MK0009 International Solved]

8/6/2019 MK0009 International Solved]

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Q.1 Explain the stages of international marketing.

International Marketing is simply marketing to people or companies outside of your owndomestic market. International marketing (IM) refers to marketing carried out by companiesoverseas or across national borderlines. This strategy uses an extension of the techniques used in

the home country of a firm. It refers to the firm-level marketing practices across the borderincluding market identification and targeting, entry mode selection, marketing mix, and strategicdecisions to compete in international markets. According to the American Marketing Association(AMA) "international marketing is the multinational process of planning and executing theconception, pricing, promotion and distribution of ideas, goods, and services to create exchangesthat satisfy individual and organizational objectives.It is simply the application of marketingprinciples to more than one country.

Many see international marketing as a simple extension of exporting, whereby the marketing mixis simply adapted in some way to take into account differences in consumers and segments. It thenfollows that global marketing takes a more standardized approach to world markets and focusesupon sameness, in other words the similarities in consumers and segments.

At its simplest level, international marketing involves the firm in making one or more marketingmix decisions across national boundaries. At its most complex level, it involves the firm inestablishing manufacturing facilities overseas and coordinating marketing strategies across theglobe.

International Marketing is the performance of business activities that direct the flow of acompanys goods and services to consumers or users in more than one nation for a profit.Theinternational market goes beyond the export marketer and becomes more involved in themarketing environment in the countries in which it is doing business.

THE STAGES OF INTERNATIONAL MARKETING

International marketing is not a revolutionary shift, it is an evolutionary process. While thefollowing does not apply to all companies, it does apply to most companies that begin asdomestic-only companies. The five stages of this internationalization are outlined below:

i) Domestic marketing:

A company marketing only within its national boundaries only has to consider domesticcompetition. Even if that competition includes companies from foreign markets, it still only has tofocus on the competition that exists in its home market. Products and services are developed forcustomers in the home market without thought of how the product or service could be used inother markets. All marketing decisions are made at headquarters.

The biggest obstacle these marketers face is being blindsided by emerging international marketers.Because domestic marketers do not generally focus on the changes in the global marketplace, theymay not be aware of a potential competitor who is a market leader in other countries. Thesemarketers can be considered ethnocentric, as they are most concerned with how they are perceivedin their home country.

ii) Export marketing:

Generally, companies began exporting, reluctantly, to the occasional foreign customer who soughtthem out. At the beginning of this stage, filling these orders was considered a burden, not anopportunity. If there was enough interest, some companies became passive or secondary exporters,
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by hiring an export management company to deal with all the customs paperwork and languagebarriers. Others became direct exporters, creating exporting departments at headquarters. Productdevelopment at this stage is still focused on the needs of domestic customers. Thus, thesemarketers are also considered ethnocentric.

iii) International marketing:

If the exporting departments are becoming successful but the costs of doing business fromheadquarters plus time differences, language barriers, and cultural ignorance are hindering thecompanys competitiveness in the foreign market, then offices could be built in the foreigncountries. Sometimes companies buy firms in the foreign countries to take advantage ofrelationships, storefronts, factories, and personnel already in place. These offices still report toheadquarters in the home market, but most of the marketing mix decisions are made in theindividual countries since that staff is the most knowledgeable about the target markets. Localproduct development is based on the needs of local customers. These marketers are consideredpolycentric, because they acknowledge that each market/country has different needs.

iv) Multinational marketing:

At the multi-national stage, the company is marketing its products and services in many countriesaround the world and wants to benefit from economies of scale. Consolidation of research,development, production, and marketing on a regional level is the next step. An example of aregion is Western Europe. But, at the multi-national stage, consolidation, and thus productplanning, does not take place across regions; a regiocentric approach.

v) Global marketing:

When a company becomes a global marketer, it views the world as one market and createsproducts that will only require minor modifications to fit into any regional marketplace. Marketingdecisions are made by consulting with marketers in all the countries that will be affected. The goalis to sell the same thing the same way everywhere. These marketers are considered geocentric.


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Q2. Give a detail note on protectionism.

Protectionism is the economic policy of restraining trade between nations, through methods such as tariffson imported goods, restrictive quotas, a variety of restrictive government regulations designed todiscourage imports and anti-dumping laws in an attempt to protect domestic industries in a particular nation

from foreign take-over or competition. This is closely aligned with anti-globalization, and contrasts withfree trade, where no artificial barriers to entry are instituted. The term is mostly used in the context ofeconomics, where protectionism refers to policies or doctrines which "protect" businesses and "livingwages" by restricting or regulating trade between foreign nations.

Protectionism causes higher prices for consumers because domestic producers are not exposed to foreigncompetition, and can therefore keep prices high. But domestic exporters also may suffer, because foreigncountries tend to retaliate against protectionism with tariffs and barriers of their own. Many economists saythat the Depression of the 1930s was precipitated by the protectionist trade barriers erected by the UnitedStates under the Smoot-Hawley Act, which led to retaliation by many countries throughout the world. Inmore recent years, many protectionist trade barriers have fallen through the passage of GATT, the GeneralAgreement on Tariffs and Trade, which went into effect in 1995, and the creation of the World TradeOrganization (WTO).

Methods of Protectionism

Although trade generally benefits a country as a whole, powerful interests within countries frequently putobstacles i.e., they seek to inhibit free trade. There are several ways this can be done:

Tariff barriers: A duty, or tax or fee, is put on products imported. This is usually a percentage of the costof the good. A tariff is a tax that raises the price of imported products and causes a contraction in domesticdemand and an expansion in domestic supply. The net effect is that the volume of imports is reduced andthe government received some tax revenue from the tariff.

Quotas: A country can export only a certain number of goods to the importing country. For example,Mexico can export only a certain quantity of tomatoes to the United States, and Asian countries can sendonly a certain quota of textiles.

"Voluntary" export restraints: These are not official quotas, but involve agreements made by countriesto limit the amount of goods they export to an importing country. Such restraints are typically motivated bythe desire to avoid more stringent restrictions if the exporters do not agree to limit themselves. Forexample, Japanese car manufacturers have agreed to limit the number of automobiles they export to theUnited States.

. Preferential Government Procurement Policies and State Aid: Free trade can be limited bypreferential behaviour by the government when allocating major spending projects that favour domesticrather than overseas suppliers. Good examples include the award of contracts to suppliers of defenceequipment or construction companies involved in building transport infrastructure projects.

The use offinancial aid from the state can also distort the free trade of goods and services betweennations, for example the use of subsidies to a domestic coal or steel industry, or the widely criticized use ofexport refunds (subsidies) to European farmers under the Common Agricultural Policy (CAP) which iscriticized for damaging the profits and incomes of farmers in developing countries

Subsidies to domestic products: If the government supports domestic producers of a product, these mayend up with a cost advantage relative to foreign producers who do not get this subsidy. U.S. honeymanufacturers receive such subsidies.
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Non-tariff barriers, such as differential standards in testing foreign and domestic products for safety,disclosure of less information to foreign manufacturers needed to get products approved, slow processingof imports at ports of entry, or arbitrary laws which favor domestic manufacturers.

. Administrative Barriers Countries can make it difficult for firms to import by imposing restrictions and

being 'deliberately' bureaucratic. These trade barriers range from stringent safety and specification checksto extensive hold-ups in the customs arrangements. A good example is the quality standards imposed by theEU on imports of dairy products.

Protectionism has frequently been associated with economic theories such as mercantilism, the belief that itis beneficial to maintain a positive trade balance, and import substitution.

Recent examples of protectionism in first world countries are typically motivated by the desire to protectthe livelihood of individuals in politically important domestic industries. Whereas formerly blue-collar jobswere being lost to foreign competition, in recent years there has been a renewed discussion of protectionismdue to offshore outsourcing and the loss of white-collar jobs.

Some may feel that better job choice is more important than lower goods costs. Whether protectionismprovides such a tradeoff between jobs and prices has not yet reached a consensus with economists.

Justifications for protectionism

Several justifications have been made for the practice of protectionism. Some appear to hold more meritthan others:

Protection of an "infant" industry: The essence of the argument is that certain industries possess apotential (latent) comparative advantage but have not yet exploited the potential economies of scale. Short-term protection from established foreign competition allows the infant industry to develop its comparativeadvantage. At this point the trade protection could be relaxed, leaving the industry to trade freely on theinternational market. The danger of this form of protection is that the industry will never achieve fullefficiency. The short-term protectionist measures often start to appear permanent.

Costs are often higher, and quality lower, when an industry first gets started in a country, and it would thusbe very difficult for that country to compete. However, as the industry in the country matures, it may be better able to compute. Thus, for example, some countries have attempted to protect their domesticcomputer markets while they gained strength. This is generally an accepted reason in trade agreements, butthe duration of this protection must be limited (e.g., a maximum of five to ten years).

Resistance to unfair foreign competition: The U.S. sugar industry contends that most foreignmanufacturers subsidize their sugar production, so the U.S. must follow to remain competitive. Thisargument will hold little merit with the dispute resolution mechanism available through the World TradeOrganization.

Preservation of a vital domestic industry: The U.S. wants to be able to produce its own defense

products, even if foreign imports would be cheaper, since the U.S. does not want to be dependent onforeign manufacturers with whose countries conflicts may arise. Similarly, Japan would prefer to be able toproduce its own food supply despite its exorbitant costs. For an industry essential to national security, thismay be a compelling argument, but it is often used for less compelling ones (e.g., manufactures of funeralcaskets or honey).

Intervention into a temporary trade balance: A country may want to try to reverse a temporary declinein trade balances by limiting imports. In practice, this does not work since such moves are typically met byretaliation.


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Maintenance of domestic living standards and preservation of jobs. Import restrictions cantemporarily protect domestic jobs, and can in the long run protect specific jobs (e.g., those of auto makers,farmers, or steel workers). This is less of an accepted argumentthese workers should instead be re-trainedto work in jobs where their country has a relative advantage.

Retaliation: The proper way to address trade disputes is now through the World Trade Organization. Inthe past, where enforcement was less available, this might have been a reasonable argument.

It may be noted that while protectionism generally hurts a country overall, it may be beneficial to specificindustries or other interest groups. Thus, while sugar price supports are bad for consumers in general,producers are an organized group that can exert a great deal of influence. In contrast, the individualconsumer does not have much of an incentive to take action to save a small amount in a year.

De facto Protectionism

In the modern trade arena, many other initiatives besides tariffs have been called protectionist. Forexample, some commentators, such as Jagdish Bhagwati, see developed countries efforts in imposing theirown labor or environmental standards as protectionism. Also, the imposition of restrictive certificationprocedures on imports is seen in this light.

Protectionists fault the free trade model as being reverse protectionism in disguise, that is, using tax policyto protect foreign manufacturers from domestic competition. By ruling out revenue tariffs on foreignproducts, government must fully rely on domestic taxation to provide its revenue, which falls heavilydisproportionately on domestic manufacturing. Further, others point out that free trade agreements oftenhave protectionist provisions such as intellectual property, copyright, and patent restrictions that benefitlarge corporations. These provisions restrict trade in music, movies, drugs, software, and othermanufactured items to high cost producers with quotas from low cost producers set to zero.

Criticism of Protectionism

According to ProfessorJagdish Bhagwati, the fact that trade protection hurts the economy of thecountry that imposes it is one of the oldest but still most startling insights economics has to offer.

The folly of protection has been confirmed by a range of studies from around the world. These indicatethat that it has brought few benefits but imposed substantial costs. Among the main criticisms ofprotectionist policies are the following:

Market distortion: Protection has proved an ineffective and costly means of sustainingemployment.

a. Higher prices for consumers: Trade barriers in the form of tariffs push up the pricesfaced by consumers and insulate inefficient sectors from competition. They penaliseforeign producers and encourage the inefficient allocation of resources both domesticallyand globally. In general terms, import controls impose costs on society that would notexist if there was completely free trade in goods and services. It has been estimated forexample that the recent tariff and other barriers placed on imports of steel into the USincreased the price of every car produced there by an average of $100

b. Reduction in market access for producers: Export subsidies, depressing world pricesand making them more volatile while depriving efficient farmers of access to the world
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market. This is a major criticism of the EU common agricultural policy. In 2002 the EUsugar regime lowered the value of Brazil, Thailand and South Africas sugar exports byover $700 million countries where nearly 70 million people survive on less than $2 aday.

Loss of economic welfare: Tariffs create a deadweight loss of consumer and producer surplus

arising from a loss of allocative efficiency. Welfare is reduced through higher prices and restrictedconsumer choice.

Regressive effect on the distribution of income: It is often the case that the higher prices thatresult from tariffs hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs,tobacco, and clothing) fall on those products that lower income families spend a higher share oftheir income. Thus import protection may worsen the inequalities in the distribution of incomemaking the allocation of scarce resources less equitable

Production inefficiencies: Firms that are protected from competition have little incentive toreduce production costs. Governments must consider these disadvantages carefully

Little protection for employment: One of the justifications for protectionist tariffs and otherbarriers to trade is that they help to protect the loss of relatively low skilled and low paid jobs inindustries that are coming under sever international competition. The evidence suggests that, in thelong term, tariffs are a costly and ineffective way of protecting such jobs. According to the DTI

study on trade published in 2004, since 1997 UK employment in textiles manufacturing has fallenby 45%, in clothing manufacture by nearly 60%, and in footwear manufacturing by around 50% -and this despite the protection afforded to European Union textile manufacturers. The cost ofprotecting each job runs into hundreds of thousands of Euros for the EU as a whole. Might thatmoney have been spent more productively in other ways? Often there is a huge opportunity costinvolved in imposing import tariffs.

Trade wars: There is the danger that one country imposing import controls will lead toretaliatory action by another leading to a decrease in the volume of world trade. Retaliatoryactions increase the costs of importing new technologies

Negative multiplier effects: If one country imposes trade restrictions on another, the resultantdecrease in total trade will have a negative multiplier effect affecting many more countriesbecause exports are an injection of demand into the global circular flow of income. The negativemultiplier effects are more pronounced when trade disputes boil over and lead to retaliation.

The diagram below shows the welfare consequences of imposing an import tariff


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Protectionism tends to lead to additional tariffs or other protectionist measures by other countries inretaliation, reduced competition (which results in inflation and less choice for consumers), a weakening ofthe trade balance (due in part to diminished export abilities resulting from foreign retaliations and in partbecause of the domestic currency loses power as there is less demand for it). An overall effect may be avicious cycle of trade wars, as each country responds to the other with a "tit for tat."

Protectionism is frequently criticised as harming the people it is meant to help, instead of aiding them;

these critics often support free trade. Some have denounced critics of protectionism as ideologues whoseopinions are shaped more by ideology than facts. However, academic economists are generally supportersof free trade. Economic theory, under the principle of comparative advantage, suggests that the gains fromfree trade outweigh any losses; as free trade creates more jobs than it destroys, because it allows countriesto specialize in the production of goods and services in which they have a comparative advantage.

Some economists, such as Paul Krugman, argue that free trade helps third world workers, even though theyare not subject to the stringent health and labour standards of developed countries. This is because "thegrowth of manufacturing and of the penumbra of other jobs that the new export sector creates has aripple effect throughout the economy" that creates competition among producers, lifting wages and livingconditions. It has even been suggested that those who support protectionism ostensibly to further theinterests of third world workers are being disingenuous, seeking only to protect jobs in developed countries.

Alan Greenspan, former chair of the American Federal Reserve, has criticised protectionist proposals asleading "to an atrophy of our competitive ability. If the protectionist route is followed, newer, moreefficient industries will have less scope to expand, and overall output and economic welfare will suffer."

Protectionism has also been accused of being one of the major causes of war. Proponents of this theorypoint to the constant warfare in the 17th and 18th centuries among European countries whose governmentswere predominantly mercantilist and protectionist, the American Revolution, which came about primarilydue to British tariffs and taxes, as well as the protective policies preceding World War 1 and 2. Accordingto Frederic Bastiat, "When goods cannot cross borders, armies will."


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Q.3 Which are the various international market entry strategies? Give examples.

International Market Entry Strategies

When an organization has made a decision to enter an overseas market, there are a variety of options opento it. These options vary with cost, risk and the degree of control which can be exercised over them. Thesimplest form of entry strategy is exporting, using either a direct or indirect method such as an agent in thecase of the former, or countertrade, in the case of the latter. More complex forms include truly globaloperations which may involve joint ventures, or export processing zones.

Basic issues

An organization wishing to "go international" faces three major issues:

i) Marketing which countries, which segments, how to manage and implement marketing effort, how toenter with intermediaries or directly, with what information?

ii) Sourcing whether to obtain products, make or buy?

iii) Investment and control joint venture, global partner, acquisition?

Decisions in the marketing area focus on the value chain. The strategy or entry alternatives must ensure thatthe necessary value chain activities are performed and integrated.

How to Enter a Foreign Market

The International Marketing Entry Evaluation Process is a five stage process, and its purpose is togauge which international market or markets offer the best opportunities for our products or services tosucceed. The five steps are Country Identification, Preliminary Screening, In-Depth Screening,FinalSelection andDirect Experience . Let's take a look at each step in turn.


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Step One - Country Identification

It is a general overview of potential new markets. There might be a simple match - for example twocountries might share a similar heritage e.g. the United Kingdom and Australia, a similar language e.g. theUnited States and Australia, or even a similar culture, political ideology or religion e.g. China and Cuba.Often selection at this stage is more straightforward. For example a country is nearby e.g. Canada and the

United States. Alternatively your export market is in the same trading zone e.g. the European Union. Againat this point it is very early days and potential export markets could be included or discarded for anynumber of reasons.

Step Two - Preliminary Screening

At this second stage one takes a more serious look at those countries remaining after undergoingpreliminary screening. Now one begins to score, weight and rank nations based upon macro-economicfactors such as currency stability, exchange rates, level of domestic consumption and so on. Now you havethe basis to start calculating the nature of market entry costs. Some countries such as China require thatsome fraction of the company entering the market is owned domestically - this would need to be taken intoaccount. There are some nations that are experiencing political instability and any company entering such amarket would need to be rewarded for the risk that they would take. At this point the marketing manager

could decide upon a shorter list of countries that he or she would wish to enter. Now in-depth screening canbegin.

Step Three - In-Depth Screening

The countries that make it to stage three would all be considered feasible for market entry. So it is vital thatdetailed information on the target market is obtained so that marketing decision-making can be accurate.Now one can deal with not only micro-economic factors but also local conditions such as marketingresearch in relation to the marketing mix i.e. what prices can be charged in the nation? - How does onedistribute a product or service such as ours in the nation? How should we communicate with are targetsegments in the nation? How does our product or service need to be adapted for the nation? All of this willinformation will for the basis of segmentation, targeting and positioning. One could also take into accountthe value of the nation's market, any tariffs or quotas in operation, and similar opportunities or threats tonew entrants.

Step Four - Final Selection

Now a final shortlist of potential nations is decided upon. Managers would reflect upon strategic goals andlook for a match in the nations at hand. The company could look at close competitors or similar domesticcompanies that have already entered the market to get firmer costs in relation to market entry. Managerscould also look at other nations that it has entered to see if there are any similarities, or learning that can beused to assist with decision-making in this instance. A final scoring, ranking and weighting can beundertaken based upon more focused criteria. After this exercise the marketing manager should probablytry to visit the final handful of nations remaining on the short, shortlist.

Step Five - Direct Experience

Personal experience is important. Marketing manager or their representatives should travel to a particularnation to experience firsthand the nation's culture and business practices. On a first impressions basis at

least one can ascertain in what ways the nation is similar or dissimilar to your own domestic market or theothers in which your company already trades. Now you will need to be careful in respect of self-referencing. Remember that your experience to date is based upon your life mainly in your own nation andyour expectations will be based upon what your already know. Try to be flexible and experimental in newnations, and don't be judgemental - it's about what's best for your company - happy hunting.

The value chain -marketing function detail


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In making international marketing decisions on the marketing mix, more attention to detail is required thanin domestic marketing. Details on the sourcing element have already been covered in the earlier coverageof competitive analysis and strategy. Concerning investment and control, the question really is how far thecompany wishes to control its own fate. The degree of risk involved, attitudes and the ability to achieveobjectives in the target markets are important facets in the decision on whether to license, joint venture orget involved in direct investment.

There are five strategies used by firms for entry into new foreign markets:

i) Technical innovation strategy perceived and demonstrable superior products.

ii) Product adaptation strategy modifications to existing products.

iii) Availability and security strategy overcome transport risks by countering perceived risks.

iv) Low price strategy penetration price.

v) Total adaptation and conformity strategy foreign producer gives a straight copy.

In marketing products from less developed countries to developed countries, point (iii) poses majorproblems. Buyers in the interested foreign country are usually very careful as they perceive transport,

currency, quality and quantity problems.

In building a market entry strategy, time is a crucial factor. The building of an intelligence system andcreating an image through promotion takes time, effort and money. Brand names do not appear overnight.Large investments in promotion campaigns are needed. Transaction costs also are a critical factor inbuilding up a market entry strategy and can become a high barrier to international trade. Costs includesearch and bargaining costs. Physical distance, language barriers, logistics costs and risk limit the directmonitoring of trade partners. Enforcement of contracts may be costly and weak legal integration betweencountries makes things difficult. Also, these factors are important when considering a market entry strategy.

Normal ways of expanding the markets are by expansion of product line, geographical development orboth. It is important to note that the more the product line and/or the geographic area is expanded thegreater will be the managerial complexity. New market opportunities may be made available by expansion,but the risks may outweigh the advantages. In fact it may be better to concentrate on a few geographic areas

and do things well.

Ways to concentrate include concentrating on geographic areas, reducing operational variety (morestandard products) or making the organizational form more appropriate. In the latter the attempt is made to"globalize" the offering and the organization to match it. This is true of organizations like Coca Cola andMacDonalds.

Global strategies include

"Country centred" strategies (highly decentralized and limited international coordination),

"Local market approaches" (the marketing mix developed with the specific local (foreign) market inmind) or

"Lead market approach" (develop a market which will be a best predictor of other markets).

Global approaches give economies of scale and the sharing of costs and risks between markets.

Entry Strategies


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There are a variety of ways in which organizations can enter foreign markets. The three main ways are bydirect or indirect export or production in a foreign country.

1 Exporting

Exporting is the most traditional and well established form of operating in foreign markets. Exporting canbe defined as the marketing of goods produced in one country into another. While no direct manufacturing

is required in an overseas country, significant investments in marketing are required. The tendency may benot to obtain as much detailed marketing information as compared to manufacturing in marketing country;however, this does not negate the need for a detailed marketing strategy.

Exporting is a relatively low risk strategy in which few investments are made in the new country. Adrawback is that, because the firm makes few if any marketing investments in the new country, marketshare may be below potential. Further, the firm, by not operating in the country, learns less about themarket (What do consumers really want? Which kinds of advertising campaigns are most successful? Whatare the most effective methods of distribution?) If an importer is willing to do a good job of marketing, thisarrangement may represent a "win-win" situation, but it may be more difficult for the firm to enter on itsown later, if it decides that larger profits can be made within the country.

The advantages of exporting are:

Manufacturing is home based thus, it is less risky than overseas based

Gives an opportunity to "learn" overseas markets before investing in bricks and mortar

Reduces the potential risks of operating overseas.

The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control hasto be weighed against the advantages.

A distinction has to be drawn between passive and aggressive exporting. A passive exporter awaits ordersor comes across them by chance; an aggressive exporter develops marketing strategies which provide abroad and clear picture of what the firm intends to do in the foreign market. There are significantdifferences with regard to the severity of exporting problems in motivating pressures between seekers andnon-seekers of export opportunities. There are differences between firms whose marketing efforts were

characterized by no activity, minor activity and aggressive activity.

Those firms who are aggressive have clearly defined plans and strategy, including product, price,promotion distribution and research elements. Passiveness versus aggressiveness depends on the motivationto export. In many LDC countries like Tanzania and Zambia, which have embarked on structuraladjustment programs, organizations are being encouraged to export, motivated by foreign exchangeearnings potential, saturated domestic markets, growth and expansion objectives, and the need to repaydebts incurred by the borrowings to finance the programs. The type of export response is dependent on howthe pressures are perceived by the decision maker. The degree of involvement in foreign operationsdepends on "endogenous versus exogenous" motivating factors, that is, whether the motivations were as aresult of active or aggressive behavior based on the firms internal situation (endogenous), or as a result ofreactive environmental changes (exogenous).

If the firm achieves initial success at exporting quickly all to the good, but the risks of failure in the earlystages are high. The "learning effect" in exporting is usually very quick. The key is to learn how tominimize risks associated with the initial stages of market entry and commitment this process ofincremental involvement is called "creeping commitment".

1.1 Aggressive and passive export paths

Exporting methods include direct or indirect export.


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Indirect export

The market-entry technique that offers the lowest level of risk and the least market control is indirectexport, in which products are carried abroad by others. The firm is not engaging in international marketingand no special activity is carried on within the firm; the sale is handled like domestic sales.

There are several different methods of indirect exporting:

The simplest method is to deal with foreign sales through the domestic sales organisation. For example, ifa firm receives an unsolicited order from a customer in Spain and responds to the request on a one-offbasis, it is engaging in casual exporting. Alternatively, a foreign buyer may approach to the firm. Productsare sold in the domestic market but used or resold abroad. This type of arrangement may arise if, forexample, a foreign department store has a buying office in the firms home country. If the exporting firmdoes not follow up the contact with a sustained marketing effort, it is unlikely to gain future sales.

A second form of indirect exporting is the use of international trading companies with local offices allover the world. Perhaps the best-known trading companies are the Sogo Sosha of Japan such as Mitsui orMitsubishi. The size and market coverage of these trading companies make them attractive distributors,especially with their credit reliability and their information network. The trading companies of European

origin are important primarily in trade with former European colonies, particularly Africa and SoutheastAsia. The drawback to the use of trading companies is that they are likely to carry competing products andthe firms products might not receive the attention and support the firm desires.

A third form of indirect exporting is the export management company located in the same country as theproducing firm and which plays the role of an export department. That is the firm has the performance ofan export department without establishing one in the firm. The economic advantage arises because theexport company performs the export function for several firms at the same time. The producer can establishcloser relationships and gains instant foreign market contacts and knowledge. The firm is spared the burdenof developing in-house expertise in exporting. The method of payment is the commission and the costs arevariable. Export management companies handle different but complementary product lines which can oftenget better foreign representation than the products of just one manufacturer. Indirect export can open upnew markets without requiring special expertise or investment. Both the international know-how and the

sales achieved by these indirect approaches are generally limited. In this approach, the commitment tointernational markets is very weak.

Direct export

In direct exporting, the firm becomes directly involved in marketing its products in foreign markets,because the firm itself performs the export task (rather than delegating it to others).

This necessitates the creation of an export department responsible for tasks such as:

Market contact

Market research

Physical distribution

Export documentation

Pricing.


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This approach to export requires more corporate resources and also entails greater risks. The expectedbenefits are:

Increased sales

Greater control

Better market information

Development of expertise in international marketing.

To implement a direct exporting strategy, the firm must have representation in the foreign markets. Thiscan be achieved in a number of ways:

Sending international sales representatives into the foreign market to establish contacts and to directlynegotiate sales contracts.

Selecting local representatives or agents to prospect the market, to contact potential customers and tonegotiate on behalf of the exporting firm.

Using independent local distributors who will buy the products to resell them in the local market (with orwithout exclusivity).

Creating a fully owned commercial subsidiary to have a greater control over foreign operations. (In mostcases, the commercial subsidiary will be a joint venture created with a local firm to gain access to localrelationships.

In direct exporting the organization may use an agent, distributor, or overseas subsidiary, or act via aGovernment agency. In direct exporting the major problem is that of market information. The exporterstask is to choose a market, find a representative or agent, set up the physical distribution anddocumentation, promote and price the product. Control, or the lack of it, is a major problem which oftenresults in decisions on pricing, certification and promotion being in the hands of others.


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Exporting requires a partnership between exporter, importer, government and transport. Without these fourcoordinating activities, the risk of failure is increased. Contracts between buyer and seller are a must.Forwarders and agents can play a vital role in the logistics procedures, such as booking air space andarranging documentation.

It is predicted that direct modes of market entry may be less and less available in the future. Growingtrading blocs like the EU or EFTA means that the establishment of subsidiaries may be one of the onlyways forward in future. Indirect methods of exporting include the use of trading companies, exportmanagement companies, piggybacking and countertrade.

Indirect methods offer a number of advantages including:

Contracts in the operating market or worldwide

Commission sales give high motivation (not necessarily loyalty)

Manufacturer/exporter needs little expertise

Credit acceptance takes burden from manufacturer.

Example : the Grain Marketing Board in Zimbabwe, being commercialised but still having Governmentcontrol, is a Government agency. The Government, via the Board, are the only permitted maize exporters.Bodies like the Horticultural Crops Development Authority (HCDA) in Kenya may be merely apromotional body, dealing with advertising, information flows and so on, or it may be active in exportingitself, particularly giving approval (like HCDA does) to all export documents.

Figure 7.4 The export marketing channel for Kenyan horticultural products.


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1.2 Piggybacking

Piggybacking is an interesting development. The method means that organizations with little exporting skillmay use the services of one that has. Another form is the consolidation of orders by a number ofcompanies, in order to take advantage of bulk buying. Normally these would be geographically adjacent orable to be served, say, on an air route.

Example: The fertilizer manufacturers of Zimbabwe, for example, could piggyback with the South Africanswho both import potassium from outside their respective countries.

1.3 Countertrade

By far the largest indirect method of exporting is countertrade. Competitive intensity means more and moreinvestment in marketing. In this situation the organization may expand operations by operating in marketswhere competition is less intense, but currency based exchange is not possible. Also, countries may wish totrade in spite of the degree of competition, but currency again is a problem. Countertrade can also be usedto stimulate home industries or where raw materials are in short supply. It can, also, give a basis forreciprocal trade.

Estimates vary, but countertrade accounts for about 20-30% of world trade, involving some 90 nations andbetween US $100-150 billion in value. The UN defines countertrade as "commercial transactions in whichprovisions are made, in one of a series of related contracts, for payment by deliveries of goods and/orservices in addition to, or in place of, financial settlement".

Countertrade is the modern form of barter, except that contracts are not legal and it is not covered byGATT. It can be used to circumvent import quotas. Countertrade can take many forms. Basically twoseparate contracts are involved, one for the delivery of and payment for the goods supplied and the otherfor the purchase of and payment for the goods imported. The performance of one contract is not contingenton the other, although the seller is in effect accepting products and services from the importing country inpartial or total settlement for his exports. There is a broad agreement that countertrade can take variousforms of exchange like barter, counter purchase, switch trading and compensation (buyback).


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Example: in 1986, Albania began offering items like spring water, tomato juice and chrome ore inexchange for a contract to build a US $60 million fertilizer and methanol complex. Information on potentialexchange can be obtained from embassies, trade missions or the EU trading desks.

Barter is the direct exchange of one good for another, although valuation of respective commodities isdifficult, so a currency is used to underpin the items value. Barter trade can take a number of formats.Simple barter is the least complex and oldest form of bilateral, non-monetarized trade. Often it is called

"straight", "classical" or "pure" barter. Barter is a direct exchange of goods and services between twoparties. Shadow prices are approximated for products flowing in either direction. Generally no middlemenare involved. Usually contracts for no more than one year are concluded, however, if for longer life spans,provisions are included to handle exchange ratio fluctuations when world prices change.

Closed end barter deals are modifications of straight barter, in that a buyer is found for goods taken inbarter before the contract is signed by the two trading parties. No money is involved and risks related toproduct quality are significantly reduced.

Clearing account barter, also termed clearing agreements, clearing arrangements, bilateral clearingaccounts or simply bilateral clearing, is where the principle is for the trades to balance without either partyhaving to acquire hard currency. In this form of barter, each party agrees in a single contract to purchase aspecified and usually equal value of goods and services. The duration of these transactions is commonly

one year, although occasionally they may extend over a longer time period. The contracts value isexpressed in non-convertible, clearing account units (also termed clearing dollars) that effectively representa line of credit in the central bank of the country with no money involved.

Clearing account units are universally accepted for the accounting of trade between countries and partieswhose commercial relationships are based on bilateral agreements. The contract sets forth the goods to beexchanged, the rates of exchange, and the length of time for completing the transaction. Limited export orimport surpluses may be accumulated by either party for short periods. Generally, after one years time,imbalances are settled by one of the following approaches: credit against the following year, acceptance ofunwanted goods, payment of a previously specified penalty, or payment of the difference in hard currency.

Trading specialists have also initiated the practice of buying clearing dollars at a discount, for the purposeof using them to purchase saleable products. In turn, the trader may forfeit a portion of the discount to sellthese products for hard currency on the international market. Compared with simple barter, clearing

accounts offer greater flexibility in the length of time for drawdown on the lines of credit and the types ofproducts exchanged.

Counter purchase, or buyback, is where the customer agrees to buy goods, on condition that the sellerbuys some of the customers own products in return (compensatory products). Alternatively, if exchange isbeing organized at national government level, then the seller agrees to purchase compensatory goods froman unrelated organization up to a pre-specified value (offset deal). The difference between the two is thatcontractual obligations related to counter purchase can extend over a longer period of time and the contractrequires each party to the deal to settle most or all of their account with currency or trade credits to anagreed currency value.

Where the seller has no need for the item bought he may sell the produce on, usually at a discounted price,to a third party. This is called a switch deal. In the past, a number of tractors have been brought intoZimbabwe from East European countries by switch deals.

Compensation (buy-backs) is where the supplier agrees to take the output of the facility over a specifiedperiod of time, or to a specified volume as payment. For example, an overseas company may agree to builda plant in India, and output over an agreed period of time or agreed volume of produce is exported to thebuilder until the period has elapsed. The plant then becomes the property of India.

One problem is the marketability of products received in countertrade. This problem can be reduced by theuse of specialized trading companies which, for a fee ranging between 1 and 5% of the value of thetransaction, will provide trade related services like transportation, marketing, financing, credit extension,etc. These are ever growing in size.


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Countertrade has following disadvantages:

Not covered by GATT, so "dumping" may occur

Quality is not of international standard, so costly to the customer and trader

Variety is low, so marketing of that is limited

Difficult to set prices and service quality

Inconsistency of delivery and specification

Difficult to revert to currency trading so quality may decline further and therefore product is harder tomarket.

The following precautions are hence suggested:

Ensure that the benefits outweigh the disadvantages

Try to minimize the ratio of compensation goods to cash if possible inspect the goods for specifications

Include all transactions and other costs involved in countertrade in the nominal value specified for the

goods being sold

Avoid the possibility of error of exploitation by first gaining a thorough understanding of the customersbuying systems, regulations and politics

Ensure that any compensation goods received as payment are not subject to import controls.

Despite these problems, countertrade is likely "to grow as a major indirect entry method", especially indeveloping countries.

Classification Of countertrade


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2 Foreign production

Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture,ownership and participation in export processing zones or free trade zones.

Licensing and franchising are also low exposure methods of entryyou allow someone else to use yourtrademarks and accumulated expertise. Your partner puts up the money and assumes the risk. Problems

here involve the fact that you are training a potential competitor and that you have little control over howthe business is operated. For example, American fast food restaurants have found that foreign franchisersoften fail to maintain American standards of cleanliness. Similarly, a foreign manufacturer may use lowerquality ingredients in manufacturing a brand, based on premium contents in the home country.

Contract manufacturing involves having someone else manufacture products while you take on some of themarketing efforts yourself. This saves investment, but again you may be training a competitor.

Direct entry strategies, where the firm either acquires a firm or builds operations "from scratch" involve thehighest exposure, but also the greatest opportunities for profits. The firm gains more knowledge about thelocal market and maintains greater control, but now has a huge investment. In some countries, thegovernment may expropriate assets without compensation, so direct investment entails an additional risk. Avariation involves a joint venture, where a local firm puts up some of the money and knowledge about thelocal market.

2.1 Licensing

Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit acompany in another country to use the manufacturing, processing, trademark, know-how or some otherskill provided by the licensor".

The several Licensing types are as under:

Patent Licensing: This can be based on a fixed fee or royalty based.

Turnkey Operation: This is based on fixed fee or cost plus arrangement and includes plant construction,personnel training and initial production runs.

Co-production agreement: This was most common in Soviet bloc countries where plants were built andthen paid for with part of the output.

Management Contract: Currently widely used in Middle East, the MNC is supposed to provide keypersonnel to operate the foreign enterprise for a fee, until local people acquire the ability to manageindependently.

Licensing of Intangibles: Intangible assets like patents, trade secrets, know how, trade marks, companyname etc. are lent to the foreign company in return for royalties or other forms of payment. Transfer ofthese assets is accompanied by technical services to ensure proper use.

Licensing involves little expense and involvement. The only cost is signing the agreement and policing itsimplementation.

Licensing gives the following advantages:

Good way to start in foreign operations and open the door to low risk manufacturing relationships

Linkage of parent and receiving partner interests means both get most out of marketing effort

Capital not tied up in foreign operation and

Options to buy into partner exist or provision to take royalties in stock.

The disadvantages are:


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Limited form of participation to length of agreement, specific product, process or trademark

Potential returns from marketing and manufacturing may be lost

Partner develops know-how and so license is short

Licensees become competitors overcome by having cross technology transfer deals and

Requires considerable fact finding, planning, investigation and interpretation.

Those who decide to license ought to keep the options open for extending market participation. This can bedone through joint ventures with the licensee.

2.2 Joint ventures

This is the next most common form of entry beyond the exporting stage to a more regular overseasinvolvement. This involves sharing risks to accomplish mutual enterprise. Widespread interest in jointventures is related to:

Seeking market opportunities

Dealing with rising economic nationalism

Preempting raw materials

Sharing risk

Developing an export base

Selling technology

Joint ventures can be defined as "an enterprise in which two or more investors share ownership and controlover property rights and operation". Joint ventures are a more extensive form of participation than eitherexporting or licensing.

Joint ventures give the following advantages:

Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-howin technology or process

Joint financial strength

May be only means of entry and

May be the source of supply for a third country.

They also have disadvantages:

Partners do not have full control of management

May be impossible to recover capital if need be

Disagreement on third party markets to serve

Partners may have different views on expected benefits.

If the partners carefully map out in advance what they expect to achieve and how, then many problems canbe overcome.


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3 International Strategic Alliances

This is a new type of collaborative strategy which has gained popularity. Commonly called internationalstrategic alliance, leading firms particularly in high tech industries have used this route for their mutualbenefit. These are short of complete merger, but deeper than arms length market exchanges. Such alliancesare especially useful for seeking entry into emerging markets. This form is very popular in Latin America,Asia and Eastern Europe.

Strategic alliances make sense due to following reasons:

Flexibility and informality promote efficiencies

Access to new markets and technologies

Creation and disbanding of projects with minimum paperwork

Multiple parties share risks and expenses

Partners can retain their independent brand identification

Rivals can often work harmoniously together

Alliance can take various forms from R&D deals to huge projects

Ventures can accommodate dozens of participants

There are many advantages of Strategic Alliances as follows:

Ease of market entry: It may be useful for a firm to partner with another that already has a presence inand knowledge of a market. For example, Kentucky Fried Chicken (KFC) partnered with the MitsubishiKeirishi in entering Japan. By doing so, KFC was assured of managerial talent to deal with localregulations and handling logistics (e.g., labor and construction) while Mitsubishi in turn got the use of anauthentic American brand name.

Shared risk: Some projects are just too big for any one company to approach alone. Boeing can partnerwith Rolls Royce, with the latter making the engines for the aircraft, while Boeing makes the frame. Many

times, deep sea oil exploration is too big a commitment for any one oil company, so two or more may cometogether.

Shared knowledge and expertise: Intel, known for its cutting edge innovations in computer chips, canpartner with a Japanese firm to do its manufacturing.

Synergy and competitive advantage: Synergy refers to the idea that the resources held by two firms,when combined, add up to more than the sum of their parts. For example, Amazon.com and FederalExpress might be able to create, together, a credible image of fast, reliable service (from FedEx) and a largeselection (from Amazon). By itself, FedEx might not have a great edge over UPS, and Amazon may nothave a real edge over Barnes & Noble, but together, by coordination, they may be able, at an affordableprice, to provide faster delivery of a wider range of items than Barnes & Noble.

The disadvantages are as under:

Legal obstacles: Since both firms have their own interests, complicated legal agreements may have to bemade up. Also, there may be limitations on market concentration, and there may be some concern about thelegality of technology transfer. In some countries, as previously mentioned, it may be difficult to enforceagreements.

Complacency: If two firms join forces where they previously competed, they may become complacent indeveloping new products, improving quality, and lowering costs and prices. When competition is place,firms tend to maintain greater discipline, which is needed for competitive ability in the long run.


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Costs of coordination: When two firms have different cultures (e.g., individualistic vs. collective orauthoritarian vs. more participative), more effort may be needed in circulating information and reachingdecisions. For example, Oracle, an aggressive computer firm in the Silicon Valley with a strong emphasison meritocracy might have difficulty working with a collectivistic Japanese firm.

Blurred lines between areas of competition and cooperation: Suppose Sony and Compaq, which bothmake computers, want to collaborate on making memory chips. To do so, they may have to share

information about other computer technology in areas where they may compete. There is now a question ofwhat to share and what to hold back. Not only is time spent deciding whether to share or withhold, butessential information may end up not being available to those who need it.

3.1 Ownership

The most extensive form of participation is 100% ownership and this involves the greatest commitment incapital and managerial effort. The ability to communicate and control 100% may outweigh any of thedisadvantages of joint ventures and licensing. However repatriation of earnings and capital has to becarefully monitored. The more unstable the environment, the less likely is the ownership pathway anoption.

These forms of participation: exporting, licensing, joint ventures or ownership, are on a continuum ratherthan discrete and can take many formats. The entry mode can be summarized as a choice between companyowned or controlled methods "integrated" channels or "independent" channels.

Integrated channels offer the advantages of planning and control of resources, flow of information, andfaster market penetration, and are a visible sign of commitment. The disadvantages are that they incurmany costs (especially marketing), the risks are high, some may be more effective than others (due toculture) and in some cases their credibility amongst locals may be lower than that of controlledindependents.

Independent channels offer lower performance costs, risks, less capital, high local knowledge andcredibility. Disadvantages include less market information flow, greater coordinating and controldifficulties and motivational difficulties. In addition, they may not be willing to spend money on marketdevelopment and selection of good intermediaries may be difficult, as good ones are usually taken upanyway.

Once in a market, companies have to decide on a strategy for expansion. One may be to concentrate on afew segments in a few countries, or concentrate on one country and diversify into segments. Otheractivities include country and market segment concentration typical of Coca Cola or Gerber baby foods,and finally country and segment diversification. Another way of looking at it is by identifying three basicbusiness strategies:

Stage one international

Stage two multinational (strategies correspond to ethnocentric and polycentric orientations respectively)and

Stage three global strategy (corresponds with geocentric orientation).

The basic philosophy behind stage one is extension of programs and products, behind stage two isdecentralization as far as possible to local operators and behind stage three is an integration which seeks tosynthesize inputs from world and regional headquarters and the country organization. Whilst mostdeveloping countries are hardly in stage one, they have within them organizations which are in stage three.This has often led to a "rebellion" against the operations of multinationals, often unfounded.


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Documents

MK0009 International Solved]