends such as global economic, political
and social trends are important to know as the evolution of a country
change according with the change in these trends. A knowledgeable
marketer will identify an opportunity long before it becomes evident to
others.
We will try to learn how to acquire global awareness while reading this book in
international marketing.
 International Marketing

1.3 Three main principles of marketing

The success in international marketing is the understanding of the marketing

discipline. The first and the most fundamental fact about marketing is that it is an
universal discipline. The marketing discipline is equally applicable from Romania
to New Zealand and from Japan to Brazil. Although the marketing discipline is
universal, markets and customers are different and this means that the marketing
practice has to vary from country to country. We cannot apply directly the
experience from one country to another. An important task in international
marketing is to recognize the extent to which marketing plans and programs can be
extended internationally and to what extent they must be adapted.
Regardless the country and the environment, there are a few principles that contain
the essence of marketing and are valid in all markets. According to Keegan (1999),
the three main principles that guide the marketing activity are: to create customer
value, to have competitive advantage and to focus on the consumer.
1. The task of marketing is to create customer value that is greater than
the one created by the competitors. The firm has to have very good knowledge of
the customer and of its needs and wants in order to satisfy those and to offer value
to the customer. This is more imperative at international level, where customers
differ from one country to another and their needs, wants and desires will be
different and will have to be satisfied differently.
2. The second important principle of marketing is to create competitive
advantage. The company has to offer higher advantages to the customers than the
competitors do. The advantage can exist in any of the marketing mix elements: the
product, the price, the advertising, the point-of-sale promotion, the distribution of
the product. One of the most powerful strategies for penetrating a new international
market is to offer a superior product at a lower price. Companies with a cost
advantage can use price as a competitive weapon. The price advantage will get
immediate customer attention and for those customers who purchase the product,
the superior quality will make an impression 2 .
3. The third marketing principle is to focus on the consumer. In order to
create customer value and to create competitive advantage, the company has to
focus, to concentrate its attention on the consumer and his wants and needs. When
the company focuses on the consumers needs, wants and desires and the ways to
accomplish these, will certainly have success, both internally and internationally.

2
Keegan W. J., 1999, Global Marketing Management, Prentice Hall, p. 5.
Introduction to international marketing

1.4 The relationship between international

marketing and other disciplines

The international marketing discipline is related to other fields of study. As we

have seen is related to marketing, as it applies the marketing principles, concepts,
techniques at international level. It is also related to international business, as
international marketing is part of the international business. In international
marketing the concepts of marketing are applied in the context of international
business. We are interested in what is more than the simply sum of the two
(marketing and international business). International marketing is different from
the marketing because even though the concepts are the same, the environments are
different and consequently decisions will be different. International marketing is
different from international business, as international marketing is only one part of
the international business, that also comprises all functions of the company at
international level: international production, international finance, international
human resource management.
When we talk about international trade and its relationship with international
marketing, we are talking about a relation of inclusion, as international trade is
only a part of international marketing. There are authors who consider that
international trade, through export “falls short of international marketing primarily
because it does not involve the company in marketing activities directed at the end
consumer” 3 . In international trade (export) the focus of the business relationship is
on the intermediary who is purchasing the goods, not on the final consumer.
International marketing should not be confused with foreign marketing, which
refers to marketing activities carried out by foreign firms within their own
countries. Marketing of Bulgarian firms in Bulgaria represents foreign marketing to
us and is not the main concern of this book. When the Bulgarian company comes to
Romania, we talk about international marketing and this is of interest to us.

3
McAuley A., 2001, International Marketing, John Wiley and Sons, p. 6.
 International Marketing

1.5 Stages of international marketing involvement

When we talk about the degrees of international marketing involvement, we have

to start our discussion from the process of internationalisation. The present interest
that firms show towards international marketing can be attributed to the shifts that
took place in the demand and the supply of different markets around the world, as
well as to the continuous changes in the international competitive environments.
This brings about the internationalisation process, and further on international
marketing activities. The internationalisation process is seen by Albaum et. al.
(1998) as a process, an end result and a way of thinking, while Luostarinen defines
the internationalisation process as a “step by step process of international business
development whereby a firm becomes increasingly committed to and involved in
international business operations through specific products in selected markets” 4 .
The degree to which the companies involve themselves in international marketing
activities depends on the degree of their overall involvement internationally.
Companies generally develop different marketing strategies depending on the
degree of experience and the nature of the operations in international markets.
Companies tend to evolve over time, accumulating international business
experience and learning the advantages and disadvantages of marketing around the
world. As a result it has been developed an evolutionary perspective of
internationalisation of the company, characterized by a number of stages of
international marketing involvement. When we talk about international marketing
involvement, we take into account the degree of market control over marketing
activities.
According to Cateora et al. (2002), there are five stages of international marketing
involvement, namely: no direct foreign marketing- indirect exporting; infrequent
foreign marketing; regular foreign marketing; international marketing; global
marketing. Kotabe et al. (1998) present the five stages of international marketing
involvement as being: domestic marketing; export marketing; international
marketing; multinational marketing; global marketing, while Jeannet et.al. (2001)
present six stages of international marketing involvement: domestic marketing;
export marketing; international marketing; multinational marketing; pan-regional
marketing and global marketing. Figure no. 1.2. presents the three models.

4
Loustarinen R., 1994, Internatinalization of Finnish Firms and Their Response to Global Challenges, UNU
World Institute for Development Economic Research , Research for Action, p. 1.
Introduction to international marketing

Figure no. 1.2 Levels of international marketing involvement

Cateora et. al. (2002) Kotabe et al. (1998) Jeannet et al. (2001)

1. no direct foreign 1. domestic marketing; 1. domestic marketing;

marketing 2. export marketing; 2. export marketing;
2. infrequent foreign 3. international 3. international
marketing; marketing; marketing;
3. regular foreign 4. multinational 4. multinational
marketing; marketing; marketing;
4. international 5. global marketing 5. pan-regional
marketing; marketing
5. global marketing 6. global marketing

The marketing involvement in a foreign market refers to the degree of market

control. Even through the stages of international marketing involvement are
presented in a linear order, the firm does not progress automatically from one stage
to another.
A firm may begin its international involvement at any one stage and to be in more
than one stage simultaneously. These stages are overlapping.

If we look at the three models presented above we can notice that two of them
consider as the starting point, the point zero of no involvement in international
markets represented by the domestic marketing, while the other (Cateora et al) sees
as the starting point the simplest form of international involvement - indirect
export. However while, two of the models consider all exporting activities as being
the same degree of involvement, Cateora et al. consider that there are three stages
during exporting showing different degrees of involvement internationally (no
direct foreign marketing, infrequent foreign marketing, regular foreign marketing)
that should be seen separately, as they require different marketing abilities and
skills from the company. Further on, while Cateora et al. see the international
marketing stage as comprising the local adaptation to individual markets, the other
two models distinguish between international marketing and
multinational/multidomestic marketing as being two different stages with
potentially different marketing strategies. The shift from international marketing to
global marketing is seen differently in the three models: Cateora et al. see a straight
direct shift from one to another, while Kotabe et al. see the multinational marketing
as a separate stage followed by the global marketing stage, while Jeannet et al. see
 International Marketing

the shift from multinational to global marketing as involving an intermediary stage,

namely the regional marketing. All three models see global marketing as being the
deepest stage of involvement internationally.
In the following section we will present all stages of all three models according to
the degree of involvement.
The domestic marketing is the marketing aimed at a single market, the firm’s
domestic market. Before entry into international markets, many companies focus
solely on their domestic market. In this case the company develops its marketing
strategy based on information about domestic customer needs and wants, industry
trends, economic, technological and political environments from the home market.
No direct foreign marketing is encountered when the company does not actively
cultivate customers outside national boundaries. However, the company sells
outside the home market, but sales are done through domestic trading companies
that sell abroad without involving the producer or sales are done through foreign
customers who come directly to the firm (for instance via internet).
Infrequent foreign marketing takes place when the temporary surpluses caused by
variations in production levels or demand are sold abroad. When domestic sales
increase foreign sales are with drawn. Few companies fit today to this model
because usually customers are looking for long term relationships and regular sales.
Regular foreign marketing takes place when the firm has permanent production
capacities devoted to production to be marketed continuously in foreign markets.
Even though the primary focus of operations and production is on domestic market
needs. At this stage profit expectations start to shift from being seen as a bonus to
regular domestic profits to the position where the company becomes dependent on
foreign sales to meet its goals.
Export marketing covers all those marketing activities involved when a firm
markets its products outside its main (domestic) base of operation and when
products are physically shipped from one market or country to another 5 .
International marketing occurs when companies are fully involved and committed
to international marketing activities. They plan production for foreign markets.
This is seen by all authors as being the next stage after exporting, when the
company acquires more experience and becomes more directly involved in the
local marketing environment within a given country or market. At this stage
companies are fully committed and involved in international marketing activities:
they seek markets all over the world, they plan production for foreign markets,

5
Jeannet J.P. et al., 2001, Global Marketing Strategies, Houghton Mifflin Company, p. 3.
Introduction to international marketing

some produce goods outside the home market, they adapt the product to local
requirements.
Multinational marketing comes as a result of the development of the multinational
corporation. The company markets its products in many countries around the world
and they market their products as if the firms were local companies. It is the case
when a company competes with many strategies, each one tailored to a particular
local market, therefore being also called the multi-domestic strategy. In this case
the main challenge for the company is to find the best possible adaptation of a
complete marketing strategy for an individual market. If they do, the major benefit
is that the company completely tailor its marketing strategy to local requirements,
but the disadvantage is that there is always a duplication of some key resources.
Pan-regional marketing occurs when companies start to emphasize strategies for
larger regions. These strategies developed due to the given diseconomies of scales
of individualized marketing strategies tailored to specific local environments. The
regional strategies encompass a number of markets and usually they are the result
of a form of economic integration (such as pan-european marketing in EU).
Companies that consider regional marketing strategies, try to tie together marketing
in one geographical region, rather than at global level, with the aim of increased
efficiency.
Global marketing is encountered when companies treat the world including their
home market, as one market. In contrast to the international OR multinational
companies that view different country markets as unique, needing individual
marketing strategies, the global company develops a strategy to reflect the existing
commonalities of market needs among many countries. The strategy is based on
global standardization (when is cost effective and culturally possible) in order to
increase returns. The entire set of operations of the company (finance, production,
provisioning, marketing) take a global perspective. It is the stage at which a huge
change of the company’ orientation and planning for international markets takes
place. However a global marketing strategy does not require absolute
standardization, but rather a consistent application of the core elements of the
marketing strategy across countries with varying degrees of customisation, as the
situation requires. One of the well known companies that has global marketing is
Coca Cola company. See box no. 1.2.
 International Marketing

Companies rarely fit one single of the stages discussed. The definitions are given
so we can have a sense of the various degree of international involvement and
commitment, as well as control. Also the firms are not progressing regularly from
one stage to the other one. A firm may begin its international involvement at any
one stage and be in more than one stage simultaneously.

BOX NO. 1.2. Global marketing at Coca-Cola

Coca-Cola is one of the most well known companies that pursues global marketing. The
following quote of the ex-president of Coca-Cola company reflects the way the company
shift towards the global approach in 1980’s.
“The culture of the Coca-Cola Co. has moved from being an American company doing
business internationally to an international company that happens to be headquartered in
Atlanta….. If you go back to our 1981 annual report, you will see references to ‘ foreign
sales’ or ‘foreign earnings’. Today (1996) the word foreign is ‘foreign’ to our corporate
language” (Roberto Goizueta, former president of Coca-Cola).

Even the structure of the company was changed to reflect its global orientation: initially
there were two vice-presidents, one in charge with the international operations and one
in charge with the USA operations. The international divisions reported to an executive
vice president, who together with the vice-president for USA were reporting to the
president. The new form of organisation consists of six regional divisions that are all put
on equal footing. The USA operation is part of the North American region. In this way
the company admitted that the future growth is going to come from emerging markets
outside USA.
In 2000 the president of Coca-Cola Mr. Daft started to change the strategy and pushed
the decision making at the local level worldwide: “This means that the company would
encourage local brands and flavours more. The company will have both global brands
and local brands, in accordance with what consumers are requiring (International Herald
Tribune, February 7, 2000)”.

1.6 International marketing orientations

The way a company responds to international market opportunities depends on
management’s assumptions and beliefs about the world and the international
activities. The orientations a company’s management and personnel can have are
collectively known as the EPRG framework: ethnocentric, polycentric, regiocentric
and geocentric.
The ethnocentric orientation assumes that the home country is superior
compared to the rest of the world. It is also known as the domestic market
extension concept. The company assumes that products and practices that
Introduction to international marketing

were successful in the home country will be successful anywhere, due to

their proven superiority in the home market. The international operations are
seen as secondary to its domestic production, the company exports excess
production, this being the main reason for selling abroad. The foreign sales are
only extensions of the domestic sales and usually they take the form of export. No
systematic marketing research is conducted outside the home country and no major
modifications are made to the products. Even if consumer needs and wants in
foreign markets are different from those in the home country, those differences are
ignored. These companies miss opportunities outside the home countries. The
Japanese company Nissan in its first years on the USA market showed its
ethnocentric orientation when exporting trucks. The vehicles were designed for the
mild Japanese winters and were difficult to start in many parts of USA during the
cold winter months. Fifty years ago the use of an ethnocentric orientation mainly
by companies originating from developed countries could assure success when
going internationally. Today such an approach is one of the largest internal threats
for a company 6 .

The polycentric orientation is the opposite the ethnocentric one. It is also known
as the multi-domestic or multinational concept. The company that bases its activity
on this orientation, recognizes the importance of market differences and develops
one marketing program for each market. The management beliefs that each country
with which the company does business is unique. Consequently each subsidiary
will develop its own unique marketing strategy in order to succeed. Unilever is one
of the companies that traditionally was guided by a polycentric approach to
international business and developed local products for all countries was operating
in and adapted marketing plans. The company guided by this orientation thinks that
success requires adaptation to local country markets. The company will adapt the
product for each market, will have localized advertising and will make local
decisions on pricing and distribution strategies. There will be no co-ordination with
other country market. In box no. 1.3. it is also presented the difference between the
polycentric orientation of Matsushita company and the global orientation of
Phillips company.

6
Keegan W.J., Op. Cit., p. 14.
 International Marketing

The regiocentric orientation belongs to those managers who view regions as

unique and try to develop regionally integrated marketing strategies. Such
approaches are usually used in the case of geographic regions that have been
integrated economically (such as European Union or NAFTA).
The global orientation stands for the philosophy when management considers that
there is only one market, the world. These companies are looking for
standardization in order to obtain economies of scale and they search for global
market segments.
Companies guided by the global marketing concept see the world as being one
market. They are looking for market segments that are similar, that have similar
demands all over the world. They are looking at markets for commonalities, that
can be standardized across regions or country market sets.
By serving a global market segment, the marketing plan wishes to be standardized
wherever it is cost and cultural effective. This can mean:
Πstandard product but country specific advertising
Πa standard brand (image), but adapted products
Πa standard advertising theme, but country specific appeals.

BOX NO. 1.3 Matsushita vs. Philips: two different marketing orientations

Up to mid-1990’s Philips Electronics, headquarted in Netherlands was a classic example of

a company with a polycentric orientation. Philips relied on autonomous organizations in
each country that developed their own strategies. The approach worked well until Philips
faced competition from Matsushita, the Japanese consumer electronics company whose
management had a geocentric orientation. Matsushita adopted a global strategy and focused
to serve the world market for home entertainment products. In TV’s Matsushita offered
European consumers two basic models, while Philips offered European customers seven
different models. If consumers had demanded variety, Philips would have been a strong
competitor. The product designs created by Philips were not based on customer preferences.
Customers wanted value in form of quality, features, design and price. Philips polycentric
approach was a heritage that was attractive to national organizations that could make their
own local decisions and strategies. But it was irrelevant to customers who were looking for
value. Customers were getting more value from Matsushita’s global strategy that by
lowering costs, offered better prices to customers. As a good price for a good quality was
required by customers, as opposed to greater variety but at a higher cost, Philips lost market
share. To cope with the new conditions, Philips management abandoned the polycentric
approach, getting more closer to a geocentric one.

Keegan J.W., 1999, Global Marketing Management, Prentice Hall, pp. 17-18.
Introduction to international marketing

The global marketing approach is looking for global market segments, namely
significant market segments with similar demands for the same product all over the
world. The global approach is applied through standardizing the market plan
(standardized product but country specific advertising; standardized brand/product
images but adapted products to meet specific needs).
To be global is a mind set, a way of looking at the market for commonalities that
can be standardized across regions or country markets. The global marketing
approach is looking for market segments with similar demands that can be satisfied
with the same product, standardizing the components of the marketing mix that can
be standardized and where are significant cultural differences, that require parts of
the marketing mix to be culturally adapted, to adapt. Theodore Levitt 7 is the one
who in its 1983 article “Globalisation of Markets” drawn attention to companies
that global orientation, is the orientation of the future, (given the evolution of
international environments).

1.7 The structure of the book

The book is divided in thirteen chapters. The first chapter is an introduction into
international marketing, the main obstacles to international marketing and the task
of the international marketer. Chapters two to six analyse all elements of the
international environment. Chapter two deals with history and geography, as
elements to be taken into consideration as they can contribute to the understanding
of the differences between markets. Chapter three focuses on the cultural
environment, as the main element of the external environment that influences the
consumers’ behaviour. It is necessary to recognize the cultural differences and to
decide whether to accommodate them or not. Chapter four presents the economic
environment and its dynamics at world level as far as international trade is
concerned. Economics gives the company a lot of information about the market
potential in each particular country and has to be studied. Chapter five and six deal
with the legal and the political environments in foreign countries, as other
important influencers for the marketing of the company abroad.
Chapter seven focuses on the market selection process with its steps as well as on
specific methods of market selection. It also presents the main market entry
strategies a company can use in the internationalisation process. Chapter eight goes

7
Levitt Th. „The globalization of markets”, Harvard Business Review, May - June 1983.
 International Marketing

further and looks at the marketing research process, its steps and peculiarities at
international level.
Chapters nine to twelve cover the main decisions the company has to take from the
marketing mix point of view at international level. Chapter nine focuses on product
management, debating the issue of standardization over adaptation of product
policy when going internationally, and the main decisions to be taken regarding
product policy. Chapter ten takes the reader through the distribution process from
the home country to the consumer in the target country market. Chapter eleven
talks about pricing strategies and specific issues related to pricing at international
level, such as price escalation, counter trade as a payment tool, transfer pricing and
parallel imports. Chapter twelve covers promotion at international level by looking
at the communication process and its steps, the promotional mix and the
relationship between manufacturers and advertising agencies when operating
internationally.

Chapter thirteen includes four marketing case studies at European level.

The geographical and the historical
international environments

We remember that we have been discussing the task of the international marketer
as being to mold the controllable elements of marketing (product, price,
distribution and promotion) to the uncontrollable elements of the environment,
coming from both the domestic environment and from the foreign environments.
The domestic environments are usually known and do not need to be studied, while
the foreign environments are formed of variables that have to be studied in order to
adapt the marketing strategy of the company to them.
The international environments have more elements, that all have to be studied:
geographic environment, historic environment, cultural environment, political
environment, legal environment and economic environment. We will be discussing
the international environment from the perspective of its components.
 International Marketing

2.1 The geographical environment

We will look at how the geographic environment of a country can influence the
marketing activity of a company in that country.
How can geography influence the marketing decisions of a company?
Geography can be studied by looking at its elements and their possible influence
over the company:
• Climate (temperatures, humidity)
• Physical terrain (altitudes, forms)
• Resources (raw materials, energy)
• Population (size, growth rates, structure)
First of all through its climate. Climate can affect on the one hand the type of
products that can be sold or not in a specific market and on the other hand it can
affect the use and the function of the product and consequently to require the
product’s adaptation.
For instance, when we talk about products suitable for certain markets depending
on the climate, it does not make sense to sell winter boots in the warm Africa and
probably swimming suits or ice-cream are less sold in northern countries with
colder climates.
Climate of a country/market can also require the adaptation of the product for those
specific climates. One of the classical examples is the one of automobiles, that will
have air conditioning by design in Southern Europe and in the Arab countries and a
better heating system in northern countries.
Again, the climate differences in Europe determined Bosch-Siemens company to
modify its washing machines: for the north of Europe where the climate is cold they
designed the washing machines with a spin cycle of 1000-1600 rotations/minute so that
the clothes come out almost dry as consumers do not have the possibility to hang them
to be dried by the sun. For the south European countries the number of rotation/minute
is usually lower, around 500 rotations/minute, as people would hang their clothes out in
the sun to be dried1 .
Climate can also influence the way the products are distributed in a country. High
humidity requires better packaging and cold weather requires too better packaging,
while hot weather requires refrigerators for food products.
For instance, the Coca-Cola company when expanding in Russia, transferred its
transportation trucks from Romania to Siberia. Given the fact that the trucks had

1
Cateora, Ph. et al., 2002, International Marketing, McGraw Hill, p. 59.
The geographical and the historical international environments

only the metal structure and in rest were formed of plastic covers, they were not
sufficient to preserve the Coca-Cola bottles in the minus 30-400 Celsius degree
winters of Siberia. At the beginning a large quantity of the products ended up
damaged (broken bottles) at destination because of the very low temperatures. The
company had to equip the trucks with special heating systems in order to be able to
use these trucks during winters in the cold Siberia.
There are countries where the climate differ from one region to another, such as
Canada, USA, Russia, conferring a higher degree of heterogeneity to these markets
that would require adapted products, packages and distribution means.
Temperature also influences the efficiency of people at work, and the aspect
becomes more important when the degree of involvement in that market increases.
Empirical research had showed that at a 260C temperature only 80% of the work
capacity is used by individuals, at 330C, the work capacity is reduced at 50% and
over 350C the work capacity is reduced at 20%. In case of intellectual work, if
enough motivated, people will work with similar efficiency up to 330C 2 .

Another geographical aspect worth studying is the physical terrain or the

topography of the land in foreign countries. Physical terrain is important to be
studied in a country because it can affect the distribution of the product in that
country. High mountains, tropical forests, deserts constitute natural barriers that
make transportation and communication more difficult in a country. The countries
of Latin America have a topography that is dominated by high mountains and
tropical forests. The tropical forest from the Amazon basin is the largest rain forest
in the world with a three million square meters surface. This is inhabitable but also
impenetrable. Such a landscape represents a strong natural barrier that inhibits
national growth, trade and communication. People live in large urban areas that are
usually isolated from one another. There are inadequate roads and poor
communication between the major cities of those countries. Because of the
physical isolation, different cities have different lifestyles and different population
characteristics and therefore can be treated as different markets.
Existence of rivers, seas and oceans is considered to be a positive aspect for
transportation. But even in this case a careful study of the natural phenomena has
to take place because otherwise mistakes can be made.
For instance, an American food processing company decided to build a plantation
of pineapples in Mexico in the delta of the river Mexico. They wanted to transport
the ripe fruits on the river down the stream to be canned and afterwards to load

2
Pop. N. et al., 2001, Marketing Internaţional, Editura Uranus, Bucureşti, p. 91.
 International Marketing

them directly on ocean ships and send them to various markets of the world. But
when the ripe season arrived the company noticed that it had a problem: the crop
maturity coincided with the flood stage of the river and the water stream was so
strong that the barges could not go up stream up to the plantation. They had to
close down the operation 3 .
Also lakes and seas could facilitate transportation and access to that country. At the
same time they can also indicate that those countries can be markets for certain
products such as entertainment, sport, tourism products.

Another element of geography that will have an influence on the company’s

activity is represented by the natural resources, such as raw materials, sources of
energy. These are important to be studied in a foreign country, when the company
intends to make production investments in that country.
The location of the earth’s resources is not equally distributed between countries.
In many cases a nation’s demand for a particular mineral or energy does not
coincide with domestic supply and the need of imports appear. Also countries that
have been self-sufficient in respect to the use of one mineral, run out of it and
become net importers of that raw material. Is the case of USA that up to 1942 was
completely self sufficient as the petroleum is concerned and who became a major
importer by 1950, its degree of dependency on foreign resources increasing from
36% in 1973, to more than 56% in 2000 4 .
Knowing the availability of natural resources in one country can be an indication of
larger potential for economic development in the future, therefore making that
country more interesting for foreign investors.

Another important element of geography is population. Population is a good

indicator to estimate the market size in a country for most consumer goods. Even
when we talk about industrial goods, population is important given the fact that
industrial demand is a derived demand from the demand for other products, in
many instances consumer products. Therefore, the study of the population of a
country is absolutely necessary when studying a foreign market. The company
should be interested in:
• the size of the population, as it gives us an idea about the actual market
potential for certain goods (mainly consumer goods, but also industrial
goods).

3
David A. Ricks, 2000, Blunders in International Business, Blackwell Publishers, Cambridge, p. 20.
4
Cateora Ph. et al., 2002, Op. Cit., p. 67.
The geographical and the historical international environments

• the growth rate of population is also of interest, as it gives us an idea

about the future market potential. It is not enough to have a great
market potential now, it is important to see what will happen also in
the future. How much is it worth to be involved in that country? The
higher the future market potential, the higher the involvement.
Sometimes the present market potential is not very high, but there are
chances that this will increase in the future, making worth the entry.
• the structure of population according to different criteria such as age,
gender, education offers information about potential market segments.
The evolution of population on different structures gives an indication
about how different market segments will evolve in the future. The
increase in the life expectancy in many countries indicates that third
age population will increase and there will be market for products
designated to this group in the future. An example of future shifts in
the structure of population of China is presented in box. no. 2.1.
• the density of population and the urbanization degree is another
important indicator. The way the population is distributed between
rural and urban areas in a country influences on the one hand the
market segments existent in the country, as consumers in urban areas
have different characteristics, education, incomes, lifestyles and
consequently demands than those in rural areas. Also the way the
company will distribute the product and will communicate with people
depends on their density. The more dispersed is the population the
more difficult distribution and communication will be. The more
concentrated the population (usually in urban areas) the easier the
distribution and communication will be. It is estimated that by 2025,
the population of the world will reach almost 8 billion inhabitants and
more than 60% of them will live in urban areas 5 . Not always living in
urban areas, means better life conditions. In Mexico City for instance,
that has over 20 million inhabitants there are 2 million families who
have no running water and no sewage facilities in their homes. There
are produced 14 000 tons of garbage everyday and only 8 000 tons are
processed, the rest being left on the streets and getting into the
atmosphere. Consequently Mexico City has major pollution problems 6 .

5
http://www.census.gov
6
Cateora Ph. et al, 1999, International Marketing, McGraw Hill, p. 71.
 International Marketing

At present the largest city in the world became Tokyo, that over-passed
26 million inhabitants in 2000, due mainly to the migration from rural to
urban areas. The migration from rural to urban areas is a phenomenon met
in many countries due to increased desire to access to education, health
facilities and better life of people all over the world.

BOX NO. 2.1 Shifts in the population’s gender structure in China

In China, due to the large increase of the population, the government took measures to
control the population growth, by allowing only one child per couple. This regulatory
measure coupled with the traditional values (that dictate the superiority of male over the
female), this defined preference of parents for boys and the possibility to prenatal scanning,
will disequilibrate the balance of the gender structure in China. Given the fact that in rural
areas people are more traditional and willing to have boys they will give up girls before
birth, while in the urban areas where people are more educated people will have what God
gave them, even if is a girl. Consequently there will be more girls in towns and more boys
in villages. It is appreciated that in 10 years time the number of male will be higher than the
number of female, with 15% positive difference in favor of males in urban areas and 45%
positive difference in favor of males in rural areas. Besides the gender desiquilibrium, it
will also take place an educational and lifestyle mismatch. There will be more less educated
men in rural areas, while in urban areas will live many educated female. Few of them will
find a suitable partner.

Cateora Ph. and Graham J.,1999, International Marketing, McGraw Hill, p.75.

Table no. 2.1 presents the structure of the world’s population by its provenience
from different groups of countries according to their level of development and
table no. 2.2 presents the population of a number of selected countries from the
208 total number of countries existent in 2002.
The geographical and the historical international environments

Table no. 2.1 Structure of world’s population on groups of countries, 2002

(thousand)
Group of countries Population
World 6.198.688
Low income countries 2.494.603
Middle income countries 2.737.920
Lower middle income 2.408.492
Upper middle income 329.428
Low and middle income countries 5.232.522
East Asia and Pacific 1.838.485
Europe and Central Asia 472.948
Latin America and Caribbean 524.905
Middle East and North Africa 305.823
South Asia 1.401.455
Sub-Saharian Africa 688.907
High income 966.165
European Union 305.483
Source: http://www.worldbank.org,

Table no. 2.2 Population of selected countries, 2002

(thousand)
Rank in total Country Population
1. China 1.280.400
2. India 1.048.641
3. United States 288.369
4. Indonesia 211.716
5. Brasil 174.485
6. Pakistan 144.902
7. Russian Federation 144.071
8. Bangladesh 135.684
9. Nigeria 132.785
10. Japan 127.150
11. Mexico 100.819
12. Germany 82.485
15. Turkey 69.626
20. France 59.485
21. United Kingdom 59.229
22. Italy 57.690
25. Ukraine 48.717
47. Romania 22.300
90. Bulgaria 7.965
Source: http://www.worldbank.org,
 International Marketing

2.2 The historical environment

It is important to know the history of a country because history influences present

behaviour of nations and consequently of consumers. Current and especially past
events explain a country’s attitudes, prejudices and fears.
By studying the history of a country we can find out and understand:
9 How it perceives its neighbours: as Romanians look suspiciously at
Hungarians and vice-versa due to history.
9 How it sees itself: we remember the well known “history book image”
of Romania as a little country attacked by other empires over time. If
we look at the map of Europe we are not so little and there are many
other countries that are much smaller than Romania. But the image was
transmitted over time due to the permanent fight of the Romanian
people for autonomy and independence in front of the empires of the
past such as Turkey, Russia, Austro-Hungary.
9 What is the role of government in the business sector in that country;
9 What are the sources of management authority: such as age and
experience in Japan and abilities and skills in USA.
9 Its attitudes towards multinational companies: a country that was
always in war over time, will be reluctant to open to foreigners.

Looking back at history we can understand the reluctance of British in building the
Channel Tunnel because of their continuous history of war with France. By
looking back at history we can understand why Greeks do not like Turkish
products, why Arabs (or at least some of them) boycott American products.

On the other hand is very important to know the history, as the locals see it,
because history is subjective: the same historical event is interpreted in one way in
a country and can be recorded and interpreted completely different in the other
country. While USA sees itself as the guardian of the Latin America and considers
all its interventions in the countries of South America as justifiable acts of foreign
policy, Latin American countries see American acts as unwelcome intrusions in
their affairs. See box no. 2.2.
The geographical and the historical international environments

BOX NO. 2.2. USA and South America: whose history?

A lot of USA activities in the past two centuries in South America is based on the Monroe
Doctrine and the Manifest Destiny. The Manifest Destiny meant that Americans were
chosen people by God to create a model society. This was justifying for the annexation of
Texas, Oregon, New Mexico and California to USA during and after mid 1800’s. The
Monroe Doctrine, that is a cornerstone of the USA foreign policy was enuncited by
president Monroe and has three basic ideas: 1) no further European colonization in the
New World, 2) abstention of the USA from the European political affairs and 3)
non-intervention of European governments in the regions of Western Hemisphere. At
beginning of 1900’s Theodore Roosevelt further developed the Monroe Doctrine, in what
is was known as the Roosevelt Corollary that stated that not only would the USA prohibit
non- American intervention in Latin America, but it would also police the area.

The Mexican-American war lasted from 1846 to 1848. The event might be dismissed as
irrelevant history north of border, but not south of it. During the war the San Patricios
(St. Patrick’s Battalion) were approximately 250 Irish men who disserted from the USA
army and fought for Mexico. When the region felt to Americans, 30 of the rebels were
hanged and the others were inscripted on their face with a D (from desertor). They
became a symbol of the Mexican independence and are honored every year both in
Mexico and in Ireland.

In 1903 the state of Panama was formed in just 67 hours with the American help. After
the Colombian Senate refused to sell the Panama Canal zone to USA, a group of
Panamian rebels traveled to Washington and agreed to stage a USA backed-revolution.
The flag, the constitution and the declaration of independence were created in New York.
On 3 November 1903 USA bribed the Colombian garrison to lay down their arms and the
revolution began. On 6th of November USA recognized the sovereignty of the State
Panama and on 18 November 1903 the Panamian Ambassador signed the Panama Canal
Treaty. In 1977, USA agreed to relinquish control of Panama Canal Zone in 1999.
In 1905 based on his corollary Roosevelt forced the Dominican Republic to accept the
appointment of an American economic adviser, who very quickly became the financial
director of the small state.

Cateora Ph. et al., 1999, International Marketing, Irwin McGraw Hill, p. 59; pp. 77-81.

The past and recent history of Europe is seen differently by different countries. A
group of Central and Eastern European scholars were in Hungary and were making
a trip to Visegrad, a well known historical town of Hungary. While presenting the
Visegrad castle, the Hungarian guide looked in one direction and said: “In that
direction is a country called Slovakia. This country had never existed, the nation
was invented at the beginning of the century”. Immediately Anetta from Slovakia
reacted to the comments. The guide who had no intention to offend anybody (but
she did not ask where from the group was before making her presentation) tried
 International Marketing

to justify herself that a very famous Hungarian historian wrote that. And Anetta
from Slovakia argued that the Slovakian historians have written completely
different.

The recent events in Iraq are another proof of the different interpretation of
historical events. While USA forces with their allies saw their intervention as being
helpful for the Iraqi people, after two years of constant boycott of the American
troups and administration, they handed in administration to locals, who perceived
Americans and their allies as intruders.
If we want to understand attitudes of a country and its behaviour, we have to know,
how it sees history.
The cultural environment

Another very important element of the international environment to be taken into

consideration when extending internationally is culture. Culture has to be studied
because buyer behaviour and consumer needs are driven by cultural norms and
cultural forces are a major factor in shaping a company’s international marketing
mix programs.
The marketing concept is focusing on the satisfaction of the consumers’ needs and
wants regardless the country they come from. But consumers’ needs and buying
behaviours are determined further by the culture they come from. In other words
people express their needs and wants differently from culture to culture. They have
similar needs and wants, but they express them differently. For instance, an
American company producing canned vegetables decided to go abroad and to start
with the canned sweet corn, considering that no flavour adjustment will be needed
to this product. The company did not need to make adjustments to the flavour, but
it had to make adjustment to the way the product was marketed because the product
was used differently in different countries: in USA (the home market) corn is used
as a side dish being hot, in France corn is used cold and added to the salad, in
Britain, corn is used as a sandwich filler and a pasta topping, in Japan, corn is used
 International Marketing

as an after school snack and in Korea, sweet corn is put on ice-cream.

Consequently, the company adapted its advertising by portraying in each country
the actual use of the canned corn 1 .
We can see that is necessary to understand the cultural similarities and differences
and to set the marketing strategies for the particular needs of each international
market. Culture influences all marketing activities, from product design,
packaging, styling to pricing, promotion and distribution and it has to be studied.
Actually markets are considered to be the result of the interaction of three aspects:
the marketer’s effort (what the company does), the economic conditions of the
country and the elements of culture of the country.

3.1 The definition of culture

Therefore, we will ask ourselves what is culture? There are an enormous number of
definitions of culture (Kroeber and Kluckhohn counted over 160 definitions of
culture 2 ). Two definitions among the most representative, are Hofstede’s and
Cateora’s. Hofstede defines culture as “the collective programming of the mind
which distinguishes the members of one group or category from those of another” 3
and Cateora et al. define culture as “the sum of total knowledge, beliefs, arts,
morals, laws, customs and any other capabilities and habits acquired by humans as
members of society” 4 . In box no. 3.1. there are presented also other definitions
of culture.
But all those definitions have a few things in common, that actually represent the
essence of culture. The culture deals with the way a group lives and it contains the
entire social heritage of a nation, it deals with everyday life and refers to the
language, values, attitudes, behaviours, knowledge a nation has. There were
identified a number of cultural universals, that the international marketer can use
in order to standardize some of the elements of the marketing program. The
cultural universals are modes of behaviour that exist in all cultures, such as
cooking, dancing, art, aesthetics, education, etiquette, family feasting, food taboos,
language, marriage, medicine, religious rituals, status differentiation etc 5 .

1
Cateora Ph. et al., 1999, Op.Cit., p. 85.
2
Kroeber A. and Kluckhohn C., 1985, Culture: A critical Review of Concepts and Definitions, Randon House,
p.11.
3
Hofstede, G., 1999, Cultures and Organizations: Software of the Mind, McGraw Hill, 1991, p. 5.
4
Cateora, Ph. et.al., 1999, Op.Cit, p. 86.
5
Keegan W., 1999, Global Marketing Management, Prentice Hall, p. 61.
The cultural environment

BOX NO. 3.1 Definitions of culture

Culture is a learned, shared, compelling, interrelated set of symbols whose meanings

provide a set of orientations for members of society. These orientations, taken together,
provide solutions to problems that all societies must solve if they are to remain viable.
(Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons,
p. 84)

Culture includes both conscious and unconscious values, ideas, attitudes and symbols that
shape human behaviour and that are transmitted from one generation to the next. (Keegan
W. Global Marketing Management, Prentice Hall, 1999, p. 59)

Culture includes the entire heritage of a society transmitted by word, literature or any other
form. It includes all traditions, habits, religion, art and language.
(Jeannet J.P. and Hennessey H.D., 2001, Global Marketing Strategies, Houghton Mifflin
Company, p. 78)

Culture is an integrated system of learned behaviour patterns that are distinguishing

characteristics of the members of any given society. It includes everything that a group
thinks, says, does, and makes, its customs, language, material artifacts and shared systems
of attitudes and feelings.
(Czinkota M. and Ronkainen I., 2001, International Marketing, Hartcourt College
Publishers, p. 61)

Culture may be defined as the ways of living built up by a group of human being
transmitted from one generation to another. Culture includes both conscious and
unconscious values, ideas, attitudes and symbols that shape human behaviour and are
transmitted from one generation to the next.
(Bradley F., 1995, International Marketing Strategy, Prentice Hall, p.133)

The common characteristics of culture that are met whatever the way it is defined
are the following:
The fact that it is learned. Culture is always learned. It is not biologically
transmitted via genes. It is cultivated by various groups (family, school, other
organizations) and it is transmitted from one generation to other, it consists of
learned behaviours in recurring situations. The sooner an individual learns these
responses, the more difficult is to change them. Tastes and preferences for food
and drink represent learned responses that are highly variable from culture to
culture and can have a major impact on consumer behaviour.
 International Marketing

• Consists of many parts, interrelated to each other. Culture is formed of

many parts, a number of elements that we are going to study further.
These parts are interrelated to one another and one part of culture, for
instance status, has an impact on another part, such as the language
that the person uses.
• It is shared by individuals as members of society. For instance, if a
person eats the sweet corn on the ice cream at home but other people
do not share this habit it means that eating sweet corn on the ice-cream
is not part of that nation’s culture.

3.2 The process of cultural analysis

In order to make easier the study of culture for both assessing the potential of
foreign markets when willing to enter the markets or for evaluating marketing
plans when the company already operates in a market, there is a cultural framework
that can be used to study culture, a framework that studies all elements of culture
and the relationships between them. See figure no. 3.1.

Figure no. 3.1 The process of cultural analysis at international level

Elements of culture

Material Social Religion Aesthetics Value

culture Language interaction Education systems

The analysis of cultures

* cultural knowledge
* cultural sensitivity
* cross-cultural comparisons

Adapt to Change the

local culture local culture
The cultural environment

The elements of culture (aspects such material culture, language, social interaction,
religion, education, value systems, etc) will be studied in order to make an analysis
of the culture. Each element will be viewed and searched separately as well as in its
interaction with other elements. In the process of culture analysis, cultural
knowledge will be gathered and cross-cultural comparisons will be done if
required, processes during which the company has to prove cultural sensitivity.
After cultures have been studied and analysed the company will make the decision
of either to adapt to the local culture or to change the local culture in order to get
acceptance for its products.

3.2.1 Elements of culture

Let’s see now what are the elements of culture that a company should look at in a
foreign market in order to decide how to set its marketing strategies for each
foreign market.
The culture of a country means:
) material culture
) language
) social interaction
) religion
) education
) aesthetics
) value systems

Material culture. The material culture of a country comprises on the one hand
the technology, the techniques a country uses to produce goods and on the other
hand its economics.
Technology refers to the know-how possessed by that society, the techniques in
the creation of the material goods, the technical educational system and the
technical know-how possessed by the people of the society. In order to appreciate
the technological level of a country a company may look at: the production
process, the country’s infrastructure, the technical level of the consumer. The
material culture affects the level of demand and, the quality and types of products
demanded.
In the developed countries the technological level is high, the technologies used in
production processes are complex and consumers understand many technical
concepts while in many developing countries, the technological level is low
 International Marketing

and technologies used in production processes are rudimentary or simple and

population has no technological knowledge. For instance, if we talked about the
concept of preventive maintenance, this is broadly understood in developed
countries, while in many developing countries this concept does not have the same
understanding. What does this mean from the marketing point view? Consumers
will not use properly the product, they have to be instructed, more resistant
products should be designed in order to have the same product life length. For
low-technological countries, some products should be adapted and simplified
because consumer can not use them, do not know to use them if they are too
complex. Electrical appliances are sold nicely in France and Britain, but they have
less buyers in the societies (such as the African ones) where less 5% of the
population have electricity in their homes. The electrical toothbrushes are
acceptable and demanded in Western developed countries, but they are seen as a
waste of money in the countries where the income can be better used on clothing
or food 6 .
Economics is the other element of the material culture of the country, referring to
the resources a country employs in production, the distribution, consumption of
goods and services and the income obtained through the creation of goods and
services.
Societies with different levels of income, spend differently this income, use
differently resources in production processes and consumers have different
consumption patterns. In high income countries consumers buy in large quantities
and less frequently, while in low income countries consumers buy in small
quantities and more frequently, for instance.

Language is seen by some as being the mirror of a culture 7 . Language is

important in information gathering and also in the evaluation of efforts. By
knowing the foreign language the international marketer does not rely completely
on the opinions of others, but can also see and hear personally what is going on.
Language is multidimensional by nature. There are two aspects related to language
that are of interest for the international marketer:
• language as a communication tool,
• the diversity of languages spoken across borders.

6
Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 144.
7
Czinkota M. And Ronkainen I., 2001, International Marketing, Hartcourt College Publishers, p. 64.
The cultural environment

Language as a communication tool is manifested both through the verbal, the

spoken language and also through the non-verbal, the silent language.
The verbal language ensures the communication of the company with both
employees, but especially customers in the foreign markets. To be able to better
communicate with the consumers, translations are used when marketing products
across borders.
Translations not only that have to be grammatically correct, but they have to keep
the cultural meaning. The most difficult to translate are the idioms. In many cases
dictionary translation is not sufficient for an accurate translation, as the idiomatic,
interpretation is different and reflects the real meaning. Translations that do not
take into consideration this fact, not only that they loose their intended meaning but
they might suggest something completely different. For example, an American
travel company when translated its advertising message “Fly on leather” in Spanish
it came out with the meaning “Fly naked”. Another American company producing
deodorants wanted to market in Germany a product under the name of ,,Mist’’ that
in English means “boare, ceaţă” being willing to suggest a romantic atmosphere,
but in German the word “mist” means garbage and animal excrements. Box no. 3.2
presents some other international blunders related to translations and
interpretations of meanings internationally.

Another consideration related to language is its capability to convey different

shades of meaning. For instance, a one-word equivalent of the English word
“aftertaste” does not exist in many languages. To communicate the idea may
require a lengthy translation such as “the taste that remains in your mouth after you
have finished eating or drinking” 8 .

The non-verbal language refers to gestures, body language, eye contact, accepted
conversational distance (personal distance), etc.
These are things that differ from one culture to another and can cause
misunderstandings when they are not known. For instance, the sign with the finger
and the thumb forming a circle, means O.K in USA but has an obscene meaning in
Greece and in Brazil, in southern France the meaning is that the sale is worthless
and in Japan the meaning is that a little bribe is asked for 9 . In Australia, the former
USA president Bush senior gave “V for Victory” sign with his palm turned inward,
not realizing that this was equivalent to the middle finger salute in the USA 10 .

8
Ibid., p .65.
9
Ibid., p. 67.
10
Grayson L.James., 1999, ”Gestures: the DO’s and TABOO’s of Body Language Around the World”, Security
Management, March, p.122.
 International Marketing

BOX NO.3.2. Blunders at international level (meanings and translations)

Š The American Motors Corporation’s car „Matador” suggest virility and strength in
USA, but in Puerto Rico it means „killer” and this is not a favourable connotation in a
place with a high trafic fatality rate.
Š A private Egyptian airline „Misair” proved to be very unpopular with the French
nationals as the name meant in French „misery”.
Š Pepsi Cola used its ad „Come alive with Pepsi” in different countries, but the
translations came out with completely different meanings: in German the literally
translation meant „Come alive out of the grave with Pepsi” and in Asia the translation
meant „Bring your ancestors back from the dead with Pepsi”.
(Ricks D., „How to avoid business blunders abroad” in Business, April 1984).

Goldsmith collected a number of hotel signs translated into English, that are translations
errors, less harmful but funny:
9 Paris: „Please leave your values at the front desk”
9 Japan: „You are invited to take advantage of the chambermaid”
9 Zurich: „Because of the impropriety of entertaining guests of the opposite sex in the
bedroom, it is suggested that the lobby be used for this purpose”
9 Romania: „The lift is being fixed for the next day. During that time we regret that you
will be unbearable”.

(Goldsmith Charles, „Look See! Anyone Do Read This and It Will Make You Laughable”,
The Wall Street Journal, 19 November 1992, p. B1.

Americans have a big personal distance (1 m), but Latin and Arabs have a small
personal distance (0,5 m). This may cause misunderstanding when North
Americans will step back to restore the normal personal distance (for them), this
being interpreted as avoidance by the small personal distance peoples, while for
the North Americans the closeness will be an invasion of their personal space.
Arabs have an old tradition in seen as following the movement of the eye pupil
during negotiations in order to interpret reactions. That is why they look right in
your eyes when talking to you and that is why they have sun glasses in many
occasions.
For Japan it is offending to look straight into eyes for a prolonged period.
Touching while talking is very common for Latin countries and for Southern
Europe, but not common for Northern European countries.

Considering the diversity of languages used across nations, there are countries
were more languages are spoken, such as Canada (French, English), Switzerland
(French, German, Italian), Belgium (French, Flemish), India were there are
14 official languages and around 750 dialects.
The cultural environment

As language is considered to be the mirror of culture more languages spoken in

one country may mean more cultures in the same national territory. These are
heterogeneous markets that might require different marketing strategies in the
same national territory.
Even when the same language is spoken in more countries meanings and
expressions can differ from one country to another. Spanish is spoken in Latin
America. There were found different words for tires: cauchos in Venezuela,
cubiertas in Argentina, gomas in Porto Rico, llantas in the other countries like
Mexico, Peru, Columbia 11 .
English is spoken in North America, in Britain, in Ireland, in Australia, New
Zeeland. Accordingly, in UK you go to the toilet, in USA you go to the restroom
and in Canada you go to the washroom. Box no. 3.3. presents some more
examples of this kind.

We can see that the understanding of the language and the interpretation of the
language is very important in international marketing. What companies need when
going internationally is a cultural translator, who is a person who translates not
only among languages but also among different ways of thinking and among
different cultures.

Social interaction refers to the ways in which people, the members of a society
relate to each other, meaning the roles of men and women in society, social class,
the family, group behaviour, marriage and rituals and so on. All these aspects
affect marketing as each of them influences the pattern of social behaviour on
overall, the value system and the social hierarchy, and consequently the buying
and consumer behaviour.
Family is the most crucial expression of social interaction in a society. In Europe
and most of the Western countries, the family unit is the nuclear family (parents
and children). In other countries (Asia, Latin America), the family unit is the
extended family (parents and children, grandparents, aunts, uncles and other
family members). In some African countries cousins and uncles are called
brothers.

11
Hani D.A, Ryan J.K and Vernon I.R., 1995, „Coordinating International Advertising”, Journal of International
Marketing, vol. 3, no. 2, p.56.
 International Marketing

BOX NO. 3.3 The same language spoken in different countries

English:
Britain - petrol and USA - gasoline; Britain - biscuits and USA- cookies; Britain -
pavement and USA - sidewalk
(Chee H. And Harris R., Global Marketing Strategy, Financial Times Professional, 1998,
p. 145)
During negotiations, the expression „tabling a proposal” means for the USA negociators
to postpone, to delay the decision, while for the British negociators means to make the
decision immediately and to take action right away.
(Ricks D., Big Business Blunders, Homewood Il.: Irwin, 1983, p. 4)

Romanian:
Romania – sufragerie and Moldova – sală
Romania – castraveţi and Moldova – pepeni
Romania – roşii and Moldova – pătlăgele
Romania – salam and Moldova – cârnaţ
Romania – batistă and Moldova – basma
Romania – borcane and Moldova – bănci
Romania – fraier and Moldova – şmecher
Romania – încălţăminte and Moldova – papuci
(Collected by the author)

Family units (either the nuclear or the extended families) play many roles in
society including the economic and the psychological support roles. For instance,
in Asian countries the responsibility for old persons stays with the children, old
people have no material means, they have no pension and they depend on their
children. Companies adapt to this economic role of the extended families. For
instance, in Sri Lanka banks promote saving programs that allow participants to
build up savings to support their parents when they will retire. In Hong Kong
when paying income-tax, the income used to support a parent or grandparent is
free of tax, the expense is deducted from the sum for which the income tax will be
paid. Other companies that do not adapt to the form the families are organized,
make mistakes. In Los Angeles a radio contest aimed at Hispanic families offered
two tickets to Disneyland. The contest failed mainly because it asked Hispanics to
pick two members out of their extended families 12 .
The role members of families play in the family are also important for international
marketers as they influence buying and consumption patterns. For instance, the
husband has a dominant role in many Latin American countries
12
Kotabe M. et al. , Op. Cit., p. 88.
The cultural environment

and Arabic countries and therefore delegate less authority to their wives when
acquiring goods such as automobiles, life insurances and even products such as
furniture or major home appliances (fridges, cookers, washing machines, etc.). In
other countries, most of the developed ones, decisions are taken jointly.
Men and women may adopt different roles in the family and in society. In the
advanced industrial societies, gender roles are becoming more blurred and less
predictable, increasingly women are competing with men at the work place. In the
developing countries women and men still play different and usually
complementary roles.
In many societies there is a social hierarchy and a class system. In the class system
members of a society are generally ranked according to a number of criteria based
on income, power, religion, wealth. Social classes tend to have quite different
consumption patterns that affect the purchasing of different goods. In some
societies only a small number of distinct social classes (Scandinavian countries)
can be identified, whereas in others (USA, India) there are many different social
classes and each of them has its own wants and goods. Upper classes in almost all
countries are more similar to each other than they are to the rest of their own
society. Lower classes tend to be more culture bound, they are less aware of other
cultures, whereas “middle classes” are more prone to participate in the process of
“cultural borrowing”. Therefore, the larger the upper and the middle classes are,
the more likely a market is to buy products and services that are not culturally
bound 13 .
In the Hindu India the social system is formed of „castes”. In the caste system, the
classes are ranked according to purity, spiritual quality and power and is defined by
birth. Understanding this social stratification system, help marketers to segment the
markets and to position their products effectively. Promoting a product as a sign of
upward mobility would not work in the Indian market 14 .

Religion plays a major role in many societies as it refers to the belief system of a
society. Religion refers to a community’s set of beliefs that relate to a reality that
cannot be verified empirically 15 . Religion influences people’s buying motives,
customs, practices, understanding, habits. In one word religion influences the value
systems of a society and the value systems of a society affect marketing, as they

13
Bradley F., Op. Cit., p. 142-143.
14
Idem, p. 147.
15
Terpstra V. and David K.., 1991, The Cultural Environment of International Business, South-Western
Publishing Co, p.73.
 International Marketing

influence: the products people buy, the way they buy them, the reasons for buying,
the newspapers they read etc.
The major religions of the world in terms of number of adherents are Christianity,
Islam, Hinduism, Buddhism, and Confucianism. Box no. 3.4 presents these
religions shortly.
Religion taboos often force companies to adapt their products and their other
marketing mix programs. Certain types of food, clothes and behaviours are
accepted or rejected by different religions and what might be innocent and
acceptable in one country is unacceptable and offending in another country. This is
how a French shipment of perfumes was rejected by the Saudi Arabian customs
because the bottle cap was in the shape of a naked woman. Religious taboos often
force companies to adapt their marketing mix programs, as McDonald’s did in
India by not selling hamburgers that contain beef and in the Arab countries by not
including pork on the menu.
Superstitions are also to be known as they affect people’s behaviours and belief
system. In USA, there is not numbered the 13th floor in any building as it has bad
luck, breaking a mirror brings bad luck, too; in Romania the black cat crossing
your way brings bad luck and spilling the salt means quarelling with someone; in
China the “feng shui” the belief of a harmonious environment influences the
position of buildings and the way houses and offices are furnished.
Even within the same religion sometimes traditions are celebrated differently. For
many Christian countries, during the celebration of Christmas, there are presents
offered on 24-25 of December. In Holland, the presents are given on 6th of
December with the occasion of St. Nicholas. In some countries, there are presents
offered on 6th of December (usually smaller presents) and also for Christmas on
24-25 December. Romania is one of them, and also France, where 6th of December
is also called ”the little Christmas” 16 . Consequently international marketers have
to be aware of differences between religions, but also within the same religion in
different countries.

16
Jeannet J.P. et. al, Op. Cit, p. 84.
The cultural environment

BOX NO. 3.4 Religions in the world

Christianity has more than 2 billion followers. It is based on the Old and the New
Testament and it has as its founder Jesus Christ. In the year 1054 the Catholicism has
separated from Orthodoxism. The Catholicism recognizes the supremacy of the Pope and
his strength as far as faith is concerned. Later, on the Protestantism has siplified the
Catholicism by proclaiming that more important is the power of the faith of the
individual, not the following of religious rituals. The attitude towards making money is
different in Catholicism and Protestantism. While the first is questioning it, the second
emphasizes the importance of work and of accumulation of wealth.
Islam has 1.2 billion adherents in the world who spread from the West coast of Africa to
the Philippines, including Tanzania, central Asia, western China, India and Malaysia. The
main fundamental islamic concepts are:
- unity = the concept of centrality, oneness of God, harmony in life
- legitimacy and equality of people = fair dealings, reasonable level of profits
- zakaat = 2.5% per year compulsory tax to all those classified as not being „poor”
- usury = charging interest on loans is not possible
- supremacy of human life = compared to other forms of life objects, human life is of
supreme importance
- community = pilgrimage to Mecca is required at least once in their lifetime if they are
able to do so
- abstinence = during the month of Ramadan Muslims are required to fast without food
and drink from the dawn to sunset; consumption of alcohool and pork as well as the
gambling are forbidden.
Hinduism has 860 million followers mainly in India, Nepal, Malaysia, Guyana, Suriname
and Sri Lanka. In addition of being a religion is also a way of life, based on the caste or
class in which you were born. The followers place value on spiritual rather than
materialistic achievement. The family is an important element in the Hindu society, with
the caste system being the norm.
Buddhism has 360 million followers and is spread from Asia to Sri Lanka and Japan. It is
a newer version of Hinduism, but it has no caste system. The emphasis is on spiritual
achievement, with achieving nirvana, a state marked by an absence of desire.
Confucianism has over 150 million followers in Asia, mainly among Chinese. It is more a
code of conduct than a religion, stressing loyalty to central authority and placing the
group before the individual.
(Czinkota R.M and Ronkainen I.A., 2001, International Marketing, Hartcourt College Publishers,
p. 67-69; Kotabe M and Helsen K., 1998, Global Marketing Management, John Wiley and Sons,
p. 90-92; Sasu C., Marketing Internaţional, 1998, Editura Polirom, Iaşi, p.73-77.
 International Marketing

Education is a means of transmitting culture from one generation to another.

Education, formal and informal plays a major role in passing on and sharing
culture. Education shapes the wishes and the motivations of people. The level of
education in a country has an impact over the receptivity of consumers from that
country to foreign marketing methods. An educated consumer is easier to be
instructed about how to use a new product. The level and the quality of education
is influencing the potential consumers of a country, but also the potential
employees of companies, the types of employees and managers that can be hired in
that country. Usually societies with a low level of education, have low incomes
and consequently the consumption potential is also low.
Both quantitative and qualitative aspects related to education have to be taken into
consideration when analysing the environment of a foreign country. Consequently
when studying the education in a foreign country, the company should be
interested in:
1. The type of educational system. There are different types of educational
systems in the world that may result in different way of thinking of consumers
around the world. The educational systems can take many forms and it is important
to the marketer to understand the differences because it can indicate the type of
consumer market available. For instance, the traditional European system
emphasizes accumulation of knowledge while the American education system
emphasizes on the development of analytical and problem solving abilities. Japan
and Korea emphasize the sciences, especially engineering to a greater extent than
some Western countries do 17 . People who go through different educational systems
develop different ways of thinking and different aptitudes and they are valuable for
the international company.
2. The level of education and the enrolment levels. The following
indicators should be of interest in order to evaluate the level of education in a
foreign country:
ª number of years of compulsory education (four classes in Mexico,
eight classes everywhere, twelve classes in Romania before 1990). The
level of education and participation of young people in educational
systems drives a country’s level of literacy and knowledge.
ª the education forms (full-time day, part time evening, distance
learning) and number of hours allocated. For instance, there are
differences in the number of hours spent by high school pupils on core
subjects such as mathematics, science and history in different

17
Czinkota M. and Ronkainen I., Op. Cit., p. 78.
The cultural environment

countries: 1460 hours per year in USA, 3170 hours per year in Japan,
3280 hours per year in France, 3528 hours per year in Germany 18 .
ª the access of women to education. In Muslim countries education is
largely preserved to males and often males are better educated in such
societies than females.
Table no. 3.1 presents countries that have the degree of illiteracy above 50%.

Table no. 3.1 Selected economies with illiteracy rates of 50% and over, 2001

Illiteracy rate
both male
% Male % Female %
and female –
country, 2001
Niger 83.5 Niger 75.6 Niger 91.1
Burkina Faso 75.2 Burkina Faso 65.1 Burkina Faso 85.1
Mali 73.6 Mali 63.3 Mali 83.4
Gambia 62.2 Gambia 55 Iraq 76.3
Senegal 61.7 Ethiopia 51.9 Benin 75.4
Iraq 60.3 Senegal 51.9 Guinea Bissau 75.3
Ethiopia 59.7 Bangladesh 50.1 Nepal 74.8
Bangladesh 59.4 Yemen 73.1
Mauritania 59.3 Senegal 71.2
Nepal 57.1 Pakistan 71.2
Pakistan 56 Mozambique 70
Mozambique 54.8 Bangladesh 69.2
Yemen 52.3 Morocco 62.8
Burundi 50.8 Egypt 55.2
Morocco 50.2 India 53.6
Sudan 52.3
Haiti 51.1
Source: www.uis.unesco.org,

3. The literacy rate it is also of interest for the international marketer. A

high level of illiteracy will suggest he use of visual aids rather than printing
materials in advertising. For instance, in some African countries a baby-food
company found out that one reason for its low sales in the region was the fact that

18
Jeannet J. P. and Hennessey H. , Op. Cit. p. 92-93.
 International Marketing

the picture on the label showing a baby, was interpreted by locals (due to their low
level of education) as containing babies 19 .
Education is important as it can influence the marketing activities of the company
in a country. For instance:
¾ a high level of illiteracy especially for women means that products
have to be modified, simplified and packaging and labelling have also
to be adapted; promotion has to be adapted: no written ads will be used
and the message will be simple and explanatory.
¾ a high level of illiteracy affects marketing research as communication
with consumers is difficult and qualified researchers and operators are
difficult to find.
¾ the cooperation with the members of the distribution channels depends
on their level of education.
¾ the nature and quality of marketing support services (such as
advertising agencies) depends on the way the educational system of
the country trained people for such occupation.

Aesthetics refers to the ideas of a culture about beauty and good taste that are
expressed through art, music, dance, colours, shapes. Such things are very
important in international marketing because they show how each culture
interprets symbols, colours and what are the beauty standards of a culture.
Colours are often used as a way to identify brands and to differentiate products.
Colours have different connotation and symbolic value in international markets.
While in Europe black is the symbol of death in some countries of Asia (Japan)
white is the symbol of mourning for the deceased. Green is the symbol of illness in
Malaysia and symbolizes death in Singapore. Red is a good luck colour in many
Oriental countries, while in African countries has a negative connotation. Colours
have different meanings in different countries and international marketers have to
know the symbols of colours in different countries before using them.
Customers everywhere respond to images and myths that help them to define their
personal and national identities. If these are not taken into consideration, mistakes
can take place. In 1997 the shoemaker Nike had to recall one model from the
international market because it had a logo intend to represent flames but that was
resembling the Arabic script of the word ”Allah”. Muslim leaders complained as

19
Kotabe M. and Helsen K., Op. Cit., pp. 94-95.
The cultural environment

finding offending the logo and the company withdraw the shoes from the world
market 20 .
Standards of beauty also differ from one country to another: what is beautiful for
some countries might be ugly for others. Imagine an ad for a Chinese product that
is done in Romania using Chinese music. The international marketer has to know
what are the aesthetic standards in a country in order to design the product styling,
the packaging and the adverts.

The value systems shape people’s norms and standards and they vary a lot across
cultures. They have their origin in history and cannot be changed in a short time.
Most of the human behaviour depends on values and attitudes. Values and
attitudes help us to determine what we think is right and wrong and what is
important and desirable and what is not. Both consumption and business behaviour
are directly related to values. And international marketers have to understand
them. Social norms represent models of behaviour and the accepted roles and
standards in a society. A belief is a person’s opinion about something and may be
based on a real fact, subjective opinion or faith 21 . For instance, someone can
believe that Dove soap is a very smooth and creamy soap. Marketers should be
interested in people’s beliefs, as they act according to these beliefs. An attitude is a
person’s point of view towards something and usually involves liking or
disliking 22 . Someone may think that the German products are the best quality
products and this will lead to a certain behaviour towards German products.
Attitudes are usually difficult to change and marketers can try to fit their products
into existing attitudes rather than trying to change them. Values are shared beliefs
or group norms 23 . They are important to be known in order to communicate
effectively with the consumers.

People’s attitude towards time vary across cultures and consequently will affect the
operation of the company in a foreign market. Edward Hall defines two time
systems 24 that can be found in different cultures: the monochronic time and the
polychronic time. In the societies that are based on the monochromic time
(M-time) people do one thing at a time, people are very punctual, they have an
organized agenda, they do not waste time, they are the “time is money” type

20
Cateora Ph. and Graham J., 2002, Op. Cit., p. 106.
21
Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing, p. 147.
22
Ibidem.
23
Ibid.
24
Hall. E. T., 1976, Beyond Culture, Anchor Press, New York.
 International Marketing

of people. These are North Americans, Swiss, Germans, Scandinavians. In the

societies that are based on the polychronic time (P-time), people have a completely
different concept of time: people do several things at a time, they are less
organized, they are less punctual, they are less rigid regarding the schedule, for
them business is a way of socializing, not the other way around, people allow for
relationships to be built. These are Latin American peoples.
Most cultures represent a mixture of M-time with P-time, but they have a tendency
to be either M-time or P-time. An example is Japan, where people arrive at
meetings on M-time but allow for P-time once the meeting begins. Recently most
business-people from P-time cultures are adapting to M-time.

Formality also differs from country to country and is important to be known as it

affects the communication between people. For instance, in USA and UK people
talk on their first name even in business environment (there is only one form of
addressing in English); in Germany, France and Romania people should use the
polite form in the business environment (these languages have two forms of
addressing); in Japan there are three forms of addressing/greeting according to the
social status and the hierarchical level (superior, equal, inferior).

Attitudes towards achievement differ from one society to another. In Western

societies achievement is well rewarded and this motivate people to work more and
to accumulate more, by acquiring goods and services. In other societies, such as
some Asian societies, achievement does not motivate people and spiritual
rewarding is more important.

Attitudes towards change can also differ from one country to another. There are
countries more resistant to change than others, where innovations and new products
are accepted more slowly and with higher difficulty. Japan is seen as a conservative
country, more resistant to change, while Scandinavian countries are more
innovative and more open to change.

Attitudes towards foreign cultures will affect activities such as positioning in

marketing. At the beginning of 1990’s American cigarettes were promoted in
Romania using the theme of the American dream, as it was a positive image of this
country in Romania. Later on, the well known slogan ”We don’t sell our country!”
influenced more the acquisition of Romanian companies by foreign investors,
rather than the acquisition of foreign products by Romanian consumers.
The cultural environment

The Japanese raise a huge wall against foreigners (gaijin) and many middle aged
bureaucrats and company officials think that buying foreign products is
unpatriotic. The Chinese think that one should build relationship (guanxi) first and
if that is successful the transaction will follow 25 .

Social behaviours are also important as they might have different meanings in
different countries. In most countries is impolite to make noises when eating and
to belch. In China it is polite to belch at the end of the meal as a sign of
satisfaction with the food. In UK is polite to eat all what is placed on the plate,
while in China if you eat all on the plate it is considered that the food was not
enough and you receive more food.
In Saudi Arabia it is an insult to question a host about the health of his spouse or to
show the soles of your shoes. In Korea you should use your both hands when you
hand in an object to another person. In Indonesia it is considered rude to point a
finger at another person. 26

3.2.2 The analysis of cultures

The cultural analysis implies gathering cultural knowledge that should be

interpreted by showing cultural sensitivity in order to make cross-cultural
comparisons.

3.2.2.1 Cultural knowledge

When analysing the culture of a country the marketer will gather information in
order to get knowledge about that country’s culture. There are two types of
cultural knowledge relevant to the international marketer, the factual knowledge
and the interpretive knowledge.
The factual knowledge refers to straightforward information about a cultural
environment, the facts that a marketer can study and understand, it is usually obvious
and it has to be learned. Such factual knowledge can be the meanings attached to
different colours and tastes, or statistics about a country’s population etc.

25
Czinkota M. and Ronkainen I., Op. Cit., p. 69.
26
Keegan K., Op. Cit., p. 67.
 International Marketing

The interpretive knowledge about culture refers to the ability to understand and
appreciate the nuances of different cultural patterns and traits. This type of
knowledge requires a degree of insight that may be described as a feeling and goes
beyond factual knowledge.
The international marketer has to have both types of knowledge: the factual
knowledge and the interpretive knowledge.
For example, factual knowledge is the fact that 98% of the Mexican population is
Catholic, but what it actually means this? What is the interpretation of this
information? Do they have the same traditions like other Catholics around the
world or do they have different traditions? 27
The interpretive knowledge is also known as experiential knowledge as it is
usually acquired based on experience in that particular cultural environment. In
case that experience does not exist in a particular country, it is advisable to work
with locals in order to be able to identify and use the interpretive knowledge.

3.2.2.2 Cultural sensitivity

When analysing culture, the international marketer has to show cultural sensitivity
or cultural empathy. They should try to get rid of the self reference criterion
(SRC), they should stop judging other cultures based on their own experience, and
based on the belief that one’s culture is superior to another culture.
James Lee was the one who has introduced the concept of self-reference criterion
(discussed in chapter no. 1) as being the root to most international business
problems. He also proposed a four steps analytical approach in order to reduce the
influence of one’s own cultural values 28 :
1. Define the problem or goal in terms of domestic cultural traits, habits
and norms.
2. Define the problem or goal in terms of foreign cultural traits, habits or
norms. Make no value judgments.
3. Isolate the self-reference criterion in the problem and see how it
complicates the problem.
4. Redefine the problem without the self-reference criterion influence and
solve for optimal the goal situation.

27
Cateora Ph. and Graham J., 2002, Op. Cit, p. 108.
28
Lee James A., 1966, „Cultural Analysis in Overseas Operations”, Harvard Business Review, no. 44,
March - April, p. 106-114.
The cultural environment

Cultural sensitivity or cultural empathy means that international marketers have to

admit from the very beginning that there are no right or wrong cultures, there are
simply different cultures. Marketers should accept that cultures are different but
equal. Just because a culture is different does not make it wrong. The belief that
one’s own culture is better just because it is his own depicts the philosophy of
ethnocentrism, one of the main dangers for the international marketer.
If there is no cultural empathy, tolerance and flexibility, conflict and
miscommunication arises.

Another important aspect when going internationally is the feeling of people, going
to work abroad. Business people moving to another culture usually experience
stress and tension, that is known as the cultural shock. An individual who enters a
new different culture has to learn how to cope with the new cultural values, as well
as to identify which ones of the old ones do not work in the new environment.
Harris and Moran presented ten tips in order to deflate the stress and the tension of
cultural shock 29 :
1. Be culturally prepared.
2. Learn local communication complexities.
3. Mix with the host and nationals.
4. Be creative and experimental.
5. Be culturally sensitive.
6. Recognize complexities in host cultures.
7. Perceive oneself as a culture bearer.
8. Be patient, understanding and accepting of oneself and one’s hosts.
9. Be most realistic in expectations.
10. Accept the challenge of intercultural experiences.

Also in order to diminish the cultural shock when going internationally and also to
foster cultural sensitivity and acceptance of new ways of doing things, training and
educational programs are needed. Czinkota and Ronkainen present a few cultural
training methods 30 :
1. Area studies programs through which is provided factual information
about a particular country. It is of little use to the international manager, but should
be the prerequisite for other training programs.

29
Harris Ph. and Moran R., 1987, Managing Cultural Differences, Gulf Publishing,, p. 212-215.
30
Czinkota M and Ronkainen I., Op. Cit., p. 86-89.
 International Marketing

2. The cultural assimilator is a program in which trainees must respond

to scenarios of specific situations in a particular country. The results are evaluated
by a panel of judges and the program is usually used to assess the suitability of
assigning a new manager abroad on a very short notice.
3. Sensitivity training programs focus on enhancing a manager’s
flexibility in situations that are quite different from those in the home country.
4. On-line training based on detailed scenarios, on relevant exercises
and on-line discussions that are delivered gradually and based on a set of support
materials.
5. Field experience that consists of sending the manager in to the
different cultural environment for a limited period of time.

3.2.2.3 Cross cultural comparisons

The analysis of culture in order to understand the environment of a country and

also to make cross-cultural comparisons envisages both macro analysis and micro
analysis.
The macro-analysis of the cultural environment includes an examination of the
variability, complexity, cultural hostility, heterogeneity and degree of
interdependence of a country’s culture. The macro-analysis is trying to identify the
climate in a country and its attitude towards business and products. The micro-
analysis focuses on the cultural impact on the target market or segment. It tries to
identify how cultural influences affect individuals in the market place. Aspects
discussed under cultural values are relevant for micro-analysis. Further we will be
discussing a few aspects relevant to micro-analysis of cultures.
From the point of view of complexity, cultures were divided by Hall in low-context
cultures and high-context cultures 31 :
The low-context cultures are those in which words carry most of information
(message), they depend on explicit verbally expressed communication, what is
meant is what is said, the context in which things are said does not matter.
Countries with low context cultures are USA, Germany, Switzerland, the
Scandinavian countries.
The high context countries are those in which communication depends on context
and non-verbal language, less information is contained in the verbal part of the

31
Hall E. T., 1976, Beyond Culture, Anchor Press, New York.
The cultural environment

message, a lot is implicit. Countries with high context cultures, or implicit cultures
are Japan, China, Asian countries, Arab countries, Latin American countries.
To know the contextual background of countries is important for communication in
business between people from different contextual backgrounds as well as for
planning marketing activities. For instance, if we talk about distribution based on
personal selling, in low-context cultures like USA sales people are rotated across
territories. In high context cultures where trust and friendship and social relationship
play an important role in business they are not rotated. See also table no. 3.2.
Although countries can be classified as high or low context in their overall
tendency, there are exceptions to the general tendency in a country and these
exceptions are found in subcultures. For instance, in USA that is a low-context
culture, there is Mafia that has a high context culture that is based on language,
ritual and a strong sense of distinct identity 32 .

Table no. 3.2 Dimensions of the high and low-context cultures

Dimensions High context Low context

Lawyers Less important Very important
A person’s word Is his or her bond Is not to be relied on; “get
it in writing”
Responsibility for Taken by highest level Pushed to lowest level
organizational error
Space People breathe on each other People maintain a bubble
of private space and resent
intrusions
Time Polychronic – everything in Monochronic – time is
life must be dealt with in its own money. Linear – one thing
time at a time
Negotiations Are lengthy – a major Proceed quickly
purpose is to allow the
parties to get to know
each other
Competitive biding Infrequent Common
Source: Keegan W., 1999, Global Marketing Management, Prentice Hall, p. 64.

Cultural homogeneity/heterogeneity refers to the degree to which separate cultures

are similar or dissimilar. This is another aspect based on which one can make
32
Keegan W., Op. Cit., p.63.
 International Marketing

cross-cultural comparisons. There are countries that have homogenous cultures and
there are countries that have more heterogeneous cultures. In the countries with
homogenous cultures people speak the same language, they have the same religion
and they have the same believes. Such countries are Japan, Korea, Scandinavian
countries. New products diffuse more rapidly in homogenous countries.
Heterogeneous cultures usually have more religions and people’s beliefs differ.
One such example is China, where each province it is a culture in itself. India is
another example with its 14 official languages and the 750 dialects. For countries
with heterogeneous cultures differentiated marketing strategies are needed.

Cultural hostility refers to the degree to which conditions in a culture are

threatening to organizational goals. The extent of hostility depends upon the
perceived acceptability and legitimacy of the firm. Hostility means that the firm
will be less able to acquire raw materials, capital, personnel, information.
Goodwill, political favours and other resources. Hostility may also reduce a firm’s
ability to dispose of its products and services 33 .

Hofstede’s cultural dimensions are also used to make cross-cultural comparisons.

The Dutch professor Hofstede made a research in 66 IBM subsidiaries worldwide
and based on this, identified four cultural dimensions that were used to classify
countries into groups according to the way they respond to business and market
context. It was noticed that there is a close link between consumer behaviour
patterns and the four cultural dimensions identified by Hofstede.
The four dimensions identified by Hofstede are: individualism/collectivism, power
distance, uncertainty avoidance and masculinity/femininity.
A. Individualism/collectivism refers to the degree to which people prefer
to act as individuals rather than group members, the view they have about
themselves.
There are individualist societies (the “me” societies) where people have an
independent view of themselves, individual initiative is accepted and rewarded, ties
between individuals are loose, everybody is expected to look after himself and his
immediate family. Such countries are USA, UK, Germany, France.
There are collectivist societies (the “we” societies) where people have an
interdependent view of themselves, they are willing to connect with others, people
are integrated into strong, cohesive groups and these groups protect people during
their life’s in exchange of unquestioning loyalty. Such countries are Asian
countries, Arab countries and some Latin countries.

33
Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 147.
The cultural environment

B. Power distance refers to the degree to which social inequality is

tolerated in a society, to the authority orientation of a society.
There are countries that score high on power distance meaning that: they see as
acceptable a high inequality between members of the society, these societies are
hierarchical and force and manipulation are used as sources of power. Such
countries are Arab countries, Latin America, West Africa.
There are countries that score low on power distance: they value equality between
members of society, they use knowledge as a source of power. Such countries are
USA, UK, Germany, Netherlands.
C. Uncertainly avoidance refers to the degree to which uncertainty is
accepted or avoided in a society, to the willingness of a society to take risks or not.
There are countries that score high on uncertainly avoidance, that try to avoid
uncertainty, are not willing to take risks, they are intolerant to ambiguity, they are
distrustful to new ideas and behaviours, they prefer structured situations and clear
rules. These societies are more rigid, they stick to historically tested patterns of
behaviour and they do not like and do not take risks, they look for the absolute
truth. Examples of such countries are Japan, Mexico, France.
There are countries with low uncertainly avoidance. These countries tolerate and
accept uncertainty, they are willing to take risks, people are more easy going in
these countries, they take a more empirical approach to understanding and
knowledge. Such countries are USA, UK, Hong Kong.
D. Masculinity/femininity refers to the importance given by society to
either male values (assertiveness, competition, success, acquisition of money, not
caring about others) or female values (quality of life, human relationships,
solidarity, respect for others).
There are masculine societies that score high on masculinity where male values
prevail, these values are dominant in the society. Such societies are Japan, Mexico,
Germany.
There are feminine societies that score low on masculinity where female values are
dominant. Such countries are Netherlands, France, Scandinavian countries.
Follow up research of Hofstede’s work in Asia led to a fifth dimension, long-
termism. There are societies with a long term orientation, where people have
values that centre around the future (such as perseverance) and there are countries
that score low on long-termism and are short term oriented where values are based
on the past and the present (such as respect for tradition).
Table no. 3.3 shows the differences in the family, at school and at the work place
according to Hofstede’s dimensions.
 International Marketing

Table no. 3.3 Differences according to Hofstede’s dimensions

A. Differences according to individualism/collectivism
Collectivist societies Individualist societies
In the family: In the family:
Education towards “we” consciousness Education towards “I” consciousness
Opinions pre-determined by group Private opinion respected
Obligations to family or group Obligations to self (self-interest, self-
(harmony, respect, shame) actualisation, guilt)
At school: At school:
Learning is for young only Permanent education
Learn how to do Learn how to learn
At workplace: At workplace:
Values standards differ for in-group Same value standards apply to all
and out-group (universalism)
Relationship prevails over task Task prevails over relationship
Moral model of employers-employee Calculative model of employer-employee
relationship relationship
B. Differences according to power distance
Small power distance Large power distance
In the family: In the family:
Children encouraged to have a will of Children educated towards obedience to
their own parents
Parents treated as equals Parents treated as superiors
At school: At school:
Student-centred education Teacher-centred education (order)
At workplace: At workplace:
Subordinates expect to be consulted Subordinates expect to be told what to do
Ideal boss is resourceful democrat Ideal boss is benevolent autocrat
C. Differences according to uncertainty avoidance
Weak uncertainty avoidance Strong uncertainty avoidance
In the family: In the family:
What is different is ridiculous or curious What is different is dangerous
Ease, indolence, low stress Higher anxiety and stress
Aggression and emotions not shown Showing aggression and emotions accepted
At school: At school:
Students comfortable with unstructured Students comfortable with structured
learning situations, vague objectives, learning situations, precise objectives,
broad assignments, no time tables detailed assignments, strict time tables
Teachers may say “I do not know” Teachers should have all the answers
At workplace: At workplace:
Dislike of rules – written or unwritten Emotional need for rules – written or
Less formalisation and standardisation unwritten
More formalisation and standardisation
The cultural environment

D. Differences according to femininity/masculinity

Feminine societies Masculine societies
In the family: In the family:
Stress on relationships Stress on achievement
Solidarity Competition
Resolution of conflicts by compromise Resolution of conflicts by fighting them
and negotiations out
At school: At school:
Average student is norm Best students are norm
System rewards students’ social System rewards students’ academic
adaptation performance
Student’s failure at school is relatively Student’s failure at school is disaster
minor accident
At the workplace: At the workplace:
Assertiveness ridiculed Assertiveness appreciated
Undersell yourself Oversell yourself
Stress on life quality Stress on careers
Intuition Decisiveness
Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman
Publishing, p. 153-154.

Hofstede supports the view that management practices in a country are culturally
dependent, leading to the conclusion that what works in one country might not
work in another. The dimensions can be also extended to marketing practices. A
high masculine society can mean preference for “high performance” products and
the use of the “successful achiever” theme in advertising. A strong uncertainty
avoidance may require strategies for reducing the perceived risk in product
purchase and use, such as emphasizing the functionality of the product. A low
uncertainty avoidance means a weak resistance to new products and a strong desire
of the consumer for novelty and variety, ensuring a faster spread of new products.
A feminine society will have consumers preoccupied by “environmentally
friendly” products and will accept socially conscious firms.
 International Marketing

3.2.3 Strategies related to the cultural environment

in foreign countries

After analysing the culture of a country, the company that wishes to enter that
market may decide either to adapt to that culture or to change the local culture.

3.2.3.1 Cultural adaptation

In terms of marketing, cultural adaptation is based on cultural congruence. The

strategy of cultural congruence involves selling products that are similar to those
that exist on the local market, products that correspond to the local cultural norms,
by trying to decrease in this way resistance of locals. The cultural adaptation of
products is recommended for the traditional societies, resistant and reluctant to
novelty, such as Asian cultures (Japan). For instance, Mc Donald’s in Japan started
initially with a USA style menu. The company realized that if it wants to go further
it has to adapt its menu to the Japanese culture. It introduced McChao a Chinese
fried rice, as 90% of the population eat rice daily. The result showed up
immediately as, sales increased 30%. It was noticed that 70% of the McChao sales
have been in the form of take out food bought by single businesspeople 34 .
The process of acculturation, of adjusting and adapting to a specific culture other
than one’s own, is one of the keys to success in international operations.
In terms of business customs a company entering a foreign market has to adapt
locally. Adaptation means to be aware of local customs and to be willing to
accommodate those differences that can cause misunderstanding, to be aware of the
self-reference criterion (SRC) and to avoid it. Business customs have been grouped
by Cateora and Graham in three categories 35 :
1. Cultural imperatives are business customs that must be known and
conformed to or avoided. For instance: in China you are not allowed to raise your
voice, you have to avoid to make your partner to “lose face”. In Japan prolonged
eye contact is considered offensive and therefore imperative to avoid. In Latin
America if you do not make a strong eye contact you risk to be considered evasive
or not to be trusted. This shows that it can happen that what is imperative to avoid
in one culture, it is imperative to do in another.

34
Jeannet J.P. and Hennessey H.D., Op. Cit., p. 108.
35
Cateora Ph. And Graham J., 2002, Op. Cit, p. 128-131.
The cultural environment

2. Cultural adiaphora are business customs and behaviours that foreigners

may conform to or participate if they wish, but they are not required. For example,
to eat and drink local specific food and, to bow your head in Japan as they do. Most
of the customs fit into this category. A symbolic attempt to participate in adiaphora
customs it is always welcomed as it helps to establish a rapport with the foreign
person. The marketer has to pay attention because what is considered adiaphora in
one culture may be perceived as an imperative in another. In China, during
negotiations, large quantities of alcohol are consumed and numerous toasts are
made. It is imperative to participate in the toasts and raise your glass but to drink is
optional. Arabs offer coffee during negotiations and a person has to accept it even
if he does not drink it all.
3. Cultural exclusives are those customs or behaviours that are reserved for
locals, from which foreigners are excluded. For instance, praying like a Muslim
when you are not one, is not acceptable, to criticize a country’s politics and morals,
is not advisable either. There are few cultural customs that are reserved exclusively
for locals.
There are not many imperatives or exclusives but most offensive behaviour results
from not recognizing them.

3.2.3.2 Cultural change

Culture has two contradictory characteristics, it is both conservative as it resists

change and is also dynamic because it changes continuously. The changing
character of culture is the one that is of interest for the international marketer, when
he is willing to try to change the local culture. Change is a result of the society
seeking ways to solve its problems. In many occasions societies have found
answers by looking to other cultures from which they borrow ideas. Cultural
borrowing is common to all cultures.
Cultural borrowing is the process through which cultural ways are borrowed from
other cultures in order to find better solutions to a society’s particular problems.
Cultures are unique but they are the result of borrowing from other cultures, the
behaviours they borrow are combined in an unique manner that becomes typical for
that society. Once a particular behaviour is seen as acceptable by the society, it
becomes approved way and becomes part of the society’s culture. The process of
cultural borrowing is the one that helps the company when, after analysing the
culture it decides that wishes to change the culture, not to adapt to it.
 International Marketing

The process of cultural change can take two forms:

1. The process of unplanned cultural change, when the company
introduces the new product to a country and hopes for the best. In this case only the
fact that the company introduced a new product whose acceptance requires a
change in consumer behaviour even if it does nothing else, initiates the process of
cultural change in that country. An innovation that offers advantages but it requires
a culture to change in order to benefit of those advantages establishes the bases for
cultural change. For instance, USA occupation forces introduced milk, bread and
steak to the Japanese culture during the second World War.
2. The process of planned cultural change takes place when the company
deliberately acts to change those aspects of the cultures that are resistant to the
company’s marketing goals. Through the planned cultural change the process is
accelerated by the company that acts as a change agent. The company acts as agent
of change when designs a strategy to change certain aspects of the culture in order
to overcome resistance to an innovative product. For example, an American
company producing frozen vegetables, in order to overcome the resistance of Asian
women to frozen vegetable had to convince Asian mom’s (who were proud of the
time spent to cook for the family- this was a sign of love and care for them) that by
using frozen vegetables they will have the opportunity to cook more often the
favourite meals for the family.
When a strategy of planned change is implemented the company has the
responsibility for the consequences of introducing that innovation. If dysfunctional
results happen as a result of marketing efforts, even if they are intentional or not,
the company is responsible.
The economic environment

The international economic environment is very important when studying foreign

environments, as it shows us what is the degree of economic development of
different regions and countries, what are the relationships between them and
consequently can help in identifying where is the greatest market potential for the
company. There are authors 1 who consider the economic dimension as being the
single most important characteristic of the global market environment, as without
money many things are impossible to the marketer.
The economic environment changed a lot after the second World War and an
analysis of its evolution is of interest to any marketer.
The international economic environment, can be looked at from two perspectives:
¾ as the international economic environment, namely the world
economy, and;
¾ the economic environment within a nation, the characteristics of a
country’s economy.

1
Keegan W., Op. Cit. p. 37.
 International Marketing

4.1 The international economic environment

We will start our discussion about the international economic environment from
the definition of the world economy. The world economy can be defined as the
totality of economies of the world’s countries and the relationships between them.
Therefore we take into consideration the relationships, the interdependence of these
economies, that are manifested mostly through international trade. Therefore, we
can say that the international economic environment is also the international trade
environment.
The world economy has changed profoundly after the second World War and one
of the most fundamental changes was the emergence of global markets, as global
competitors started to replace local ones, by responding to new opportunities. Also
the integration of the world economy has increased significantly.

4.1.1 International trade flows

As the interdependencies between the world markets are reflected in the

international trade environment, we will look at world trade statistics to see what
are the trade patterns between countries. If we look at the evolution of international
trade, we can notice that merchandise trade (import/export) has increased faster
than the production. In the last 20 years the trade patterns showed that there are
three major trading areas that have emerged and dominate the world trade: the
European Union, the Pacific Rim (led by Japan) and NAFTA (led by USA). These
trading areas, that are also known as “the Triad” account for more than 80% of the
world output and more than 80% of the world’s trade (see table no. 4.3), while they
account only for 16% of the world’s population.
In spite of globalisation, if we look at the world trade statistics we can notice that
most of the trade and the trade increases take place between neighbouring
countries. Trade is more localized. For instance, forty percent of the North
American trade is done with North America, 67% of the Western European trade
takes place within EU and 48% of the Asian trade takes place within Asia. See
table no. 4.2. There are a few exceptions, such as Central and Eastern Europe that
deals more with Western Europe (56.2% of its trade) than within the region
(25.5%). Also Middle East that deals more with Asia and Africa that deals more
with Europe. See tables no. 4.1, 4.2 and 4.3.
The economic environment

Table no. 4.1 Intra and inter-regional merchandise trade, 2002

Billion $
Destination
Origin North Latin Western CE Africa Middle Asia World
America America Europe Europe East
North 382 152 170 7 12 20 204 946
America
Latin 215 54 44 3 4 5 23 350
America
Western 270 55 1787 168 66 68 208 2657
Europe
CE 14 6 176 80 4 7 24 314
Europe
Africa 24 5 71 1 11 3 24 140
Middle 38 3 40 2 9 17 116 244
East
Asia 394 39 260 21 26 48 792 1620
World 1336 315 2549 282 133 169 1391 6272
http://www.worldbank.org, “World Bank indicators, 2002”

Table no. 4.2 Share of inter-regional trade flows in each region’s total
merchandise exports, 2002
%
Destination
Origin North Latin Western CE Africa Middle Asia World
America America Europe Europe East
North 40.3 16.1 17.9 0.7 1.2 2.1 21.5 100
America
Latin 61.3 15.4 12.6 1.0 1.2 1.3 6.7 100
America
Western 10.2 2.1 67.3 6.3 2.5 2.6 7.8 100
Europe
CE 4.5 1.9 56.2 25.5 1.2 2.4 7.7 100
Europe
Africa 17 3.3 50.9 0.7 8.1 2.3 16.8 100
Middle 15.5 1.4 16.4 0.8 3.8 7.1 47.7 100
East
Asia 24.3 2.4 16.0 1.3 1.6 3.0 48.9 100
World 21.3 5.0 40.6 4.5 2.1 2.7 22.2 100
http://www.worldbank.org, “World Bank indicators, 2002”
 International Marketing

Table no. 4.3 Share of regional trade flows in world merchandise exports, 2002
%
Destination
Origin North Latin Western CE Africa Middle Asia World
America America Europe Europe East
North 6.1 2.4 2.7 0.1 0.2 0.3 3.2 15.1
America
Latin 3.4 0.9 0.7 0.1 0.1 0.1 0.4 5.6
America
Western 4.3 0.9 28.5 2.7 1.1 1.1 3.3 42.4
Europe
CE 0.2 0.1 2.8 1.3 0.1 0.1 0.4 5.0
Europe
Africa 0.4 0.1 1.1 0.0 0.2 0.1 0.4 2.2
Middle 0.6 0.1 0.6 0.0 0.1 0.3 1.8 3.9
East
Asia 6.3 0.6 4.1 0.3 0.4 0.8 12.6 25.8
World 21.3 5.0 40.6 4.5 2.1 2.7 22.2 100

http://www.worldbank.org, “World Bank indicators, 2002”

4.1.2 International Agencies promoting economic stability

and trade

Stability in the international economy is a prerequisite for world peace and

prosperity. That is why there are a number of organizations that were set up in
order to contribute to the economic stability of the world. We will shortly discuss
some of them.
The economic environment

The General Agreement on Tariffs and Trade/The World Trade Organization 2 . In

1947 after the second World War, part of the world’s countries have chosen trade
liberalization. Consequently the General Agreement for Trade and Tariffs was
formed (GATT). The GATT was set up in 1948 and its membership gradually
increased over time, as countries perceived the benefits of working together to
reduce barriers to trade. The principles included in GATT’s articles were
reciprocity, non-discrimination and transparency. The main objective of GATT
was to reduce and if possible eliminate trade restrictions and to create an
international forum in which nations to discuss trade issues and to solve trade
conflicts and plan trading policies by setting regional agreements (agreements for
geographical zones) and sectorial agreements (agreements for certain industries).
GATT was a multilateral agreement that even though had no biding authority over
its members, acted to persuade its members to eliminate tariffs and quotas among
members, to improve the trading environment through negotiations, to follow the
most favoured nation (MFN) rule by which all members treat each other equally
and without discrimination and to treat exports from developing countries
preferentially. GATT reduced tariffs from 40% in 1947 to less than 5% in 1990 3 .
On January 1, 1995 GATT was transformed in the World Trade Organization
(WTO) that provides a more formal framework to deal with trading issues. WTO
continues to pursue reductions in tariffs on manufactured goods as well as
liberalization of trade in agriculture and services. WTO concentrates its efforts in
four areas: the liberalization of trade of goods and services, decide how to integrate
China, to deal with “new issues” such as foreign investment, competition policy
and labour standards.

The International Monetary Fund 4 (IMF) was established in 1944 and has as main
goal to promote orderly and stable exchange rates, to maintain free convertibility
among currencies of member nations, to reduce impediments to trade and provide
liquidity to counteract temporary balance of payments disequilibria (offers short
term loans).

The World Bank 5 (also known as the International Bank for Reconstruction and
Development) has as main goal the reduction of poverty and the improving of
living standards by promoting sustainable growth and investments. It provides long
term loans (usually for fifteen to twenty-five years) and technical assistance and
policy guidance to developing-country members to achieve its objectives.

2
http://www.wto.org
3
Jeannet J.P. and Henessey H.D., Op. Cit, p.70.
4
http://www. imf.org
5
http://www.worldbank.org
 International Marketing

The Organization for Economic Cooperation and Development (OECD) 6 . OECD

has 29 members: Western Europe, the United States, Australia, Canada, the Czech
Republic, Hungary, Japan, Mexico, New Zealand, South Korea and Turkey. It is
also known as the “rich man’s club”, as it focuses on the interests of a minority of
the world’s population, the countries with the highest level of economic
development. The OECD conducts numerous research projects, it does economic
forecasts, provides economic data about the member states, the advanced
economies, but also about developing countries, it also conducts studies in
international trade, foreign investment and other areas.

The Group of Seven. The world’s leading industrial nations have established a
Group of Seven, which meets regularly to discuss the world economy. Finance
Ministers and central bank governors from the United States of America, Japan,
Germany, France, Britain, Italy and Canada make up this group, referred to as the
G7. The group works together informally to help stabilize the world economy and
reduce extreme disruptions. Sometimes this group extends to the Group of Ten
(including Sweden, the Netherlands and Belgium).

The United Nations Conference of Trade and Development (UNTCTAD). The less
developed countries felt that they were treated unfair therefore they have chosen a
redistribution system of the world trade, a system that would favour certain sectors,
those sectors where these countries were more powerful (such as raw material
sectors). The organization makes sectorial agreements mainly on primary goods.

4.1.3 The economic integration

The interdependence between the economies of the world can also be seen by
looking at the forms of regional economic integration.
The main forms of regional economic integration are:
• Free trade areas (NAFTA, CEFTA)
• Custom unions (ASEAN)
• Common markets (MERCOSUR)
• Monetary unions (European Union)
• Political union

6
http://www.oecd.org
The economic environment

Free Trade Areas are the simplest form of economic integration. Within a free
trade area nations agree to give up to trade barriers among themselves but each
nation is allowed to maintain independent trade relations with non-group countries.
Custom Unions are a more advanced form of economic integration that has the
same characteristics as a free trade area but adds a new feature of a common
external tariff/trade barrier for non-members countries. Individual countries can
have their own independent trade agreements with non-group countries.
Common Markets are the third level of economic integration. Countries members
to the group have all characteristics of a custom union (free-trade between the
members and common tariffs for tertiary countries) and more it encourages free
flows of capital and labour.
Monetary Unions are the highest form of economic integration. This is a common
market (free flows of goods, labour and capital among member countries and common
tariff barriers for non-members) that have a common currency. Member countries no
longer regulate their own currencies, there is a common currency that is regulated by a
supra-national central bank. EU became the first monetary union in 1999.
Political Union represents the culmination of the process of integration, in which
member states have a common political system. There is no such a union so far, but
EU is aiming towards it.
Figure no. 4.1 presents the characteristics of the main forms of economic integration.
The main regional economic agreement in the world are also presented in table no. 4.5
and box no. 4.1 presents a few details about the economic integration in the world.

Figure 4.1 The forms of regional economic integration

FREE TRADE AREA

No tariffs between
member countries

CUSTOM UNION
+ common custom tariffs
common custom border

COMMON MARKETS
+ free flow of goods (already existing)
labour
capital

MONETARY UNION
+ common currency
 International Marketing

Table no. 4.5. Major regional trade agreements

Trade
Member countries
agreements
AFTA ASEAN Free Trade Area
Brunei, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore,
Thailand, Vietnam
ANCOM Andean Common Market
Bolivia, Colombia, Ecuador, Peru, Venezuela
APEC Asia Pacific Economic Cooperation
Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan,
Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines,
Russia, Singapore, South Korea, Taiwan, Thailand, Vietnam, United States
CACM Central American Common Market
Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
CARICOM Caribbean Community
Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada,
Guyana, Jamaica, Montserrat, St. Kitts-Nevis, St. Lucia, St. Vincent,
the Grenadines, Suriname, Trinidad-Tobago
ECOWAS Economic Community of West African States
Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau,
Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra
Leone, Togo
EFTA European Free Trade Association
Iceland, Liechtenstein, Norway, Switzerland
EU European Union
Austria, Belgium, Cipru, Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia,
Slovenia, Spain, Sweden, United Kingdom
GCC Gulf Cooperation Council
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates
LAIA Latin American Integration Association
Argentina Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico,
Paraguay, Peru, Uruguay, Venezuela
MERCOSUR Southern America Common Market
Argentina, Brazil, Paraguay, Uruguay
NAFTA North American Free Trade Agreement
Canada, Mexico, United States
SAARC South Asian Association for Regional Cooperation
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka
Sources: http://www.aseansec.org; http://www.apec.org; http://www.caricom.org;
http://www.eurunion.org; http://www.mercosur,org; http://www.nafta.org
The economic environment

BOX NO. 4.1 Economic integration in the world

Integration in Europe. The integration agreements in Europe are the EU and the EFTA. The
Single European Market started on 1 January 1993. The most important consequence of the
freedom of movement of products, services, people and capital is the economic growth.
Sources of increased growth in the European Union come from eliminating the transaction
costs associated with border controls and patrols, custom procedures; obtaining economies of
scales by concentrating production facilities; more intense competition among European
companies. The process of harmonizing regulations and laws on products, trade and people
has give EU a strong position in the international economic and political community. EU is
the most successful integration agreement known so far at world level.
Integration in North America. The North American Free Trade Agreement (NAFTA) has
been signed in 1992 by USA, Canada and Mexico. Among the key issues in NAFTA are the
stage elimination of customers barriers over 15 years, includes intellectual property rights
and services, wage differentials may increase competitiveness where productivity allows, no
political union envisaged etc.
The ratification of NAFTA created the largest free market of the world with more than
390 million consumers. Canada gains very little from NAFTA, therefore much of the
controversy centred around USA and Mexico. USA firms will have access to low waged
Mexican labour force, and new jobs will be created in Mexico. Both countries will have
access to millions of additional consumers and the liberalized trade will bring higher
economic growth in both countries.
Integration in Latin America. The Latin American countries have been reforming their
economies since 1980’s and they looked at trade as a way to escape stagnation, inflation and
debt. There were a number of initiatives to integrate some for the region economies (in 1991
few countries formed the New Common Market of Central America, also in 1991 the
Mercosur). Many of the Latin American nations realized that if they do not unify they will
be marginalized in the global market. For economic and political reasons many of these
attempts have not reached their objectives, but the opening of these economies had a
significant impact on their trading relationships.
Integration in Asia. One of the major features of the Asian countries is their heterogeneity.
However market forces have driven formal integration in Asia, too. ASEAN had no formal
structure before 1991 as consensus was based only on informal consultation. In October
1991 the AFTA was formed. Another Asian economic arrangement is APEC that has as
objective to achieve free trade by 2010.
Integration in Middle East. The GCC was formed in 1980 as a defences measure due to the
perceived threat of the Iran-Iraq war. Its objective is to reach free trade arrangement with
Europe.
Integration in Africa. In 1975, 16 west African countries formed the ECOWAS, but most of
its objectives have not been reached due to small membership and lack of economic
infrastructure.
Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt
College Publishers, p. 121-129.
 International Marketing

Why do we need to know in which regional economic agreements is a country

member? First of all to know what facilities we can benefit and secondly by
entering a country that is part of an economic regional agreement, it means
accessing the whole region, it means a larger market in terms of size. Even though
from the marketing point of view the company has to be careful, as a larger
economic market (such as European Union for instance) does not necessarily mean
a market completely homogenous. Cultural differences between countries can
hinder a standardized approach for the whole EU.
However, a company that wishes to internationalise on one or another market has
to know these agreements and to which of them are the different countries part of,
in order to benefit of the facilities offered.

4.1.4 Major players in the international trade

Among the main players in the world trade are multinational companies (MNC)
originated from the developed countries of North America and Western Europe,
and structures specific to the Asian countries such as Keiretsu, Sogo Shosha,
Zaikai, Chaeobol. Recently more small and medium size enterprises (SME) at
world level became involved in international trade.

Multinational companies (MNC)

United Nation conducted a study that showed that there are over 36.000 MNC’s
with more than 180.000 affiliates in the world. The top 100 MNC’s account for
16% of the world’s productive assets 7 . They play an important role in the global
economy and also in the international trade.
MNC’s are among the major players in the world trade. From the total world trade
one third takes place between branches of MNC’s in different countries, it is an
intra-firm, intra-MNC’s trade. Another third of the world trade takes place between
MNC’s and other corporations and the last third of the world trade takes places
between non-MNC’s companies. So, we can see that MNC’s play a major role in
the world trade, as they are involved in selling and buying two thirds of the total
volume of trade at the world level.
We have seen that intra-firm trade accounts for one third of the world trade. There
is also another type of trade that is of importance, the intra-industry trade, the trade
that occurs between similar industries from different countries. The intra-firm
7
„Multinational: A Survey”, Economist, March 27, 1993.
The economic environment

trade is a business-to-business trade and its main marketing role is to reach the
objectives of the company on different markets. For instance, Colgate Palmolive
Romania buys soap from the Turkish subsidiary to sell it in the Romanian market.
These types of sales envisage usually to offer the whole range of company’s
products in foreign markets.
The intra-industry trade is a trade of one good that goes both ways between two
different countries. For instance, China sells clothes to USA and USA sells clothes
to China. In this situation, its marketing role is diversification. Intra-industry trade
occurs when the production of a good takes place sequentially in more stages
distributed over several countries: computers are produced in this way and buying
and selling intermediate products is intra-industry trade. In Western Europe
between 50-60% of the imports of manufactured products are intermediate
products and represent intra-industry trade and in USA 47% of the imported goods
are intra-industry trade 8 .
Besides MNC’s (original from North America and Western Europe) there are also
other actors that play an important role in the international trade environment and
in the world economy. In Japan there are cartels and cooperation on a scale not
possible in the West because of anti-trust and competition rules. In Japan there are
three main forms of organizations (Keiretsu, Sogo Shosha, Zaikai) that have a great
influence over the internal economic life as well as over external economic life.

Keiretsu is an industrial group, a group of companies that have limited ownership

in one another, so that there is a mutual interdependence between them. The
members of a Keiretsu buy goods from one another, they practice reciprocal
purchasing. They represent cooperative networks in an industry and have the
following characteristics:
¾ cross-shareholding of stock and linkage (exchange of directors)
¾ the formation of a presidents club where top executives meet on a
regular basis to discuss business and the relationships between the
group members and between those and other groups
¾ they make joint investment among member companies
¾ keiretsu member banks provide financing to keiretsu companies
¾ they buy and sell among members

8
Cateora Ph. and Graham J., 1999, Op. Cit, p. 30-31.
 International Marketing

Toyota has its Keiretsu by owning shares in a number of companies that supply it
with part components. Similarly in Toyota Keiretsu there are companies that sell
the product.
Box no. 4.2 presents more details about the Japanese keiretsu system.
Sogo Shosha are major Japanese trading companies, they have offices in other
countries and they represent cooperative networks in distribution. There are
thirteen Sogo Shosha in all, they dominate the commodity and capital goods
imports, as they collectively handle more than half of Japan’s internal and external
trade. They are particularly interested in high volume and high value trade and
offer market intelligence based on world-wide local office networks. The largest
Japanese Sogo Shosha are Mitsubishi, Mitsui, Marubeni and Sumitomo.
Zaikai is like a product club formed of the top managers of the most important
companies from Japan. It has close links with the government, use contacts with
politicians, influence networks, generous funds, put pressure on government and
labour and influence trade negotiations. Even the origin of the name is illustrative
for the activity of zaikai (in Japanese zai = money and kai = world).

In Korea there are a number of conglomerates, called Chaebols. And they

dominate every aspect of Korea’s economy. In 1960’s Korea decided to
concentrate the country’s resources in the handful of a few companies. They were
given cheap credit were protected from foreign competition in this way forming the
chaebols. Chaebols get the best graduates and managers and in the last years they
have expanded into areas such as entertainment and retailing. There are 30 large
groups that dominate the Korean economy, but the largest four chaebols are
Hyundai, Samsung, LG and Daewoo. Their combined sales account for 80% of the
GNP, they control almost 60% of exports and employ 3% of the workforce. There
are small companies in Korea that have only one Chaebol as customer, but there is
no sense of “shared destiny” as in the case of the Japanese Keiretsu’s and their
suppliers.
The economic environment

BOX NO. 4.2 Keiretsu’s in Japan

A keiretsu is a strategic infrastructure that contains diverse companies and is also called an
industrial group. There are a few types of keiretsu’s:
The capital keiretsu is formed of a federation of independent firms that are clustered around a
bank and a general trading company. Cross shareholding is common among members firms, as
well as exchange of corporate directors. The mentality of buying from member groups is still
strong. Among those are Mitsui, Mitsubishi, Sumitomo and Fuyo Group.
The production keiretsu is typical for the automotive industry and has as main characteristics
the vertical integration of manufacturers and their suppliers. The large manufacturing firms
have a group of primary subcontractors that further distribute work to thousand of other little
firms. All subcontractors are integrated into the manufacturer’s production processes and
receive technological, managerial and financial support.
Sales-distribution keiretsu involve vertical integration of product distribution from factory to
the retail outlets. Matsushita and Hitachi are companies engaged in this type of keiretsu and
they are also involved in capital and production keiretsu’s.
The distribution keiretsu’s are in decline as: 1) keiretsu stores charge high prices and the
consumers switched to discount stores looking for lower prices and 2) maintaining keiretsu
retail stores causes inefficiencies in the manufacturer’s production system, as each store has to
maintain the full line of company’s products regardless of the pace of sale.
Specific to keiretsu is the „buy group products” mentality and reciprocal purchasing. If one
company buy from another one will expect that company to also buy from it. However, no
company will harm itself for the sake of the group. No single company dominates in a
keiretsu, and most member companies depend on other for no more than 15-20% of their
supplies or sales.
In 1990’s responding to the increased competition, many keiretsu affiliated firms started to
extend outside their keiretsu by buying from either independent or other keiretsu-affiliated
suppliers.

Sources: Lafayette De Mente B., How to do business with the Japanese, 1994, NTC Business
Books, p. 205; Johnston CB and Kwan A., 1999, „Note on the Japanese Keiretsu”, Ivey Publishing,:
Keys J.B., Wells R.A. and Denton L.T. „Japanese Managerial and Organizational Learning”,
Thunderbird International Business Review vol. 40 no. 2, p. 119-139, March/April 1998.

Small and Medium Enterprises (SME’s) are becoming key players in the global
economy and have a growing role in the world trade. A popular myth is that it is
more difficult for small firms to become involved in exporting or international
marketing. The assumption is based on three interrelated issues: smaller firms have
less awareness and knowledge of foreign markets, they cannot achieve the same
economies of scale as large firms do and they usually lack the necessary
managerial and financial resources to internationalise. Recent studies in Europe
showed that almost half of SME’s have the potential to compete internationally
 International Marketing

given growth, improvement and perseverance. SME’s were seen as being customer
oriented, response focused and concerned with new products. Therefore, their
competitive advantage will come from speed, responsiveness and closeness to
customers 9 . SME’s have both constraints (such as exchange rates, getting paid
when doing business internationally, sources for financing, political instability that
can throw them out of the markets, lack of production capacity and sometimes the
attitude of the management) but also opportunities to compete in the global
economy. There are always opportunities for the smaller firm in international
markets given the fact that they are willing to take risks. The best SME’s have an
entrepreneurial management style, characterized by informal approaches to
planning, and heavy reliance on networks rather than bureaucratic planning
procedures associated with large organizations.

4.2 The economic environment within a nation

We have seen that when a company goes international has to look at the economic
environment of each particular market it wants to enter (by looking at the market
characteristics, the degree of protectionism/liberalism and its financial situation,
the relationships between the economies of different countries), as well as at that
particular country in the context of the world economy, how much it trades and
with whom, from what economic agreements is part? We have been talking so far
about the international economic environment or the international trade
environment. We will continue by looking at the characteristics of an economy that
the marketer should be interested in.

First the company should know what is the type of economic system of the
particular country of interest. There are three types of economic systems: capitalist,
socialist and mixed. The classification is based on the method of resource
allocation: market allocation, command (central planned) allocation and mixed
allocation.
The market allocation system relies on consumer to allocate resources. The market
system is an economic democracy, through which consumers decide what will be
produced and by whom by buying or not buying certain goods from the market.
USA and the Western European countries are examples of predominantly market

9
McAuley A., 2001, International Marketing, John Wiley and Sons, p. 107-118.
The economic environment

economies. The system’s superiority in the allocation of goods and services

according to people’s needs and wants is seen as the reason for which the former
socialist countries voted for it 10 .
The command allocation system is a system in which the state has the power to
serve the public interest and this includes deciding which products to make and
how to make them. Consumers are free to spend their money on what is available,
but decisions about what is produced and therefore, what is available are made by
state planners. As demand is higher than the supply in these economies, the
elements of the marketing mix are not used as strategic variables. China, the
former USSR countries and India are examples of economies that rely on command
allocation systems.
The mixed allocation system is based on the fact that in reality there are no pure
market or command allocation systems in the world. All market system have a
command sector and all command systems have a market sector, other said they are
mixed. In a market economy the command allocation sector is measured through
the proportion of the gross domestic product (GDP) that is taxed and spent by the
government. Among the member countries of the OECD this proportion varies
from 32% of the GDP in the USA to 64% in Sweden 11 . On the other hand in China
1-2% of the national output belongs to the private sector 12 .
Than the company should look at the market characteristics of each specific
country in order to be able to appreciate market potential. Among the aspects of
interest should be:
9 Population
9 GNP, GNP/capita; PPP
9 Household size and income
9 Consumption patterns
9 Inflation
9 Infrastructure
9 The rapport liberalism/protectionism

Population is the indicator that gives a close idea about the market potential for a
large variety of goods, especially consumer goods, but not only. Under the
demographic environment we have discussed what are the aspects related to
population that are of interest for the company studying the foreign environment

10
Keegan W. Op. Cit, p. 40.
11
OECD Economic Outlook no. 50, December 1991, Paris-OECD, p. 206.
12
Goldstone J., „The Coming Chinese Collapse”, Foreign Policy, summer 1995, p. 35-52.
 International Marketing

and these includes size, growth, structure on different criteria, density and the
degree of urbanization. Urbanization that refers to the proportion and concentration
of population living in the cities, is important to be studied as urban areas represent
a concentration of potential customers and as urban and non-urban areas have
different consumption patterns and consequently distinct customer requirements.
When doing so, it is important to know how different countries define urbanization
as this can differ a lot from one country to another. For instance, in USA the urban
area is defined as a place with 2.500 or more inhabitants, while in Sweden is a
built-up area with at least 200 inhabitants with no more than 200 meters between
honses 13 .
In many cases developing countries are less urbanised and they are less attractive
markets, as customers are difficult to reach and greater promotional effort is
required to reach a dispersed population that in many cases has a high level of
illiteracy. In many cases the degree of urbanization is a good indicator for the size
of the market and show what type of marketing strategies can be used in that
particular country.

Population is a good indicator for market potential, but besides the existence of
consumers companies also need consumers with money. Therefore, the income has
to be studied in a foreign country in order to appreciate market potential. Among
the best indicators to evaluate the income of a country (and of consumers), as well
as its degree of economic development are the Gross National Product (GNP), the
Gross National Product/capita (GNP/capita), the Purchasing Power Parity (PPP).
The Gross National Product (GDP) is a country’s output of goods and services in
a year and reflects the income that a country has. The GDP generally shows what is
the degree of development of a country.
The GNP/capita shows how much each person would have if the GDP would be
divided equally. Knowing a country’s GNP/capita is the first step in understanding the
general standard of living that the average citizen has in a country. Country markets are
at different stages of development. GNP/capita it was used by the World Bank to group
countries in four categories. These are presented in table no. 4.6.

The Low Income Countries are also known as pre-industrial countries, as they have
the income lower than 755$/capita. These countries have limited industrialization
and high percentage of the population is engaged in agriculture and subsistence

13
Czinkota M and Ronkainen I., Op. Cit, p. 100.
The economic environment

farming, they have high birth rates, low literacy rates, political instability and
unrest. These countries concentrate in Africa south of Sahara desert and in Asia:
Angola, Bangladesh, Cameroon, Congo, Etiopia, Ghana, Haiti, India, Kenya,
Liberia, Mongolia.

Table no. 4.6 Country Income groups (Atlas Method)

Development Status Income group US/capita

Industrial countries High income > $9.266
Middle income
Developing countries - upper middle $2.966-$9.265
- lower middle $756-$2995
Low income <$755
Source: World Bank, World Development Report 2000, http://www.worldbank.org

Lower-Middle-Income countries are also known as less-developed countries, and

they have the income comprised between $756-$2995. These countries are at the
first stages of industrialization and they have factories that supply a growing
domestic market with goods such as clothes, packaged food, building materials,
batteries, etc. Consumer markets in these countries are expanding, and these
countries are seen as an increased competitive threat as they mobilize their
relatively cheap labour to serve target markets in the rest of the world 14 . Such
countries are Guatemala, Philippines, Turkey, Indonesia. Romania is included in
this category as it had its GNP/capita in 2002 of 1870$.

Upper-Middle-Income countries are also known as industrializing countries and

they have their GNP/capita comprised between $2966-$9265. In these countries the
percentage of population engaged in agriculture decreased fast as people move to
the industrial sector and consequently the degree of urbanization increases fast.
These countries have rising wages, high rates of literacy and advanced education.
They are seen as becoming strong competitors in the international markets as they
experience export-driven economic growth. Such countries are: Chile, Hungary,
Malaysia, Mexico, Uruguay, Venezuela.

14
Keegan W., Op. Cit., p. 42.
 International Marketing

High Income countries are also known as advanced, industrialized, post-industrial

countries. They have the GNP/capita more than $9266. The characteristics of these
countries are that more than 50% of GNP comes from the service sector, the
knowledge overpasses the capital and is seen as a key strategic resource,
technology is given high importance. Such countries are: United States, Japan,
Germany.

One important aspect when we talk about income, it is also the distribution of
income.
When the income that a country produces during an year is not distributed
relatively equal, than we have the so-called bipolar societies. These are countries in
which a small portion of the population (for instance 10% of the population) holds
the largest part of the GNP (50% of the GNP). The Latin American countries are
typical examples of bipolar societies. Brazil is one of the most unequal societies.
Here one fifth of the population earns around 65% of the national income, while
the bottom fifth earns 3% of the national income 15 . Other countries with unequal
distribution of the income are Bangladesh, China.

One indicator that evaluates closer the purchasing power of consumers in a country
is the Purchasing Power Parity (PPP). PPP adjust the GNP for the cost of living, it
shows what the money can buy in a country by measuring the purchasing power of
different countries over the same type of goods and services. In this way it allows
for comparisons of standards of living across countries. PPP makes the comparison
of the purchasing power of other currencies with the American $. Table no. 4.7
shows the GNP/capita and the PPP/capita of a number of countries. The table
shows how the differences between the GNP and PPP for the same country is in
fact a reflection of different standards of living and purchasing powers in those
countries. Where the GNP is higher than the PPP the cost of living is higher, it is
more expensive to live in that country than to live in the USA (the comparison is
done with the US dollar, as the USA was the one who conceived the indicator in
order to be able to compare countries). In the countries were the GNP is lower than
the PPP, the cost of living is lower, it is cheaper to live in that country than in
USA. In other words with the same amount of money, you can buy more goods and
services in that country than in USA.

15
Ibid, p.48.
The economic environment

Table no. 4.7 The GNP/capita and the PPP/capita for selected countries, 2002

Country GNP/capita ($) PPP/capita ($)

Argentina 4.220 10.190
Australia 19.530 27.440
Bulgaria 1.770 7.030
Canada 22.390 28.930
Estonia 4.190 11.630
France 22.240 27.040
Germany 22.740 26.980
Greece 11.660 18.770
Hungary 5.290 13.070
India 470 2.650
Japan 34.010 27.380
Moldova 460 1.600
Norway 38.730 36.690
Poland 4.570 10.450
Romania 1.870 6.490
Singapore 20.690 23.730
Slovenia 10.370 18.480
Switzerland 36.170 31.840
Turkey 2.490 6.300
Ukraine 780 4.800
United States 35.400 36.110
Source: World Development Indicators, Table 1.1 “Size of the Economy”,
http://www.worldbank.org,

The household size and income is another aspect of interest to the international
marketer. A household is defined as all the persons, both related and unrelated,
who occupy a housing unit 16 . The size of the household is important as
consumption patterns will differ according to size, as well as the income available
to be spent. In Western societies, the trend of the last years was the increase in the
number of households, as the size of the household was diminishing. This
happened due to the increased number in divorces and the formation of more single
households or single parent households. In developing countries the size of the
household is much larger due to the extended family structures (who leave in the
same household) and also the higher number of children per family. The size of the

16
Blackwell R. D., Miniard P. W. and Engel J. F., 1997, Consumer Behaviour, Dryden Press: Hyndale, p. 311.
 International Marketing

household can influence the size of the packed meat for instance: family sizes (with
8-10 pieces) for large household countries or single packages (2-3 pieces) for small
household countries.
Developed countries calculate also the household income and this can give a very
good idea about the purchasing power of families in these countries.

Consumption patterns refer to the structure of expenses of consumers for different

categories of goods (food, household, savings). The share of income spent on
necessities provides an indication of the market’s development level and an
approximation of how much money the consumer has left for other purchases.
It is known that once the income of a family increases, the proportion of food
expenditure will decrease, the household expenditure will remain relatively
constant, while spending on other goods and savings will increase. In developed
countries the percentage of the income spent on food is much smaller than in the
developing countries. In 1997 the percentage spent on food in USA was 10% while
in India it was 49%, in Nigeria 49%, in Indonesia 44% in Brazil 38% 17 .
Transportation is more expensive in developed countries, therefore the percentage
of the income spent on transportation is much higher in these countries. In USA in
1997, 18% of the income was spent on transportation, In Australia 11%, while in
Indonesia 1.2% and in India 3.2% 18 .
When we talk about consumption patterns, we can obtain data about the average
consumption of a certain product in a country. The availability of such data
depends on the degree of development of the data collection system in that country.
Developed countries have more sophisticated data collection systems, that offer
more detailed data that can give a marketer a better “feeling” of the market.
Western Europe has very well developed data collection systems regarding the
consumption of different products. For instance, in 1993 in Italy there were
consumed 25 litres of beer per capita, 58 litres of wine per capita and 0.9 litres of
spirits per capita, while in Germany the consumption was of 135 litres of beer per
capita, 23 litres of wine per capita and 2.6 litres of spirits per capita.
Data about consumption of different goods and their percentages in the total
income are valuable but they also have to be treated with caution, as the way the
data has been produced can differ from one country to another and to achieve
consistency might be difficult. For instance, while a unit of soft drink might mean
in a country a pack of six bottles, in other might mean a single bottle.
17
International Marketing Data and Statistics 1999, London, Euromonitor.
18
Ibid.
The economic environment

Inflation in a country has to be known by the international marketer, as it usually

complicates his life as it influences the consumers’ behaviour and the pricing
policy of the company.
Inflation affects the ability of both industrial customers and consumers to buy and
introduces uncertainty in the buying habits. Further, this makes it difficult for the
company to predict demand. Consequently there is higher difficulty for the
company to plan its activity and to set its pricing policy. The developed countries
were able to keep inflation at single digits, while in other countries inflation is
high. See table no. 4.8. In the high inflation countries the marketer might have to
make changes in the elements of the marketing mix in order to meet customer
needs and to maintain the level of demand (more economical products, more
rational promotion, more customer involvement in distribution).

Infrastructure of a country can give us an image over the type of business a

company can have in that country. The availability and the quality of a country’s
infrastructure it is important for the international marketer, as he is going to rely
heavily on services provided by the local market. The study of the infrastructure
has to take into consideration primarily the following aspects:
• transportation
• communications
• commercial infrastructure
• financial infrastructure

Transportation and related indicators about the transportation networks in a

country will give us an idea about how the company can distribute its products in
that country. In case of consumer goods that have to reach individual consumers all
over the country transportation infrastructure becomes crucially important,
especially if population is dispersed.

Therefore, indicators such as: length of railroads, length of paved streets and
number of vehicles (trucks, buses) have to be study in order to know how easy it
will be to distribute the product. Is there any possibility to transport by water? Than
indicators specific to water transportation (such as lengths of rivers, number of
ships, size and tonnage of ships) have to be studied.
 International Marketing

Table no. 4.8 Inflation (at consumer prices) in a number

of selected countries, 2004
Countries 2004
Canada 2.0
Mexico 4.5
United States 3.0
Autralia 2.6
Japan -0.1
Korea 3.3
New Zealand 2.7
Austria 2.9
Belgium 2.6
Czech Republic 1.7
Denmark 1.0
Finland 0.2
France 1.6
Germany 1.6
Greece 4.1
Hungary 4.1
Ireland 2.3
Italy 1.9
Luxembourg 2.0
Netherlands 1.5
Norway 1.1
Poland 4.2
Portugal 2.0
Slovak Republic 3.2
Spain 3.1
Sweden 0.0
Switzerland 1.4
Turkey 9.2
United Kingdom 3.2
Source: http://www.oecd.org

However, such indicators show what is the availability of different transportation

means, but they give little indication over the quality of these transportation
networks. To be able to appreciate the quality of the transportation infrastructure
other indicators related to the volume of transport, are to be studied: rail traffic by
freight tons per kilometre, number of passenger cars etc.
The economic environment

Communication in a country is as important as transportation as the company has to be

able to communicate within and outside the market. Communication infrastructure
usually depends on the general level of economic development and can be estimated by
looking at indicators such as: number of phones/100 inhabitants, number of
newspapers/1000 inhabitants, number of computers/1000 inhabitants, number of
servers/1000 inhabitants, number of TV’s/1000 inhabitants, number of
radios/inhabitant. These will give us an indication over how the company can
communicate with its consumers, how it can reach them both to research them and to
promote its products. Such communication means are necessary for a country in order
to be able to compete in the world and to attract foreign investors.
In the last years the diffusion of the internet technology in businesses and in the
consumers daily lifestyles has been rapid. The penetration is higher in the
developed industrialized countries, but the study of such facilities in any
international market is important. Indicators such as number of internet hosts,
number of people using the internet. In January 2005, there were 317.6 million
internet hosts at world level that increased from 72.3 million in 2000, 43.2 million
in 1999 and from 9.4 million in 1993 19 . The total number of people using internet
was in 2000 304.36 million persons at world level, of which 44.9% in North
America, 27.3% in Europe, 22.4% in Asia-Pacific, 3.5% in Latin America, 0.8% in
Africa and 0.3% in Middle East 20 .
The development of wireless technologies (television, cable, cell phone) are also
important as they influence the way we can communicate with our consumers. Cell
phones for instance, were more successful in Europe and Japan than in United
States.
The commercial infrastructure refers to advertising agencies, market research
companies, distributing organizations, that can influence both the promotion and
distribution strategies in that country. If the commercial infrastructure is week in a
country, the company has to fulfil those functions and this means higher financial
and human involvement and investment.
The financial infrastructure refers to the financial institutions (banks, insurance)
from a country that can facilitate the financial transactions of the company within
that country and in relationship with other countries. The more developed these are
in a country, the better the company can reach its objectives.
The rapport liberalism/protectionism in a country is also of interest for the
international marketer. In other words we are interested in the level of
protectionism in that country. Governments use barriers against imports

19
http://www.isc.org, Internet Domain Survey, January 2005.
20
http://www.nua.ie/survey/how_many_online/index.html, How many on line
 International Marketing

and foreign businesses in order to protect local industry and to raise money for the
state budget. We can appreciate that among the most frequent goals of imposing
barriers are: protect local jobs by keeping out rival imports, protect infant
industries until they are strong enough to cope to foreign competition, encourage
investment in “home” industries, reduce or eliminate balance of payments
problems, prevent foreign firms from dumping, promote political objectives.
There are two types of barriers that a government can use against imports: tariff
barriers and non-tariff barriers.
The tariff barriers refer to a tax imposed by a government on goods entering at its
borders, either to discourage imports or to raise money for the state budget or for
both reasons. There are also tariffs on exports or transitory goods, but most
common are the import tariffs. Countries that have high tariff barriers are highly
protected, while those with low tariff barriers are more liberal in their international
trade. In 1993, Thailand was one of the most protected countries with a 41.5%
average tariff, while in mid 1990’s Estonia, Lithuania and Norway were among the
most liberal countries with a 0.4% average tariff, respectively 1.9% and 2.2%21 .
Most of the countries have some tariff barriers in order to protect local industries.
GATT and the World Trade Organization militated and managed to obtain
reductions on tariffs for many products. Consequently, lately governments started
to use non-tariff barriers as a means of protection, as some of them are more
difficult to prove that they represent a protectionist measure.
Among the non-tariff barriers there are quotas, standards, export subsidies,
voluntary export restraints and others.
Quotas are physical limits on the amount of goods that can be imported into a
country. As opposed to tariffs that restrict trade by directly increasing the prices,
quotas increase prices by directly restricting trade and inducing a higher demand
than supply situation.
Voluntary Export Restrictions (VER) function on the same principle as quotas and
consist of an agreement between the importing country and the exporting country
for a restriction on the volume of export. They are common on textiles, clothing,
steel, agricultural products, etc. Japan has a VER with USA and with EU.
Formal and administrative non-tariff barriers include charges, requirements and
restriction such as surcharges for border crossing, licensing regulations, packaging
and labelling regulations, size and weights requirements. These can be the most
problematic and are the least quantifiable.
In the chapter about the political environment and the economic policies of
governments we will come back again to the topic of protectionism.

21
http://www.worldbank.org, World Bank Indicators 1999.
The legal environment

When going international, the international marketer has to understand two types of
legal environments: the broader international legal environment and the local legal
environment. In this context the international marketer has to look at:
ª international laws
ª the legal system in each country of interest, as companies have to
comply to the local laws and they can do this by knowing the way the
laws are applied (according to the type of legal system)
ª to the way that international legal disputes can be solved, as the
marketer might be in a dispute at international level
ª specific laws of interest for the international marketing activity in the
countries of interest.
In this chapter, we will shortly discuss each of these aspects.

5.1 International laws

There are no international laws as such. Therefore, international law may be
defined as rules and principles that nation-states consider biding upon themselves
that are usually established through certain treaties and agreements. These can be
bilateral agreements and treaties of friendship or multilateral agreements and
treaties between nations such as the World Trade Organization, the International
Convention for Protection of Industrial Property etc. (some of them discussed
 International Marketing

previously under the economic environment and some more will be discussed later
in this chapter under types of laws). Most of the international law refers to the
commercial laws and treaties that regulate the trade and commercial relationships
between countries.

5.2 Legal systems

Countries have developed legal systems that are the bases for any legal decision
and action in that country. As there are no international laws, foreign subsidiaries
and expatriate employees live within the legal bounds of the host country legal
systems. The international marketing managers must be aware of the laws that will
govern all business decisions and contacts, as countries differ in their laws and
their use of these laws. They have to comply to the national laws of that country, as
normally all economic activity within a nation is governed by the nation’s laws.
That’s why it is useful to see what are the major legal systems in the world and
what are they based on.
There are three main legal systems in the world:
1. the common law
2. the code law
3. the Islamic law

The common law system belongs to the countries that were at one time under
British influence or former colonies of Britain. In this system:
ƒ there are no laws written to cover all foreseeable situations
ƒ cases are decided on the basis of tradition, common practice and
interpretation
ƒ precedents are very important in understanding the common law
ƒ the common law does not differentiate between civil, criminal and
commercial activities and a business may be liable under any of these
laws.
Such legal systems are seen as being flexible and evolving over a period of time.

The code law (or civil law) has its origin in the Roman law and later on in
Napoleonian Code. In this system:
 there are sets codes of conduct inclusive for all forseable situations
(rules for all situations);
The legal environment

 there are three separate codes: civil, criminal, commercial. In some

areas codes are not sufficiently specific and must be interpreted by the
court;
 laws themselves are very important in understanding the code law;
 the code law accepts unforeseeable events such as flood, earthquake as
“acts of God”, for which the company is not responsible.

The common law applies in most USA (except Louisiana state), in most Canada
(except Quebec province), in all ex-British colonies such as Australia, New
Zealand and some of the Asian countries: India, Pakistan, Malaysia, Singapore and
Hong-Kong. The civil/code law applies in most Western Europe (except UK), in
Central and Eastern Europe, in Latin America, in Japan and other Asian countries:
Korea, Thailand, Indochina, Taiwan, Indonesia and China.
It is appreciated that although in theory the differences between the common law
and the code law are large, in practice they are not always so broad. For instance,
many common law countries (among which the USA) have adopted commercial
codes to govern the conduct of business. In UK for instance, where the common
law system is in practice, function also the EU regulations, based on the code law
system.

The Islamic law relies on the legal interpretation of the Koran, it is based on
religious principles. Islamic law defines a complete system that prescribes specific
patterns of social and economic behaviour for all individuals. Unlike the common
and the code law systems, which say that the law should be man-made and that it
can be improved through time, the Islamic legal system says that God established a
”natural law” that embodies all justice. Because the laws are based on the
interpretation of Koran, the international marketer must have knowledge of the
religion’s principles and understand the way the law may be interpreted in each
region In this system:
€ there is the prohibition of payment of interest: the common practice is
that both the borrower and the lender share the rewards and the losses
in an equitable way (the banking system function differently in these
nations)
€ business with alcohol and gambling are forbidden
€ the objective of the Islam law is social justice, it emphasises on
equality and fairness for the good of society.
 International Marketing

For instance, if one is in Saudi Arabia and takes a cab and while he is in the cab,
the driver makes an accident, he has to pay for the damage. It is not a matter of
who is guilty but who has the ability to pay! He has the money (as he took a taxi!),
he should pay. It is matter of social justice for them.

5.3 International legal disputes

Suppose that your company has an import contract for two industrial equipments
from US. You do not manage to come to terms with the American company, as far
as the installation of the equipment is concerned: they do not want to install it
unless you pay an extra fare. The contract stipulations are ambiguous. What do you
do? Do you go to court? To which court? Their court? Your court? Is there any
other solution? We can see that it is really important to have knowledge about the
international legal environments when doing business internationally.
We know that there are no international laws from the legalistic point of view. The
main question that arises is whose legal system is going to be used when
international dispute arises?
Conflicts can arise between governments, between governments and corporations
and between corporations.
When the conflicts arise between nations, between governments they will be solved
by the International Court of Justice (ICJ), also called the World Court, that was set
by the United Nations in Hague in 1946. The other two cases are solved by the
national court of one of the parties involved or through arbitration.
The ICJ solves only conflicts between nations based on the international
conventions (that represent the international law). If a nation has allowed a case
against it to be brought before ICJ and then refuses to accept a judgement against
it, the plaintiff nation can seek recourse through the UN’s highest political arm, the
United Nations Security Council which can use its full range of powers to enforce
the judgement.
When disputes arise between companies situated in two countries or between
companies and governments, there are three types of gradual formal actions that
may be taken: conciliation, arbitration and litigation.
It is recommended that before any formal action to try to settle the dispute
informally. If this is not possible, one option is the conciliation.
Conciliation is a non-binding agreement between parties to solve disputes by
asking a third party to mediate differences.
The legal environment

When a dispute arises in a commercial transaction, the two parties involved can try
to solve the problem by asking a third party to conciliate, to mediate the conflict.
The third party can be a court on which the two parties agreed. The conciliation
sessions are private and all information disclosed during sessions is confidential.
However the conciliation agreement is not binding and if one of the parties is not
content it can go further, for arbitration or for court.
Chinese believe that when a dispute occurs, informal friendly negotiation should be
used first to solve the problem. If it fails conciliation should be triad. Some Chinese
companies might refuse to do business with companies that want to use directly
arbitration in case of disputes 1 .
Arbitration consists of the use of an arbitrator from an ”arbitration commission”
whose resolutions are binding.
Many firms engaging in international business include in the contracts an agreement
of arbitration. Through this agreement all parties commit to take disputes (if they
arise) to an arbitrator before pursuing other legal resources (going to court). An
experienced arbitrator is chosen and both parties agree to honour its judgement.
Arbitration, as conciliation is also confidential. In many countries, decisions reached
in formal arbitration are compulsory under the law. There are a number of arbitration
centres established by countries, organizations and institutions and they follow
formal rules for the process of arbitration. See box no. 5.1.
Cateora and Graham gave an example of a situation that was solved through
arbitration: an English businessman had a contract to buy from a Japanese
manufacturer 100.000 dolls at the price of 80 cents each, for which he found a
contract to sell them at 1.40$ each. Before the dolls were delivered a strike took
place at the Japanese plant and the consequence was that the price per doll
increased from 80 cents to 1.50$. The English claimed that he had a contract for
80 cents/doll and the contract should be respected, while the Japanese company
justified that they could not foresee the strike and this is “an act of God” (code
law). At the same time the British used to the common law and precedents in
similar situations, argued that strikes are part of running a business, not “an act of
God” and the initial contract should be respected. They went to an Arbitration
Centre that decided that they both should share the loss and both parties were
content and complied 2 .
In general, most arbitration is successful, but its success depends on the willingness
of both parties to accept the arbitration’s rulings.

1
Cateora Ph. and Graham J., 2002, Op. Cit, p. 184-185.
2
Ibid., p. 185-186.
 International Marketing

As we already said in many countries, arbitration’s ruling is enforceable. There is a

convention signed by 120 countries, the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, the so called New York Convention,
through which member countries have agreed to accept and enforce foreign
arbitration decisions from all the others member states.
There are a number of arbitration centres around the world that are recognized as
being fair and efficient. Recently, China increased its number of arbitration centres
that became recognized at the world level.

BOX NO. 5.1 Arbitration Centers

• The London Court of Arbitration

• The Zurich Court of Arbitration
• The American Arbitration Association (AAA)
• The International Chamber of Commerce (ICC) located in Paris
• The Commercial Dispute Resolution Centre of the Americas
• The Swedish Arbitration Institute of the Stockholm Chamber of Commerce (used
to administer disputes between Western and socialist countries)
• China’s Beinjing Conciliation Centre
• The World Arbitration Institute in New York
• The Advisory Conciliation and Arbitration Service (ACAS)
• Other active centres in Vancouver, Hong Kong, Kuala Lumpur, Buenos Aires,
Bogota, Mexico City

The international Council for Commercial Arbitration (ICCA) was established to

coordinate the activities of arbitration organizations. The ICCA meets every four
years in different locations around the world.
Litigation, meaning going to a public law suit, is the last solution to solve a
dispute, as it has high negative effects:
¾ law suits have high costs,
¾ law suits are time consuming as they create delays in the economic
activity of the company (if we are talking about some fashionable
products, they will be out of fashion until the law suit is over),
¾ going to court and pursuing a law suit is bad image for the company,
¾ the issue will be judged according to the that country’s national laws
and the fact that the suit takes place in the foreign country might result
in an unfair treatment in the foreign court,
The legal environment

¾ there is less of confidentiality as compared to conciliation or

arbitration, as law suits are usually public,
¾ it is difficult to enforce in one country, decisions made by a court in
another country.

Companies can minimize international legal problems by:

ª first of all be aware of the commercial laws within each country the
company is doing business in. Each country has laws regarding
activities in promotion, product development, labelling, pricing,
channels of distribution.
ª you have to know the international conventions, as there has been an
effort to standardize regulations regarding customs, units of
measurements, so on.
ª design a good contract, by using contract terms that are not bound to
one culture, using clear units of measurement, specify the jurisdiction
in the event of a dispute, include an arbitration clause.

5.4 Types of laws

Another aspect very useful for the international marketer, when studying the legal
environment in the countries of interest is to look at specific laws that can influence
the marketing activity of the company in that market. There are a few types of such
laws that should be envisaged by the company:
ƒ laws regarding the protection of intellectual property rights
ƒ commercial laws
ƒ laws regarding the ethical business behaviour

5.4.1 Laws regarding the protection

of intellectual property rights

Companies spend large amounts of money to discover patents, to establish brand

names and trademarks, as they wish to be successful on the market by offering
consumers good products. Therefore, patents, brand names, trademarks are
important assets for any company and they have to be protected. Patents and
trademarks that are protected in one country are not necessarily protected
automatically in another, so global marketers must ensure that patents
 International Marketing

and trademarks are registered in each country where business is conducted. For
instance, in France the designer Yves Saint Laurent was denied to market a new
luxury perfume called “Champagne”, as the law allows the name to be applied only
to sparking wines produced in the Champagne region. Saint Laurent launched the
perfume “Champagne” in USA, UK, Germany and Belgium, as the name
“Champagne” was not protected in these countries. The perfume is sold without a
name in France 3 .

Intellectual property refers to ideas that are translated into tangible products,
writings and so on, and that are protected by the state for a limited period of time
from unauthorized commercial exploitation. There are a few categories of
intellectual property that a company can hold and consequently that need
protection 4 :
/ a patent is granted to a person who first invented a product or
technology.
/ a copyright protects original literary, dramatic, musical, artistic and
other intellectual works. A copyright provides its owner the exclusive
rights to reproduce and distribute the material.
/ a trademark is a word, symbol or device that identifies the sources of
goods and may serve as an index of quality.
/ a trade secret is another means of protecting intellectual property and it
fundamentally differs of the other three presented, as protection is ought
without registration, but through secrecy. Consequently, a trade secret it is
not legally protected. However, it can be protected in courts, if the
company can prove that it took all precautions to protect the idea from its
competitors and that they obtained it illegally through espionage or other
illegal means. The Coca Cola formula is a secret that is well kept at Coca-
Cola company’s headquarters in Atlanta, USA.

The ownership over intellectual property (patent, trademark or copyright) is

established differently in different countries. Generally speaking, there are two
systems:
1. the “first to use” or the “first-to-invent” system where the ownership
over a patent or trademark belongs to the company that first
invented/used it. This is compatible with the principles of the common

3
Keegan W., Op. Cit, p. 96.
4
Kotabe M and Helsen K., Op. Cit., p. 138-139.
The legal environment

law. In USA for instance, patents and trademarks are usually protected
based on the “prior use” principles, while for the copyright registration
is required for the protection of intellectual rights. Even if for the
trademarks registration is not mandatory, it is highly recommended,
2. the “first-to-file” or the “first-to-register” system is the system that
gives ownership to the company that fills in the registration form first.
Most countries have this type of intellectual work protection system.
However, in most situations the protection is granted with a grace
period, meaning that the product has to be introduced and sold on the
market within a given period from registration. The period varies
between one to five years, on average being three years. McDonald’s
lost its right to use its trademark in Venezuela, as after the registration
did not use it for two years, the grace time allowed by law to start
using a registered trademark. A Venezuelan company registered the
name and the golden arches and used it.

Due to the differences in protection systems over the world and legislation,
different situations can occur. For instance, an American attorney working in South
Korea noticed that when a foreign company would come to Korea and start to
negotiate for distribution or licensing, the Korean company would register the trade
name in its own name, and later on would use it as an advantage in negotiation or
would sell back the trademark to the company. Similarly, McDonald’s had to re-
buy the right to use its symbol “the golden arches” in Japan where another
company registered it first 5 .

In Japan, the patent system is very slow and tends to pressure companies to reach
agreements rather than assign penalties. It took AlliedSignal eleven years to get a
patent on amorphous metal alloys. The company alleged that the Japanese Patent
Office delayed the process, while the Ministry for Trade and Industry (MITI)
launched a catch up program with thirty-four Japanese companies 6 . In Japan, the
intellectual protection legislation intents more to share technology rather than
protect it, they think that an invention should serve a larger, national goal, with
rapid spread of technology among competitors in a way that promotes cooperation.
USA managed to obtain promises for change from Japan: after years of discussion

5
Cateora Ph and Graham J., 1999, Op. Cit., p. 177-178
6
Jeannet J.P. and Hennessey H. D., Op. Cit., p. 157.
 International Marketing

both USA and Japan have agreed to make changes to their systems. Japan has
promised to speed up patent examinations, eliminate challenges to patent
submissions and allow patent applications to be filed in English.

The infringement of trademarks and copyrights is a critical problem in international

marketing. There are different such forms: 1) counterfeiting that is the
unauthorized copying and production of a product. 2) imitation that is the use of a
product name that differs slightly from a well-known brand but it is close enough
to it, so that the consumers will associate it with the genuine product (for example
Levy’s from Levi’s or Nikee from Nike). Similarly symbols can be imitated.
3) piracy that is the unauthorized publication or reproduction of copyright work.
There are many products that are subject to infringement in the world and the
problem became more acute in 1980’s: shoes, apparel, software, videos, electronics,
watches, jewellery, industrial products etc. For instance in 1998, the worldwide cost
of software piracy was estimated at 11.4 billion $ with 96% of the Chinese software
being pirated, 77% in Eastern Europe and 27% in the United States 7 .

Over time a number of international conventions were signed between countries in

order to protect intellectual rights:
• The Paris Convention or the International Convention for the
Protection of Industrial Property, was established in 1883 and has
almost 100 signatory countries. The treaty facilitates multi country
patent registration by ensuring “the right of priority”. Practically once
an application for protection for a patent is filled in one member state,
the applicant has twelve months to fill in the application in any other
member country, otherwise looses the right for protection.
• In Europe there is an European Patent Convention (administered
through the European Patent Office) through which an applicant can
fill in a single patent application that will cover all convention states
for a period of 20 years, if approved.
• The Patent Cooperation Treaty (PCT) has 39 signatories. Members
constitute a union that provides technical services and cooperates in
filling, searching and examination of patent applications in all member
countries.

7
Ibid, p.158.
The legal environment

• The Trade-Related Aspects of Intellectual Property Rights (TRIP’s) is

an agreement done under the World Trade Organization that is the
most comprehensive multilateral agreement on intellectual property to
date. TRIP’s sets standards of protection for a full range of intellectual
property rights that are embodied in current international agreements.

5.4.2 Commercial laws within the country8

There are numerous laws affecting the commercial activity of a company within a
country. Some of the laws of interest are the marketing laws (regarding promotion,
labelling, channel of distributions, pricing), green marketing laws (regarding
packaging, waste disposal, deforestation), antitrust laws (anti monopoly, price
discrimination, supply restrictions) and bankruptcy laws.

The marketing laws are present everywhere. All countries have laws regulating
marketing activities in: promotion, product development, labelling, pricing,
channels of distribution. These laws have to be studied to know what marketing
activities can the company pursue in each country. Legal differences between
countries may prevent a standardized marketing program.
There are laws regarding product liability and the differences between laws in
different countries can cause problems. For instance in USA, the plaintiff has to
prove that the product was defective at the time it left the producer’s premises,
while in EU manufacturers have to prove that the product was not defective when it
left the company. More differences rise from the different legal system, as in USA
the court judgement is given by jurors, while in UE by judges. Also, in Europe the
losers in a product liability suit will bear the legal costs. If a company is found to
owe damages to a plaintiff, it also has to pay the plaintiff’s legal costs, and so on.
There are laws regulating promotion that differ from country to country. For
instance:
Πin Austria and France offering premiums as a promotional tool is
illegal,
Πin Germany if you make a comparative advert, your competitor can go
to court to ask for proof of any implied or stated comparison,

8
Cateora Ph. and Graham J., 2002, Op. Cit.; Jeannet J.P. and Hennessey H D, Op. Cit.; Kotabe M. and Helsen K.,
Op. Cit.
 International Marketing

Πin Canada all claims and statements must be examined to ensure that

they are not false or misleading. If any reasonable person could
possibly misunderstand the statements, than they are considered to be
misleading.
There are laws regulating pricing: in 1994, in China, the government allowed
foreign passenger cars to be priced only in the range of 15.600$ to 26.000$. That
means that by law no foreign car manufacturer could either under price or
overprice the car. In the circumstances in which production volumes were low, few
foreign manufacturer can realize profits.
There are laws regulating distribution. For instance, in France, selective or
exclusive distribution is permitted by law. A French company (Consten) had the
exclusive right to import and distribute consumer electronics products from the
German company Grundig. This company sued another French company for
bringing Grundig electronics illegally (through parallel imports) into France by
buying from various foreign suppliers and selling in France. Even though two
French courts considered they are right, the appeal made at the Paris Court of
Appeals by the company, suspended the judgement on the grounds that “territorial
protection is damaging the realization of the Common Market” by impending the
free flow of goods. The EU law takes precedence to the national laws of countries.

Green marketing laws started to emerged in the recent years in different countries.
Germany is one of the countries with the most stringent green marketing laws.
Germany regulates the recycling of packaging waste: they have the Green Dot
Ordinance through which: retailers are required to take back boxes, cartons and
other primary packaging and consumers have to pay a refundable deposit for non-
refillable containers. A non-profit organization was set up (DSD= Duales System
Deutschland) that is responsible to collect and recycle materials. Retailers pay a fee
to DSD and in exchange they have the right to display the green dot on packaging.
This arrangement eliminates the need for consumers to pay deposits. The program
was successful.

Anti-trust (anti-monopoly) laws have their origin in USA at the end of the last
century (1890 Sherman Antitrust Act). The USA antitrust laws have been
concerned from the beginning with the maximization of consumer welfare by
preventing arrangements that will increase the market power without concurrently
increasing social welfare through reduced costs and increased efficiency. In 1914
the Clayton act strengthened the USA antitrust law, by forbidding exclusive
dealing and price discrimination. The USA antitrust laws were originally aimed at
The legal environment

domestic monopolies and cartels. Later on, in 1945 they have been extended to
foreign companies if they have an adverse effect on foreign or domestic trade of
USA (even if the companies are located outside USA). The extraterritoriality of the
USA anti-trust laws was reinforced with regulations and legislations such as the
1977 Antitrust Guidelines for International Operations and the 1982 Foreign Trade
Antitrust Improvements Act.
For instance, at the beginning of 1990’s Bayer company granted an exclusive
patent license for a new household insecticide to Johnson&Sons for the USA
market. Both companies were sued, as the licensing deal would have allowed
Johnson&Sons company to monopolize the USA household insecticide market.
In the last years, European Union as well as Japan and other countries started to
enforce anti-trust laws. Similarly, before P&G was allowed to buy a German
company producing hygiene products, it had to agree to sell off one of its German
divisions that was producing sanitary napkins. P&G was already marketing a brand
of sanitary napkins in Europe and the Commission was concerned that allowing
them to keep all brands and production facilities would give them control over 60%
of the German sanitary products market and 81% of the Spanish sanitary products 9 .

Bankruptcy laws vary also from country to country. We have here a few
examples 10 :
In UK, Canada and France the laws favour the creditors, When a firm enters
bankruptcy, it is appointed an administrator who has to recover the creditor’s
money.
In USA the law tends to protect the business from the creditor, when the company
is in a bankruptcy situation, the management prepares a reorganization plan, which
is then voted by the creditors.
In Germany and Japan bankruptcies are usually handled by the banks, behind the
closed doors.

5.4.3 Laws regarding the ethical business behaviour

Corruption is often met in international marketing, as some countries are more

corrupt than others. Table no. 5.1 presents the Corruption Perception Indexes (CPI)
(compiled by the independent organization Transparency International) for a
number of countries for the year 2003.

9
Cateora Ph. and Graham J., 2002, Op. Cit., p. 196.
10
Jeannet J.P. and Hennessey H. D., Op. Cit, p. 156.
 International Marketing

The CPI relates to perceptions of the degree of corruption as seen by business people,
academics and risk analysts and ranges from 10 (high clean) to 0 (highly corrupt). At
least three surveys were required for a country to be included in the CPI.

Bribery was defined as a means for one party to get from another party (at the cost
of a third party) some special treatment that would otherwise not normally be
obtainable. Bribery is viewed differently by executives from different countries and
what constitutes bribery for some might not be bribery for others, depending on
local customs and practices.

Table no. 5.1 Corruption Perception Index for selected countries, 2003

Rank Country CPI Score Survey used High-low

2003 range
1. Finland 9.7 8 9.2-10
2. Iceland 9.6 7 9.2-10
3. Denmark 9.5 9 8.8-9.9
New Zealand 9.5 8 9.2-9.6
5. Singapore 9.4 12 9.2-9.5
6. Sweden 9.3 11 8.8-9.6
7. Netherlands 8.9 9 8.5-9.3
8. Australia 8.8 12 6.7-9.5
Norway 8.8 8 8.0-9.3
Switzerland 8.8 9 7.8-9.2
11. Canada 8.7 12 6.5-9.4
Luxembourg 8.7 6 8.0-9.2
United Kingdom 8.7 13 7.8-9.2
16. Germany 7.7 11 4.9-9.2
18. USA 7.5 13 4.9-9.2
21. Japan 7.0 13 5.5-8.8
35 Italy 5.3 11 3.3-7.3
40. Hungary 4.8 13 4.0-5.6
54. Bulgaria 3.9 10 2.8-5.7
83. Romania 2.8 12 1.6-5.0
100. Moldova 2.4 5 1.6-3.6
106. Ukraine 2.3 10 1.6-3.8
132. Nigeria 1.4 9 0.9-2.0
133. Bangladesh 1.3 8 0.3-2.2
Source: http://www.transparency.org/cpi/index.html
The legal environment

USA was the first country to impose high ethical standards for USA firms doing
business abroad, by passing legislation to regulate bribery abroad. The USA
Foreign Corrupt Practices Act was enacted in 1997 and it prohibits USA
corporations to bribe official of foreign governments or political parties in order to
obtain or retain business. Payments to third parties are also prohibited when the
company has a reason to believe that part or all money would go to foreign
officials (only if it knows). Convictions for enfringing the law are severe: jail
sentences of 1 to 5 years for persons involved, fines up to 10.000$ for persons and
of 1 mil $ or more for companies involved. In 1993 an American business
executive was convicted for giving money and airplane tickets for his honey moon
to a Nigerian government official hoping to secure a contract 11 . Similarly in 2000 a
USA environmental engineering firm was found that made corrupt payments to an
Egyptian governmental official to assist the company to gain a contract. The
company paid a civil fine of 400.000$ and reimbursed the Department of Justice
the costs of the investigations.

USA companies continuously protested that they are loosing business to foreign
competitors that do not have restrictions on paying bribes abroad. European and
Japanese view such payments as a cost of business. The German government used
to consider payoffs legal as long as they are made outside Germany. They were
even tax deductible 12 .
Therefore, in 1988 in USA the Foreign Corrupt Practices Act was amended
through the Omnibus Trade and Competitiveness Act. The changes excluded from
being considered a bribe and therefore being illegal grease payments, facilitating
and lubrication payments. These are small payments given to lower level officials
in order to perform their duty properly. Such things include: getting shipments
through customs, red tape as realising permits, scheduling inspections, getting the
visas, etc. These small payments are considered as tips. However, the law does not
prohibit to pay bribes to non officials (non-governmental).
As American companies always complained that they are disadvantaged in doing
business internationally as compared to other foreign companies, the American
government lobbied other countries to adopt legislation that would outlaw the
practice of bribing foreign government officials. In 1997, 20 years after USA
outlawed bribery of government officials abroad, an anti-bribery treaty was

11
Keegan W., Op. Cit, p. 101.
12
Jeannet J..P. and Hennesey H.D., 1988, International Marketing Management, Houghton Mifflin Company,
p. 126.
 International Marketing

negotiated by the countries members of OECD. The central provision of the treaty
was that member countries would prosecute corporations for paying bribes to
foreign government officials in the same way the bribery of its own officials in the
home country is prosecuted as being illegal. Twelve countries have changed the
national laws to comply to the treaty among which Germany, Japan, United
Kingdom, South Korea etc.
It was noticed that worldwide the level of ethical behaviour is rising over time, and
what represented acceptable behaviour at one time may suddenly be cause for
prosecution under new local laws.
The political environment

The political environment is another element we are interested to analyse when

operating internationally. The global political scene is changing rapidly as changes
in governments, changes in policies, revolutions and political upheavals occur daily
in different corners of the world. As such events can have a strong impact, either
positive or negative on businesses, the importance of knowing the political
environment is obvious. The process of analysing the international political
environment would start with a study of the home country political environment,
the host country political environment by looking at the political forces on the one
hand and governmental actions on the other hand and international agreements
(treaties conventions, organizations). Then the political risk is assessed and in the
last stage the company will decide over what risk reduction strategy to adopt if it
considers that it is necessary and if it decides to internationalise in that market.
Figure no. 6.1 presents the process of international political environment analysis.

At global level the main players in the political arena are home country
governments, host country governments and trans-national bodies and
organizations. The interactions between these groups results in a given political
climate. We are going to discuss each of these actors and their actions and how the
interaction between them can influence businesses either in a positive or a negative
manner.
 International Marketing

Figure no. 6.1 The process of international political environment analysis

Home country Host country International

political environment political environment agreements

Political risk assessment

Risk reduction strategies

6.1 The home country political environment

The political environment in the home country can influence the activity of a
company on international markets. The political development in a company’s home
country can affect either the role of the company in general or some particular
aspects of its operations. How it can do this? In two ways:
€ through the actions of home country governments,
€ through the actions of different pressure groups in the home country.

Home country governments can prevent companies from doing business on

ideological, political or national security grounds. This can result in an embargo on
trade with the particular country. The embargoes can be unilateral, when they are
imposed by one country only. USA is a country that over time had many unilateral
embargoes towards other countries:
/ USA embargo towards Cuba, trying to convince this country to change
its political ideology. The embargo was imposed in 1961, when
Fidel Castro came into power, and since than USA businesses can neither buy from
or sell to Cuba. Since 1993, USA companies can trade with Cuba if apply for a
special licence. In 1998, the Clinton administration resumed the direct fights with
Cuba and started to open up as far as mail deliveries and restrictions to travel
The political environment

of academics, cultural and sport groups are concerned. However, trade between
USA and Cuba is still under embargo.
/ USA embargo towards Vietnam was imposed in 1975 and it was lifted
in 1994.
Unilateral embargoes are seen to pose a risk on the competitiveness of the
company in that particular country, putting in advantage the companies from other
countries that do not have an embargo with that particular country. Therefore,
lately it is a larger emphasis on multilateral embargoes, with coordinated actions of
more countries. Multilateral embargoes usually come from a group of countries or
increasingly from the United Nations. Such multilateral embargoes were:
— the trade embargo of the global community that was imposed against
South Africa as a protest to its apartheid regime in 1980’s. In 1991,
when the regime changed many countries lifted the embargo.
— the embargo of United Nations against Iraq as a result of the Gulf War
from 1991 until 2001.
— the embargo of United Nations against Yugoslavia imposed in 1992
and continued afterwards in 1993 and in 1999 until de removal of
Slobodan Milosevic. Romania adhered to this embargo towards
Yugoslavia/Serbia and Romanian companies and individuals that were
doing business were affected.

Export controls represent another way in which home governments can influence
the activity of a company in foreign markets. By law there are certain products that
in different countries are banned or restricted to export. It is the case of weapons in
many countries or other goods that are considered to be either needed in that
country (as being scarce in the country) or strategic products. Such sensitive
products can be the high technological products. The limitation of exports is done
usually through the requirement of export licenses that are written authorizations
for exports.

Pressure groups from the home market can also influence the company’s activity
abroad. Pressure groups are special interest groups that through their actions are
trying to mobilize support to get the home country government to sponsor specific
regulations favourable to their point of view. Pressure groups from the home
country can influence companies:
) for the choice of the market. For instance in 1970’s, USA civil rights
groups and church groups pressured American companies to reduce their business
with South Africa due to its apartheid policy.
 International Marketing

) also the methods of doing business can be influenced by pressure

groups from the home-country. International companies can be influenced in areas
such as product policies, promotional policies and pricing policies. Product policies
include the decision to cease to market a certain product (such as pharmaceutical or
pesticides) in a market due to safety reasons. Pricing policies can be influenced on
the reason of charging higher or unfair prices. Promotional policies used by
companies abroad can also be influenced by pressure groups. Nestle had to adjust
its marketing promotion strategies while marketing its infant formula product in
developing countries as it was accused that the product was harming babies due to
the improper sanitary conditions and the use of contaminated water in the
preparation of the product in the Third world countries. In 1974, based on an article
published by a British journalist a boycott was launched against Nestle by an
organization specially formed called INFACT (the Infant Formula Action
Coalition). As a result of the public protest of the pressure groups, a new code for
marketing infant formula was endorsed by the World Health Organization, code
that was subject to voluntary participation by WHO member governments.
Boycotts organized by pressure groups can have a great influence over businesses
as we have seen in the case of Nestle. In 1990 a boycott was launched by
environmentalists against tuna caught in nets that trap and kill dolphins. This
caused the company Heinz to switch to tuna that was caught without trapping
dolphins.
Companies have to look at home country pressure groups and identify if there is
any way in which their businesses can be affected.

6.2 The host country political environment

Companies that operate in international environments have to have knowledge of

multiple sets of political relationships in order to decide how to further act in each
country. In each country the political climate is determined by the interaction of
different participants that relate to each other, such as host governments through
their philosophies and actions and the local interest groups. Analysing the host
country political environment we are interested to study its political stability, the
political risk encountered there, to see how to assess the political vulnerability and
how to reduce the political risk.
The political environment

Political stability is defined as the continuity of the set of rules or code of

behaviour regardless of which government is in power 1 . Stable political
environments are those in which the existing relationships among the key players
are not expected to change. Companies can plan their affairs with some degree of
certainty when they operate in stable environments. Therefore, an ideal political
climate for an international company is a stable and friendly environment. Stable
political systems and their governments provide continuity. Continuity means
stability: continuity of laws, of rules, of regulations in a country provides a stable
political environment desired by companies.
Political stability can shift to political instability because of change. When the
interaction between the key players on the political arena in a country and their
outcomes are unpredictable, we meet political instability. Change is the main
source of political instability and political risk. Change can occur as a change in
government that will bring new political parties or as a change in the political
philosophy through new policies of the same party.
Such changes are seen as being customary for developing countries, but do not
happen only there. And we have here the example of the Norwegian government
that had a sudden change of policy. At the beginning of 1980’s an American
company went to Norway to exploit petroleum in the North Sea. It wanted to form
a joint venture: the American company would come with the technology and
Norway had to come with an amount of capital. But the Norwegian government
said that does not have the money, and ask it from the American company. The
American company gave them the money with a low interest rate of 6 % in
exchange of receiving a tax exemption on profits. In the meantime the price of oil
grew and the Norwegian government thought that the American company was
doing a lot of money and that they do not need a tax exemption. Consequently,
they change the law retroactively. The American company complained that the
measure was not constitutional. Probably this was forbidden in the American
Constitution but was not in the Norwegian Constitution! This was a matter of
political stability!
Political stability is influenced by political parties, their philosophies, interests and
their actions, by nationalism and by pressure groups.
In order to assess the political stability of a country the company should look at:
4 the type of political system:
‰ single party system (communist regions –Mexico),

1
Cateora Ph. and Graham J., 1999, Op. Cit, p. 145.
 International Marketing

dual party system: USA (Republicans, Democrats), UK

‰
(conservative, labours). Their ideology is not divided. They rather
have different constituencies,
‰ multi-party system (Italy, Japan, Romania) when continuity and
stability suffers as there are formed coalition governments, in
which different parties have different goals.
4 the longevity of the political system and parties,
4 the philosophies of all major political parties within a country, as any
of them can become dominant and to change the existing attitude
towards foreign investment. For instance, in 1994 the Chinese
government announced that they would not approve any more joint
ventures in the automobile industry for up to three years and new car
manufacturing plants will be approved only if they buy at least 40% of
their components in China and increase this domestic content up to
60% in three years.
As usually businesses operate in a country based on the decisions taken by its
government, it is important to try to understand the governmental behaviour and its
actions. A government’s actions have their bases in the self-interest of the
government and consequently the study of the possible governmental interests or
national interests is useful, as they can either favour and encourage or limit or
discourage a business. Jeannet and Hennessey 2 see as typical goals of governments
the following:
ª self preservation, as primary goal of any entity including states and
governments.
ª security, as each entity seeks to maximize the opportunity for
continued existence and to minimize outside threats.
ª prosperity, as the improvement of living conditions of the citizens of a
country is a concern for many governments.
ª prestige is sought for by many governments, as a means for reaching
other objectives or as an end in itself.
ª ideology is often protected and promoted by governments.
ª cultural identity is also protected by governments through their
interventions.

2
Jeannet J.P. and Hennessey H., Op.Cit. , p. 119-126.
The political environment

Nationalism is another source of political instability and it refers to an intense

feeling of national pride and unity and in its extreme form is the chauvinism.
Nationalism can take anti-foreign business forms. We remember the Romanian
slogan from the beginning of 1990’s: “We don’t sell our country!”. The effect of
nationalism on foreign production is the same whether the country is industrialised
or developing. In the past feelings of nationalism were very strong in developing
countries and many governments acted against foreign companies. For example,
between 1960-1990 a total of 1535 firms from 22 countries were expropriated by
76 nations. Today the attitude had changed and foreign investors are seen as a
source of capital and technology for the needs of different developing countries.

Government rules and regulations. Governments use a variety of policies,

programs, laws to pursue their economic and other interests. These policies and
actions can affect to a large extent the operations of businesses domestic or foreign
in that market. Possible governmental policies, regulations and actions of interest
to the international marketer are:
ƒ import restrictions,
ƒ local content laws,
ƒ governmental procurement,
ƒ governmental subsidies,
ƒ operating regulations
ƒ tax controls,
ƒ investment regulations (ownership control),
ƒ exchange controls.

1. Import restrictions regulate the transfer of products and services and

have the purpose to protect local producers by diminishing competition from
imported products and by trying to force foreign investors to purchase more
materials from the country. The most common forms of import restrictions are the
tariffs and the quotas. Import duties raise the price of the imported goods, so that
the domestic products have a relative price advantage. Import quotas are used to
avoid excess dependence on any one country, especially for food. The total
embargo for imported goods is a specific type of quota. Up to 1993, Japan imposed
an embargo on rice imports, justified by the superiority of the Japanese rice over
foreign rice, a very important aspect as rice was sacred and represented the soul of
the nation. When the local crop was poor in 1993, the government was forced to
lift the embargo on imported rice. This came to the advantage of the Japanese
 International Marketing

consumer who noticed that imported rice was cheaper than the local protected rice,
and they could not make the difference in quality 3 .
2. Local content laws. Local content laws require a percentage of a
product sold in the country to have local content. For instance, in the European
Union the local content requirement is of 45 % for foreign assemblers. This means
that both domestic and foreign companies have to procure their raw materials and
other materials in a 45% proportion from the region in order to be able to sell in the
EU market. This can affect costs and further prices. Similarly, in the NAFTA
countries 62% of all cars content should come from the member countries.
3. Governmental procurement. Buy local restrictions appear usually in
case of governmental purchasing. Governments can use their purchasing power to
favour local companies over foreign importers.
4. Governmental subsidies and incentives Subsidies are given by the
host governments in order to encourage exports of local companies. Export is
considered to be beneficial for a country as it creates jobs and brings revenues to
the country and sometimes is encouraged by governments. Subsidies are a way in
which governments support usually local industries. Subsidies can be direct (by
offering 1$ for each exported product for instance) or indirect (by supporting a
component of the exported product, such as the cotton to produce garments that
will be further exported).
Incentives are given by the host governments to attract foreign companies to that
country. They can take the form of tax exemption or reduction, no tariff imported
products, part components or equipment.
5. Operating regulations for foreign investors. Host governments can
influence directly the operations of foreign subsidiaries by imposing specific
conditions on the company’s operations. India is one country were over time there
were many restrictions on foreign imports, investments and foreign operations. In
India companies are not allowed to either close down the factory or sack
employees without the government permission. Also the 1994 Indian government
allowed Pepsi-Cola to establish a joint venture for bottling the refreshment drink,
but one of the conditions was to use a local brand name and not the Pepsi Cola
brand name, as they believed that global brands gave an international marketer an
advantage over the local companies. Therefore, Pepsi Cola was sold in India under
the name Lehar.

3
The Economist, 23 April 1994, p. 66; Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 175.
The political environment

Some countries may control prices for products such as food, gas, pharmaceutical
in order to control the cost of living in periods of inflation. The determination of
maximum price level, may affect substantially the company’s profits and finally
determine its exit from the market.
6. Tax controls refer to increased income taxes for foreign profitable
companies when countries wish to increase their incomes. This will increase the
price of the product and make it uncompetitive. Differential interest rates for loans
can also be used by local financial institutions and governments to favour local
companies and put foreign companies at a disadvantage.
7. Investment regulations such as ownership control may be applied in
case of products seen as being part of the national wealth: land, natural resources.
In India, there was a ceiling of 25% for each investor willing to buy shares in the
state-owned petroleum companies that were privatised 4 . As a general trend in
1960s –1970s many countries tightened their conditions on ownership control, but
in 1980s and 1990s a liberalization of both trade and foreign investment took place
as the contribution of foreign capital and technologies to a country’s development
has been recognized.
8. Exchange controls stem from shortage of foreign currency of a country
and envisage to conserve the supply of foreign currency by limiting or totally
restricting the currency exchanges. It was the case in 1992 when the Stolojan
government in Romania limited free currency exchanges for a short period of time
in order to preserve the Romanian hard currency reserve. For the foreign company
this raises the issue of profit repatriation on the one hand and of the availability of
hard currency to import other components for production, on the other hand.

The international agreements with influence over a business and the climate in
which it functions are the economic agreements (such as the forms of economic
integration) and have been discussed under the economic environment or other
type of agreements of different international organizations and they have been
discussed under the legal environment.

4
Kotabe M. and Helsen K., Op. Cit, p. 122.
 International Marketing

6.3 Political risk assessment

The political risk is the risk of change in government policy that will have a
negative impact on the company’s ability to operate effectively and profitably. Or a
more detailed definition says that the political risk is the possibility that political
decisions, events or conditions in a country will AFFECT THE BUSINESS
CLIMATE in such a way that investors will loose money or not make as much
money as expected when making decisions to invest 5 . For instance, in 1994 Brazil
suddenly raised the tariff for imported cars from 20% to 70%. This made the price
of imported cars to increase dramatically, and an average priced Volvo ended being
priced at 85.000$ damaging the company’s positioning strategy in the market. The
companies that had local production facilities like Fiat and Ford had a clear cost
advantage, and little competitions from external producers 6 .
There is political risk in any country, but the range of risks varies widely from one
country to another. Generally speaking political risk is lower in countries that have
a history of stability and consistency and is higher in countries that do not have
such a history of stability.

Given the existence of political risks when going internationally, the process of
political risk assessment before entering a foreign market and during the operations in
that market is a necessity. Political risk assessment can have as objectives either to
know about any possible instabilities of governments and political climate to decide if
to place new investments in that country or not, or to monitor the existing operations
and their political climate in order to decide over future courses of action.
When assessing the political risk, the answer to the following questions should be
looked for by the international companies:
1. How stable is the host country’s political system?
2. How well is the host government enforcing and respecting specific
rules such as ownership or contractual rights, in the context of its own
ideology?
3. How long is the government likely to remain in power?
4. How would the rules change in case of change of the present
government?
5. What changes are expected in the specific rules that are to be changed?
6. If changes are to occur what actions should the company take?

5
Howell, L .D. , The International Executive, Vol. 34 (6), December, 1992, p. 485-489.
6
Kotabe M. and Helsen K., Op. Cit., 121.
The political environment

The forms of political risks that a country may face in a foreign country range from
simple forms, such as customs delay, problems in obtaining working visas to the
most extreme forms that is the loss of control over assets and ownership. The
governmental policies, rules and regulations are measures taken by the political
world that have effects mainly in the economic sphere. Therefore, we can say that
the main forms of political risks in a foreign country are:
• Loss of control and ownership.
• Political sanctions such as embargos.
• Interest groups’ actions such as boycotts.
• Governmental policies rules and regulations.

The loss of control and ownership are usually due to dramatic political changes,
such as coup-de-etat. There are three main processes through which the loss of
control and ownership occurs.
Confiscation refers to the takeover of the company’s assets with no compensation
at all or the seizing of the company’s assets without payment.
Expropriation refers to the takeover of the company’s assets with some
compensation or the seizing of the company’s assets some reimbursement, that it is
usually a lot under the market value of the company or the assets seized. There is
also the phenomenon of nationalization that refers to the process through which a
government decides to take over ownership of an industry, from both local and
foreign firms, in order to control that industry. Usually the respective industry is
considered a strategic industry that contributes to the economic sovereignty of the
country and companies do receive some level of compensation.
Domestication refers to the process of gradually transferring the control and the
ownership from the foreign investor to the locals. Imposed domestication can
manifest through:
— a large number of nationals at top management level in the company.
This will increase the decision – making power of locals,
— a large number of local employees. These local employees might need
training of years for specialized jobs,
— greater locally produced components. Such local content requirements
may force a company to use inputs of higher costs or lower quality,
making the products uncompetitive,
— the foreign investor may be forced to sell shares of stock to local
investors at a pre-determined price.
 International Marketing

Political sanctions such as embargoes that can be imposed by a nation or a group

of nations towards another nation, by stopping all trade with the boycotted nation.
We have discussed them under the home country political environment. And we
have the examples of the long term boycotts of USA with Libya, Iran, Cuba.
Interest groups can also put pressures on a company’s activity and launch boycotts
against it. We have exemplified under the home country environment. Similar
actions can occur in the host countries as well. One of the most mediatized boycott
was the boycott launched by the Arab League in 1970’s - 80’s against companies
dealing with Israel. In 1997 the German drug company Hoechst AG wanted to
launch in the USA market an abortion pill. Because abortion is a politically
sensitive issue in USA, protests began against the arrival of the pill, and a coalition
of anti-abortion groups tried to boycott other 11 drug products sold by the company
in USA.
A more recent example is the boycott of the French products in the USA market
due to differences in opinion regarding the invasion and the war launched against
Iraq in 2003.
The rules, regulations and actions are a major source of risk and they have been
discussed under the political environment of the host countries.

The political risk can be assessed either in house based on a model development by
the company or based on external sources, specialised in assessing political risk.
Bradley 7 presents the political events that were introduced in the calculation of the
Feierabend political risk index in 1970s:
1. Elections
2. Vacation of office
3. Significant change of laws
4. Acquisition of office
5. Severe trouble within a non-government organization
6. Organization of the opposition party
7. Government action against significant groups
8. Micro strikes
9. General strikes
10. Macro strikes
11. Micro demonstrations
12. Macro demonstrations

7
Bradley F., Op. Cit, p. 165.
The political environment

13. Micro riots

14. Macro riots
15. Severe macro riots
16. Arrest of significant persons
17. Imprisonment of significant persons
18. Arrest of few insignificant persons
19. Mass arrests of insignificant persons
20. Imprisonment of insignificant persons
21. Assassinations
22. Martial law
23. Execution of significant persons
24. Execution of insignificant persons
25. Terrorism and sabotage
26. Guerrilla warfare
27. Civil war
28. Coup d’etat
29. Revolts
30. Exile

In recent years such extreme events as the ones presented in the above political
index are less frequent and are encountered in less and less countries as compared
to 1970s and 1980s, mainly developing countries. The political risk in developed
countries is given mainly by the governmental rules, regulations and actions.
However, conflict and violent change it is a major political risk. The company has
to seriously consider if either to enter or not countries were the likelihood of
violence is high. When guerrilla wars, civil disturbances and terrorism takes place
in a country, it is a possibility that violence to also be directed towards a
company’s property and employees. In 1991, Detlev Rohwedder, the chairman of
the German Treuhand, the institution in charge with the privatisation of the former
state companies of East Germany, was assassinated by the Red Army Fraction
because he was a “representation of capitalism” 8 .
McDonald’s establishments (seen as a symbol of USA) have been many times
ravaged and burned in different countries due to anti-USA feelings.
Figure no. 6.2 presents an evolution of the terrorist acts at world level over a
number of years. The largest number of terrorist acts in period 1998-2003, took
place in Latin America, peaking in 2001 with 201 terrorist attacks, followed by

8
Czinkota M.R. and Ronkainen I.A, Op. Cit., p.174.
 International Marketing

Asia and Middle East. The highest number of casualties in the period 1998-2003
were in USA with September 11th attack followed by Africa. The highest number
of facilities struck were businesses, as opposed to diplomatic, governmental or
military facilities.

Figure no. 6.2 International terrorist incidents in the period 1982-2003

Year Number of terrorist acts
1982 500
1983 506
1984 565
1985 635
1986 612
1987 665
1988 605
1989 375
1990 437
1991 565
1992 363
1993 431
1994 322
1995 440
1996 296
1997 304
1998 274
1999 395
2000 426
2001 355
2002 205
2003 208
Source: http://www.state.gov/www/global/terrorism

Political vulnerability plays an important role in appreciating political risks both in

developing and developed countries. When assessing political vulnerability in a
country, the product itself plays an important role. Some products are more
politically vulnerable than others. Products that are perceived to have an effect on
environment, national and economic security, welfare of people and are subject of
public debate are more likely to be politically sensitive and to receive more
political attention. Health products are an example and we have seen the example
of the abortion-pill on the American market. Food products are another example
and we have seen the case of Nestle in the third world countries.
The political environment

Favourable political attention can mean protection, reduced tax rates, exemption
from quotas and any other forms of protection for local products and can lead to
labour agitation and different forms of governmental harassment in the case of
undesirable products. For instance, the production and sale of missiles and missile
technology can bring about political sanctions.

6.4 Reducing the political risk

In spite of the political risks, companies will still exploit opportunities that a
particular market offers. Although there are countries in which, the political risks
are extreme, most countries have a moderate political risk. The company should
look for ways to be accepted politically by the host country and to lessen the
political risk.
1. One way to reduce political vulnerability is to be a good corporate
citizen. A company is a good corporate citizen in a country if it helps
the country to achieve progress. Companies that are good corporate
citizens have a good relationship with the government and use locally
produced products, transfer capital, technology and skills into the
country, create jobs, make tax contributions and support cultural
events. For instance, Pepsi-Cola sponsored opera and ballet in
Argentina, Coca-Cola supports education in Romania.
2. In spite of efforts of being “a good corporate citizen”, long term
solutions to politically hostile environments are those that reduce their
risk. These include 9 :
a. Forming joint ventures with locals as this helps to diminish anti-
multinational feelings. Also partnering with locals that have
excellent contacts among the host country governing officials is
another possibility.
b. Expanding the investment base by including more investors and
banks in the financing of the investment, diminishing the risk in
this way. If the banks have made loans to that particular country
that threatens with expropriation the power of the bank can be used.
c. Local borrowing is a way of financing local operations from local
banks. If the government expropriates the company, creates
problems to its own financial institutions. Government are reluctant
to create problems to its own institutions and this comes in the
favour of the international company. Local borrowing is not always
possible due to restrictions imposed towards foreign companies.

9
Cateora Ph. and Graham J, 1999, Op. Cit., pp. 158-159; Jeannet and Hennesey, Op. Cit, p. 149-151.
 International Marketing

d. Licensing of technology for a suitable fee, can be used when risks

are high and the company does not want to invest the money or
when the technology is unique and the host country wants the
technology.
e. Planned domestication may be adopted by companies in order to
reduce risks. They would gradually support locals in participating
in all phases of the company operations. The parent company
would still have a reasonable control even though nationals would
take important decisions in management and ownership. It was
noticed that company trained nationals tend to have strong
corporate views rather than a national perspective.
f. Minimizing fixed investments can be used to diminish risk as
political risk is related to the amount of capital invested. The lower
the invested capital, the lower the risk as the exposed assets are
kept to a low level. Leasing equipment can be a solution instead of
buying the equipment.
g. Horizontal integration. Companies that have specialized plants in
various countries encounter less political risks than those that have
integrated, independent plants in each country. In this way
economies of scale can be obtained at the local plant. Further, the
risk can be reduced by having at least two plants that are engaged
in the same operation in two different countries.
3. Political payoffs refer to the process of paying those in power
(officials) to intervene in favour of the international company. OECD
countries are not allowed to use political payoffs. Korea is a country
known for using this method when going internationally.
4. Political risk insurance is an option for the companies from developed
countries, whose governments created systems for insuring against
political risks, when going internationally. In USA for instance, exist
both governmental and private sources for international protection. In
1969 the Overseas Private Investment Corporation (OPIC) was formed
in order to facilitate the operations of USA firms in developing
countries 10 . OPIC offers three types of insurances: currency
inconvertibility insurance, expropriation insurance and war or
revolution insurance. In Germany there is the Hermes Kreditanstalt that
provides exporters with insurance. Usually insurance policies cover
only the actual loss, and not the lost profits.

10
Jeannet J.P and Hennessey, Op. Cit, p.151.
External markets selection
and market entry

We have been presenting so far the macro-environment of foreign markets and the
variables that a firm would be interested to study in order to know the foreign
macro-environment. Further on we will see how the aspects discussed so far
(meaning all aspects of the foreign environment: economic, political, cultural and
legislative) are used to assess market opportunities and to select markets.
The external market selection process is very important for the company that is
willing to internationalise for a number of reasons:
/ the errors that occur in an international environment are more
expensive than the errors that take place in the internal market
/ by choosing wrongly a foreign market, the company pays two types of
costs: a) the effective cost of the unsuccessful try to enter the foreign
market and b) the cost of the lost opportunity, by loosing the occasion
to enter a market in which the company could have been successful.

This chapter discusses the possible approaches that a company can adopt when
going international, the market selection process and market selection methods and
techniques.
 International Marketing

7.1 Market selection approaches

A company may use one of the following approaches to market selection: the
systematic approach, the non-systematic approach and the relational approach.
The systematic approach is encountered when the selection of markets takes place
based on a planned and well structured process through which countries are
compared and then selected.
The non-systematic approach (that is also called the opportunistic approach)
depicts the situation when a company internationalise because receives some
external stimuli that indicates some opportunities abroad: such stimuli are orders
for the company’s products or requests for information about the company’s
product from foreign potential clients, clients with which the company does not
cooperate at present.
The relational approach is the approach in which the company bases its
internationalisation process on the relationship it has with companies or partners
from foreign countries.

7.1.1 The systematic approach

The systematic approach compares in a systematic way and prospects markets by

setting market selection criteria based on which the foreign markets potentials are
searched, countries are classified and grouped and are selected those countries with
the highest market potential that correspond to the strategies and future intentions
of the company. The systematic approach is a rational decision making process that
has a normative nature, it prescribes how things should be done in order to select a
market. A systematic approach to market selection is recommended in order to
diminish the risks of errors.

7.1.1.1 The market selection process

As part of the systematic approach, the market selection process has been defined
as a process of gathering information and screening countries by collecting data
about countries and passing them through a number of filters in order to eliminate
the less promising opportunities. Figure no. 7.1 presents the market selection
process.
External markets selection and market entry

Figure no. 7.1 The steps of the market selection process

Filter 1 MACROLEVEL RESEARCH

= General market potential

* economic (GNP; GNP/capita; Income/capita)

* political (political structure)
* demographic (total population; growth rate, structure)
* social (religion, race) rejected
* geographic (surface, climate, landscape) countries

Preliminary opportunities

Filter 2 INDUSTRY LEVEL RESEARCH

= The industry market
potential

* growth trends for similar products

* cultural acceptance of the type of products rejected
* taxes and duties for the category of products countries

Possible opportunities

Filter 3 MICROLEVEL RESEARCH (MARKET

POTENTIAL FOR THE COMPANY)
= Expected company
profit

* competitors
* market entry costs, ease of entry rejected
* forecasted sales countries

Probable opportunities

Filter 4 COMPATIBILITY WITH THE FUTURE

COMPANY STRATEGY

* resources Country
* objectives, strategies priority list

Source: Figure adapted after Jeannet J.P. and Hennessey H.D., 1988, International Marketing
Management, Houghton Mifflin Company, p. 139.
 International Marketing

1. Filter 1 is the evaluation of the general potential of the market (the

macrolevel research).
The first stage of the market selection process uses macro variables in order to
filter the countries. At this stage the general market potentials are evaluated in
terms of economic activity, social forces and political structure. The macro
indicators used to assess the general market potential are: economic indicators,
political indicators, geographical indicators and demographic indicators. Most of
these indicators have been discussed under the type of environment they are part
of, but we will shortly present them here in the context of market selection.
The macro indicators generally show what is the general potential of the market.
They are used in the first stage of the market selection as data are readily available
and can be used to quickly eliminate countries with little or no potential demand
and with excessive risks.

The economic indicators such as total GNP, GNP/capita show us what is the
wealth of a country. The wealth of a country determines the purchasing power and
the consumption patterns, that are of primary interest for the international marketer.
Per capita income is an indicator of people’s earnings in that country, but the
income distribution is another very important indicator, as it shows the number of
persons who actually earn much enough to buy the company’s product. For
instance, if in a country with a per capita income of 3000$, only 10% of the
population gets most of the country’s income and the rest lives in poverty, the
potential size of the market for house product (cookers, fridges) will be the 10% of
the population. It is the case of the bipolar societies.
If available, the household or personal disposable income is another valuable
indicator that shows how much on average may a household spend. It is the income
after tax. The indicator discretionary income shows how much is left after they
fulfil the current necessities. These indicators are available mainly in developed
countries.
The macroeconomic indicators will indicate if the country is too small, to be
considered (GNP may be large enough but disposable income too low).

Geographic characteristics, such as size of the country, the climate conditions

and topographical characteristics are taken into consideration in order to evaluate
the possibility to serve the market segment. Also characteristics such as natural
resources and energy are of interest in the case the company wishes to produce
locally.
External markets selection and market entry

Political indicators try to measure the political risk, as political instability can
remove a country from the screening process right from the first stages. The
political risk tends to be more subjective than the quantitative indicators of the
market size. However, marketers can use a number of indicators to assess the
political risk: the probability of nationalization, the number of expropriations, the
political executions, government interventions, limits on foreign property,
restrictions on capital movement and others, industrial disputes. There are
syndicated services that rate political risk: the World Political Risk Forecast by
Frost and Sullivan or the Political Risk Index of the Economist Intelligence Unit.
Data provided by such organizations are good in the long term, but they cannot
predict critical events that occur in different countries (such as the invasion of
Kuwait in 1991 or the collapse of the Berlin Wall in 1989). The company has to be
attuned to such current events in the countries of interest, as they have a profound
impact on the business.

Demographic characteristics. Demographic statistics will show the market

potential as population is an indicator for market potential for many consumer
goods, age structure will also show the size of the market taking into account the
age market segment we are willing to serve. Again countries that do not have a
largely enough population potential can be eliminated market.
The countries that do not have a large enough general potential are rejected and the
countries that remain are considered to be preliminary opportunities and are passed
further to be researched in more detailed.

2. Filter 2 consists of the evaluation of the general potential of the market

related to the product (industry level research). Through this filter all the
countries that passed the previous filter, the ones that had a large enough general
market potential, are evaluated further in order to evaluate the potential market size
for that particular type of product. The stage is also called the evaluation of the
potential in the industry and will show the marketer how many products of that
type the market can absorb. At this stage micro indicators are used to estimate the
market size for that particular type of product. The micro indicators are specific to
the product and they indicate the actual consumption of that type of product in the
country. When consumption figures are not available the marketer can evaluate the
market size by looking to local production as well as the imports of that specific
product. Therefore, micro-indicators to be looked at can be the consumption or the
production and imports of radios, passenger cars, coffee, rice, alcohol beverages,
etc or the consumption of electricity, of gasoline, or the number of hospital beds,
 International Marketing

the number of farms, the number of tourist arrivals etc. These indicators are
specific to the company’s product. By looking at the consumption figures, the
company will have an indication over the perceived need.
Sometimes the actual consumption statistics may not be available for a certain
product, and in this case proxy variables are used: consumption of similar,
substitute products, complementary products. For instance, the number of farms
may indicate the potential demand for tractors or in order to determine the market
for medical equipment, marketers may use the number of hospital beds or the
number of doctors per 1000 inhabitants as a proxy variable, the number of tires
consumed after the number of cars.
Other indicators to be studied at this stage relate to:
( taxes and duties requirements, as a high custom duty for the
company’s product may eliminate a country from the screening
process, if the company does not want to manufacture locally.
( the cultural acceptance of the product is also taken into consideration
at this stage. Indicators might indicate a good general market potential,
but the cultural acceptance of the product might be low and
consequently the product market potential will diminish. For instance,
swimming suits or alcohol in Muslim countries.
The potential market size in the industry will be appreciated based on the current
size and on the growth rate.
The countries that do not have market potential for that type of product are rejected
and the remaining countries after this second filter are possible opportunities and
are studied further.

3. Filter 3 is the evaluation of the company’s sales potential (microlevel

research).
In the third stage of the selection process, the potential sales of a company’s
product in a foreign market are evaluated. After the general market potential of a
number of countries was evaluated and the attractive ones have been retained and
have been evaluated from the industry potential point of view, at the third filter
stage, the evaluation shifts from the evaluation of the market potential towards the
potential profitability of the company and the size of the market for the specific
product of the company. In order to evaluate how much the company can sell on
the respective market, aspects such as the competitors, the ease of entry, the cost
of entry will be considered. At this stage the company tries to forecast the sales and
the potential profits.
External markets selection and market entry

The competitive structure of foreign markets it is difficult to determine and that is

why it is usually left for the last stages of the screening process, when only a
limited number of countries are screened. The company has to find out what is the
number of competitors in the market, what is their size, what is their origin, either
local or international and what is the quality of competition. Sources that can be
used to gather information about competitors are: research reports of research
organizations 1 , Chambers of Commerce, as secondary data, as well as from
primary data collection from potential consumers, distributors, trade officials.
How much is going to cost the company to enter that market given the investment
needed and the local costs, the taxes of the country and the entry procedure? Given
the cost of entry and the expected sales, the company will try to forecast what is
the expected profit. Both quantitative and judgemental ways to evaluate the
expected profits can be used.
The countries where the company does not expect to sell enough are rejected and
the countries considered to have sales potential for the company represent the
probable opportunities and will be further researched.

4. Filter 4, the last stage of the selection process takes into consideration
the corporate factors influencing the decision (the compatibility with the strategy
of the company). At this stage countries are ranked based on corporate: resources,
objectives, strategies. For instance if, South Africa has an expected potential equal
to Venezuela, Venezuela may be given priority if the company’s strategy is to enter
later Columbia and Bolivia. After the last filter a list of country priorities results
and this is used to make the final decision.

7.1.1.2 Market selection methods

It is also of interest to look to a few MARKET SELECTION METHODS that the

company can use in order to systematically select markets: the listing of selection
criteria, the scoring market selection model and the compensatory model.

1. The listing of selection criteria

The listing of selection criteria method consists of developing a set of criteria and
certain level limits (minimum or maximum) for these criteria required for a country
to move through the stages of the screening process. The levels (limits) for each
criterion will be established by the management according to what they consider
acceptable or not in respect of a certain aspect.
1
The international Market Research Mall publishes an online listing of the available research reports at:
www.ecnext.imrmall.com .
 International Marketing

We have here an example of using this method for a dialysis equipment (the model
was used for the external market screening process by an USA company in
1980’s). Figure no. 7.2 presents the model.

Figure no. 7.2 Screening process to target countries for kidney dialysis
equipment

FILTER 1: Macro-level research Gross Domestic Product over $15 billion

Gross Domestic product per capita
over $1500
FILTER 2: General Market Factors Less than 200 people per hospital bed
Relating to the Product Less than 1000 people per doctor
Government expenditure for the health
care over $100 million
Government expenditures for health care
per capita over $20
FILTER 3: Micro Level Factors Kidney-related deaths over 1000
Specific to the Product Patient use of dialysis equipment over
40% growth in treated population
FILTER 4: Final Screening of Target Number of competitors
Markets Political stability

Source: Jeannet J.P. and Hennessey H. D., 2001, Global Marketing Strategies, Houghton Mifflin
Company, p. 181.

At the first stage minimum levels of the GDP ($15 billion) and the per capita GDP
($1500) are established by the management, levels considered to be large enough
to allow governmental expenses for dialysis equipment. The lower the GDP/capita
in a country, the lower are the expected governmental expenditures for the health
system and consequently for dialysis equipment.
The remaining countries are the preliminary opportunities and they will be passed
through the second filter, the evaluation of the type of product market potential or
the industry potential, in our case the health industry. A number of indicators will
be studied, indicators related to the product. Dialysis is a complicated procedure
that needs specialized personnel to conduct it. In order to conduct such procedure a
country needs a high level of specialization. The higher levels of medical
concentration, the higher the chances for medical specialization.
External markets selection and market entry

Therefore, by looking at indicators such as the number of people/doctor and the

number of people/hospital bed, we can evaluate the level of medical development.
Indicators such as the governmental expenditure for health, total and per capita,
whose lower level (limit) is established by the management are important, as
countries that do not invest in health care tend not to be interested to make more
substantial investment in specialized programs.
The next stage, filter 3 will take into consideration indicators specific to the
product, such as the number of deaths related to kidney problems/1000 loc. This
indicator gives an indication over how many people could have been treated. It is
not enough for people to die from kidney diseases, but they also have to be treated
in order to have market potential in that country. Therefore, a minimum 40%
annual growth in the number of patients suffering from the disease, who use the
equipment, was considered an acceptable level.
Filter 4, the last stage of this screening model, took into consideration the
competitive structure of each country and the political stability.

2. The scoring market selection model

The scoring model or the scoring technique consists in using a number of

indicators that are compiled in a final score and that are given different percentages
according to the degrees of importance assigned to each of them. In order to use
this selection model, the marketer has to follow a number of steps:
1. The first step is to set the criteria based on which the selection will
take place. The criteria can be grouped in broad categories, such as
market characteristics (market size, buying behaviour) or entry barriers
(tariff barriers, non-tariff barriers).
2. Set the ranking procedure. For instance, on a scale from 1 to 10,
where 1 is the lowest and 10 is the highest.
3. Set weights of selection criteria. At this stage each indicator will be
given a percentage according to its importance in the selection process.
4. Gather data concerning indicators. At this stage data will be
collected for all countries of interest that are included in the selection
process, according to the criteria set.
 International Marketing

5. Calculate scores for each country. Based on all indicators, their

ranking (based on their sizes) and the importance given to them, the
marketer will calculate for each country scores for each indicator that
will be added up in a final score. See table no. 7.1.
6. The final stage will be to select the country/countries based on the
rankings of the final scores.

Table no. 7.1 presents a hypothetical scoring market selection model for Europe.
Based on this principle different scoring models can be constructed and used. We
have here an example of a scoring selection model used by an USA can producer in
1980’s for external market selection. The model was called the customized
weighted multivariate technique and it is presented in table no. 7.2.

In the hypothetical model presented in figure no. 7.1., there were six criteria used
to select markets, namely the market potential, tariffs, non-tariff barriers, the
product fit, the competitive intensity and the shipping costs. For each of them there
have been established weights (W = 15%, 5% etc). “E” represents the estimates
used for the ranking procedure, where 0 = very bad conditions, 1 = bad conditions,
2 = acceptable conditions, 3 = favourable conditions, 4 = very favourable
conditions and “W x E” represents the weighted estimate for each indicator.
At the end all weighted estimates for all indicators are added up in a final score for
each country. Then the countries are ranked according to the size of the final score.
When the differences between the final scores are higher, the selection decision is
easier. When there are very close final scores (for instance 202 with 208), the
company might take a multiple entry decision or it can group countries in groups
with similar scores. Further on, the countries can be treated as a group or the
selection process can be continued by introducing more criteria, in order to
differentiate the countries.
Table no. 7.1 A hypothetical scoring model for international market selection

Selection Market Non-tariff Product Competitiv Shipping Final

Tariffs
criteria potential barriers fit e intensity costs score
Rank
Weights W=15 W=5 W=17 W=25 W=22 W=16 Max
Countries E WxE E WxE E WxE E WxE E WxE E WxE 400
Denmark 2 30 2 10 1 17 3 75 1 22 3 48 202 4
Sweden 3 45 4 20 3 51 2 50 2 44 3 48 258 2
Norway 2 30 3 15 2 34 3 75 1 22 2 32 208 3
Finland 4 60 4 20 3 51 3 75 4 88 1 16 310 1
Portugal 0 0 3 15 1 17 0 0 2 44 2 32 108 5
Spain
….
 International Marketing

Table no. 7.2 The customized weighted multivariate technique

for a can producer

Payback index Percentage Desirability index Percentage

Political stability 26.0 Quality of infrastructure 13.6
Political freedom 7.0 Availability of financing 10.1
Civil liberties 7.0 Labour situation 9.1
Quality of infrastructure 6.7 Market growth 8.6
Nationalization 6.3 Currency convertibility 6.6
probability
Desire for foreign 5.6 Per capita income 7.1
investment
Bureaucratic delays 5.4 Market size 7.1
Market size and growth 4.4 Inflation 6.8
Inflation 3.6 Physical quality of life 6.0
Labour situation 3.5 Bureaucratic delays 5.1
Currency stability 3.3 Enforceability of 4.4
contracts
Balance of payments 3.3 Balance of payments 3.4
Availability of financing 2.4 Currency history 3.2
Restrictions on capital 2.3 Corporate tax level 2.2
movements
Government 1.5 Local management 2.0
interventions
Limits on foreign 1.4 Cultural interaction 1.7
ownership
Cultural interaction 1.4 Government intervention 0.8
Corporate tax level 0.8 …………
…………..

Source: Douglas S.P. and Craig C.S., 1983, International Marketing Research, Prentice Hall,
p. 289-292.

We have here the example of an USA company that developed in 1980’s two
customized indices in order to evaluate and select markets:
& the index of desirability,
& the payback index (risk).
Each index comprises a number of indicators that have different weights according
to the importance given to them by management. A number of factors are used in
both the risk and the desirability index, as they can represent both a risk factor
External markets selection and market entry

and a desirable factor according to their evolution. But they have different weights
in the two indices according to the contribution they bring to the country risk or
country desirability. For instance, the quality of infrastructure is the most important
variable (13.6% degree of importance) in considering the desirability of one
country (as they are going to have an extensive distribution), meaning that a good
infrastructure of a country will increase its desirability index, while in the risk
index, there are other variables more important in evaluating the country risk,
meaning that a bad infrastructure will affect less the risk (payback) index. The
higher the desirability index, the more desirable is the country. The higher the
risk/payback index, the less desirable and the more risky a country is.
Obviously the most developed countries will always score the highest, therefore is
recommended that the method to be used on groups of countries, in order to
differentiate them within the group.

3. The compensatory model

This is a new model that proposes the use of two key constructs, a trade-off between
demand potential and trade barriers in the context of the firm strategy. Through this
model the company will screen many markets directly at industry level. It is a
compensatory model because is trying to compensate, to express a trade-off between
pluses and minuses, in our case between the demand potential as a plus and the trade
barriers (as a minus) for the countries under review. The model is suitable to
systematically screen markets in order to internationalise by exporting.
The two constructs used by the compensatory industry model are the demand
potential and the trade barriers, each of them being formed of four variables. The two
constructs are built for each country and are evaluated in the context of the
company’s strategy. Figure no. 7.3 presents the synthesis of the compensatory model.

The demand potential construct will be built based on four variables, namely the
apparent consumption, the import penetration, the origin advantage and the market
similarity.
The apparent consumption refers to how much a country consumes from a certain
product. The consumption of a product is a good indication for the market potential
in that country, as it can be sold on the market according to how much they
consume. A country will consume from a product how much it produces locally to
which will be added how much it imports from that product and will be deducted
how much it exports towards other countries. Therefore, the apparent consumption
is calculated as the domestic production plus the imports minus the exports of that
product.
 International Marketing

Figure no. 7.3 The demand versus barriers compensatory model

Demand potential Trade barriers

Apparent Origin advantage Tariff Geographic
consumption barriers distance

Import Market similarity Non-tariff Exchange rate

penetration barriers

Strategy

Defensive Offensive

International market selection

Source: Papadopoulus N., Chen H. and Thomas D.R. ,”Toward a trade-off model for international
market selection”, International Business Review, vol. 11, 2002, p. 170.

The import penetration is the second variable included in the demand potential
construct. Import penetration shows how much from the apparent consumption
comes from imports. A high percentage of imported goods will show an openness
of the market toward foreign products. On the other hand it can also indicate a low
competitiveness of the domestic producers, signalling an attractive target market.
Further on, the origin advantage variable, will show how much from the imported
goods originated in the country of origin of my product. A high share of the country
of origin in the total imports of the targeted country, shows that the company has a
number of advantages in that country. Such possible advantages are:
9 other exporters from the country of origin can help with market
information,
9 there is already a favourable image of the products coming from the
country of origin (in a given industry),
9 there are strong trade relations between the exporting and the importing
countries that result in a greater trade promotion effort at local foreign
level.
External markets selection and market entry

Market similarity is the last variable of the demand potential construct, the one that
shows the pluses of the external markets. Market similarity is considered based on
the idea that demand tends to be higher in markets that are similar to the market
where the product was initially developed. High similarity between markets
reduces usually the risk and the uncertainty. It is calculated as a compilation of a
number of indicators such as life expectancy, GDP/capita, electricity production,
percentage of imports in GDP.

The trade barriers construct is also formed of four variables: the tariff barriers,
the non-tariff barriers, the geographic distance and the exchange rate.
Tariff barriers can influence market selection either positively or negatively. The
lower the tariff barriers, the more attractive the market is. Tariffs influence the
exporter’s prices and the pricing strategy of the company on that market. In this
model tariff barriers are measured by the weighted mean annual tariff rate over the
studied period.
The non-tariff barriers are in many cases more important than the tariff barriers in
exporting. They refer to:
/ Quotas. Governments can impose limits or restrict the number of units
or the total value of a product or product category that can be imported
in the country.
/ Trade control. The state can control the trade with certain commodities
when monopolizes it. It is the case of Sweden, where the Swedish
government controls the import of all alcoholic beverages and tobacco
products.
/ Voluntary quotas. These are encountered when exporters voluntary
agree to restrict its exports to a certain amount or quantity. Japan
voluntary restrained its exports of cars to EU and USA and its exports
of TV’s to USA.
/ Other non-tariff barriers such as custom procedures, administrative and
technical regulations.
The larger such non-tariff barriers are the less attractive the market becomes. And
the low overall incidence of non-tariff barriers suggests an openness of the market.
As we have seen most of the non-tariff barriers are qualitative and it is needed a
quantification scheme in order to include them in the compensatory market
selection model. Papadopoulus et al. suggest the quantification of the non-tariff
barriers by developing a composite index that consists of the 20 barriers items
 International Marketing

in the World Trade Organization’s Trade Policy Review, by weighting each item
by its frequency of occurrence in the target market.
The geographic distance is directly related to the transportation costs and can act
as a major barrier through its effect on the export price. The higher the geographic
distance is the higher the cost of transportation and the less attractive the market is.
In the barrier construct it will be included as the mileage between exporting and
targeted countries.
The exchange rate is the last variable in the trade barrier construct of the
compensatory model. Exchange rates are volatile and currency exchange rates
between exporting and importing countries represent a major risk element in
exporting as they can have a major impact on pricing strategies and the overall
strategy of the company in the market. As measurement for the compensatory
model it was considered the change in the official exchange rate as compared to the
previous year.

The two constructs that compensate one another will be used for market selection
differently by different companies, in concordance with the strategy they follow,
either an offensive or a defensive strategy.
The companies that will follow an offensive strategy will seek growth at the
expense of the competitors and will value opportunities more than being concerned
by risks. The companies that will follow a defensive strategy will concentrate more
on preventing competitors from grabbing their market share.
Each construct will be given a mark and for each country will be two scores, one
for the market potential and one for the trade barriers. A matrix will be formed (see
figure no. 7.4) and based on this matrix information the company will select the
countries with the high market potential and the low trade barriers for its particular
product.

Figure no. 7.4 The final matrix in the compensatory model

Export markets
High barriers Low barriers
High market potential XXXX
Products
Low market potential
External markets selection and market entry

Talking about the systematic approach for market selection we have to mention that
there are syndicated sources that evaluate country risks and offer country indices.
Such sources are BERI- Business Environmental Risk Intelligence, The Economists
(EIU), the Moody’s, Standard and Poor’s and others. Such sources evaluate the
country risk with its components: political, economic, financial. Table no. 7.5 shows
some of the types of variables that are used when calculating different country
risk indices.
When using such country indices the company has to bear in mind that many of
them are calculated in order to evaluate the financing risk 2 and not the investment
risk 3 . The type of information needed when evaluating the two types of risks is
different and most of the country risks indices calculated by different agencies
envisage the financing risk and not the business risk or the risk of investment.
One agency that also develops market indices for market selection is the
Economic Intelligence Unit (EIU). The EIU published for the last thirty-seven
years market indicators that allow managers to quickly compare country
opportunities. EIU combines statistical data by using a large number of variables in
three main indices: market size, market growth and market intensity.
The market size index measures the total potential of a market based on a number
of indicators such as population (double weighted), urban population, private
consumption expenditure, steel consumption, cement and electricity production,
ownership of telephones, cars and televisions, buses, trucks, etc.
The market growth is an indicator of the rate of increase of the market size. Is
calculated by averaging the above mentioned indicators over five years.
The market intensity is an index that measures the concentration of the purchasing
power in a country or the richness of the country. It is calculated by averaging per
capita consumption of different products (above mentioned) and the percentage of
urban population –double weighted. The average world intensity is considered to
be 1 and each country index is calculated in proportion with the world intensity.

2
The financing risk is the risk encountered when a fnancial institution lends money to a country/government.
3
The investment risk is the risk encountered when a company is willing to expand and invest in an external
market.
 International Marketing

Table no. 7.5 Variables included in different types of country indices

Indices Variables included

Standard and Poor’s Political environment (stability,
governmental alternation, system’s
flexibility, political support, the
orientation of the political parties).
Social environment (standard of living,
income distribution, labour market
conditions, the urbanization degree, the
literacy rate, the relations with the
neighbours, frontier conflicts)
Economic environment (international
investments, GNP, exports, the
economy’s structure, natural resources,
currency regime, the taxes level).
Moody’s Political extremism, legislative system,
political structure, income distribution,
ethnical and religious differences,
liquidity, the balance of payments, the
independence of the Monetary Authority,
interest rate, exchange rate, capital
international flows, dependency on
imports/exports, labour force mobility).
EIU The economic growth (GNP), inflation,
external debt, the export degree of
prelucration, unfavourable neighbourhoods,
government legitimacy, army
involvement in politics, ethnical tensions,
internal conflicts.

At the beginning of years 2000, according to EIU market indices, USA, most of
Europe and Japan were countries with large market sizes, low growth and high
intensity, while countries such as China, Indonesia and Germany had high market
growth and low market intensities.
External markets selection and market entry

When selecting market opportunities, every company has specific needs and
interests. The syndicated sources of information are not usually relevant to the
company’s product. They offer information about the general market potential, but
not about the market potential for the company’s specific product. That is why
there are firms that develop their own systems of country evaluation and selection
based on a number of variables weighted specifically for that firm according to the
importance given by management to each criterion. This is the approach that we
recommend, to develop specific market selection models that will illustrate the
market potential for the company’s specific product. Syndicated sources can be
used in the primary phases of the screening process, when evaluating the general
market potential.
The systematic approach has a normative character, as it shows what companies
have to do in order to select markets.

7.1.2 The non-systematic approach to market selection

The non-systematic approach, also called the opportunistic approach occurs when a
company enters in a foreign market as:
— a consequence of receiving orders from abroad. In this case the
selection of the foreign market is given by chance, not by an organized
selection process. There is little or no information search, as firms are
expanding internationally on an opportunistic basis.
— or when markets are selected by rules of thumb.

There were studies that showed that many, companies do not have a systematic
approach to market selection, the explanations varying from the limited capacity of
companies to collect the numerous necessary statistical data to the fact that
companies generally use a more opportunistic manner when internationalising. The
criteria used when selecting markets through the opportunistic approach are
subjective. One of these criteria is the psychic distance. Many firms expand
internationally at the very first stage based on the psychic distance. The psychic
distance refers to those factors that are preventing or disturbing the flow of
information between firms and the market and include aspects such as differences
in language, in culture, in the level of education, in political systems or the level of
industrial development. The smaller is the psychic distance the more attractive is
the market and vice-versa.
 International Marketing

This method is used by small companies at their first stages of internationalisation

when they tend to approach the neighbouring countries, rather than large
companies that usually search more thoroughly external markets before making the
entry decision. However, generally speaking firms start their internationalisation
process by entering those markets that they can understand more easily, meaning
those with a small psychic distance, leaving the more distant markets for a later
stage.
While the systematic approach has a normative nature, as it tells how to select
markets, the non-systematic approach has a descriptive nature, as it tells what
companies have done when going internationally.
Sometimes companies use a mixed approach to market selection. The mixed
approach combines the two approaches discussed previously by transforming a
non-systematic approach, an opportunistic approach into a systematic one. Once
the order comes from abroad, the company realizes that there are opportunities
abroad and starts searching for the best options.

7.1.3 The relational approach to market selection

More recently, as more importance is given to customer satisfaction and to

relationship marketing, the relationship approach to market selection started to
develop. In contrast to the other selection approaches that were focusing on selecting
countries, the relational approach focuses on the business relationship and the foreign
customer as the unit of analysis. Using this approach the company will focus on the
decision process through which it identifies and selects exchange partners. In other
words through this approach it takes place the assessment of potential international
exchange partners and the screening process involves gathering information about
each partner and filtering out the less desirable partners.
Figure no. 7. 4 presents the model for choosing an international partner through the
relational approach.
The exchange partner screening process has three stages:
1. Awareness. At this stage the company searches in order to identify a
number of feasible international partners. It uses many information
sources, including the firm’s network. It will start by looking at those
with which it has direct relations (customers, suppliers) and will
continue later with those with which it has indirect relations (customers
of customers and suppliers of suppliers). The company envisages to
identify the skills and the qualifications of potential partners.
External markets selection and market entry

Figure no. 7. 4 The choice of an international partner – the relational approach

Awareness

Exploration

Choice

Source: Figure adapted after Andersen P. and Buvik A., “ Firms’ internationalisation and alternative
approaches to the international customer/market selection”, International Business Review,
vol. 11, no. 3, 2002, p. 353.

2. Exploration. At this stage the company tries to identify which of the

potential partners are attractive. The attractiveness of one partner
depends a lot on his willingness to negotiate further. If the potential
partner perceives as beneficial a future collaboration with the company,
as the benefits of such a relationship exceed the costs of the
relationship, this is a signal of attractiveness and further
communication and bargaining is likely to occur. At this stage are
considered obligations, benefits, burdens, attitudes and standards of
conduct. There are also taking place trial purchases. The exploration
stage can be very short, when one of the partners does not find
attractive such a collaboration and prefers an alternative partner.
3. The choice of partner(s). This is the last phase when the company will
select one or more partners by choosing among the existing
alternatives. The company will use criteria such as goal compatibility
and performance to make the decision. Usually these criteria are
appreciated based on direct experience and each such screening process
brings more experiential knowledge to the company.
 International Marketing

This approach is usually used in the case of industrial markets and of institutional
markets. Also, where the uncertainty of the environment is perceived as being high,
it is more probable the use of a relational method for market selection rather than a
traditional method.

Among the market selection approaches, the systematic approach is usually used
by large MNC’s that are screening a large number of markets based on a large
number of variables. The approach is used in case of non-contractual entry modes,
such as export or investment. The relational approach is suggested in case of
organizational customers, when there are envisaged high risk countries and when
the company uses contractual entry modes such as licensing, franchising,
production management.

7.2 Market entry strategies

The company that goes international has also to decide on the market entry
strategy. The decision can take place prior to market selection and the selection
process is done starting from the chosen market entry mode, or the market entry
mode is decided according to the condition of each market.
There are a number of aspects a company has to take into consideration when
deciding on the entry mode: the internal or the firm-specific criteria and the
external or the environment specific criteria. Table no. 7.6 presents the two
categories of criteria.

External criteria
Market size and growth: large markets (current size and potential future size given
by the growth rate) justify major commitments.
Risk: the greater the risk factor, the less resources are recommended to be
committed in the country concerned.
External markets selection and market entry

Table no. 7.6 Decision criteria for mode of entry

Internal firm-specific criteria External environment specific criteria

Company objectives Market size and growth
Need for control Risk
Internal resources, assets and capabilities Government regulations
Flexibility Competitive environment
Local infrastructure
Source: Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons,
p. 246-249.

Government regulations: such as trade barriers or local content laws can constrain
the available options for the company.
Local infrastructure: the poorer the local infrastructure is, the more reluctant the
company is to commit major human and monetary resources.
The external factors determine the overall attractiveness of the country.

Internal criteria
Company objectives: companies that have limited aspirations usually chose an
entry mode that require a minimum amount of commitment (such as licensing).
Proactive companies with more ambitious objectives usually choose an entry mode
that gives them more flexibility and control.
Need for control. The level of control is directly related with the amount of
resource commitment, the smaller the commitment, the lower the control. Most
firms decide based on a trade off between the degree of control desired and the
level of resources committed.
Internal resources, assets and capabilities: the tighter the resources are, the less
commitment the company will have for foreign markets (such as exports and
licensing).
Flexibility. To cope with market environmental changes, international companies
need a minimum of flexibility. Contractual arrangements such as joint ventures and
licensing provide very little flexibility, while wholly owned subsidiaries, again
offer little flexibility when the company takes a market exit decision.

The different modes of entry can be classified according to the degree of control
the company can have over marketing activities from low control entry modes
(indirect exporting) to high control entry modes (wholly owned subsidiary).
 International Marketing

There are three major strategies the company can adopt in order to entry in a
foreign market, as presented in table no. 7.7.

Table no. 7.7 Type of market entry strategies

Type of strategy Strategies

Export entry modes Indirect exporting
Direct exporting (agent/distributor)
Direct exporting (branch/subsidiary)
Cooperative exporting (piggybacking)
Contractual entry Licensing
modes Franchising
Technical agreements
Service contracts
Management contracts
Construction/turn key contracts
Contract manufacture
Co-production agreements
Strategic alliances
Investment entry modes Sole venture/wholly owned subsidiary (new establishment)
Sole venture/wholly owned subsidiary (acquisition)
Joint venture (new establishment/acquisition)
Source: Root F.R., Foreign Market Entry Strategies, 1982, Amacom, p. 7; Kotabe M. and
Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 250-266.

We will present some of them in the coming section.

Export entry modes are used by companies that first internationalise and by
companies that are not willing to commit a lot of resources in that particular
market.
Indirect exporting takes place when the company used domestic intermediaries
(such as brokers, export agents) to go abroad. It is suitable for companies with little
or no experience abroad and it has the advantage that the company can use the
intermediary’s experience of foreign markets.
External markets selection and market entry

Direct exporting takes place when the company exports through intermediaries
located in foreign markets. This export method requires higher level of expertise
from the manufacturer than the previous one, but at the same time allows for larger
control over its distribution channel.
Cooperative exporting or piggyback exporting takes place when the company uses
the overseas distribution network of another company (domestic or foreign) to sell
goods in the foreign market.

Contractual entry modes consist of forming non-equity contractual associations

with foreign entities.
Licensing involves an agreement of a company (licensor) that grants rights under a
contract to another company (licensee) from overseas. In a licensing agreement
rights are granted over intangible property such as patents, copyrights, trademarks,
procedures in exchange of a fee or royalty. Such contracts are signed for different
periods of time. Using licensing as a market entry method, the company can gain
market presence without any equity investment. Usually companies use licensing
when they do not have the time and the knowledge to engage in international
markets. Having a foreign partner offers the advantage as no investment is
necessary and better knowledge about the foreign market is available. The
disadvantage is that the company depends on the foreign licensee to produce sales,
from which it receives a percentage. So, the company’s revenues depend on the
capacity of the licensee to produce sales.
Franchising is a form of licensing through which the franchiser makes a total
marketing program (including brand name, logo, products and methods of
operations) available to the foreign franchisee. Franchising is prevalent in
industries such as services and retail.
Contract manufacturing takes place when a company arranges its products to be
produced by an independent foreign company on a contractual basis. The
manufacturer’s responsibility is restricted only to production, then products are
given to the international company and that usually takes over the marketing
responsibilities. Contract manufacturing is usually chosen for countries with a low
volume market potential combined with high tariff protection: the local production
is advantageous to avoid high tariffs, but the foreign market does not support the
volume to justify the building of a plant.
 International Marketing

Investment entry modes involve ownership of production units or other facilities

in the overseas market.
Joint ventures (equity based) involve the creation of a new separate business entity
under the joint ownership and control of two or more partners. The major
advantage of joint ventures as compared to lesser forms of resource commitment is
the return potential. Then is a possible high commitment entry mode, where foreign
governments discourage wholly owned ventures. For most joint ventures control is
the biggest shortcoming along with the lack of trust and the raise of mutual
conflicts.
Wholly owned subsidiary consists in 100 percent owned companies. Fully
ownership strategies can take two routes: acquisitions (when an existing foreign
company is bought) or green-field (a new plant is built from scratch). The main
benefit consists of full control over all operations, as well as getting all profits. The
disadvantages are that is expensive and demanding for the company’s resources
and the company bears the whole risk in case of failure.
External markets selection
and market entry

We have been presenting so far the macro-environment of foreign markets and the
variables that a firm would be interested to study in order to know the foreign
macro-environment. Further on we will see how the aspects discussed so far
(meaning all aspects of the foreign environment: economic, political, cultural and
legislative) are used to assess market opportunities and to select markets.
The external market selection process is very important for the company that is
willing to internationalise for a number of reasons:
/ the errors that occur in an international environment are more
expensive than the errors that take place in the internal market
/ by choosing wrongly a foreign market, the company pays two types of
costs: a) the effective cost of the unsuccessful try to enter the foreign
market and b) the cost of the lost opportunity, by loosing the occasion
to enter a market in which the company could have been successful.

This chapter discusses the possible approaches that a company can adopt when
going international, the market selection process and market selection methods and
techniques.
 International Marketing

7.1 Market selection approaches

A company may use one of the following approaches to market selection: the
systematic approach, the non-systematic approach and the relational approach.
The systematic approach is encountered when the selection of markets takes place
based on a planned and well structured process through which countries are
compared and then selected.
The non-systematic approach (that is also called the opportunistic approach)
depicts the situation when a company internationalise because receives some
external stimuli that indicates some opportunities abroad: such stimuli are orders
for the company’s products or requests for information about the company’s
product from foreign potential clients, clients with which the company does not
cooperate at present.
The relational approach is the approach in which the company bases its
internationalisation process on the relationship it has with companies or partners
from foreign countries.

7.1.1 The systematic approach

The systematic approach compares in a systematic way and prospects markets by

setting market selection criteria based on which the foreign markets potentials are
searched, countries are classified and grouped and are selected those countries with
the highest market potential that correspond to the strategies and future intentions
of the company. The systematic approach is a rational decision making process that
has a normative nature, it prescribes how things should be done in order to select a
market. A systematic approach to market selection is recommended in order to
diminish the risks of errors.

7.1.1.1 The market selection process

As part of the systematic approach, the market selection process has been defined
as a process of gathering information and screening countries by collecting data
about countries and passing them through a number of filters in order to eliminate
the less promising opportunities. Figure no. 7.1 presents the market selection
process.
External markets selection and market entry

Figure no. 7.1 The steps of the market selection process

Filter 1 MACROLEVEL RESEARCH

= General market potential

* economic (GNP; GNP/capita; Income/capita)

* political (political structure)
* demographic (total population; growth rate, structure)
* social (religion, race) rejected
* geographic (surface, climate, landscape) countries

Preliminary opportunities

Filter 2 INDUSTRY LEVEL RESEARCH

= The industry market
potential

* growth trends for similar products

* cultural acceptance of the type of products rejected
* taxes and duties for the category of products countries

Possible opportunities

Filter 3 MICROLEVEL RESEARCH (MARKET

POTENTIAL FOR THE COMPANY)
= Expected company
profit

* competitors
* market entry costs, ease of entry rejected
* forecasted sales countries

Probable opportunities

Filter 4 COMPATIBILITY WITH THE FUTURE

COMPANY STRATEGY

* resources Country
* objectives, strategies priority list

Source: Figure adapted after Jeannet J.P. and Hennessey H.D., 1988, International Marketing
Management, Houghton Mifflin Company, p. 139.
 International Marketing

1. Filter 1 is the evaluation of the general potential of the market (the

macrolevel research).
The first stage of the market selection process uses macro variables in order to
filter the countries. At this stage the general market potentials are evaluated in
terms of economic activity, social forces and political structure. The macro
indicators used to assess the general market potential are: economic indicators,
political indicators, geographical indicators and demographic indicators. Most of
these indicators have been discussed under the type of environment they are part
of, but we will shortly present them here in the context of market selection.
The macro indicators generally show what is the general potential of the market.
They are used in the first stage of the market selection as data are readily available
and can be used to quickly eliminate countries with little or no potential demand
and with excessive risks.

The economic indicators such as total GNP, GNP/capita show us what is the
wealth of a country. The wealth of a country determines the purchasing power and
the consumption patterns, that are of primary interest for the international marketer.
Per capita income is an indicator of people’s earnings in that country, but the
income distribution is another very important indicator, as it shows the number of
persons who actually earn much enough to buy the company’s product. For
instance, if in a country with a per capita income of 3000$, only 10% of the
population gets most of the country’s income and the rest lives in poverty, the
potential size of the market for house product (cookers, fridges) will be the 10% of
the population. It is the case of the bipolar societies.
If available, the household or personal disposable income is another valuable
indicator that shows how much on average may a household spend. It is the income
after tax. The indicator discretionary income shows how much is left after they
fulfil the current necessities. These indicators are available mainly in developed
countries.
The macroeconomic indicators will indicate if the country is too small, to be
considered (GNP may be large enough but disposable income too low).

Geographic characteristics, such as size of the country, the climate conditions

and topographical characteristics are taken into consideration in order to evaluate
the possibility to serve the market segment. Also characteristics such as natural
resources and energy are of interest in the case the company wishes to produce
locally.
External markets selection and market entry

Political indicators try to measure the political risk, as political instability can
remove a country from the screening process right from the first stages. The
political risk tends to be more subjective than the quantitative indicators of the
market size. However, marketers can use a number of indicators to assess the
political risk: the probability of nationalization, the number of expropriations, the
political executions, government interventions, limits on foreign property,
restrictions on capital movement and others, industrial disputes. There are
syndicated services that rate political risk: the World Political Risk Forecast by
Frost and Sullivan or the Political Risk Index of the Economist Intelligence Unit.
Data provided by such organizations are good in the long term, but they cannot
predict critical events that occur in different countries (such as the invasion of
Kuwait in 1991 or the collapse of the Berlin Wall in 1989). The company has to be
attuned to such current events in the countries of interest, as they have a profound
impact on the business.

Demographic characteristics. Demographic statistics will show the market

potential as population is an indicator for market potential for many consumer
goods, age structure will also show the size of the market taking into account the
age market segment we are willing to serve. Again countries that do not have a
largely enough population potential can be eliminated market.
The countries that do not have a large enough general potential are rejected and the
countries that remain are considered to be preliminary opportunities and are passed
further to be researched in more detailed.

2. Filter 2 consists of the evaluation of the general potential of the market

related to the product (industry level research). Through this filter all the
countries that passed the previous filter, the ones that had a large enough general
market potential, are evaluated further in order to evaluate the potential market size
for that particular type of product. The stage is also called the evaluation of the
potential in the industry and will show the marketer how many products of that
type the market can absorb. At this stage micro indicators are used to estimate the
market size for that particular type of product. The micro indicators are specific to
the product and they indicate the actual consumption of that type of product in the
country. When consumption figures are not available the marketer can evaluate the
market size by looking to local production as well as the imports of that specific
product. Therefore, micro-indicators to be looked at can be the consumption or the
production and imports of radios, passenger cars, coffee, rice, alcohol beverages,
etc or the consumption of electricity, of gasoline, or the number of hospital beds,
 International Marketing

the number of farms, the number of tourist arrivals etc. These indicators are
specific to the company’s product. By looking at the consumption figures, the
company will have an indication over the perceived need.
Sometimes the actual consumption statistics may not be available for a certain
product, and in this case proxy variables are used: consumption of similar,
substitute products, complementary products. For instance, the number of farms
may indicate the potential demand for tractors or in order to determine the market
for medical equipment, marketers may use the number of hospital beds or the
number of doctors per 1000 inhabitants as a proxy variable, the number of tires
consumed after the number of cars.
Other indicators to be studied at this stage relate to:
( taxes and duties requirements, as a high custom duty for the
company’s product may eliminate a country from the screening
process, if the company does not want to manufacture locally.
( the cultural acceptance of the product is also taken into consideration
at this stage. Indicators might indicate a good general market potential,
but the cultural acceptance of the product might be low and
consequently the product market potential will diminish. For instance,
swimming suits or alcohol in Muslim countries.
The potential market size in the industry will be appreciated based on the current
size and on the growth rate.
The countries that do not have market potential for that type of product are rejected
and the remaining countries after this second filter are possible opportunities and
are studied further.

3. Filter 3 is the evaluation of the company’s sales potential (microlevel

research).
In the third stage of the selection process, the potential sales of a company’s
product in a foreign market are evaluated. After the general market potential of a
number of countries was evaluated and the attractive ones have been retained and
have been evaluated from the industry potential point of view, at the third filter
stage, the evaluation shifts from the evaluation of the market potential towards the
potential profitability of the company and the size of the market for the specific
product of the company. In order to evaluate how much the company can sell on
the respective market, aspects such as the competitors, the ease of entry, the cost
of entry will be considered. At this stage the company tries to forecast the sales and
the potential profits.
External markets selection and market entry

The competitive structure of foreign markets it is difficult to determine and that is

why it is usually left for the last stages of the screening process, when only a
limited number of countries are screened. The company has to find out what is the
number of competitors in the market, what is their size, what is their origin, either
local or international and what is the quality of competition. Sources that can be
used to gather information about competitors are: research reports of research
organizations 1 , Chambers of Commerce, as secondary data, as well as from
primary data collection from potential consumers, distributors, trade officials.
How much is going to cost the company to enter that market given the investment
needed and the local costs, the taxes of the country and the entry procedure? Given
the cost of entry and the expected sales, the company will try to forecast what is
the expected profit. Both quantitative and judgemental ways to evaluate the
expected profits can be used.
The countries where the company does not expect to sell enough are rejected and
the countries considered to have sales potential for the company represent the
probable opportunities and will be further researched.

4. Filter 4, the last stage of the selection process takes into consideration
the corporate factors influencing the decision (the compatibility with the strategy
of the company). At this stage countries are ranked based on corporate: resources,
objectives, strategies. For instance if, South Africa has an expected potential equal
to Venezuela, Venezuela may be given priority if the company’s strategy is to enter
later Columbia and Bolivia. After the last filter a list of country priorities results
and this is used to make the final decision.

7.1.1.2 Market selection methods

It is also of interest to look to a few MARKET SELECTION METHODS that the

company can use in order to systematically select markets: the listing of selection
criteria, the scoring market selection model and the compensatory model.

1. The listing of selection criteria

The listing of selection criteria method consists of developing a set of criteria and
certain level limits (minimum or maximum) for these criteria required for a country
to move through the stages of the screening process. The levels (limits) for each
criterion will be established by the management according to what they consider
acceptable or not in respect of a certain aspect.
1
The international Market Research Mall publishes an online listing of the available research reports at:
www.ecnext.imrmall.com .
 International Marketing

We have here an example of using this method for a dialysis equipment (the model
was used for the external market screening process by an USA company in
1980’s). Figure no. 7.2 presents the model.

Figure no. 7.2 Screening process to target countries for kidney dialysis
equipment

FILTER 1: Macro-level research Gross Domestic Product over $15 billion

Gross Domestic product per capita
over $1500
FILTER 2: General Market Factors Less than 200 people per hospital bed
Relating to the Product Less than 1000 people per doctor
Government expenditure for the health
care over $100 million
Government expenditures for health care
per capita over $20
FILTER 3: Micro Level Factors Kidney-related deaths over 1000
Specific to the Product Patient use of dialysis equipment over
40% growth in treated population
FILTER 4: Final Screening of Target Number of competitors
Markets Political stability

Source: Jeannet J.P. and Hennessey H. D., 2001, Global Marketing Strategies, Houghton Mifflin
Company, p. 181.

At the first stage minimum levels of the GDP ($15 billion) and the per capita GDP
($1500) are established by the management, levels considered to be large enough
to allow governmental expenses for dialysis equipment. The lower the GDP/capita
in a country, the lower are the expected governmental expenditures for the health
system and consequently for dialysis equipment.
The remaining countries are the preliminary opportunities and they will be passed
through the second filter, the evaluation of the type of product market potential or
the industry potential, in our case the health industry. A number of indicators will
be studied, indicators related to the product. Dialysis is a complicated procedure
that needs specialized personnel to conduct it. In order to conduct such procedure a
country needs a high level of specialization. The higher levels of medical
concentration, the higher the chances for medical specialization.
External markets selection and market entry

Therefore, by looking at indicators such as the number of people/doctor and the

number of people/hospital bed, we can evaluate the level of medical development.
Indicators such as the governmental expenditure for health, total and per capita,
whose lower level (limit) is established by the management are important, as
countries that do not invest in health care tend not to be interested to make more
substantial investment in specialized programs.
The next stage, filter 3 will take into consideration indicators specific to the
product, such as the number of deaths related to kidney problems/1000 loc. This
indicator gives an indication over how many people could have been treated. It is
not enough for people to die from kidney diseases, but they also have to be treated
in order to have market potential in that country. Therefore, a minimum 40%
annual growth in the number of patients suffering from the disease, who use the
equipment, was considered an acceptable level.
Filter 4, the last stage of this screening model, took into consideration the
competitive structure of each country and the political stability.

2. The scoring market selection model

The scoring model or the scoring technique consists in using a number of

indicators that are compiled in a final score and that are given different percentages
according to the degrees of importance assigned to each of them. In order to use
this selection model, the marketer has to follow a number of steps:
1. The first step is to set the criteria based on which the selection will
take place. The criteria can be grouped in broad categories, such as
market characteristics (market size, buying behaviour) or entry barriers
(tariff barriers, non-tariff barriers).
2. Set the ranking procedure. For instance, on a scale from 1 to 10,
where 1 is the lowest and 10 is the highest.
3. Set weights of selection criteria. At this stage each indicator will be
given a percentage according to its importance in the selection process.
4. Gather data concerning indicators. At this stage data will be
collected for all countries of interest that are included in the selection
process, according to the criteria set.
 International Marketing

5. Calculate scores for each country. Based on all indicators, their

ranking (based on their sizes) and the importance given to them, the
marketer will calculate for each country scores for each indicator that
will be added up in a final score. See table no. 7.1.
6. The final stage will be to select the country/countries based on the
rankings of the final scores.

Table no. 7.1 presents a hypothetical scoring market selection model for Europe.
Based on this principle different scoring models can be constructed and used. We
have here an example of a scoring selection model used by an USA can producer in
1980’s for external market selection. The model was called the customized
weighted multivariate technique and it is presented in table no. 7.2.

In the hypothetical model presented in figure no. 7.1., there were six criteria used
to select markets, namely the market potential, tariffs, non-tariff barriers, the
product fit, the competitive intensity and the shipping costs. For each of them there
have been established weights (W = 15%, 5% etc). “E” represents the estimates
used for the ranking procedure, where 0 = very bad conditions, 1 = bad conditions,
2 = acceptable conditions, 3 = favourable conditions, 4 = very favourable
conditions and “W x E” represents the weighted estimate for each indicator.
At the end all weighted estimates for all indicators are added up in a final score for
each country. Then the countries are ranked according to the size of the final score.
When the differences between the final scores are higher, the selection decision is
easier. When there are very close final scores (for instance 202 with 208), the
company might take a multiple entry decision or it can group countries in groups
with similar scores. Further on, the countries can be treated as a group or the
selection process can be continued by introducing more criteria, in order to
differentiate the countries.
Table no. 7.1 A hypothetical scoring model for international market selection

Selection Market Non-tariff Product Competitiv Shipping Final

Tariffs
criteria potential barriers fit e intensity costs score
Rank
Weights W=15 W=5 W=17 W=25 W=22 W=16 Max
Countries E WxE E WxE E WxE E WxE E WxE E WxE 400
Denmark 2 30 2 10 1 17 3 75 1 22 3 48 202 4
Sweden 3 45 4 20 3 51 2 50 2 44 3 48 258 2
Norway 2 30 3 15 2 34 3 75 1 22 2 32 208 3
Finland 4 60 4 20 3 51 3 75 4 88 1 16 310 1
Portugal 0 0 3 15 1 17 0 0 2 44 2 32 108 5
Spain
….
 International Marketing

Table no. 7.2 The customized weighted multivariate technique

for a can producer

Payback index Percentage Desirability index Percentage

Political stability 26.0 Quality of infrastructure 13.6
Political freedom 7.0 Availability of financing 10.1
Civil liberties 7.0 Labour situation 9.1
Quality of infrastructure 6.7 Market growth 8.6
Nationalization 6.3 Currency convertibility 6.6
probability
Desire for foreign 5.6 Per capita income 7.1
investment
Bureaucratic delays 5.4 Market size 7.1
Market size and growth 4.4 Inflation 6.8
Inflation 3.6 Physical quality of life 6.0
Labour situation 3.5 Bureaucratic delays 5.1
Currency stability 3.3 Enforceability of 4.4
contracts
Balance of payments 3.3 Balance of payments 3.4
Availability of financing 2.4 Currency history 3.2
Restrictions on capital 2.3 Corporate tax level 2.2
movements
Government 1.5 Local management 2.0
interventions
Limits on foreign 1.4 Cultural interaction 1.7
ownership
Cultural interaction 1.4 Government intervention 0.8
Corporate tax level 0.8 …………
…………..

Source: Douglas S.P. and Craig C.S., 1983, International Marketing Research, Prentice Hall,
p. 289-292.

We have here the example of an USA company that developed in 1980’s two
customized indices in order to evaluate and select markets:
& the index of desirability,
& the payback index (risk).
Each index comprises a number of indicators that have different weights according
to the importance given to them by management. A number of factors are used in
both the risk and the desirability index, as they can represent both a risk factor
External markets selection and market entry

and a desirable factor according to their evolution. But they have different weights
in the two indices according to the contribution they bring to the country risk or
country desirability. For instance, the quality of infrastructure is the most important
variable (13.6% degree of importance) in considering the desirability of one
country (as they are going to have an extensive distribution), meaning that a good
infrastructure of a country will increase its desirability index, while in the risk
index, there are other variables more important in evaluating the country risk,
meaning that a bad infrastructure will affect less the risk (payback) index. The
higher the desirability index, the more desirable is the country. The higher the
risk/payback index, the less desirable and the more risky a country is.
Obviously the most developed countries will always score the highest, therefore is
recommended that the method to be used on groups of countries, in order to
differentiate them within the group.

3. The compensatory model

This is a new model that proposes the use of two key constructs, a trade-off between
demand potential and trade barriers in the context of the firm strategy. Through this
model the company will screen many markets directly at industry level. It is a
compensatory model because is trying to compensate, to express a trade-off between
pluses and minuses, in our case between the demand potential as a plus and the trade
barriers (as a minus) for the countries under review. The model is suitable to
systematically screen markets in order to internationalise by exporting.
The two constructs used by the compensatory industry model are the demand
potential and the trade barriers, each of them being formed of four variables. The two
constructs are built for each country and are evaluated in the context of the
company’s strategy. Figure no. 7.3 presents the synthesis of the compensatory model.

The demand potential construct will be built based on four variables, namely the
apparent consumption, the import penetration, the origin advantage and the market
similarity.
The apparent consumption refers to how much a country consumes from a certain
product. The consumption of a product is a good indication for the market potential
in that country, as it can be sold on the market according to how much they
consume. A country will consume from a product how much it produces locally to
which will be added how much it imports from that product and will be deducted
how much it exports towards other countries. Therefore, the apparent consumption
is calculated as the domestic production plus the imports minus the exports of that
product.
 International Marketing

Figure no. 7.3 The demand versus barriers compensatory model

Demand potential Trade barriers

Apparent Origin advantage Tariff Geographic
consumption barriers distance

Import Market similarity Non-tariff Exchange rate

penetration barriers

Strategy

Defensive Offensive

International market selection

Source: Papadopoulus N., Chen H. and Thomas D.R. ,”Toward a trade-off model for international
market selection”, International Business Review, vol. 11, 2002, p. 170.

The import penetration is the second variable included in the demand potential
construct. Import penetration shows how much from the apparent consumption
comes from imports. A high percentage of imported goods will show an openness
of the market toward foreign products. On the other hand it can also indicate a low
competitiveness of the domestic producers, signalling an attractive target market.
Further on, the origin advantage variable, will show how much from the imported
goods originated in the country of origin of my product. A high share of the country
of origin in the total imports of the targeted country, shows that the company has a
number of advantages in that country. Such possible advantages are:
9 other exporters from the country of origin can help with market
information,
9 there is already a favourable image of the products coming from the
country of origin (in a given industry),
9 there are strong trade relations between the exporting and the importing
countries that result in a greater trade promotion effort at local foreign
level.
External markets selection and market entry

Market similarity is the last variable of the demand potential construct, the one that
shows the pluses of the external markets. Market similarity is considered based on
the idea that demand tends to be higher in markets that are similar to the market
where the product was initially developed. High similarity between markets
reduces usually the risk and the uncertainty. It is calculated as a compilation of a
number of indicators such as life expectancy, GDP/capita, electricity production,
percentage of imports in GDP.

The trade barriers construct is also formed of four variables: the tariff barriers,
the non-tariff barriers, the geographic distance and the exchange rate.
Tariff barriers can influence market selection either positively or negatively. The
lower the tariff barriers, the more attractive the market is. Tariffs influence the
exporter’s prices and the pricing strategy of the company on that market. In this
model tariff barriers are measured by the weighted mean annual tariff rate over the
studied period.
The non-tariff barriers are in many cases more important than the tariff barriers in
exporting. They refer to:
/ Quotas. Governments can impose limits or restrict the number of units
or the total value of a product or product category that can be imported
in the country.
/ Trade control. The state can control the trade with certain commodities
when monopolizes it. It is the case of Sweden, where the Swedish
government controls the import of all alcoholic beverages and tobacco
products.
/ Voluntary quotas. These are encountered when exporters voluntary
agree to restrict its exports to a certain amount or quantity. Japan
voluntary restrained its exports of cars to EU and USA and its exports
of TV’s to USA.
/ Other non-tariff barriers such as custom procedures, administrative and
technical regulations.
The larger such non-tariff barriers are the less attractive the market becomes. And
the low overall incidence of non-tariff barriers suggests an openness of the market.
As we have seen most of the non-tariff barriers are qualitative and it is needed a
quantification scheme in order to include them in the compensatory market
selection model. Papadopoulus et al. suggest the quantification of the non-tariff
barriers by developing a composite index that consists of the 20 barriers items
 International Marketing

in the World Trade Organization’s Trade Policy Review, by weighting each item
by its frequency of occurrence in the target market.
The geographic distance is directly related to the transportation costs and can act
as a major barrier through its effect on the export price. The higher the geographic
distance is the higher the cost of transportation and the less attractive the market is.
In the barrier construct it will be included as the mileage between exporting and
targeted countries.
The exchange rate is the last variable in the trade barrier construct of the
compensatory model. Exchange rates are volatile and currency exchange rates
between exporting and importing countries represent a major risk element in
exporting as they can have a major impact on pricing strategies and the overall
strategy of the company in the market. As measurement for the compensatory
model it was considered the change in the official exchange rate as compared to the
previous year.

The two constructs that compensate one another will be used for market selection
differently by different companies, in concordance with the strategy they follow,
either an offensive or a defensive strategy.
The companies that will follow an offensive strategy will seek growth at the
expense of the competitors and will value opportunities more than being concerned
by risks. The companies that will follow a defensive strategy will concentrate more
on preventing competitors from grabbing their market share.
Each construct will be given a mark and for each country will be two scores, one
for the market potential and one for the trade barriers. A matrix will be formed (see
figure no. 7.4) and based on this matrix information the company will select the
countries with the high market potential and the low trade barriers for its particular
product.

Figure no. 7.4 The final matrix in the compensatory model

Export markets
High barriers Low barriers
High market potential XXXX
Products
Low market potential
External markets selection and market entry

Talking about the systematic approach for market selection we have to mention that
there are syndicated sources that evaluate country risks and offer country indices.
Such sources are BERI- Business Environmental Risk Intelligence, The Economists
(EIU), the Moody’s, Standard and Poor’s and others. Such sources evaluate the
country risk with its components: political, economic, financial. Table no. 7.5 shows
some of the types of variables that are used when calculating different country
risk indices.
When using such country indices the company has to bear in mind that many of
them are calculated in order to evaluate the financing risk 2 and not the investment
risk 3 . The type of information needed when evaluating the two types of risks is
different and most of the country risks indices calculated by different agencies
envisage the financing risk and not the business risk or the risk of investment.
One agency that also develops market indices for market selection is the
Economic Intelligence Unit (EIU). The EIU published for the last thirty-seven
years market indicators that allow managers to quickly compare country
opportunities. EIU combines statistical data by using a large number of variables in
three main indices: market size, market growth and market intensity.
The market size index measures the total potential of a market based on a number
of indicators such as population (double weighted), urban population, private
consumption expenditure, steel consumption, cement and electricity production,
ownership of telephones, cars and televisions, buses, trucks, etc.
The market growth is an indicator of the rate of increase of the market size. Is
calculated by averaging the above mentioned indicators over five years.
The market intensity is an index that measures the concentration of the purchasing
power in a country or the richness of the country. It is calculated by averaging per
capita consumption of different products (above mentioned) and the percentage of
urban population –double weighted. The average world intensity is considered to
be 1 and each country index is calculated in proportion with the world intensity.

2
The financing risk is the risk encountered when a fnancial institution lends money to a country/government.
3
The investment risk is the risk encountered when a company is willing to expand and invest in an external
market.
 International Marketing

Table no. 7.5 Variables included in different types of country indices

Indices Variables included

Standard and Poor’s Political environment (stability,
governmental alternation, system’s
flexibility, political support, the
orientation of the political parties).
Social environment (standard of living,
income distribution, labour market
conditions, the urbanization degree, the
literacy rate, the relations with the
neighbours, frontier conflicts)
Economic environment (international
investments, GNP, exports, the
economy’s structure, natural resources,
currency regime, the taxes level).
Moody’s Political extremism, legislative system,
political structure, income distribution,
ethnical and religious differences,
liquidity, the balance of payments, the
independence of the Monetary Authority,
interest rate, exchange rate, capital
international flows, dependency on
imports/exports, labour force mobility).
EIU The economic growth (GNP), inflation,
external debt, the export degree of
prelucration, unfavourable neighbourhoods,
government legitimacy, army
involvement in politics, ethnical tensions,
internal conflicts.

At the beginning of years 2000, according to EIU market indices, USA, most of
Europe and Japan were countries with large market sizes, low growth and high
intensity, while countries such as China, Indonesia and Germany had high market
growth and low market intensities.
External markets selection and market entry

When selecting market opportunities, every company has specific needs and
interests. The syndicated sources of information are not usually relevant to the
company’s product. They offer information about the general market potential, but
not about the market potential for the company’s specific product. That is why
there are firms that develop their own systems of country evaluation and selection
based on a number of variables weighted specifically for that firm according to the
importance given by management to each criterion. This is the approach that we
recommend, to develop specific market selection models that will illustrate the
market potential for the company’s specific product. Syndicated sources can be
used in the primary phases of the screening process, when evaluating the general
market potential.
The systematic approach has a normative character, as it shows what companies
have to do in order to select markets.

7.1.2 The non-systematic approach to market selection

The non-systematic approach, also called the opportunistic approach occurs when a
company enters in a foreign market as:
— a consequence of receiving orders from abroad. In this case the
selection of the foreign market is given by chance, not by an organized
selection process. There is little or no information search, as firms are
expanding internationally on an opportunistic basis.
— or when markets are selected by rules of thumb.

There were studies that showed that many, companies do not have a systematic
approach to market selection, the explanations varying from the limited capacity of
companies to collect the numerous necessary statistical data to the fact that
companies generally use a more opportunistic manner when internationalising. The
criteria used when selecting markets through the opportunistic approach are
subjective. One of these criteria is the psychic distance. Many firms expand
internationally at the very first stage based on the psychic distance. The psychic
distance refers to those factors that are preventing or disturbing the flow of
information between firms and the market and include aspects such as differences
in language, in culture, in the level of education, in political systems or the level of
industrial development. The smaller is the psychic distance the more attractive is
the market and vice-versa.
 International Marketing

This method is used by small companies at their first stages of internationalisation

when they tend to approach the neighbouring countries, rather than large
companies that usually search more thoroughly external markets before making the
entry decision. However, generally speaking firms start their internationalisation
process by entering those markets that they can understand more easily, meaning
those with a small psychic distance, leaving the more distant markets for a later
stage.
While the systematic approach has a normative nature, as it tells how to select
markets, the non-systematic approach has a descriptive nature, as it tells what
companies have done when going internationally.
Sometimes companies use a mixed approach to market selection. The mixed
approach combines the two approaches discussed previously by transforming a
non-systematic approach, an opportunistic approach into a systematic one. Once
the order comes from abroad, the company realizes that there are opportunities
abroad and starts searching for the best options.

7.1.3 The relational approach to market selection

More recently, as more importance is given to customer satisfaction and to

relationship marketing, the relationship approach to market selection started to
develop. In contrast to the other selection approaches that were focusing on selecting
countries, the relational approach focuses on the business relationship and the foreign
customer as the unit of analysis. Using this approach the company will focus on the
decision process through which it identifies and selects exchange partners. In other
words through this approach it takes place the assessment of potential international
exchange partners and the screening process involves gathering information about
each partner and filtering out the less desirable partners.
Figure no. 7. 4 presents the model for choosing an international partner through the
relational approach.
The exchange partner screening process has three stages:
1. Awareness. At this stage the company searches in order to identify a
number of feasible international partners. It uses many information
sources, including the firm’s network. It will start by looking at those
with which it has direct relations (customers, suppliers) and will
continue later with those with which it has indirect relations (customers
of customers and suppliers of suppliers). The company envisages to
identify the skills and the qualifications of potential partners.
External markets selection and market entry

Figure no. 7. 4 The choice of an international partner – the relational approach

Awareness

Exploration

Choice

Source: Figure adapted after Andersen P. and Buvik A., “ Firms’ internationalisation and alternative
approaches to the international customer/market selection”, International Business Review,
vol. 11, no. 3, 2002, p. 353.

2. Exploration. At this stage the company tries to identify which of the

potential partners are attractive. The attractiveness of one partner
depends a lot on his willingness to negotiate further. If the potential
partner perceives as beneficial a future collaboration with the company,
as the benefits of such a relationship exceed the costs of the
relationship, this is a signal of attractiveness and further
communication and bargaining is likely to occur. At this stage are
considered obligations, benefits, burdens, attitudes and standards of
conduct. There are also taking place trial purchases. The exploration
stage can be very short, when one of the partners does not find
attractive such a collaboration and prefers an alternative partner.
3. The choice of partner(s). This is the last phase when the company will
select one or more partners by choosing among the existing
alternatives. The company will use criteria such as goal compatibility
and performance to make the decision. Usually these criteria are
appreciated based on direct experience and each such screening process
brings more experiential knowledge to the company.
 International Marketing

This approach is usually used in the case of industrial markets and of institutional
markets. Also, where the uncertainty of the environment is perceived as being high,
it is more probable the use of a relational method for market selection rather than a
traditional method.

Among the market selection approaches, the systematic approach is usually used
by large MNC’s that are screening a large number of markets based on a large
number of variables. The approach is used in case of non-contractual entry modes,
such as export or investment. The relational approach is suggested in case of
organizational customers, when there are envisaged high risk countries and when
the company uses contractual entry modes such as licensing, franchising,
production management.

7.2 Market entry strategies

The company that goes international has also to decide on the market entry
strategy. The decision can take place prior to market selection and the selection
process is done starting from the chosen market entry mode, or the market entry
mode is decided according to the condition of each market.
There are a number of aspects a company has to take into consideration when
deciding on the entry mode: the internal or the firm-specific criteria and the
external or the environment specific criteria. Table no. 7.6 presents the two
categories of criteria.

External criteria
Market size and growth: large markets (current size and potential future size given
by the growth rate) justify major commitments.
Risk: the greater the risk factor, the less resources are recommended to be
committed in the country concerned.
External markets selection and market entry

Table no. 7.6 Decision criteria for mode of entry

Internal firm-specific criteria External environment specific criteria

Company objectives Market size and growth
Need for control Risk
Internal resources, assets and capabilities Government regulations
Flexibility Competitive environment
Local infrastructure
Source: Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons,
p. 246-249.

Government regulations: such as trade barriers or local content laws can constrain
the available options for the company.
Local infrastructure: the poorer the local infrastructure is, the more reluctant the
company is to commit major human and monetary resources.
The external factors determine the overall attractiveness of the country.

Internal criteria
Company objectives: companies that have limited aspirations usually chose an
entry mode that require a minimum amount of commitment (such as licensing).
Proactive companies with more ambitious objectives usually choose an entry mode
that gives them more flexibility and control.
Need for control. The level of control is directly related with the amount of
resource commitment, the smaller the commitment, the lower the control. Most
firms decide based on a trade off between the degree of control desired and the
level of resources committed.
Internal resources, assets and capabilities: the tighter the resources are, the less
commitment the company will have for foreign markets (such as exports and
licensing).
Flexibility. To cope with market environmental changes, international companies
need a minimum of flexibility. Contractual arrangements such as joint ventures and
licensing provide very little flexibility, while wholly owned subsidiaries, again
offer little flexibility when the company takes a market exit decision.

The different modes of entry can be classified according to the degree of control
the company can have over marketing activities from low control entry modes
(indirect exporting) to high control entry modes (wholly owned subsidiary).
 International Marketing

There are three major strategies the company can adopt in order to entry in a
foreign market, as presented in table no. 7.7.

Table no. 7.7 Type of market entry strategies

Type of strategy Strategies

Export entry modes Indirect exporting
Direct exporting (agent/distributor)
Direct exporting (branch/subsidiary)
Cooperative exporting (piggybacking)
Contractual entry Licensing
modes Franchising
Technical agreements
Service contracts
Management contracts
Construction/turn key contracts
Contract manufacture
Co-production agreements
Strategic alliances
Investment entry modes Sole venture/wholly owned subsidiary (new establishment)
Sole venture/wholly owned subsidiary (acquisition)
Joint venture (new establishment/acquisition)
Source: Root F.R., Foreign Market Entry Strategies, 1982, Amacom, p. 7; Kotabe M. and
Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 250-266.

We will present some of them in the coming section.

Export entry modes are used by companies that first internationalise and by
companies that are not willing to commit a lot of resources in that particular
market.
Indirect exporting takes place when the company used domestic intermediaries
(such as brokers, export agents) to go abroad. It is suitable for companies with little
or no experience abroad and it has the advantage that the company can use the
intermediary’s experience of foreign markets.
External markets selection and market entry

Direct exporting takes place when the company exports through intermediaries
located in foreign markets. This export method requires higher level of expertise
from the manufacturer than the previous one, but at the same time allows for larger
control over its distribution channel.
Cooperative exporting or piggyback exporting takes place when the company uses
the overseas distribution network of another company (domestic or foreign) to sell
goods in the foreign market.

Contractual entry modes consist of forming non-equity contractual associations

with foreign entities.
Licensing involves an agreement of a company (licensor) that grants rights under a
contract to another company (licensee) from overseas. In a licensing agreement
rights are granted over intangible property such as patents, copyrights, trademarks,
procedures in exchange of a fee or royalty. Such contracts are signed for different
periods of time. Using licensing as a market entry method, the company can gain
market presence without any equity investment. Usually companies use licensing
when they do not have the time and the knowledge to engage in international
markets. Having a foreign partner offers the advantage as no investment is
necessary and better knowledge about the foreign market is available. The
disadvantage is that the company depends on the foreign licensee to produce sales,
from which it receives a percentage. So, the company’s revenues depend on the
capacity of the licensee to produce sales.
Franchising is a form of licensing through which the franchiser makes a total
marketing program (including brand name, logo, products and methods of
operations) available to the foreign franchisee. Franchising is prevalent in
industries such as services and retail.
Contract manufacturing takes place when a company arranges its products to be
produced by an independent foreign company on a contractual basis. The
manufacturer’s responsibility is restricted only to production, then products are
given to the international company and that usually takes over the marketing
responsibilities. Contract manufacturing is usually chosen for countries with a low
volume market potential combined with high tariff protection: the local production
is advantageous to avoid high tariffs, but the foreign market does not support the
volume to justify the building of a plant.
 International Marketing

Investment entry modes involve ownership of production units or other facilities

in the overseas market.
Joint ventures (equity based) involve the creation of a new separate business entity
under the joint ownership and control of two or more partners. The major
advantage of joint ventures as compared to lesser forms of resource commitment is
the return potential. Then is a possible high commitment entry mode, where foreign
governments discourage wholly owned ventures. For most joint ventures control is
the biggest shortcoming along with the lack of trust and the raise of mutual
conflicts.
Wholly owned subsidiary consists in 100 percent owned companies. Fully
ownership strategies can take two routes: acquisitions (when an existing foreign
company is bought) or green-field (a new plant is built from scratch). The main
benefit consists of full control over all operations, as well as getting all profits. The
disadvantages are that is expensive and demanding for the company’s resources
and the company bears the whole risk in case of failure.
International marketing research

Market information is a key element in the company’s international success and

therefore marketing research is crucial if the firm wants to reduce the risks of
undertaking business in international markets. Marketing research is an important
tool for reducing the risks in the decision making.
Marketing research has been defined as “a set of techniques and principles for
systematically collecting, recording, analysing and interpreting data that can help
decision makers who are involved with marketing goods, services or ideas” 1 or as
“the systematic collection, objective search for, and analysis and interpretation of
information relevant to the identification and solution of any of the firm’s
marketing problems” 2 .
International marketing research has the same purpose as the domestic marketing
research: to provide information to the decision - makers in order to take a more
documented decision. Even though the purpose is similar, the scope of
international marketing research is broader than the one of the domestic marketing
research, for the following reasons:
1. the research takes place in a larger number of countries and each
country is unique in its own way,

1
Parasuraman A. Marketing Research, 1991, Addison-Wesley Publishing Company, p. 5.
2
Chee H. and Harris R., Op. Cit, p. 193.
 International Marketing

2. in international market research there are a higher number of variables

needed to be collected:
• there are variables that are relevant to each country, aspects that in
the domestic marketing research are constant and usually known
(laws, the political systems, the channels of distribution, culture)
but which become unknown variables that need to be researched in
other foreign country
• there are international variables that derive from the international
activity such as exchange rates, international policies, duties,
international documentation, port facilities etc.
3. the nature of decisions differ in the international marketing and
therefore specific knowledge and information are required in order to
make decisions when penetrating a new market, choosing what
country to enter, deciding how to reach the target-markets in foreign
countries,
4. the costs of doing research internationally is higher than in the
domestic market,
5. international marketing research encounteres besides the usual
difficulties (that are encountered in the domestic research), specific
difficulties at international level: the co-ordination of the research in
more countries, the availability and accuracy of secondary data, setting
the comparability of data obtained from different countries.

The international marketing research is much more complex than the domestic
marketing research and at the same time is more necessary for the company. In
international marketing intuition or decision taken when little information is
available is not enough to enable the success of the company. In 1970’s P&G
launched the diapers Pampers in Japan. Initially, sales were growing fast, but
Pampers proved to be too bulky for Japanese mothers, who change diapers twice as
frequently as Americans. Given the scarcity of space, Japanese mothers desired
thiner diapers. A Japanese competitor was able to see this and designed thinner
diapers, grabbing market share from P&G. P&G in Japan would have been able to
meet the market’s requirement if adequate marketing research would have been
undertaken 3 . This example shows that here are firms that engage in international
marketing that do not benefit of complete, detailed information about countries.
Some of these firms do not appreciate information (through company culture)
3
Kotabe M. and Helsen H., Op. Cit., p. 151.
International marketing research

and some others do not have the resources (financial, human and of time) to
undertake international research, and this is usually the case of small companies.
As a firm becomes more committed to international marketing, the cost of failure
increases and therefore more emphasis is placed on research, as marketing research
provides the necessary information to avoid costly mistakes of poor strategies or
the cost of lost opportunities. By doing research the Pepsi Cola company found out
that the Canadian market was ready for a new cola that did not contain sugar, but it
also found out that the youth market, especially males was adverse to the diet soda.
Consequently, Pepsi Cola company launched the drink Pepsi Max as a trendy,
cool, with no sugar cola. The TV advertising campaign showed Pepsi drinkers who
were “Living Life to the Max”, by performing death-defying actions 4 .

There are different types of researches that would gather different type of
information:
1. General research in international markets that gathers general
information about the country/market, information about technologies
and about the competitive environment. This information is used to
make decisions at corporate level,
2. Industry research that gathers information about specific markets such
as market potential, market share, supply and demand trends, as well
as a detailed competitors’ research (industry structure, actions of
competitors etc.),
3. Marketing research that gathers information relevant to the main
marketing activities. There are more types of marketing research:
Š consumer behaviour studies (consumers preferences and attitudes,
segmentation),
Š product studies (testing new products, measuring the consumers’
loyalty towards products, how the packaging is appreciated,
brands’ studies),
Š price studies (the analysis of knowing the price, the consumers
sensitivity to price according to the demand elasticity to price),
Š distribution studies (identify distribution channels, measuring
distribution channels length and efficacy),
Š promotion studies (searching the promotional media, measuring
the ads efficacy).

4
Jeannet J.P. and Hennessey H.D., Op. Cit, p. 220.
 International Marketing

Some companies treat the three types of research distinctly, while others would
consider them as one comprehensive research activity.

8.1 The international marketing research process

The international research process consists of a number of subsequent activities, as

also shown in figure no. 8.1:
1. Problem and research objectives definition.
2. Planning the research process.
3. Collecting the data.
4. Analysing and interpreting the data.
5. Communicating the results.

The steps of the research process at international level are similar to those of the
research process at national level, but at each stage there are specific issues that
appear at international level. The different stages will be discussed briefly, mainly
through the perspective of their peculiarities at international level.

8.1.1 Step 1: Problem and research objectives definition

The research problem definition or formulation is one of the most important steps
of the research process to be understood. When a problem or an issue appears in
the company (such as the decrease of sales), management has to make decisions
and sometimes they need more information to make these decisions, information
that can be obtained through marketing research. In order to be solved this
managerial problem or issue has to be translated into a research problem. The
questions that arise are: What we are going to study? What is that we want to find
out? In the example given above the problem of decreasing sales can be
transformed in the research problem: Why the sales have decreased? Further the
research objectives would be to identify the causes of sales decrease.
The cliché of a well defined problem being a half solved problem definitively
applies at international level, too. A very well designed research is not going to
compensate a wrongly defined problem.
Figure no. 8.1 The steps of the marketing research process

Problem Analysing
and research Planning the Collecting the Communicating
research data and interpreting
objectives the results
process the data
definition

* Problem * Sources of data * Editing * Written report

- secondary
* Objectives - primary * Codifying * Oral presentation

* Information * Research meethods * Data analysis

- observation
- interview
- survey
- experiment

* Instruments
- questionnaires
- mechanical instruments

* Sampling

* Contact methods
- mail
- phone
- personal
Source: Figure adapted after Nicolescu L., 1996, “Studiile de Marketing – Baza Proiectării Strategiei Firmei” in Strategii Manageriale de Firmă, Editura Economică, p. 214.
 International Marketing

Therefore, maximum attention has to be paid at the problem definition stage.

At international level, problems may not be the same in different countries and
cultures for the same product. There are some aspects that should be taken into
consideration when considering doing research internationally:
1) The structure of the market: the size of the market, the phase from
product life cycle in which the product is in every country, the number
of competitors. All these aspects might generate different company
problems and therefore different research needs resulting in non-
comparable data for multi country research.
2) The functional equivalence. Even if we are talking about the same
product its functionality may differ from one country to another and
this should be acknowledged when defining the research problem. For
instance:
a. The bicycle is used as a leisure product in USA, while in China
and in Holland is used as a transportation mean. Consequently, in
USA the bicycle will compete with other recreational goods (such
as skis, exercise equipment), while in China it will compete with
small cars, scooters, motorcycles 5 .
b. Hot milk base chocolate drinks are consumed differently from one
country to another. While in USA and in UK it is consumed in the
evening, before going to sleep, being seen as a relaxes, in Latin
America it is consumed in the morning, being seen as a waking up,
energizer. Functional equivalence is reached neither in the time
period nor in the purpose of use 6 .
The function served by a particular good has to be considered in the
country context and has to be defined in each country, and according to it
to search the market and decide on marketing strategies.
3) The conceptual equivalence deals with the extent to which concepts
have the same significance in different cultures.
a. The concept of women rights in a Muslim country is non-existent.
b. The concept of product quality is likely to differ for the Western
European consumer from the one of an Eastern European
consumer. This becomes obvious if we look at the quality of
services in Romania as compared to other Western European
countries.
5
Jeannet J.P. and Hennessey H.D., Op. Cit, p. 229.
6
Usunier J.C., 1996, Marketing across cultures, Prentice Hall, p.144.
International marketing research

c. The use of the word “family” has different meanings in different

countries according to the social organisation: in Romania, as in
USA and other countries the concept of family includes the parents
and the children. In Mexico and other Latin American countries,
the concept of family refers to the extended family formed of
parents, children, uncles, cousins and other relatives.

The issue of equivalences appears very frequently when researching

internationally, at every stage in the research process. Some of them will be further
discussed under the other steps of the research process. Box. no. 8.1 presents the
main types of equivalences that have to be ensured when researching
internationally.

A major difficulty in formulating research problems at international level is the

unfamiliarity with the foreign environment. The lack of familiarity with the local
environment may lead to false assumptions and wrongly defined research problems
and further on, to false conclusions about the foreign market. Many companies
conduct exploratory research at early stages of the research process in order to get
more familiar with the foreign environment and understand better consumers’
actions.
Also, in multi-country research studies, the self-reference criterion (SRC) may
hinder the problem definition, therefore a tight collaboration between headquarters
and local subsidiaries should take place at all stages of research including problem
definition.
 International Marketing

BOX NO. 8.1. Cross-culture equivalences in international marketing research

A. Construct equivalence relates to the question of whether the researcher is

studying the same phenomenon in different countries.
a. Functional equivalence: Is the function of the product the same in different
countries?
b. Conceptual equivalence: Are the concepts used to identify activities in the
different markets similar?
c. Definition equivalence: Are categories used by the researcher in different
markets equivalent from the conceptual point of view?
d. Temporal equivalence: Is the product researched at the same stage of the life
cycle in different countries?
B. Translation equivalence relates to the question of whether the researcher is
asking the same questions in different markets as a result of translations of original
research questions.
a. Lexical equivalence: is the one provided by dictionaries
b. Idiomatic equivalence: consists in ensuring the same meaning of idioms in
different languages
c. Grammatical-syntactical equivalence: refers to the order in which words are
used in different languages
d. Experiential equivalence: refers to ensuring the same meaning of words and
sentences in the daily life of consumers
C. Sample equivalence relates to whether the sample used in different countries are
equivalent and representative.
a. Sampling unit equivalence: Did we include in the sample unit of each country
the persons who really influence the aspect we are researching?
b. Frame equivalence: Does the listing frame used ensure equivalence of samples
in different countries?
c. Sample selection techniques: Do the selection technique used ensure
comparability of samples in different countries?
D. Measurement equivalence relates to the question whether the phenomenon is
measured in the same way in different countries.
a. Gradation equivalence: Are the measurement units for weight, volume
equivalent in different countries?
b. Scalar equivalence: Are the scales used in different countries equivalent?
E. Data collection equivalence relates to the similarity of the data collection
a. Respondents cooperation equivalence: Do respondents cooperate to a similar
extent in different countries
b. Context equivalence of data collection: What are the elements of context that
can influence responses in different countries?
c. Response style equivalence: Is there any pattern in the response style of
respondents from different countries that make results not equivalent?
Sources: Usunier J.C., 1996, Marketing across cultures, Prentice Hall, p. 143-159; Chee H.
and Harris R., Global Marketing Strategy, 1998, Financial Times Pitman Publishing,
p. 197-199.
International marketing research

8.1.2 Step 2: Planning the research

As it is shown in figure no. 8.1. at the research planning stage, the researcher has to
make decision over how the study is going to be conducted. In order to design the
plan of the research, he will decide over a number of few important aspects:
/ sources of data,
/ research methods,
/ research instruments,
/ sampling,
/ contact methods.
We are going to see at the level of each of the aspects what should the researcher
do at international level.

8.1.2.1 Sources of data in international research

At international level as at national level, there are two types of data that can be
collected: the secondary data and the primary data. The secondary data are those
that already exist, that have been collected with a different purpose, but can also be
used in the present research study. The primary data are the data that are collected
especially for reaching the objectives of the present study. Any research should
start with the collection of secondary data, as these already exist and are cheaper.
They are not always relevant to the problem to be solved and do not always offer
all the information needed for a more documented decision. The information still
needed, will be gathered based on primary data, for which a primary data collection
plan will be designed.
At international level there are numerous sources of secondary data that can be
used, such as government publications, trade journals, banks, advertising agencies,
international organizations, including information from internet sources. Table
no. 8.1 presents some of the main secondary data sources that can be used at
international level with their web pages addresses.
When collecting secondary data at international level, there are a number of
difficulties that can appear:
1. Availability of data. In developed countries sources of secondary data
are usually rich (USA is seen as the best equipped country with international
market data gathered by both governmental agencies and private companies). This
is not the case in less developed countries were secondary data is scarce (an
exception is India). Where data is missing, the researcher needs to infer data by
using proxy variables values from either previous periods or from complementary
or similar products, if available.
 International Marketing

Table no. 8.1 Secondary sources of data at international level

Organization Type of information Web site address

European Union server European Union www.europa.eu.int
for all institutions
CORDIS Information on EU www.cordis.lu
research programs
European Parliament European Parliament’s www.europarl.eu.int
activities
Euro The single currency www.euro.eu.int
United Nations General UN www.un.org
United Nations International Trade Centre www.intracen.org
UNCTAD/WTO
United Nations UN publications www.un.org/pubs/
Association of South General ASEAN www.asean.or.id
East Asian Nations
(ASEAN)
World Bank (WB) General WB www.worldbank.org
International Monetary General IMF www.imf.org
Fund (IMF)
Organization for General OECD www.oecd.org
Economic Cooperation
and Development
(OECD)
Transparency Corruption www.transparency.de
International
New York Times New York Times Index www.nytimes.com
Wall Street Journal Wall Street Journal Index www.wsj.com
Advertising Age General www.adage.com
Business Week General www.businessweek.com
The Economist General www.economist.com
The Economist EIU World Outlook www.eiu.com
forecasts of trend for 160
countries
USA Government Statistics www.stat-usa.gov
Political Risk Group Political Risk Yearbook www.prsgroup.com
Euromonitor European marketing data www.euromonitor.com
and statistics
Country data www.country.data.com
Esomar Statistics www.esomar.nl
International marketing research

2. Reliability of data. Even where data exist it may not be accurate and
reliable. Some official statistics may be too optimistic for reasons of national pride
or to fulfil conditions for obtaining international funding (IMF, WB) and this is
usually the case of less developed countries. Providing inaccurate data may occur
in the case of developed countries for reasons such as the tax structures: the fear of
tax collection may determine adjusted data on production statistics, in EU countries
foreign trade statistics may be blown up as there are subsidies offered for exports.
In order to try to increase the reliability of data the researcher may:
ƒ Triangulate the data: to obtain the same information from at least three
different sources and speculate on possible reasons behind the
differences. Such reasons can be the calculation of some indicators
based on value not on volume, or due to the fact that definition of
category is not the same.
ƒ Validate data: checking the consistency of one set of secondary data
with other data known as valid. In this way a correlation of variables
takes place. For instance, we can check the sales of baby product with
the number of women of childbearing age or with the birth rates.
Sometimes the accuracy of data suffers because of the black or grey market
economy. In the GDP calculations this is not included and in some countries it can
be as high as 40% - 60% of the economy. Similarly when we talk about trade
statistics, the smuggling activities are not included in the official statistics, but it
can influence the availability of a certain product on a market, when they are high.
3. Comparability. Cross-country research requires comparison of
indicators across countries. Sometimes data coming from one country may not be
comparable with data coming from other countries and cross-country comparisons
are difficult to make when:
¾ there are no universally accepted systems for reporting indicators and
sometimes data needed is aggregated into different indicators, that
have different definition from country to country.
 International Marketing

Here are few examples 7 :

Š Germany classifies TV sets purchasing as “recreational and
entertaining”, while the same expenditure is classified as “furniture,
furnishings and household equipment” in USA.
Š the youth market has been defined as 10-14 age group, 13-20, 14-18,
15-24 age, group and others in different countries. Table no. 8.2
presents the age categories in a number of countries

Table no. 8.2 Age groups classifications in different countries

Mexico Venezuela Argentina Germany Spain Italy Philippines

14-18 10-14 14-18 14-19 15-24 13-20 14-18
19-25 15-24 19-24 20-29 25-34 21-25 19-25
26-35 25-43 25-34 30-39 35-44 26-35 26-35
36-45 35-44 35-44 40-49 45-54 36-45 36-50
46+ 45+ 45-65 50+ 55-64 46-60
65+
Source: Keegan W., Op. Cit., p. 189.

Š local definitions of consumption of refreshment drinks were found to

be different in different countries as presented in table no. 8.3.

Table no. 8.3 Definitions of consumption of refreshment drinks in different

countries

Country Definition
Mexico Count of number of occasions product was consumed on day
prior to interview
Argentina Count of number of drinks consumed on day prior to interview
Germany Count of number of respondents consuming “daily or almost
daily”
Spain Count of number of drinks consumed “at least once a weak”
Italy Count of number of respondents consuming product on day
prior to interview
Philippines Count of number of glasses of product consumed on day prior
to interview
Source: Keegan W., Op. Cit., p. 190.

7
Keegan W., Op. Cit, p. 189.
International marketing research

¾ when data is calculated with different base years and result in not
comparable data.
In order to ensure comparability data has to be tested by trying to answer to the
following questions:
o Who collected the data?
o How was collected?
o For what purpose? (if it is any reason to make the data unreliable).
4. Timeliness (up-to-date) refers to the age of data. Data may be out of
date or infrequently collected and in this case is irrelevant to the current situation.
There are differences in the frequency the data is collected in different countries.
For instance, in USA a population census takes place every 10 years, while in
Bolivia every 25 years 8 . There are data more perishable in time (political opinions,
inflation, productions) and data variables, that change rather slowly (population
density, income distribution). Industrial production statistics can be one or two
years old, while statistics related to population can be two to five years old, as data
is not so perishable. In countries where inflation is high (of three or four digits),
data such as income and production or GDP should be very recent, of months or
even days old. In countries where inflation is stable (of low number of one digit)
data can be one year or more old.

8.1.2.2 Research methods

The main research methods that can be used and the international marketer has to
choose from or combine are the observation, the in-depth interviewing, the focus
groups, surveys and the experiments. Box no. 8.2. presents shortly each of them.

There are research methods that are more suitable in some countries than others, in
the sense that they are preferred or more culturally acceptable traditional and give
better results:
& in USA both quantitative data and qualitative data is collected through
surveys and focus groups,
& when using focus groups a high cultural sensitivity is required. In
Asian cultures, strangers from outside the group are excluded.

8
Jeannet J.P. and Hennessey H. D., Op. Cit. p. 233.
 International Marketing

BOX NO. 8.2. Research methods

Observation is a reviewing of relevant persons (consumers) and environments. There are

more types of observation:
— the open observation when the subjects do know that they are researched,
— the hidden observation when the subjects do not know that they are observed,
— the direct observation when the consumer behavior or the phenomena of interest is
directly searched,
— the indirect observation when the results and the consequences of the costumer
behavior are searched,
— the structured observation when the data to be collected is preset on categories of
information,
— the unstructured observation when the data to be collected is not set from the
beginning.

In-depth interviewing is a detailed personal discussion between a researcher and one

consumer.

Focus groups are discussions organized between a mediator and a group of 6-10 persons on
a given topic in order to produce a detailed insight.

Surveys are interviews (personal, mail, telephone, internet) with a large number of people in
order to find out their preferences, knowledge, satisfaction related to different products, for
which statistical generalization can be done. Surveys can be also:
Ž structured, when they use a list of preestablished questions,
Ž unstructured, when the interviewer leads the discussion with each respondent
according to his answers.

Experiments are research processes through which a cause (Ex: moving the position of the
product on the shelf) – effect (Ex: evolution of sales) relationship is tested. Through the
method one or more causal variables are changed systematically, being collected the effect
variables, while other factors that can influence the effect variables are kept under control.

As a result, getting the right group dynamics necessary to get the information is
hard to obtain.
& Japanese do not trust and are sceptical about quantitative methods, they
think that personal interviews can offer better information than data collected by
mail or telephone surveys. They also prefer observation. Nissan Company has sent
a researcher to spend time in an American family (by renting a room in their house
for six weeks) only to observe how Americans use their cars. Toyota Company
send a researcher team in California to observe how women are using cars. They
noticed that women with long nails had difficulties in opening doors and using
International marketing research

certain knobs on the board. Consequently, Toyota altered the interior and exterior
design of the cars designated to the American market. What is interesting is that the
Japanese research teams include besides the marketing people the product
engineers, so they would see the reaction of customers’ and make the required
changes to the product.
The use of one research method or another in different markets depends also on the:
& availability of qualified personnel. For the focus groups well trained
moderators are needed and this is dependent on educational services
available in the market and for interviews trained operators are necessary.
& services available in the market. In order to conduct large scale
surveys, specialized companies are needed.

8.1.2.3 Research instruments

The most frequently used research instrument (especially in surveys) is the

questionnaire. The questionnaire is a list of questions presented to respondents to
which they have to respond.
In multi-country research, the research instrument (the questionnaire) has to be
translated from one language to another. The master questionnaire (the
questionnaire conceived in the language of origin) has to be translated adequately
into other languages. When translating from one language to another lexical
equivalence, idiomatic equivalence, grammatical-syntactical equivalence and
experiential equivalence have to be insured. This means that the translation should
be grammatically correct and not only the translation of words should be done, but
also the translation of concepts. Cultural nuances should be incorporated so that the
appropriate message to be conveyed. Careless translations of questionnaires can
lead to embarrassing mistakes and good translations are hard to accomplish.
Mistakes have been made by companies, organizations and individuals throughout
time due to translation difficulties. In 1994 at the United National World
Conference on Population Development, held in Cairo, the concept of
“reproductive health” was translated in numerous ways (that would not reflect the
real meaning), due to the inexistence of the expression in many languages. In
German the translation had the meaning “health of propagation”, in Arabic the
formula “spouses takes a break from each other after childbirth”, in Russian
the expression became “the whole family goes on holiday”, Chinese translated it as
 International Marketing

“a holiday at the farm”, showing practically that the expression was not
translatable 9 .
In order to minimize translation errors, there are a number of recognized methods
that can be used.
1. Back translation is a two phases process:
Š in phase one the master questionnaire is translated from the home
language into the foreign language by a bilingual who is a native
speaking of the foreign language,
Š in phase two the translated version is translated back into the home
language by a bilingual who is a native speaker of the home
language.
2. Parallel translation involves more than two translators translating the
questionnaire independently and simultaneously. Than, results are compared and
differences discussed and the most appropriate translation chosen.
3. Committee translation takes place when a group of translators are
translating and discussing the questionnaire together.
4. Decentering takes place when successive translations and back
translations are done, each time a different version by a different translator. The
process is repeated until the original version, is translated, in a foreign language
and than translated back in the same language in the same words.

When building the questionnaire measurement equivalence has also to be ensured

and aspects such as scalar equivalence and gradation equivalence have to be
considered.
Scalar equivalence refers to the fact that scores from subjects from different
countries should have the same meaning and interpretation. But the standard format
of scales used in survey research differs across countries:
 in USA, 1 to 5 or 1 to 7 point scales are most common, while in France
a 10-20 point scale is common, when measuring attitudes preferences
for instance.
 in some countries 1 is seen as the best regardless of how the scale is
designed and in other countries 1 is seen as the worst, whatever.
The use of an uncommon scale can result in misunderstanding and frustration when
reading the questionnaire and unintentional response errors. Japanese for instance,

9
Usunier J. C., Op. Cit., p. 147.
International marketing research

had problems in understanding the agree/disagree scale, as the consensus is the rule
there, not the disagreement.

Where levels of education are low, companies can use graphics and illustrations
such as the funny face scale.
One solution is to design cultural accepted scales for each cultural context where
the questionnaire will be distributed.

8.1.2.4 Sampling

The researcher has to obtain results that represent the true market situation and he
can do this by reaching representative members of the population that is searched.
Very rarely the entire population is examined and usually a sample is selected. In
order to select a sample:
— a sampling unit has to be defined
— a sample size
— a sampling procedure has to be chosen

The sampling unit refers to the definition of the population that is going to be
researched. In cross-country researches comparable populations have to be
identified. The population to be researched can be defined either externally
(imposed criteria such as location, age, income, education based on statistical data)
or internally (by internal variables such as psychological and personality
characteristics that can be obtained from syndicated researches or company’s
databases).
There are two problems that may appear related to the sampling unit, the
population to be researched:
1. Lack of secondary data. In many countries there is a lack of detailed
socio-economic information. There are no breakdowns on age or on
type of retailers or other detailed information that can help to build a
representative sample. For instance, if we do not have the breakdown
on types of retailers we cannot build a representative sample. We do
not know if from 100 retailers 20% or more are boutiques, or 10% or
more are supermarkets.
2. The absence of a sampling frame, a listing of the target population to
be researched. This means a telephone directory for population or a
database for businesses. In developed countries such listings are very
 International Marketing

detailed, while in less developed countries, such listings may not exist
simply or may be incomplete or out of date.

The sample size, refers to the number of subjects from the total targeted population
to be researched (for instance, a 3 % sample of the total population). When the size
of the total population is not known due to the scarcity of economic/social data, the
desired sample size becomes more a guesswork.
Sample sizes may vary across cultures. Heterogeneous countries (such as India
where there are spoken 14 official languages) demand bigger sample sizes than
homogeneous cultures (such as Thailand).

The sampling procedure. Researchers prefer probabilistic sampling procedures,

when each subject has an equal chance to be selected in the sample, as this enables
them to make statistical generalisations. If due to the lack of secondary data and a
sampling framework, there is no possible to build a probabilistic sample, a
convenience sample will be used. Convenience samples will be used when data is
missing as a non-probabilistic method that does not allow statistical inferences, but
allows to interview those who are the most easily and convenient to reach. A
convenience sample should be six time larger than a probabilistic sample in order
to get results with the same reliability.
The lack of detailed data does not prevent sampling, it only makes it more difficult
and less reliable. The construction of the sample will depend heavily on experience
and judgement.
Detailed data and sampling frames are available in developed countries and less
available in less developed countries. There are also exceptions, as China has a
very good and detailed evidence of households from cities.

8.1.2.5 Contact methods

The contact method should be taken into consideration when the sampling takes
place. The main contact methods that can be used are: personal, by telephone, by
mail and via internet (in some countries).
The choice of the contact method to be used in a country is influenced by cultural
norms and infrastructure.
International marketing research

ª cultural norms often rule out certain data collection methods. Here we
have some examples:
Š in some Muslim countries (Saudi Arabia) telephone interviewing
during daytime is not accepted as housewives do not respond
to calls from strangers. They are also not allowed to remain alone
with a stranger (the personal interview is also excluded).
Š Germans tend to show greater resistance to telephone interviewing
than other Europeans.
ª infrastructure can also influence the data collection method that can be
used. The use of mail services requires both literacy and reliable postal
service. Some countries have inadequate infrastructure and this makes
some contact methods to be unattractive:
Š in Brazil and Nicaragua and some other Latin American countries a
large proportion of the mail faces huge delays or never gets
delivered,
Š in Jordan and also in some Asian countries houses are not
numbered and streets are not identified, so it is difficult to mail
to them,
Š in some Latin American countries the letter is paid at destination,
so it is difficult to send them something that they possibly do not
want and ask them to pay for it,
Š the coverage with telephone in households varies widely between
countries from the upper end: USA 93%, Sweden 90%, 80% in UK
to the lower end 7% in China, 1% in the rural India. Other countries
are situated in-between: 10% in Sri Lanka, 33% in Portugal 10 ,
Š the state of roads and the state of regular public transportation in
some countries of Africa is so poor that personal contact with
certain subjects may be difficult.
The market researchers must often improvise and choose the second best
alternative as a research method in order to accommodate both cultural and
infrastructure local conditions.

10
Pop N.Al and Dumitru I., 2001, Marketing Internaţional, Editura Uranus, p. 148; Kotabe M. and Helsen K, Op.
Cit., p. 164.
 International Marketing

8.1.3 Step 3: Collecting the data

It is important to check the quality of data collection process in order to ensure data
quality. Also in multi-country research the data collection equivalence has to be
ensured. There are a number of biases that can be encountered at the data collection
stage:
− the non-response bias is the most severe problem that may be
encountered and is due to reluctance to talk to strangers and fears about
confidentiality:
Š In Eastern Europe it was noticed a high level of reluctance to
answer to interviews.
Š In China, surveys that were sanctioned by local authorities obtained
higher response rates.
Š USA respondents were more inclined to answer personal questions
than the UK respondents.
− the courtesy bias refers to the respondents in some cultures who give
researchers answers they feel are desired by the interviewers, they try
to be polite to the researcher they try to give answers they think will
please the interviewer, they do not tell what they really think. And this
does not help the research. This is most commonly met in Asia and
Middle East. In the Japanese culture every person has the obligation to
ensure that the other person is not offended and this might induce the
courtesy bias.
− the social desirability bias refers to the situation in which respondents
attempt to give answers that they believe reflect a particular social
status or educational level. This type of bias was noticed among well-
educated respondents or upper level social classes, across countries.
For instance, for questions such as What types of newspapers and
magazines do you read? and How often do you go to opera? they
would answer what they think a person in their position will do, not
what they really do.
International marketing research

− the topic bias refers to the social sensitivity of particular topics in

different countries:
Š in India the discussion about sex tends to be taboo and in Thailand
signs of affections between people of the opposite sex are not
allowed in public. In Asian countries respondents are more
reluctant to discuss topics related to sex.
Š women’s role in society in Middle East countries is a sensitive
topic.
Š discussions about taxes in European Union represent again a
sensitive topic.
− the researcher bias relates mainly to the self-reference criterion when
the researcher is involved in interviewing. It is recommended that a
local agency to be hired to collect the data.

8.1.4 Step 4: Analysing and interpreting data

The researcher must have a high degree of cultural understanding of the market
where the research is conducted. In order to be able to analyse and interpret the
data, he should know:
€ the social customs,
€ the semantics,
€ the current people’s attitudes,
€ the business customs.
Therefore, it is absolutely necessary for the researcher to have a feeling of the
target country either by conducting the research or at least being involved in the
research process in the respective country.

8.1.5 Step 5: Communicating the results

The research report is the culmination of the research process and the focus of the
presentation is communication. The report has to be complete in the sense that it
contains all the information required as formulated in the research objective and it
 International Marketing

also must be concise. When reporting back to headquarters, cross-cultural

communication takes place and the results of the research have to be translated in a
language that is comprehendible for managers at headquarters. Specific to
international research reports is to identify data sources (to ensure the accuracy
and reliability of information) and to identify interviewed officials (banks,
governments), but not the consumers, with names and positions.
The managerial team will be the one that will use the results of the research and
will make the decision based on the analysis presented.

8.2 Other international marketing research issues

8.2.1 Qualitative and quantitative research

Usually Western companies’ studies include both qualitative and quantitative

research when more detailed information is needed the study starts through
collecting qualitative information (detailed information about one’s thoughts and
feelings of consumers for instance) through focus groups (most commonly) or
observation. Than the information obtained through qualitative research is
validated through a quantitative survey, whose results are generalized.
Starting with qualitative research is even more necessary in an international context
as we already discussed the number of unknown variables (such as habits,
behaviour, attitudes influenced by culture) is much higher than in the domestic
environment.
Procter and Gamble was selling the Ariel detergent to the 5% of the Egyptian
market that had automatic washing machines. The company wanted to extend in
the market and therefore organized a “Habits and Practices” study through home
visits and discussion groups (qualitative research) through which they wanted to
find out the likes, dislikes and habits of Egyptians house-wives. Among 95% of
homes that washed in a non-automatic washing machine or by hand the washing
process consisted of soaking, boiling, bleaching and washing each load several
times. Several products were used in the process. This process showed that there is
potential in the market for a high performing detergent that would accomplish
everything. After the basic product concept was conceived (one product instead of
several to do the laundry) the company organized again a focus group to assess
reaction for different brand names and later on for refining advertising and
International marketing research

promotion wording. The results of the qualitative research were validated through a
survey (quantitative research) 11 .
8.2.2 Multi-country studies

When conducting multicultural research, the comparability and equivalence of

results must be ensured. Even through different research methods have different
reliabilities sometimes in order to ensure comparability of results, different
research methods have to be applied in different countries.
For example, a study conducted in USA and Japan, was done by means of mail
survey in USA and by means of personal contact through contact people already
known by the managers (in Japan business people do not usually answer to mailed
questionnaires).

8.2.3 Marketing information systems (MIS)

Many companies need information and data that goes beyond specific international
marketing research projects. Most of the time, daily decision are made and there is
no time or money for special research. An information system already in place is
needed to provide managers and other decision makers with the basic information
for most of the ongoing decisions.
For the global company the design of a MIS at international level is a necessity in
order to be able to make comparisons between countries and in order to understand
customers from different cultures and cultivate a relationship with these customers
that will constitute a competitive advantage in the future.
The function of the MIS is to systematically provide information resources to the
company to evaluate the markets it wishes to enter. As the basis for competitive
advantage shifted from having a good product to cultivating good relationships
with customers, markets and suppliers, the existence of market intelligence has a
key role in these relationships and represent an asset for the company.
To be useful such a MIS needs to have a number of attributes 12 :
ˆ to be relevant, so that the data gathered to have a meaning for the
decision maker,

11
Cateora Ph. and Graham J., 1999, Op. Cit, pp. 201-202.
12
Czinkota M.R. and Ronkainen I.A., Op. Cit., p. 250.
 International Marketing

ˆ to be timely, so that the necessary information to be available when

needed, not later,

ˆ to be flexible, so that to be in the form needed by the management,

ˆ to be accurate, especially information coming from the international
environment, as very quickly this can becomes outdated due to major
changes,
ˆ to be exhaustive and to be based on a broad variety of factors, as there
are numerous interrelationships between variables,
ˆ to be convenient to be used and to be accessed.
The use of internet in research is a new opportunity not only for offering secondary
data through data bases but by offering the possibility to conduct primary data
collection through:
ƒ on-line surveys,
ƒ on-line focus groups,
ƒ e-mail marketing list.
International product policy

When going internationally product decisions are critical for the firm’s marketing
activity, as they define its business, customers, competitors, as well as the other
marketing policies, such as pricing, distribution and promotion.
Improper product policy decisions are very easily made with negative
consequences for the company as the following examples illustrate 1 :
• Ikea, the Swedish furniture chain insists that all its stores carry the
basic product line with little or no adaptation to local tastes. When it
entered the USA market with the basic product line they did not
understand the reluctance of the USA customers to buy beds.
Eventually the firm discovered that the Ikea beds were a different size
than the USA beds and the bed linen the consumer had did not fit to
the bed. They would have had to specially buy bed linen from Ikea to
fit to the bed. Ikea remedied the situation by ordering larger beds and
bed linen from its suppliers.
• When Ford introduced the Pinto model in Brasil was unaware of the
fact that pinto in the Brazilian slang meant small male genitals. Not
surprisingly sales were small. When the company found out why the
sales for the Pinto model were so small it changed its name to Corcel
(that means horse).

1
Kotabe M. and Helsen K., Op. Cit, pp. 301-302.
 International Marketing

These examples show how easily companies, even the experienced ones commit
international „blunders”, and emphasize once again the importance of the product
policy at international level. The main product policy decisions that a company
faces when going abroad comprises aspects such as:
1) What is the degree of adaptation /standardization of the company
products on each foreign market?
2) What are the products that the company is going to sell abroad
(product portofolio decisions)?
3) What products have to be developed for what markets?
4) What is the branding strategy abroad?
We will start our discussion about product policy by first looking to what a product
is and how it can be defined.

9.1 Product concepts

Most of the product concepts learned in basic marketing are applicable in

international marketing, too. Therefore, we can define the product as a bundle of
attributes both tangible (physical attributes) and intangible (emotional attributes)
that offer satisfaction to the consumer.
However, the product can be seen at different levels according to the degree of
inclusion of different physical or non-physical benefits. Figure no. 9.1 presents the
levels of the product and the type of benefits offered at each level.

Cateora and Graham see a product concept, whatever the product is, as being
formed of three components: a) the core component: including the main functional
features of the product that fulfils a basic need and offers a core benefit, such as
design features and technical features, b) the packaging component that includes
other elements such as styling, quality, packaging, brand name and c) the support
services component that refers to the services associated to the product:
installation, instruction of use, repair and maintenance, warranties, spare
parts a.s.o.

Kotler sees the product concept at three levels (that are assimilated with the
components from Cateora’s model): core product, actual product and augmented
product.
The core product fulfils a basic need and offers core benefits, the benefits that
consumers attain when purchasing the good or the service. It includes aspects such
International product policy

as the product platform and the basic functional and design features of the product,
as well as corresponding legal requirements.
The actual product offers usually physical benefits and consists of styling,
packaging, trademark, brand, quality and corresponding legal requirements.

Figure no. 9.1 Levels of product and associated benefits

Augmented product

Actual product
Physical
benefits

Core product

Core
Services
benefits
benefits

The augmented product usually offers benefits through services and includes
aspects such as installation, instruction, delivery, warranty, after-sale services,
credit facilities, repair and maintenance, spare parts availability and other related
services.

Either if it deals with the domestic market or with foreign markets, the company
should be aware that the consumer looks for benefits at all three levels or in all
three components of the product.
In international marketing, the company should identify the changes needed at each
level in order to fit the market. The consumer when it acquires a product, sees it as
a whole package including aspects of all three levels and therefore, producers
should also decide what they are going to offer to consumers at each level.
 International Marketing

At international level requirements at each level can be different as we will see in

the following section.

9.2 The degree of adaptation/standardization

One of the main decisions in international marketing is whether to adapt or

standardize the product for different markets. Standardization means offering the
same product in all markets, while adaptation refers to complying to local tastes
and requirements and make changes to the product to satisfy local needs by
offering different products in different markets.
Complete standardization is only an utopia, as even the most standardized
products, (such as McDonald’s, Coca-Cola) known as global products did suffer
adaptation in foreign markets. The issue is not if it is necessary or not to adapt,
because there is always the case, but what is going to be the degree of adaptation
required.

In order to decide over the degree of standardization/adaptation the company

should start by looking at the factors that possibly favour standardization and those
that possible favour adaptation and identify their presence in each company/market
relationship. Table no. 9.1 presents the main factors influencing both
standardization/adaptation.

Table no.9.1 Standardization or adaptation?

Factors in favour of standardization Factors in favour of adaptation

1. Common consumer tastes 1. Different consumer tastes
2. Production and research and 2. Different levels of economic
development economies of scale development
3. Marketing economies of scale 3. Government influence and legal
4. Centralized management requirements
5. Strong positive country of origin 4. Different use conditions
effect 5. Local competition
6. Global competition

Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College
Publishers, p. 306.
International product policy

If we take into consideration the factors that favour standardization we can see
their influence:

Common customer tastes refer to the market homogeneity, as there are products
for which there is a world market, there is a homogenous market world-wide and
they do not need modifications. These are the products for which there is a global
market segment. The youth market, for instance, is a relatively homogenous market
world-wide for products such as jeans, pop music, fast food, rich people.
In relationship to common consumer tastes is the convergence of tastes, as another
phenomenon that is taking place in recent years. Due to the fact that people travel
more, communication means are more developed-cable TV, internet-, and people
started to have similar tastes and wishes across the globe.

Economies of scale in production and research. A standard product brings

economies of scale in production, due to mass production, it also brings economies
of scale in researching as the process takes place in a centralized way and is
focusing on creating new global products (innovations) instead of researching in
order to adapt produces to local tastes. Economies are also realised because of
sourcing, as many global companies are using global sourcing for supplying their
different production and selling utilities in the world. In most cases economies of
scale are the key driver behind standardization, most companies standardize their
products in order to be more cost effective through economies of scale.

Marketing economies of scale. Standardized products facilitate standardized

promotion resulting in savings on advertising. For instance, Colgate Palmolive
used only two TV ads in order to promote its anti-tartar toothpaste in 47 countries,
resulting in large economies on advertising.

Centralized management refers to the fact that it is much easier to administer and
manage one standard product in many markets than many products in many
markets.

The factors that discourage product standardization and encourage adaptation are
discussed here:
 International Marketing

Different consumer tastes. Consumer tastes and preferences are highly specific
and often vary between countries for many products. Levitt (1983) argued that
lower prices, better quality reliability and heavy promotion will make consumers
world-wide to compromise on local preferences and to choose the global product.
This is not always the case. Research conducted in European countries showed that
in spite of European integration, customer preferences for washing machines vary
across countries with respect to dimensions: British, French and Italians preferred
narrow washing machines, while Germans and Swedes preferred wider washing
machines 2 .

Different levels of economic development are reflected in differences in the

standards of living that further encourage product modification. Markets where
there is a low per capita income have a lower purchasing power, that in many cases
requires the simplification of products to make them affordable. Such countries
usually have lower levels of users’ skills, that also require customisation of the
product in order to make it either easier to use or with less maintenance required.

Local competition usually calls for adaptation, as in very competitive markets

customisation may be necessary to gain competitive advantage against other
companies.

Governmental and legal requirements are the main factors requiring adaptation at
international level. Governmental requirements often materialise in protectionist
measures. For instance, high tariffs may determine the company to buy
components and produce locally, without standardization. Or the “local content”
rule may determine companies to buy or manufacture locally, modifying in this
way the product.
Legal requirements can also determine changes of the product. For instance,
perfumes sold in the Middle East cannot contain alcohol in their composition due
to religion mores play the role of law. In UK and Holland margarine has to be
improved with vitamins by law, while in Italy, extra vitamins in margarine are
forbidden. This definitively requires adaptation to local legal conditions in order to
be able to sell on those markets.

2
Chee H. And Harriss R., Op. Cit., p. 380.
International product policy

Use conditions. Even if a product is used in the same way, has similar functions in
different countries, the conditions in which it is used may differ substantially. Such
differences may determine the product modification in order to cope with the
specific use conditions and at the same time to be able to fulfil the same functions.
For instance, Avon produces a moist lipstick for hot and dry climates in order to
avoid melting of the solid ones.

The issue is what should be the degree of globalisation, what elements of the
product policy should be adapted to local conditions and which ones can remain
unchanged? The company should always balance between standardization and
adaptation according to local conditions.
When a company wants to decide whether or not to standardize or adapt or the
degree of standardization, it should look at three main elements that combine the
factors of influencing the adaptation/standardization relationship with the
company’s activity. The three elements are market environment, product
characteristics and company considerations, as presented in table no. 9.2.

Table no. 9.2 Elements to consider for standardization/adaptation

Company’s
Market environment Product’s characteristics
considerations

Government influence Product attributes Objectives

Legal requirements Services associated to Profitability
Non – tariff barriers the product Cost/benefits analysis
Geography and climate Brand Organizational capacity
Level of economic Country of origin effect
development Packaging
Supporting infrastructure
Buying and consuming
models
Cultural interpretation of
symbols
Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College
Publishers, p. 309.
 International Marketing

The first thing to be studied is the market environment from each country through
all its components the economic, the cultural, the political and the legal
environment and to decide what are the elements from the country environment
that may require or impose adaptation. Secondly, the company should look at the
product’s characteristics and identify what are the characteristics of a product that
should be modified in order to fit the environment. The third aspect a company
should take into consideration when deciding whether or not to standardize or the
degree of standardization is the company’s situation and the compatibility of this
aspect with the previous two. Even if the company finds what are the elements of
the environment that require some adaptation, even if it decides what are the
characteristics of the product that should be adapted or standardized, the company
should still look at the compatibility with other elements: Do these changes fit into
the company’s objective? Is it profitable to make the changes for that particular
market? Is the market large enough to bring me a profit, given the costs of
adaptation? Does the company have the organizational capacity (number of
employees, qualified employees, distribution systems) to adapt or to standardize?

Some of the elements of the market environment a company should look at when
considering the degree of standardization have been discussed under the
influencing factors. Some other we will shortly discuss here.

Non-tariff barriers are a specific type of protectionist measure that can influence
to a large extent the degree of standardization of a company’s products in a foreign
market. One of the main types of non tariff barriers are the different standards.
There are more type of standards that can differ from one country to another and
require adaptation: hygienic standards (for food, chemical products, pharmaceutical
products), safety standards (in the auto industry: brakes, lights, airbags, seat belts),
technical standards (the voltage – 220V in Europe and 110V in North America, the
different shapes of plugs).
Besides the standards, but also part of the non-tariff barriers are procedures such as
approvals or tests of the products, that ultimately may require adaptation, after long
delays. For instance, in Japan the imported pharmaceutical products have to be
tested in Japanese laboratories before getting access to the market. This is justified
by the argument that Japanese are physiologically different from other peoples.
International product policy

The climate and the geography as part of the environment, can influence the
characteristics of the product or the packaging. Cars have all air conditioning for
hot climates and better heating systems and radiators for cold whether. Nestle
introduced a new ingredient that has a low content of fat, in the chocolate it sells in
hot climates, in order to increase its melting point.

Supporting infrastructure refers to the availability, structure and type of activity of

institutions of distribution en-gross and en-detail, logistical infrastructure (such as
warehousing and transportation), media infrastructure (such as advertising agencies
and national televisions), financial institutions (such as banks and insurance
companies). Distribution and logistical infrastructure may influence the packaging
of the products: when the product changes many hands until it gets to the
consumer, it needs more resistant packaging.

Buying and consuming models. Buying models refer to: frequency of buying
(daily, weekly, at fortnight, monthly) and the quantity of buying (small quantities,
large quantities). This will influence the size of packaging: in developed countries
consumer usually buy in large quantities and less frequent and therefore products
have to be packed in large number or large quantities. In developing countries,
people buy in small quantities but more frequent, so packaging will be in small
numbers or small quantities.
Consuming models of the same product can differ from one country to another and
consequently to require adaptation of its characteristics. The product might have a
variety of utilizations. The Knorr soups are used in Western Europe to make soups,
while in Latin America, as well as in Romania are used to improve the soups,
therefore the product’s characteristics have been modified accordingly.
The degree of literacy of consumers can influence labelling and the formulation of
use instructions: in some Arab countries where the level of literacy is low, use
instructions are done through drawings. The level of users’ skills that is also related
to the degree of literacy, can induce product adaptations: where the level of users’
skills is low, the product will be simplified.

Cultural interpretation of symbols, as part of the cultural environment can play a

part in adapting products. Things, activities, symbols may have different
interpretations in different countries. The marketer should know if the symbol he
wants to use on the package will have the same meaning, interpretation as in the
home market, or as intended. A French company exported to Germany cheese that
 International Marketing

it was produced in the Pirinei Mountains. In order to transmit the idea of a natural
product, a home-made product they had on the packaging the image of a shepard
between his sheep. After an initial failure, they researched the market and found
out that for the Germans the image of the shepard was associated with the dirtiness
in which a shepard lives. The company changed the image of the shepard with a
mountain landscape and were successful in the German market.

When the company look at the product characteristics in order to decide if either
to adapt or standardize it can use the three levels of the product and the three
components of a product, as an analysis framework: the core component, the
packaging component and the service component.

The core component (the physical product with its functional features) may require
both discretionary or mandatory adaptation as alterations in design, functional
features, flavours, dimensions or colour might be required.
A company might have to change the dimension of the product according to the
consumers dimension or the dimension of the environment the product is used in,
as the following examples illustrate:
• clothes, footwear, watches sold by Westerns to Asian people have to be
adapted to their small dimensions and those sold by Asians to Westerns
have to be adapted to their larger dimensions.
• warehouse and decorations for Japan have to be smaller as there, the
space in which people live is much smaller than in Europe or America.
• in Spain, Coca-Cola failed with the 2l bottle to find out that the bottle it
did not fit into the Spanish fridges. They introduced the smaller
1.5l bottle.
The colour might be changed according to the association given to a certain colour
in different countries. For instance, white symbols purity in Western countries and
mourning and death in some Asian countries. Green means hope in Western
countries and illness in Malaysia and other Asian countries where green is
associated with the jungle. P&G sold pink diapers in China and failed because pink
is associated with girls. In the one-child policy China where boys are wanted,
people did not want other people to think that they have a girl even when they had,
so they would not buy pink Pampers 3 .

3
Cateora Ph. and Graham J., 1999, Op.Cit, p. 371.
International product policy

The smell may also need adaptation. In 1980’s a British company sold in Japan a
product for furniture polishing that proved to be unsuccessful for the older
generation. When they researched to find out the causes they learned that the smell
was similar to a disinfectant used to wash the toilets in 1950’s. Sales increased
after they changed the smell. Also Japanese prefer for the floor washing lemon
smell, as opposed to pine tree smell, as they sleep very close to the floor and the
lemon smell is more pleasant to them.

The packaging component includes aspects such as style features, packaging,

labelling, trademarks, brand name, quality and may require both discretionary and
mandatory changes.
Labelling may need adaptation and in many instances is mandatory adaptation, as
the following examples illustrate 4 :
− in Venezuela prices have to be written on the label, while in Chile is
illegal to put the price on the label. This imposes a mandatory
adaptation for the Latin America continent,
− in China no “temporary labels” are accepted any longer. Information
should be written in Chinese on the original package,
− labels may be required to be written in more languages in multilingual
countries, such as Canada, for instance.
Quality may be seen from two perspectives, as performance quality (the
perspective of the firm that is to fulfil the function for which it is produced) and as
market perceived quality (the perspective of the consumer: what sees a consumer
as being quality and this is usually more than the performance quality). Marketers
should find out what would be perceived as quality in each country/market and to
comply.
Packaging has in both domestic and foreign environments the same two functions,
the protective function and the promotional function. The protective function aims
to protect the product on its way from the producer to the consumer. At
international level, when designing the packaging, the company has to take into
consideration the climate of different countries and to adapt the package to it,
against humidity, hot weather or cold weather. Also, the package should be adapted
to the way the product is going to be handled in each country. In Japan strong
packages are required, as there are a large number of intermediaries involved in the
distribution of products.

4
Ibidem, p. 372
 International Marketing

The promotional function aims to attract the customer and make a positive
impression. What is attractive in one country may not be in another. The symbolic
interpretation is different and should be known. Few examples are presented 5 :
• in Mexico yellow flowers used as a trade mark where rejected because
it symbolizes death and disrespect,
• in some Asian countries the red circle trademark of one company was
rejected as was associated with the Japanese flag and had a negative
connotation due to the Asian history.

The support services component includes services such as repair and maintenance,
instructions, installation, warranties, deliveries, availability of spare parts, etc. The
level of required associated services dependy on the behavioural patterns, literacy
and educational levels in different countries.
The support services component is very important for industrial goods and for
durable consumer goods. The offering of services depends on distributors to a large
extent and a weak and inadequate distribution system may make it difficult for the
company to offer such services and to standardize services across countries.

The country of origin effect (COE) is one of the main factors that can affect the
product policy internationally. The COE is defined by Cateora and Graham as any
influence that the country of manufacture has on consumer’s positive or negative
perception of the product. There are two main types of COE that are met at
international level and should be taken into consideration: the country stereotypes
and the country/ product stereotypes.

Country stereotypes refers to the image that consumers in one country have about
the product according to the country from which the product originates. Consumers
have cultural stereotypes about countries that will influence their product
assessment. A country image stereotype can either help or hurt a company’s
product. The company has to identify to what degree does the COE hurt or help the
product’s evaluation.
Japanese products are perceived in the West as reliable and technically advanced.
Japan is perceived as offering technically advanced and reliable products (positive
influence for such products) but with no style and emotions (“short of soul” was
mentioned in a study made in Europe about Japanese products). This is a negative

5
Ibid., p. 370
International product policy

influence for products that would need style, design, emotions, products such as
clothes or cosmetics. Kao and Shiseido, the two Japanese cosmetics companies that
are very successful in Asian countries, had difficulties in Europe and
North America because there is a poor image about Japanese cosmetics in these
regions. We can see that there are attributes on which a country is perceived
positively (high-tech in Japan) and other attributes on which a country is perceived
poorly (style, design in Japan).

Generally speaking products from developed countries are affected by a positive

COE, while products from developing countries are affected by a negative COE. It
was also noticed that in general, consumers prefer domestic products over imports
(mainly in Western countries), but this is not a rule. In some Central and Eastern
European countries (Russia, Romania) there is a COE against products made
locally, especially technical products. However, there is a positive COE for local
food and some clothes.
The place of manufacture has a higher influence in many cases than the location of
the headquarters. An Italian silk scarf made in China, looses from its perceived
quality product attributes due to a negative COE of Chinese products.
COE affects especially people who are more conservative, and less educated.
Consumer expertise also makes a difference, as when few things are known about
the product, the COE is higher, while when more information is known about the
product and about the brand, the COE is smaller.
COEs are not stable, they change over time, as consumers become more familiar
with a country and products supplied by it.

Country/product stereotypes refer to the fact that there are products that are
associated with certain countries. For instance, perfume with France, silk with
China, fast food with USA, electronics with Japan, tea with Britain, industrial
equipment with Germany, pizza with Italy a.s.o. Such stereotypes are product
specific they have a positive influence over products of that category, but they do
not extend to other categories of products from those countries.

As we have seen, products may pursue two types of adaptation, the mandatory
adaptation and the discretionary adaptation. When the company is obliged to adapt
if it wants to enter the market, we deal with mandatory adaptation. The
mandatory/obligatory adaptation is imposed by legal requirements (safety
 International Marketing

and hygienic standards), by existent technical standards and also by geographical

climate.
Discretionary/voluntary adaptation is up to the company, it is at the company’s
discretion and depends on tastes, preferences, buying and consumption patterns, in
one word by cultural factors. A recent study showed that the most frequent reasons
for adaptation mentioned by international companies, were the mandatory reasons.

Companies can pursue different degrees of adaptation/standardization that gives an

indication over the marketing strategy of the company. If the company has 0-3
adaptations to its product, there is a relative standardization and on ethnocentric
approach. If the company does 4-8 adaptations to its product, there is substantial
adaptation and an geocentric approach. If the company has 9 or more adaptations to
its product, there is total adaptation and a polycentric approach.

9.3 Product portofolio

and product line management

In every country in which a company operates, it has to set what is its product mix,
what are the products that the company is going to sell in that market, the products
considered to be suitable for that market as well as profitable. The product mix
refers to all the items a firm offers in a country. Usually companies manage their
products by grouping them in product lines. A product line is a group of products
that are closely related in one or another direction: they function similarly or they
are sold to the same customer group or they are marketed through the same type of
outlet etc.
For instance, Procter&Gamble has a product mix formed of four product lines,
namely detergents, toilet soaps, shampoos and household cleaners. Each product
line has its depth according to the number of products contained. The detergent
product line comprises products such as Tide, Ariel, Daz and others, the toilet soap
product line comprises Camay, Oil of Ulay and Zest, the shampoo product line
comprises Head & Shoulders and Vidal Sasson and the household cleaners product
line comprises different flash liquids, flash cream, flash spray products.
Usually companies sell abroad a smaller number of product lines and of items than
in the home market.
International product policy

In international markets, companies have to set their product portofolios by making

the following decisions:
ƒ What products to maintain?
ƒ What new products to add to the existing product lines?
ƒ Which of the existing products to drop from the existing product lines?
These product line decisions are influenced by the firm’s international strategy. If
the company’s strategy is to expand, new products will be added. If the general
company’s strategy is to restrain its international operations, products will be
dropped. A company’s foreign product line should not be too narrow, otherwise the
few products have to bear a high, disproportionate cost of the entry due to high
marketing and management costs.

A company will maintain in its product portofolio all the products that are
profitable and contribute to a positive image of the company in that respective
market.

A company has also to search its product portofolio and to drop the products that
are not profitable. But the company should be aware that dropping a line in one
market could result in increased overheads in other national markets for global
products.

When a firm adds new products to its lines in the international context, it needs to
consider the overall profits, the global profits that can be obtained rather than those
obtainable in a particular national market.

A company can use a few strategies when adding new products in a foreign market:
1. Sell the same product as in the home market, strategy also known as the
domestic market extension or the ethnocentric strategy. Usually is the case when
the company thinks its home product is the best and tries to sell it elsewhere.
2. Adapt existing products to each local market, also known as the multi-
domestic or the polycentric strategy. The company thinks that adaptation to local
conditions is the key for success.
3. Develop a new standardized product for all markets, also known as the
global or the geocentric strategy. The company thinks that success may be obtained
by standardization that offers the advantage of economies of scale. In this case the
company will focus on the commonalities and similarities between countries,
 International Marketing

trying to serve the common needs through a unique standard product designed from
the very beginning for the global market.
4. Acquire local brands and reintroduce. The company may acquire local
production facilities, local companies that will have their own local brands. These
local brands are known and have a high degree of awareness and in many cases
positive image on the market, of which international companies can benefit.
Therefore, the international company can keep the local brands and reintroduce
them by modifying and improving the product, by changing the package and by
repositioning the product. Unilever used this strategy extensively in Eastern Europe
by acquiring local companies and keeping local brands along its global brand. The
company sells the global brand Omo as well as local brands that have been
reintroduced (in Romania Dero, in Hungary Biopan and in Poland Pollena 2000).

9.4 New product development

When developing a new standardized product for all markets, the company goes
through the process of new product development. The process of new product
development is similar for all firms, whether they operate in the domestic market or
overseas, in the sense that they do follow the same steps as presented in figure no. 9.2.

Idea generation. New product development begins with ideas that emanate from
many sources: employees, customers, competitive products, retailers, inventors
from outside the company. The more ideas are initially considered the higher the
chances to improve the process. International companies often capitalize on their
global know-how by transferring new product ideas that are successful in one
country to another country or market. For instance, the Dockers line of casual jeans
was introduced in Japan in 1985, by the Levi Strauss Company. As the line became
very successful in Japan, the company decided to launch the product in USA and
Europe as well 6 .

Screening. In the screening phase ideas with potential are separated from those that
do not meet company objectives. All ideas that are interesting and also compatible
with the companies’ objectives are retained for further consideration.

6
Kotabe M. and Helsen K. , Op. Cit. p. 316.
International product policy

Product concept testing is the stage at which the product concept, namely the idea
on which it was based the development of a new product, is tested. The product
concept is a detailed description verbally and visually sometimes of the new
product/service. The concept testing can play a major role in the whole process as
ideas that do not attract consumers can be eliminated. Through concept testing, the
new product concept is tested on the market: a marketing research project is done
in order to measure consumer attitudes and perceptions towards the new product
idea. A series of focus groups with the consumers are usually used to conduct
concept testing.

Business evaluation or the business concept testing is the following phase. Product
ideas that enter this stage undergo a thorough business analysis: market potential is
evaluated, the prospective growth rate, the competitive environment, as well as the
company resources necessary to transform idea into product and to launch the
product in the market.

Figure no. 9.2 The process of new product development

New ideas generation

Ideas screening

Testing the product concept

Testing the business

Testing the prototype

Market test

International launching

Prototype development is the next phase in which the ideas with profit potential are
converted into a physical product.
 International Marketing

Market testing is the phase in which the prototyped products are tested in the real
world. Market testing or test marketing is a field experiment through which the
new product is marketed in a certain area (a city, a few cities or even a country)
considered to be representative for the total market. A complete marketing
campaign comes together with the launch of the new product. A test market can be
considered a rehearsal before the product launch, as the goal of the market test is to
project market share and sales volume. In international marketing a whole country
may be used for market test, country called “the lead country” and according to the
product performance in that country, it will be launched in other countries as well.
For instance, Pepsi used Canada as a test market for its product Pepsi Max and
rolled it out globally afterwards, Unilever used Thailand as a test market for its
shampoo Organics, Kentucky Fried Chicken (KFC) used Singapore as a test market
for the breakfast menu 7 .
Test markets also have shortcomings, they are time-consuming, are expensive and
the major inconvenient is the fact that they might alert competitors. Many MNC’s
often prefer to skip the test market stage and to go directly to full-scale production
and commercialisation.
An alternative to real life test markets are the laboratory test markets. These may
be organized in a simulated store setting in which consumers are exposed to many
products, among which the new product. They are given an amount of money and
asked to buy a product. Some buy the new product and those who do not, are given
a free sample of the new product. All are asked to give feedback after they
consume the product. The advantage of the laboratory tests markets is that it keeps
it safer from competition, but they have the disadvantage that are not so accurate as
the real life test markets.

The launching on the market stage is the one in which products are commercialised
through full scale marketing. An important issue in international marketing is the
timing of entry of the new product. There are two possibilities when the company
wishes to enter more country markets, as presented in figure no. 9.3:
1. the waterfall model or the sequential model, in which products are
launched in one market and afterwards in more markets one after the
other. It is usually used when the product is customized to local
markets and this takes time.

7
Ibidem, p. 324.
International product policy

2. the sprinkler model or the parallel model, when the new product is
launched almost simultaneously on a global or regional scale.

Figure no. 9.3 International product launching strategies

The waterfall model/the sequential model

Home country

Country A

Country B

Country C

Country D
…

over 3 years

The sprinkler model/the parallel model

Home country

Country Country Country Country Couyntry

A B C D E

1-2 years

Source: Kotabe M. and Helsen K., 2001, Global Marketing Management, John Wiley and Sons,
p. 326.
 International Marketing

9.5 Innovations and diffusion of innovations

at international level

When products are added to the product line in one country, regardless the way
they are added (as imported from the home market of the company, modified for
the local conditions or new global products), if they are new to that country they
represent innovations for that market.
When launching a new product in a foreign market, one of the most important
aspects for the company becomes the process of innovations’ diffusion.

The diffusion of innovations refers to the spread of new ideas/products and is the
time between the introduction of the product in the market and the full adoption of
the product. The goal of diffusion is to shorten the time lag between introduction of
an idea/product and its widespread adoption. At international level, the process of
geographic expansion can last up to few decades. For instance, McDonald’s had
the time span between the USA launch and the foreign launch of twenty two years,
Coca-Cola of twenty years and Marlboro of twenty five years 8 .

The acceptance of new products by the consumer is a major concern for

international companies. Usually for the adoption of a new product consumers go
through step-by-step process in order to decide whether to accept or reject the new
product. There are five stages in the product acceptance: awareness, knowledge,
evaluation, trial and adoption. Not all the consumers have to pass through all these
stages and the time taken between different stages will also differ from one
consumer to another. Research revealed that there is a distribution tendency in the
number of consumers adopting the product and the time period involved as
presented in figure no. 9.4.
There can be identified five categories of consumers: innovators (2.5%), early
adopters (13.5%), early majority (34%), late majority (34%) and laggards (16%). It
is only when the early and late majority adopters enter the market that the potential
of the market develops. However, a prominent role is played by the early adopters
and the influence they have. Word-of-mouth spread by previous adopters has often
a higher influence and impact on the adoption decision, than the non-personal
factors such as media advertising have.

8
Kotabe M. and Helsen K., Op Cit, p. 325.
International product policy

Figure no. 9.4 New product adoption segments

Early majority Late majority

Early adopters

Laggards
Innovators

2½ 13 ½ 34 34 16

x* - 2σ x - 2σ x x+ σ
Time of adoption of innovations
*
x = mean time for adoption

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Pitman Publishing, p. 398.

The diffusion of innovation in a foreign market depends on the degree of newness

of the product, in other words how new is the product for the foreign consumers.
Cateora and Graham 9 identified more degrees of newness that a product can have
in a foreign market, according to the product’s influence on existing consumption
patterns:
• Congruent innovation is actually not an innovation at all it has no
effect on consumption patterns, the market perceives no newness. The
product concept is accepted by the culture and the innovatess consists
in the introduction of variety and quality in the functional features of
the product or even an exact duplicate of an existing product is
introduced in the market. An example would be the sugar made either
from cane or from beet.
• Continuous innovation has the least disruptive influence on
consumption patterns. Usually an alteration of the product is involved
rather than the creation of a new product. The modifications of the
product are usually perceived as improved satisfaction due to the
product use. An example would be the toothpaste with fluoride that it
does not change the consumption pattern, but gives more satisfaction
through higher protection. Similarly is the coffee with different
flavours.

9
Cateora Ph. and Graham J., 1999, Op. Cit., p. 360-361.
 International Marketing

• Dynamically continuous innovation has more disruptive effects on

consumer behaviour and consumption patterns, but does not involve
new consumption patterns. It consists of the creation of new product or
considerable alteration of an existing one, fulfilling new needs.
Through dynamically continuous innovations new needs are fulfilled,
needs that arise from new expectations, new lifestyles. An example
would be the electric toothbrush that fulfils a new need, but requires
serious changes in consumption patterns. Similar are the cellular
phones.
• Discontinuous innovation consists in the creation of new previously
unknown products that introduce completely new consumption
patterns. It introduces an idea/behaviour where there was none before.
For instance, the television; computer; microwaves; internet; ATM
(automatic teller machines) when they were first introduced.

The higher the degree of newness and the more changes required in consumption
patterns, the more difficult is the diffusion of innovations, and the longer is the
diffusion process. By analysing the degree of newness that its product brings to a
society, the company may alter the degree of newness in order to gain quicker
acceptance. An USA company introduced a cake mix in the UK market to cook
fancy cakes with ice cream. This was customary in USA but in UK the usual cakes
are dry sponge cakes. They also use fancy cakes with ice cream but only at special
occasions when they buy it from the bakery, a cake mix not being good enough for
a special occasion. As the UK market was unfamiliar with the cake mix, the
product was a dynamically continuous innovation. By introducing the cake mix for
sponge cake (a familiar cake in UK market) the innovation changed from a
dynamically continuous innovation to a continuous innovation 10 . When a new
brand of cake mix appears in the USA market there is a congruent innovation as
consumption patterns do not change and the product is not perceived as something
new. When a new unique flavour of a cake mix is introduced, that is a continuous
innovation as minimum disruptive effect is on the consumption patterns and the
product is perceived as offering improved satisfaction. When the cake mix (for
fancy cakes) was introduced in the UK market, it was a dynamically continuous
innovation as the consumers where not used with using cake mixes for fancy cakes

10
Ibid., p. 362.
International product policy

and they used to buy the fancy cakes only for special occasions and only from the
bakery. The product required a change in consumption patterns, therefore it was a
dynamically continuous innovation. If the cake mix would be offered in a country
where no previous knowledge of cakes exist, than we deal with a discontinuous
innovation, as involves introduction of a completely new product and new
consumption patterns.

As we have seen the more innovative a product is perceived to be, the more
difficult is to gain market acceptance. Marketers can change the consumers’
perceptions about innovations, but first of all they have to understand what is the
consumers’ perception about that innovative product. To do so, the marketer has to
analyse the five characteristics of innovations and determine the rate of resistance
or acceptance of the market to that particular product:
1. What is the relative advantage of the new product? Does the consumer
perceive the new product as offering higher value than the existing products? If a
high relative advantage is perceived, the acceptance rate will be high. For instance,
when the electrical toothbrush is seen as better than the manual toothbrush as it is
more efficient, the acceptance is high.
2. Compatibility: Is the new product compatible with the culture, the
norms, the values, the acceptable behaviours? If the product is perceived as
culturally compatible, the rate of acceptance will be high. For instance, the
hygienic women tampons Tampax in Islamic countries illustrate the lack of
compatibility of the product with the local culture.
3. Complexity: Is the product perceived as being a complex product,
difficult to use? If the product is perceived as being complex and difficult to use,
the rate of acceptance will be low. The microwave in a country with a low
technical education would be a difficult product to use.
4. Triability: Is the product perceived as being risky? Is it economically
risky, meaning too expensive for the value it will offer or is it socially risky, will
people not agree with that product? If the perceived risk is high its triability will be
low so its acceptance/rate will be also lower.
5. Observability: Can the benefits of the product be easily communicated?
If yes, it means the product has a high degree of observability and will probably
have a higher rate of acceptance.
 International Marketing

By analysing the new product from the perspective of these five characteristics, the
marketer can find out what are the consumers’ perceptions about the new product
and once these perceptions have been identified they can be changed in order to
accelerate product acceptance.

9.6 Branding strategies at international level

For a company that goes international branding is important, as it is more difficult

than branding in the domestic market. Branding is usually rooted in the culture of a
country and brand names designed for one country can have different meanings in
other languages or no meaning at all. A brand is a name, a sign, a symbol, a logo, a
term or a combination of these used by a firm to differentiate its offerings from
those of the competitors. In most product categories, companies do not compete
with products, but with brands, with the way the augmented products are
differentiated and positioned as compared to other brands. All brands are products
or services in that they serve a functional purpose, but not all products or services
are brands. A product is a physical entity, but is not always a brand, as brands are
created by marketers. A brand is a product or a service that besides the functional
benefits provides also some added value, such as 11 :
— familiarity, as brands identify products,
— reliability and risk reduction, as brands in most instances offer a quality
guarantee,
— association with the kind of people who are known users of the brand,
such as young and glamorous or rich and snobbish.

For many firms the brands they own are their most valuable assets. Associated to
the brand is the brand equity that refers to brand name awareness, perceived quality
or any association made by the customer with the brand name. A brand can be an
asset (for Coca Cola the brand is an asset) or a liability (for Nestle the brand was a
liability when the boycott for the infant milk formula was launched
internationally).

11
Bradley, F., Op. Cit, p. 460.
International product policy

How a company chooses a brand is an elaborated process. In France there is a

company that specializes in finding international brands names. Jeannet and
Hennessey present the steps undertaken by this company 12 :
1. The company brings citizens of many countries together and asks them
to state names in their particular language that they think would be suitable to the
product to be named. Speakers of different languages can immediately react in case
names that sound unpleasant in their language or have unwanted connotations
appear.
2. The thousands of names that are accumulated in few such sessions, are
than reduced to five hundred by the company.
3. The client company is asked to choose fifty names from the five
hundred.
4. The fifty chosen names are than searched to determine which ones have
not been registered in any of the countries under consideration.
5. From the usually ten names that still remain in the process after this
phase, the company together with the client will make the final decision.
When choosing a name for products to be marketed internationally a company may
consider different naming strategies, as those exemplified in box no. 9.1.

There are a number of branding strategies that a company may use at international
level:
1. According to the existence or not of a brand there are:
Š the no branded products that have the advantage of lower
production costs and lower marketing costs but they have the
disadvantage that do not have market identity and compete severely
on price,
Š products with brands that can benefit a lot from their brands if
brand awareness is high and the image is positive. Sometimes the
brand can be considered the most valuable asset of the company.

12
Jeannet J.P. and Hennessey H.D., 2001, Op. Cit, p. 542-543.
 International Marketing

BOX NO. 9.1 Strategies for for searching brand names

1. An arbitrary or invented word not found in any dictionary (Coca-Cola).

2. A recognizable word (in English or other language), but totally unrelated to the product
(Dove).
3. A word (in English or another language) that suggests some characteristics or purpose of
the product (Head and Shoulders).
4. A word that is descriptive to the product (Mr. Clean).
5. A geographical place or a common surname (Kentucky Fired Chicken).
6. A design, a number, a letter or some other element that is not a word or a combination of
words (3M).

Source: Jeannet J.P. and Hennessey HD., 2001, Global Marketing Strategies, Houghton
Mifflin Company, p. 543.

For instance, Coca-Cola brand’s equity was evaluated at over 35 bill. $

according to one source. The fact that brands are assets for companies is
illustrated by their market value. In 1987 Nestle bought the UK chocolate
maker Rowntree with 4.5 billion $, five times the book value, due to its
ownership of well known brands such as After Eight, Kit Kat and Rolo.
Similarly Philip Morris bought Kraft with 12.9 billion $, a price four times
the book value 13 .

2. According to the number of products that have the same name, there are:
6 individual brands, when each company’s product has its own name
usually with no association with the company name. Individual
brands are used when the company addresses different market
segments. In the cigarettes industry one producer has Camel,
Winston and Winchester brands, each of them addressing different
market segments,
6 family/umbrella/ corporate brands. When all products of the
company or a group of products of the company have the same
name, we have the family or umbrella branding. When this name is
the corporate name, we have corporate branding. Such corporate
brands are Shell, Levi’s, Sony, Kodak, Daewoo, Virgin etc.

13
Bradley F., Op. Cit, pp. 475-476.
International product policy

Sometimes companies use both a specific individual name with the

name of the corporation. For instance, Chocapic from Nestle, or
Toyota Lexus.

3. According to the number of brands commercialised in one market, the

company may have:
6 single brand and it is usually the case when there is a high market
homogeneity. The main disadvantage of having just one brand in a
country is the limited shelf space at retailer level, resulting in lower
exposure of the company. The advantage is that brand confusion for
the customer is eliminated and more focused and efficient marketing
is permitted for the company,
6 multiple brands when a company has more brands in one market.
This strategy is to be used when the market is segmented and
consumers have various needs. Coca-Cola company has on the
Romanian market multiple brands, among which Coca-Cola, Sprite,
Cappy, Fanta, etc. The advantage of this strategy is that more shelf
space is gained by the company (if the consumer does not buy Coca-
Cola but buys Fanta the money goes to the same Coca-Cola
company). Among the disadvantages are the fact that there are
higher marketing costs, as different marketing plans and programs
are designed for each brand and the economies of scale are lost.

4. According to the owner of the brand

6 there are manufacturer’s brands as most brands we know: Levi’s,
Coca-Cola, Nike, Levi’s, Adidas, etc.
6 there are private brands that are retailers’ brands or store brands.
Retailers started to buy products and than resell them under their
own name. The private brands recently became very popular. They
offer high margins for retailers as compared to the margins for
manufacturers’ brands, they have extensive and better shelf space,
they benefit of heavy in-store promotion and they are usually low
price/good quality products. In UK they represent one third of
supermarket sales and their sale proportion increases in continental
Europe, too.
 International Marketing

5. According to the geographical spread of the brand, there are:

6 global brands that have been defined by Chee and Harris 14 as
brands that are marketed with the same positioning and marketing
approaches in every part of the world. Some other authors consider
that it is not so easy to define a global brand. However, using global
brands (at least the same name everywhere) offers some advantages
to the company:
ƒ obtaining economies of scale,
ƒ building easier brand awareness, as global brands are more
visible than local brands,
ƒ by using global brands the company can capitalize on media
overlap that exist in many regions (for instance, Germany with
Austria),
ƒ using global brands contributes to increased prestige for the
company, as it gives consumers a signal that the company has the
resources to compete globally and has the will power and
commitment to support the brand world wide.
6 local brands are more indicated to be used in certain conditions,
such as the following:
ƒ there are legal constraints. A few years ago in India, Pepsi was
called Lehar as the legislation was asking that all brand names to
be local.
ƒ if the brand name is already used for a similar or not similar
product in that country, another brand name has to be chosen.
Budweiser is an American brand of beer, but in Europe a Czech
beer company owned the name. So the USA company called its
beer Bud in Europe.
ƒ when there are cultural barriers and the global name is either
difficult to pronounce or has an undesirable association. A
company producing milk from New Zeeland, renamed its powder
milk sold in Malaysia from Anchor (domestic name) to Fern
(local name) because the name Anchor was a beer brand heavily
advertised in Malaysia. The company considered that the
consumers will not buy this product used for children if its name

14
Chee H. and Harris R., Op. Cit, p. 385.
International product policy

would be associated to an alcoholic beverage, especially that a

large proportion of the population is Muslim in Malaysia.
Many international companies have used local brands by adapting their
domestic brands to the environment of the new foreign markets. Procter and
Gamble for instance, adapted the name of its household cleaner Mr. Clean to
the European markets by translating it. The brand became Monsieur Propre in
France and Meister Proper in Germany 15 . General Motors, also adapted its
brand for Europe, even though was selling the same product. The automobile
became Opel in Germany and Vauxhall in U.K..16

Brand name selection procedures for international markets are therefore important,
as the company has to choose either to adapt or standardize its brand name. A key
issue for companies in international marketing is whether they should use global or
local brands. The decision of either to use global or local names should be taken
according to what each market dictates. In the countries where patriotism is high
and consumers have a strong buy-local attitude local brands are recommended.
Also, local brands are to be used in the countries where global brands are not
known and where local brands have a strong brand equity. When the brand is
strong companies should go global with it. A company should use global brands
where is possible and to use national/local brands where necessary.

9.7 Protection of brands

The issue of brand protection becomes an aspect to be considered due to the fact
that companies are loosing millions of dollars annually, due to product and brand
piracy.
Products are pirated in many ways across countries:
• Imitation: names or symbols, similar to very well known brands are
used. Some examples are: Colgate- Coalgate; Levi’s –Levy’s, Lewis.
• Falsification of the products takes place when the brand is copied but
the products are forgeries. Asian countries are the largest suppliers of
forgeries: China, Malaysia, Vietnam.

15
Jeannet J.P. and Hennessey H.D., Op. Cit., p. 544.
16
Bradley F., Op. Cit, p. 462.
 International Marketing

• Priority. Where the laws give priority to those who register the brand
the first. A person can buy a number of very well known brand names
and sell them further to those interested in falsifying or back to the
manufacturers of the products, at high prices.
Therefore, a very important issue in international marketing is the issue of brand
protection. Companies should protect their brands based on both national and
international legislation.

National legislation is developed in accordance to the legal system of the country

(see also the chapter on the legal environment):
ˆ in the code law system, brands are protected based on priority: it has
the right to use the brand the company that registered it first. The
system applies in countries such as France, Germany, Bolivia.
ˆ in the common law system, the priority to use the brand belongs to the
company that used first the name on the market. The system applies in
countries such as USA, Canada, Taiwan, Philippines.
ˆ systems that are a combination of the previous ones. For instance, in
Japan the law says that the one who registered the brand first has the
right to use it, but at the same time allows to those who used for a long
time the name to continue to use it.
In some countries the company is obliged to “use” the trademarks (brands) in order
to benefit of protection, this means to sell in that market significant volumes of the
product. Most countries offer a grace period of five years before the owner has to
use the trademark. Elements such as: names, signs, any distinctive elements; should
be legally registered in order to be protected.

International legislation. At international level there are a number of agreements

concerning the protection of property rights (including brands). Among those there
is the International Convention for Industrial Property Protection from Paris signed
in 1883 to which are signatory over 100 countries. The member states extend the
national legislation concerning trademarks protection to all member states.
International product policy

9.8 Industrial goods and services

Industrial goods and services when marketed internationally have certain

peculiarities, given by their different nature. For both of them the issue of whether
to standardize or to adapt is still the main decision as far as the product policy is
concerned, when going internationally.

Industrial markets are already standardized across countries to a large extent.

Therefore, we can appreciate that the issue of standardization versus adaptation is
less relevant to industrial products, as compared to consumer goods, as there are
already many similarities in the marketing of industrial products across markets.
The industrial demand influences the product policy decisions of companies. The
demand for industrial products is influenced to a large extent by two factors:
− professional buyers tend to act in concert. The phenomenon is easily
seen on the PC market. Supposing that the demand for PC’s declines,
than all PC producers (IBM, Mc Intosh, Toshiba, etc) will decrease
their demand of part components, and they all do it simultaneously
(acting in concert), as they all have the same signals from the market.
− the demand for industrial goods is a derived demand. Derived demand
is the type of demand that depends or results from the demand of
another good. For instance, the demand of part components for PC
derives from the demand of PC’s on the market. Usually minor
changes in consumer demand determine major changes in the derived
related industrial demand.
At international level, the product policy of industrial products faces the following
specific aspects:
1. The demand for industrial goods is influenced by the degree of
internationalisation of the country. The latest, most modern equipment is usually in
demand in industrialized countries, while countries less industrialized might
demand entire factories, not only equipment.
2. A quality product in industrial markets is a product that reflects exactly
the needs and expectations of the buyer, no more, no less. No more because it
might be too complicated and difficult to use and no less because it does not fulfil
the need the consumer has. This is important to be known in international
marketing as the way quality is interpreted in highly industrialized countries differs
 International Marketing

of the way quality is interpreted in less developed countries. They have different
expectations according to different quality standards, formed based on the different
level of technological development and education.
3. The service component of the industrial product plays a major role in
the international market. Services such as programming materials, quick delivery,
repairs and other after sales services may be determinant in purchasing or not an
industrial product. These services have to reflect the exact needs of each market.
4. Relationship marketing is seen as the key to success in industrial
markets. It refers to the formation of a long term relationship with the customers,
starting with gathering information on the customer needs, providing the product
and the associated services and follow up to find out how satisfied is the customer.

Services represent an increasing part of the world economy and because of their
peculiarities they should be treated separately. In the developed countries services
account for 60% of their Gross National Product. For instance, in USA services
account for 69% of the Gross National Product and employ 79% of the work force.
Even in the less developed countries services account for 30% of the GNP.
Globally, the service sector is growing rapidly and accounts for 25 to 30% of the
world trade.
The evolution of the service sector in the last years will project the future trends of
the sector in the coming years:
4 services have and will have an increasing role (% in GNP) in many
national economies due to changing life-styles and increasing
standards of living,
4 the demand for premium services will increase,
4 the growth sectors in the world economies will be services: tourism,
transportation, computer systems, financial services, education,
4 trade barriers differ from those of physical goods and deregulation of
the service industry is expected.

When going international service companies have two main reasons and play two
major roles, namely:
• Client followers when they go international to serve home-country
clients, but once established in the foreign market, service companies
expand their client base to local customers. Examples are hotels,
accounting, advertising companies.
International product policy

• Market seekers when they actively seek for customers for their
services worldwide. Examples are education, transportation, tourism.

When internationalising, services face specific challenges in foreign markets to

which they have to find solutions:

1. Protectionism is still higher with respect to services than to tangible

goods. The non-tariff trade barriers are affecting the most services. For instance:
Š USA government is buying training services only from USA
companies- this is a national policy.
Š Canada gives priority to Canadian citizens for available jobs by
prohibiting employment of foreigners.
Š Indonesian government has monopoly on telecommunication.
Š North Korea limits the number of tourists allowed to enter and exit the
country.
GATT rules favouring world trade and diminishing protectionism referred only to
goods for a numerous number of years. Since the creation of the WTO in 1995, the
service industry started also to be deregulated in the international trade. An
illustrative example is Japan.

2. Culture plays a much bigger role in services. Because there is a person

to person (people-to-people) contact, cultural barriers may be more prominent for
services. If we talk about education, classroom interaction varies substantially
around the world. Students in Japan listen to lectures, take notes and ask questions
(if they do it at all) only after class. Consequently in Japan the idea of grading class
participation is nonsense. At the same time in Spain communication is more
intense. Undergraduate classes are very large up to 100 students and students talk
to their friends, among themselves, even when the instructor is talking.
That is why service companies often customize the product to the local market. But
even if services are less standardized than tangible products are, companies are
willing to provide a consistent quality image world wide.

The cultural barriers manifest not only in the relationship of the company with the
customer, but also with its own employees. In Poland, at the beginning of 1990’s
employees at McDonald’s were revolted that unhappy workers were expected to
put on “ happy faces” when serving their clients. In Romania, one employee was
 International Marketing

also revolted that she has been penalized 10% of her monthly salary, because she
did not smile in the day when a member of her family died. Another example is
that of the American transport company that received protests from its drivers in
France because they were not allowed to have wine over lunch and in Britain
because they were not allowed to have their dogs with them in the delivery trucks.

The concept of internal marketing stands for treating the company’s employees as
their customers. In other words the company should identify the needs and wants of
its employees and try to fulfil them “so that” to make them more efficient. Internal
marketing is very important especially for the service industry where the employee
has a major role in the delivery of the service.
International distribution systems

When planning for international markets, distribution plays a very important role.
Sometimes distribution may be the biggest constraint to successful marketing as
getting the product to the target market can be a costly process if barriers in a
distribution structure cannot be overcome. Distribution channels differ to a great
extent from one country to another on a number of dimensions, due to influencing
factors such as culture, tradition, customs, legal requirements. There are, however a
number of things that are common to all channels regardless the product category
or the market.

Marketing channels have been defined by Bradley as a set of independent

organizations involved in the process of making a product or service available for
use or consumption 1 . One of the main differences in establishing a domestic or an
international distribution system consists of the complexity of the variables
involved in the choice of “international activities”, when each foreign market has a
different distribution system.

1
Bradley F., Op. Cit., p. 546.
 International Marketing

This chapter presents the main aspects a company must consider when making
international channel decisions. In order to decide over the distribution strategy in a
particular country, a company should study:
& What are the general distribution structures in a country.
& What are the specific (wholesaling, retailing) distribution patterns in a
certain industry.
& What are the middlemen choices in that country.
& What are the factors affecting the choice of the distribution channel.
& How to locate, select, motivate, evaluate and terminate channel
members.
& What alternative distribution strategies can be used.
& What are the main logistic decisions to be taken.

10.1 International distribution patterns

In every country and in every market, consumer and industrial products go through
a distribution process in order to get to the consumer. Each country has its own
distribution structure. Even though distribution decisions are similar in all
countries, the way they are put into practice is different because in each country
there are different channel alternatives and different market patterns.
Each country has its own distribution structure through which goods pass from the
producer to the consumer and in each country, the behaviour of channel members
is a result of the interaction of cultural environment and the marketing process of
companies. Channel structures can vary from little developed distribution
infrastructure found usually in emerging markets to highly developed systems
found usually in developed industrialized countries.

The first thing the company should do is to look at general distribution patterns in a
particular country. To do so the company should analyse the types of distribution
structures existent in that country, according to criteria such as philosophy and the
way the product gets from the producer to the consumer.
According to philosophy, there are 2 :
• Import-oriented channel structures.
• Mass consumption structures.

2
Cateora Ph. and Graham J. , 1999, Op. Cit, p. 408-409.
International distribution systems

According to how the product gets from the producer to the consumer, there are:
Š Conventional channel structures (that use intermediaries).
Š Modern channel structures direct channels (to consumer).

Import-oriented distribution structures

These structures originated in economies that were/are dependent on imported
manufactured goods and are usually met in developing countries. Typically in such
structures where the importer controls a fixed supply of goods, develops a
philosophy of selling a limited supply of goods at high prices to a small number of
affluent customers. It results a seller’s market, as demand exceeds supply and the
customer is the one who seeks the supply. In that country the distribution structure
developed has a limited number of middlemen that perform both wholesaling and
retailing functions.
The import-oriented philosophy influences all aspects of market activities and
behaviour and determines an import-oriented attitude in which the notion of
economies of scale and using the price as a way to stimulate demand are not
known. For instance, in Brazil, a bank ordered piggy banks for a local promotion.
Because the promotion went well, better than expected, the banker placed a reorder
three times higher. The reaction of the local manufacturer was to increase the price
based on the theory that with a higher demand the prices go up. This happened in
spite of the fact that production costs (due to economies of scale) would decrease.
In these countries there is the one-deal mentality of pricing at retail and wholesale
levels. The importer controls the supply and he will set the price at whatever the
market will bear. Each shipment is a deal and the price of goods will be set for
every deal based on landed cost and the assessment of demand and supply at that
moment.
This type of attitude and mentality affects the development of intermediaries and
their functions, in one word the way they perform their jobs. Today there are a few
countries that fit perfectly in this model, but even if countries have developed
economically and the market systems changed accordingly, if their channel
structures evolved from import-oriented system, influences can still be seen.

Mass consumption-distribution
The philosophy in a mass distribution structure is that a supplier sells to as many as
possible customers and one supplier does not dominate the distribution system. The
channel structure in these countries is highly developed and has a variety of
intermediaries.
 International Marketing

The mass consumption distribution structure prevails in industrialized countries.

The supply of goods is large and there is a buyer’s market as the buyer has strong
negotiation power. Producers try to push the goods towards consumers and highly
developed channel structures with a variety of intermediaries are developed in
order to do this. The distribution system is formed on the idea that the channel of
distribution is a chain of intermediaries that perform specific activities and each of
them sells to a smaller unit beneath, until the chain reaches the consumer. Each
intermediary has specialized functions and usually in these countries fully
integrated distribution systems have developed.

Traditional channel structures

These are the channels that use intermediaries to get the product from producer to
consumer. They also differ according to the length, as well as the form of
organization. The length of the channel, according to the number of intermediaries
between the producer and the consumer can be short (few intermediaries) or long
(a larger number of intermediaries). The form of organization can vary from
corporate (chains of retailers), to franchise (when the distributor will be a
franchisee of a large company) or independent (such as solitary boutiques).

Modern channel structures

These are the direct channels that go straight to the consumer. Such methods can be
the door-to-door, telemarketing, through catalogues, via internet or through mail.
Such direct marketing techniques were initiated in developed countries and are
used there on a large scale. They are also used by multinationals as a distribution
channel choice in markets with insufficient and/or underdeveloped distribution
systems. Traditional direct marketing firms such as Zepter and Oriflame have been
successful in Latin America, Asia and Eastern Europe.
The Internet gives the possibility to develop the e-commerce as a form of direct
selling. E-commerce is developed in industrialized countries where computers are
spread to a large percentage of population and the telephone service is cheap
enough, where there is a banking system that permits payment by card and where
postal and express services are well developed in order to deliver the products
(logistics is a key constraint in e-commerce).
International distribution systems

In order to emphasize the differences existent between different distribution

structures at international level, a short description of distribution patterns in a
couple of countries will be done. For instance, if we compare the USA distribution
structure with the Japanese distribution structure, we can see that they are
completely different.
The American structure is characterized by a large variety of retailers, by a
diminishing number of wholesalers, a lot of discount stores and large retailers that
control the network.
The Japanese structure is characterized by many small wholesalers dealing with a
large number of retailers, and manufacturers control networks. Small retailers
benefit from strong protection through The Large Scale Retail Store Law. The law
strictly regulated the retail sector until 1998. The law required that any store larger
than 500 square meters needed the approval of the prefecture, of MITI (Ministry of
International Trade and Industry) and the agreement of local retailers. The law was
designed to protect small retailers against competition coming from domestic and
foreign large companies.
After 1998 the Japanese distribution system started to restructure. The Retail law
has been relaxed in the sense that stores larger than 1000 square meters have to get
the above mentioned approvals. Specialty discounters developed in competition
with the traditional stores. These type of stores offer low prices as they buy directly
from manufacturers. Some of them do this based on “global purchasing” (buy
anywhere in the world as long as it is as cheap as possible), global retailers arrived
and consequently new choices in price appeared for the Japanese consumer.
Japanese prices used to be the highest in the world (2-4 times higher than USA
prices) because there was no price competition on the one hand and because of the
large number of intermediaries on the other hand.
The American structure serves the consumers who make large and less frequent
purchases as the time became more limited in families and as people have higher
incomes and can afford to spend more money at one shopping trip, while the
Japanese structure serves the consumers who make small frequent purchases at
small conveniences stores based on the idea that in this way they can get fresh and
good quality products and a good service.
Box no. 10.1 presents more details about the Japanese distribution systems.
 International Marketing

BOX NO. 10.1 The Japanese distribution system

The Japanese distribution system is complex, and highly fragmented comprising numerous
retail firms and different layers of wholesalers, most of them being small organizations.
Japan has traditionally been segregated by product type and the subsequent development of
many specialized marketing channels. For instance, meat stores sell about 80% of the meat
items.
The main features of the Japanese distribution system are:
1. Personal relationship. The system puts a great emphasis on the development of strong
personal relationships with users in order to ensure both stable supply and price over a
long period of time. This strong relationship of service, loyalty and commitment to
consumers is passed on the whole distribution structure from producers to wholesalers
and retailer. See also Box no. 4.2. about keiretsus.
2. Credit and payment. Due to a limited capital equity, producers supply goods to
wholesalers who pay back in 6 months time (usually payments take place twice a year in
Japan). This type of defferred payment is known as Tegatas and allows wholesalers to
manage with small amount of capital.
3. Sale or return. Retailers take back goods from customers and wholesalers are willing to
take back unsold goods from the retailers, showing the strong links of the Japanese
distribution system and the close ties among Japanese companies.
4. Delivery. The high frequency of deliveries is much part of the system. Wholesalers sell to
retailers in small quantities at regular intervals, due to the limited financial resources of
the intermediaries. Many Japanese homes are small and they lack storage space, therefore
they shop several times a week.
5. Cultural values. The Japanese consumer demands a high level of service, such as
availability of credit and free home delivery, long opening hours and the right to return
non-defective goods. On the business culture, vertical integration is very strong in Japan
based on strong personal relationships.

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Pitman Publishing,
p. 467-471.

The Romanian distribution structure underwent visible changes in the last 15

years. It is a distribution structure in transition from a structure dominated by large
scale wholesalers that sold to a specified number of retailers certain quantity of
goods according to the plan, towards a new distribution structure. During the
communism there were a few large wholesalers that had territorial exclusivity and
sold according to plan. After 1990 the emerging distribution structure was formed
of many small private Romanian wholesalers and retailers. Many international
companies have formed their own distribution force, as existing middlemen were
not considered to be able to fulfil adequately all distribution functions. Starting mid
1990’s foreign large retailers, wholesalers and “cash and carry-s” entered the
Romanian market, as part of their globalisation process (Metro, Sel-Gros, Bila,
Carrefour, Cora).
International distribution systems

10.2 Distribution patterns for the product category

After studying the distribution structures of a country at a general level, the

company should study what are the patterns of distribution in the particular
industry the company function in, for that specific product. Whatever the
distribution decisions the company will take these are dependent of what already
exists in each country it wants to enter.
Aspects such as the following ones have to be studied:
• Middlemen services.
• Line breadth.
• Costs and margins.
• Channel length.
• Nonexistent channels.
• Blocked channels.
• Power and competition.
• Stocking.

Middlemen services. Services attitudes of middlemen vary from one country to

another according to culture and to the distribution structure developed in that
country. In Egypt for instance, the main purpose of the trading system is to handle
physical distribution of available goods. The middlemen are not interested in
promoting and selling individual items of merchandise and the manufacturer must
undertake much of the promotional and the selling effort. In China, the wholesalers
see as their only function to store the goods and wait for the customer to come and
take it 3 .

Line breadth refers to the number of product lines carried by wholesalers and
retailers. Every country has a distinct pattern of distribution as far as the line
breadth is concerned. Some countries have broad lines distribution systems as
wholesalers and retailers carry everything and other countries have narrow lines
distribution systems, when wholesalers and retailers are specialized on certain
products. In UK traditionally wholesalers and retailers are specialized and carry
single product lines such as ties, scarves, socks and cards or category product lines
such as baby products. In Italy there are numerous specialty houses and in Finland
retailers carry general lines of merchandise.

3
Cateora Ph and Graham J., 1999, Op. Cit., p. 416.
 International Marketing

Costs and margins of trade companies have to be studied for every country as they
differ according to the level of competition, to the services offered, to the
efficiencies and inefficiencies of scale, to purchasing power and tradition. In India
for instance, in urban areas competition is high and costs and margins are low,
while in the rural area competition is low due to lack of capital, traders have
monopoly and they practice high prices with wide margins. In USA supermarkets
have a 2-3% margin, while in UK the margin is 7-8% and in Romania in the retail
industry it goes up to 30%.

Channel length refers to the number of intermediaries between producer and

consumer. Generally it was noticed that at international level channels are shorter
for industrial goods and consumer goods with high prices than for products with
low prices.

Non existent channels. In many countries (usually less developed countries)

adequate market coverage cannot be obtained through only one channel (as in
developed countries). In some other countries there are not at all appropriate
channels of distribution. For instance, in Peru, the informal distribution system
accounts for 25% of sales in retailing. Street markets and ambulatory sellers offer
wider market penetration than formal channels. Therefore, a company should use
different distribution channels both formal or informal in order to reach different
market segments.

Blocked channels. An international marketer may be blocked from using the

distribution channel he wants due to the fact that competitors already established
product lines in various channels and distributors do not want to take
supplementary new products. Also, associations and cartels of middlemen may
restrict the number of distribution alternatives available to a producer. In UK
glasses are sold only based on prescription through registered optical (that are
controlled by a few large companies), while in USA reading glasses may be bought
in many different types of stores, including supermarkets.
International distribution systems

Stocking. Sometimes foreign middlemen carry limited inventories due to lack of

capital, the high cost of credit and fear of inflation. For the producer this may mean
out of stock conditions and sales lost to competitors. Sometimes manufacturers are
providing warehouse facilities and extend long credit in order to encourage
middlemen to carry large inventories. However, for small stores large inventories
are impossible to carry.

Power and competition. Patterns of power concentration should be studied for each
country. There are countries where manufacturers and/or wholesalers have larger
power, such as Japan and other countries where retailers have larger power such as
USA and countries in Western Europe.

Retail patterns should be studied separately. The structure of retailing in terms of

number of retailers and size is of interest. Producers can sell directly to large
dominant retailers, but it can be difficult to sell directly to small retailers, who in
the aggregate handle a great volume of sales.
¾ In Italy, there are many small retailers as they are protected by local
legislation. In order to open a new retail store, a company must obtain
a license from a municipal board formed of local traders people.
¾ In South Africa there are 31.000 stores in total. 1.000 of these are the
large stores that concentrate 60% of the grocery sales. The rest of 40%
of the sales can be covered through the 30.000 retailers, but they might
be difficult to reach 4 .
¾ In UK the market is dominated by few large retailers (such as Asda,
Tesco, Sainsbury’s, Safeway) and access to the market is possible only
through them 5 .

4
Ibid, p. 418.
5
Czinkota M.R. and Ronkainen I.A., Op. Cit., p. 390.
 International Marketing

10.3 Setting and implementing

the distribution strategy

After the company studied what is available in the foreign market will decide over
its distribution strategy. The main aspects related to the distribution strategy are
channel design, channel management and logistics.

10.3.1 Channel design

In order to make channel design decisions the company has to look first at the
factors that influence the possible designs of the channel. One of the most used
techniques to do this, is the so called “C” rule that was proposed by a number of
authors as presented in table no. 10.1.

Table no. 10.1 Factors affecting distribution channel design – the “C” method

Cateora et al. Czinkota et. al. Usunier Chee et al.

Cost Customer Consumers and Company objectives
Capital requirement characteristics their Capital
Control Culture characteristics Cost
Coverage Competition Culture Coverage
Character Company Character Continuity
Continuity objectives Capital Character of the
Character Cost product
Capital Competition Communication
Cost Coverage Control
Coverage Continuity Customer
Control Control characteristics
Continuity Culture
Communication Complementary
skills
Competition
Channel power
Sources: Cateora Ph. and Graham J., 1999, International Marketing, Mc Graw Hill, p 436-439;
Czinkota M.R. and Ronkainen I. A., 2001, International Marketing, Hartcourt College
Publisher, p. 392; Usunier J.C., 1996, Marketing Across Culture, Prentice Hall, p. 349-350;
Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman
Publishing, p. 446-455.
International distribution systems

Part of these factors have been approached under the study of existing product
category distribution systems, as many are the characteristics of the existent
distribution systems in different countries. We will be discussing some of those
that are considered to be among the most important.

Customer characteristics and culture. Distribution channels create utility for

customers, therefore customer characteristics, such as the demographic and the
psychographic ones, will be a basis for channel design decisions. The company
should consider customer numbers, shopping habits, reaction to different selling
techniques, income, geographical distribution. Table 10.2 presents a number of
cultural influencers over distribution at retailer’s level.

Table no. 10.2 Influence of culture on distribution through retailers

Selected aspects of distribution Aspects that might differ according to culture

Shopping hours Is time spent shopping seen as wasted
(economic time)?
Is the return of goods (complaining) standard
behaviour?
Opening hours Religion based arguments in favour of
restricted opening hours
Product range Products may be banned because of religious
or legal prescriptions
Willingness to service consumers Human nature is good (friendliness towards
shoppers) versus bad (indifference/negative
view of service to others)
Waiting lines Compliance with rules
Self-service versus personnel in Differences according to level of educational
contact and economic development
Source: Usunier J.C., 1996, Marketing Across Cultures, Prentice Hall, p. 352.

Cost. There are three categories of channel costs that have to be taken into
consideration and compared for all distribution alternatives in a country: the initial
costs, the maintenance costs and the logistical costs. The initial costs include all
cost for locating and setting up the channel, such as travelling expenses to locate
and select channel members, negotiation costs and the capital costs necessary to set
up a channel. The maintenance cost includes the cost of auditing and controlling
the channel, local advertising expenses, the promotions and the operational
 International Marketing

discounts to intermediaries or the salaries of salespeople and sales managers, as

well as their travelling expenses where the company has its own sales force. The
logistical costs comprise transportation expenses, storage costs, the cost of
breaking the bulk shipments into smaller sizes and the costs of customs paperwork.
The costs have to be evaluated in a strong relationship with functions that the
distributor fulfils. There are two main types of functions that distributors have to
deal with, namely the commercial functions and the logistical or the physical
functions.

Among the commercial functions are the credit (paying the products when they are
received, not after they are sold), the promotion of the products, merchandising as
one important way of promoting, conducting market studies as they are the closest
to the consumer and the transfer of title from one middlemen to another and to the
final consumer. Among the physical/logistical functions there are the reception of
merchandise (port/airport), the transport local/national/international, warehousing,
packaging/ break bulk and after-sale services.

It is necessary for the company to estimate the costs of all alternatives in order to
be able to choose the most suitable option. High distribution costs are usually
reflected in higher prices at the consumer level and may endanger the entry in the
new market.

Capital requirements refer to the issue of what financial resources are necessary to
maintain a distribution channel in terms of cash flows. Maximum investment is
usually required when the company establishes its own channels through its own
sales force. The distribution through intermediaries requires capital for providing
initial inventories or loans.

Coverage refers to both the number of areas in which the company’s product is
represented and the quality of that representation. Coverage can be therefore
assessed on geographical or market segments. The selection of one channel
member over another may be influenced by the respective market coverage. It is
easier to obtain geographical market coverage in large urban areas than in small
cities or less populated areas. In order to determine a distributor’s market coverage
the following must be determined: a) location of sales offices that indicates where
efforts are focused, b) salespersons’ home base, as they generally have the best
International distribution systems

penetration near their homes and c) previous year’s sales by geographic location
that indicate the channel member’s success in each geographic area.

Control. The use of intermediaries leads to loss of some control over the marketing
of the firm’s products. With a direct sales force, a manufacturer can control to a
larger extent price, promotion, type of retail outlet to be used and other marketing
aspects. Longer channels, especially with distributors who take title to goods, often
result in little or no control over the marketing activity.

Character of the product. The nature of the product will have an impact on the
design of the channel:
− for the perishable goods or those with a short shelf life will be used
shorter channels in order to reach the consumer quickly,
− for the products requiring after-sale services (such as technical products)
short channels, such as direct sales or a trained agent, will be used,
− for non-perishable products usually longer channels will be used,
− for the bulky products a short channel is preferred in order to minimize
the distance and the number of times the products change hands
between channels intermediaries.
Besides the nature of the product, the size of the product line also affects the
selection of channel members. For instance, a distributor or a dealer is more likely
to stock a broader product line, while an agent usually sells limited product lines.

Continuity is important as channel design decisions are the most long-term of the
marketing mix decisions. Therefore, maximum care should be taken in choosing
the right type of channel, given the intermediaries available and the environment.
Ensuring continuity rests on the company because foreign distributors may have a
more short-term view of the relationship. Most middlemen have little loyalty for
their suppliers. They handle their brands when they sell and they quickly reject
them when they fail to produce profit during a period. Or it might be the case that
when one individual retires or moves out of the distribution activity the company
may find that it lost its distribution in that area country.
In Japan wholesalers believe that it is important for manufacturers to continue to
improve the product even after initial success. If no improvements are made local
 International Marketing

competitors are likely to enter the market by producing the product at a lower price
and distributors will turn to them 6 .
Communication refers to the exchange of information between channel members
that is essential to the functioning of the channel. There are various distances
between the international company and the potential distributors, that may cause
problems. The shorter the distance between the potential channel member and the
manufacturer the better chances for increased communication. There are a few
types of distance to consider 7 :
ˆ geographic distance – the physical distance separating the two
partners: from Bucharest to New York,
ˆ cultural distance – the differences in values, norms and behaviour
between the two partners: Asian countries have a high context way of
communicating, while Westerners have a low-context way of
communicating,
ˆ social distance – the familiarity with each partner’s operating methods:
during Ramadan fasting period in Islamic countries no serious business
takes place,
ˆ temporal distance – the length in time between the placement of an
order and the actual delivery of the product: due to transformation of
telecommunication and transportation it is possible at present to deliver
goods in just few days from one continent to another,
ˆ technological distance – the differences in process technologies
between the two partners reflected in compatibility, competitiveness,
product experience and quality of the product: exports from less
developed countries are perceived as inferior to exports from
developed countries.

Competition is necessary to be assessed in order to decide over channel design.

Channel competition can occur in a number of ways: first is the competition of
products that are placed on the shelves side by side and second through blocking
the distribution channel by filling them with competitors’ products and refusing the
company access to the market.

6
Czinkota M.R. and Ronkainen I.A., Op.Cit., p. 401.
7
Chee H. and Harris, Op. Cit, p. 451.
International distribution systems

The design of the distribution channel should definitively start from the company’s
objectives of profitability and market share, objectives to be further translated at
the level of distribution objectives once the distribution strategy is set.
The main decisions that a company has to take when designing the channel refer
to segmentation-targeting- positioning and to setting the channel structure.
1. Segmentation-targeting–positioning starts by dividing the market in
groups through segmentation. In distribution, segments are best defined on the
basis of demands for the service outputs of the marketing channel. A distribution
channel also adds value to the product marketed through it and this is important to
the consumer. The value-added services created by channel members and
consumed by the end-users along with the product purchased are called service
outputs. Service outputs include aspects such as bulk-breaking, spatial
convenience, waiting and delivery time and assortment and variety 8 . End-users in
different countries have varying demands for these service outputs and the
company has to decide whom to serve and how, through the intermediaries it
chooses.
When targeting, the company chooses what segments to serve and what segments
to ignore, given the way different consumers want to buy products.
By positioning, the company will try to define what is the optimal channel to serve
each segment, trying to design a distribution channel that meets the segment’s
demands.

2. Establishing the channel structure involves taking decisions over the

following aspects:
Š channel length,
Š channel width,
Š types of intermediaries,
Š the use of multiple channels.

Channel length refers to the number of intermediaries involved in the physical or

ownership path of the product from the manufacturer to the consumer. The
company can choose long channels with a large number of intermediaries or short
channels with only a few or no intermediaries at all, according to the influencing
factors discussed above. Jeannet and Hennessey consider that the channel length is
influenced by three aspects, namely: a) product’s distribution density, as products

8
Coughlan A.T. and Stern L., 2001, „Marketing Channel design and management” in Kellogg on Marketing,
Dawn Iacobucci (ed.), p. 252.
 International Marketing

with extensive distribution usually have longer channels of distribution, b) the

average order quantities, that often depends on the purchasing power and income
of the targeted customer group and c) the availability of channel members 9 . Figure
no. 10.2 presents possible configurations of the distribution channels for different
types of products.
Looking at the distribution chains, we can say that one can eliminate a middlemen
but not the channel functions. Therefore, the real question is who can do the job at
the least cost? The wholesaler? The manufacturer? The retailer? If there is no
wholesaler, the retailer will fulfil the breaking the bulk function. If the producer
sells directly to the consumer, the warehousing function will stay either with the
producer or/and with the consumer. Either one buys a 1 kg detergent boxes more
often or one buys a 5 kg detergent box, case in which one does not consume more,
but takes over the warehousing function.

Channel width refers to the number of intermediaries at each level in the

distribution chain. Closely related is the distribution density that has to be set by
the company. The distribution density refers to the number of outlets or distribution
points required for the efficient marketing of the firm’s products. The key for
setting the distribution density lays with the consumer’s shopping behaviour, in
terms of the effort expended to locate a desired item. This behaviour may vary to a
large extent from one country to another. The possible distribution strategies that a
company can adopt from the density point of view are:
ª extensive (intensive) distribution,
ª selective distribution,
ª exclusive distribution.

Extensive/intensive distribution means that a firm tries to place its products or

services in as many as possible outlets. This type of distribution is recommended
for consumer goods and convenience goods for which the consumer does not make
a special effort to get the product (soft drinks, chewing gum, cigarettes, etc.).
Selective distribution means that a firm selects a few retail outlets to carry its
products. In this case the consumer will search in more outlets before making the
decision to buy the product. It is indicated for products that inspire brand loyalty
from consumer (clothes, cosmetics etc.).

9
Jeannet J.P. and Hennessey H.D., Op. Cit., p. 604.
 International Marketing

Exclusive distribution means that only one retail outlet is used to carry the product.
It is assumed that the consumer will searched for the desired product and will not
accept substitutes. It is suitable for products such as automobiles.
Types of intermediaries to be used. There are two basic decisions that the company
has to take when choosing intermediaries to serve a particular foreign market. The
first is to determine what type of relationship to have with intermediaries, the
alternatives being distributorship or agency relationship. The second is that the
company has to decide whether to use indirect exporting, direct exporting or
integrated distribution to penetrate a foreign market.
Distributorship or agency relationship?
A distributor (merchant) is a company that purchases the product from the
producer and sells it further. Therefore, it has more independence than the agency,
being able to better control the marketing activity for product lines carried. The
main characteristics are that they take title to manufacturer’s goods, assume trading
risks and are less controllable by the manufacturer.
An agent operates based on commission, does not usually handle physical goods
and has less freedom of movement than a distributor, meaning that the
manufacturer has more decision power over marketing activities. The main
characteristics are that agents work on commission and do not take title to the
merchandise.
Middlemen are differentiated according to the fact they take title to the goods or
not. Middlemen in different countries have different names but regardless the
names they have, that sometimes can be misleading, the marketer should study
what are the functions that the middlemen fulfil. Many middlemen in international
markets wear many hats and they can be clearly identified only in the relationship
with a specific firm.
A middleman can fulfil all distribution functions for some companies or only some
distribution functions for other companies, meaning that the same company can be
an agent for a client and a merchant/distributor for another company.

Indirect exporting, direct exporting or integrated distribution?

Indirect exporting means to sell your products to another domestic firm that acts as
sales intermediary and usually takes over the producer’s operations on the
international side. Indirect exporting is practiced by firms in their early stages of
the internationalisation process.
International distribution systems

Direct exporting means that the company takes direct responsibility for its products
abroad by either selling directly to a foreign customer or finding a local foreign
representative to sell its products in the market.
Integrated distribution means that the company makes an investment into the
foreign market in order to sell its products in that market or more broadly. Such
investment can be a sales office, a distribution network or even a manufacturing
facility.
Table 10. 3 presents possible types of middlemen that can be involved in
international marketing.

The use of multiple channels. Another decision that the company has to make is
either to go through a single distribution channel or more distribution channels.
The addition of new distribution channels is meant to offer alternative ways for
current and potential customers, so that to have customized channel approaches for
each distinct consumer segment in the market. For many products the use of
multiple distribution channels becomes a necessity as one of the executive
managers of Bloomingdale, one of the major USA retailers stated, that each
product should be sold in three channels at the same time: brick-and-mortar store,
catalogue and on-line channel 10 . However, where multiple channels are managed
together, the potential for channel conflict is great.

10.3.2 Channel management

The logical steps to be followed when developing international distribution

channels, as part of the channel management are:
1. Locating middlemen.
2. Selecting middlemen.
3. Motivating middlemen.
4. Controlling middlemen.
5. Terminating middlemen.

Locating and selecting middlemen are the first steps in the process. In order to
locate middlemen, the company establishes a number of criteria to be used in
evaluating middlemen. Most companies emphasize on actual or potential

10
Coughlan A.T. and Stern L., Op. Cit., p. 264.
 International Marketing

productivity of the middlemen, but there are more criteria that should be taken into
consideration. Table 10.4 presents a model for channel member selection.

Table 10.3 International channel intermediaries

Domestic (indirect) Foreign (direct)

Agents (commission based) Agents (commissioned based)
Broker Is a low cost agent Broker Works based on
that brings buyers commission and
and sellers together deals with
commodities,
operating on a
country or on a
group of countries
basis.

Export agent Is an individual Manufacturer’s Does not take

middleman that has representative physical possession
a short term of goods, but takes
relationship with the the responsibility
manufacturer for for the producer’s
whom provides a goods in a city,
selling service in one regional market
or two markets area, entire country
or several countries

Export Works under the Managing agent Conducts business

management name of in a foreign nation
company manufacturer, as a under an exclusive
(EMC) low cost independent contract with the
marketing parent company,
department with compensation being
direct responsibility based on percentage
to the parent firm of the profits.

Export jobber Deals mostly with

commodities and
works on a job-lot
International distribution systems

Domestic (indirect) Foreign (direct)

basis assuming
responsibility for
arranging
transportation.

Merchants (take title of goods) Merchants (take title of goods)

Global retailer/ Buys from local Complementary Arrangements to
wholesaler suppliers and sells in marketing distribute the
their subsidiaries product of another
abroad. company

Trading Accumulates, Distributor/ Has the exclusive

company transports and dealer rights in a foreign
distributes goods country to sell the
from many products of the
countries. Generally manufacturer
located in
developing
countries.

Buying office Purchases Retailer/ Buys from foreign

merchandise on wholesaler manufacturers and
request and does not sells the goods
have long-term further.
relationships.

Complementary Arrangements to Purchasing agent Purchases goods

marketing distribute the from manufacturers
product of another and sells them to
company. Also wholesalers and
called piggy- retailers
backing.

Source: Cateora Ph and Graham J., 1999, International Marketing, Irwin McGraw Hill, p. 426-434;
Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Hartcourt College
Publishers, p. 403.

Productivity refers to the potential sales volume or how much would the company
be able to sell through those middlemen. Financial strength wants to see what is the
liquidity of the middlemen.
 International Marketing

Managerial stability and capability evaluates the knowledge and managerial

stability of the middlemen on which the fulfilment of the distribution functions
depends. The reputation of business is important as when the producer is not
known in the foreign market, the selling is influenced to a large extent by the
reputation of the seller.
The location of the potential intermediaries will be done based on screening the
possibilities by sending letters of intention, following up the best respondents,
checking prospective middlemen via references and also personally checking the
promising firms and finally signing the agreement.

Table no. 10.4 Criteria for channel member selection

Characteristics Weight Rating

Goal and strategies
Size of the firm
Financial strength
Reputation
Trading areas covered
Managerial stability and capability
Compatibility
Experience
Sales organizations
Physical facilities
Willingness to carry inventories
After-sales service capability
Use of promotion
Sales performance (productivity)
Relations with the local government
Overall attitude
Source: Adapted after Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times
Pitman Publishing, p. 459.

According to Cateora et al. 11 the screening and the selection process should follow
the next steps:
1. a letter of intention, including information about the product and what
are the distribution requirements, is sent to each prospective
middleman,

11
Cateroa Ph and Graham J., 1999, Op Cit , p. 440.
International distribution systems

2. the best respondents will be asked more detailed information such as

lines handled, size of the firm, number of salespeople and territory
covered,
3. middlemen are checked through references from other clients,
4. personal check of the promising firm (if possible).
After the prospective middlemen have been located, the company should select
those that can perform and will be eliminated those that are under financed (if we
cannot support them financially through credits), those that have low sales volume,
those that cannot be trusted.
Experienced exporters suggest that the best way to find the suitable middlemen is
to go to that country and talk to ultimate users to find out whom they consider the
best distributors. After a middleman has been found, evaluated and selected, an
agreement with him should be made. The distribution agreement between the
producer and the middleman should include the specific responsibilities of the
manufacturer and middleman including the annual sales minimum. It is
recommended that initial contracts to be signed only for one year, to see the
performance of the middleman for the first year.

Motivating middlemen. Once middlemen have been selected, the manufacturer

should motivate them in order to keep a high level of interest in the manufacturer’s
products. The main motivational tools that can be used are:
• Financial rewards- incentives (discounted products) and margins.
• Psychological rewards- publicity, local newspaper, trips in the country
of the manufacturer.
• Communication- letters, periodicals with information, personal visits.
• Support- credit, special product information, technical assistance,
product service, advertising support.
• Close relationship- long term relationship, friendship in some cultures
(Arab, Japan, Latin America).
The financial incentives in the form of higher than average gross margins can be
used as a powerful inducement at international level, particularly for the
management of independent distributors, wholesalers and retailers. The expected
gross margins are influenced by the cultural history and by the channel. If a retailer
usually gets a 50% margin and the firm offers 40%, the effort of that retailer may
be less than expected for the company’s product.
A combination of motivational tools is recommended to be used at international
level to keep the distributors interested in the company’s products.
 International Marketing

Controlling and evaluating middlemen. The company wants to exert enough

control over channel members to help guarantee that they interpret and execute the
company’s marketing strategies. The company has to make sure that local
intermediaries implement price, sales, advertising and service policies. The issue of
control becomes more difficult at international level due to the usually longer chain
on the one hand and due to differences in culture, tradition, legal systems in
distribution on the other hand. The issue of control becomes important when there
are no integrated distribution systems and when the company distributes its
products through independent intermediaries mainly.
There are two types of control a company may pursue when controlling its
distribution systems in a country:
Š Control over the system
Š Control at middlemen level
The control over the distribution system takes place through:
& cost and market coverage objectives comparison against the planned
ones,
& the existence of grey markets is controlled, when through secondary
wholesaling (unauthorized outlets) the goods of the company are
entering the country. Goods intended for one country are diverted
(exported) through distributors to another country where they compete
with existing retail and wholesale organizations. The company’s
products that entered the country through unauthorized channels
become the greatest competitors for its own products. Such situations
can enter in conflict with exclusive arrangements with distributors and
affect the relationship of the manufacturer with these distributors.
Temporary distribution audits are recommended in order to revise existing
distribution systems due to changes in circumstances. The analysis should include
aspects such as:
ˆ different channels used by each product line,
ˆ costs of maintaining each channel and costs trends,
ˆ sales trends and sales volume of each channel,
ˆ types and numbers of end-users served by each channel,
ˆ number of middlemen involved in channel,
ˆ degree of control over channel and balance of bargaining power,
ˆ contractual obligations, contract expiry dates, exclusivity rights,
ˆ channels used by main competitors.
International distribution systems

The control at middlemen level, through which the manufacturer should know and
control to a certain degree the activities of the middlemen. At a minimum,
marketing channels should provide the products/services as follows 12 :
− in desired quantities (lot size),
− when needed (delivery time),
− at different locations (market –decentralization),
−
where they are displayed and combined with complementary and
substitutable items (assortment breadth) allowing for market demand.
Therefore, the company would measure performance by evaluating the outputs of
the system based on evaluative criteria, such as: sales volumes, market coverage,
services offered, prices, advertising. Controlling can be done through reports and
also through personal visits by company representatives.
When control fails or the interests of the company are not met the middlemen must
be terminated.

Terminating middlemen
There are two main questions related to the middlemen termination: When do we
terminate middlemen and how do we terminate middlemen?
When?
Middlemen will be terminate when they cannot be controlled, when they do not
perform by not meeting the planned sales volume and when the market situation
changes and the distribution strategy has to change.
How?
Middlemen can be terminated through simple dismissal, as in USA or Romania or
with compensation because of legal protection. In some countries, legal protection
makes it difficult to terminate a relationship with a middlemen. In Columbia, for
instance, when a manufacturer terminates an agent, it is required to pay 10% of the
agent’s average annual compensation multiplied by the number of years the agent
served, as a final settlement. In other countries in order to determine whether the
relationship should be ended the company has to go through an arbitration process.
Whenever contracts are signed with middlemen competent legal advice is very
important, so that termination conditions to be stipulated in the distribution
agreement.

12
Bradley F., Op. Cit., p. 558.
 International Marketing

10.3.3 Channel relationship

After the company established the distribution strategy, it has to implement it by

managing the channel through the steps discussed above, but also by managing the
channel relationships.
Manufacturers and intermediaries in international channels have very different
perspectives. Table no. 10. 5 presents the different needs of channel members. It is
necessary to achieve a minimum concordance between the objectives and the needs
of all parties in the distribution system: manufacturer, intermediary and the
consumer.

Conflict relationships. Conflict in distribution channels arises when inter-

organizational management breaks down, when one channel member’s actions
prevents the channel from achieving its goals.

Table no. 10.5 The needs of channel members

Factors important to manufacturer Factors important to intermediaries

Final consumer considerations Product and/or brand image
Company strategic issues Support assistance provided
Financial returns Compatibility of the product with the
intermediary’s existing line
Probability of effective long-term Trade reputation of the manufacturer
working relations
Potential intermediary’s financial Potential profit contribution
status
Management ability
Source: Bradley F., 1995, International Marketing Strategy, Prentice Hall, p. 550.

Cooperation is essential for distribution due to the numerous firms involved, many
of which being independent decision makers and not under common ownership.
The situation is complicated by culture, distance and legal factors in international
markets. Channel conflict is common but at the same time dangerous, as one
channel member can harm total channel performance.
International distribution systems

Channel conflict can have more forms:

1. According to the sources of conflict
Œ differences between channel members’ goals and objectives (goal
conflict),
Πdisagreement over the domain of action and responsibility (domain
conflict),
Πdifferences in perceptions of the market place (perceptual conflict).
2. According to the level it takes place:
Πvertical conflict that occurs between different levels in a marketing
channel. For instance, when a channel member bypasses another
member and sells or buys the product direct, or a disagreement over
the way the profit margins are distributed among channel members,
Πhorizontal conflict occurs between intermediaries at the same level in
a marketing channel, such as between two or more retailers or two or
more wholesalers.
In general channel conflict reduction takes place based on the application of one or
more sources of power.
The company has to make a difference between poor channel design that can affect
the channel performance too and the poor performance due to channel conflict.

Power relationships. Inducing all channel members to implement the channel

design appropriately is essential. But not all of them may have the same incentives
to operate in the desired manner. If a channel member does not perform
appropriately, the entire channel effort suffers. One way to determine the chain to
react appropriately is to have a “channel captain”, who using its channel power to
implement the optimal channel design, as in many cases channel leaders use power
to coordinate and implement channel strategy. A channel member’s power is “its
ability to control the decision variables in the marketing strategy of another
member in a given channel at a different level of distribution” 13 . Firms use power
in bargaining, they make commitments, provide rewards, make threats and
sometimes compromise in order to manage the conflict.
There are five sources of power that leaders of distribution channels can use:

13
El-Ansary A.I. and Stern L.W., 1972, „Power Measurement in the Distribution Channel” in Journal of
Marketing Research, vol .9, p. 47.
 International Marketing

& reward power: when a company is perceived as being able to offer

economic advantages (such as wider margins and promotional
allowances) to a distributor,
& coercion power: when a company is perceived as being in the position
to punish a distributor by reducing margin, slowing shipments and
reducing territory rights,
& expertise power: when a company is perceived as possessing special
knowledge (such as managerial and technical training) that can be
shared to the distributor,
& referent power: refers to the attraction of being associated with other
firms of well-known brands in the market,
& legitimacy power: when the company is perceived as having the right
to lead (such as in the case of contractual vertical marketing).

Coordination relationship. When the disparate members of the channel are

brought together to advance the goals of the channel, rather than their own
independent and likely conflicting goals, the channel is said to be coordinated. The
term denotes both the coordination of interests and actions among the channel
members who produce the outputs of a marketing channel and the coordination of
performance channel flows with the production of the service outputs demanded by
target end-users. Coordination is the end goal of the entire channel management
process. Channel coordination is not a one time achievement but anon-going
process of analysis and response to the market, to the competition and the abilities
of the members of the channel.

10.3.4 Alternative strategies to distribution

When international companies find non-responsive channels abroad, they can

develop alternative approaches. Among the most common alternative approaches
to gain access to distribution channels are the following:
− piggybacking,
− joint ventures,
− original equipment manufacturers,
− acquisitions,
− franchising.
International distribution systems

Piggybacking is an arrangement with another company that sells to the same

customer segment, to take new products for distribution as if they were theirs. One
producer (the carrier) uses their established overseas distribution network to market
goods of another producer (the rider) along side their own. The carrier acts as an
agent by selling the rider’s products on a commission basis. The new company is
practically “piggybacking” its products on the shoulders of the established
company’s sales force. The arrangement is very useful for firms that have
difficulties in getting intermediaries to pioneer new products for them. In addition
the firm retains control over pricing and product positioning. The method is quite
common in the pharmaceutical industry.

Joint ventures are projects in which two or three parties invest and form a new
legal entity. In the case of distribution the foreign producer forms a joint venture
with a local partner that has access to the distribution network. This is one of the
most frequently used way by foreign producers to get access to the Japanese
market. In 1993 the Japanese brewery market was dominated by four domestic
producers: Kirin, Asahi, Sapporo and Suntory with a total of 98% market share. In
order to get over the locked distribution channels, the USA producer Budweiser,
established a joint venture with Kirin, the largest brewer of the four to distribute its
imported products. Due to slow increase in the market share in 1998, the USA
company asked its distribution partner to produce canned beer locally to assure
freshness in the Japanese market 14 .

Original equipment manufacturers (OEMs) agreement occurs when an

international producer supplies products to a local firm, who in turn sells the
products under the local firm’s established brand name. The international
manufacturer gains access to the local firm’s distribution network and the local
company broadens its product line. Distributing in foreign markets under a OEM
agreement has the disadvantage that the local OEM will put its own label on the
imported label and the international company does not have access to local
consumers and cannot achieve a strong identity in the market.

Acquisitions take place when the foreign producer buys equity in an intermediary
or it buys an entire local company in order to gain instant access to the distribution
channels. It is important to try to find a company that has good relationships to

14
Jeannet J.P. and Hennessey H.D. , Op. Cit., p. 618.
 International Marketing

wholesale and retail outlets. The disadvantage is that it requires a substantial

amount of capital.

Franchising is another alternative distribution entry strategy to rapidly overcome

traditional channel obstacles. This is an agreement in which the franchiser makes a
total marketing program (including brand name, product, method of operation and
management advice) available to a franchisee in a foreign market.
Numerous international companies use these methods of market entry:
McDonald’s, Benetton, the Body Shop.

10.4 International logistics

International logistics were defined by Kotabe and Helsen as the design and
management of a system that directs and controls the flows of materials into,
through and out of the firm across national boundaries to achieve its corporate
objectives at a minimum total cost 15 . International logistics comprises the materials
management (as the inflow of raw materials, parts and supplies in) and through the
firm and physical distribution that refers to the movement of the firm’s finished
products to its customers.
At international level, international logistics is even more important due to its
complexity, given the fact that on average 35% a company’s expenditure is
accounted for physical distribution activities.
The main components of physical distribution are traffic and transportation
management, inventory control, material handling and warehousing, order
processing and fixed facilities location management. Table no. 10. 6 presents the
main decisions that have to be taken at the level of each logistical component.

Table no. 10.6 Main decisions in international logistics

Logistical activity Main decisions to be taken

Traffic or transportation management Choose the mode of transport
Inventory control Frequency of order in a given period
The amount to order
Material handling and warehousing The way products are stored and

15
Kotabe M. and Helsen K., Op.Cit., p. 466.
International distribution systems

moved
Order processing Ways to shorten order processing
Fixed facilities location management Location of warehousing facilities in
relationship to production facilities
Traffic and transportation deals primarily with establishing the transportation
mode. The main choices are air, sea, rail, truck or a combination of some of them.
In order to take the best decision the marketer has to know the specific properties
of the different modes of transport. The three most important factors in determining
an optimal transportation mode are value to volume ratio, the perishability of the
product and the cost of transportation 16 . The value to volume ratio is determined by
how much value is added to the materials used in the product. Perishability of the
product refers to the quality degradation over time and or product obsolescence
along the product life cycle. The cost of transportation should be considered in the
light of the value to volume ratio and the perishability of the product.
Ocean shipping is usually used for the transport of heavy, bulky and non-
perishable products such as oil, steel, automobiles. They have the advantage that
container ships carry standardized containers that facilitate the loading and the
unloading of cargo and inter-modal transfer of cargo.
Air freight. The total volume of international trade using air shipping is small (less
than 2% of the total volume of international trade of goods) even though increasing
in the last years. Usually the high value small volume goods are more likely to be
shipped by air, such as semiconductors, diamonds and also perishable goods such
as flowers.
Most goods are transported through inter-modal transportation through which
more modes of transportation are employed. When different modes of
transportation are involved, the company has to make sure that cargo is utilized at
full load, in order to minimize the per unit transportation cost.
Inventory control is important as inventory represents tied up capital and the
company is preoccupied to reduce its level to the minimum required. In order to do
that, many companies have adopted the Japanese system Just In Time (JIT) for
delivering parts and components.

Order processing has as main concern the shortening of the cycle and the
allowance for lower safety stocks. At present the available communication
technology influences the time it takes to process an order, where this technology is
available. Mail, telephone or fax systems do not work perfectly everywhere.

16
Ibid, p. 469.
 International Marketing

However, a rapid order processing can be a competitive advantage, as offers more

satisfaction to consumers, and more satisfaction means repeated business.

Material handling and warehousing refers to the way the products are handled
and stored. These decisions depend on where the firm’s customers are
geographically located, on the pattern of existing and future demand and the level
of customer service required. For those products that have to be delivered quickly,
the storage facilities have to be located near the customer. Warehousing at
international level involves dealing with different climates or longer average
storage periods that may require changing warehousing practices. More recently
automatic warehousing has been introduced in developed countries as a new
concept for the handling, storage and shipping of goods. Warehouses are often near
the factory and goods are stored automatically in bins up to twelve stories high.
The delivery and the retrieval of goods are controlled by a computer system.
Although automated warehouses require capital significant investment in
technology they have as effect a good reduction in costs.

Fixed facilities location management refer to the relationship between the main
fixed elements in the logistical flows, namely the production and the warehousing
facilities. A balance has to be obtained between satisfying the customer’s
requirements (for whom facilities have to be placed as close as possible to him so
that delivery to be quick) and the overall logistic costs.

10.5 Trends in distribution

Distribution systems throughout the world are evolving permanently as a result of

economic, social and political changes. Therefore, when developing a world-wide
distribution strategy marketers have to be aware of possible future developments.
There are a number of trends in distribution that manifest at worlds’ level and we
will present them shortly here.

Internationalisation of distribution is one trend as retailers of all kinds

(supermarkets, discount stores, department stores, hypermarkets) are being
developed globally shifting from developed countries to emerging economies. Such
examples are IKEA, McDonald’s, Pizza Hut, Carrefour, Marks and Spencer, Laura
Ashley, etc. The European Union motivated retailers in these countries to expand
International distribution systems

overseas, as they saw global retailers entering their markets. Table no. 10.7
presents a number of retailers that are active at pan-European level.

Table no. 10.7 The main pan-European retailers

Retailer Headquarters Markets

Aldi Germany Pan-european
Bata Canada Pan-european
Benetton Italy Pan-european
Body Shop International United Kingdom Pan-european
C&A Holland Pan-european
Carrefour France Pan-european
Hennes&Mauritz Sweden Pan-european
IKEA Switzerland Pan-european
La Boutique Melanie France Pan-european
Maildex Holland Pan-european
Marks&Spencer United Kingdom Pan-european
Metro Switzerland Pan-european
Mister Minit Germany Pan-european
Patagonia USA Pan-european
Ter Meulen Post Holland Pan-european
Thorn EMI United Kingdom Pan-european
Toys R Us USA Pan-european
Source: Samiee S., 1995, “Strategic Considerations in European Retailing”, Journal of
International Marketing, vol. 3, no. 3, p. 49-76.

The development of large scale retailers is another trend of the last years. The
trends evolves in the existence of fewer but larger supermarkets. The factors that
have been identified as contributors to this trend are 17 : the availability of
refrigerators and freezers on a large scale, the development of transportation
capacity with increased car ownership and the rise of the two income families with
the consequence of a reduction in shopping time but with an increase in cash
availability.

Information technology influences to a larger extent the developments in

distribution world wide. The retail industry moved fast to the use of electronic
check-out that scans the bar codes, speeds up the checking out process, reduces

17
Chee H. and Harris R., Op. Cit, p. 443.
 International Marketing

errors and eliminates the need to put the label on each product, improves inventory
control, gives the opportunity to track consumer behaviour. Both manufacturers
and retailers can collaborate in using the data offered by information technology to
better satisfy the consumer.

The development of direct marketing is another recent trend. The main instruments
of direct marketing such as telemarketing (selling by telephone), direct mail and
door-to-door sales are developed in many countries. Examples are companies like
Amway, Mary Kay Cosmetics, Oriflame, Avon, Zepter, Herba Life, many of them
functioning after the multilevel marketing principles.

Other trends include the shift from traditional to modern structures (new forms;
new alliances, new processes), the development of specialty stores (also known as
“category killers”), stores that are specialized in single product lines and are called
like this, due to the prices, the variety, the assortment that “kill” this product
category in other stores, discount stores and supermarkets extended to a large
degree in the last years in developed countries but also in developing countries.
The international pricing policy

International pricing is one of the most critical and complex issues that a firm
faces. Price is the only marketing mix element that creates revenue, while all the
others entail costs. This characteristic of pricing makes it a very important strategic
marketing instrument. Price is the money or other considerations (including other
goods and services) exchanged for the ownership or use of a good or service 1 .
From the consumer point of view, price is used to indicate value when it is paired
with the perceived quality of a product or service. Value can be defined as the ratio
of perceived value to price. The relationship shows that for a given price, as
perceived quality increases, value increases too. For some products, the price itself
influences the perception of quality and the value to consumer. It is the case of
products for which the consumers think that the higher the price the higher the
quality. How consumers make value assessments is not fully understood, but they
usually make comparative value assessments by judging the worth and the
desirability of the product or service relative to substitutes that satisfy the same
need.

We will be looking in this chapter to the factors that affect pricing internationally,
to strategies for price setting at international level and to a number of specific
aspects related to price when operating internationally.

1
Berkowitz E.N., Kerin R.A. and Rudelius W., 1989, Marketing, Irwin p. 284.
 International Marketing

11.1 Factors affecting international pricing decisions

The factors affecting pricing internationally can be grouped in three categories, as

presented in table no. 11.1.

Table no. 11.1 Factors affecting international pricing

Company factors Market factors Environmental factors

Company objectives Competition and market Regulations and
and policies structure government policies
Costs Customer demand and Exchange rates
income levels
Profitability Distribution channels Inflation
Price control

We will be discussing some of each category.

11.1.1 Company factors

Company’s and price objectives and policies. When developing a pricing strategy
a company has to decide what it wants to accomplish with this strategy. A
company’s pricing objectives should take into consideration the marketing
objectives, and these in turn are based on the overall company strategy. The
company’s objectives will vary from one market to another and they will also vary
in time, as marketers have to adjust their objectives both financial (return on
investment) and marketing-related (market share) according to the foreign market
conditions. We have seen that pricing takes place based on the company’s
objectives (such as maximizing current profits or projecting a premium image), but
the pricing may also influence the overall strategic decisions of the company
(based on price a company may decide to produce locally rather than export in a
country).
Chee and Harris presented which are the most common pricing objectives at
international level. See table no. 11.2.

Costs are often a major factor in price determination, because they provide a floor
under which prices cannot go in the long run. The company wants to set a price
The international pricing policy

that will at least cover the costs needed to make and sell its products. Therefore, the
structure of the costs becomes important. We know that the company costs consist
of two parts: the variable costs (which change with the sales volume) and the fixed
costs (which do not vary with the sales volume). The way these two components
are taken into consideration in the price determination depends on the pricing
strategy used by the company. See the section on pricing strategy.

Table no. 11.2 The most common pricing objectives

Pricing objectives Description

Return on investment Prices are set at a predetermined level of return on the
capital outlay on the short term
Market skimming The firm wants to get as much profit as possible from the
market in a short period of time (through a high price)
Market penetration The firm wants to grab as much market share as possible in
a short period of time (through low price)
Market stabilisation The firm (usually in a position of market leader) wants to
maintain the status quo
Early cash recovery When the firm has a liquidity problem, it wants to generate
high volume of sales and a high cash flow (special gifts,
discounts)
Prevent new entrants Setting a low price in order to prevent new entrants from
entering the market
Product differentiation Firms with a broad product range that wish to segment the
market can do this on the basis of price.
Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman
Publishing, p. 483-485.

11.1.2 Market factors

Competition and market structure represents another key factor in international

price setting. The differences in the competitive situation across countries usually
lead to cross border price differentials. In some countries the presence of
counterfeit products could force the firm to lower the price in those markets.
Also the prices of competitors’ products (the substitute products for the consumer)
have an impact on the sale volume attained by the international company. The
decision the company has to take is whether to price above, at the same level
 International Marketing

or below the competition. Any price differential from competitors has to be

justified in the minds of consumers by a differential in utility, namely perceived
value. The closer the substitutability of products, the closer prices should be.
The type of market structure or nature of competition (oligopoly or monopoly) can
influence the firm’s pricing strategy. The firm must price the product more
competitively if there are other sellers in the market. A firm entering an oligopoly
market where only few sellers dominate the industry, will be under pressure to
keep its prices in line with the existing firms. In some African countries where the
import of cars is controlled by a few competitors, luxury cars are extremely
expensive. On the other hand a sole supplier of a product, has virtually a monopoly
position, but it has larger flexibility to set the price.

Customer demand and income levels are important elements to be taken into
consideration when setting the price. While the costs set the floor for the price, the
consumer’s perceived value attached to the product will set the ceiling of the price.
Consumer demand depends on the buying power (correlated with the income
level), the tastes and habits of consumers, their lifestyles and substitutes. These
demand conditions are different from one country to another, with consequences
over prices.
The income level and the buying power is a key aspect in determining the price.
The relationship between price and demand is expressed in the concept of the
elasticity of demand, which measures how responsive is the demand to a change in
price. In the countries where there are high income levels, consumers have lower
price elasticities towards goods such as food, shelter and medical care, one reason
being the lack of other alternatives such as “do it yourself” as in lower income
countries.
In the countries where the per capita income is low, consumers are very price-
sensitive. Practicing premium prices is difficult in such countries, therefore an
option is considered to be to go for the mass market by adjusting the product
(downsizing or lowering the quality of the product) 2 . Price sensitivities change
over time, and even in developed countries with a high per capita income, in
periods of recessions, customers become more price sensitive.
Each country market should be stratified by estimating the number of customers
who will buy at several levels of price, so that to choose whom to address.

2
Kotabe M. and Helsen K., Op. Cit, p. 370.
The international pricing policy

Distribution channels. When setting the prices the international marketer has to
consider distribution channels, too, besides the consumers. The distribution costs
add up to the production costs and will increase the final price to the consumer.
Distribution costs are function of channel length, gross margin they practice and
logistics. Such aspects vary from one country to another, affecting the final price to
consumer.
The manufacturers and the intermediaries have to co-operate in order to have a
successful pricing strategy. Things became more complicated in the last decades as
the balance of power went more towards the distributors. Large retailers order in
bulk and they heavily bargain for large discounts with manufacturers.

11.1.3 Environmental factors

Regulations and government policies have both a direct and an indirect impact on
pricing policies. Factors that have a direct impact on pricing policies include taxes
rates (such as the value added taxes) and tariffs’ levels, import licenses and
antidumping legislation. Tariff levels differ from country to country. In countries
where there are high custom duties and the price elasticity is high, the price might
have to be set at lower levels if the product is to achieve a satisfactory sales
volume. Consequently, profitability will be low in these countries. Also when
import duties in a country are high on finished products, but relatively lower for
component parts and materials, it might be an incentive to produce or assemble
locally.
Import licenses are issued by some governments, when they consider that prices
are too low or too high. For instance, one company from Brazil needed a product
that Brazilian manufacturers were unable to provide due to lack of capacity.
Brazilian authorities (supposedly to foster local production) did not permit the
importation of the product from USA or Japan because it was available in these
countries at a price lower than the Brazilian manufacturers charged 3 .
Antidumping regulations are found in most industrialized countries. Dumping has
been defined as the practice of selling in foreign markets at prices below those in
the domestic market or below the production cost. Antidumping legislation is
enacted by countries that wish to protect certain local industries from price
fluctuations that would disrupt local production. Antidumping actions are allowed
under the WTO (World Trade Organization) provisions, as long as they meet two

3
Albaum G., Strandskov J. and Duerr E., Op. Cit., p. 366.
 International Marketing

criteria: “sales are less than fair price” (it usually means selling abroad at prices
below those in the country of origin) and “material injury” to a domestic industry.
In 1998 there were 225 WTO antidumping cases opened by twenty-six countries.
In 1980’s and 1990’s 80% of the antidumping charges have been brought by USA,
Canada, European Union and Australia often against Asian countries.

Exchange rates movement is one of the most unpredictable factors affecting

pricing. As the exchange rates move up and own, they affect all producers. An
appreciation or depreciation in the relative value of a currency can affect the firm’s
pricing structure and profitability. A company’s costs are often calculated in the
domestic currency and as this currency weakens it means that the company’s goods
are cheaper in another currency. This can represent a new opportunity as prices in
foreign markets are reduced and sales and market share can be kept or increased.
The companies that produce in countries with appreciating currencies have more
difficult situations. The goods manufactured in countries whose currency gets
stronger against the currency of the exporting country will have higher prices in the
exporting market and the export demand will drop.

Inflation rate is another major variable that can affect the cost and the pricing of a
product. First countries have different inflation rates and second inflation varies
over time. In stable economies inflation rate is a single digit inflation (in most EU
countries inflation rate is between 0-2%) while in instable economies inflation rate
can go up to several hundred or even thousands (it was the case of Brasil in
1980’s). In such highly inflationary environments the company has to adjust the
prices permanently to keep up with inflation, in this way product may turn out to be
more expensive. In such countries companies may price the product in a stable
currency (dollar, Euro, Yen) and translate prices into the local currency on a daily
basis.
Besides the difficulty in setting the price in highly inflationary countries, there are
also other aspects that can influence negatively the company’s activity: costs may
rise faster than the inflation rate, in highly inflationary economies price controls are
normally implemented and also foreign exchange controls, stopping the firm to
remit its profits.

Price controls. In some countries governments regulate and control prices either
for the entire economy of for specific industries (such as health, education, food
and other essential items). The justifications for price control are mainly political,
The international pricing policy

but also economical: the purpose is to stop inflation and the accelerating wage-
price spiral, as well as to protect consumers. In such markets the company
functions as in a regulated industry.
European Union countries have the drug industry highly regulated: in UK drug
prices are established through the Pharmaceutical Price Regulation Scheme that
limits the overall profitability of drug companies even though they are allowed to
set prices. Also drugs to be included on the list for governmental reimbursement to
customer have price limits and consequently there were companies that had to
diminish their prices in order to qualify. France and Germany also have restrictive
measures in order to limit the overall health costs 4 .
In some countries price controls are so severe by setting maximum ceilings to
price, that companies might have to restrain from the market. Cadbury Schweppes
sold in 1982 its plant in Kenya as price control made its operations unprofitable 5 .
Company representatives usually sustain that there are a number of negative
consequences to price controls:
Š the maximum price often becomes the minimum price if a sector is
allowed to price increase, because all business in the sector will take it
regardless of cost justification,
Š the wage-spiral advances highly in anticipation of price controls,
Š labour often turns against price restrictions because they are usually
accompanied by salary restrictions,
Š authorities raise less taxes because less money is made.

11.2 Pricing strategies

International pricing is influenced as we have seen by a number of factors: it starts

from the companies’ objectives, is developed through the company policy, is based
on product cost and its structure and takes into consideration environmental factors.
Considering these factors the company may use different strategies for pricing at
international level. According to the pricing situation, presented by Becker 6 as
being first-time pricing, changing pricing and multiple product pricing, the
company may use different pricing strategies. The main alternatives when choosing
one way or another of pricing are presented further.

4
Jeannet J.P. and Hennessey H.D., Op. Cit., p. 409.
5
Czinkota M. and Ronkainen I.A, Op. Cit., p. 576.
6
Becker H., 1980, „Pricing an international marketing challenge”, in International Marketing Strategy, eds.
Thorelli H. and Becker H., Pergamon Press, p. 207.
 International Marketing

Standardized or adapted pricing?

One question related to standardization adaptation of prices is: Can price be
standardized? Can we set an uniform price in all countries?
In nominal terms, we can set the same value price everywhere. Suppose a
hamburger is 4$ everywhere. But what does it mean 4$ in each country? Is the
price really the same? We can compare what the 4$ means in every country by
comparing how much time one spends in each country to bring up this amount of
money. When one buys something one is actually exchanging some of his time. If
he makes 4$/h the price of a hamburger is one hour work. For someone who makes
40$/h the price of buying a hamburger is 6 minutes of his work. This can be really
a valid criterion to see what price means in every country. The price is not the same
because the purchasing power differs from one country to another. To conclude, we
cannot standardize price in nominal terms, due to differences in incomes and
purchasing power, positioning of the product in different countries, due to product
life cycle (the product might be in different stages in different countries requiring
therefore a different price).
When we talk about standardizing prices we have to distinguish the idea of
standardizing prices versus standardizing price policies. We cannot standardize
prices, but we can standardize pricing policies. We just have to retain that
standardising price is not the same as standardizing pricing policies. We can say
that our strategy is to have a competitive price in all markets, to sell the product at
a low price and to position it as a mass product and we will set the price to
whatever this means in each country.

Full cost pricing or marginal pricing?

The company can chose any of the two above mentioned strategies. The full cost
pricing strategy is also called the cost-plus pricing. This approach adds the
international costs and a mark up at the domestic manufacturing costs. In other
words, the overseas customers pay for the total production cost of the product
(including the fixed costs), as well as for the marketing costs and logistical costs of
selling the product abroad. In many cases this method leads to very high prices for
the end user, making the product uncompetitive in some instances. The marginal
cost pricing is also known as the dynamic incremental pricing. Through this
method the price is set based on only variable costs for production and the
exporting costs for the product, in other words the costs incurred for the production
of that particular item, based on the judgment that the overheads are recuperated
The international pricing policy

from the previous products. The actual cost floor can be somewhere between direct
costs and the full cost.
If the export price is much lower than the domestic price (due to non-inclusion of
fixed costs) dumping accusations might be triggered from the export market.
Among the reasons for pricing exports at less than the full price are 7 : to assist a
dealer organization to grow, to keep a group of employees working together, to sell
a special product outside the usual export line, orders for large volumes, the export
customer provides his own installation and services and when incremental sales
may result.
On the short run when the company has excess capacity, prices can be set only on
direct costs, such as labour, raw materials, shipping, but on the long run prices
should recover full cots.

Skimming or penetration pricing?

A company may enter new markets either using high prices or low prices.
The skimming strategy consists of selling products at high prices in a new market,
based on the idea that you are selling a new product, an innovative product and you
can maximize your profits until the competition enters the market. This strategy
can be used in those countries where there are only two income level groups: the
wealthy and the poor. The poor cannot buy the product because its cost is higher
than the price they can afford to pay and you address the wealthy segment that is
usually in-sensitive to prices. For instance, high tech products: when they are new
they are sold at high prices, the market is skimmed by addressing those who are
willing to pay a high price for a new product. The skimming strategy deliberately
attempts to reach a market segment that is willing to pay a premium price for the
product. The strategy is used in the introduction phase of the product life cycle, by
limiting the demand to the early adopters who are willing to pay the price. The
goals of this pricing strategy are on the one hand to maximize revenue on limited
volume and on the other hand to reinforce the customers’ perceptions of high
quality, the price being part of the positioning strategy.
As a form of the skimming strategy, some companies have the objective to make
the largest short run profit possible and than retire from business, little thought
being given to the company’s permanent position in the market.
Another form of the skimming strategy is what is called the sliding down demand
curve that has the objective to become established in the foreign market as

7
Albaum G., Strandskov J., and Duerr E., 1998, International Marketing and Export Management, Addison
Wesley, p. 362.
 International Marketing

an efficient producer at optimum volume before foreign or domestic competitors

get in. The strategy consists of starting with an entire emphasis on pricing on the
basis of what the market will bear and moving from this point toward cost pricing
at a planned pace. The pace must be slow enough to pick up profits, but fast
enough to discourage competitors from entering the market. It is considered that
the companies following this strategy are seeking to recover development costs and
to become an established entity in that market 8 .

The other strategy the company can follow is the penetration strategy. In this case
the objective is to “penetrate” the market, to get a good market share, to cover the
market well in a short period of time and it is done by selling the product at low
prices. Obtaining the high market share in a short period of time will compensate
for a lower per unit return. It is usually a competitive manoeuvre that envisages the
creation of a loyal customer base and such an approach usually requires mass
markets, price sensitive customers and decreasing production and marketing costs
as the sales volume increase.
As forms of the penetration strategies Albaum, Strandskov and Duerr have
identified three forms 9 : the expansionistic pricing, the pre-emptive pricing and the
extinction pricing. Expansionistic pricing means that the price goes much lower in
order to get a larger percentage of customers who are potential buyers at very low
prices. The pre-emptive pricing means to set the prices so low in order to
discourage competition, the price level being close to the total unit cost.
Temporarily prices can also be set below the cost in order to discourage
competition, based on the assumption that profits will be made in the long run. The
extinction pricing has the purpose to eliminate existing competitors from
international markets, by again setting very low prices, close or under the total unit
cost. The strategy may be adopted by large low-cost producers with the purpose of
driving weaker marginal and small producers in the industry.
Both pre-emptive and extinction strategies are associated with dumping in
international markets, case in which foreign governments may impose antidumping
sanctions or close the market completely to the producers.

If similar products exist in the target market, market pricing can be used, by
determining the price based on competitive prices. This strategy is used when the
company has no choice but to accept the prevailing market price.

8
Ibid, p. 371.
9
Ibidem.
The international pricing policy

Whatever the pricing strategy the company uses, the one who finally decides what
is the right price is the consumer. He sets the price at the level he perceives, he
receives value for the money paid (for that price).
Companies from different countries can use different strategies in setting the price
for their products as figure no. 11.1 presents the differences between the USA
typical system and the Japanese typical system.

An important aspect when setting the export price internationally is the price
quotation. Different levels of prices can be used when exporting according to who
pays the transportation, handling and insurance costs. Table no. 11.3 presents the
main price quotations under the INCOTERMS system, that is a voluntary system,
but that is applied in courts and arbitration bodies when is the case.

Table no. 11.3 Price quotations (INCOTERMS)

INCOTERMS (main Description

terms)
Ex works (point of The seller’s responsibility and costs ends at this point in his
origin) home country (ex factory, warehouse, mine, point of origin)
Free on board (FOB) The seller’s responsibility and costs end in most cases when
the goods are loaded on the appropriate carrier (ship or
other)
Free along side (FAS) The seller has to provide the delivery of goods free
alongside, but not on board of the transportation carrier, but
only in the port of shipment.
Cost and freight The seller’s responsibility ends when the goods are loaded
(C&F) on board a carrier or in the custody of a carrier. The seller is
responsible for paying for the transportation, but the buyer
still has to pay for the insurance.
Cost, insurance and The seller responsibility ends when the goods are loaded on
freight (CIF) board a carrier and also has to provide and pay for the
transportation and for the insurance.
Ex dock The seller is responsible to provide and pay all the costs so
that the goods arrive on the dock of the overseas port of
destination, with the import duty paid.

Source: Albaum G., Strandskov J. and Duerr E., 1998, International Marketing and Export
Management, Addison Wesley, p. 380-383.
 International Marketing

Figure no. 11.1 Price setting strategies USA and Japan

United States Japan

Market Research Market Research

Product Characteristics Product Characteristics

Planned Selling Price

Design
Less Desired Profit

Engineering TARGET COSTS

Supplier Design Engineering Supplier Pricing

Pricing

Target costs for each component force

COST marketers, designers and engineers
from all departments and suppliers
to struggle and negotiate trade-offs
If cost is too high,
return to design phase
Maufacturing

Maufacturing
Continuous Cost Reduction
Periodic Cost Reduction
Source: Robert M., 1993, Strategy Pure and Simple: How Winning CEO’s Outthink Their
Competition, McGraw Hill, p. 115.

11.3 Specific aspects in international pricing

Price escalation occurs when the price in the foreign market ends up higher than
the price in the domestic market due to transportation costs, local taxes, custom
duties, distribution margins, export documentation charges, insurance etc.
The international pricing policy

Transportation costs are important because international marketing requires

shipments of products over long distances. The contribution of transportation cots
to the final price depends on the type of product. High technology products are less
sensitive to transportation costs than standardized consumer goods or commodities.
For expensive goods (such as computers and electronic instruments) transportation
costs usually represent only a small fraction of total costs and rarely influence
pricing decisions, while for commodities, transportation costs represent a higher
percentage from the total costs and can decide who gets an order.
Tariffs and local taxes also add to the domestic costs. Custom duties can take three
forms and contribute to the final price differently: specific (is a flat charge per
physical unit imported, such as 15% per machine), ad valorem (is a percentage of
the value of goods imported, such as 20% of the value of imported sweaters) and
compound (includes both a specific and an ad valorem charge, such as 1$ per
camera plus 10% of its value).
Administrative costs consist of fees for imports certificates or export or import
licenses and other documents.
Distribution channel costs. Every time the product goes down the channel towards
the consumer, somebody gets a commission every time the product changes hands
there are more taxes paid (VAT), there are added more margins and the product
gets more expensive. The larger the number of intermediaries the higher the final
price, more handling and transportation is needed, more margins. Price escalation it
also a problem of poor channel design.
All these elements add up and increase the price in the foreign market. Table no.
11.4 presents an example of price escalation for a good that can be sold both
through an importer or direct to a wholesaler.

Price escalation can increase the export price with few percentages until up to
100% or more. For instance, an USA company exporting household cleaning
products to South America, by adding transportation, import duties and taxes,
wholesaler distribution margins, retail margins and VAT ended up in an excess of
300% 10 . This type of escalation provides a strong incentive to locate production
closer to the consumer in order to diminish the costs.

10
Keegan. W., Op. Cit, p. 416.
 International Marketing

Table no. 11. 4 Price escalation

Domestic
Cost categories per unit Export channel (Euro)
channel (Euro)
Firm’s price 40 40.00 40.00
Insurance and shipping
costs 4.00 4.00
Landed cost 44.00 44.00
Tariff (20% of the 8.80 8.80
landed cost)
Importer’s cost 52.80
Importer’s margin 13.20
(25% on cost)
Wholesaler’s cost 40.00 52.80 66.00
Wholesaler’s margin 13.33 17.60 22.00
(33.3% on cost)
Retailer’s cost 53.33 70.40 88.00
Retailer’s margin (50% 26.66 35.20 44.00
on cost)
Retail price 80.00 105.60 132.00

Price escalation 32% 65%

There are two strategies that the company can follow when price escalation occurs:
1. To adjust the marketing mix and to position the product as a luxury
product highly priced. This strategy involves the use of the total cost pricing that
adds to the production costs, the export cost. By adopting this strategy the company
sacrifices volume to keep a high unit price. Lego, the Danish toy maker sells its
building blocks in India with prices comprised between 6$ and 223$, addressing
middle-class parents by emphasizing the educational value of the Lego toys.
2. To diminish the price and bring it in line with what the domestic
consumers pay, taking also into consideration the foreign market prices. This
approach is used when the marginal cost pricing method is used. There are
The international pricing policy

a number of ways to try to lessen export prices. Kotabe and Helsen and Cateora
and Graham present some of these methods for lowering the export price 11 :
1. Rearrange the distribution channel. Distribution channels are often
responsible for price escalation, either due to the length of channel or
the high margins practiced by intermediaries. One way to lower export
prices is to shorten the channel and to try to negotiate with
intermediaries lower margins. Obtaining lower margins from
distributors is possible only when a large part of their business depends
on the company’s product.
2. Lower the production costs for foreign markets. There are a few ways
how the company can lower production costs for foreign markets:
A. By using different materials (cheaper materials) of lower quality
and a lower price.
B. By eliminating costly features or make them optional. A company
can offer in a foreign market a core product and all other features
to become optional. Such an example is represented by the
automobiles, that in some markets have a lot of expensive features
(such as central locking, leather sofa, air conditioning, etc)
optional. The customers buy the core product and they can decide
if they want to pay extra or not for the optional features.
C. By down-sizing the product. Another option would be to downsize
the product by offering a smaller version of the product or less
content.
3. Assemble or manufacture the product in foreign markets. A closer
proximity to the customer will lower the transportation costs. But it is
not necessary to manufacture in the export market. Another argument
in favour of assembling goods in a foreign market would be that
usually taxes for raw materials and part components are lower than for
manufactured goods, so it is more advantageous to import part
components than finished goods.
4. Lowering tariffs:
A. If the production costs are lowered, that will also mean lower
tariffs as the tax will be applied to a lower value.
B. Modify slightly the product so that it can be reclassified into a
different lower tariff classification or simply trying to persuade

11
Kotabe M. and Helsen K., Op. Cit, pp. 375-376 ; Cateroa Ph. and Graham J., Op Cit., 1999, p. 563-566.
 International Marketing

the custom officer to classify it under a lower tariff category. For

instance, an American company producing data communication
equipment faced a 25% custom duty in Australia as the product
was classified as “computer equipment”. They managed to
persuade the Australian government to reclassify it as
“telecommunication equipment” for which the custom duty was
only 3%. This made a big difference in price.
Also, when USA introduced an extra 10% tax for luxury cars (over
30000$), Land Rover increased the maximum weight of the Range
Rover models so that the Range Rover could be classified as a
truck rather than a luxury car, escaping in this way the extra 10%
custom duty.
C. Repackaging may be a solution to lower custom duties when the
taxes differ for different sizes of the package. In USA tequila
bottled in larger bottles is taxed half than in the smaller bottles, so
the product was rebottled in larger recipients in order to lower the
custom duty.

5. Using free trade zones or free ports when possible. There are more
than 300 free trade zones in the world: there are entire countries that
are free trade zones (Sri Lanka, Mauritius) or only a simple warehouse
in a town can represent a free trade zone. In a free trade zone, the
payment of the import duties is postponed until the product leaves the
free trade zone and either enters the country or is exported to a third
country. Initially the free trade zones were used as storage facilities in
order to export to other countries. For instance, an American
manufacturer of hair dryers stores its product in a Chinese free trade
zone, that acts as a main distribution centre for the entire Asia.
Presently, free trade zones are also used now to assemble products and
to export them in that country or in other countries. A Japanese
company assembles motorcycles in an American FTZ, motorcycles
that will be consequently imported in USA and exported in Canada
and Latin America. By assembling the product in a FTZ, the prices
can be lowered as no duties on labour and overhead costs are paid and
no tariffs are paid for local part components that are used to assemble
the goods. However, if the finished products are not imported into the
country from the FTZ, no tariffs will apply.
The international pricing policy

Parallel imports and price coordination. A phenomenon that may occur in

pricing and distributing internationally is the one of parallel imports. Importers buy
products from distributors in one country and sell them in another to distributors
who are not part of the manufacturer’s regular distribution chain. Through parallel
imports the company enters in competition with its own products, that enter the
country through unauthorized channels of distribution. The main company’s
products competitors, are the same company products that enter the foreign country
through another distribution channel and at another price maybe. It blows up the
distribution and the pricing policy of the company. Parallel imports are a matter of
lack of control over distribution.
When do parallel imports occur? When would one import a good that already exist
in the Romanian market, imported by somebody else?
There are a few situations that encourage parallel imports:
1. Large price differentials,
2. Exclusive distribution,
3. Variations in the value of currencies,
4. Restrictions: import quotas, high tariffs.

1. Large price differentials. When the company sells the same product in
two neighbouring countries at different prices and the price difference is higher
than the transportation cost between the two countries, there is the possibility of
parallel imports. For instance, in Europe in the pharmaceutical industry the
difference in prices among countries is up to 20%, encouraging therefore parallel
imports.
2. Exclusive distribution. When companies want to maintain an exclusive
quality image they use only a few distributors, allow them high margins, in order to
obtain extra services for customers or a large inventory assortment. Products such
as fragrances and fashion articles (Gucci or Nike) are sold through exclusive
distributors at high prices in order to create an exclusive quality image.
Consequently, they may be subject of parallel importing.
3. Variations in the value of currencies between countries. In European
Union before the introduction of Euro the Germans were buying the Volkswagen
cheaper in Italy than in Germany. The lira was weaker than the mark, so by
exchanging the marks in liras the German was paying less (calculated in Marks) in
Italy than he was paying in Germany.
 International Marketing

4. Restrictions such as high tariffs or quotas increase the price of the

products on that market and might make it more convenient for the consumer to
buy it from the neighbouring country. In this way illegal imports are encouraged.

In these circumstances the question raised is how a company can stop or diminish
parallel imports?
A first sight solution might be the harmonization of prices across countries. But is
really price harmonization a solution to parallel imports? In European Union for
instance, according to the free movement of goods principle, parallel importing is
not restricted. And we have the example of the two French companies importing
Grundig equipment from Germany – one was an authorized distributor the other
one was an un-authorized distributor. The authorized distributor sued the other
company and according to the French law it won. But the un-authorized dealer
appealed to the EU Court and won. According to the free movement principle of
EU, companies cannot restrict distribution. As the EU laws have precedent over
national laws, the parallel import was allowed.
One possible solution to stop parallel imports would be to align prices at a pan-
regional level through price coordination. Kotabe and Helsen proposed a few steps
to the process 12 :
S1. Determine the optimal price for each country. The first step is to find
out what is the optimal price for each country, the price that would maximize
profits in that country, based on costs incurred and the standard of living of the
country.
S2: Find out whether parallel imports are likely to occur at those prices.
The second step is to find out if parallel imports are likely to occur in the region.
And this will be probably the case if there are low-price markets (given the demand
and the purchasing power) the high-price markets.
S3: Set a pricing corridor. The third step would be to narrow the gap
between high price markets and low price markets, by setting a price corridor.
Such a solution would sacrifice companies profits by lowering the price in high-
price markets and would lower demand by increasing price in low-price markets.
Figure no. 11.1 presents the method.

12
Kotabe M. and Helsen K., Op. Cit., p. 390-392.
The international pricing policy

Figure no. 11.1 Price coordination at regional level

Highest

Old price differential

Future price corridor

Lowest
Today Tomorrow

Source: Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 391.

Dumping is an important global pricing strategy issue. Dumping is defined

differently by various economists as well as by different governments, either as
prices below cost of production or prices below the price of the same goods in the
home market. In many cases dumping is defined as an unfair price. But what is an
unfair price? Some say, a price below the production cost other say it is a price
below the price of the same good in the home market. The problem is that some
products are only manufactured for export, they are not produced for the local
market and there is no home price to compare to.
In 1979 the GATT’s Antidumping Code defined dumping as the sale of an
imported product at a price lower than that normally charged in a domestic market
or country of origin. In this way imported goods are sold at very competitive prices
and this can be detrimental to the local firms producing similar goods.
There are a number of causes for dumping, among which the most frequent are:
• Subsidies from government in production.
• Subsidies from government in export.
• Subsidies from government in transport.
• Pricing on marginal cost.
There are several types of dumping and table no. 11.5. presents them shortly.
 International Marketing

Table no. 11.5 Types of dumping

Type of dumping Description

Predatory dumping A firm is selling the product at a considerable loss to gain access
to the market and drive out competitors.
Persistent dumping A firm consistently sells at lower prices in one market than in
others, as a permanent strategy, usually due to different market
conditions.
Sporadic dumping A firm wants to get rid of the unsold stocks and dumps the
excess in markets abroad where they are not usually exporting
to.
Unintentional Occurs because of the existence of a time lag between the date
dumping of the sales agreement and the arrival of the goods. The
exchange rates’ fluctuations can cause the final price of the good
to be below the usual price in the manufacturer’s home market.
Reverse dumping Occurs when the price of a good is much lower in the
manufacturer’s home market.
Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman
Publishing, p. 493-494

Whenever companies are suspected of dumping, they can be asked to pay dumping
taxes. For instance, Boeing has accused Airbus that is dumping its products into the
USA market by selling comparable models with 10-20 million $ below the actual
costs. Airbus was thought to be subsidized by the different governments from the
countries that formed the consortium.
Dumping is considered illegal in many countries and when it occurs it is difficult to
prove it. Many countries have their own policies and procedures for protecting
national companies from dumping. Also, since the removal of the traditional trade
barriers (tariffs, quotas) countries switched to non-tariff barriers such as accusing
of dumping to protect their local industry.
We can notice that different countries use anti-dumping for different purposes,
from legitimate protection from predatory dumping up to local protectionism by
limiting foreign competition.
Most dumping practices are sporadic and unpredictable and therefore difficult to
include in planning. However, very rarely there is also continuous dumping taking
place, an example being the sale of agricultural products at international prices,
when the farmers are subsidized by governments.
The international pricing policy

As we mentioned, in the last 20 years most anti-dumping actions have been taken by
USA, Canada, European Union and Australia, in many cases against Asian countries.
There are a number of strategies that companies can use in order to avoid anti-
dumping accusations and still practice lower prices:
1. To base its strategy on non-price competition, such as the use of credit
facilities to both consumers and distributors, that is equivalent with a
price reduction and avoids the dumping laws.
2. To differentiate the home product from the exported one, by selling
different brands in foreign markets for comparable products, so that
removing any basis for price comparison and avoiding charges of
dumping.
3. To move away from low value to high value products through product
differentiation. This is a practice used by Japanese car manufacturers
that complete their product lines in foreign markets with up scale
products.
4. To move the location of the production in the host market.

Counter trade is a pricing tool that involves some form of non-cash

compensation. Counter trade comes in a few forms, some of them that involve cash
compensations and some others that do not involve the use of money.
Forms that do not involve any type of cash payments are barter, clearing
agreements and switch trading, while forms that involve some use of money are
product buy-back, compensation, counter purchase and offset as presented in table
no. 11.6.

Table no. 11.6 Types of counter trade

Non cash counter trade forms Cash counter trade forms

Barter Product buy-back
Clearing agreements Compensation deals
Switch trading Counter purchase
Offset

Non-cash counter trade forms

Barter is a direct exchange of goods between two parties: one product is exchanged
for another product without the use of money. In the communist years, Pepsi Cola
company was exchanging Pepsi concentrate with Russian vodka and also Pepsi
concentrate was exchanged for Romanian wines.
 International Marketing

Clearing agreements. Under this form two governments agree to import a specified
value of preset goods from one another over a given period of time. Each party sets
up an account that is debited whenever goods are traded. Imbalances at the end of
the contract period are cleared through payment in goods (and sometimes can be in
hard currency too).
Switch trading. This is a variant of the clearing agreements, where a third party is
involved. The right to the surplus credits between the two governments is sold to
specialized traders (switch trader) at a discount. The third party then uses the
credits to buy goods from the deficit country.

Plus cash counter trade forms

Compensation takes place when a company sells industrial equipment to Venezuela
and receives 60% of the payment in convertible currency and 40% in wool. The
advantage is that as compared with the barter, there is an immediate cash
settlement of a portion of the bill. If the seller has to rely on a third party to find a
buyer, the cost involved has to be taken into consideration in the original
compensation negotiation.
Counter purchase consists in signing two parallel contracts. Every party agrees to
buy from the other party a certain amount of goods for hard currency. Both parties
pay in hard currency, but each party commits to buy goods from the other party.
The importer sets up a shopping list with the goods that it wants to sell through
counter purchase in the same amount of money (or %) from the goods bought.
Counter purchase is the most popular form of counter trade.
Product buy-back is usually used when a production plant, a turn key plant,
production equipment or technology is sold. The seller of the production facility
agrees to be paid integrally or partially with the products manufactured with the
equipment. Levi’s agreed to buy Hungarian made jeans in order to be able to set up
a factory next to Budapest. The major inconvenient of the product buy back is that
the products that are bought back enter in competition with the company’s own
products.
Offset. Offset is a variant of the counter purchase, in which the seller agrees to
“offset” the purchase price by sourcing from the importer’s country or transferring
technology to the other party’s country. This form is common in defences industry
contracts.
The international pricing policy

The counter trade is used as a pricing tool in certain situations, when it offers
certain advantages:
z To gain access to new or difficult markets, markets that lack hard
currency in cash and would prefer to pay with goods.
z Shortages of hard currency lead to exchange controls. A company may
overcome government imposed currency restrictions by using barter
agreements.
z Companies that have a large amount of overhead need to increase sales.
They can use counter trade in order to dispose of the surplus products.
z Also companies that accept counter trade as a form of payment will be
able to capitalize, to benefit of a long-term good-will from those
countries.
Counter trade accounts for about 10-15% of the world trade according to some
sources and about 20% according to other sources. However, its use increased over
time. While in 1975 only the Central and Eastern European countries were using it,
at present the number of countries using it as a method of payment increased from
15 to 100. As developed countries become saturated markets the source for future
development will be the emerging, industrializing, developing countries, countries
that might be short of hard currency and therefore counter trade may be a good way
of payment for them. The conclusion is, that there is future growth potential for
counter trade.

However, counter trade is risky and has a number of shortages that companies have
to assess before committing to such a strategy.
ˆ The goods offered in exchange cannot be used in-house and the
company might face a problem of what to do with those goods. Getting rid of those
goods might be a major headache, especially if the goods are of poor quality or
when it is an oversupply of that particular good. The company may use third
parties (specialized brokers) to sell their goods.
ˆ Such deals usually involve a longer period of time in order to agree
over the goods to be treated and their perspective valuation, the percentage of cash
and goods, the time horizon for contracts.
ˆ There is always the risk that the price of the goods that will be received
to change from the time the contract is signed until the products are delivered and
sold. Also, there is always the uncertainty over the quality of the goods.
ˆ Transaction costs are usually higher as the company has to find buyers for
the goods received, they have to pay commissions to middlemen if they use any.
 International Marketing

In conclusion, the company has to balance the advantages and disadvantages of

counter trade and decide when to use it or not. Historically Western European and
Japanese companies accepted counter trade as a payment tool from countries in
shortage of hard currency, more then American companies. Presently, American
companies started to use counter trade too, as they realized that this can be a
competitive advantage in dealing with new and difficult markets.

Transfer pricing. A substantial amount of global business takes place between

subsidiaries of the same company. It is estimated that one third of the world trade
volume takes place among the largest eight hundred multinationals. The pricing of
goods and services bought and sold by operating units or divisions of a single
company represent the transfer pricing. So, transfer prices (or the intra-company
prices) are prices used in transactions between buyers and sellers that have the
same corporate parent. How these prices are set is a major issue for international
companies and governments. Transfer prices can create problems because they are
not determined in the market place through the interaction of willing buyers and
sellers and this can result in a situation where foreign transfer prices are set at a
level that does not reflect a fair value. Due to a number of factors related to the
context in which multinational companies operate, transfer prices are used to
manipulate profits, duties and incomes of the company. Table no. 11. 7 presents the
main factors that can influence transfer pricing.

Table no. 11.7 Factors influencing transfer pricing

Influences on transfer pricing decisions

1. Market conditions in the foreign country
2. Competition in the foreign country
3. Reasonable profit for the foreign affiliate
4. Economic conditions in the foreign country
5. Import restrictions
6. Custom duties
7. Price controls
8. Taxation in the foreign country
9. Exchange controls
Source: Czinkota M.R. and Ronkainen I.A., 2001, International Marketing, Harcourt College
Publishers, p. 564.
The international pricing policy

Different tax, tariff or subsidy policies in different countries invite to the

manipulation of transfer prices. By accumulating more profits in a low-tax country,
a company lowers its overall tax bill and thus increases profit. At the same time the
company is interested to minimize income in high tax countries. The higher the
duty rates, the higher the incentive to reduce transfer prices, so that to minimize the
custom duties.

There are a number of reasons for which multinational companies use transfer
prices in their favour. Among those we present the most frequent ones:
1. To minimize tax liabilities. Given the different level of taxation,
companies will try to maximise profits in low income countries and to
minimize profits in high income countries.
a. From countries with low income taxes: transfer prices are set high
for goods and services sold from countries with lower corporation
tax to another subsidiary of the firm in a high tax country. By
transferring (selling) the goods at high prices the company gets high
income that is taxed low, while the partner company in the high
income country to which the goods are transferred have higher costs
(by buying at high prices) and get less income to be taxed.
b. From countries with a high corporation tax: transfer pries are set
low for goods and services transferred from countries with high
corporation tax to a country with a low corporation tax. By
transferring (selling) the goods at low prices, companies are
obtaining low incomes and consequently low profits to be taxed in
a high tax country. At the same time the companies from low tax
countries to which products are transferred at low prices get large
incomes that are low taxed. See table no. 11. 8.

Table no. 11.8 Minimizing tax liabilities

Low corporation tax High transfer prices High corporation tax

High corporation tax Low transfer prices Low corporation tax

 International Marketing

2. To avoid host country government regulation. If the foreign

government places restrictions on the repatriation of dividends,
interests or royalties, the company can manipulate again the transfer
prices in order to shift funds out. Usually it is the case of developing
countries that have such restrictions and from where multinational are
willing to transfer the funds.
a. From the developing country (with restrictions). The goods will
be transfer from the developing country to another country by
setting low transfer prices. In this way the company does not
accumulate high income and high profits in a country from which
it is difficult to repatriate.
b. From the developed country. The goods will be transferred from
the developed country to the developing country at high prices,
that represent high costs of acquisition for the company in the
developing country, and at the same time money (costs paid) get
out of the country. See figure no. 11.2.

Figure no. 11.2 Avoid foreign government regulations

Low transfer prices

Developing country
Developed country
(restrictions)
High transfer prices

3. Reduce tariff duties (when they are ad valorem). Goods are transferred
to countries with high tariffs at low transfer prices, so that lowering the
value of goods and services and paying a lower tariff.
4. Avoid sharing profits. When the company has a form of a joint venture
and not a wholly owned subsidiary in a foreign country, does not want
to share the profits with the foreign partner. In these cases there is an
incentive for companies to transfer goods and services in subsidiaries
that are joint ventures in foreign countries at high prices, involving
high costs for the company and therefore less profits to be shared with
the local partners. A low transfer price towards a subsidiary that is
a joint venture would mean that profits obtained have to be shared.
The international pricing policy

Many joint ventures have died due to discussions around the issue of
transfer pricing.
There are a number of methods that multinational use to set the transfer prices.
They are grouped in two main categories, namely market based transfer pricing and
non market based transfer pricing.

A. The market based transfer pricing uses the market mechanism as a cue
for setting transfer pricing. Such prices are usually referred to as arm’s length
prices, meaning that the company charges the price that any buyer, any third party
from outside the company would be charged. Prices set based on this approach are
very easy to justify to third parties, such as tax authorities.
There is also a method known on its own as the market based transfer pricing,
through which the price is achieved from the price required to be competitive in the
international market. This market price approach is based on an established market
selling price, and the products are usually sold at a discount to allow some margin
of profit for the buying division.

B. The non-market based transfer pricing comprises various policies that

deviate from the market based pricing. Among those the most well known are:
a. cost based pricing
b. the negotiated pricing.
Negotiated prices can be set at any levels and can solve any of the multinational’s
problem from the ones mentioned above.
The cost based pricing can also be done in at least three different ways, all having
at starting point the cost, but different levels of costs:
a.1. Based on the manufacturing cost, when the transfer price is set at the
level of the production cost.
a.2. Cost plus approach:
a.2.1. Local manufacturing cost plus a standard mark-up
a.2.2. Cost of most efficient producer plus standard mark-up
 International Marketing

Countries governments started to monitor the way multinationals use transfer

prices, so that to stop them to avoid paying taxes especially in the high-tax
countries.
Whenever they are suspected, they become subject to a tax audit from authorities
risking high fines or other constraining measures (import restrictions, price
controls, exchange controls).
In the last years many multinationals started to set their transfer prices based on the
arm’s length method, that is usually accepted also by foreign governments.
International promotion strategy

Communication is a major part of the international marketing activities. It is not

enough to produce and make available a product or a service, it is also necessary to
provide information that buyers need in order to make purchasing decisions.
Communication takes place through the promotional activity. The function of
promotion at international level is similar to that in a domestic market, as the firm
communicates with its customers and other different audiences with the objectives
either to inform, to persuade or to remind, in the attempt to achieve the corporate
goals.

12.1 The international communication process

The elements of the communication process are the same in the international
communication process as in the internal communication process, with the only
difference that this time it takes place in two cultural contexts. The different
cultural contexts can increase the probability of misunderstandings, because the
message is encoded in one culture and decoded in another. Figure no. 12.1 presents
the elements of the communication process at international level.
 International Marketing

Figure no. 12.1 The elements of the international communication process

Factors influencing
the communication situation
• Language differences
• Cultural differences
• Social differences
• Economic differences
• Legal differences
• Competitive differences
• Noise differences

Source Encoding Message Decoding Receiver

/ sender transmission activity
channel

Company Message Mass Message Action

with translated communication interpretation of the potential
product into media, sales by market consumer
or service appropriate promotion etc. responding
meaning for to the message
market

Noise

Competitor activities
Communication
distractions, confusion

Feedback Response

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman Publishing,
p. 522.

1. The communication process starts with the information source/sender,

that is the international marketer who has a product about which wants to send a
message. The product message is conceived in the cultural context of the country
of origin and is conveyed to the cultural context of a foreign country. The product
International promotion strategy

message should contain information that reflects, the needs and the wants of the
target market from the cultural context of the foreign country where the customer
is. The danger of acting based on the self-reference criterion (SRC) is high. For
instance, in USA the toothpaste is seen as a product that reduces the risk of cavity,
while in UK toothpaste is seen rather as a breath control product. The same product
serves different basic needs and this should be reflected in advertising messages.

2. In the second step of the communication process, the message is

encoded. The encoding takes also place in the cultural context of the country of
origin and symbols used to encode the message are very important at this stage
because, as we have already seen, things have different symbols in different
cultures. The SRC can interfere at this stage too. For instance, a perfume company
used a drop of rain in one of its ads, that for Europeans symbolizes a clean, cool,
refreshing image while for Africans is a sign of fertility.

3. The third stage of the communication process is to send the message

through the message channel. The media channel selection is very important, as
channels are selected in the foreign country and they have to reach the targeted
consumer in order for the communication to be effective. Errors such as ad
newspapers addressed to people who cannot read and TV ads addressed to masses
when only 15% of the population has a TV in the household, are to be avoided.

4. In the forth stage of the communication process, the message sent

through media is decoded by the receiver in the cultural context of the foreign
market. There are a number of decoding problems that can appear. For instance,
Pepsi’s “ Come Alive” was decoded as “come out of the grave” in some cultures,
due to bad translation. Decoding errors may appear accidentally when no
symbolism is intended but in the other culture some symbolism is attached to the
message or when the intended symbolism has no meaning to the decoder.

5. In the fifth stage, at the receiver level, action is taken based on the
decoded message.

6. The company evaluates the results of its actions through a feedback

system (marketing research). Errors are to be identified at any stage in the
communication process: information source, encoding, media channel, decoding
and corrected. This stage takes place in both cultural contexts.
 International Marketing

7. The last element of the communication process is the noise referring to

uncontrollable and unpredictable influences that can affect the process in any of the
six stages (such as competitive advertising, confusion). Noise is disruptive, cannot
be controlled and comes from one or another of the cultural contexts or from the
interaction of the two cultural contexts.

12.2 The international promotion planning process

International promotional planning involves the following steps:

1. Select target audience and positioning theme.
2. Set campaign objectives and the degree of worldwide standardization.
3. Determine the promotional mix.
4. Determine promotional budget.
5. Develop message strategy.
6. Decide on media strategy.
7. Assess effectiveness.

The international promotional plan is designed through a process that usually

follows a number of steps: It starts with the selection of target audience: to whom
we wish to communicate and also the selection of the positioning theme: meaning
what is the position (= the image) the company wishes to transmit about its
product. The next step is to set the promotional objectives for that promotional
campaign and to determine the degree of standardization for that campaign: Is the
company going to have a standard promotional campaign in all countries? Is it
going to adapt to local conditions? To what degree shall the company standardize?
To what degree shall the company adapt? Then, the promotional mix, the
promotional tools to be used in order to reach the promotional objectives are set.
The required budget for reaching the objective is also set, as a company cannot
start promoting without knowing how much money is available. The development
of the most effective message is the next step, when the standardization/adaptation
decision has again to be taken. After setting what is going to be the message to be
transmitted to the target audience, the company sets the media that is going to be
used. The last step of any process is to assess the effectiveness, to compare what
was planned to do with what was actually done. We will start looking at these steps
in detail.
International promotion strategy

12.2.1 Select target audience and positioning theme

Target audience refers to the market segment: is it going to be a global segment or

a local segment?
Positioning refers to the image for each country: is it going to be global positioning
or local positioning?

The first step in the marketing planning process is to identify the market segment:
who are the consumers to whom the company will address the products?
The market segment the company chooses to serve is the target audience. To this
audience the company is going to send the messages. The issue that arises in
international marketing is: shall the company address to a global segment or not?
Shall it choose the audience according to the similarities and commonalities
between consumers from different countries? Gillette when selling products for wet
shaving of legs, found out that in USA 75% of women wet shave their legs, while
in Europe only 30% of women wet shave their legs. Therefore, there are two
different segments to whom the company can address in Europe according to their
behaviour: 1) to those who do not remove their hair at all, the objective being to
convince them to start removing the hair and 2) to those who use other method of
removing the hair, the objective being to switch to wet shave from other methods
based on the argument that it can be done whenever needed.

The company has to set what is the positioning of its product for the international
markets, what is the image it wishes to transmit in different markets. The issue
whether does the company want to have a global positioning, to transmit the same
image all over the world or does it want to adapt to local markets, appears again.
Usually global positioning comes with global market segments.

12.2. 2 Set campaign objectives and degree of standardization

When talking about the degree of standardization at the level of the promotional
activity, one should start with the basic marketing strategy, the segmentation and
positioning. Global segments require global positioning. Based on the chosen
market segments and the positioning strategy selected, one should decide over the
degree of standardization at the promotional activity level. The standardization
may concern promotional objectives (to set unique objectives for all countries), the
 International Marketing

promotional mix across countries (it can use the same tools everywhere or not), its
message (can use the same message everywhere or not), its media strategy (it can
use similar or different media means to transmit the message). The company
decides over the degree of standardization/adaptation of the promotional activities
based on local conditions of the market and the company’s objectives.

The company has also to decide over the promotional objectives, objectives that
derive from the company’s objectives. Possible promotional objectives can be
related to brand awareness, improving perception or promoting new services.

12.2.3 Determine the international promotional mix

After the company has chosen a market segment and the positioning strategy for
the product, after setting the promotional objectives of the campaign the company
has to choose the promotional mix, to choose the best means to fulfil the
promotional objectives. A company may use: advertising, personal selling (that it is
also a distribution means), sale promotions and public relations to promote its
products. Table no. 12.1 presents the main promotional tools, part of the
promotional mix.

Table no. 12.1 Promotional mix tools

Advertising Personal selling Public relations Sales promotions
Newspapers Sales Annual reports Discount prices
Magazines presentations Corporate image Samples
Journals Sales meetings House magazines Coupons
Directories Telemarketing Press relations Premiums, gifts
Radio Public relations “Bundle”
TV Events products
Cinema Crisis Competitions
Posters management
Transport

12.2.3.1 Advertising

One of most debated issues in international marketing is whether advertising

should be customized from country to country. One view is that adapted
advertising should be used, as the only way to achieve relevant advertising is to
develop separate campaigns for each country.
International promotion strategy

At the other extreme is the view that advertising should be standardized for all
markets. In the past, companies (coming mainly from developed countries) that
internationalised in foreign markets had country specific marketing programs,
being guided by an adapting strategy. After 1985, many companies started to be
aware of the advantages of standardization and started to adopt global marketing
strategies. As we already discussed a global strategy allows for standardization
where possible and for adaptation whenever necessary. It is a marketing philosophy
that makes possible to standardize some parts of the marketing mix and not others.
For instance, Ford Escort (the same product) is sold as an affordable product in
USA and as a premium car in India. Due to the differences in the economic
development level and the purchasing power, the product was repositioned (from a
popular car to a premium car) for the Indian market and the advertising was
adapted accordingly. Standardized or global advertising is usually used:
ª when the company addresses global market segments and it addresses
similar needs with similar messages,
ª when it has worlds brands. Brands such as Coca-Cola, Pepsi-Cola, Mc
Donald’s are global brands that use the same name in the creative
strategy everywhere in the world,
ª when the product is sold at regional level. For instance, in Europe many
companies practice pan-european advertising as media coverage across
Europe expands and in order to avoid confusion resulted from exposure
to multiple messages and brands of the same product , companies try to
advertise brand names and promotions across Europe. Plus, besides the
uniform image developed through pan-european advertising, the
company will obtain cost savings with the production of ads.

One way to standardize advertising is to use pattern advertising. Pattern

advertising is a compromise between standardization and adaptation. Pattern
advertising reflects the philosophy of planning globally acting locally OR thinking
globally and acting locally.
Through pattern advertising, the company has a global advertising strategy (such as
a standardized basic message) that is slightly modified in order to meet local needs
(small modifications of the ad design or different media). For instance, Levi’s uses
pattern advertising when has a common advertising strategy that focus on the two
same things world-wide: the quality of the product and the American origin. But
these two points are expressed differently in different countries. In UK ad, there is
 International Marketing

a cowboy in a Wild West setting wearing jeans in order to suggest America, while
in Japan, there is James Dean in Levi’s jeans in the ad to suggest the American
origin 1 . Channel emphasises on prestige in its ads (this is the common strategy) but
prestige is perceived differently in different countries and therefore requires
different creative execution (this is the adaptation part).

As we already have seen global advertising offers the advantages of creating a

global image for the product and of obtaining cost savings, but there are some
barriers to global advertising, some challenges the advertising faces in
international markets:
¾ Language limitations.
¾ Cultural diversity.
¾ Media limitations.
¾ Legal and tax considerations.

1. The language limitations represent an element that comes as a

disadvantage for global advertising. Language translations can determine errors
such as 2 :
• Simple carelessness. For instance, “Body by Fisher” (original)
became “Corpse by Fisher” (translation).
• Multiple meaning words (where more dialects are spoken in one
country or where one language is spoken in more countries and the
same word has different meanings). For instance, Parker Pen
Company when entering the Latin American market translated
literally the slogan used in USA – “Avoid embarrassment –use
Parker Pens”. In Spanish the word embarrassment has also the
meaning of un-wanted pregnancy, resulting that Parker was
advertising its pens as contraceptives.
• Idioms or local slogan can determine blunders in international
marketing. For instance, one USA advertiser used the same slogan
in the UK market: “You cannot use a more fine napkin at your
dinner table”, but in UK the word napkin is the slang for diaper.

1
Cateora Ph and Graham J., 1999, Op. Cit, p. 486.
2
Kotabe M and Heksen K., Op. Cit, p. 402-404.
International promotion strategy

Therefore, solutions to avoid language mistakes are:

• to involve a local advertising agency,
• for English speaking audiences, use the English slogan world wide.
Examples are United Colors of Benetton; Coke is it or Always
Coca-Cola; Pepsi – the choice of a New Generation; Philips makes
things better etc.,
• to use of voice-overs that say an adapted local slogan.

2. Cultural diversity of markets can also represent a barrier towards global

advertising. Communication is more difficult in an international environment
because things are perceived differently due to cultural factors. If perceptions over
the same thing are different it means that messages received differ in different
countries and cultural factors should be taken into consideration. P&G when
entered the Japanese market with Pampers used an ad illustrating a stork delivering
Pampers to homes. The campaign failed because Japanese did not understand why
storks were bringing Pampers. In Japan’s folklore babies are brought by giant
peaches floating on the river, not by storks 3 .
Religion as part of culture plays also an important role. For instance, in Saudi
Arabia P&G had to adapt its ad for shampoo by showing the face of a woman with
a veil on her head and the hair of another woman from the back.
The attitude towards advertising is important. At the beginning of 1990’s,
consumers in Central and Eastern Europe preferred ads that offered information
about the product, while lifestyle ads were less effective. Such attitudes change
over time. People’s attitudes towards advertising affect the effectiveness of ads. In
Egypt for instance, people have negative attitudes towards advertising, while in
China, consumers declared that advertising is the prime factor that consumer use
when choosing a brand 4 .

3. Media limitations. In developed countries the number of media

possibilities is high while in emerging markets there is a lack of media choice as
media infrastructure is underdeveloped, there are few TV stations and radio
stations, the quality of print media such as magazines, newspapers is poor,
advertising cannot be properly planned as there are no reliable statistics available
about media readership (there are no surveys on who reads what and where). This
can impede standardized media strategies. But, the poor quality of existing media

3
Cateora Ph. and Graham J., 1999, Op. Cit, p. 494.
4
Kotabe M and Heksen K., Op. Cit, p. 407.
 International Marketing

made companies to find new solutions to advertise their products. For example, in
Egypt, ads are print on the sails of boats, in Romania and also in Hungary ads are
placed on the material covering a construction site or a building being renovated.
Media production costs are to be taken into consideration as advertising rates might
not be stable over time, making global advertising even more difficult.

4. Legal considerations of every country can be an obstacle for global

advertising, as companies have to comply with national laws. The main domains
that are regulated in advertising and the major types of advertising regulations are
the following:
Š Comparative advertising
Š Content of advertising message
Š Advertising of “vicious products”
Š Advertising towards children
Š Advertising taxation

Comparative advertising refers to comparisons made between products in ads.

Comparative advertising can be explicit (when the name of the competitive product
is mentioned in the ad) or implicit (when products of competitors are not named
and the competitive products are only implied). An example of implicit
comparative advertising are the detergents ads, when “the usual detergent” (the
competitor’s) is not so good as Ariel.
In USA direct comparative advertising is commonplace, while in other countries
comparative advertising is more or less restricted. In Belgium and Luxembourg the
law explicitly bans comparative advertising. In India, Unilever had to give up one
of its ads for the Pepsodent toothpaste because claimed it is 102% better than the
leading brand, even though the name of the leading brand was not mentioned, but
the well known cling of Colgate was present and a model was miming the name
Colgate 5 . In EU, the harmonization of laws governing advertising takes place and
as comparative advertising is concerned, implicit comparisons will be allowed but
explicit comparisons will be banned.
The content of the advertising message is also regulated in some industries in
different countries. There are institutions that have to approve the ads that will be
used. In Australia, there is an Advertising Standard Council that banned the ad of a
plumbing company that showed a girl getting even with her boyfriend by turning

5
Cateora Ph. and Graham J., 1999, Op. Cit, p. 490.
International promotion strategy

on all taps and provoking a flood. The Advertising Standard Council qualified the
ad as “encouraging to irresponsible waste of water” during an Australian draught.
In Vietnam the Ministry of Trade, the Ministry of Culture, the Customs
department, any TV station or newspaper can censor an ad.
TV advertising of the so called “vicious products” such as alcohol, tobacco is also
regulated in many countries. Table no. 12. 2. presents some of these regulations in
selected countries from Europe.

Also there are other types of products, besides the “vicious products” that are also
regulated in many countries. Pharmaceuticals are such products: in Austria advertising
for drugs is forbidden by law, in Denmark is forbidden advertising for
non-prescription drugs and in France prior approval of a government authority is
needed to advertise drugs. Other types of products that are regulated in different
countries are: slimming products in Finland certain such products can not be
advertise; pregnancy tests and contraceptives (forbidden in Ireland), sweets (ads for
sweets have to display a toothbrush symbol in Netherlands), cars (ads for cars have to
contain costs of taxes and insurance and figures of net fuel consumption in Portugal),
pornographic ads or any ads offensive to the public taste are forbidden in UK.

Table no. 12.2 European advertising regulations of vicious products

Country Tobacco Alcohol

Austria Banned on TV Large number of restrictions
Denmark Banned Restrictions and voluntary
restraints
Finland Banned Banned
France Banned Banned, especially for drinks
with high alcohol content
Germany Forbidden No restrictions so far
Italy Banned Restricted
Netherlands Voluntary restrictions Voluntary restrictions
Switzerland Banned Banned
UK Pipe tobacco and cigar ads Voluntary restrictions
are permitted but strictly
regulated

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman
Publishing, p. 525.
 International Marketing

Advertising towards children is another domain subject to regulations in some

countries. Examples are the following:
ª In Quebec, Canada TV stations are not allowed to air towards children
and the same in Sweden.
ª In Finland children cannot speak or sing the name of a product in a
commercial.
ª In Italy commercials in cartoon programs are banned.
ª Advertising for war toys and games of chance are forbidden in
Germany.

In some countries special taxes apply to advertising. The amounts designated to

advertising are supplementary taxed by governments. This is the case of Austria.
France also intends to introduce such taxes on TV and radio advertising. Such taxes
increase the cost of promotion and the per capita cost of advertising.

12.2.3.2 Sales promotions

Sales promotions refer to a collection of short term incentive tools directed to

consumers and/or retailers that have the objectives to increase sales quickly. Table
no. 12.3 presents the main sales promotions tools with the objective envisaged by each.

The same aspect related to the degree of standardization a company can apply to
sales promotions at international level is important. For most international
companies sales promotions have a local character due to:
ˆ different stages of the market maturity: in early stages of the product
life cycle (PLC), samples and coupons to induce the trial of the
product are appropriate, while in more established markets (the
maturity stage of the PLC) bonuses, in-pack coupons, price reductions
in order to encourage repeat purchase are recommended,
ˆ different cultural perceptions about different forms of sales
promotions. For instance, European consumers use far fewer coupons
than the American consumers,
ˆ trade structure. One major issue of companies is how to allocate their
promotional budget between consumer promotion- directed to the
final consumer (pull strategy) and trade promotion- directed to
middlemen (push strategy). This depends on the differences in local
trade structure and the balance of power between manufacturers
International promotion strategy

and distributors. P&G tried to cut down on trade promotions and to

introduce everyday low prices for final consumers in Germany. The
result was that several major German retailers gave up P&G products.
In this case trade promotions seemed to be more effective than
consumer promotion 6 .
ˆ government regulations represent the most critical factor in designing
a promotional package, as countries differ to a large extent in this
respect for different forms of sales promotion 7 :
− premiums: in France the value of a premium must not exceed 7%
of the products price; in Germany free premiums are illegal; in
Netherlands premiums must not exceed 4% of the value of the
product and has to be related with the main product; in Japan the
value of the premium should not exceed 10% of the value of the
product purchased.
− price reductions in Germany, authorities must be notified in
advance if the company is going to have a sale and sales are
limited to certain occasions: winter or summer sale, company
anniversary; while in USA, UK, France price reductions are
allowed any time of the year.
− competitions: in UK, if a purchase is not required, the chance must
determine the winner, but if a purchase is mandatory, skills should
decide the winner; in Netherlands winning by chance is illegal and
competitions that require the exercise of skills are permitted but
prizes should not exceed a certain value; in Germany competitions
are allowed with the purpose to draw attention to the product, but
no order form should accompany the competition details, otherwise
is illegal.
Given the above mentioned aspects there are certain situations when sales
promotions techniques are recommended to be used and other situations when they
are not 8 :

6
Kotabe M and Heksen K., Op. Cit, p. 433.
7
Ibid, pp. 432-433; Chee H. and Harris R., Op. Cit, p. 548.
8
Dahringer L.D. and Muhlbacher H., 1991, International Marketing, Addison-Wesley, p. 500.
 International Marketing

Table no. 12.3 Sales promotion techniques

Technique Objective
Reduce price
Coupons Encourage trial or repeat purchase

Trade allowances Build distribution and increase orders

Price-offs Encourage repeat purchase

Add value or perceived

value
Self-liquidating premiums Encourage trial or repeat purchase

Continuity premiums Reward users; encourage repeat purchase

Bonus pack Increase perception of value; convert trier into user

Contests and sweepstakes Encourage trial purchase; draw attention to other

promotional messages

Provide information
Displays Draw attention to the product; provide information

Special events Draw attention to the product; provide information

Trade shows and Create presence in the target’s mind

exhibitions

Product demonstrations Allow consumers to evaluate product without risk;

build distribution

Source: Chee H. and Harris R., 1998, Global Marketing Strategy, Financial Times Pitman
Publishing, p. 545.

A. Coupons :
Š require well-developed backward channels to handle redemption,
Š require literacy on part of retailers and consumers,
Š social status perceptions affect effectiveness.
International promotion strategy

B. Contests and sweepstakes:

Š take the legal considerations into account,
Š prize choice should vary to match target market tastes,
Š likely to be less effective where mass media coverage is poor.
C. Price-offs:
Š likely to be ineffective in environments where prices are subject to
bargaining,
Š subject to trade misuse,
Š require sophistication from retailers.
D. Stamps:
Š unfeasible in unstable economic conditions (for both manufacturer
and target market),
Š handling and redemption require stable channels.

12.2.3.3 Public relations

Public relations is concerned with images and it has the objective to build good
relations and improve understanding between the company and all with whom it
comes into contact, both within and outside the organization, namely its public.
Table no. 12. 4 presents the main types of public a company wants to communicate
with.

Table no. 12.4 The categories of publics for an organization

Categories of public for an organization

Customers
Media
Employees
Activists groups
Financial community
Suppliers
Stockholders
General public
Host government
Home government
 International Marketing

Public Relations have both an internal side, regarding the communication within
the company and an external side, regarding the communication with the external
public (also known as marketing public relations).

Internal public relations. Especially in multinational companies, internal

communication is important to create an appropriate corporate culture. Japanese
have been good in achieving good internal public relations.

External public relations. Through public relations the company intends to build a
good reputation of the: organisation, products and its people. The purpose of the
Public Relations is to establish a credible environment in which other promotional
tools to be used more effectively, therefore, Public Relations activities have the
role to complement the other promotional tools. The Public Relations have the
objective to ensure that the market is receptive to the company and its products. In
a foreign environment the company has to influence the external environment and
the public opinion in relationship with the company and its products, to create a
positive public opinion. A number of tools can be used in this respect and table no.
12.5 presents them.
Public relations today are considered to be a broader concept that includes publicity
activities as well. When compared to advertising, the general public is likely to
believe publicity because it is free and is not directly influenced by the firm.

Among the main objectives that are envisaged through Public Relations activities,
the following are the main 9 :
/ promote awareness of the existence of the company,
/ anticipate and counter criticism of the company and to minimise
damage to the company image, in relationship with product issues and
corporate conduct,
/ to overcome prejudice against the use of the company’s product,
/ to promote and establish a brand image in a foreign market,
/ to increase a company’s sphere of influence and achieve a high profile.

9
Chee H. and Harris R., Op. Cit, p. 540-541.
International promotion strategy

Table no. 12.5 Public relation tools

Public Relation tools Examples

News release

Special events Visits, competitions, openings

Lobbying Government, politicians, opinion

leaders, pressure groups

Audio-visual presentations Video, audio cassettes, films, slides

Printed presentations Company newsletters, brochures,

other publications

Corporate identity materials Business cards, logos, stationary,

uniforms

Sponsorship Arts and sports

Crisis management is also part of public relations. When crisis situations are not
managed well the company’s image suffers on the long term. Perrier- the mineral
water company from France had a negative corporate image when in 1990 were
found in a bottle traces of benzene and the company did not manage properly the
crisis. In recent years crisis management is becoming more formalized in
companies with specialists who are ready to step in when problems and criticism
arise. In order to handle Public Relations there are companies that have their own
PR department, such as Toyota, and there are companies that hire specialists from
the PR departments of large advertising agencies.

12.2.3.4 Personal selling

Personal selling takes place when a customer or a prospective purchaser is met in

person by a representative of the firm for the purpose of making a sale. Personal
selling is considered both a distribution tool and a promotional tool and when used
adequately a market research tool. As a promotional tool personal selling is the
most expensive but it is also very effective and flexible in the sense that instant
feedback can be given. Personal selling is recommended when the market is
concentrated and when the products are expensive (high unit value) or not
frequently purchased.
 International Marketing

If we compare advertising with personal selling, it can be noticed that there are
differences in more respects as presented in table no. 12.6.

Table no. 12.6 Personal selling versus advertising

Personal selling Advertising

• Two way communication process - • One way communication process-
the salesperson can give instant the message is sent through media
feedback • More “noise” – more disturbing
• Less “noise”- there is a direct factors
conversation • Non-personal medium
• Face-to-face contact- personal communication
activity • Control the message- as it is sent in
• Larger share of the promotional one form for all customers
budget than advertising • Limited customer contact and pre-set
• In emerging markets advertising message
media may not be available and
labour might be cheap and it might
be easy to hire a large sales force
• Less control over the message sent
- because the salesperson responds
on the spot, as he considers
appropriate for the situation; this
may differ from the firms pre-
prepared message
• More persuasive - the salesperson
can adapt to fit the customer
personality and product needs

At the level of personal selling there is little true international selling, because
salespeople carry out most of their sales within one country. Each sale is a sale in
one country and salespeople typically work in one region. Personal selling is a
personal activity that requires that the salesperson understands the needs and the
wants of the customer. In international selling the salesperson has to know the local
customs and to be able to form relationships with the customers. Personal selling
has the purpose to sell a product to a customer. In order to do this, the company’s
salespeople have to leave the customer with the appropriate perception of the
products and of the company.
International promotion strategy

Personal selling is influenced by the company culture and by the country culture.
The differences between the cultures of two companies determine differences in
the practices of those people working in the two companies. The differences
between the cultures of two countries determine different values of employees of
the same company in two different countries. If we try to change the company’s
culture and to introduce new practices, we might manage without strong negative
reactions from employees. For instance, we can ask salespeople to report to a group
instead of a boss (in collectivist culture) in order to increase group responsibility. If
we try to change procedures that are strongly rooted in the country’s culture, we
might encounter strong negative response and we might fail. For instance, trying to
form a sales force by integrating both men and women in Saudi Arabia. The least
effect will be that the sale force will not do its best. In conclusion, the company
culture determines the working environment and the practices to be used. The
country cultures (values build at an easily stage in life) influence which
management practices will succeed.

International sales force issues are really local issues in a foreign country. A
company may standardize the sales management approach for all countries or
customize the sales management approach for each country. However, in all
situations the management of the sales force in a multinational company, consists
of the following steps:
1. Setting sales force objectives
2. Designing sales force strategy (size, structure, compensation)
3. Recruiting and selecting salespeople
4. Training salespeople
5. Motivating and compensating salespeople
6. Evaluating salespeople

1. Setting sales force objectives. They are derived from the objectives of
the company. The roles the sales force has to play in reaching the company’s
objectives represent the objectives of the sales force. They (the roles) state what the
sales force is asked to do. For instance, if the company has the objective:
Š to provide customer with more understanding of the product, than the
sales force objectives will be to push for the publicity of the product,
Š to enter the markets as low cost provider, than the sales force objectives
will concentrate on the sales volume, to expand market share.
 International Marketing

Š to create a high quality- high service image of product, the sales force
objective will be to offer customer satisfaction and to solve customer
complaints.
The sales force objectives will determine the size of sales force, the structure of the
time spent by salespeople either for promoting new products and/or existing
products or for delivering customer satisfaction and increasing sales volume.

2. Designing sales force strategy. When setting its sales force strategy a
company addresses the following issues: structure, size and compensation.
Structure: What is going to be the structure of the sales force? Territorial, product
or customer centred? The structure of the sales force sets the responsibilities of
each salesperson. In a territorial sales force, each salesperson is responsible for a
particular geographic area. In a product sales force, each salesperson sells only one
product or product line. In a customer sales force, each salesperson is responsible
for particular clients.
The size of the sales force is usually calculated according to the number of visits
necessary per customer and the number of persons required to do the necessary
number of visits. In an international environment the customer’s expectations may
modify the calculations. In USA a client might be satisfied to buy large quantities
of goods and see the salesperson every six months, in other countries, clients might
buy smaller quantities more frequently, expecting therefore to see the salesperson
more often.
Compensation: How to compensate the salespersons in order to motivate them to
do a good job? Companies do not pay equally their sales force in different
countries, as pay expectations (the pay rate) differ from one country to another. In
some countries a commission-based compensation is the main motivating tool
(individualistic societies), while in other countries a commission-based
compensation may not constitute a motivation (in collectivist societies where
people want to be part of the group, they do not want to stand out with anything
from their peers. Once a young Japanese in an American company in Japan, was
proposed the position of top manager because he was the best employee and had
the best ideas. Although he refused, he was appointed anyhow. The sales went
down because nobody listened to him. The company should adapt its compensation
plan accordingly.
International promotion strategy

3. Recruiting and selecting people. In order to recruit and select

salespeople, a company should decide:
ƒ what it wants in its salespeople in every country, what type of skills
and character traits they are looking for,
ƒ what will work best in an unfamiliar culture, because the skills
required for success as a salesperson, depend on the culture in which
the sales take place,
ƒ how to find and attract the people with the necessary skills.
For instance, in Western countries a salesperson has to be outgoing, while in other
cultures (such as Middle East) a more quieter and more patient salesperson can
maximize the sale.
The first decision the company has to take is whether to use local salespeople or
foreign salespeople. When choosing foreign people for a local sales force, the
company may use either expatriates (people coming from the country of origin of
the company) or third national countries (people working for the company and
coming from a tertiary country, neither from the home or the host country).
The use of expatriates, third nationals or of local salespeople depends on the
circumstances and has each a number of advantages and disadvantages.
Expatriates are preferred when:
9 products are highly technical,
9 the selling requires extensive background of information and
applications,
9 (sometimes) to add to the prestige of the product in the eyes of foreign
customers.
The disadvantages of having expatriate selling personnel are:
9 high cost,
9 cultural and legal barriers,
9 a limited number of very good (and difficult to find) personnel willing
to live abroad (in certain countries) for extended periods.
Local nationals have the advantage that:
9 are more knowledgeable of the cultural and legal environment,
9 are better to get in unfamiliar distribution systems and referral
networks.
 International Marketing

Having local nationals as sales personnel has disadvantages as well:

9 there is the tendency of headquarters personnel to ignore their advice,
9 the lack of understanding of how home office politics influence
decision making,
9 the lack of qualified personnel (especially in emerging markets).
Third country nationals are expatriates from their own country, working for a
foreign company in third country. Third country nationals are sought by
multinational companies because:
9 they speak several languages,
9 they know the industry or the foreign country well,
9 sometimes in order to avoid double taxation.

When deciding what kind of sales force to use, the company has to take into
consideration the host country restrictions. In most countries there are restrictions
concerning the number of non-national allowed to work within the country. Some
countries (USA, Canada) limit work permits for foreigners to positions that cannot
be filled by a national. In some countries (Latin America) there are laws protecting
the workers’ rights. Employees are penalized for dismissing employees. For
instance, in Venezuela, if a person worked for more than three months for a
company, he is entitled to receive one month pay at the time of dismissal, 15 days
pay for every month worked at the company exceeding 8 months and 15 days pay
for each year worked for the company. Other Latin American countries have
similar laws.
When selecting selling personnel the selection criteria must be localized because
what it makes a good salesman in one country might not do it in another one.

4. Training the sales force. The nature of the training depends on who is
being trained, the expatriates or the local nationals. Expatriates are usually trained
on cultural sensitivity, cultural orientation, customs, culture, history, foreign sales
practices. Local nationals are being trained about the company history and culture,
its products, technical information and selling methods. Normally, international
sales training has to be adapted to the needs of the local market. For high
technology and highly standardized products, sales training may be held at regional
or international level, as technical aspects are more similar across countries.
International promotion strategy

Such centralized training is done by companies as 10 :

¾ IBM that has an European training centre that is attended by about
5000 persons a day, as IBM usually offers its salespersons an initial
training of 13 months and expects all its salespeople to spend 15% of
their time each year in additional training.
¾ Mc Donald’s has also a Mc Donald’s Hamburger University at Chicago
where partners from around the world come to receive centralized
training.
Home-office personnel has also to be trained in order to be receptive to the needs
of foreign operations. They also have to receive cross-cultural training and to be
send periodically abroad in order to increase their awareness of the problems of the
foreign operations.

5. Motivating salespeople. Motivation is especially complicated in the

international environment when the firm deals with different cultures. The
marketing and sales activities require highly motivated employees regardless the
location. In order to motivate the sales force in one country the firm has to find out
what motivates people in that country as there are national and cultural differences
in motivation. The company has to design appropriate compensation systems.
Financial compensation is one of the main motivators in all countries. But the way
financial compensation is awarded has to be adapted to each country. There are
countries in which the use of commissions is not publicly accepted, case in which
the company should use salary increase instead of commissions to motivate
salespersons who perform high. In collectivist cultures (in Asia) it is unacceptable
that one person should accept substantially more than another in the same position.
In Japan the bonus system is based on group effort. When financial rewards are not
acceptable the company must rely more on non-financial rewards such as
recognition, titles. Communication is also important in maintaining high levels of
motivation because everyone performs better when well informed. Foreign
managers need to know what is happening in the present company. Other ways to
motivate are foreign trips, training.
The compensation of sales force in different countries have to be adapted to local
conditions however, when setting it there are aspects to be considered, as presented
in table no. 12.7.

10
Kotabe M and Helsen K., Op. Cit, p. 452-453.
 International Marketing

Table no. 12.7 Do’s and don’ts in international compensation

Do’s Don’ts
• Do involve representatives from • Don’t design the plan centrally
foreign countries and dictate to local offices
• Do allow local managers to • Don’t create a similar framework
decide the mix between base and for jobs with different
incentive pay responsibilities
• Do use consistent performance • Don’t require consistency across
measures (results paid for) and countries on every performance
emphasis on each measure measure within the incentive plan
• Do allow local countries • Don’t assume cultural differences
flexibility in implementation can be managed through the
• Do use consistent incentive plan
communication and training • Don’t proceed without the
themes worldwide support of senior sales executives
worldwide

Source: Cateora Ph. and Graham J., 2002, Op. Cit, p. 532.

6. Evaluating the sales force. The last step in the sales force management
is the evaluation. A company can evaluate its sales force through quantitative
evaluation and through qualitative evaluation.
Quantitative evaluation consists in measuring aspects such as sales, structure of
sales and increases in sales at company level and/or individual level.
Qualitative evaluation takes into account the knowledge the salesperson
accumulated, the manner of the salesperson and the opinions of customers
(customer satisfaction), peers and supervisors. Evaluation in international sales
management provides useful information for making international comparisons.

There are a number of skills considered necessary for an international sales

manager 11 :
Maturity: to be able to work more independently and to have the ability to make
decisions on their own without guidance from the home office.
Emotional stability: to be sensible to different behaviours from different countries,
to have considerable knowledge about the job, off the job and to know the local
language and to be able to handle interpersonal relationships.

11
Cateora Ph. and Graham J., 2002, Op. Cit, p. 521-523.
International promotion strategy

Enjoy travel: two thirds of their nights are in hotel rooms, therefore they have to
enjoy travelling otherwise they get tired or/and bored quickly.
Positive look: to like what they do, their job, travelling, going internationally.
Flexibility: to be sensitive to habits of the market. Similarly is valid for the persons
who work at home for a foreign company.
Cultural empathy: to be open to the new, foreign customs (if some one is confused
about the environment is not going to be effective).

A new approach to promotion in recent years is the integrated marketing

communication (IMC). IMC has the purpose to coordinate all promotional
activities, from mass advertising to sponsorships and sales promotions in order to
convey one and the same idea in a unified voice. In other words, all promotional
mix elements to centre around a single key idea. If a company wishes to develop
about its product the image that is a reliable product than, all promotional
activities, all types of advertising, all sales promotions, all public relations
activities and all personal selling should transmit this idea.

12.2.4 Determine the promotional budget

One of the delicate decisions that marketers face when planning their
communication internationally is about money. How much to spend on
communication? How to allocate resources across different markets?
There are a number of methods to set the promotional budget among which the
most important are:
ƒ Percentage of sale.
ƒ Competitive parity.
ƒ Objective-and-task.

As a percentage of sale, the company sets its promotional budget as a percentage

of either past or expected sales revenue. The advantage is that is a simple method.
The disadvantage is that sales drive advertising not advertising drives sales, as it is
supposed to happen. It is not suitable for a market entered recently as there are no
historical sales and the future sales cannot be very well predicted.

Competitive parity. Through this method companies set their budgets by looking at
competitors’ spending and matching their amount. The rationale behind this
method is that “competitors’ collective wisdom” shows the “optimal” spending
 International Marketing

amount in the industry. In this way the company can maintain a minimum of share
of voice (brand advertising as proportion of industry advertising). When entering a
new market usually is necessary to spend more for new brands in order to step out
from the crowd in the consumers’ eyes.

The objective-and-task method is the most popular method. The budget is planned
based on the overall cost of fulfilling the company’s stated objectives, either
market share, brand awareness.

The way resources are allocated across countries is another important aspect of
budgeting promotion internationally. A few approaches can be followed by
multinational companies 12 :
There is bottom-up planning: each country subsidiary determines independently
how much money to be spend within its market and requests the desired resources
from the headquarters.
At the other extreme is the top-down budgeting through which the headquarters
sets the overall budget and shares it among subsidiaries.
The regional angle method becomes the most commonly used and consists of each
region deciding over the resources needed to achieve its planned objectives and
than proposing it to the headquarters.

12.2. 5 Develop message strategy

The next step in the promotional planning process is to develop the message
strategy. At international level the main decision to be taken is over the
standardization/adaptation of the message. Talking about advertising there are
some advantages and disadvantages in trying to standardize the advertising
message and also some barriers to standardization. Table no. 12. 8 presents them.

Table no. 12.8 Merits of standardization and barriers to standardization

Merits of standardization Barriers of standardization

• Economies of scale • Cultural differences
• Consistent image • Advertising regulations
• Global consumer markets • Market maturity
• Cross fertilization • ‘Non-invented syndrom” (NIH)

12
Kotabe M. and Heksen K., Op. Cit, p. 415.
International promotion strategy

Among the advantages are the following :

The company obtains economies of scale when standardizing the message. A
single campaign is cheaper than multiple country campaigns. For instance, Levi’s
saved around 2,2 million $ by shooting a single TV ad that covered six European
countries. Savings are obtained because there are fewer executives (people) who
develop the campaign at global or regional level.
Another advantage is to have a consistent (the same) brand image, to have a single
brand identity across a region. Message consistency is important in regions where
there is extensive media overlap (such as Europe) and for goods that are sold to
customers who travel the globe.
A standard message strategy is an advantage when there are global customer
segments, segments that are culturally similar across the globe.
Another advantage of globalisation is cross-fertilization. Cross fertilization means
that marketers encourage their subsidiaries to consider and adapt (if suitable)
advertising ideas proven successful in other markets. This process of exploiting
good ideas is not restricted to global brands. P&G used for Latin America and
other parts of the world an ad that was developed in Taiwan. To come up with a
good idea takes a long time, so when a company comes up with a good idea it is
worth to consider it in other country subsidiaries, as well.

There are a number of barriers to a message standardization strategy. Cultural

differences and advertising regulations have to be known as they always require
adaptations. Market maturity in relationship to the product also requires different
strategies for different countries. In Eastern Europe at the beginning of 1990’s most
ads were presenting mainly product information as the consumer was willing to
know only about the product, while in the last years lifestyles ads have been
developed as the consumer became more sophisticated.
The NIH syndrome refers to the reluctance of certain local subsidiaries or local
advertising agencies to accept creative materials from other countries.
Companies can use different strategies to develop advertising messages and there
are a number of appeals that are universals. Examples are given in table no. 12.9.

For products that are identical physically but which are used differently from one
market to another, such as different food products (cereals, instant coffee,
margarine, etc) the advertising message has to be adapted.
 International Marketing

Table no. 12.9 Examples of universal appeals

Type of appeal Description/Examples

Case histories/story telling The use of cases /examples/stories to show the
benefits of the product.
Superior Quality Promises superior quality.
Country of origin Benefits of a strong positive country of origin effect,
emphasizing on the origin of the product.
Ex: Becks beer from Germany.
Heroes and Celebrities Uses local or international heroes or celebrities, such
as sports heroes, or movie and music celebrities.
Ex: James Bond for Swiss watches Omega.
Lifestyles Reflects a lifestyle that is shared by the target
customers.
Ex: (Taft hair spray for a dynamic lifestyle).
Market leadership For the leading brand in a country.
Corporate Image Transmits positive.

Source: Kotabe M and Heksen K., 1998, Global Marketing Management, John Wiley and Sons,
p. 422.

12.2.6 Decide on media strategy

After the company knows what is the promotional budget and what is the message
it wants to transmit, it has to establish what is the media strategy. Media objectives
are usually set and media performance is evaluated based on a number of aspects
such as the following 13 :
Reach. Refers to the number of individuals or households reached.
Frequency. Refers to the number of times a message is delivered to target
audiences.
Continuity. Refers to the pattern of message delivery.
Size. Refers to the space or time unit employed.

When deciding over what media to use in international markets, the company has
to consider the following aspects:

Availability. In some countries there is too few advertising media (few TV stations,
radio stations and newspapers) and competition to get in these media is very high,
therefore the cost is high. In other countries, there is too many advertising media

13
Albaum G., Strandkov J. and Duerr E., Op. Cit. p. 451.
International promotion strategy

(too many TV stations, newspapers) so that a company cannot get effective

national coverage at a reasonable cost.

The cost of advertising media differ from country to country; it is usually

negotiable and advertisers can bring the cost of reaching a prospect down by using
advertising agencies with bargaining power that can buy more media space (for
more client companies) at lower pieces.

Coverage is very important when choosing an advertising medium. In international

marketing in many countries there is a lack of information regarding the coverage
of media (there is no one measuring how many persons read a certain newspaper or
listen a certain radio station). Another issue in international markets is that
sometimes is difficult to reach certain sectors of the population with the existing
media advertising. Therefore, companies invented other means to obtain the
desired population coverage, such as using video vans with infomercials for the
rural areas in developing countries (Colgate in India).
In many international markets there is a lack of media research and market data,
such as TV and radio audiences and newspaper readership.
Even in such cases without the knowledge of the market coverage, companies are
still using on a large scale advertising through different media.

The media infrastructure that can be used varies from standard media vehicles such
as radio, TV that are well established in most countries to new media such as cable
and satellite TV.
Newspapers. In some countries there might be so many newspapers that only
partial market coverage can be obtained cost effectively.
Magazines. Foreign national magazines are not used very often by international
marketers because few have a large circulation and running the ads (even though
paid) is not always guaranteed. Lately, there are international and local editions of
magazines such as Cosmopolitan, Elle, Playboy.
Radio and TV. Advertising on radio and TV is usually regulated by governments.
For instance, in UK the non-commercial TV station BBC does not receive any
advertising; in Germany total ad time must not exceed 12 minutes/hour; in South
Korea commercials are limited to 8% of the air time and are shown grouped at the
beginning and the end of the programs.
New media such, as satellite, cable TV and internet are increasing. Satellite TV
permits greater coverage and is ideal for global or regional standardized messages.
 International Marketing

12.2.7 Assess effectiveness

The last stage of any process is to evaluate, to assess the results obtained. For this
purpose the promotional activity has to be controlled and monitored permanently.
The results will be compared with the plan to check if the marketing (market share,
sales volume) and promotional (brand awareness) objectives have been reached.
Corrections are introduced if the evaluation brings out that there have been made
mistakes.

12.3 Coordinating international advertising

Global or pan-regional advertising approaches require a lot of coordination across

countries. In order to co-ordinate advertising across countries a number of tools can
be used by the international companies:
• Cooperative advertising (monetary incentives),
• Advertising manuals (materials),
• Lead-country concept,
• Global or pan-regional meetings.

Cooperative advertising is used by firms that assign the advertising responsibility

to their local distributors. Because the effort put into advertising by distributors
may vary across countries and little consistence in the message may exist across
countries, the company can offer monetary incentives to distributors in order to get
some level of coordination. Usually the monetary incentives take the form of
cooperative advertising through which the firm contributes to the local distributor
advertising spending activities.

Advertising manuals, videotapes, instructions, handbooks are used to guide the

international advertising efforts. In order to obtain pattern advertising, advertising
instructions are given for the commonalities part. Wrigley introduced a video tape
with instructions for international advertising. In the handbook, things such as how
the gum should be put into the mouth, what the background of the video should be
and how to handle the gum before shooting the commercial were included as
guidelines. Companies such as Mercedes and Seiko have also handbooks to
communicate advertising guidelines to subsidiaries.
International promotion strategy

The lead-country concept (test the advert) can be used in advertising also, besides
in the process of product introduction. For instance, Colgate Palmolive has
implemented a lead-country system for international advertising campaigns.

Another way to coordinate international advertising is to organize global or pan-

regional meetings between marketing executives from each country, regional
senior executives and key creative staff from the advertising agencies. Goodyear,
the American tyre maker uses such a system to coordinate its international activity.

When talking about coordinating advertising internationally, the advertising

transference is an aspect worth taking into consideration. Closely related to the
issue of standardization is that of transferability of a successful campaign from one
market (domestic or export) to another market. Transference refers to how a
marketing strategy “arrived” in a foreign market and can be defines as the extent to
which a marketing activity or strategy is performed the same in a foreign market
compared to the market from which it came, usually the home market. There are a
number of strategies through which advertising campaigns can be extended-
adjusted at international level 14 :
1. Complete extension. A successful advertising effort it is transferred to
other countries without any modification either in the content or the
media choice.
2. Symbolic extension. Successful advertising is extended to other
countries with modifications only in the background situations.
Minimal modifications take place, as both the appeal and the medium
remain the same.
3. Literal extension. The strategy is used when buyer expectations are the
same, but the encoding/decoding processes are different. In this
strategy different media can be used from one country to another or the
same media can be used differently according to the local legislation.
4. Symbolic and literal extension. When the company is marketing an
universal product (such as Coca-Cola, Unilever, IBM) both symbolic
and literal extension take place, rather than only one of them.
5. Simple adjustment. The medium and the background remain the same,
while the product is promoted on a different appeal.

14
Ibid, p. 465.
 International Marketing

6. Symbolic adjustment. In this strategy content elements, appeals and

background are slightly modified.
7. Literal adjustment. The appeals are greatly changed and different
media is used to convey the messages.
8. Complete adjustment. The strategy suggests a complete fresh approach
in a foreign country.

12.4 Choosing an advertising agency

When developing an advertising campaign internationally a company may do it in-

house (like Benetton, Channel, Hugo Boss), may hire a local advertising agency or
may hire a multinational advertising agency. Local domestic advertising companies
have the advantage of providing the company with the best cultural interpretation,
being in the position to create advertising targeted to the local market, but might
have the disadvantage of a weak level of sophistication. On the other hand the use
of international companies with not enough experience in a certain country can
lead to mistakes with economic consequences. For instance, in 1980’s Jaguar when
entered the Saudi Arabia market used a British advertising agency to develop its
campaign. The Saudi audience reacted negatively to the Lebanese Arabic used in
ads and to the fact that the visuals have been shot in United Arab Emirates (where
people wore a certain headdress that was not typical for Saudi Arabia) 15 .
The best compromise is considered to be the multinational agency with local
branches.
When choosing an advertising agency for global advertising the following criteria
should be taken into consideration:
Š Market coverage,
Š Quality coverage,
Š Expertise in central international campaigns,
Š Quality of support services,
Š The image the company wants to projects (local versus global),
Š Size,
Š Conflicting accounts.

15
Jeannet J.P. and Hennessey H.D., Op. Cit., p. 511.
International promotion strategy

Market coverage: Does the company cover all relevant country markets?
Quality of coverage: What are the skills of the agency? Does the level of skills
meet the company standards? Is there a match between the agency existing skills
and the market required difficulties? For instance, in Japan, where media space is
scarce, media buying skills are more critical than creative skills.
Does the company have expertise in organizing central advertising campaign?
Does the company know how to coordinate a global or pan-regional campaign?
What is the scope and the quality of support services? Companies hire advertising
agencies not only for creative skills and media buying skills, but also for other
support services such as marketing research and other forms of communication,
such as sales, promotion, public relations event- sponsorship.
According to the image the company wants to project, either of being local or
being global, it will choose a local or a global advertising agency.
The size of the agency is usually critical for media buying as large companies have
more negotiating power than small companies.
Is there the issue of conflicting accounts? Does the agency already work with an
account of one of our competitors? There are two major risks in case of conflicting
accounts: first the confidentiality issue, as companies share with their advertising
agencies a lot of confidential data and in the agency people work together and
information can get through and second, superior creative talent might be assigned
by the ad agency to the competing brand’s account.

Many of the international companies that have global operations found it difficult
to deal at the same time with a large number of agencies (according to the number
of countries entered). Therefore, many multinational firms concentrated their
accounts with large advertising agencies that operate at global level all their
promotional activities. Among the leaders are McCann Erickson, Young and
Rubicam, J. Walter Thompson, Ogilvy and Mather and BBDO. Tables 12.10 and
12.11 present some of the largest advertising agencies at international level
according to the revenues and to the number of international creative awards.
 International Marketing

Table no. 12.10 Top agency networks worldwide by revenues, 2003

$
Agency Revenues
Dentsu 1.9 bill.
BBDO Worldwide 1.24 bill.
McCann Erickson Worldwide 1.22 bill.
J.Walter Thompson 1.18 bill.
Publicis Worldwide 1.02 bill.
DDB Worldwide 943 mill.
Leo Burnett 886 mill.
TBWA Worldwide 771 mill.
Euro RSCG 756 mill.
Ogilvy and Mather Worldwide 706 mill.
Grey Advertising 650 mill.
Saatchi & Saatchi 543 mill.
Young and Rubicam Advertising 517 mill.
Foote, Cone & Belding 453 mill.
Lowe Worldwide 406 mill.

Source: http://www.mind-advertsing.com/agencies

Table no. 12.11 Top 10 agencies in 2003 by international creative awards

Agency Awards
BBDO World wide 136
TBWA Worldwide 130
Saatchi & Saatchi 110
DDB Worldwide 107
Leo Burnett 90
Lowe Worldwide 77
J. Walter Thompson 51
Ogilvy & Mather 51
McCann Erickson 42
Euro RSCG 33

Source: http://www.mind-advertsing.com/agencies
Case studies*
Case study 1
The larger you are the harder you fall!

Authors: Alexandru Bucoi,

Lecturer Romanian-Canadian MBA
Luminiţa Nicolescu
Associate Professor,
Academy of Economic Studies

1.1 Introduction

December 14th, 1998. The activity is at its peak at S.C. ASTESE Production S.R.L.
Due to the nature of its products, well known on the Romanian market under the
name of Angelli, both the production and the commercial activity are carried out at
maximum parameters.
The end of the year means for Angelli products not only a raise in sales, but a
genuine explosion, generating practical difficulties in satisfying the high demand.
The results of this year appear to be unexpected, the sales raised with over 40% as
compared to last year’s sales, surpassing all management expectations. Appendix
no. 1 presents the evolution of the sales for Angelli products between 1995-1998.

*
These case studies have been ellaborated with the support of Leonardo da Vinci Program BG//00/B/F/PP-132022.
 International Marketing

The work carried out for more than one year, day and night, by AB and EP for the
organisation of a new modern sales system and of a performing distribution
network (meant to replace the old out-dated sales system), started to show its
results now.
Sitting in his Office at 4 Splaiul Unirii, AB, Commercial Manager, was about to
analyse the orders arrived that morning from the territory in order to see if he needs
to modify the orders of quantities and types of products for the production section.
The phone rings and the pleasure to hear an old friend, SN, Promotion Manager at
a well-known cigarette company, is great, but the news he brings are not as good…
“Have you heard about the new ordinance issued by the Ministry of Finance?”, the
question came directly. “No!…What ordinance?” “The one with the excises
and…” “Do they increase the excises again?”, “Yes… I don’t know….maybe….but
this is not important, they intervene heavily in the selling activity.”, “…..”.
“I have unofficially received a copy, I’ll send it to you by e-mail”, “OK, thank you!
Talk to you later. Bye!”
What draws AB’s attention in the following minutes in the received message is:
Emergency Ordinance no. 50 (Extracts from the ordinance are presented in
Appendix no. 5)
…………………………………………………………………………
“One economic agent, internal producer or importer of alcoholic beverages and
tobacco products may have contractual relations with a maximum of 15
economic agents that carry wholesale trading activity.”
……………………………………………………………..…………
“The provisions of this emergency ordinance come into force on January 1st 1999”
“It is not possible”, exclaimed AB. ”Does the Ministry of Finance impose these
things? This is not possible! It is a joke…”

1.2 Company description and history

Astese Production S.R.L. is one of the largest producers of alcoholic beverages in
the Romanian market, being the holder of the Angelli brand and leader in the field
of sparkling wines. It is a Romanian company with 100% private capital, the
majority of the capital being Italian. The firm has 74 employees, its organisational
structure being presented in Appendix no. 2.
Case study

The first Angelli products emerged in the Romanian market in the second half of
the year 1994. These products were the two products that later became
representative for the Angelli brand: Gran Moscato – sweet sparkling wine and
Cuveé Imperial – demi-dry sparkling wine. Immediately after the launching of the
Angelli products, there were obtained very good results and a high volume of sales.
This determined the company to diversify its product portofolio in order to satisfy
the tastes of all consumers. Thus in 1995 they started the production of vermouths
and appetisers, the first products of this kind being the classical vermouths Bianco
– white vermouth, Rosso – red vermouth and Cherry – cherry-flavoured appetiser.
In 1996 the first products in the liqueur range were introduced: Café Café with
coffee flavour, Elexir di Pesca with peach flavour and Elixir di Nocciola with
hazelnut flavour. The product range diversified continuously, for each production
line: sparkling wines, vermouths, appetisers and liqueurs, so that in 1998 the firm
was producing and commercialising 16 products. Appendix no. 3 presents the
entire Angelli products range in 1998.
In 1998, as it can be seen in figure no. 1.1, 68% of the company’s activity (as the
volume of sales) was given by sparkling wines, 27% by vermouths and appetisers
(out of which 23% is given by the Cherry appetiser and 4% by other appetisers and
vermouths) and 5% by liqueurs.
Figure no. 1.1 The structure of the sales volume according to the product types

4% 5%

23% vs
ch
li
ve

68%

vs = sparkling wine; ch = cherry; li = liqueurs; ve = vermouths

In 1996, sales started to slow down after the initial increase. This led to the
decision to organise a new distribution system based on the modern concepts of the
market economy. At the very beginning of the company’s operations, the selling
activity was performed by approaching various present or potential customers, in
order to convince them to acquire the Angelli products. The customers were
contacted randomly, there was no customer selection. After the products were sold,
 International Marketing

they were not tracked down to the final consumers: it was not known to whom the
products were further sold, in what quantities and under what conditions. The
objective of the company was to replace the existing chaotic distribution system,
with a well-organised and co-ordinated system. For this purpose, at the beginning
of 1997 an Italian adviser with a vast experience (acquired in the Italian market) in
sales, was hired by the company. He had the mission to conceive and to put into
practice a sales system and a modern distribution network for the Angelli products,
based on a thorough observation of the real conditions in Romania. Practically, in
the field of the alcoholic beverages, Astese was the first company to put into
practice a new modern distribution system adapted to the Romanian market
conditions.

The first changes took place in the second half of the year 1997, more precisely in
August when AB was hired as Commercial Manager at Astese. He and the Italian
adviser formed a team and together designed a specific sales structure at national
level. These new structures were conceived so that to achieve a direct relation with
the market, and to allow monitoring the evolution of the products in the market.
Through the new system a set of support services was offered to the direct clients
(distributors, wholesalers, retailers). The results were seen immediately, as the year
1997 concluded with an unpredicted sales rise of 35% as compared to the previous
year.

In 1998, the production was carried out in a space rented from the vine and
winemaking station Banu Mărăcine next to Craiova, where, besides the production
line, there was also a final products warehouse. Moreover, the company had two
large warehouses in Bucharest that were supplied with goods as the production was
carried out. Practically, the delivery of products was performed from all three
warehouses. An important investment was done, and a modern factory was under
construction in Bucharest. The factory envisaged the increase in the production
capacity three times and the warehousing capacity twice. Through the coming into
use of the new factory, the new warehouse and the new headquarters, the factory in
Craiova and the three warehouses were to be gradually dissolved.

1.3 The position on the market of the Angelli products

The market for the Angelli products has some specific features:
Case study

/ with respect to the sparkling wines, the competition was hardly present
in 1998/1999. There were no other brands that could represent a
powerful competition at the time. Other products (such as the Faber
sparkling wines) appeared lately, and this could affect the sales of the
Angelli products.
/ it is a very highly seasonable market, over 60% of the sales being
performed between October 15th – January 15th of each year. For all
the other types of products (vermouths, liqueurs, appetisers) the
demand is relatively stable all year long, with small fluctuations and
slight increases at the end of the year period. Appendix no. 4 presents
the evolution of the sales for different types of Angelli products during
a year.
The Angelli products are mass products, designated to all the consumers and they
may be bought both from the kiosks at the corners of the streets and in the shops,
restaurants and luxurious bars. The prevalent market segment for the Angelli
products, namely women aged between 18-45, from towns with a population over
50 000 inhabitants, is targeted for promotion reasons.
The market shares for the three types of Angelli products are presented in table no. 1.
Table no. 1 The market shares of Angelli products in 1998

Type of Sparkling Cherry Vermouths Liqueurs

products wines and
appetisers

Market share 60% 85% 20% -

Angelli wished to go on consolidating its market leader position for the sparkling
wines by initiating an aggressive sales strategy (intense distribution and sustained
promotion of the sales towards all the links of the distribution channel and towards
the final consumer), and investing in advertising activities.
The Angelli products were present in over 50% of the selling points, existent at
national level (kioks, shops, supermarkets, restaurants, bars). Over 70% of the total
sales of the Angelli products is achieved in the key-selling points (the most prosperous
commercial points, with a great flow of visitors and consumers), all of them being
 International Marketing

commercial points in which the base assortment of Angelli products (Cuvee Imperial,
Cocktail Pesca and Cherry) are present in proportion of over 85%.
The medium price for sparkling wines is 1,47$, for vermouths, and 1,53$ for
appetisers and 1.57$ for liqueurs. The prices in lei (local currency) of the Angelli
products, as well as of the competing products are up-dated at the same time with
the evolution of the price for the raw materials and of the inflation in the Romanian
market.
The main competing products for the Angelli products were in 1998/1999:
Garrone, the leader in the field of the vermouth products, with a market share of
75%. The firm diversified its production, offering also a range of frizzante wines,
competing with the Angelli sparkling wines. Due to the advantage obtained
through its vermouths, Garrone managed to promote to the level of intermediaries
and of retail sellers its other types of products. It is a potential powerful rival for
the Angelli sparkling wines.
Garrone invests in publicity as well as in promotion activities (advertisements,
sales promotion, participation in exhibitions). It tries to follow closely the Astese
politics both from the point of view of the promotion – publicity, and from the
point of view of the distribution and sales organisation. This firm started as well to
organise its own sales structure and a distribution network at national level.
Faber is a competitor for the sparkling wines, but it just entered the market.
Venezia is a local brand in the field of the sparkling wines, produced in Timişoara
by SC Veliero S.R.L. that through the low prices (30-35% cheaper than the Angelli
products) managed to extend gradually in other areas.
The Angelli products enjoy a high notoriety (the performed studies show that over
87% of Romania’s mature population knows the Angelli brand) and a very good
image in the market. The products are seen as having an excellent price/quality
ratio that made Angelli products to be preferred by consumers.
The good product image is due to their look, completely different from other
similar products from the Romanian market. Everything that represents its look:
labels, caps, necklaces are designed and manufactured in Italy by experienced
companies in the field.
The image campaign is done through TV advertising and annually are invested in
this activity around 800.000 $. The logo: “Angelli, the prelude to an adventure” is
a very famous logo in Romania, at the level of the whole country.
Case study

The entire video spots’ creation and production is done in Italy ensuring an image
of quality and distinction. The main promotional campaign of each year is carried
out during September – December 31st, the emphasis being on the Angelli
sparkling wines that actually become the central point for the entire activity of the
company in this period.

1.4 The organisation of the distribution

The distribution system through which the Angelli products are sold is based on its
own selling force and on intermediaries.
The own sales force is composed of nine Area Sales Managers, some of them
having subordinated a sales agent. Each Area Sales Manager operating area
includes a number of a few counties.. For the areas where there are a large number
of distributors and where there are large cities, the Area Sales Managers have
subordinated a sales agent.
The sales agents receive the orders for products from the intermediaries and
transmit them to the Sales Department in Bucharest. The Sales Department, based
on the orders received from the country, sells the products to the intermediaries, the
price including also the transportation of the products from the Astese warehouses
to the intermediaries’ locations in the country. The company uses independent
transportation companies and the sales managers and agents ensure the
relationships with the intermediaries, merchandise at the retailers and have the task
of solving any issues arising at the retailers or end consumers level (such as orders,
transportation or quality issues).
The main types of intermediaries with whom the sales agents are in contact and by
whom the Angelli products are distributed are:
Distributors. These represent companies that carry out a dynamic sales activity,
having their own sales agents who visit each retailer of the allocated sales area. In
general they sell a product package that also contains the Angelli products.
Wholesalers. These represent companies that carry out a static sales activity,
displaying the goods in huge commercial centres that are visited by retailers. The
retailers are buying from wholesalers and the quantity of products is decided by
themselves based on the sales experience they had with the respective product.
 International Marketing

The company does not have a direct sale to retailers or end consumers. The only
direct commercial relationship is with Metro cash and carry the first store of this
kind in Romania.
Figure no. 12 presents the members of the distribution channel for the Angelli products.
Figure no. 1.2 The distribution system of the Angelli products

ProducerAstese
SRL

Bucharest Sales
Department

Area Sales
Managers (9)

Distributors

Wholesalers Metro Cash &Carry

Wholesalers

Retailers

End consumers

The company has trading relations with 186 intermediaries (distributors or

wholesalers) covering the whole country. The distribution of Angelli products at
national level depends on the potential of every intermediary. Exclusive relations
with intermediaries from a certain geographic area are not agreed to, in the sense
that for the same area there may operate two, three or more distributors for Angelli
products, depending on market demand.
A standard procedure for selecting the intermediaries was used, which together
with the company’s motivating system, resulted in Angelli products being
Case study

distributed by the most serious, and performing distributors at the time. The main
criteria for the selection of Angelli products’ intermediaries include: the sales
volume, the average inventory levels, the delivery time, the treatment of damaged
and lost goods, the co-operation in promotional and training programs, the
middlemen services owed to the customer.
The distributors may operate:
& only for one county area (distributors like: Mach, Boema, San Land,
Sorla etc.),
& for the area of several counties: Net Group Distribution (Sibiu, Alba,
Arad, Teleorman, Bucharest, Suceava, Vrancea, Mureş, Brăila), ERNA
(Iaşi, Suceava, Vaslui, Bacău), BDM (Baia Mare, Satu Mare, Bistriţa,
Cluj), Valentiana (Vâlcea, Olt, Gorj) etc.
There is no direct client (including Metro) that has more than 4% of the turnover of
Astese Production S.R.L. Consequently the company’s activity at the level of
intermediaries is atomised, there are no clients with a determining share in the
company’s activity.
In spite of this, due to the intermediaries’ motivating system, 90% of them have
accepted to work in exclusive purchasing conditions with Astese. They do not
distribute brands considered competitors for Angelli products. The intermediaries
are motivated through the system of relations Angelli-client and through the
awarding system.
In the relationships with the distributors the stimulation and price system used is:
& 7% discount off the invoice direct price list, as an operational
discount 1 .
& a 6% award, based on the achievement of the sales targets established
for a period of three months. This 6% discount is divided between the
most four important product groups: sparkling wines, liqueurs and
Cherry, vermouths and appetisers (others than Cherry). The share for
each product group vary from one period to another (the objectives are
set for a three-month period), according to the interest the company has
in promoting a certain product group through distribution systems.

1
The 7% off functional discount from the price list is granted to the distributors to offer them a margin that allows
them to operate by supporting their distribution expenditures. In rare cases in which the retailers asked for
products directly from Angelli, these are sold at the price list.
 International Marketing

The company suggests to the distributors a minimum selling price to retailers at the
level of the price list +2% and to wholesalers at a minimum of the price list of +1%.
For wholesalers, that either have direct contact with Astese either with Astese’s
distributors, the stimulation represents:
9 3% operational discount, granted directly on the invoice.
9 2% award for the achievement of the sales targets established for a
three-month period, similarly as for the distributors.
As a selling price of the wholesalers to retailers, the company suggests a minimum
selling price at the level of the price list.
The orders received from the distributors through the Area Sales Managers are
honoured in maximum 48 hours. The transport is done through specialised
transportation companies. For this activity there are used lorries with a capacity
between 5 and 20 tons, according to the structure and importance of the order. The
transportation activity is co-ordinated, organised and paid for by Astese Company.
The commercial relations with the clients, regardless the role they have within the
distribution chain (wholesalers, distributors, retailers) are done without any formal
commercial sale-purchase contracts. They have mostly an informal character. The
only formal contractual agreement is the one with Metro Romania, because of the
specific conditions that this intermediary requires.
The number of direct clients is not in any way limited or fixed, there is the
possibility for co-operation with any trader that is in compliance with the
company’s criteria. The actual traders (intermediaries and retailers) carry out their
activity based on a trading authorisation that is valid for different types of products
(foodstuffs, consumer goods etc.), there is no requirement for a special
authorisation for alcoholic products.
Case study

1.5 What has to be done?

Reading the mail took AB just a few minutes because the problem seems very
clear.
Beginning with January 1st 1999, the whole distribution system had to be changed
being necessary the shift from a distribution network made up of
186 intermediaries to a system according to which there were not allowed more
than 15 intermediaries. The effects of this situation were terrible and hardly to
evaluate on the spot. Thus, for the afternoon of the same day at 18.30 has been
convoked a meeting with all those responsible for the sales activity in order to
make a first analysis and appreciation of the situation.
Because of the quick way the meeting has been convoked at 18.30 everybody was
present (as it rarely happened before) and was waiting with interest to find out the
reason for which the meeting has been convoked. The news have been a real
surprise for everyone. After a noisy period when everyone was trying to expound
his opinion, one has tried to understand the situation and its future implications. It
has not been easy and although at 23.00 o’clock the discussion has not been over
yet, the effective formulation of a coherent and logical solution could not be done.
It was certain that the emotional factor was influencing all discussions.
Consequently, there was decided that it is necessary a time of reflection for
everybody and next day, at 17.00 o’clock tomorrow a new meeting was scheduled
at which the General Manager of the company was going to be invited in order to
make decisions.
It is vital for the company’s Commercial Department to analyse the situation the
company faces and to make proposals for coping with the problems envisaged to
occur beginning January 1999. The way the first meeting has been taking place has
not helped in finding some alternatives with a viable finality. You are employed as
an adviser who has been hired from outside the company and who is not part of the
company employees’ actual subjective way of thinking to analyse the situation and
to search possible solutions that could reduce the impact of this emergency
ordinance.
 International Marketing

For the next meeting that will take place 17.00 o’clock you have to prepare a
material through which you express your point of view concerning the following
aspects:
Assignment questions:
1. Study carefully Appendix no. 5, referring the Emergency Ordinance
no. 50 of 14.12.1998. What are the main problems that appear once the
provisions of this ordinance come into force?
2. Propose immediate actions that can be put into practice by SC Astese
Production in order to face the new situation created, starting January
1st, 1999.
3. Describe a plan of measures that could be elaborated in 1999 by
SC Astese so that to ensure a high sales volume for its products.
Case study

Appendix no. 1
Angelli sales evolution for 1995-1998

The graph represents the volume of sales.

Sales - quantity
 International Marketing

Appendix no. 2

Organisational Chart of S.C. Astese Production SRL

General Director

General Director Assistant

Telephon
Operator

Production Commercial Chief Purchassing

Director Director Accountant Coordinator

Laboratory Marketing
Responsible Coordinator Treasurer Company's
2 persons 1 person driver

Products Logistic Accounting

Preparation Coordinator Responsible
Coordinator 3 persons
4 persons
3 Delivery
Responsibles Financial
(one for each Responsible
Bottling Section
Manager wearhouse) 1 person
24 persons 9 persons

9 Area Sales
Manager
7 Sales Agent
Case study

Appendix no. 3
The assortment of the Angelli products in 1998

Sparkling wines:
• Gran Moscato – sweet since 1994
• Cuvee Imperial – semidry since 1994
• Cocktail Pesca – sweet with peach flavor since 1995
• Cocktail Fragola – sweet with strawberry flavor since 1995
• Kir Royal – sweet with gooseberry flavor since 1998
• Cuvee Imperial Magnum (1,5 l) – semidry since 1998

Vermouths and Aperitifs:

• Bianco – white since 1995
• Cherry – with cherry flavor since 1995
• Rosso – red since 1995
• Amerikano – cocktail with orange flavor since 1996
• Manhattan – cocktail with whisky flavor since 1996
• Bellini – cocktail with peach flavor since 1996
• Fragola – with strawberry flavor since 1998

Liqueurs:
• Café – Café - with coffee flavor since 1996
• Elixir di Pesca - with peach flavor since 1996
• Elixir di Nocciola – with peanuts flavor since 1996
 International Marketing

Appendix no. 4

The evolution of sales for Angelli products for a year

A. Sales evolution for Angelli vermouths (value)

100000
80000
60000 Series1
40000 Series2
20000
0
1 2 3 4 5 6 7 8 9 10 11 12

B. Sales evolution for Angelli sparkling wines (value)

2000000

1500000
Series1
1000000
Series2
500000

0
1 2 3 4 5 6 7 8 9 10 11 12
Case study

Appendix no. 5

Emergency Ordinance no. 50 of December 14th 1998 (excerpt)

Art. 23
(5) Annex no. 16 of the present emergency ordinance presents the types of
relationships that can be developed between the supplying and buying economic
agents as far as the goods subject to authorization are concerned.

Annex no. 16 to the emergency ordinance no. 50 /December 14th 1998

The Commercial relations between suppliers and buyers of the products subject to
authorisation.
…………………………
II. for the commercialisation of the alcoholic beverages
Provider Buyer
1. Alcoholic beverages producer Wholesale trader
2. Alcoholic beverages producer Retail trader
3. Alcoholic beverages producer Alcoholic beverages producer
4. Alcoholic beverages importer Wholesale trader
5. Alcoholic beverages importer Retail system trader
6. Alcoholic beverages importer Alcoholic beverages producer
7. Whole sale system trader Retail trader
……………………………….
(6)… “One economic agent, internal producer or importer of alcoholic beverages
… may have contractual relations with a maximum of 15 economic agents that
carry out a commercial activity in wholesale system 2 .”

Art. IV. The provisions of this emergency ordinance come into force starting with
January 1st 1999…

Annex no. 17 to the emergency ordinance no. 50/December 14th 1998

Taxes of authorisation for the commercialisation ……, of the alcoholic
beverages……
……………………….

2
The law defines by economic agents that carry out a wholesale activity, all the economic agents that,
buy and sell products in large quantities. The intermediaries of the Angelli products, both
distributors and whole sale traders, are included in “commercial agents that carry out their
commercial activity in the wholesale system”.
 International Marketing

3. Alcoholic beverages
a) for the commercialisation of each type of alcoholic beverage
from its own production or from import 10,000,000 lei
b) for the commercialisation of the following product groups in wholesale and
retail system:
- spirits 10,000,000 lei
- wines and wine-based products 10,000,000 lei
- beer 10,000,000 lei
- imported alcoholic beverages 10,000,000 lei
c) for the commercialisation of the alcoholic beverages in public alimentation
system;
- catering units with 40 seated places or bar places 5,000,000 lei
- catering units with 41-100 seated places or bar places 10,000,000 lei
- catering units with over 100 seated places or bar places 10,000,000 lei
- catering units with seasonal activity: 1/3 of the authorisation tax collected by
the units with permanent activity, according to the number of seated places or bar
places
- for canteens and canteen - restaurants that organise festive dinners; 5% of the
minimal tax collected for the catering units.
d) for the alcoholic beverages commercialisation in the shops selling at retail
prices, the tax is collected for each sale unit, according to the following product
groups, as follows:
- spirits 1,000,000 lei
- wines and wine-based products 1,000,000 lei
- beer 1,000,000 lei
- imported alcoholic beverages 1,000,000 lei
…………..
All organizations involved in the commercialisation of these products have to have
written contracts.
…………. …….. there will be used special invoices and shipping documents
enscripted with “alcohol beverage” ……..

The average exchange rate leu /$ was in 1999 of 8904 lei / $ (source http:
www//bnro.ro).
Case study 2

Global Spirits Company - how to enter the

Alcohol market ∗

Author: Luminiţa Nicolescu

Associate Professor
Academy of Economic Studies

2.1 Introduction

The new alcohol factory, located at the outskirts of Ploieşti, a town situated 60 km
North from Bucharest, the Romanian capital, is almost finished. When the new
equipment will be installed, the production capacity will increase four times. The
owner, Gheorghe Iaciu (called Gigi) looks proudly at the large building and reflects
over the activity of his companies over the last seven years (1994-2001) while
planning for the future:

“My companies were local companies run in a centralized way based solely on my
feelings. I have transformed them in profit centers where specific work is done by
specialists in the field.
I am going to be successful internationally, now that my companies became
“proper” market driven companies that function based on market economy
principles such as the performance and efficiency, as I have learned and seen
while living in U.S.!”

∗
The author thanks Gheorghe Iaciu, the owner of the Global Spirits Company for his contribution to the
ellaboration of this case study.
 International Marketing

2.2.1 History and presentation of the Gheorghe Iaciu companies

Gheorghe Iaciu graduated the faculty of Agricultural Equipment at the Polytechnic

Institute from Bucharest, the most prestigious technical educational establishment
in Romania, in the year 1987. He worked for four years at the Station for
Agricultural Mechanization, Ştefăneşti, Ilfov district, as head of section.
In 1990 after the changes that took place in Romania Gheorghe Iaciu became
involved in trading activities by buying and selling different goods such as clothes,
cigarettes, cosmetics and others. He remembers the beginning of his
entrepreneurial activities as follows:
“I knew that I have entrepreneurial spirit and I wanted to do business. The
problem was the lack of capital. I started with trade as it was the fastest way to
change my financial state. I was involved in trading activities for one year and in
one year, by starting from zero I reached the 11th place at the country level in
terms of turnover. In 1992 I had a turnover of 25 mill. $, but I realized that I am
not done for trade. I wanted to invest. So what have I done? I’ve done something
related to my previous activity: I built spaces for commerciants.”

After he accumulated significant capital he sett up in 1994 the company Expo

Market Doraly, that is 100% in his ownership. Other companies were sett up with a
similar activity profile in order to benefit of financial facilities granted by the law
at the time 1 . Table no. 1 presents the companies owned by Gheorghe Iaciu.
The “Doraly” companies built commercial spaces at the outskirts of Bucharest on
the road towards Constanţa and rented them to wholesale companies. The
“commercial space” renting business was chosen as a start-up business for a
number of reasons:
& in 1994 trade was a booming activity in Romania. Final consumers
were still buying the products they were missing for many years during
the communist shortage period. At the same time state companies
started to be restructured and employees were given “bonus packages”
in order to voluntarily leave companies, actions that brought large
amounts of disposable cash in the market,
& in 1994 the distribution system for consumer goods in Romania was
completely fragmented: there was a large number of small retail shops

1
Such as tax exemptions for the first 5 years of activity.
Case study

that were buying from wholesale companies, companies that were

under-developed at the time,
& the entrepreneur Gheorghe Iaciu worked in the trade sector previously
and he knew the market of wholesale companies. He also had good
relations with trading and importing companies, as he said:
“I had a good name among commerciants and wholesalers. They trusted me and
they paid me in advance the rent for commercial spaces. In this way I was able to
make the first investments.”

Table no. 1 Legal status of Gheorghe Iaciu companies in the period 1994-2001

Year of
Companies Year of setting up Observations
dismantling
Expo Market Doraly 1994 -
Expo Market G&D 1994 1996 Merger with Expo
Market Doraly
Expo Market Doraly 1994 2001 Merger with Expo
III Market Doraly
Expo Market Doraly 1995 1999 Merger with Expo
Group Market Doraly
Five Group 1995 1999 Merger with Expo
Market Doraly
Doraly Mall Constanţa 2001 - Separation from
Expo Market Doraly
Global Spirits 2001 - Separation from
Company Expo Market Doraly

The two main services the company offers are: renting display spaces and renting
warehousing spaces to en-gross trading companies with all the logistics to support
the activity of the companies that rent the commercial space.
The physical facilities of the company developed over time by increasing the
commercial space from 5500 square meters at the beginning of 1997 to around
25.000 square meters in 2001, as Expo Market Doraly became market leader in
renting commercial spaces in Bucharest. Bucharest is the largest market for trade,
as 65% of the merchandise sold en-gross in Romania is commercialized in
Bucharest. There are 37 en-gross centers in Bucharest with surfaces comprised
between 1000-30.000 square meters and Doraly is the market leader measured as
the percentage of visitors. See appendix no. 1.
 International Marketing

The competitive advantage of the Doraly companies in the space renting business,
was the large range of connected services 2 related to the renting service and the
high degree of seriousness and promptness in doing business. When setting up the
Doraly companies, Gheorghe Iaciu had as objective to serve the clients and to offer
them the services they need at high quality standards. He looked for adapting to the
client’s need permanently and for the best way to do this by reinvesting
continously for the improvement of the supplied services. He finally succeeded to
create a business sustainble on its own as he mentioned:
“I organized the system and now it works on its own. It brings us money without
being necessary to be there all the time.”

The turnover of the Doraly companies increased continously between 1994 and
2000, as it is presented in table no. 2.

2.2.2 Towards the diversification of activities

Given the positive evolution of the “en-gross” business in Romania, the owner
accumulated more capital and he decided to invest further. He had two strategic
options:
1. to expand the renting commercial spaces business further at national
level or,
2. to invest in a completely different business.
1. Initially he wanted to extend the “en-gross spaces” business at national
level as he had successful experience in the field, but he could not obtain the best
situated places in the large towns of Romania. He managed only in 2001 to set up a
commercial center in Constanţa. The center was sett up as another company in
Gheorghe Iaciu’s ownership, the company Doraly Mall Constanţa. This company
rents commercial spaces to retailing companies, not to en-gross companies as the
company in Bucharest. Constanţa is the largest harbour at Black Sea in Romania
and a large commercial center. The Doraly commercial center was sett up based on
the good relationships the owner had with local business people in Constanţa. For
the other towns, the competition to get the best places (the ones with high
commercial flow) was too strong and he could not afford to compete for them.

2
Such as flexibility in the renting period, access to parking and cars security, security of goods and clients,
maintenance of rented space and settlement of any complaints in maximum 8 hours, availability of local and
international telephone services, availability of cooling spaces, heating during winter etc.
Table no. 2 The evolution of the turnover of the Gheorghe Iaciu companies in the period 1994-2000

Million lei/$ 1
Turnover/Year 1994 1995 1996 1997 1998 1999 2000
Expo Market Doraly (lei) 1.525 1.904 5.267 14.930 43.799 87.224 169.578
$ 921450 753164 1682210 2077072 4919025 5669786 7821863
Expo Market G&D (lei) 1.337 2.095 1.338 - - - -
$ 807854 828718 427339 - - - -
Expo Market Doraly III (lei) 300 1.426 1.731 2.766 5.248 6394 5.225
$ 181268 564082 552858 384808 589398 415626 241005
Expo Market Doraly Group (lei) - 1.527 2.786 4.035 6.557 - -
$ 604034 889811 561352 736410 - -
Five Group (lei) - 1.401 3.584 8.337 6.773 - -
$ 554193 1144682 1159849 760669 - -
Doraly Mall Constanta (lei) - - - - - - -
$ - - - - - - 120.000
Global Spirits Company (lei/$) - - - - - - -

1
The exchange rates leu/$ in the period 1994-200 were: www.bnro.ro
Years 1994 1995 1996 1997 1998 1999 2000 July 2001
Exchange rate 1655 2528 3131 7188 8904 15384 21680 27855
 International Marketing

The consumer goods distribution system started to change in Romania. Independent

supermarkets, chains of Romanian supermarkets (Mega Image, La Fourmi) and large
international chains of supermarkets (Billa, Carrefour) developed in Romania in the
last years. The Romanian consumer buying habits started to change, as large
supermarkets became available. Consequently, small retailers, convenience stores,
independent shops, boutiques and kiosks were loosing their clients and started to
disappear or diminish their activities. As these retailers were the main clients of the
en-gross trading companies, the demand for commercial space for en-gross trade
started to decline too. The en-gross market in Bucharest became a mature market that
began to decline with 5-7% yearly. The competition became harder and in the last
years, the tool to compete remained the price and size of the business. Consequently
prices for commercial space renting decreased dramatically (from 60$/square meter
in 1994 to 25$/square meter in 2001). Therefore, the tendency is that the large
companies will swallow the small companies.
2. Given the declining market of the en-gross industry and the difficulty to
get the appropriate places (a critical success factor in this business), Gheorghe
Iaciu decided to diversify its activity by entering the production sector as he said:

“I knew that trade is going to decline, the en-gross industry is not very
developed anywhere in the developed countries. The trend is of diminishing this
en-gross sector everywhere. Therefore, I decided to invest in production. The
question was: in what production sector? I have chosen the alcohol industry for
a couple of reasons: I had some experience in the cereal market, the main raw
material for alcohol and I heard that the margins are high in this industry. I
realized that I can exploit the long-term advantages offered by the Romanian
strong agricultural potential. I wanted to obtain a mass non-perishable product.
In this way I got to the alcohol. I did not know anything about alcohol
production and selling, but I knew where from to take the raw material. I did not
understand the black market and its implications over this industry”.

In the period July 1997 - August 1998 the first alcohol factory was built from
scratch in Ploieşti with an initial investment of 2.4 mill. $. The factory was
equipped with modern equipment: a German distillery with continuous production
flow that has a capacity of 10.000 litres/day. The alcohol factory was part of the
Expo Market Doraly company, but it functioned as a separate profit centre. At the
very beginning the company even though very well equipped was
Case study

not successful in the alcohol business, as the owner explains:

“In 1998 I had an alcohol factory that was producing alcohol that I couldn’t sell.
The entry barriers in the industry were very high. The market was closed,
producers of alcohol beverages were buying only from already known suppliers
and I was a new-comer. Besides this, the black market of alcohol was very strong.
The alcohol accise was 2$/litre”. I was obtaining alcohol at 50 cents a litre, but
nobody cared about my 50 cents, when they could obtain goods with 2$ cheaper
from the black market producers. I have always functioned legally and paid my
taxes, so I could not compete with the black market.”

When Gheorghe Iaciu realized that he has a product (the alcohol) that he can not
sell, he decided to integrate and to use the alcohol to further produce alcoholic
beverages as he details:

“I ended up producing alcohol beverages because I had the alcohol and I had
nothing to do with it. I bought the necessary equipment to produce beverages, I
created a product and I entered the alcoholic beverages market. Now I know that I
was not ready to manufacture products. The people I hired have not make alcohol
ever in their life”.

He acquired an Italian bottling installation that has a 3.000 bottles/hour capacity

and he started to produce both raw alcohol and alcoholic beverages. He looked in
the Romanian market, by searching the products existing on the shelves of shops,
identified a gap in the gin offer and decided to produce gin. The process of
producing alcoholic beverages started based on the owner’s intuition. He has
chosen the name of the product, designed the bottle and the label himself and the
company launched the product in the Romanian market in November 1998.
In 1999, Gheorghe Iaciu started to restructure his companies, by merging all space
renting activities in one company and separating from the existing companies
businesses in other fields of activity (alcohol) or situated outside Bucharest (renting
space in Constanţa) as it can be seen in table no. 1. In 2001 Gheorghe Iaciu had
three legal companies that were all in his ownership and over which he had the
entire control and decision power. He gave up part of his ownership to family
members, mainly to his wife Dorina Iaciu, who is Gigi’s adviser in business as he
confessed:
 International Marketing

“I am in charge with the business and its strategic and financial side, but when it
comes to design and aesthetics, I always ask Dorina before making a decision. She
has a good flair: what she likes is successful in the market, what she doesn’t like
has no success in the market”.

The three companies employ a total of 278 employees in 2001 as it is presented in

table no. 3.
The alcohol factory was initially part of Expo Market Doraly company and it was
legally transformed in a completely new company (by separation) in 2001, when it
became the Global Spirits Company (GSC). However the factory functioned as an
independent entity since its beginning in 1998.

Table no. 3 Evolution of employee number of Gheorghe Iaciu companies

in the period 1998-2001

Company/Year 1998 1999 2000 2001

ExpoMarket Doraly 160 150 148 141
Global Spirits Company 102 100 95 106
Doraly Mall Constanta - - 23 23
TOTAL 262 250 266 270

2.2.3 The alcohol business becomes the main business

for Gheroghe Iaciu

The alcohol company enlarged the product lines by introducing in production besides
gin, products such as vodka, cherry, rum and liqueur as different brands and sub-
brands, so that in 2001, it had 11 brands and sub-brands. Appendix no. 2 presents
the whole range of alcoholic products of the company.
Among the products, the vodka brands account for the highest percentage of the
production volume (62% in 2001) and for 50% of the sales volume of 120.000
l/month of the company, while the gin brands account for 28% production volume
and for 40% of the sales volume of 60.000 l./ month. Appendix no. 3 presents the
whole range of the company’s products and their percentages in the production
volume and in the sales volume.
Case study

The GSC’s products address two major general market segments in the Romanian
market: the medium consumer segment and the low consumer segment.
The medium consumer segment comprises: persons with a medium towards high
degree of culture, persons preoccupied of an increase in their social status, persons
with ages between 20-60 years old as a large segment and between 25-40 years old
as a central segment, with net monthly incomes between 1.5 mill. lei - 3 mill. lei
(54$- 108$ 3 ). The company addresses both women (Bartender’s gin, Bartender’s
Peach /Lemon Vodka) and men (Black Label Vodka, Baternder’s Fine Vodka) in
this segment. Prices for these products range between 2$ and 4 $.
The low consumer segment comprises persons with a low towards medium degree
of culture, with no major preoccupation for an increase in their social status,
persons who buy the products mainly for a very good price/quality relation,
persons with the age comprised between 20-60 years as a large segment and
between 30-50 years old as a central segment, with net monthly incomes of
maximum 1.5 mill. lei (54$). The company addresses both women (Bartender’s
Sour Cherry, Vulturul Regal Vodka, Club 26 Vodka) and men (Bartender’s Rum,
Vulturul Regal Vodka, Club 26 Vodka).
For the main two product types of GSC gin and vodka, the market position differs.
The Bartender’s gin is the market leader with 51% market share at the beginning of
2001 (see appendix no. 4) while for the vodka’s the market shares are still low
(see appendix no. 5). In May 2001 the gin market share increased to 53% and
vodka’s market share increased to 4%.

After the initial failure with the alcohol business in 1998 Gheorghe Iaciu realized
that he has to make some changes in the way he runs his business, as he confessed:

“The fact that I started to chose what product to manufacture at inspiration was a
bad start. Later I understood that I had to find my way and initially I tried to do
this through my employees. But I realized that I can not get anywhere with them.
At that moment I understood that something has to be changed. I had my
entrepreneurial spirit, I had my orientation towards quality, but this was not
enough, I was doing everything after my feelings. I realized that first of all I should
start to transform myself …. I knew that I have to get more knowledge. So, I
decided to do an MBA. I searched the Romanian market for such an educational
service, I decided that what was available in the Romanian market is not what I

3
The average exchange rate leu/$ in the period January-July 2001 was 27.855 lei/$.
 International Marketing

want, so I applied at universities in United States. I have been accepted and I

attended the MBA program of Florida University in USA, for two years, in the
period June 1998 – June 2000. In the meantime I was managing my business from
distance via email. This was a turning point for me. I learned a lot. I learned that a
person cannot do everything right on his own, a person cannot know
everything,………..”

Consequently, when he returned from USA he started to make changes in the

company. Everything started with a change in strategy.

2.3 The transformation of the companies’ activities

after June 2000
Gheorghe Iaciu followed an MBA in USA, period in which he managed his
business from distance. At the same time he accumulated knowledge, friends and
relations at international level. The effects of the study period on his managerial
activity started to be seen after a while as he explains:
“I entered this program, I accumulated knowledge, but I really felt the
accumulations only after one year and a half. These accumulations helped me to
find my direction in business. At the end of last year (2000) I personally knew what
I want in business and I took some strategic decisions:
1. I concluded that I have to separate my businesses and to stop moving
funds from one business to another. I decided to let each business to function on its
own. I finally managed to legally separate the businesses in 2001.
2. My time is limited. Where do I use it preponderantly? In the business I
think it is the future, where the potential is higher. And this is the Global Spirits
Company.
3. My resources are also limited. So where do I use them? I concluded
that in the alcohol business. I decided to focus on the alcohol business. What does
this mean? That I have to make a strategy in this field.”
The strategy chosen by Gigi Iaciu for the alcohol business, was to restrain the
number of brands, to create new brands, to recreate some brands and to re-launch
them in the Romanian market and to launch them internationally, too.
Case study

2 3.1 Changes in quality

Global Spirits Company decided to focus on the quality of the product as a

competitive advantage. Consequently he decided to improve the quality of its
products: the alcohol (50% of the total turnover in 2000) and the alcoholic
beverages (50% of the total turnover in 2000). As the alcohol is a basic component
for the alcoholic beverages, its quality was decisive. Therefore, the quality of the
alcohol became the key element in ensuring the quality for alcohol buyers and for
the alcoholic beverages buyers.
In order to ensure a high quality of the alcohol Global Spirits Company needed to
answer the following questions:
/ how to control and monitor quality? And they changed the
technological process and made investments in new equipment,
/ how to obtain quality? And they set up a research laboratory and hired
the best specialists in the field,
/ how to measure quality? And they created a continuous quality control
system part of the technological process with established parameters
for the final products.
The company acquired highly modern testing equipment in order to verify the
quality of the alcohol and of the alcoholic beverages. Than the company changed
the technological process and the equipment twice until they managed to obtain the
quality of alcohol desired. Part of the technological process is sample testing: every
two hours the quality and the concentration of the alcohol is measured and when it
does not correspond to the quality standards established the alcohol is reintroduced
in the distillation process.
After the changes made, in September 2000 Global Spirits Company managed to
obtain the standards of quality desired for the alcohol. Consequently the number of
clients for alcohol increased from zero to 33 in one year time, in the conditions in
which (according to Gigi Iaciu) 80% of the alcohol in Romania is sold in the black
market. In the first half of 2001, the company ranked the second in the country as
sales volume (measured as contributor to the state budget 4 ), while as production
capacity it ranked the 22nd. The high number of clients attracted in one year time,
was based on an organized direct selling process and a thorough market research

4
The ranking refers to the alcohol sales declared and for which taxes are paid to the state budget. The black
market sales are excluded.
 International Marketing

and gathering of information prior to the negotiation process. Gigi Iaciu describes
the process:

“We personally went to every potential client, as many times as it was necessary. It
is not so easy to convince someone to buy from you. You have the first contact, it
takes some time to find out who is the right person to talk to, than you have to know
what is he interested in. To do this you have to know his products, to know what
problems have his products. We decomposed their products, we know their
recipees, we analysed their products in detail, we had their products checked by
our tasters, so we know what problems they have and how to approach them at
negotiations. This is how we managed to attract 33 clients in one year, by
identifying their problems and proposing solutions for them. We still have clients
for alcohol on our waiting list, whom we cannot honour due to the lack of
production capacity.”

In order to obtain high quality alcoholic beverages, besides a good quality alcohol,
there is necessary a good quality water, as in a litre of vodka, 40% is alcohol and
the rest is water. This was the second element for which the company ensured a
high quality: the composition of water before entering the technological process.
After one year since the new high quality standards have been introduced, in the
October 2001 the Global Spirits Company received the ISO certificate.

2.3.2 Changes in the product range

In October 2000 the company started to implement the new strategy as far as the
alcoholic beverages are concerned. Contracts were signed with American and
English companies for the development of new products, a team of researchers was
hired, the best tasters in Romania were brought in the company in order to develop
high quality products. The company worked simultaneously to develop few
products.
The company decided to focus on a few product lines for which to develop a
number of new brands and to reposition the existing brands. Table no. 4 presents
the product lines and the new and repositioned brands.
Case study

Table no. 4 The new product lines and brands at GSC

Product line Brand Position* Image

Vodka Luma NB Ultra
premium
Goldessa NB Premium
Dakk NB Medium
Gin Bartender’s R Premium
Premier
branding in NB Ultra
progress premium
Liqueur Epriz NB Premium
Brandy branding in NB Ultra
progress premium
*NB = New brand; R = Repositioned

The company has chosen to focus on these products based on:

) the sales estimations, by focusing on products with high volume sales
potential,
) the existence of markets at global level, where the GSC products can
be competitive.
The new/repositioned brands are completely different from the previous GSC
products: their composition is based on newly improved recipees, their image and
market position is changed. The owner appreciates that the creation of the new
brands is ”revolution as compared to what we have done the first time”.

Appendices no. 6 and no. 7 present by comparison the old Bartender’s gin bottle
and the new Bartender’s gin bottle, respectively the old vodka brand and the new
vodka brand.
The new products will be launched gradually, while they are ready to enter the
market, while the old products will be withdrawn also gradually. The first two
new/repositioned brands that are already ready (Bartender’s gin and Dakk vodka)
will be launched in March 2002. By the end of 2001 another two brands will be
ready (Luma Vodka and Goldessa Vodka), in summer 2002 the liqueur brand
(Epriz) will be ready and in October-November 2002, the other two brands will be
finished: the brandy and the ultra premium gin. By the end of 2002 it is envisaged
 International Marketing

that five brands Bartender's Premier, Dakk, Goldessa, Luma, Epriz will be
launched in the Romanian market and probably in some foreign markets, too.
In the creation of the new products, GSC’s contribution focused on the
composition and the quality of the products themselves, while the image creation
and all marketing activities were subcontracted to professional organizations, as the
owner mentioned:

“My opinion is that if a company tries to do everything on its own, ends up as a

poor company. Our company focused on what it knows to do better: products. We
have a research-testing laboratory and we focus on the development of the
physical product. For the image creation and for the marketing activities we hired
specialized companies. We don’t want to do the work of Saatchi & Saatchi, or
Ogilvy or A.C. Nielsen. They give me the information and I use it to make the
decisions.”
The marketing research activity became a priority activity at GSC, as “no decision
can be made without a thorough search of the market”.
Gheorghe Iaciu intensified the marketing research activities at his companies by
subscribing to specialty publications, by participating at exhibitions and fairs (both
as an exposant but, researching the competition, too) by getting acquinted with the
personalities in the field at world level, by continuously searching the internet for
information about the alcoholic producers and their products at world level, by
buying market studies at global level and by continuously analysing competition
and consumers.
GSC is aware that the most important thing for the success of the business is to get
high sales volumes, by obtaining a high market share. In 1998 when it first started
to launch the alcoholic beverages in the Romanian market, Bartender’s gin was the
only product that was sustained with marketing activities and this was the only
product that got a 53% market share in spring 2001. For all new/repositioned
brands, the company designs at the moment marketing programs, meant to obtain a
certain market share from the targeted segment, based on the following steps:
¾ create awareness through advertising,
¾ stimulate trial through sales promotion,
¾ get market coverage through distribution,
¾ sustain the brand in the market (reminding advertising and sales
promotions).
Case study

The company has as objectives to reach in Romania a 60% market share in the gin
market and 60% market share in the vodka market in 2002 with the
new/repositioned brands.

2.3.3 Approaching external markets

In the summer of 2000, when Gigi Iaciu decided to revise the strategy of its
companies, he re-analysed the Romanian market with different eyes (in the light of
the knowledge accumulated in USA) and he noticed that the Romanian market has
not a very high potential from the point of view of the potential sales volumes and
of the type of products that can be sold here, as he explains:

“At national level we have a weak market. The market potential is low from
quantitative point of view, as well as from qualitative point of view. In the
Romanian market there are few consumers with pretentious tastes and we cannot
design premium brands for the Romanian market as the volume is low and there
cannot be obtain profits for specially designed high quality products.
At that moment I realized that if I want to create premium products I have to relate
myself to foreign markets. However, the company has to be the first in its domestic
market in order to accumulate enough capital to be able to internationalise.”

Consequently when the new brands have been conceived, they were designed as
global brands. The company registered its property rights over the new brands in a
number of over 100 countries (15 countries from European Union, USA, Canada
and another 70 countries partners at the Madrid Protocol), investing in this over
500.000$ with the plan to go international with these brands. The company already
started to negotiate with a number of partners from different countries for the
distribution of its newly designed brands. However, the strategies for different
countries will be different as the owner mentioned:
“We cannot go in the same way in all countries. We have one approach for the
neighbouring countries and a different approach for countries such as UK, USA,
France, Germany and Japan. There are products that can be sold in all countries
and there are products that can be sold only in a few countries.”
The company has negotiated and found partners for distributing its products in
USA, in the Scandinavian countries and in some of the neighboring countries:
Bulgaria and Yugoslavia. It also made offers in U.K, Italy and Canada.
 International Marketing

GSC considers that it has no potential to address the medium USA market that is
stable and very competitive, but considers that it has chances to penetrate the
premium and the ultra premium markets that have a 17% yearly growth rate and
are not so competitive (from the point of view of the number of competitors). In
Canada and in the Scandinavian countries GSC intends to enter both in the
premium market (where to compete on quality) and in the medium market (where
to compete on price). In the neighbouring Eastern European countries the company
will enter especially with the medium products.

2.3.4 The need for overall change

In April 2001 the company started an investment in a new factory for alcoholic
beverages, factory that will increase the production capacity four times from
10.000 litres/month to 40.000 litres/month and that will be finished in February
2002. The increase in the production capacity took place based on three reasons: to
satisfy the demand for alcohol that was higher than the production capacity, to
ensure a competitive price for alcohol (and further for Global Spirits Company
beverages) by producing high volumes and obtaining economies of scale and to
obtain highest quality possible.
The total investment of the company after June 2000, was of over 6 mill. $, of
which 4.8 mill. $ in equipment, 1 mill. in the creation of brands and 500.000 for the
protection of brand names in foreign markets.
In order to be able to reach these objectives of 60% market share in Romania for
two product lines in 2002 and to internationalise in the medium and in the long
term, the GSC also made some changes in the human resource activity and in the
financial-accounting activity.
The initial failure with the alcohol in 1998, determined subsequently the
reorientation of GSC towards quality. The owner realized that he has to change the
way he was selecting employees: from hiring whoever was available, he shifted
towards hiring professionals and specialists in the alcohol production and the best
tasters in the country for the conception of the new products. The training activity
became part of the human resource policy at GSC, even though still not very
focused, as the owner explains:

“I invested money in training employees because human resource is the most

important in a business and it is the most difficult to develop. One rather is able to
retechnologize sooner than forming a good working team. It is a very long process.
The most I invested in myself, as with the others I did not know in whom to invest
and in what direction. I did not know who will be suitable and who will stay. It is a
long process, it takes one at least a few months to know an employees, his
Case study

capabilities and suitability for the needs of the company. Now all employees are
trained in computing, foreign languages, marketing etc. Some of them improved,
some others did not. The process is very slow. These are people who lived with a
certain mentality for many years. We want them to transform themselves in
capitalists over night. This not simply possible. It takes time and I am supporting
them in this process.”

Also for certain activities (such as market research and advertising) that the
company’s employees cannot do it at a high level, GSC subcontracts the tasks to
professional organizations.
The company also changed the financial and accounting system by replacing the
overall evidence kept for alcohol separate and for alcoholic beverages (in total)
separate with an evidence for each brand. The new financial-accounting system
based on the introduction of the new software allows to know the costs and the
profits for each product separately.
The company has well established objectives as far as the Romanian market is
concerned (to increase its market shares for gin and for vodka up to 60% with the
new/repositioned brands) and the end of 2002 will be decisive to see if the
company is successful or not. The structure of GSC will change by reducing the
percentage of the alcohol selling activity to 25% in the favour of producing
alcoholic beverages.
Results on a large scale that will include international markets are expected to be
obtained in five years time.
The final thoughts of Gigi Iaciu reflect the aspects he wants to focus on in
developing the strategy for his business:

“The basic of our business is:

9 emphasizing on brands and consumers,
9 executing highly qualitative products in an efficient way,
9 developing an exceptional marketing activity.”
2.4 Assignment questions:

1. How did the strategy change at the Gheorghe Iaciu companies and at
Global Spirits Company in the period 1994-2001?
2. What were the concrete actions that reflected the change in the general
strategy and in the strategy of Global Spirits Company?
3. What were the factors that contributed to the change in strategy?
 International Marketing

Appendix no. 1

The first 16 en-gross companies in Bucharest in 2000 as number of visitors

No of stands as a %
Name of the No. of of the total number Degree of visiting
No.
company stands of stands in all en- as a % of total
gross companies
1 Doraly 625 6.62 13.47
2 Niro2 952 10.09 13.30
3 Flora 686 7.27 13.15
4 Prisma1 576 6.11 5.74
5 Europa 2000 21.20 4.59
6 Metro Otopeni 0 0.00 3.95
7 Chirigii 147 1.56 3.79
8 Metro Militari 0 0.00 3.67
9 Sam Expo 175 1.85 3.49
10 Apromat-co 243 2.58 3.30
11 Percy 193 2.05 3.07
12 Massa 327 3.47 2.75
13 Mate Vila 164 1.74 2.64
14 Herastrau 230 2.44 2.23
15 Manor 74 0.78 2.18
16 Doraly lll 99 1.05 2.11
Case study

Appendix no. 2

The assortment of alcoholic beverages at Global Spirits Company

Alcohol Market ∗
No. Products Bottle sizes
concentration segment
1. BARTENDER’S 40% 750ml. M
DRY GIN 500ml.
1000 ml.
2. BARTENDER’S 40% 700ml. M
BLACK LABEL 500ml.
VODKA 375ml.
8000 ml.
3. BARTENDER’S 40% 700ml. M
FINE VODKA (RED) 500ml.
8000 ml.
4. BARTENDER’S 30% 700ml. M
PRINCESS VODKA 500ml.
8000 ml.
5. BARTENDER’S 37.5% 500 ml.
PEACH/LEMON M
VODKA
6. BARTENDER’S 25% 500 ml.
VISINATA (SOUR L
CHERRY)
7. BARTENDER’S 40% 500 ml. L
RUM
8. VULTURUL REGAL 33% 500 ml.
(VODKA) L
9. CLUB 26 VODKA 26% 700 ml. L
10. NOBLESS (SOUR 25% 700 ml. M
CHERRY LIQUEUR)
11. NOBLESS 25% 700 ml. M
RASBERRY
LIQUEUR)

∗
M represents the medium consumer segment.
L represents the low consumer segment.
 International Marketing

Appendix no. 3

The percentage of every product in the total volume of production

and in the total volume of sales (2000)

PERCENTAGE OF PRODUCT IN
THE PRODUCT QUANTITY SALES
PRODUCED
DRY GIN 375 ML 40% 2.97% 2.81%
DRY GIN 500 ML 40% 11.33% 13.60%
DRY GIN 750 ML 40% 13.88% 23.68%
Liqueur Sour Cherry 0.20% 0.45%
Liqueur Rasberry 0.14% 0.33%
RUM 500 ML 40% 4.77% 4.43%
VISINATA 500 ML 18% 4.66% 4.58%
VODKA BARTENDER’S 750 ML 40% 7.36% 8.73%
VODKA Club 26 5.97% 2.92%
VODKA LEMON 500 ML 30% 3.00% 2.86%
VODKA N 375 0.99% 0.66%
VODKA N 500 4.64% 4.35%
VODKA N 700 3.56% 4.22%
VODKA PEACH 500 ML 30 % 1.62% 1.55%
VODKA PRINCES 500 ML 30% 18.49% 12.34%
VODKA PRINCESS 700 ML 30% 6.55% 5.64%
VODKA R 500 3.81% 3.59%
VODKA VULTURUL-REGAL 6.08% 3.24%
TOTAL BOTTLES 100.00% 100.00%
RUM 40% 8 L 0.68% 0.79%
VODKA BLACK 8 LP 40% 36.05% 37.52%
VODKA BLACK 8 LS 40% 15.82% 17.91%
VODKA PRINCESS 8 LP 40% 24.98% 20.20%
VODKA RED 8 LP 40% 22.47% 23.58%
TOTAL BOTTLES 100.00% 100.00%
Case study

Appendix no. 4

The market share of the Bartender’s dry gin against the competition
in the period August 1999-January 2001

Market Share Market Share Market Share Market Share

Brand Aug. - Sept. Apr. – May Aug. - Sept. Dec. 2000 – Jan.
1999 2000 2000 2001
Bartender's 34.5% 49.0% 45.1% 51.1%
Gilmans 16.8% 17.7% 24.4% 13.4%
Sankt 8.2% 9.7% 10.1% 3.6%
Petersburg
Russeika 4.7% 4.2%
Big Ben 7.8%
Skanderberg 6.5%
Sanburgen 4.8%
Beefeater 6.0% 4.2%
 International Marketing

Appendix no. 5

The market share of the GSC vodka’s brands against the competition
in the period August 1999-January 2001

Market Market Market Market

share share share share
Brand
Aug. - Sept. Apr. – May Aug. - Sept. Dec. 2000 – Jan.
1999 2000 2000 2001
Bartender's Vodka 0.6% 1.8% 2.3% 2.5%
Vulturul Regal 0.8% 1.0%
Club 26 Vodka 0.7% 0.8%
Scandic Pop 10.7% 17.2% 20.4% 20.3%
Polar 5.2% 6.6% 8.6% 7.9%
Voltamar 4.7% 4.3% 2.4%
Imperial Gold 4.5%
Stalinskaya 4.4% 4.9% 5.7% 5.4%
Regal 3.9% 2.8%
Vorona 3.6% 7.5% 7.9% 9.4%
Uncle Sam 3.6%
Alexander 3.3% 3.8% 3.5% 3.0%
Perfect 3.4% 3.3% 2.8%
Vinalco 2.5% 2.7% 2.6%
Sankt Petersburg 2.3% 2.7%
Monopol 2.6%
Case study

Appendix no. 6

The old Bartender’s gin and the new repositioned Bartender’s gin

A. The old Bartender’s bottle B. The new Bartender’s bottle

 International Marketing

Appendix no. 7
The old and the new vodka brands and bottles

A. The old vodka brand B. The new vodka brand

and bottle and bottle
Case study 3

Danmixer

Author: Madsen,
Aalborg Business College,
Denmark

About the case

Danmixer is a real company and the employees are all real characters. The name of the company has
been changed. When you have finished your work with the case you will know why!

Only some of the events and statements given in interviews are constructed for this case. Some of the
problems that the case makes topical are real, and some are fiction, but the are all realistic. The
information about the company, its products and competitors are authentic.

Some of the employees have been interviewed and some informational material of the company has
been used for presenting the company and some of the facts about it.

No contact should be made to any of the companies mentioned in the case!

3.1 Introduction

”We have to rethink the situation of the company in order to make the right
decisions. I want you to take into consideration that we obviously are facing some
major threats. But the future will bring some very interesting opportunities. Our
markets are becoming more and more competitive and our customers are
becoming more and more competent when it comes to product specification,
supplier search and performance review. And we must never forget the strategic
role of marketing. I am not a hundred percent sure that it is wise of us to aim too
much at using the Internet-solution for all sales and marketing tasks. We have to be
carefully about “nursing” our customers realising the importance of relationship
marketing”
 International Marketing

The Managing Director Holger Colding found himself doubtful about the use of
E-Business in Danmixer. He had the feeling, that he had to get a better background
to make the right decisions. He felt that the use of Informational Technology and
E-Business should be treated as a more integrated part of the Marketing Strategy.
However, Informational Technology was not his only concern. Recently speaking
with his best friend, who is a marketing manager in an company producing
equipment for hospitals and laboratories he said:
“Until now we have been satisfied with our core-competence within Product
Development and our marketing activities have been secondary as long as our
products have been excellent. Still our engineers have been doing a good work
when it comes to the sales processes and building relationships, but I believe we
may not yet have the ability and time for market monitoring” (Colding)

3.2 November 2001

It was a cold day in November 2001. Project Manager Jens Nygaard Andersen
looked out of the window. A truck was loading a big mixer for Tetra Pak in
Sweden. Tomorrow Mr. Andersen was leaving for Ireland for a sales meeting, last
week he was in Germany, and the week before he was in England. Actually he was
now wondering if there might be any other solution than all these sales meeting all
around the world. He turned around and looked at the computer screen. Another
product-inquiry had arrived via the homepage. He had been quite sceptical, but
now he realised that the homepage generates some new customers. At the time they
made the homepage it had only cost about 10.000 Danish kr. which is
approximately 1000 USD. What if we invest 10 times that amount of money? And
what if the number of travels abroad could be reduced? He did not really know, but
one thing was for sure. The new homepage would have to offer more facilities than
the old one. Something like customer-support, and maybe use some famous
companies as references.
Case study

For the time being Danmixer was registered in some search engine 1 databases:
WWW.Jubii.dk
WWW.1klik.dk
WWW.Albot.dk
WWW.Altavista.dk
WWW.Arriba.dk
WWW.Berta.dk
WWW.Excite.com
WWW.Directhit.com
WWW.Google.com
WWW.Hotbot.com
WWW.Lycos.com
Mr. Andersen went recently to a seminar at the University in Aalborg, Denmark.
The professor spoke about Internet Marketing-strategies. One of the theoretical
approaches, that made an impression on Mr. Andersen was the Net-activities
organised as Public Internet, intranet and extranet. Mr. Andersen remembered
something about the Internet being characterised as the public area for current and
potential customers, competitors, research community and media. The Intranet
deals with proprietary information with a focus on employee communication. The
intranet is more process oriented and useful for development tasks as well as the
Internet is more sales and marketing oriented. He did not remember a lot about the
extranet – he only had a vague memory about it being a kind of blend. Luckily Mr.
Andersen still has the handouts from the Power Point presentation. Until now
Danmixer has not been using either intranet nor extranet.
Once Mr. Andersen was discussing the company’s actual and future use of the
Internet, Mr. Andersen found Mr. Colding very doubtful about the effect and
measuring the effect of the Internet Marketing activities. According to Mr.
Andersen Mr. Colding was not really aware of the opportunities of the Internet.
“Isn’t unrealistic to believe that we can become a virtual company doing
electronic commerce as long as we are producing turbo mixers for food
manufactures? I don’t think you find any company that is more into conventional,
physical business than Danmixer. And what is Internet marketing after all?”
(Colding)
1
Search engines use special automatic tools known as spiders or robots to index web pages of registered sites.
Users can search this index by typing in keywords to specify their interest. Pages containing these keywords will
be listed, and clicking on a hyperlink will take the user to the site.
 International Marketing

Mr. Andersen showed Mr. Colding a theoretical model in order to understand the
concept of Electronic Commerce (Appendix no. 1).
“Of course we are not a 100% into electronic commerce as long as our product
are physical, but think about a lot of our services. These services may be delivered
in a digital way. In this sense you may define Internet Marketing as the application
of the Internet and related technologies to achieve marketing objectives 2 ”

3.3 Who is Danmixer?

Danmixer is a limited company with its registered head office in Aalborg,

Denmark.
Holger Colding, who is now the managing director of Danmixer, founded the
company in 1989. Colding had at that time all ready gained much experience
within this industry due to the fact, that he had founded another company in 1972,
which developed and produced Plants for slaughterhouses. All productions are
based on stainless steel, and the production is done In-house.
Danmixer employs approximately 80 people in Denmark and specialises in the
manufacture and development of Turbo Process Mixing Systems, High Shear
Mixing Plants, Blending Vessels, Cooling Vessels and In-Line Mixing – supplying
the world market. Agents in e.g. Ireland, Japan and United Kingdom represent
Danmixer.
Danmixer’s different departments are:
• Senior Management (Mr. Colding and Mr. Krog),
• Sales Department (9 employees),
• Design and R&D Department (4 employees),
• Project Management Department (10 employees)
• After Sales Department (2 employees),
• Purchasing Department (1 employee),
• Quality Department (1 employee),
• Finance Department (2 employees).

2
Definition according to Dave Chaffey, E-Business and E-Commerce Management, Prentice Hall, 2002.
Case study

As to career opportunities Danmixer says:

“At Danmixer we work in an open environment, which encourages teamwork, we
respect each other’s personalities, creativity and expertise, we are continuously
developing our knowledge and competencies, we offer dedicated training and
challenging project opportunities”
Today Danmixer is a leading partner for both small and large enterprises in the
world of high quality mixing systems. The mission statement says:
“It is our mission to produce high quality products and systems that improve and
compliment the customers’ current manufacturing systems. Our technology adds
value to productions plants all over the world.”
Danmixer can meet all national standards and regulations when supplying
equipment. The Danmixer Systems are used for producing Dairy Products,
Prepared Food, Baby Food, Convenience Food, Health Care, Cosmetic, Dental and
Pharmaceutical Products.
Some of the customers are famous companies:
• Arla Food
• Astra
• Campells
• Heinz
• Nestlé
• Northern Food Group
• Tetra Hayer
• Tetra Pak
• Unilever
During the years Danmixer has been able to make money, and the financial
situation is at the time very good. And still growth goals are essential to the
management.
In spring 2001 Danmixer was certified to conform to the quality management
system standard DS/EN ISO 9001:2000. Danmixer’s systems are manufactured to
the European standards and legislation.
 International Marketing

3.4 Product - The Turbo Mixing System

The Turbo Mixing System gives optimal powder / liquid or liquid / liquid mixing
with / without high shear mixing. Products / ingredients homogenise, emulsify and
disperse in a few seconds. Particles can be blended gently into the products.
Powders and additives will be sucked into the system by vacuum. Danmixer calls
this the ”All in one Process”.
The All in one process reduces producing time, handling time, down time for
cleaning and down time for maintenance.
This process results from years of on-going research and development. All systems
will reduce processing time, handling time, down time for cleaning and down time
for maintenance in comparison to conventional mixing technology.

3.5 Internationalisation

In order to understand the process of internationalisation we have to go back to

1972, more than 17 years before Danmixer was founded. From the very beginning
Danmixer served the German market, while colleagues and competitors in
Denmark had a clear focus on the slaughterhouses and food producing companies
in Denmark. Meanwhile Danmixer made analysis that concluded that the German
market was more attractive. The domestic market was also considered important
because of Colding’s philosophy saying “If you are not competitive in your
domestic market, it will be difficult to become competitive in foreign markets”.
Today, most of the companies producing ham in Poland, Hungary, The Czech
Republic, Germany and France are using Scanio equipment. Colding brought this
international orientation with him when he sold Scanio and founded Danmixer. In
other words, Danmixer has had an international orientation and competence from
the first day.
In 2000 the export share of Danmixer was about 90%. Danmixer uses both indirect
and direct export modes, depending on country and product. In many cases
Danmixer benefits from using Agents abroad.
Case study

3.7 The market and the customers

In 1999 a survey was made to explore, which marketing efforts were the most
important for exporting companies in the Northern Part of Denmark when
interacting with foreign customers. The most important dimensions turned out to
be long term personal relations and personal contacts in the export market for
Danmixer. Marked with an X. The percent numbers covers the whole survey. More
than 50 companies were asked. See table.

3.8 Tetra Pak – A key customer -

Tetra Pak in Sweden is the one of the biggest clients and best relations for
Danmixer for the mixer-product. Tetra Pak is an internationally oriented company
and the company has about 50% of the world market for machines for packaging
milk-products, juice, chocolate-milk, ice cream and other products made by mixing
powder and liquid. The attitude in Danmixer was that it is not always an advantage
to have one such big customer.
Danmixer is in this way a production company for Tetra Pak, and Tetra Pak will
provide Danmixer with information about different markets. The bargaining power
of the two companies is in a way quite balanced since they are mutually dependent
on one another and Danmixer does not feel being the weak part:

“We invented the mixer. We invented a good machine, which is able to combine
both thick-and thin fluid ingredients. Tetra Pak is machines for packaging and
cardboard-materials. To Tetra Pak it is not so important to make money on the
mixers, but the next step in the production and packaging-process. If they sell a
mixer to a customer, they all ready know that the customer will face a need for
packaging the product.” (Holger Colding, Managing Director)
 International Marketing

Danmixer’s interaction with the market:

To which extend Completely Completely No
do you agree in…: Agree Agree Disagree Disagree Ans.
Most of all we try to
64% 25%X 7% 2% 2%
build long term
relation to
important players in
the market
When we need
41% 48%X 5% 2% 4%
knowledge about a
market, we use our
contact person
When new
34% 41% 20%X 2% 2%
opportunities occur
we try to benefit
from them
immediately
We attach
50% 20% 20% 7%X 2%
importance on
visiting
foreign markets to
be updated
When we need more
9% 57% 16% 11%X 7%
information
about a market or
think of
increasing our
activities, we make
a market research
Collecting and
11% 55% 18% 11%X 5%
analysing data
is a core activity in
our company
Case study

This mutual dependence was due to the fact that the operation speed of the
Danmixer Mixers was higher than any competitors, which made Tetra Pak’s
customers more efficiency and that would call for a demand for more packaging-
machines supplied by Tetra Pak. So it was attractive for Tetra Pak to incorporate
Danmixer´s products in Tetra Pak’s customers’ production process.
At Danmixer the management were very much aware of the consequences and
requirements for Danmixer.
“It’s an advantage that we can concentrate on product and process-development
and production. For small and medium sized companies I believe this is a general
tendency. They have to define themselves as subcontractors. We have to be
trustworthy and our financial situation must be alright, and finally our image must
be a professional company being capable of product development, and sales
support” (Colding)

3.9 Ingredients producing companies

It was important for Danmixer to sell their mixers to the ingredient producing
companies. The faster the ingredient company was able to produce ingredients, the
more it could lower its cost and the more competitive the ingredient company
would appear in an industry extremely focused on low costs and with difficulties
differentiating their products since they were only an anonymous part of a product
in the next step of the value-chain.

3.10 Competitors
This great focus on the benefits of Danmixers Turbo-mixer has caused that the
company has not paid any specific attention on monitoring the competitors.
“We have to admit that we don’t know for sure a lot about our competitors. We
always believed that staying competitive ourselves by our innovative product and
additional services would be of greater importance than anything else. Besides we
have to realise that we don’t have enormous resources for market analysis. Still we
do know some competitors from the WWW”. (Jens Nygard Andersen)
 International Marketing

Danmixer’s competitors according to Danmixer are:

• APV Crepace,
• Fryma,
• EMI Incorporated,
• APV Limited,
• Silverson,
• LIGTHNIN,
Some of these companies have Web sites.

3.11 Selling directly – supported by the agents

Danmixer also put strong emphasis to selling directly to some companies in order
to get out in these companies and be inspired. Danmixer became almost an
international brand within food producing companies and Danmixer positioned
itself as the supplier of effective mixing.

“Well, taking at quick look at our list of references, it is impressing. Enormous

companies like Heinz, Nestlé, Coca-Cola and McDonald’s are just some of the
names on it. Today Danmixer is a synonym for a mixer. They say we can make it on
The Danmixer.” (Colding)
Because all these companies have become international having departments in
many different countries this helped Danmixer becoming international.
The role of the agents is to provide the customers with information and advice
when it comes to assembling. The agents are also supporting Danmixer with legal
assistance according to local law and they help Danmixer with the contracts. There
have been some rumours about a few agent feeling left too much on their own
when the needed some product documentation. Mr. Colding neglected these
rumours when Mr. Andersen told him about his experiences.
There is no marketing department in Danmixer as such. At Danmixer they did not
make formal sales forecast for the company split on countries, they just make the
budget in a way that satisfied the accountant, nor did they estimate future total
demand.
Case study

The sales effort was based on the benefits and quality of the products in itself. The
sales process could last several years from the time of the initial contact till the
placement of the order. A lot of different employees are involved at Danmixer and
at the customer’s company as well in connection with every order. The personality
of the sales man is important and a professional promotion material is required. It
is of great importance that the technical back up people in Denmark are well
skilled and willing to participate in cross functional teams thinking of themselves
as part time marketers. Sometimes the sales people had to convince the technical
back up people that some tailored specific adjustments were needed to get the
order.
Danmixer offers all the customers a service agreement incorporating 6-monthly or
12-monthly service visits by its own service engineers. The service engineers, who
are well skilled, are also available outside normal business hours.
Danmixer consider its stock as a vital part of its core business. Spare parts for
customers service and parts for production are produced in-house and always in
stock. Component standardisation and keeping a large spare parts stock ensures
efficient servicing. E.G. it ensures that approx. 95% of all spare parts are available
ex stock, which can be delivered anywhere in Europe within 24 hours.
Furthermore Danmixer often use test mixers at the customers’ companies
concerning offering the potential customer a possibility to study the efficiency of
the mixer. It was a well-defined part of the sales policy at Danmixer. Usually
Danmixer has at least 4 or 5 test machines around the World and a test-person,
whose only job is to support the tests of the mixers. Very often he stays at one
place for a week. In Danmixer’s promotional material it says:
“Pilot Plants – Test before you Invest
We have pilot plants with all functionality of our production size systems. Pilot
plant testing can be carried out at your site or in our Test Facility in Denmark”
The sales people have to know a lot about the customer’s products and production-
process. Otherwise it would be impossible to bring the message about the Mixer.
The ideally educational background of a sales representative is food technologist.
Producing ice cream for instance calls for insight in the amount of air required.
 International Marketing

“It is very important that you make the right mix, and in the mix stabililsators are
used. The expensive part is to make the ice cream stabile. If we tell the customer
that they can reduce the amount of stabilizer by 10% by using our mixer, they get
very interested. Take as an example Glasbolaget in Sweden, that we sold three
mixers. They used to buy stabilizers for about 17 millions d.kr, and today they only
use stabilizer for about 10 million d-kr.” (Colding)

3.12 Gaining knowledge of the markets

Danmixer has no marketing department as mentioned. Gaining knowledge of a

certain market therefore focused on finding companies that might find the mixer
useful. In that way the marketing research and promotional effort became fused:
“Like we’re doing in Ireland. Here we visit supermarkets and food exhibitions.
Facing for instance a yoghurt producing company, we’ll call them, and ask how
the make yoghurt. And they will answer. So we will ask if they would like to try our
test mixer for a period, and they very often become surprised that it is possible to
lend a machine” (Colding)
The information about the market, that Danmixer get from Tetra Pak is of great
importance, too. The close relationship to Tetra Pak was the reason that potential
customers’ relationship to Tetra Pak was carefully examined. In other word one
could say that the marketing strategy was very relational oriented – and less based
on long term planning on the one hand or intuitive solutions on the other hand. It
was very often from personal relations contacts to the customers were initiated.

3.13 Pricing

“Pricing the products is not easy. First of all you have to decide the boundaries of
the offer for which you will charge money. Of course we will like to see ourselves
as using Value-Based Pricing but then again we have to make sure which element
of the offering are creating value for the customer. We tend to make our pricing
only on the core product and some foreseen needed service. Very often the need for
after-sales services exceeds our imagination before selling. Actually, I mean that
we don’t charge enough for the products in these cases. In a way we sometimes
gives a lot of services for free, while customers needing less after-sales service
Case study

in reality are being charged too much. I also this that we should carefully study
how subtle variations in the core product’s characteristics provide incremental
value for certain customers” (Jens Nygaard Andersen)
In Colding’s point of view Danmixer is doing the right thing about pricing. He
claims that the company is to small for a more differentiated way of pricing, and he
also says, that he wants Danmixer to be profiled as a service-minded company and
a trustworthy business partner.
 International Marketing

Appendix no. 1

Model for Electronic Commerce

The core of
electronic commerce

Electronic commerce areas

Virtual product

Virtual process
Digital

Product

Physical Digital process

Product
Physical process

Physical Digital Virtual delivery agent

Traditional
commerce agent agent

Source: Turban, King, Lee, Warkentin and Chung, Electronic Commerce, Prentice
Hall, 2002
Case study 4

“Selecta washes best” *

or
The Craft Of Making Yogurt

Author: Diana Antonova

University of Russe, Bulgaria

4.1 Introduction

Making her way to the newly opened dairy factory called Pristis, Daniella thought
to herself “There is no reason for not thinking of “Selecta” like of Marilyn Monroe
or of “Ariel” like of Hollywood”. Daniella was going to her first meeting with the
owner of the factory to discuss the new image of the company products.

“Hollywood is dead! – Somebody would say. Only the senile old men could be
delighted with the movie stars. Alas, this is the reality, and our dreams and
expectations disappear together with Hollywood. Realistic movies having no
mysticism flood the cinema screens. And overwhelm them. The glitter of jewels is
gone – they are replaced by the stress. There is no need to look for the decline of
the cinema far back in the past. The Roman Empire collapsed because they
preferred the stadium games to the church ceremonies. The Catholicism lost its
magic influence at that moment the priests gave up the gold and the purple
mantles. The person of today needs bread and dreams.”

Dannie stopped her Fiat Uno in from of the widely open gate of the new Mecca of
yogurt in Rousse. “It is quite a façade! I wander what is it in the inside?” Led by
curiousity, she paced hurriedly along the flower alley leading to the administrative
building.
*
With thanks to Jacque Segela and his book “Hollywood washes best” which explains the strategy of giving birth
to the “star” market products.
 International Marketing

“It is about time the tired sellers of dreams from Beverly Hills passed the baton to
the advertising. Our trademarks will be the new stars so that the consumption
becomes a cultural act. The advertising should gain its right of citizenship refused
by its enemies. The advertising will replace the dreams machine and it will become
an everyday Hollywood. Let’s leave the ditch Styx ** of the announcements with no
regret or shame in order to step on the lively beaches of the advertising. Let’s stop
being King Trade’s buffoons! Let’s create the eighth art and congratulate among
the Olympians of the nowadays civilization its parent – the cinema. In a nutshell,
the advertising as well as the cinema wants just one thing – to be the industry of
the spirit. So, let’s get our right of immortality…”
Daniella knocked at door with the “Manager” sign on and flatly crossed the
threshold of the office. There was no secretary. Daniella was met by the manager
himself.
“Let’s go back to the beginning”, Daniella started without an introduction, “I want
to know everything if we are to work together”.

4.2 About the producer of the star

(in the place of introduction)

“ Even the good business education has its imperfection. It does not equip you with
techniques and technologies for creating new products and services. This turns
into a public problem when a person decides to start up own business. People like
me can either have a live and die life in the public services sector (if they have any
such job) or constantly experience difficulties in their attempts to link realities with
somebody’s bookish understandings.”

This was the concept of Vassil Stefanov, a young man who dived into the depths of
the dairy industry of yogurt production. Vassil was well educated with a degree in
engineering, important certificates with honours as well as a master degree in
Business Administration from the Sofia University.

Vassil’s entrepreneur odyssey dates back from his higher degree in Computer
Technologies and Systems obtained at the University of Ruse. The first period was
connected with the department of Computer Systems at the University of Rousse
which had a history of over 45 years.

**
The underground river in the ancient Greek mythology, where the souls of the dead float carried by the ferryman
called Sharon and where the gods take their most solemn oaths.
Case study

“During my study for a bachelor’s degree the University delivered different

international projects under TEMPUS and PHARE, and I was included in some of
them. This gave me the opportunity to do some research on the possibilities of
industrial cooperation between the EU member countries. Doing the research as a
side activity, not directly connected with my permanent job, contributed to a great
degree to my self-confidence.
My second period, when I studied for my master’s degree in Business
Administration at the Sofia University, contributed to my closer view to the
programs in the scientific-and-research sector and the research areas set by a
Bulgarian export company. Till then I did not know anything about the business. It
happened that my research job was related to the European food markets and I
came to the conclusion that there was a chance for the development of a narrow
specialist in the production of foodstuffs. All this helped me a lot later. But the
more important was that it lit the flare of the entrepreneur inside me and inspired
me to start an independent production business.”
Looking for a topic for his master’s thesis Vassil was already determined not be
anybody’s employee. He accepted his master’s programme as a chance to develop
his business idea and to do the necessary research and planning. The topic of his
thesis was “Entrepreneur success or failure – the significance of the foresight”. His
aim was to accomplish a research in its completeness in order for him to be able to
implement his business ambitions.
“When finally I was able to arrange the pile of my conscious experience, I realized
I wanted to take my own strategic decisions. I was conscious of the fact I could fail
but I knew that before giving it a try I would not be satisfied being somebody’s
clerk”.

4.3 Heavenly because naturally (the development of the idea)

“I would like to be able to say that the idea came as a result of the deep analysis of
the market needs. But actually, it came from my parents. The most important fact
for me was that I was able to recognize the opportunity the moment I saw it”.

The idea that influenced Vassil Stefanov was connected with the production of a
new type of yogurt combining the advantages of the homemade yogurt with the
quality provided by the industrial technologies. His idea was to distribute the
 International Marketing

product among the mass consumers at reasonable prices. The idea was not marked
with originality. At that time, there were more than 60 brands of dairy products and
the Danon Company held 30% of the market in that sector. There were a number of
small dairy farms that made yogurt and produced 7 tons of yogurt daily using non-
pasteurized milk produced in own farms especially for the purpose.
On the other hand, apart from the products developed on the basis of Bulgarian
recipes, Danon was the ruler of the market with its continental style yogurts in
many different variatins. All the yogurts had trade names like Fibella, Geranium,
Elena, LB Bulgaricum, Danon Classic, Danon Magic. Only the latter was
successfully trying to contribute to its trademark among the consumers. Danon
Activia had attractive packaging and got on the right side of the media.
The next, but not the last, the traditions of the Bulgarians had turned the homemade
yogurt into a fetish. Preparing homemade yogurt was something done in every
second household.
Stefanov felt that if the ordinary dairy farms did not undertake some risky and
determined steps towards their survival, they would hardly reach to a real and
stable market for their production.

4.4 Much ado about…Yogurt! (the dairy market in Bulgaria)

Milk has been having a major place in the food of the Bulgarians for ages now.
According to the Bulgarian standards for adequate nourishment the milk and the
dairy products should take minimum 35% of the needed proteins in the food. To
put it in figures, this means that only the consumption of milk and yogurt should be
between 300-500 grams daily which is equal to about 90-129 kg of milk and dairy
products yearly. On a national scale, 1 200 000 tons of milk would be necessary in
order to guarantee this production. Considering the production of milk and dairy
products for export, then the figure will be 1 600 000 tons.
Attention to the Bulgarian yogurt and its nourishing and dietetic characteristics has
been paid since the beginning of the XX century. The prominent Russian biologist
Ilya Metchnikov discovered that the micro flora of the Bulgarian yogurt through
the products of its life cycle could neutralize the putrefactive intestinal
microorganisms and especially their harmful products. The numerous tests on the
yogurt only proved its dietetic and healing properties. These qualities are believed
to be a result of the metabolism of Lactobacillus Bulgaricus and Streptococcus
Case study

Thermopilus – microorganisms that the yogurt contains and that cause favourable
changes in the gastro-intestinal microenvironment. The Bulgarian yogurt is an
excellent food for people suffering of lactic insufficiency. The scientific tests show
that the consumption of yogurt decreases the cholesterol content in the body. Dairy
products have anti-tumor qualities, too. Scientists have proved that a diet with
yogurt including live lacto-acidic bacteria can increase the power of the cells
responsible for the immunity.
It is told that once a Japanese tried the Bulgarian yogurt and went into such
ecstasies over it that he got soiled. He asked for a handkerchief to clean the dirty
spot and then took it to Japan. That was how the famous Lactobacillus Bulgaricus
was taken to the Country of the Rising Sun. Today, Japan produces over 200 000
tons of yogurt yearly through Bulgarian license.
Till 1989 the Bulgarian patent for the yogurt leaven and the technology of yogurt
production was bought by 21 countries.
Over 20 kinds of yogurts are produced all over the world according to the bacteria
used, and not connected with the use of flavours or fruit. The Bulgarian yogurt is
made with the famous Lactobacillus Bulgaricus and Streptococcus Thermophillus.
The natural yogurt in Bulgaria comprises 97% of the total production. The second
position is taken by the so-called flavoured yogurts and the fruit yogurts (with
pieces of fruit). The third niche is for the dairy drinks like whipped diluted yogurt
(containing no water). The fourth segment of the yogurt market is taken by the so-
called green cheese – not very popular in Bulgaria but traditional for the West
European countries. The green cheese is a mixture of cream and fine curd. The
desserts come to complete the range of yogurts. LB Bulgaricum, the only
association in the dairy branch, developed a group of healthy foodstuffs with
several variations on the basis of Lactobacillus Bulgaricus. The products are
clinically tested and sold at the chemist’s as additives.
The yogurt is a primordial product for the Bulgarians. Regardless of this fact, the
biggest problem for the dairy branch is the low purchasing power of the
population. A special inquiry made in 2000 shows that 35% of the population
restricted the consumption of milk and dairy products for financial reasons. In this
respect, the producers of dairy products face a number of problems:
Š Permanently low purchasing price of the cow milk and not
satisfactory for the dairy-farmers but only for the dairy manufacturers.
The producers delay the payments to the farmers. The price is fixed
 International Marketing

after a research in the whole region and the neigbouring dairy-farmers

are paid nearly the same for the milk. Sometimes, the farmers give a
little lower price than the one of the neighbour in order to attract
producers’ attention.
Š Most of the dairy-farmers prefer to sell their milk directly in the
cities. They make their own stations and permanent customers who
prefer dairy-farmers’ milk to the expensive and skimmed one from the
supermarkets.
Š Most of the dairy business is “in a shadow”. 1 656 million litres of
milk were produced in 2000, and the statistic figures show that only ¼
of this quantity was processed. This means than only 25% of the dairy
production was officially registered.
Š The export issue – restrictions and requirements is another problem
faced by the dairy producers due to the restricted home market. Special
General Instructions issued by the European Union identify who and
under what conditions can supply the Common Market with dairy
products. In 2000 three Bulgarian companies (BG Enterprise 12 –
Belovo, Philipopolis – Plovdiv, Kondov Ecoproduct – Staro Selo)
obtained a license to export to the EU. “The quota for Bulgaria will not
be accomplishes for certain”, the experts predict, “because these
companies do not have the capacity…..Our dairy products from cow
milk are not very suitable for export. They are out of fashion both as
products and as packaging and also difficult to be measured. The
inconsistent quality of the milk can not guarantee constant
characteristics of the product.”
Š The dairy producers have an unexpected competitor in the face of
the households. In 1998 the yearly consumption of yogurt in Bulgaria
was 180 000 tons 55% of which – homemade. In 2000 the
consumption was 190 000 tons, and 35% of it was homemade yogurt.

The traditional make and consumption of yogurt in Bulgaria is connected with the
production of national dairy products. Among these are: yogurt, Bulgarian white
brined cheese and yellow cheese. This tradition is strongly violated today, which in
turn, gives reasons to question the adequate nourishment of the population.
Case study

All the above said leads to the conclusion that “Everybody loses from the chaos
on the dairy market”:
‹ The end users
They are made to buy milk from unlicensed producers only because it is
cheaper. But this milk does not undergo though veterinary control and may
appear dangerous for the health.
‹ The unlicensed producers
The purchasing prices of the milk are too low and the dairy-farmers cannot
cover their expenses for medical treatment and breeding of the animals.
The farmers look for direct buyers of their production.
‹ The licensed producers
They face difficulties in finding market for their production due to obvious
reasons (higher prices connected with the increased expenses).

4.5 Yogurt for the advanced

(the idea in its course of development)

Following the above analysis, Vassil Stefanov developed his business idea taking
into consideration the good sides of each sector and eliminating the bad ones. He
organized his own seasonal buying of “fresh milk” directly from the dairy-farmers
and made preservatives that allowed keeping of same quality throughout the year.
Vassil assigned a task to a Dairying Institute to develop his own strain of Lactus
Bulgaricum bearing the specific taste of the natural yogurt – granular composition
and slightly tart taste. Regular supply of raw material throughout the year allowed
production of quality and natural yogurt with three levels of butter content (1,2%;
2% and 3,6%) according to the European standards. The yogurt production was
made fully by hand with the implementation of production and management
techniques for obtaining high productivity. Stefanov equipped a laboratory for
permanent control over the quality of the incoming raw material and over the end
product.
According to the consumers’ classification of the main trademarks of dairy
products organized by Bacchus Magazine, the basic place was given to Danon-
Serdica.
The leading principle for the production of the Danon yogurts is the exclusion of
preservatives. As a result, the yogurts are fresh and natural. The yogurts made
 International Marketing

by Danon-Serdica are characteristic with their thickness and butter content. Also,
only tested leaven is used for their make. One of the insufficiencies of these
yogurts is the powdered milk added to them which hardens the yogurts and makes
then homogenous. But the consumers think that this makes the yogurts lose their
natural base.
The initial marketing research made by Stefanov showed that the target consumers
of his future product are A, B, and C1 socio-economic groups – well-educated,
travelled a lot, responsible to their health, nice food lovers and liking go eat at
home. This picture underwent through a certain differentiation as a result of a
further research.
The yogurt that complied with the demands of the above consumer groups was a
series of three variations of a traditional Bulgarian recipe – an environment
friendly product made from selected cow milks from the Danube Valley.

4.6 Yogurt – The backbone of the fast summer

(the way to self-perfection)

The first step Vassil Stefanov made towards the development of his initiative was
to gain the approval of the Business Incubator in Rousse as since 1995 they were
providing funding under a programme called “Start-up Your Own Business”. The
programme manager was Katya Ganeva. She started an individual investigation as
part of the research for obtaining a precise idea of the expected consumer target
group. This was based mainly on their habit of consuming yogurt. The research
was needed to add to Vassil’s information in order to provide steady basis for
future strategic market decisions.
“The feeling to be in a direct contact with the customers was unfamiliar to me.
Doing the research myself gave me the chance to gather information in depth and
in such details which I would not have obtained through reading book researches
no matter how good and expensive they might have been.”
The final picture was of consumers purchasing at the small shops in the
neighbourhoods or at the big supermarket chances like Metro, Fantastico and Billa,
their attitude being standard for the average European customer:
9 positive to the innovations, ready to try new kinds of the constantly
expanding range of dairy products,
Case study

9 the level of yogurt consumption exceeded the consumption of the other

dairy products – white cheese, yellow cheese, curd, creams,
9 the consumption of natural yogurt compared to the other yogurts was
20:80 unlike the average European figures.

At that stage, Vassil started to work out the profile of the yogurt he would produce.
He made a network analysis of 9 of the mostly sold yogurts at the market and his
conclusions were made in the form a bipolar scale: “sweet-salty”, “homogenous-
granular”, “white-yellow”, “thick-thin”, tart-natural” (presented with numbers from
0÷5). The highest average figures were for yogurt similar to the one called Elena –
produce of the Dairy Company in the town of Elena. The Dairy company of Elena
supplied the Bulgarian market with several thousand tons of yogurt yearly and
with a constant growth.

4.7 Neither snails nor fish can move backwards

(initial business planning)

The “Start-up Your Own Business” Programme, where Vassil Stefanov

participated, included also a preparation of a financial plan which together with the
market research and the marketing plan formed the complete business plan for a
period of three years.
The initial investment for the implementation of his business idea amounted to
USD 70 000 and circulating assets of USD 10 000. This appeared to be a profitable
initiative with generated growth at sales of USD 0,2 mil. in its third year.
“I brought to the fore a project based on a product that I had not yet developed
and even not yet created. The only favourable fact to be mentioned about my
business plan at that time was that I needed only 0,1% of the Bulgarian market in
order to finish without a loss. The kind of yogurt, which I was supposed to make on
the basis of my research, would reach to sales equal to 1÷30 of the sales foreseen
by me.”
Following the recommendations of Dimitar Kotzev from the Management and
Business Development Centre (MBDC), Vassil Stefanov started to seek for a
partner with the necessary technical background. Vassil considered the role of his
future partner as an impartial director of the company who would observe the
production process, control the quality and develop the new product.
 International Marketing

“First, you need a whole united team of balanced and skilful people in order for
you to be able to impress everybody. Having such a team, you will get on the right
side of the Business Incubator and they will agree to provide you with funding,
being certain that the money will not be lost. Finally, you should use the agreement
for funding and the energy of our team to convince the banks to give you money for
the equipment you need”.
Through the RMBDC Vassil was introduced to a well-known experienced manager
at one of the biggest local cooperatives who suited best for the position of the
Technical director. That person was not willing to leave his current job but offered
to provide private consultations.

4.8 The leopard cannot change its spots

(problems with the partnership and a new beginning)

The first problems between Vassil Stefanov and his new “partner” appeared nearly
right after the approval of the possible funding for research. This was proved by the
increasing uneasiness of the technical director which was later transformed into
indifference.
“This person was a top manager in the dairy industry sector. He had a very strong
personality. His idea was to use me as a “façade” because he would never take the
risk directly and leave his job without somebody’s help. I was happy to use his
services because of his prestige and I was certain he would leave me to manage the
business without him to interfere. This was a partnership of mutual interest. But I
needed technical advice and he was not prepared to give me any. I quickly broke
the relationship as the mutual interest did not exist.”
The project, regardless of the recommendation to receive funding, was at a
standstill due to the impossibility of starting the real production. In his attempts to
find a new person for the position of the technical director Vassil went to the Dairy
Company of Elena where the competitive yogurt of his potential future product
was produced. There, Vassil managed to convince Mehmed Etemov, the
production manager, to become his consultant at the start of his production. In his
turn, Mehmed introduced somebody to Vassil. This was Asen, a young person who
was a graduate of the Dairy Industry Department at the Institute of Food,
Beverages and Tobacco Industries in Plovdiv. At that time, Asen was having his
practical training at the Dairy Company of Elena. Vassil and the young specialist
Case study

set their partnership very quickly and rushed into the new initiative together. With
his skills the new partner suited perfectly to the necessity of a manager for the tests
and for the product development.

The technological development being started, Vassil concentrated on the main

problem that had remained – the funding and his own contribution to it.
“My wife and I lived on her salary since the beginning the business initiative. Our
savings were spent for the building and maintenance of our home so, it was not
easy to find cash and at the same time to keep the management interest to the
production. I could point my father a guarantor of a loan but independence was a
significant element of my understandings for starting a business”.
The decision consisted of two parts. The first part – to start a job as an associate
lecturer at MBDC to go parallel with some small jobs in market research and
consultancy, and to invest all he got from these jobs. The second part of the
decision was to arrange a contract for rent of secondhand equipment from the
Dairy Company of Elena. This agreement gave Vassil the chance to make the first
quantities of the products planned for the starting year of production. During the
second year Vassil considered to move the yogurt production modern premises that
were the property of the local state company for dairy production called Sirma-
Prista.
“This strategy appeared to be successful. The most important was that the
expenses for obtaining basic capital were postponed for the second year and this
made the risk of failure smaller. Initially, only the circulating assets had to be
funded. Meanwhile the production increased and needed bigger own production
chambers. The production proved itself and at that stage I did not want to have
difficulties or side problems connected with equipment. Nearly all of the loans I
had planned were related to the main capital, so in the first year there were no
loans. The situation then showed that I would be able to support the start of the
production with my own sources alone.”

When the development of the problem showed good results and led promisingly to
a successful end during the following two months, Vassil planned for the first time
the details of his strategy for the launch of the product.
 International Marketing

4.9 The milkman should be the boss

(planning the promotion of the product)

In order to increase their market share Danon-Serdica PLC undertook an active

advertising campaign. The Company’s concept all over the world was HEALTH.
Vassis Stefanov decided to follow their example. The subject of the promotion was
to put forward a new trademark of yogurt with regional importance for the home
market.
Stefanov’s company was of regional significance which was the reason for him to
choose a regional advertising company for the promotion of his yogurt. Than
company was aware of the market situation in the Ruse Region. The advertisers
formulated the main characteristics of the new product as follows: health, quality,
tradition and promotion of the most characteristic strengths of the region to a wider
range of customers.
The specific message of the yogurt became The millennial tradition of health.
The budget for the campaign was the money for the initial marketing research; the
identification of the leading consumer motives; the place of Vassil’s company on
the Ruse market; the graphic design of the package and the formulation of the
original name of the new yogurt. The amount was USD 1000.
The suggestion for regionalism was achieved through the emphasis on the fact that
the yogurt was made of Selected Fresh Milks from the Danube Valley. The
attempts of the team to find a name of the product led them far into the depths of
history. In ancient times (during the Thracian and Roman periods) Bulgaria spread
on a territory of 4 autonomous regions – Serdica, Astica, Getica, Seletica, the latter
being the land of the Danube Valley. As the name of the product should include
traditional elements, the team started from the name of the region – Seletica, and
after certain modifications they reached to the name of Selecta. On one hand, this
was the old name of the region and on the other, it meant something selected, i.e.
the product had a local mark and meant quality. The team thought of a way to
describe the gustatory characteristics of the 3 yogurt variations – 1,6%, 2% and
3,6% butter content. In order to avoid the names with technical connotation like
skimmed, normal and rich yogurt, they decided to use the suffixes light, prim,
luxury as to reach to a bigger emotional influence.
Case study

The suggestion of succession was obtained through the design of the package. The
earthenware pot covered with a piece of cloth was related to the “Grandma’s
earthenware pot” (in the past, and even nowadays, people in the villages make
yogurt in earthenware pots). The garden geranium drawn on the package was a
flower one could find in every Bulgarian house. The garden geranium gave the
feeling of home coziness. The idea of quality, which according to the consumers
could be achieved only by the homemade yogurt, was suggested through the line
drawing of an earthenware pot. The use of certain colours – blue, yellow and green
added to the impression of something natural and fresh. The white whirl around the
pot increased the suggestion for the magic power of the product.
The test production of the new product started in January 2000. The first batch was
a fact at the end of April. Selecta was yogurt with high quality and low cost price,
which made it attractive to the customers. The yogurt satisfied consumers’
demands for a healthy product.
Vassil Stefanov began to distribute his product himself, certain that the other
distributors would not be fully devoted on the grounds of their 20% discount for
promoting Selecta in the supermarkets. For a couple of weeks he managed to sell
the yogurt in more than 30 supermarkets in Ruse region and in Sofia receiving cash
payments for the product. The supermarkets sold Selecta-light with 1,6% butter
content in blue package; Selecta-prim with 2% butter content in green package
and in yellow package Selecta-luxury with 3,6% butter content. The product was
accepted very well with regards to its quantity and at a price within the range of
USD 0,25÷0,40 for a 0,400 gr. jar. The blue packaged Selecta-light appeared to
become the most popular. Vassil Stefanov felt that if he offered the yogurt at lower
price he would sell bigger quantities but he would have losses and it would take
time to cover them.
“I already knew that the low profit was the basic mistake of the dairy companies. I
felt that if my product did not have good price it would not have a market and
respectively I would lose the business”.
After the initial period Vassil realized he had kept to the retail sales for too long.
The access to the mass market would not have been possible without distributors.
Vassil signed contracts with three distributors – the distribution chain of the Dairy
Company of Elena, the supermarket chains Billa and Metro.
He did not undertake any promotion but he managed to get on the right side of the
media. Small quantities of the test production were kept in store.
 International Marketing

4.10 Market has the last word (marketing research)

Towards the end of 2000 it became obvious that the direction of growth planned by
Vassil would not be accomplished. The growth for a 7 months period remained 7
tons daily apposed to the expected 10 tons.
The sales at the mass market were disappointing except for Selecta-light which
exceeded the sales of Danon-Classic and Elena-2% but only because the price was
5% lower than the one of the competitors.
“I was absolutely certain at that stage – being on the market for 7 months I
considered this a good exercise towards the big business. I learned a lot and I lost
during the first year. The money I lost was not that much as the overheads kept
relatively low. I think, my biggest loss was my naivety, but this is not harmful to the
business. I realized I had an excellent product and I worked not in the food
industry but in the free industry. At the beginning, the product sells its interest to
the customer, not its quality. But quality is the basis of the rate of return in
business. Finally, I realized that my product competed not with the best products of
the competitors but with the low purchasing power of the mass consumers. The
future were the small niches of the delicacy dairies”.

4.11 Pleasure does not fade (epilogue)

Vassil Stefanov’s efforts to create a distinguished remarkable product were

rewarded in May 2001 when his new product was awarded gold medal at the
Plovdiv Fair and a month later he got another - the Golden Lion Prize at the “Made
in Bulgaria” Exhibition. The prize was awarded for innovations in the dairy
production. A new star was born – Selecta – buffalo cow yogurt with 6,5% butter
content.
This prize gave him new support to continue with his ideas for business
development and to get new contacts directed to the foreign producers through the
media. The Japanese Concern “Medji” paid an interest in Selecta and the Japanese
Ambassador in Bulgaria was a mediator in the deal for selling the license for the
production of the yogurts in Japan. Now at the beginning of 2002 it is quite
possible to find more jars of yogurt labelled SELECTA from Bulgaria in the
supermarkets of that distant country than in the Bulgarian ones.
Case study

Stefanov finished his story. Daniella had a sip the coffee that got cold long time
ago. She thought:
“Is this the beginning of the success or its end? Everything seems both simple and
unfinished. How many “starlets” are necessary to bring up a celebrity, how many
celebrities are necessary for a star to be born and how many stars – to create a
myth! This is the incredible challenge of our job. We have been chasing the Holy
Graal all though our lives to finally make an advertising campaign that will remain
in the eternity. Then a first magnitude star will be born from the cosmic dust – and
only Heaven and us will know who its parents are…”
“We will work together!”, Danialla pressed Vassil’s hand.
“We have to conquer this hard Bulgarian market. This is the truth!”, he took her
hand. “The road ahead has to be travelled and everybody faces it alone! There
isn’t a method that could release you from the responsibility of thinking with your
own brains, as your favourite Segela says.”

The advertiser and the engineer turned sights at the same time to the glass screen
separating the manager’s office from the production chamber with the flow line.
The jars of Selecta-buffalo cow yogurt moved steadfastly along the line.