The Globalization of Markets?
In a now-famous Harvard Business Review article, Theodore Levitt wrote lyrically about the globalization of world markets. Levitt's arguments have become something of a lightning rod in the debate about the extent of globalization. The rise of global media such as MTV , and the ability of such media to help shape a global culture, would seem to lend weight to Levitt's argument. If Levitt is correct, his argument has major implications for the marketing strategies pursued by international business. However, the current consensus among academics seems to be that Levitt overstates his case. Although Levitt may have a point when it comes to many basic industrial products, such as steel, bulk chemicals, and semiconductor chips, globalization seems to be the exception rather than the rule in many consumer goods markets and industrial markets.
Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways. Markets can be segmented in numerous ways: by geography, demography , social-cultural factors, and psychological factors. Because different segments exhibit different patterns of purchasing behavior, firms often adjust their marketing mix from segment to segment. When managers in an international business consider market segmentation in foreign countries, they need to be cognizant of two main issues--the differences between countries in the structure of market segments, and the existence of segments that transcend national borders. The structure of market segments may differ significantly from country to country. An important market segment in a foreign country may have no parallel in the firm's home country, and vice versa.
Product Attributes
Cultural Differences
Countries differ along a whole range of dimensions, including social structure, language, religion, and education. The most important aspect of cultural differences is probably the impact of tradition. Tradition is particularly important in foodstuffs and beverages. Tastes and preferences are becoming more cosmopolitan. Coffee is gaining ground against tea in Japan and Great Britain, while American-style frozen dinners have become popular in Europe (with some fine-tuning to local tastes). Taking advantage of these trends, Nestle has found that it can market its instant coffee, spaghetti bolognese, and Lean Cuisine frozen dinners in essentially the same manner in both North America and Western Europe. However, there is no market for Lean Cuisine dinners in most of the rest of the world, and there may never be.
Economic Differences
Consumer behavior is influenced by the level of economic development of a country. Firms based in highly developed countries such as the United States tend to build a lot of extra performance attributes into their products. These extra attributes are not usually demanded by consumers in less developed nations, where the preference is for more basic products.
Product and Technical Standards
Even with the forces that are creating some convergence of consumer tastes and preferences among advanced, industrialized nations. Differing government-mandated product standards can rule out mass production and marketing of a standardized product. Several special parts must be built into backhoe-loaders that will be sold in Germany: a separate brake attached to the rear axle, a special locking mechanism on the backhoe operating valve, specially positioned valves in the steering system, and a lock on the bucket for traveling.
Differences in technical standards also constrain the globalization of markets. Some of these differences result from idiosyncratic decisions made long ago, rather than from government actions, but their long-term effects are nonetheless profound.
Distribution Strategy
A Typical Distribution System
The three main differences between distribution systems are retail concentration, channel length, and channel exclusivity.
Differences between Countries
Retail Concentration
In some countries, the retail system is very concentrated, but it is fragmented in others. In a concentrated system, a few retailers supply most of the market. A fragmented system is one in which there are many retailers, no one of which has a major share of the market. This has facilitated system concentration. Japan's much greater population density together with the large number of urban centers that grew up before the automobile have yielded a more fragmented retail system of many small stores that serve local neighborhoods and to which people frequently walk.
Channel Length
Channel length refers to the number of intermediaries between the producer and the consumer. If the producer sells directly to the consumer, the channel is very short. If the producer sells through an import agent, a wholesaler, and a retailer, a long channel exists. The choice of a short or long channel is primarily a strategic decision for the producing firm. However, some countries have longer distribution channels than others. The most important determinant of channel length is the degree to which the retail system is fragmented. Fragmented retail systems tend to promote the growth of wholesalers to serve retailers, which lengthens channels.
Channel Exclusivity
An exclusive distribution channel is one that is difficult for outsiders to access. For example, it is often difficult for a new firm to get access to shelf space in US supermarkets. This occurs because retailers tend to prefer to carry the products of long-established manufacturers of foodstuffs with national reputations rather than gamble on the products of unknown firms. The exclusivity of a distribution system varies between countries. First, after a decade of lackluster economic performance, Japan is changing. In their search for profits, retailers are far more willing than they have been historically to violate the old norms of exclusivity. Second, P&G has been in Japan long enough and has a broad enough portfolio of consumer products to give it considerable leverage with distributors, enabling it to push new products out through the distribution channel.
Choosing a Distribution Strategy
A choice of distribution strategy determines which channel the firm will use to reach potential consumers. The optimal strategy is determined by the relative costs and benefits of each alternative. The relative costs and benefits of each alternative vary from country to country, depending on the three factors we have just discussed: retail concentration, channel length, and channel exclusivity.
Because each intermediary in a channel adds its own markup to the products, there is generally a critical link between channel length, the final selling price, and the firm's profit margin. The longer a channel, the greater is the aggregate markup, and the higher the price that consumers are charged for the final product.
If such an arrangement is not possible, the firm might want to consider other, less traditional alternatives to gaining market access. Frustrated by channel exclusivity in Japan, some foreign manufacturers of consumer goods have attempted to sell directly to Japanese consumers using direct mail and catalogs. REI, a retailer of outdoor clothing and equipment based in the northwestern United States, had trouble persuading Japanese wholesalers and retailers to carry its products. So instead it began a direct-mail campaign in Japan that is proving very successful.
Communication Strategy
Barriers to International Communications
International communication occurs whenever a firm uses a marketing message to sell its products in another country.
Cultural Barriers
Cultural barriers can make it difficult to communicate messages across cultures. We discussed some sources and consequences of cultural differences between nations in Chapter 3 and in the previous section of this chapter. Due to cultural differences, a message that means one thing in one country may mean something quite different in another. The best way for a firm to overcome cultural barriers is to develop cross-cultural literacy .In addition, it should use local input, such as a local advertising agency, in developing its marketing message. If the firm uses direct selling rather than advertising to communicate its message, it should develop a local sales force whenever possible. Cultural differences limit a firm's ability to use the same marketing message the world over. What works well in one country may be offensive in another.
Source Effects
Source effects occur when the receiver of the message evaluates the message based on the status or image of the sender. Source effects can be damaging for an international business when potential consumers in a target country have a bias against foreign firms.
Source effects are not always negative. French wine, Italian clothes, and German luxury cars benefit from nearly universal positive source effects. In such cases, it may pay a firm to emphasize its foreign origins.
Noise Levels
Noise tends to reduce the probability of effective communication. Noise refers to the amount of other messages competing for a potential consumer's attention, and this too varies across countries.
Push versus Pull Strategies
The main decision with regard to communications strategy is the choice between a push strategy and a pull strategy. A push strategy emphasizes personal selling rather than mass media advertising in the promotional mix. Although very effective as a promotional tool, personal selling requires intensive use of a sales force and is relatively costly. A pull strategy depends more on mass media advertising to communicate the marketing message to potential consumers.
Factors that determine the relative attractiveness of push and pull strategies include product type relative to consumer sophistication, channel length, and media availability.
Product Type and Consumer Sophistication
A pull strategy is generally favored by firms in consumer goods industries that are trying to sell to a large segment of the market. For such firms, mass communication has cost advantages, and direct selling is rarely used. But a push strategy is favored by firms that sell industrial products or other complex products. Direct selling allows the firm to educate potential consumers about the features of the product.
Channel Length
The longer the distribution channel, the more intermediaries there are that must be persuaded to carry the product for it to reach the consumer. This can lead to inertia in the channel, which can make entry very difficult. Using direct selling to push a product through many layers of a distribution channel can be very expensive. In such circumstances, a firm may try to pull its product through the channels by using mass advertising to create consumer demand--once demand is created, intermediaries will feel obliged to carry the product.
Media Availability
The rise of cable television in the United States has facilitated extremely focused advertising. With a few exceptions such as Canada and Japan, this level of media sophistication is not found outside the United States. Even many advanced nations have far fewer electronic media available for advertising.
Media availability is limited by law in some cases. Few countries allow advertisements for tobacco and alcohol products on television and radio, though they are usually permitted in print media.
The Push-Pull Mix
The optimal mix between push and pull strategies depends on product type and consumer sophistication, channel length, and media sophistication. Push strategies tend to be emphasized:
· For industrial products and/or complex new products.
· When distribution channels are short.
· When few print or electronic media are available.
Pull strategies tend to be emphasized:
· For consumer goods.
· When distribution channels are long.
· When sufficient print and electronic media are available to carry the marketing message.
Global Advertising
In recent years, largely inspired by the work of visionaries such as Theodore Levitt, there has been much discussion about the pros and cons of standardizing advertising worldwide. One of the most successful standardized campaigns has been Philip Morris's promotion of Marlboro cigarettes.
For Standardized Advertising
The support for global advertising is threefold. First, it has significant economic advantages. Standardized advertising lowers the costs of value creation by spreading the fixed costs of developing the advertisements over many countries. Second, there is the concern that creative talent is scarce and so one large effort to develop a campaign will produce better results than 40 or 50 smaller efforts. A third justification for a standardized approach is that many brand names are global.
Against Standardized Advertising
There are two main arguments against globally standardized advertising. First, as we have seen repeatedly in this chapter and in Chapter 3, cultural differences between nations are such that a message that works in one nation can fail miserably in another. Second, advertising regulations may block implementation of standardized advertising. The scheme advertised the offer of "bonus points" every time American Express cardholders used their cards. According to the advertisements, these "bonus points" could be used toward air travel with three airlines and hotel accommodations.
Dealing with Country Differences
Some firms are experimenting with capturing some benefits of global standardization while recognizing differences in countries' cultural and legal environments. A firm may select some features to include in all its advertising campaigns and localize other features. By doing so, it may be able to save on some costs and build international brand recognition and yet customize its advertisements to different cultures.
Pricing Strategy
Price Discrimination
Price discrimination involves charging whatever the market will bear; in a competitive market, prices may have to be lower than in a market where the firm has a monopoly. Price discrimination can help a company maximize its profits. It makes economic sense to charge different prices in different countries. First, the firm must be able to keep its national markets separate. The second necessary condition for profitable price discrimination is different price elasticities of demand in different countries. The price elasticity of demand is a measure of the responsiveness of demand for a product to changes in price.
The Determinants of Demand Elasticity
The elasticity of demand for a product in a given country is determined by a number of factors, of which income level and competitive conditions are the two most important. Price elasticity tends to be greater in countries with low income levels. Consumers with limited incomes tend to be very price conscious; they have less to spend, so they look much more closely at price. In general, the more competitors there are, the greater consumers' bargaining power will be and the more likely consumers will be to buy from the firm that charges the lowest price.
Profit Maximizing under Price Discrimination
For those readers with some grasp of economic logic, we can offer a more formal presentation of the above argument. The US market is not competitive, so there the firm faces an inelastic demand curve (DU) and marginal revenue curve (MRU). Also shown in the figure are the firm's total demand curve (DJ+U), total marginal revenue curve (MRJ+U), and marginal cost curve (MC). The total demand curve is simply the summation of the demand facing the firm in Japan and the United States, as is the total marginal revenue curve.
Strategic Pricing
Predatory Pricing
Predatory pricing is the use of price as a competitive weapon to drive weaker competitors out of a national market. Once the competitors have left the market, the firm can raise prices and enjoy high profits. For such a pricing strategy to work, the firm must normally have a profitable position in another national market, which it can use to subsidize aggressive pricing in the market it is trying to monopolize.
Multipoint Pricing Strategy
Multi-point pricing becomes an issue when two or more international businesses compete against each other in two or more national markets. Multipoint pricing refers to the fact a firm's pricing strategy in one market may have an impact on its rivals' pricing strategy in another market. Aggressive pricing in one market may elicit a competitive response from a rival in another market. This strategic response recognized the interdependence between Kodak and Fuji and the fact that they compete against each other in many different nations. Fuji responded to Kodak's counterattack by pulling back from its aggressive stance in the United States.
Pricing decisions around the world need to be centrally monitored. It is tempting to delegate full responsibility for pricing decisions to the managers of various national subsidiaries, thereby reaping the benefits of decentralization.
Regulatory Influences on Prices
Antidumping Regulations
Both predatory pricing and experience curve pricing can run afoul of antidumping regulations. Dumping occurs whenever a firm sells a product for a price that is less than the cost of producing it. Most regulations, however, define dumping more vaguely.
Antidumping rules set a floor under export prices and limit firms' ability to pursue strategic pricing. The rather vague terminology used in most antidumping actions suggests that a firm's ability to engage in price discrimination also may be challenged under antidumping legislation.
Competition Policy
Most industrialized nations have regulations designed to promote competition and to restrict monopoly practices. These regulations can be used to limit the prices a firm can charge in a given country.
Configuring the Marketing Mix
There are many reasons a firm might vary aspects of its marketing mix from country to country to take into account local differences in culture, economic conditions, competitive conditions, product and technical standards, distribution systems, government regulations, and the like. Such differences may require variation in product attributes, distribution strategy, communications strategy, and pricing strategy. The cumulative effect of these factors makes it rare for a firm to adopt the same marketing mix worldwide.
However, there are often significant opportunities for standardization along one or more elements of the marketing mix. Firms may find that it is possible and desirable to standardize their global advertising message and/or core product attributes to realize substantial cost economies. They may find it desirable to customize their distribution and pricing strategy to take advantage of local differences. In reality, the "customization versus standardization" debate is not an all or nothing issue; it frequently makes sense to standardize some aspects of the marketing mix, and customize others, depending on conditions in various national marketplaces.
New Product Development
Firms that successfully develop and market new products can earn enormous returns. Intel, which has consistently managed to lead in the development of innovative microprocessors to run personal computers; and Cisco Systems, which developed the routers that sit at the hubs of internet connections, directing the flow of digital traffic. In today's world, competition is as much about technological innovation as anything else. The pace of technological change has accelerated since the Industrial Revolution in the 18th century, and it continues to do so today. The result has been a dramatic shortening of product life cycles. Technological innovation is both creative and destructive. An innovation can make established products obsolete overnight. But an innovation can also make a host of new products possible. Witness recent changes in the electronics industry.
This "creative destruction" unleashed by technological change makes it critical that a firm stay on the leading edge of technology, lest it lose out to a competitor's innovations. As we explain in the next subsection, this not only creates a need for the firm to invest in R&D, but it also requires the firm to establish R&D activities at those locations where expertise is concentratedThe Location of R&D
By and large, ideas for new products are stimulated by the interactions of scientific research, demand conditions, and competitive conditions. Other things being equal, the rate of new product development seems to be greater in countries where:
· More money is spent on basic and applied research and development.
· Underlying demand is strong.
· Consumers are affluent.
· Competition is intense.23
Basic and applied research and development discovers new technologies and then commercializes them. Strong demand and affluent consumers create a potential market for new products. Intense competition between firms stimulates innovation as the firms try to beat their competitors and reap potentially enormous first-mover advantages that result from successful innovation.
Integrating R&D, Marketing, and Production
Although a firm that is successful at developing new products may earn enormous returns, new-product development is very risky with a high failure rate. One study of product development in 16 companies in the chemical, drug, petroleum, and electronics industries suggested that only about 20 percent of R&D projects result in commercially successful products or processes. The reasons for such high failure rates are various and include development of a technology for which there is only limited demand, failure to adequately commercialize promising technology, and inability to manufacture a new product cost effectively. Firms can avoid such mistakes by insisting on tight cross-functional coordination and integration between three core functions involved in the development of new products: R&D, marketing, and production. Tight cross-functional integration between R&D, production, and marketing can help a company to ensure that
1. Product development projects are driven by customer needs.
2. New products are designed for ease of manufacture.
3. Development costs are kept in check.
4. Time to market is minimized.
Cross-Functional Teams.
First, the team should be led by a "heavyweight" project manager who has high status within the organization and who has the power and authority required to get the financial and human resources the team needs to succeed. The "heavyweight" leader should be dedicated primarily. Second, the team should be composed of at least one member from each key function. The team members should have a number of attributes, including an ability to contribute functional expertise, high standing within their function, a willingness to share responsibility for team results, and an ability to put functional and national advocacy aside. Third, the team members should be physically co-located if possible to create a sense of camaraderie and to facilitate communication. This presents problems if the team members are drawn from facilities in different nations.
Implications for the International Business
The need to integrate R&D and marketing to adequately commercialize new technologies poses special problems in the international business, since commercialization may require different versions of a new product to be produced for different countries.
While there is no one best model for allocating product development responsibilities to various centers, one solution adopted by many international businesses involves establishing a global network of R&D centers. Within this model, fundamental research is undertaken at basic research centers around the globe. These centers are normally located in regions or cities where valuable scientific knowledge is being created and where there is a pool of skilled research talent . These technologies are picked up by R&D units attached to global product divisions and are used to generate new products to serve the global marketplace. At this level, emphasis is placed on commercialization of the technology and design for manufacturing. If further customization is needed so the product appeals to the tastes and preferences of consumers in individual markets, such redesign work will be done by an R&D group based in a subsidiary in that country or at a regional center that customizes products for several countries in the region.
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