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r i t i c a l M a s s a n d

In t e r n a t io n a l M a r k e t i n g S t r a t e g y

Vern Terpstra Ph .D.

U n i v e r s i t y o f M i c h ig a n

The importance of critical mass has long been recognized in physics

and military strategy. It is also recognized in business and economics

where the term "economies of scale" is more often used. We will use

these terms interchangeably in the present article. While these expres-

sions have no precise definition, they are widely used and generally

understood. Other terms with similar meanings or connotation are the

experience curve, synergy, leverage, entry barriers, and breakeven

point.

There is some difference in emphasis between the two terms. "Econo-

mies of scale" generally suggests that , in some situations, increasing out-

put leads to decreasing costs per unit. "Critical mass" usually indicates

that some minimum amount of effort or resources must be gathered

before any impact or output can be realized. Economies of scale is the

most widely used term but it is applied mostly to production situations.

It is our purpose here to show that the concept of economies of scale is

equally applicable to the marketing, and especially to the international

marketing, activities of the firm. Indeed, it will be argued that firms

must plan for critical mass and economies of scale for international

marketing success.

C R IT IC L M S S N D E C O N O M I E S O F S C L E

IN I N T E R N T I O N L M R K E T I N G

International marketing can be defined as the activities undertaken

by the firm to relate to its foreign markets. The major activities usually

9 Academyof MarketingScience,Journal of the cadem y ofM arketing Science

Summer, 1983, Vol. 11, No. 3, 269-282

0092-0703/83/1103-0269 $2.00

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TERPSTRA 270

inc luded a re (1) m ark e t r e sea rch , (2) p rod uc t d eve lo pm en t and man age-

m en t, (3) pricing, (4) dis tr ib utio n, and (5) prom otion . Ou r ap pro ach will be

to t ake these marke t ing ac t iv i t i e s one by one ( excep t fo r p r i c ing ) and

s h o w h o w i m p o r t a n t c r it ic a l m a s s a n d e c o n o m i e s o f s c a le c a n b e i n t h e i r

pe r fo rmance . We beg in w i th in te rna t iona l marke t in te l l igence .

ntem at iona l M arket n te ll igence

K n o w l e d g e o f t h e m a r k e t i s a p r e r e q u i s i t e t o s u c c e s s f u l m a r k e t i n g .

Unfo r tuna te ly , knowledge i s no t a f r ee good equa l ly d i s t r ibu ted to a l l

p r o d u c e r s . T h e r e f o r e f i r m s i n v e s t s i g n i f i c a n t s u m s t o s t u d y t h e i r

d o m e s t i c m a r k e t s . M a r k e t k n o w l e d g e is e q u al ly e s se n t i a l fo r m a r k e t i n g

i n t e r n a t i o n a l l y b u t i t r e q u i r e s r e l a t i v e l y g r e a t e r i n v e s t m e n t t h a n

d o m e s t i c m a r k e t r e s e a r c h . I n t e r n a t i o n a l i n f o r m a t i o n c o s t s m a y b e

h igher fo r s evera l r easons : (1) the re i s a l a rge n um ber o f fo re ign mar -

ke t s . (2) the f i rm i s fu r th e r aw ay f rom fo re ign m arke t s . (3) the f i rm i s l e s s

f ami li a r w i th th e fo re ign cu l tu re an d m arke t ing . (4) s t a t i s t i c s a r e o f t en

les s ava i lab le and r e l i ab le in fo re ign m arke t s . (5) l angua ge d i f f e rences

requ i r e m ul t ip le tr ans la t ion . F u r th e rm ore , the va lue o f the in fo rmat ion

m a y b e l e ss b e c a u s e o f t h e s m a l l e r s iz e o f m a n y f o re i g n m a r k e t s

c o m p a r e d t o t h e d o m e s t ic .

B e c a u s e o f t h e s i ze a b l e i n v e s t m e n t i n k n o w l e d g e r e q u i r e d f o r in t e r-

n a t i o n a l m a r k e t i n g , m a n y f i r m s h a v e b e e n d e t e r r e d f r o m m a r k e t i n g

a b r o a d . N u m e r o u s s t u d i e s of e x p o r t e r s c o m p a r e d t o n o n , e x p o r t e r s h a v e

s h o w n t h a t i g n o r a n c e o f f o r ei g n m a r k e t s a n d m a r k e t i n g i s a m a j o r

d e t e r r e n t t o e n g a g i n g in e x p o r t . K n o w l e d g e c o s ts a r e a n e n t r y b a r r i e r .

A n o t h e r i n d ic a t o r o f t h e i m p o r t a n c e o f k n o w l e d g e f o r i n t e rn a t i o n a l m a r -

k e t i n g i s t h e f a c t t h a t f i rm s g e n e r a l l y b e g in t h e i r m a r k e t i n g a b r o a d i n

c o u n t r i e s w h i c h a r e m o s t l i k e t h e i r h o m e m a r k e t , t h u s a t t e m p t i n g t o

min imize the i r knowledge inves tmen t . Th i s p rac t i ce i s in acco rd w i th

L i n d e r s t r a d e t h e o r y w h i c h s u g g e s t s t h a t m o s t in t e r n a ti o n a l t r a d e

t a k e s p l a c e b e t w e e n c o u n t r ie s w i t h si m i la r i n c o m e l e v e ls a n d c o n s u m e r

p r e f e r e n c e s . ~

We have sugges ted tha t fo re ign marke t in te l l igence i s a lumpy ind i -

v i s ib le k ind o f inv es tm en t wh ich i s a p re req u i s i t e fo r in te rna t iona l m ar

ke t ing . Th i s has two impl ica t ions . One i s tha t knowledge cos t s a r e a

b a r r i e r t o e n t r y i n i n t e r n a t i o n a l m a r k e t i n g . A n o t h e r i s t h a t o n c e t h e

inve s tm en t has be en m ade , the re a r e econom ies o f s ca le in exp lo i t ing it .

A f i r m t h a t h a s m a d e t h e i n i t i a l i n v e s t m e n t i n f o r e i g n m a r k e t k n o w -

ledge can exp lo i t it a t l i t t le o r no inc rem en ta l cos t by s e l ling the know -

l e d g e t o o t h e r s o r b y e x p a n d i n g i t s o w n i n t e rn a t i o n a l m a r k e t i n g , s u c h a s

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27 C R IT IC A L M A S S A N D I N T E R N A T I O N A L M A R K E T I N G ST R A T E G Y

in app ly ing the ana ly t i ca l t echn iques i t has l ea rned to o the r marke t s .

Th ere a re s eve ra l il lu s t ra t ions o f f i rms exp lo i t ing the s ca le econom ies

f ro m t h e i r i n v e s t m e n t in fo r e ig n m a r k e t k n o w l e d g e . In a g e n e r a l s e n s e ,

t h is k n o w l e d g e i s p a r t o f t h e a d v a n t a g e o f t h e m u l ti n a ti o n a l f i rm a n d

par t o f the in te rna l iza t ion p roces s . A s W i ll iamson s ays , the f i rm m us t b e

an e f f i c i en t in fo rmat ion p roces so r . 2 M o r e s p ec if ic e x a m p l e s a r e t h e

e x p o r t m a n a g e m e n t c o m p a n y (E M C ) a n d t h e J a p a n e s e t r a d in g co m -

p a n y ( JT C ). O n e o f t h e m a j o r a r g u m e n t s f o r u si n g a n e x p o r t m a n a g e -

m e n t c o m p a n y i s t h a t i t o f f e rs th e p r o d u c e r i n s t a n t f o r e ig n m rketing

and

m rket

k n o w h o w . T h e E M C h a s a l r e a d y m a d e t h e k n o w l e d g e

i n v e s t m e n t . I t e f f e c t i v e ly s e ll s i ts k n o w l e d g e t o a n u m b e r o f p r o d u c e r s

w h o b u y i t on a n i n c r e m e n t a l b a s is . T h i s w a y o f b u y i n g f o r e ig n m a r k e t

k n o w l e d g e i s m o d e r a t e a n d m a n a g e a b l e c o m p a r e d t o t h e p r o d u c e r ' s

h a v i n g t o m a k e t h e w h o l e i n v e s t m e n t b y i ts e lf .

T h e J a p a n e s e t r a d i n g c o m p a n y i s s i m i l a r t o t h e E M C i n n a t u r e

e x c e p t . t h a t t h e E M C p a l e s in c o m p a r i so n t o t h e s iz e a n d s c o p e o f t h e

J T C . T h e J T C i s t h e p r e e m i n e n t m o d e l . I n d e e d , i t h a s s t i m u l a t e d

i m i t a t o r s i n m a n y o t h e r c o u n t r i e s . W h i l e t h e J T C p r o v i d e s m a n y s e r -

v ices i t i s pe rhaps mos t f amous fo r i t s in fo rmat ion ga the r ing ac t iv i ty .

T h e a u t h o r v i s it e d t h e c o m p u t e r c o m m u n i c a t io n s c e n t e r a t M i t su i w h i c h

m us t b e one o f the l a rge s t such f ac i li ti e s in the wor ld .

A d d i t i o n a l l y , J T C ' s d o e x t e n s i v e i n t e l l i g e n c e a b r o a d . T h e P a n A m

bui ld ing in N ew Yo rk is an anth i l l of in te l l igence act iv i ty . M itsubish i

has two f loo r s the re and a smal l a rm y o f peop le ga the r ing in tel l igence . 3

T h e t r e m e n d o u s i n v e s t m e n t i n i nt el li ga n ce m a d e b y t h e J T C s i s m a d e

ava i l ab le a t a mo de s t p r i ce to the i r thou sand s o f J ap an ese c l ien t s.

E x c e p t f o r t h e l a r g e r s c a l e o f o p e r a t io n s , t h e y a r e s im i l a r t o t h e E M C in

th i s s e rv ice . Bo th the EMC and the JTC se l l the i r in te l l igence no t a s a

s e p a r a t e i t e m b u t a s p a r t o f t h e p a c k a g e o f s e r v i c e s t h e y o f f e r.

A l t ho u g h t h e E M C a n d t h e J T C a r e p a r ti c u la r ly g o o d e x a m p l e s o f

the im por tan t ro le o f the in te ll igence func tion , i t is a lso ev id en t in m any

o t h e r s i t u a ti o n s . In d e e d , i n m o s t c a s e s w h e r e t h e f ir m e n t e r s a f o r e ig n

m ark e t in some coo pera t ive ve n tu re , the h igh cos t o f local kno wled ge i s

u s u a ll y a n im p o r t a n t r e a s o n f o r t h e c o o p e r at io n . T h e t e r m c o o p e r a t i v e

ven tu res inc ludes d i s t r ibu to r s and l i censees as we l l a s the t r ad i t iona l

j o i n t v e n t u r e b e c a u s e in a ll t h r e e c a s e s o n e o f t h e m o t i v a ti o n s i n

c h o o si n g t h e e n t r y m e t h o d is t o o b t a i n th e lo ca l p a r t n e r ' s m a r k e t k n o w -

l e dg e . F o r e x a m p l e , m a n y f ir m s u s e t h e U n i t e d A f r ic a C o m p a n y ( U A C )

a s a d i s t r i b u t o r w h e n s e l l i n g t o A f r i c a n m a r k e t s . U A C h a s b e e n i n

A f r ic a s in c e c olo nia l d a y s a n d k n o w s t h e t e r r i t o r y e x t r e m e l y w e l l. F r e s h

a r r i v a l s i n t h o s e m a r k e t s w o u l d n e e d t o m a k e a r e l a t i v e l y b i g i n v e s t -

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TERPSTRA 272

m e r it t o g e t s a t i s f a c t o r y k n o w l e d g e a b o u t ' t h e m . B y u s i n g U A C a s t h e i r

d i s t r i b u t o r , t h e y c a n a v o i d m a k i n g t h a t i n v e s t m e n t i n m a r k e t

intell igence.

Product evelopment

Pro du c t d eve lo pm ent invo lves ma ny func t ions wi th in the f i rm inc lud-

ing eng inee r ing , f inance , and p roduc t ion a s we l l a s ma rke t ing . H ow eve r ,

i t i s theore t ic a l ly a t l e a st , e s sen t ia l ly a marke t in g func t ion w he re in the

f i rm see ks to m a in tain and enhan ce i t s ma rke t f r anch ise . I t is the p rod-

uc t which b r ings the f i rm and i t s ma rk e t to ge the r . A g lance a t any m ar -

ke t ing tex t wi ll conf irm the c en t ra l ro le o f p rod uc t d eve lo pm ent in

marke t ing .

F o r p r e s e n t p u r p o s e s , w e m u s t i d e n t i fy t h a t t h i s m a r k e t i n g a c t i v it y

invo lves f ixed cos t s which le ad to econom ies o f s cale . Th is i s no t ha rd to

d o as t h e r e a r e m a n y u p - f ro n t co s t s in p r o d u c t d e v e l o p m e n t t h a t h a v e

been we l l iden t if i ed in the l i t e ra tu re . M os t o f the se a re pe r sonne l cos t s

f o r n e w p r o d u c t d e p a r t m e n t s o r c o m m i t te e s , r e s e a r c h s c ie n t is t s, a n d s o

o n, b u t t h e r e a r e f u r t h e r c o s t s f o r l a b o r a t o r y e q u i p m e n t a n d t e s ti n g , a n d

lega l cos t s inc lud ing even tua l ly pa ten t p ro tec t ion . Kot le r c i t e s the

examp le o f a com pany w hich e s t im a ted i t s cos t s o f f ind ing one success fu l

new pro du c t a t $14 mill ion.4 In som e indus t r ie s i t c an run much h ighe r.

P r o d u c t d e v e l o p m e n t f o r i n t er n a ti o n a l m a r k e t i n g h a s t h e s a m e k i n d s

o f c o s t s a s f o r d o m e s t ic m a r k e t i n g b u t t h e y a r e e v e n l a r g e r b e c a u s e

som e of them m us t b e ca r r ied on in fo re ign ma rke t s a s w e l l a s a t home .

F o r e x a m p l e , g a t h e r i n g a n d s c r e e n in g o f i d ea s , p r o d u c t a n d / o r m a r k e t

te s t ing , and p a ten t p ro tec t ion a re a ll a c t iv it i e s tha t m us t be ca r r ied ou t

multi -na tiona lly. In the case of the H ov ercra f t , ten pe rce nt of the

d e v e l o p m e n t c o s t s w a s s p e n t j u s t o n g e t t i n g p a t e n t p r o t e c t i o n a r o u n d

t h e w o r l d . F o r d a n d G e n e r a l M o t o r s a r e d e v e l o p i n g w h a t t h e y c a l l a

wor ld car . The cos t s o f th i s a c t iv i ty a re g rea t e r than the a l r ead y la rge

a m o u n t s r e q u i r e d t o b r i n g o u t a n e w m o d e l d o m e st ic a ll y .

P r o d u c t d e v e l o p m e n t i s a n e x p e n s i v e a c t i v i t y a n d t h e r e f o r e f a v o r s

la rge f i rms, inc luding mult ina t iona ls . Indeed, mult ina t iona ls have an

advan tage compared to o the r l a rge f i rms which a re no t mul t ina t iona l

b e c a u s e t h e y c a n c o n d u c t t h e m u l t i c o u n t r y a c t i v i t i e s r e q u i r e d f o r

produc t deve lopment more e f f ic ien t ly than pure ly na t iona l f i rms and

then exp lo i t tha t deve lopment in many marke t s . Even la rge mul t i -

na tional s, h ow eve r , o f ten f ind p rodu c t de ve lop m ent cos t s so l a rge tha t

e v e n t h e y c a n n o t a f fo r d t o d e v e l o p n e w p r o d u c t s a lo n e. S o m e o f t h e

wor ld ' s b igges t en te rp r i se s a re ge t t ing toge the r o r f ind ing some coop-

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273 CRITICALMA SS AND INTERNATIONAL MARKETING STRATEGY

p e r a t i v e w a y s t o s h a r e t h e c o s t s of d e v e l o p i n g n e w p r o d u c t s .

Exa m ples : 1 . In the a i r c ra f t indu s t ry , M cDonne l l Dou g las soug h t to

j o in w i t h F o k k e r o f t h e N e t h e r l a n d s t o d e v e l o p a n e w g e n e r a t i o n o f

a i rp lanes . Fokker i s a l so s eek ing t i e s w i th l a rge J apanese f i rms l ike

Fu j i , Kaw asak i , and M i t sub i sh i .

2 . In deve lop ing a new eng ine fo r tomor row ' s a i r c r a f t , Genera l E lec -

t ri c , R o l ls R o y c e , a n d P r a t t a n d W h i t n e y a r e a l l s e e k i n g p a r t n e r s t o

s h a r e t h e d e v e l o p m e n t c o s ts . G e n e r a l ly , t h e c o o p e r a t i v e v e n t u r e s w ill

in clu de f i rm s f ro m t h r e e c o u n t r i e s - U n i t e d S t a t e s , J a p a n , a n d o n e f r o m

E u r o p e . R o l l s R o y c e a l re a d y h a s e n t e r e d a c o n s o rt i u m w i t h I H I ,

K a w a s a k i a n d M i ts u b i sh i in J a p a n .

3 . In the com pute r indu s t ry , IC L o f Br i t a in i s co l l abora t ing w i th Fu j i t -

su o f J ap an to impro ve i t s m a in f r am e c om pute r s . In te l has been a go- it-

a l o n e s u c c e s s s t o r y b u t n o w i t h a s s i g n e d a t e n y e a r a g r e e m e n t w i t h

A d v a n c e d M i c r o D e v i c e s f o r j o i n t d e s i g n a n d d e v e l o p m e n t o f f u t u r e

p r o d uc t s. T h e r e a r e s e v e r a l a s p e c t s t o t h e a g r e e m e n t b u t t h e m a i n

reason fo r the jo in t v en tu r e i s to im prov e R & D ef f ic i ency. 's

4 . I n t h e a u t o m o t i v e fie ld , t h e r e h a v e b e e n n u m e r o u s j o i n t v e n t u r e s o f

E u r o p e a n f ir m s f o r t h e d e v e l o p m e n t o f n e w m o d e l s, e n g i n e s, a n d c o m -

p o n e n t s . E v e n m i g h t y G e n e r a l M o t o r s h a s a j o i n t v e n t u r e w i t h S u z u k i

M o t o r s o f J a p a n , p a r t o f w h i c h w i ll i n v o lv e jo i n t d e v e l o p m e n t o f a n e w

s m a ll c a r w h i c h w i ll b e p a r t o f G M ' s w o r l d w i d e s t r a t e g y .

5 . I n t h e w a t c h i n d u s t r y , S e i k o , o n e o f t h e i n d u s t r y l e a d e r s, r e c e n t l y

a c q u i re d a S w i s s w a t c h c o m p a n y t o f u r t h e r S e i k o 's d e v e l o p m e n t o f h i gh

c o s t l u x u r y w a t c h e s f o r w o r l d m a r k e t s .

6 . I n t h e n e w i n d u s t r y o f r o b o ti c s , G e n e r a l E l e c t r ic i s s o m e w h a t o f a

l a tecomer . To he lp i t m ove m ore r ap id ly in to th i s f ie ld , GE wi ll be as sem-

b l i n g H i t a c h i r o b o t s f o r s a l e i n t h e U . S . m a r k e t a n d l a t e r b e g i n

deve lop ing i ts own mode l s , ge t t in g a s t a r t w i th H i tach i t echno logy . GE

h a d e a r l i e r s i g n e d a n a g r e e m e n t w i t h D E A , a n I t a l i a n p r o d u c e r o f

robo t s .

Product ine

A n o t h e r a s p e c t o f p r o d u c t p o l i cy i s t h e s e a r c h f o r a p r o f i t a b le a n d

c o m p l e m e n t a r y f a m i l y o f p r o d u c t s t o o f fe r t o t h e m a r k e t . H a v i n g a n

a d e q u a t e l in e o f c o m p l e m e n t a r y p r o d u c t s i s t h e m a r k e t i n g g e n e r a l ' s

c r it ica l mass fo r a succes s fu l a s sau l t on the m ark e t and the d i s t r ibu t ion

channe ls . The p rod uc t line i s sue i s r e l a te d to ou r p rev ious d i s cus s ion on

p r o d u c t d e v e l o p m e n t b e c a u s e t h e t r a d i t io n a l w a y o f g e t t i n g a f a m i ly o f

p r o d u c t s w a s t h r o u g h i n t er n a l d e v e l o p m e n t . B e c a u s e p r o d u c t d e v e l o p -

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TERPSTRA 274

m en t i s inc reas ing ly a s t ra in on the f i rm ' s r e sou rces and beca use i t o f t en

is a v e r y s l ow p r o c e ss , m o r e a n d m o r e f ir m s a r e t r y i n g t o g e t a n a p p r ~

pr ia te p rod uc t mix by jo in ing w i th o th e r f irms . In r ec en t yea r s , acqui si -

t io n o f o t h e r c o m p a n i e s h a s b e e n a p o p u l a r w a y t o e x p a n d t h e f ir m ' s

p roduc t l ine . Acqu i s i t ion r educes the t ime r equ i r ed to ge t a p roduc t

add i t ion and , a l l th ings cons ide red , i s p robab ly a l so cheaper than

in te rna l deve lopmen t .

A p a r t f ro m a c q u is it io n o f a n o t h e r c o m p a n y , t h e r e a r e l e s s e x p e n s i v e

w a y s o f j o in i n g w i t h o t h e r f ir m s t o r e d u c e t h e c o s t o f a s s e m b l i n g a p r o d -

uc t f ami ly . W e wil l c i te s ev era l ex am ples o f f i rms jo in ing toge the r to

es tab l i sh a des i r ed f ami ly o f p roduc t s . Unde r ly ing a l l the e xam ples i s

t h e s a m e t h e m e , t h e n e e d t o o v e r c o m e t h e c o s t b a r r i e r s i n a s s e m b l i n g a

p rodu c t m ix . Th i s i s accompl i shed b y r ea li z ing the econom ies o f s ca le o f

sha r ing in the e f fo r t s and p rod uc t s o f o th e r f i rms . A l l o f the exam ples

invo lve mu l t ina t iona l f i rms , h igh ligh t ing the po in t tha t the dev e lop m en t

o f an in te rna t iona l f ami ly o f p rod uc t s i s ano th e r ac t iv i ty l end ing i t s e l f to

econom ies o f s ca le . Econ om ies de r ive f rom tw o sources : one i s r edu ced

d e v e l o p m e n t c o s t s; t h e o t h e r i s i n p r o d u c t io n c o s t s a v o i d e d b y g e t t i n g

produc t s f rom ano the r f i rm, pay ing inc remen ta l ve r sus f ixed cos t s .

E x a m p l e s : 1 . J a p a n h a s b e e n t h e w o r l d ' s la r g e s t u s e r o f f a cs im i l e

m a c h i n e s b e c a u s e t h e s e m o r e e a s il y t r a n s m i t t h e c o m p l e x i d e o g r a p h s o f

t h e J a p a n e s e l a n g u a g e t h a n d o t e le x m a c h in e s . P a r t l y b e c a u s e o f t h is ,

s o m e J a p a n e s e f ir m s h a v e b e c o m e le a d i n g p r o d u c e r s . S i e m e n s o f G e r -

m a n y a n d B u r r o u g h s a n d 3 M o f t h e U n i t e d S t a t e s a r e a ll m a r k e t i n g

h igh spee d f acsimi le ma ch ines f rom Japan . Ev en X erox im por t s i t s h igh

spee d mo de l f rom i t s J apa ne se a f fi li a te . Exp la in ing the i r r a t iona le , a 3M

exec u t ive sa id , W e s imply can ' t cov er a ll r ang es o f ma ch ines ou r se lve s

s o t h e y fill g a p s i n t h e i r p r o d u c t l in e s b y b u y i n g f r o m t h e J a p a n e s e . 6

E v e n g i a n t I B M m a r k e t s s m a l l c o p ie r s fr o m M i n o lt a f o r s im i l a r re a s o n s .

2 . The au tomobi le indus t ry p rov ides o the r i l lu s t r a t ions . The Genera l

M oto r s t i e w i th S uzuk i inc ludes the l ikel ihood tha t GM w il l round ou t i t s

p rodu c t l ine w i th ve ry sm al l mode l s mad e b y Suzuk i. Br it a in 's BL wi ll

en r ich i t s p roduc t o f f e r ings by s e l l ing a Br i t i sh p roduced ve r s ion o f

Ho nda ' s mids ized Ba l l ade . One aspe c t o f the AM C-Re nau l t link i s tha t

AM C wil l have a r easonab le r ang e o f p rod uc t s to o f f e r f rom R enau l t ,

p e r h a p s a l lo w i n g A M C t o s u r v i v e i n t h e U .S . m a r k e t .

3 . In the p harm aceu t i ca l ind us t ry , in te rna l p rod uc t dev e lop m en t is an

e x t r e m e l y c o s t ly an d s l o w p r o c e s s. T h e r e f o r e i t i s s t a n d a r d p r a c ti c e b y

mul t ina t iona l s in th i s indus t ry to round ou t the i r p ro duc t line by some

o ther me thod such as l i cens ing , jo in t ven tu res o r acqu i s i t ions . Warner

L am be r t has r e l i ed on l icens ing o f o the r s ' p rod uc t s fo r a m a jo r p a r t o f i t s

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75 CRITICAL MASS AND INTERNATIONAL MARKETING STRATEGY

pharma ceu t i ca l s a les . M erck i s a g ian t in the in dus t ry b u t i t s ti ll m ark e t s

in t h e U . S . a n u m b e r o f d r u g s d e v e l o p e d b y a r e l a t iv e l y s m a ll S w e d i s h

f irm, A .B . As t r a . P f i ze r i s expand ing i t s Med ica l Sy s tem s D iv i s ion o f fe r -

i n g s b y m a r k e t i n g d i a g n o s t i c g e a r f r o m t h e J a p a n e s e A l o k a c o m p a n y .

istr ibut ion

D i s t ri b u t io n i n i n t e rn a t io n a l m a r k e t i n g o f t e n in v o l v e s a n e x t r a s t e p

n o t fo u n d in d o m e s t i c m a r k e t i n g . I n d o m e s t i c m a r k e t i n g t h e t a s k i s to

g e t t h e p r o d u c t f r o m t h e p r o d u c e r t o t h e c o n s u m e r v i a s o m e d i s t r i b u -

t ion channe l. The ex t r a s t ep in in te rna t iona l m arke t ing i s tha t the p rod-

u c t o f t e n s t a r t s f r o m a n o t h e r c o u n t r y a n d m u s t b e e x p o r t e d i n t o t h e t a r -

ge t marke t . Thus , d i s t r ibu t ion in in te rna t iona l marke t ing i s u sua l ly a

t w o s t a g e p r o c e s s , i n t e rn a t i o n a l a n d d o m e s t i c . I t i s w o r t h w h i l e t o e x a m -

ine each s t age o f th i s d i s t r ibu t ion to s e e the ro le econo mies o f s ca le

migh t p lay .

E x p o r t i n g . T h e r e a r e s e v e r a l a s p e c t s t o t h e i n te r n a t io n a l d i s t ri b u t i o n

o r e x p o r t i n g t a s k , m o s t o f w h i c h l e n d t h e m s e l v e s t o e c o n o m i e s o f s c al e.

T h e f i r s t t a s k i n e x p o r t i n g i s m a k i n g a p p r o p r i a t e o r g a n i z a t i o n a l

a r r a n g e m e n t s f o r t h i s n e w k i n d o f m a r k e t i n g f o r t h e f i rm , s u c h a s

s e t t i n g u p a n

expor t depar tmen t .

T h i s t e n d s t o b e c o m e a f i x e d c o s t

opera t ion to a l a rge deg ree , thu s l end ing i t s e l f to econom ies o f s ca le . Fo r

e x a m p l e , a n A m e r i c a n p a c k a g e d g o o d s m a r k e t e r b e g a n e x p o r t i n g t o

E u r o p e . T h e n e w e x p o r t d e p a r t m e n t p e r s i s t e n t l y h a d h i gh se l li n g c o s t s

as a pe rc en t o f s a les . As th e f i rm cou ld no t s ign if i can tly exp and s a les o f

i ts o w n p r o d u c t s i n E u r o p e , i t s o u g h t e c o n o m i e s o f s c al e b y c a r r y i n g t o

E u r o p e c o m p l e m e n t a r y p r o d u c t s o f o t h e r U . S . f ir m s , a p i g g y b a c k

a r r a n g e m e n t . T r a d i n g c o m p a n i e s a n d E M C s o f f e r a n o t h e r w a y f o r f i rm s

t o a v o id t h e f i x e d c o s t b a r r i e r o f a n e x p o r t d e p a r t m e n t . S e ll in g t o t h e s e

o rgan iza t ions i s l ike a domes t i c s a le and no spec ia l admin i s t r a t ive

o v e r h e a d i s n e c e s s a r y .

A n o t h e r e a r l y t a s k i n e x p o r t i n g i s

m ark e t research

l e a r n i n g w h a t

f o r e i g n c u s t o m e r s w a n t a n d h o w t o r e a c h t h e m . T h e i m p o r t a n t s c a l e

economies in th i s marke t in te l l igence func t ion have a l r eady been

d i scus sed .

A n o t h e r j o b i n e x p o r t i n g i s t h e physical distribution of the goods .

Sh ipp ing i s an a rea w he re the econom ies o f s ca le a r e r ecogn ized exp li cit -

ly in th e voc abu lary of the bu s iness , less- than-carload-lot , and so on .

W h e t h e r t h e e x p o r t i n g b e d o n e b y t r u c k o r t r a i n , s h i p o r p l a n e , t h e r e

a re obv ious s av ings in ma tch ing as c lose ly as pos s ib le the t echn ica l and

economic spec i fi ca t ions o f the ca r r i e r . M any e xp or te r s hav e l e s s than

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TERPSTRA 276

o p t i m u m s i z e d e x p o r t s h i p m e n t s a n d a r e f o r c e d t o p a y h i g h e r r a t e s

u n l e ss t h e y c a n c o m b i n e s h i p m e n t s s o m e h o w t o g e t e c o n o m i e s o f s c al e.

T h e r e a r e s e v e r a l m e c h a n i s m s w h i c h o f fe r t h e s e e c o n o m i e s t o e x p o r t-

e r s : f r e i g h t f o r w a r d e r s , t r a d i n g c o m p a n i e s , e x p o r t m a n a g e m e n t c o m -

pan ies (EMC's) and p ig gyb ack expor t ing . Trad ing com pan ies and EM C's

w e r e d i s c u s s e d e a r l i e r . F r e i g h t f o r w a r d e r s o f t e n c o m b i n e t h e

s h i p m e n t s o f s e v e r a l c l ie n t s fo r b e t t e r r a t e s . P i g g y b a c k e x p o r t i n g i s

when a manufac tu re r w i l l ca r ry ano the r f i rm ' s p roduc t s in to fo re ign

m a r k e t s a l o n g w i th i ts o w n . A l l o f t h e s e a p p r o a c h e s o f f e r c o m b i n e d

s h i p m e n t s a n d t r a n s p o r t a t i o n s a v i n g s a s p a r t o f t h e i r a t t ra c t i o n . I n

con t r as t , f i rms tha t can ' t f ind economica l sh ipp ing may be

noncompet i t ive in fo re ign marke t s .

R e l a t e d t o p h y s i c a l d i s t r i b u t i o n a r e t h e

documentation insurance

and f inancing tasks

in expor t ing . These require specia l ized sk i l l s and

c o n t a c t s a n d a l so l e n d t h e m s e l v e s t o e c o n o m i e s o f s c al e, a s e v i d e n c e d b y

the e x i s t enc e o f the spec ia l ized agency , the fo re ign f r e igh t fo rw arder .

T h e f o r e ig n f r e ig h t f o r w a r d e r h a n d l e s d o c u m e n t a t io n a n d o t h e r a s p e c t s

o f ex po r t sh ip m en ts fo r m any f irms , bo th l a rge and small . Becau se o f h is

in te rna l econom ies o f s ca le , he as su re s h i s su rv iva l. M os t o f h is c l i en t s

f ind i t mo re e xpen s ive to p e r fo rm h is func t ions in house than to use hL,

s e rv i c e s. T h e J a p a n e s e t r a d i n g c o m p a n y p r o v i d e s s i m i la r e c o n o m i e s f o r

i t s c l i en t s . Fo r example , in su rance cos t s can be l e s s when the t r ad ing

c o m p a n y h a s a s p e c i a l d e p a r t m e n t a n d e x p e r t i s e t o h a n d l e i t . A s o n e

i llu s tr a tion , Mi t su i in the U n i ted S ta tes has a l a rge m as te r con t r ac t w i th

the Fore ign Cred i t In su rance Assoc ia t ion fo r i t s sh ipmen ts f rom the

U.S . Th i s means each c l i en t en joys coverage a t l e s s cos t than do ing i t

alone.

Distribution within the foreign market E x p o r t i n g i s g e t t i n g t h e

p r o d u c t f ro m t h e p r o d u c e r 's c o u n t r y t o th e c u s t o m e r 's c o u n t r y . N o w w e

examine d i s t r ibu t ion w i th in the cus tomer ' s coun t ry . Th i s i s the t r ad i -

t io n a l ta s k o f d i s t ri b u t io n a s d i s c u s s e d in m a r k e t i n g t e x t s w h e r e s c a le

econom ies a re ind ica ted as a m a jo r r a t iona le o f d i s t r ibu t ion channe l s .

C o r e y n o t e s t h a t A d i s tr i b u t io n s y s te m . . , i s a k e y e x t e r n a l r e s o u r c e .

No rm al ly i t t ak es yea r s to bu i ld , and i s no t eas i ly changed . ' Ko t le r

s a y s m i d d l e m e n a r e u s e d b e c a u s e m o s t p r o d u c e r s l a c k t h e f i n a n c i a l

r e s o u r c es t o e m b a r k o n a p ro g r a m o f d i r ec t m a r k e t i n g a n d b e c a u s e

midd lemen o f f e r super io r e f f ic i ency base d on the i r exper ience , special i-

zation, contacts , and scale.8

T h e r a ti o n a l e o f d i s tr i b u ti o n s y s t e m s a p p l ie s in a n y c o u n t r y , w h e t h e r

i t b e t h e h o m e m a r k e t o r t h e f o re i g n m a r k e t . T h e p r o d u c e r ' s re l ia n c e o n

t h is e x t e r n a l r e s o u r c e is o f te n g r e a t e r in f o re i g n m a r k e t s , h o w e v e r , b e-

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77 CRITICAL MASS AND INTERNATIONAL MARKETING STRATEGY

c a u s e m o s t i n t e r n a ti o n a l m a r k e t e r s o p e r a t e o n a s m a l l e r sc a l e i n t h e i r

f o re i g n m a r k e t s t h a n t h e y d o a t h o m e . M a n y f i rm s f e e l t h a t t h e y c a n n o t

g e t a n a d e q u a t e p r e s e n c e i n f o r e i g n m a r k e t s m e r e l y b y r e l y i n g o n t h e

ex i s t ing d i s t r ibu t ion channe l s the re . A l thou gh th ese channe l s o f f e r s ca le

e c o n om i e s , t h e s e f ir m s b e l i e v e th a t a n e v e n g r e a t e r i m p a c t i s n e c e s s a r y

so the y jo in w i th na t iona l f i rms to ge t the c r it i ca l mas s des i r ed . Th e con-

t e m p o r a r y w o r l d m a r k e t s c e n e o f f e rs i n n u m e r a b l e i l l u s tr a t io n s o f e x -

po r te r s jo in ing w i th na t iona l f i rms to ach ieve an e f f ec t ive sca le o f d i s tr i -

bu t ion pene t r a t ion . Th e ex am ples com e from a ll coun t r i e s and a l l indus-

t r ies . A few wil l be c i ted here .

E x a m p l e s : 1 . I n t h e a u t o i n d u s t r y , M i t s u b i sh i j o in e d w i t h C h r y s l e r t o

b e a b l e t o re a c h t h e U . S . m a r k e t t h r o u g h t h e t h o u s a n d s o f C h r y s l e r

dea le r s . S imi la r ly , Renau l t ' s ma jo r r eason fo r jo in ing AMC in the U .S .

w a s t o g a i n a c c e s s t o A M C ' s e s t a b l i s h e d d e a l e r n e t w o r k . R e n a u l t

f i g u r e s i t w o u l d h a v e t a k e n t e n y e a r s t o b u i l d a c o m p a r a b l e n e t w o r k .

R e n a u l t w o r k e d t h e s a m e w a y i n S w e d e n b y j o in i n g w i t h V o l v o t o d i st ri -

b u t e s o m e o f i ts m o d e l s t h r o u g h V o l v o's d e a l e r s t h e r e . I n t h e a u t o i nd u s-

t ry espec ia lly , e s t ab l i sh ing a dea le r ne tw ork i s a l a rge inv es tm en t , so

sca le economies a re pa r t i cu la r ly impor tan t .

2 . S o m e e x a m p l e s f r o m t h e f o o d i n d u s t r y . G e n e r a l F o o d s t r i e d t o

o p e r a t e i t s o w n d i s t r i b u t i o n s y s t e m i n J a p a n f o r a b o u t t w e n t y y e a r s .

I n s uf f ic i e n t v o lu m e a n d u n s a t i s f a c t o r y p r o f i t s fo r c e d th e J a p a n e s e s u b -

s i d ia r y t o j o in w i t h A j i n o m o t o , a c o m p a n y t w e n t y t i m e s i t s o w n s iz e .

R e s u l t a n t e c o n o m i e s l e d t o b o t h g r e a t e r m a r k e t s h a r e a n d p r o f it s f o r

Gen era l Foods - Japan . In a s imi la r m anne r , Q uake r Oa t s was unsucces s -

fu l g o i n g it a l o ne w i t h i t s p e t f o o d s i n G e r m a n y s o Q u a k e r d e c i d e d t o

p i g g y -b a c k w i t h H e n k e l , t h e d e t e r g e n t f ir m , w h i c h h a s o n e o f t h e b e s t

d i s tr i b u ti o n o r g a n iz a t io n s i n G e r m a n y . O n e o f t h e m a j o r a r g u m e n t s fa -

v o r i n g t h e N a b i s c o - S t a n d a r d B r a n d s m e r g e r i s t h e s y n e r g y t h e f i r m s

wi ll ach ieve in the i r d i s t r ibu t ion in fo re ign m arke t s .

M c D o n a ld 's p r o v i d e s a d i f f e r e n t k i n d o f f o o d c o m p a n y e x a m p l e , b u t

one wh ich i l lu s t r a tes th e imp or tance o f c r it i ca l ma ss in d i s tr ibu t ion .

M c D o n a l d 's n o w h a s o v e r 1 , 0 0 0 o u t l e t s o v e r s e a s . H a v i n g s t a r t e d a

d e c a d e a g o , t h e y a r e n o w s t a r t i n g t o a c h i e v e e c o n o m i e s o f s c al e t h a t

t h e i r c o m p e t i t o r s c a n 't b e g i n t o e n j o y u n ti l t h e y s p e n d m u c h m o r e t i m e

and money bu i ld ing up a c r i t i ca l mass ab road .

3 . Sav in and O l ive t t i have jo ined toge the r to s e l l cop ie r s and o the r

ma ch ines fo r the o ffi ce o f the fu tu re . Eac h c la ims tha t the ve n tu re w i l l

b r in g g r e a t e r p e n e t r a ti o n in t h e m a r k e t o f t h e o t h e r p a r t n e r . N e i t h e r

pa r tne r f e l t i t cou ld make i t a lone in the fo re ign marke t .

4 . M a n y J a p a n e s e p r o d u c e r s e n j o y p r o d u c t i o n e c o n o m i e s o f s c a le b u t

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TERPSTRA 278

have p rob lems ge t t ing a c r i t i c a l mass in fo re ign marke t d i s t r ibu t ion .

T h e r e f o r e , t h e y f r e q u e n t l y p i g g y b a c k o r o t h e r w i s e c o o p e r a t e w i t h a

na t iona l f i rm to ga in economies in d i s tr ibu t ion . Th e M i t sub ish i -Chrys le r

connec t ion was no ted above . Mino l ta se l l s cop ie r s in the U .S . th rough

I B M e v e n t h o u g h i t h as i t s o w n U . S . m a r k e t i n g s u b s id i a ry . T h e l a t t e r

o rgan iza t ion i s too sma l l to have the de s i red m ark e t cove rage . Hi tach i is

a ma jor fo rce in Jap an bu t d idn ' t f e e l ab le to ma rke t i t s robo ts in the U .S .

by i t se l f. H i tach i i s wo rk ing W ith Gen e ra l E lec t r i c a s the m a jor w ay to

e s ta b l is h a m a r k e t p r e s e n c e i n th e U . S . M a j o r J a p a n e s e f ir m s a r e u s i n g

t h e s a m e s t r a g e g y t o e n t e r E u r o p e a n m a r k e t s . F o r e x am p l e , M i t s u b is h i

i s m a r k e t i n g h i g h s p e e d c o p i e r s i n E u r o p e v i a S i e m e n s m a r k e t i n g

o r ga n iz a ti o n. F u j i t s u w i ll m a r k e t c o m p u t e r s i n E u r o p e t h r o u g h I C L , t h e

Br i t i sh compute r company . Nis san ha s l inks wi th seve ra l c a r manufac -

tu re r s in Eu rop e and Suzuki 's t i e wi th G ene ra l M otors g ive s it a cce ss to

GM's worl wi e s a l e s n e t w o r k . I n t h e d r u g i n d u s t r y , J a p a n e s e a n d

W e s t e r n f i r m s a r e p i g g y b a c k i n g w i t h e a c h o t h e r t o p e n e t r a t e e a c h

o the r s ' ma rke t s .

romotion

P r o m o t i o n i s a n o t h e r m a j o r t a s k in m a r k e t in g , s o m e t i m e s c al le d t h e

c o m m u n i c a ti o n s jo b . K n o w l e d g e i s a s s u m e d t o b e f r e e a n d u n i v e r s al l y

ava i lab le in the th eor y o f pe r fec t compe t i t ion . Because tha t i s no t t rue in

t h e r e a l w o r l d , t h e p r o d u c e r m u s t c o m m u n i c a te w i t h p o t e n t i al c u s to m -

e r s t o i n fo r m t h e m o f h is o f fe r in g s a n d t o p e r s u a d e t h e m t o b u y . T h e

m a j o r f o r m s o f m a r k e t i n g c o m m u n i c a t io n s a r e a d v e r t i s in g a n d p e r s o n a l

sel ling. Sa les prom otion an d p ubl ic i ty can a lso be im po r tant in some c ir -

cum s tances . W e wi ll cons ide r th e ro le o f e conomies o f s ca le in communi -

ca t ions o r p romo t ion in in te rna t iona l ma rk e t ing .

A dve r t i s ing i s the m os t v i s ib le o f the p romo t iona l too l s used b y mar -

k e t e r s . C u s t o m e r s m a y b e r e a c h e d b y r a d i o a nd t e l ev i s io n o r a v a r i e t y

of p r in t media . Ad ve r t i s ing and the consu m er f r anch ise i t he lps to

ach ieve a re exp l ic i t ly r ecognized a s ba r r ie r s to en t ry by economis t s .

T h i s m e a n s t h a t a d v e r t i s i n g e x p e n d i t u r e s b y e x i s t i n g f i r m s c r e a t e a

h igh co s t hurd le fo r a newco m er . Th e ne w f i rm , fo r examp le , c an 't spend

o n e h u n d r e d t h o f t h e a d b u d g e t o f e x i s ti n g f ir m s a n d e x p e c t t o g e t a o n e

p e r c e n t m a r k e t s h a r e . A d v e r t i s i n g i s a n o t h e r l u m p y e x p e n s e i t e m

which lends i t s e l f to e conomies o f s ca le . P roc te r and Gamble and

G e n e r a l M o t o r s a r e t h e l e ad i n g a d v e r t i s e r s i n t h e U . S. m a r k e t . E a c h h a s

an adve r t i s ing b ud ge t nea r $500 mi ll ion A new com pe t i to r fo r e i the r o f

the se f i rms wou ld have a ha rd t ime ach iev ing a c r it ic a l ma ss and m aking

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279 CRITICALMASS AND INTERNATIONALMARKETINGSTRATEGY

his voice heard unless he had lots of money- or lots of help.

Personal selling is the major promotional tool in the industrial

market. When one considers the sales force of a Du Pont, a General

Electric, or an IBM it is obvious that personal selling can be another high

cost hurdle for a new competitor. Establishing and managing a sales

force is also usually a fixed cost activity lending itself to economies of

scale.

The costs of promotion to establish a market franchise are an en try

barrier in domestic markets. They are often a relatively greater barrier

in foreign markets because international marketers usually operate on a

smaller scale abroad than at home. It is true that many firms, especially

multinationals, have successfully hurdled these barriers abroad. That

illustrates the point precisely. It is because these firms are large and

have the resources that they can overcome the cost hurdles and buy into

foreign markets. It is said, for example, that Procter and Gamble

entered European markets and bought a fifteen percent market share

in a short time with heavy advertis ing campaigns. Procter and Gamble

has the resources to do that.

The promotional task of gaining product/brand recognition and a

market franchise in a country requires a critical mass as do the o ther

international marketing activities discussed above. Nissan provides an

unusual example of this. The company wants to change its brand name

from Datsun to Nissan, the company name. One observer estimated this

would cost $60 million in the U .S.- some critical mass. Small firms may

find the promotional costs of foreign market entry too great and remain

domestic marketers only, or they may try to find ways of sharing prc~

motional costs, such as using a trading company or other cooperative

ventures. Large firms may be able to achieve the critical mass required,

as in the Procter and Gamble illustration or the Nissan case. Even large

firms, however, often find it desirable to avoid or lessen the cost of

buying market position in a foreign country. Some examples will illus-

trate this.

Examples. In the consumer packaged goods industry, Colgate has an

experienced marketing staff in many countries plus international adver-

tising knowhow and contacts. To take advantage of Colgate's economies,

various producers used Colgate to market their products abroad, includ-

ing Wilkinson blades and Du Pont (for a consumer product). General

Foods-Japan could not afford a large enough sales force to cover Japan-

ese retail outlets. By joining with Ajinomoto, General Foods was able to

dismiss its own sales force and piggyback on the large staff of

Ajinomoto.

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TERPSTRA 280

It is worthwhile noting how the Japanese those very successful

international marketers have frequently used the established market

position of national firms in place of or alongside of their own promo-

tional efforts. For example Japanese tractor makers specialize in

models of less than 40 horsepower. Six of seven U.S. tractor manufac-

turers market these smaller models under their own brand name

through their marketing organizations. The U.S. firms widen their line

by their sharing. The Japanese gain a critical mass in promotion and

distribution.

Sony and Matsushita are the leading producers of videotape record-

ers. In the U.S. the majority of these are sold under such brand names

as RCA Zenith and Sears and by the marketing organizations bearing

these names.

In copiers Minolta and other Japanese producers are selling in the

U.S. under such names as IBM Savin Pitney-Bowes and 3M and

through their market ing organizations.

In the new field of robotics Hitachi chose to enter the U.S. using not

only the marketing force of GE but also sells its equipment with the GE

brand name.

In all these cases international marketers are capitalizing on estab-

lished brand names and marketing organizations. They can gain a signi-

ficant volume of business without high sta rt up costs. This gives them a

critical mass and allows them production economies of scale and may

provide a foothold for future business under their own brands.

C O N C L U S I O N S N D IM P L I C T IO N S

We have suggested tha t to be successful many international market-

ing activities require a critical mass or economies of scale. To illustrate

this we examined the various functions of marketing. Obviously the

elements of the marketing mix are interrelated and economies in one

function are affected by economies in another. For example gaining a

critical mass in distribution may influence economies in market intelli-

gence or promotion. This was evident in some of our examples. Our

analysis is consistent with all those who stress market share as impor-

tant to profitable operations. Economies of scale can be signifcant in

domestic marketing but they are equally critical and harder to achieve

in international marketing. This has implications both for firms and for

countries.

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281 CRITICALMA SS AND INTERNATIONALMA RKETING STRATEGY

Fo r f i rms , the impl ica tion i s tha t a m ass ing o f r e sou rce s m ay be

nece ssa ry to c ross the th re shho ld to e f fec t ive in te rna t iona l m a rke t ing .

I n a r e c e n t c as e, A T & T w a n t s t o m a r k e t t o N i p p o n T e l e p h o n e a n d T ele -

graph which ha s jus t open ed i t s bus ine ss to non-Jap anese f i rms . In 1981,

the re fore , A T& T open ed a To kyo off ic e a t a f i r s t yea r cos t o f ov e r

250,000. Th is i s no t nece ssa r i ly a typ ica l exam ple b u t i t i l lus t r a te s the

p r o b l e m . S m a l l e r f i r m s m a y a v o i d i n t e r n a t i o n a l m a r k e t s b e c a u s e o f

t h e i r l ac k o f r e s o u r c e s , o r t h e y m a y j o in i n s o m e k i n d o f c o o p e r a t i v e v e n -

t u r e t o g a i n t h e n e c e s s a r y c r i t i c a l m a s s . T h e s e c o o p e r a t i v e v e n t u r e s

r a n g e f r o m t r a d i n g c o m p a n i e s , e x p o r t m a n a g e m e n t c o m p a n i e s , a n d

p iggyback expor t ing to l i c ens ing and jo in t -ven ture s .

L a r g e c o m p a n i e s m a y h a v e a d e q u a t e r e s o u r c e s t o m a k e a s u ff ic i en t

i m p a c t b y t h e m s e l v e s , a s in t h e A T & T e x a m p l e . M a n y l a r g e c o m p a n i es ,

howeve r , a l so face p rob lems of d i seconomies o f s ca le . Even AT&T i s

unce r ta in abo u t ma in ta in ing i t s Tok yo off ic e. N um erou s exam ple s w e re

g iven ea r l i e r o f o th e r l a rge f i rms ' coope ra t ive e f fo r t s to avo id b ig cos t

ou t lays and ga in economies . The Ja pa ne se exam ple s a re e spec ia l ly no te -

w o r t h y b e c a u s e t h e J a p a n e s e h a v e b e e n s o su c c e ss f u l i n t h e i r i n t e r n a-

t io n a l m a r k e t in g . P a r t o f t h a t s u c c e s s d e r i v e s f r o m t h e i r r e c o g n i t io n

t h a t i n m a n y a r e a s, a c ri ti ca l m a s s a n d e f f e ct i v e m a r k e t p e n e t r a t i o n m a y

be ach ieved qu icke r by jo in ing wi th na t iona l f i rms to sha re th e ben e f i t s

o f the i r a l r eady e s tab l i shed econom ies o f s cale . A s a r e su l t , they have

b e e n m o r e a c t i v e i n c o o p e r a t i v e v e n t u r e s t h a n t h e A m e r i c a n s a n d t h e

E u r o p e a n s .

An impl ica t ion fo r manage rs i s tha t they mus t r e cognize the sca le

prob lem in in te rna t iona l ma rke t ing and cons ide r i t in the i r s t r a teg ic

p lan nin g. T h a t m a y m e a n a v o i d in g m a r k e t s o r p r o d u c t a r e a s w h e r e t h e

f i rm can not a ch ieve a c r i ti c al mass . A l te rna t ive ly , i t cou ld mean the f i rm

m u s t s e e k w a y s t o a c h i e v e t h e c ri ti ca l m a s s b y s h a r in g in t h e e f f o r t s a n d

r e s o u r c e s o f o t h e r f ir m s . T h e r e a r e m a n y d i f f e r e n t w a y s o f s h a r i n g a s

was ev iden t in the example s c i t ed .

F o r n a t i o n s w i s h i n g to e x p a n d t h e i r e c o n o m i e s a n d t h e i r e x p o r t s , t h e

implica tion is tha t to achieve the ir goa ls , m ore coo pera t ion be tw ee n

f i rms bo th domes t ic a l ly and in te rna t iona l ly shou ld be a l lowed and

encouraged . Even p roud France i s s eek ing fo re ign he lp in key indus -

t ri e s. M a n y c o u n t r ie s a r e f o r m i n g o r c o n s i d er i n g m o d e l s o f t h e J a p a n e s e

t rad ing company . In some ca se s t ax , compe t i t ion , o r o the r l aws migh t

h a v e t o b e r e v i e w e d t o a l lo w o r e n c o u r a g e s u c h c o o p er a ti o n . T h o s e w h o

f a v o r fr e e t r a d e s t r e s s t h e b e n e f i t s o f i n t er n a ti o n a l i n t e r d e p e n d e n c e .

W h a t w e ' v e b e e n d i s cu s s in g is si m i la r e x c e p t t h a t t h e i n t e r d e p e n d e n c e

is m ore f i rm and indu s t ry spec if ic and th e re fo re ha s impl icat ions fo r

m anage rs a s we l l a s na t iona l p lanne rs .

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TERPSTRA 8

F O O T N O T E S

1Sta f fan B. L indner , An Essay on Trade and Transformation ( Ne w Yo r k : W i l e y ,

1961.

2 Ol iv er W i l l ia m s o n , T r a n s a c t i o n - Co s t E c o n o m ic s : T h e G o v e r n a n c e o f Co n t r a c tu a l

Re l a t i o n s , Journal of Law and Economics 22 (October, 1979), pp. 233-262.

3Business Week

December 14, 1981, p . 52.

4Ph i l ip Kot le r , Marketing Management (New York: Pre nti ce Hall , 1980), p . 314.

SBusiness Week October 19, 1981, p. 47.

6Business Week

N ov em be r 2 , 1981 , p . 104 .

7 E . Ra y m o n d Co r e y , Industrial Marketing (Eng lewood Cl i f f s , N.J . : P ren t ice Ha l l ,

1976), p. 263.

8Kot le r ,

op cit.

p. 417.

9Fortune June 15, 1981, P. 7.

B O U T T H E U T H O R

VE RN TE RP ST R A is Professor of International Bu siness at the Uni-

vers i ty of Michigan. H e has taught over seas and at the W harton School .

He received his B.B.A. and M.B.A. and Ph.D. from the University of

Michigan. H e i s l i s ted in Who s W ho in the Un ited S tates . H e has

written in major journals and has published several books includir g

Internat ional M arket ing Cul tural En viro nm en t o f Internat ional Busi-

ness and Comparative An alysis for Internat ional M arket ing. He is on

the editorial boards of the Journa l o f M arke t ing and the Journal o f

Internat ional Bu siness Studies.